SNC-Lavalin’s chief executive Neil Bruce is confident the second half of 2019 will be better than the last few months.
“We’ve taken some reputational hits,” he told analysts during a conference call on Thursday, adding, “This was not as a result of anything we did.”
But some analysts see it differently. Even putting aside the national political scandal that has exploded around whether the Montreal-based company received improper treatment in its years-old, yet still ongoing federal criminal prosecution related to overseas bribery charges, the company has repeatedly stumbled to execute its business plan in recent months.
Many of the missteps were wholly unrelated to the criminal prosecution, including the implosion of a client relationship in Chile that led to a $350 million writedown and what some analysts cast as Bruce’s failure to adequately manage expectations about company performance.
During the past year, the company’s share price has declined more than 45 per cent; and on Thursday, the company released what Bruce described as disappointing first quarter results, including a $17.3 million loss and an announcement the firm is pulling out of 15 countries.
The company’s stock closed down 13 per cent on Thursday to $28.97.
Bruce, a U.K. native with a strong Scottish accent, joined SNC in 2013 with initial responsibility for the company’s oil and gas and mining business. Before this, he had had a decades long career with a strong focus on oil and gas, including work in Alberta’s oilsands.
Within two years at SNC, he had risen to chief operating officer and then in September 2015 to chief executive officer and a director on the board. The company’s stock generally trended up for the first few years, but has been trending down after hitting $61 per share in June 2018.
It now sits at around $31 per share and Neil has struggled to assure investors that he has derisked the company as it battles criminal charges and a heavy debt load.
Last month, its share price slid again when it announced a highly anticipated sale of part of its stake in Ontario’s Highway 407 toll road. SNC owns 16.7 per cent of the road, which has been one of the company’s most reliable generators of cash, but this summer Neil said the company planned to sell a 6.7 per cent stake because its value was not appreciated.
SNC-Lavalin recently announced plans to sell a stake in privately-owned Highway 407 to the Ontario Municipal Employees Retirement System for $3.25 billion.
“To be clear, we believe that the 407 is currently undervalued,” Bruce told analysts in August. “We believe that its value is in excess of the current analyst consensus. This is the only way to truly demonstrate the value.”
Then, months passed and no sale occurred, until in early April, the company announced it was selling a 10.01 per cent stake to the Ontario Municipal Employee Retirement System for $3.25 billion.
Frederic Bastien, an analyst with Raymond James, called the price “underwhelming” and noted it fell below analyst estimates — contrary to what Bruce had conditioned everyone to expect.
“What should have given SNC-Lavalin’s stock a jolt of life struck like a wet towel instead,” Bastien wrote.
Canadian billionaire Stephen Jarislowsky, an investor and former director of SNC, has said in a letter to the company it should allow shareholders to vote on the sale.
On Thursday, the company announced another stakeholder in the 407 may be interested in exercising its right of first refusal to purchase the stake from SNC, potentially triggering payment of a 2.5 per cent break fee, or around $80 million to OMERS.
At the general meeting on Thursday, one shareholder asked management if they had shopped the sale around to others to avoid the situation, but executives declined to answer directly, saying the sale had been well-publicized; and Bruce praised the sale price, saying it was higher than what analysts had estimated — back in 2015, instead of referencing more recent estimates.
“He did a poor job of overselling the value they could get for the 407,” said Mike Willemse, an analyst at the investment firm Taylor Asset Management. “I don’t know why he overhyped it.”
Many shareholders were happy because the sale would put around $3 billion onto SNC’s balance sheet, if it closes at the end of June as expected, and the company has been battling high debt loads.
In February, Standard & Poors downgraded SNC to BBB-, and now, along with another credit ratings agency, DBRS, it has confirmed SNC’s BBB credit rating, the bottom tier of investment grade.
The debt situation came into focus in January when SNC first indicated that a problem was brewing in Chile with state-run copper miner Codelco, on a sulfuric acid plant construction project in which SNC was responsible for cost overruns.
“We’re incredibly disappointed with the situation,” Bruce told analysts a few weeks later. “Ultimately, the project management did not appropriately adhere to the terms and conditions of the contract.”
Initially, Bruce said he met with people at Codelco to resolve the situation, and believed the company could book revenues from the project in 2019. Weeks later, SNC was fired by Codelco, resulting in a $349 million writedown that, the company said, will continue to eat away at its mining segment’s profits into next quarter.
The challenges we have faced … are short-term. We have a plan
SNC CEO Neil Bruce
The company also said the deterioration of Saudi-Canadian diplomatic relationships during the past year was hurting its oil and gas business.
In the past few years, Saudi Arabia had emerged as a major source of revenue — one of only four countries besides Canada, the U.S. and the U.K. where SNC derives more than 10 per cent of its revenue. That’s up dramatically from 2014, when SNC derived only 7 per cent of its revenue from the entire Middle East.
On Thursday, Bruce said that while the company is having trouble winning new projects in Saudi Arabia in the oil and gas sector, its work in other sectors in the kingdom is “progressing well.”
Still when analysts asked for more details of how the company will be able to meet its earnings guidance of around $2-$2.20 per share in 2019, Bruce pointed to a cost-savings program expected to reduce $100 million in overhead costs this year, and $250 million annually.
It also booked $3.26 billion in new projects in the quarter, increasing its backlog to $15.8 billion, he said and expects revenues from the resources segment to pick up later this year.
But as Bruce repeatedly acknowledged, the year has not started off well. The firm cut its dividend for the first time in 27 years from 28.7 cents to 10 cents, but it also endured a political scandal that has not yet faded from public attention.
Former Attorney-General Jody Wilson-Raybould testified in Ottawa that she felt pressure from the Prime Minister’s Office to compel prosecutors to settle the criminal case against SNC-Lavalin, in which it is charged with paying millions of dollars in bribes to Libyan government officials between 7 and 20 years ago in order to win contracts there.
That situation remains unresolved, although Bruce said he is “confident” that the court will determine the correct outcome.
“The challenges we have faced … are short-term,” Bruce told shareholders. “We have a plan.”
• Email: [email protected] | Twitter: GabeFriedz
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