MONTREAL - SNC-Lavalin Group Inc. (TSX: SNC) announces it is transforming its Resources Business to focus on a Services offering in a limited number of existing primary markets, that complement the Company's broader engineering services capabilities and strategy, which should return the Resources Business to profitability in 2021.
The Company announced in July 2019 that it would be exploring all options with regard to its Resources Business, as part of its decision to exit LSTK contracting and focus on its high potential Engineering Services. It has since completed a strategic review of the Resources Business, with the decision to transform the Business to focus solely on the profitable parts of the service business and sell or close non-primary parts of the business, including the exit of multiple geographies.
The new Resources Services business will be a targeted service offering that management expects to be profitable in full year 2021. The legacy Resources Projects business and associated LSTK projects will be largely wound down and the projects complete by the end of 2020.
Client offering to be focused on engineering consulting, project management services, and advising on construction management in the energy, mining and metallurgy sectors.
Focused on the Americas and the Middle East, the primary energy and mining regions where the business has existing profitable relationships with long-standing customers, and clear visibility on opportunities.
Geographic footprint significantly reduced from 30 to 9 countries, exiting all non-primary markets through either sale or closure.
Agreements reached to dispose of the South African Resources business, with 1,800 employees, to local management, and divestment of the European Fertilizer business.
Headcount expected to be reduced from approximately 15,000 to 8,000 by the end of 2020 and to 6,000 by the end of 2021.
Revenue from Resources Services Business expected to contribute approximately 10% of overall SNC-Lavalin total revenue in 20211.
Expected to be profitable for full year 2021, reaching break even on a Segment adjusted EBIT(1) basis in first half of 2021.
'Our decision to transform and redefine our resources services is the conclusion of a thorough and extensive strategic review of our whole Resources business. With the Resources LSTK Projects largely complete by the end of the year, this is the right time to transform and redefine our services business, which we believe can be valuable in its own right and complement our other SNCL Engineering Services businesses,' said Ian L. Edwards, President and CEO of SNC-Lavalin. 'We are confident about moving forward with the Resources Services business and its potential to add real value to our Professional Services and Project Management capabilities across service lines and primary markets.'
Path to Profitability
Management believes that, upon successful execution of a newly transformed service offering, the Resources Services business should have the capability, scale and market potential to become a profitable and attractive component of SNCL Engineering Services - with profit margins over time that would be expected to be in line with the other engineering services businesses.
'After the challenges we have faced over the last period, we are energized about the opportunity ahead to redefine and build our new services business, which will look different as we will exit non-primary geographies, and focus on the primary markets of the Americas and the Middle East. We have already been taking clear steps to focus our oil and gas, and mining service offerings, reducing overheads and reviewing all parts of our business to identify and build the areas where we have expertise that our clients value, and can deliver sustainable services profitably. I would like to thank both the team for all their hard work through the review and the actions already taken, and our clients for the support shown as we transform our business and enhance our services,' said Craig Muir, President, Resources, SNC-Lavalin.
The business is expected to break even at a Segment adjusted EBIT(1) level in the first half of 2021, and be profitable for the full year 2021. The Resources Services business has a clear path forward to achieving profitability due to a combination of factors, including a significant reduction in overhead costs, which is expected to decrease by 50% by the end of 2020 compared to 2019, and be further reduced by an additional 25% by the end of 2021.
Resizing the business will result in expected one-time restructuring costs of approximately $50 million to $60 million, with $30 million of this restructuring charge being recorded in Q2 2020. As a result of the restructuring, the Resources Services Business is expected to deliver a quarterly negative Segment adjusted EBIT(1) in the range of $15 million to $25 million for the remainder of 2020.
Basis for Financial Outlook of Resources Services Business and Segment
The financial outlook for the Resources business and segment provided herein is based on the assumptions and methodology described above as well as in the Company's second quarter 2020 Management's Discussion and Analysis under the heading, 'How We Budget and Forecast Our Results' and the 'Forward-Looking Statements' section below and is subject to the risks and uncertainties summarized therein and in the Company's 2019 Annual and second quarter 2020 Management's Discussion and Analysis, which are more fully described in the Company's public disclosure documents.
Non-IFRS Financial Measures and Additional IFRS Measures
The Company reports its financial results in accordance with IFRS. However, the following non-IFRS measures Segment Adjusted EBIT is used by the Company in this press release. Additional details for this non-IFRS measure can be found below and in section 9 of SNC-Lavalin's Management's Discussion and Analysis ('MD&A') for the second quarter of 2020, filed with the securities regulatory authorities in Canada, available on SEDAR at www.sedar.com and on the Company's website at www.snclavalin.com under the 'Investors' section. Non-IFRS financial measures do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. Management believes that, in addition to conventional measures prepared in accordance with IFRS, these non-IFRS measures provide additional insight into the Company's operating performance and financial position and certain investors may use this information to evaluate the Company's performance from period to period. However, these non-IFRS financial measures have limitations and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
Assumes SNC-Lavalin's current level of revenues and operations and assumes and gives effect to transformation plan for Resources as announced in this press release.
Segment Adjusted EBIT consists of revenues allocated to the applicable segment less i) direct cost of activities, ii) directly related selling, general and administrative expenses, and iii) corporate selling, general and administrative expenses that are allocated to segments. Segment Adjusted EBIT is the measure used by management to evaluate the performance of the Company's segments, and gives investors an indication of the profitability of each segment, as it excludes certain items that the Company believes are not reflective of the segment's underlying operations. Such financial measure also facilitates period-to-period comparisons of the underlying segment's performance. Expenses that are not allocated to the Company's segments are: certain corporate selling, general and administrative expenses that are not directly related to projects or segments, impairment loss arising from expected credit losses, gain (loss) arising on financial assets (liabilities) at fair value through profit or loss, restructuring costs, impairment of goodwill, impairment of intangible assets related to business combinations, acquisition-related costs and integration costs, amortization of intangible assets related to business combinations, the federal charges settlement (PPSC) expense and gains (losses) on disposals of PS&PM businesses and Capital investments (or adjustments to gains or losses on such disposals), net financial expenses and income taxes. Also, it should be noted that the following adjustment was removed from the list of adjustments disclosed in prior periods as there was no adjustment of this nature in the current periods and the previous year: the net expense for the 2012 class action lawsuit settlement and related legal costs.
Reference in this press release, and hereafter, to the 'Company' or to 'SNC-Lavalin' means, as the context may require, SNC-Lavalin Group Inc. and all or some of its subsidiaries or joint arrangements, or SNC-Lavalin Group Inc. or one or more of its subsidiaries or joint arrangements.
Statements made in this press release that describe the Company's or management's budgets, estimates, expectations, forecasts, objectives, predictions, projections of the future or strategies may be 'forward-looking statements', which can be identified by the use of the conditional or forward-looking terminology such as 'aims', 'anticipates', 'assumes', 'believes', 'cost savings', 'estimates', 'expects', 'goal', 'intends', 'may', 'plans', 'projects', 'should', 'synergies', 'target', 'vision', 'will', or the negative thereof or other variations thereon. Forward-looking statements also include any other statements that do not refer to historical facts. Forward-looking statements also include statements relating to the following: i) future capital expenditures, revenues, expenses, earnings, economic performance, indebtedness, financial condition, losses and future prospects; ii) business and management strategies and the expansion and growth of the Company's operations and iii) the expected impacts of the ongoing COVID-19 pandemic on the business and its operating and reportable segments as well as elements of uncertainty related thereto. All such forward-looking statements are made pursuant to the 'safe-harbour' provisions of applicable Canadian securities laws. The Company cautions that, by their nature, forward-looking statements involve risks and uncertainties, and that its actual actions and/or results could differ materially from those expressed or implied in such forward-looking statements, or could affect the extent to which a particular projection materializes. Forward-looking statements are presented for the purpose of assisting investors and others in understanding certain key elements of the Company's current objectives, strategic priorities, expectations and plans, and in obtaining a better understanding of the Company's business and anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes.
Forward-looking statements made in this press release are based on a number of assumptions believed by the Company to be reasonable as at the date hereof. The assumptions are set out throughout the Company's 2019 annual MD&A (particularly in the sections entitled 'Critical Accounting Judgments and Key Sources of Estimation Uncertainty' and 'How We Analyze and Report our Results') and as updated in the first and second quarter 2020 MD&A. If these assumptions are inaccurate, the Company's actual results could differ materially from those expressed or implied in such forward-looking statements. In addition, important risk factors could cause the Company's assumptions and estimates to be inaccurate and actual results or events to differ materially from those expressed in or implied by these forward-looking statements. These risks include, but are not limited to: (a) impacts of the COVID-19 pandemic and the elements of uncertainty related thereto; (b) results of the new 2019 strategic direction coupled with a corporate reorganization; (c) fixed-price contracts or the Company's failure to meet contractual schedule, performance requirements or to execute projects efficiently; (d) contract awards and timing; (e) remaining performance obligations; (f) being a provider of services to government agencies; (g) international operations; (h) Nuclear liability; (i) ownership interests in Capital investments; (j) dependence on third parties; (k) joint ventures and partnerships; (l) information systems and data; (m) competition; (n) professional liability or liability for faulty services; (o) monetary damages and penalties in connection with professional and engineering reports and opinions; (p) insurance coverage; (q) health and safety; qualified personnel; (s) work stoppages, union negotiations and other labour matters; (t) extreme weather conditions and the impact of natural or other disasters and global health crises; (u) intellectual property; (v) divestitures and the sale of significant assets; (w) impact of operating results and level of indebtedness on financial situation; (x) liquidity and financial position; (y) indebtedness; (z) security under the SNC-Lavalin Highway Holdings Loan; (aa) dependence on subsidiaries to help repay indebtedness; (bb) dividends; (cc) post-employment benefit obligations, including pension-related obligations; (dd) working capital requirements; (ee) collection from customers; (ff) impairment of goodwill and other assets; (gg) outcome of pending and future claims and litigations; (hh) ongoing and potential investigations; (ii) settlements; (jj) further regulatory developments as well as employee, agent or partner misconduct or failure to comply with anti-bribery and other government laws and regulations; (kk) reputation of the Company; (ll) inherent limitations to the Company's control framework; (mm) environmental laws and regulations; (nn) Brexit; (oo) global economic conditions and (pp) fluctuations in commodity prices.
The Company cautions that the foregoing list of factors is not exhaustive. For more information on risks and uncertainties, and assumptions that could cause the Company's actual results to differ from current expectations, please refer to the sections 'Risks and Uncertainties', 'How We Analyze and Report Our Results' and 'Critical Accounting Judgments and Key Sources of Estimation Uncertainty' in the Company's 2019 annual MD&A and as updated in the first and second quarter 2020 MD&A, each filed with the securities regulatory authorities in Canada, available on SEDAR at www.sedar.com and on the Company's website at www.snclavalin.com under the 'Investors' section.
The forward-looking statements herein reflect the Company's expectations as at the date of this press release and are subject to change after this date. The Company does not undertake to update publicly or to revise any such forward-looking statements whether as a result of new information, future events or otherwise, unless required by applicable legislation or regulation.
Founded in 1911, SNC-Lavalin is a fully integrated professional services and project management company with offices around the world. SNC-Lavalin connects people, technology and data to help shape and deliver world-leading concepts and projects, while offering comprehensive innovative solutions across the asset lifecycle. Our expertise is wide-ranging - consulting & advisory, intelligent networks & cybersecurity, design & engineering, procurement, project & construction management, operations & maintenance, decommissioning and sustaining capital - and delivered to clients in four strategic sectors: EDPM (engineering, design and project management), Infrastructure, Nuclear and Resources, supported by Capital.