SNC-Lavalin Group Inc. will speed up its expansion into the United States in the years ahead as it tries to boost sales and profit after a two-year retrenchment.
Montreal-based SNC-Lavalin, which is entering negotiations with Quebec prosecutors to settle fresh criminal charges related to a bridge contract in Montreal nearly two decades ago, unveiled a new three-year growth plan Tuesday. This includes accelerating and widening its footprint in the U.S. as SNC builds on its track record with private-sector clients and government bodies such as the Federal Emergency Management Agency.
The company’s U.S.-based revenue stood at $1-billion in 2020 as profit margins in the country more than doubled over the past three years. SNC wants to increase sales further by pushing out from its existing hubs in states such as Texas and Florida in a bid to capture its share of an estimated US$5-trillion in U.S. infrastructure spending.
The U.S. is seeing the “combined impact of climate change and poor infrastructure,” said Steve Morriss, who leads SNC’s U.S. engineering services business from his base in California. “Our neighbourhood was burned out in a wildfire three years ago started by faulty electrical equipment. We’ve suffered droughts and water shortage. And it’s the increasing frequency of events like that that are driving public sentiment and investment.”
The U.S. is one of three priority markets, together with Canada and Britain, for SNC as it tries to re-establish itself as an engineering powerhouse on the global stage after years of crisis. Chief executive Ian Edwards has reshaped SNC by selling oil and gas and other assets; the company is now pivoting toward a new business model centred on engineering services and consulting work, while riskier construction contracts that have historically sucked cash are wound down.
By focusing on the company’s core experience in areas such as transportation, water resource management and nuclear decommissioning, Mr. Edwards and his team say they can boost SNC’s services revenue by 4 per cent to 6 per cent a year without acquisitions. Among their priorities is deploying future free cash flow to improve the company’s debt leverage ratio and reclaim an investment grade credit rating.
SNC currently has a credit rating of BB+ from S&P Global Ratings, the highest level of junk. The ratings agency downgraded the company two years ago, citing significant losses on lump sum turnkey construction projects and uncertainty about unresolved legal issues. In June, it upgraded its outlook on the company’s credit to stable from negative based on a view that earnings and cash flow should improve over time.
The U.S. represents a “vast opportunity” for SNC, but over the next 12 to 24 months the company will likely use any incremental free cash flow to pay down debt, National Bank analyst Maxim Sytchev said in a research note. He rates the shares “outperform” with a 12-month price target of $44.
SNC shares closed down 2.2 per cent to $35.68 in trading Tuesday on the Toronto Stock Exchange amid a broader market decline.
Stung by construction contracts that went sour, including a $260-million deal with Chilean miner Codelco, and hobbled by allegations of past corruption practices, SNC has seen its power and reputation as a Canadian corporate champion wither over the years. The company’s market capitalization now stands at $6.4-billion, less than half that of cross-town rival WSP Inc. and also less than the value of Edmonton-based Stantec Inc.
Mr. Edwards, a British-born operations expert who took command of SNC in 2019 after the abrupt departure of then-CEO Neil Bruce, appears determined to restore some of that former glory, in part by leveraging collaboration among the company’s 31,000 employees and focusing operations in countries where it can generate predictable results and cash flows. But he admits it won’t happen overnight. The company has tallied net losses in two of the past three years.
“What we’re about here is permanently derisking this business,” Mr. Edwards said Tuesday during a webcast with investors. “And permanently getting on a trajectory that will take it to success. The work’s not done. You know, we have more work to do and we’re acutely aware of that as a team. But we’re on the right road.”
Quebec’s office of criminal prosecutions announced last week that it charged two of the company’s business entities – SNC-Lavalin Inc. and SNC-Lavalin International Inc. – and former SNC vice-presidents Normand Morin and Kamal Francis in connection with a long-standing RCMP investigation into bribes paid on a $128-million contract to refurbish Montreal’s Jacques Cartier bridge in 2002. Prosecutors are now offering the company a chance to negotiate a deferred prosecution agreement to avoid a trial.
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Nicolas Van Praet