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May 5, 2022

Supply chain woes and COVID absences continue to gnaw at SNC-Lavalin earnings

Varun Anand discusses SNC-Lavalin


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SNC-Lavalin Group Inc. earnings sagged last quarter, falling below expectations due to thin margins in its flagship engineering division as the company struggles to plug the cash drain of fixed-price construction contracts.

While swinging back to a profit following a loss in its fourth quarter, the engineering firm saw higher bidding and business development costs chip away at its net income. Meanwhile sick workers and supply chain woes continued to stall key projects.

The first-quarter results sparked a more than 13 per cent drop in share price, which fell by $3.84 to close at $24.99 on the Toronto Stock Exchange.

"A market overreaction? Yes. But investor fatigue is palpable. A bad tape today indeed," Laurentian Bank Securities analyst Troy Sun said in a note to investors, referring to executives' conference call with him and his colleagues Thursday. "Another messy quarter."

CEO Ian Edwards cited "really, really strong demand" for SNC's engineering expertise and renewed interest in nuclear power amid the wrench in global energy markets thrown by Russia's invasion of Ukraine. The company continues to make "good progress" on refurbishing parts of the Darlington and Bruce Power projects in Ontario, he said.

Under Edwards' stewardship since June 2019, SNC-Lavalin has shifted its focus to design and engineering services and away from so-called lump-sum turnkey (LSTK) projects — fixed-price contracts under which companies have to eat any cost overruns. But those projects continue to weigh heavily on the company's bottom line.

Even as Edwards reduced the LSTK backlog, COVID-19 and supply snarls helped drive a quarterly loss before interest and taxation of $30.5 million for that segment.

On one of its two major Ontario projects, some 62 per cent of the workers stayed home at some point last quarter due to the Omicron variant, Edwards told analysts on a conference call Thursday.

"Obviously we need people physically on the job," he said.

Supply chain issues are causing delays of Chinese-made window glazing, pushing back the completion of above-ground transit stations.

"There's consequential knock-on delays, because we obviously can't fit out the station, we can't finish it, we can't do the mechanical and electrical work."

SNC's fixed-price contracts include Toronto's Eglinton Crosstown light rail line, Ottawa's Trillium Line rail extension and the greater Montreal area's REM light-rail network. The three massive projects are slated to wrap up in 2022, 2023 and 2024 respectively.

Despite a tough quarter, the company maintained its outlook for organic revenue growth in its services segments of four to six per cent and an overall margin of eight to 10 per cent for earnings before interest and taxes, in line with its 2022-2024 targets.

Rather than generating net cash from operations last quarter, SNC-Lavalin spent $134 million, leaving operating cash flow far in the negative. The metric was a positive $5.6 million a year earlier.

SNC said its profit from continuing operations attributable to shareholders totalled $24.8 million or 14 cents per diluted share for the quarter ending March 31.

The result compared with a profit of $67.7 million or 39 cents per diluted share in the same quarter last year.

First-quarter revenue totalled $1.89 billion, up from $1.82 billion in the first three months of 2021.

Professional services and project management revenue rose to $1.87 billion compared with $1.8 billion last year, while revenue from its capital business fell to $16.4 million compared with $21.7 million a year earlier.

On an adjusted basis, SNC-Lavalin said its professional services and project management business earned $39.4 million or 22 cents per share for the quarter, down from $83.4 million or 48 cents per share a year ago.