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Report on Business Caisse calls for ‘across the board’ change at SNC-Lavalin

SNC-Lavalin Group Inc.’s biggest investor sharpened its criticism of the beleaguered engineering company Monday, saying it needs to shake up its culture to improve its project execution and reverse its stock-price slide.

Pension fund giant Caisse de dépôt et placement du Québec, which holds a 20-per-cent stake in SNC-Lavalin, reaffirmed its long-term support for the Canadian engineering and construction company. But the Caisse, in its second public comment in recent weeks, said an internal overhaul is needed to better the company’s chances at future success. As a project-management company earning relatively slim profit margins, SNC-Lavalin needs to fine-tune its ability to complete projects and still make money, Caisse chief executive officer Michael Sabia said.

“What we want to see and what the company needs is a wholesale, step-function change in the quality of its execution. And that touches across the board. That’s from human-resources policy to systems to the kinds of projects the company takes on,” Mr. Sabia told reporters after discussing the pension fund’s midyear results.

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“It’s a cultural change. It’s a step up, a major step up, in discipline. It’s a major step up in systems … in the capacity to overview project by project and to know where each one of those projects stands down to decimal points. That’s what’s required.”

Montreal-based SNC-Lavalin has lost about two-thirds of its market capitalization over the past year. The stock’s meltdown and related events have rattled investors, shaken the political establishment and left one of Canada’s most important engineering companies increasingly exposed to an unwanted takeover.

The assessment by the Caisse, which speaks regularly with SNC-Lavalin, highlights the depth of the changes that might be required at SNC-Lavalin. The company’s struggles have hurt all shareholders, perhaps none more so than the Caisse. The pension fund said it has seen the value of its investment in SNC-Lavalin decline by $700-million over the first six months of this year. It had pegged the worth of the stake at $1.6-billion at the end of 2018.

SNC-Lavalin shares have dropped precipitously since July 22. The company said then that 2019 financial results would come in “significantly lower” than anticipated and withdrew its previous annual earnings forecast. Management blamed the reset on higher costs on certain infrastructure and resource projects.

It was SNC-Lavalin’s third profit warning since January and prompted a public rebuke from the Caisse, which called out “the current unacceptable trend of the business” and urged “decisive and timely” action from the SNC-Lavalin board. Such a public statement is rare for the Caisse, which does not typically comment on its individual investments.

The Caisse put out its public statement for two reasons, Mr. Sabia said Monday. First, to head off questions it expected to receive from SNC-Lavalin stakeholders given the importance of the profit warning announcement. Second, to send a message.

“We do believe that the company, that its board, needs a heightened sense of urgency,” he said. “I believe that is occurring. I believe that is a positive thing. But I also believe that it was necessary and that’s why we took the action that we took.”

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On August 1, SNC-Lavalin slashed its dividend for the second time this year and reported a decline in profit margins for what it considers its best business lines as it unveiled a $2.1-billion quarterly loss. In his first conference call exchange with analysts and investors as SNC-Lavalin’s interim chief executive, Ian Edwards subsequently failed to stem concern about SNC-Lavalin’s prospects.

The company’s stock, which was already trading at lows not seen in 14 years, tanked further after the call. It closed down another 6 per cent to $17.81 in trading on the Toronto Stock Exchange Friday, bringing the company’s market value to $3.1-billion, less than half the value of cross-town rival WSP Inc. The TSX was closed Monday for the civic holiday.

SNC-Lavalin’s struggles began last fall as a sharp sell-off over the company’s failure to win a deal from federal prosecutors to settle bribery and fraud charges. The case sparked a prolonged political controversy for the federal Liberal government, which has come under fire for Prime Minister Justin Trudeau and his staff applying pressure on former attorney-general Jody Wilson-Raybould to overturn a decision by prosecutors not to reach a settlement – called a deferred prosecution agreement – with the company.

It soured further in recent months over questions about the company’s operations and profit-making ability. Chile’s Codelco, the world’s biggest copper producer, was so upset about SNC-Lavalin’s performance it cancelled a US$260-million contract with the Canadian company.

Mr. Sabia said the Caisse remains convinced in the potential of SNC-Lavalin. “With changes to its strategy and a relentless focus on execution, SNC-Lavalin can be a prosperous company with a significant global stature,” he said. “As a long-term investor, we’re there and we’ll stay there.”

Mr. Edwards has sketched out the start of a major strategic shift for SNC-Lavalin that will see it stop bidding on all lump-sum turnkey construction contracts as it moves to do more consulting services work and also focus on its nuclear operations. The idea is to retreat to higher-profit parts of the business while gradually getting out of fixed-price contract work, which SNC-Lavalin says are riskier because the builder agrees to absorb any cost overruns.

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As SNC-Lavalin winds down a fixed-bid project backlog worth $3.4-billion, investors have voiced worry the company will tally significant cost overruns on the projects. That risk is real but counterbalanced by the fact Mr. Edwards’s team has completed an in-depth review of the remaining projects with the help of outside auditors, RBC Capital Markets analyst Derek Spronck said in a note published Monday.

“With a new strategic plan, SNC is moving towards a more sustainable business model,” Mr. Spronck said. “However, investor confidence remains low and skepticism high.”

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