SNC-Lavalin Group Inc. SNC-T says it is seeing exceptionally strong demand for its services, but an increase in work prospects means it is spending more on bidding and business development, as the Canadian engineering giant reported weaker-than-expected earnings for its latest quarter.
Investors did not like what they heard, despite the fact SNC-Lavalin executives stood by their financial guidance for the full year. The stock lost 13.3 per cent in trading Thursday to close at $24.99 on the Toronto Stock Exchange, not far from its 52-week low.
“We have seen a really, really strong demand for our services,’’ SNC-Lavalin chief executive Ian Edwards said on a conference call, citing as one example a new deal with the British government that will see the company plot the decarbonization of up to 16 energy-intensive industrial sites, such as chemical plants, as part of Britain’s effort to cut emissions. “It’s a particularly busy time.”
Mr. Edwards is trying to re-establish SNC-Lavalin as a go-to partner for governments and other clients as it claws its way back from years of crisis. The CEO has reshaped the company by selling oil and gas assets and pivoting toward a new business model centred on engineering services and consulting work, while riskier fixed-price construction contracts that have historically sucked cash are wound down.
Net profit from continuing operations for the first quarter ended March 30 was $24.8-million or 14 cents a share, the Montreal-based company said Thursday. That’s down 63 per cent from the same period a year ago. Revenue climbed 3.8 per cent to $1.9-billion.
For the company’s core SNCL services business, SNC-Lavalin reported organic revenue growth of 8.4 per cent from last year’s quarter as the backlog of work won but not yet executed increased to $11.2-billion. The segment includes engineering services, nuclear, operation and maintenance, as well as the Linxon unit, which is a joint venture with Hitachi Energy.
Adjusted earnings before interest and taxes for that main business came in at $126.7-million, shy of what analysts expected. The profit margin in the segment was 7.6 per cent during the quarter, below management’s 8-to-10-per-cent annual target.
In sum, SNC spent more to win new business and its executives argued it’s worth it because that’s translating into stronger revenue. They said they expect the bidding costs to come down in the months ahead. That did little to convince the market that the worst is over for SNC.
“We believe SNC is now in a careful juncture where more growth is not what investors are looking for,” National Bank Financial analyst Maxim Sytchev said in a note to clients. Rather, they want profit predictability and consistency, he said, especially given that comparable engineering companies that have reported quarterly earnings so far are showing profit margin improvements.
Mr. Edwards and his team have now reduced the backlog on the last remaining fixed-price construction contracts to less than $1-billion, shaving another $210-million from the work still to complete during the first quarter. The company said in March it will incur maximum future losses of $300-million to complete the contracts in a worst-case scenario. It booked $20-million under that estimate in the first quarter.
Three big contracts remain, all of them light rail transit systems: The Eglinton Crosstown LRT project in Toronto, the Trillium Line expansion project in Ottawa, and Montreal’s Réseau Express Métropolitain. All of them have encountered problems of one kind or another recently, including increased worker absenteeism from the COVID-19 pandemic and issues obtaining construction materials in a timely way. Subcontractors are also asking SNC to compensate them for rising inflation.
In one of the Ontario projects, about 62 per cent of workers stayed home at some point during the first three months of this year because of COVID, Mr. Edwards said. Meanwhile, that same project has supply chain issues, he said. More specifically, there have been delays in the delivery of Chinese-made glazing for above-ground transit stations as that country pursues strict lockdowns to prevent disease outbreaks.
As a consequence there are “knock-on delays, because we obviously can’t fit out the station,” the CEO said. “We can’t finish it. We can’t do the mechanical and electrical work.”