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May 2, 2019

SNC shares hit 10-year low after CEO reveals plan to exit 15 countries

SNC 'disappointed' after posting surprise loss

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MONTREAL -- Shares in SNC-Lavalin Group Inc. (SNC.TO) hit a 10-year low Thursday after the company announced plans to wind down its operations in 15 countries and reported a $17-million loss in its latest quarter.

The stock closed down $4.48, or 13.13 per cent, at $28.97 Thursday.

"We will stop bidding on certain projects, certainly within the mining area," CEO Neil Bruce said. "We're not going to continue to -- in fact we have already stopped -- bidding on pure lump-sum EPC (engineering, procurement and construction) projects."

Fixed-price bids for infrastructure and oil and gas will continue, but only in "core regions," he said. SNC-Lavalin is firmly rooted in both construction and engineering, exposing it to potentially higher margins, but also the cost overruns and fixed-price contracts that can plague the world of builders.

Bruce declined to specify which countries the company will exit, but said they represent about $85 million in total revenue with "no long-term plan" for growth. The retreat means SNC will step back from between 25 per cent and 30 per cent of the 50-plus states where it operates.

The engineering and construction giant also hopes to save $250 million annually with an organizational revamp, combining its oil and gas business with its mining unit as part of a cost-reduction program under chief operating officer Ian Edwards, who was appointed in late January.

SNC noted that one of the three shareholders in Highway 407 may exercise its right of first refusal on the company's plan to sell the bulk of its 16.77 per cent stake in the toll highway operator for $3.25 billion, a move expected to close before the end of June.

If that happens, SNC will owe OMERS -- the pension plan poised to buy a 10.01 per cent stake in 407 International Inc. -- a break fee of 2.5 per cent of the purchase price, or about $75 million, said analyst Benoit Poirier of Desjardins Capital Markets.

"Considering this shareholder only has to match OMERS' $3.25-billion offer, the net proceeds to SNC are unlikely to change materially," added Frederic Bastien, an analyst with Raymond James.

Bruce declined to name which of the other two owners of the toll highway -- Spain's Ferrovial S.A., holding a 43.23 per cent stake, and the Canada Pension Plan Investment Board with 40 per cent -- was making a bid.

In the light of a shaky first quarter with earnings far below expectations, analysts met Bruce's "confident" belief in SNC's 2019 profit forecast with skepticism.

Bastien said the promised turnaround "seems unrealistic to us at first blush."

"Considering the many cost-savings initiatives of past years, we find it somewhat surprising there is still that much fat to trim out of the business," he said.

Analyst Derek Spronck of RBC Dominion Securities noted some would question "whether SNC-Lavalin will be able to meet their 2019 guidance targets."

Yuri Lynk of Canaccord Genuity said meeting those targets would likely require two "record quarters" in the second half of the year.

The forecast calls for earnings before interest, taxes, depreciation and amortization of between $900 million and $950 million.

Earlier this year, the firm slashed its 2018 guidance twice in three weeks, more than halving its profit forecast and halting all bidding on future mining projects amid an ongoing diplomatic feud between Canada and Saudi Arabia -- a key source of oil and gas revenue -- and delays on SNC's project with Codelco, Chile's state-owned copper mining company, which has since cancelled the contract.

"We're making absolutely no excuses around that," Bruce said of the US$260-million deal involving construction of two new acid plants for a smelter at the Chuquicamata mine.

"There's a lot of events that we consider to be out (of) our control, but that certainly was within our control, and we failed in that respect."

Ottawa's spat with the Saudi regime continues to hurt the company, he said. "We have seen a number of opportunities that we would normally expect to have a reasonable chance of success actually fall away."

Bruce reiterated his belief the company has lost out on between $5 billion and $6 billion in contracts over the past five to seven years, with European and American competitors seeking "to persuade a customer that we are too high-risk," particularly since SNC was slapped with corruption charges in 2015.

He said he expects the criminal case -- which concerns charges that are between seven and 20 years old, he noted repeatedly -- to take up to three more years to play out.

SNC-Lavalin said it lost $17.3 million or 10 cents per share last quarter, far below analysts' expectations of 34 cents per share, according to Thomson Reuters Eikon. That compares with a profit of $78.1 million or 44 cents per share in the first quarter of last year.

Revenue totalled $2.36 billion, down from $2.43 billion a year ago.

On an adjusted basis, the Montreal-based company said it earned 21 cents per share for the quarter ended March 31, compared with an adjusted profit of 77 cents per share a year earlier.

The results included an adjusted loss of eight cents in its engineering and construction business, while its capital investments business earned 29 cents per share in its most recent quarter.

That compared with an adjusted profit of 51 cents from the engineering and construction side a year ago, while the capital investments business earned 36 cents per share.