MONTREAL — SNC-Lavalin Group Inc. delivered more harsh news to investors Thursday, cutting its quarterly dividend by 80 per cent as the troubled engineering giant grappled with a $2.12-billion net loss in its second quarter.
The dividend drop to two cents per share from 10 cents per share came after a third straight quarter of losses and amid a major strategic shift under the company’s new CEO, whose predecessor left in June following the controversial handling of a high-profile court case that has embroiled the Trudeau government.
SNC-Lavalin’s share price fell 10.7 per cent to $18.65 in afternoon trading, its lowest level since January 2005.
On a conference call, interim chief executive Ian Edwards admitted “there is no question that SNC-Lavalin is experiencing some difficult challenges.”
“In recent quarters we have provided guidance on our financial results that we did not deliver. This is unacceptable. It’s unacceptable to me and it’s unacceptable for our stakeholders who place trust in the company to do what we say we will do,” he said.
Edwards last week announced the company is quitting the competitive field of fixed-price contracts — where general contractors eat any cost overruns — and pivoting toward a more stable business model that revolves around engineering services.
On Thursday, he said volatility and cost issues associated with so-called lump-sum turnkey projects were “the root cause of the company’s underperformance.”
Edwards also reiterated his aim of “exploring all options” for SNC’s resources segment, including selling its flagging oil and gas business — which accounted for one quarter of overall company revenues last year, down from 44 per cent in 2016.
SNC-Lavalin remains saddled with a $4.6-billion backlog on fixed-price resource and infrastructure contracts, its ”biggest stumbling block,” said analyst Maxim Sytchev of National Bank of Canada.
The two areas — which include oil and gas projects and mine construction in the Middle East as well as two rail projects in Canada — cost the firm about $307.7 million before interest and taxes in the latest quarter due to higher expenses, the company said.
“Some are assuming that the company will need as much as $500 million to $1 billion to complete these projects given the lack of a clean track record on the part of SNC’s management,” Sytchev said in an investor note.
While revenue at SNC’s main segment — newly formed to handle a swath of engineering services — grew nearly 11 per cent, the unit’s earnings before interest and tax dropped nearly 20 per cent amid falling margins across all sub-divisions.
“Performance in most divisions is underwhelming,” Sytchev said.
Nonetheless, SNC-Lavalin’s renewed focus on engineering and design is already bearing fruit. It won engineering, consultant and planning contracts in the United Arab Emirates and southern U.S. last month, which “show SNC continues to be successful in winning work outside of Canada,” analyst Frederic Bastien of Raymond James said in a research note.
Thursday’s dividend cut dents earnings at Quebec’s Caisse de depot, SNC’s largest investor whose nearly 20 per cent stake has dropped in value by nearly $875 million since the beginning of the year. The pension fund manager’s nearly 35 million shares will now bring in about $2.8 million less in dividends each quarter, an $11.2-million hit annually.
Last week the Caisse took the rare step of publicly rebuking the firm, saying its recent performance “requires decisive and timely action” by the board.
Analysts expect the sale of SNC-Lavalin’s $3.25-billion stake in Ontario’s 407 toll highway to be completed in the third quarter.
On top of a daunting shift in strategy, the company faces a trial after allegedly paying $48 million in bribes to officials under former Libyan leader Moammar Gadhafi and defrauding Libyan organizations of some $130 million between 2001 and 2012.
SNC-Lavalin was at the centre of a drawn-out political controversy earlier this year following accusations by former attorney general Jody Wilson-Raybould that top government officials pressured her to overrule federal prosecutors in the Libya case and negotiate a deferred prosecution agreement, a kind of plea deal that would have seen the firm pay a fine rather than face prosecutors.
The latest quarter’s net loss included a non-cash charge totalling $1.8 billion to reflect the reduced value of its goodwill and other intangible assets.
The Montreal-based company said its $2.12-billion net loss attributable to SNC-Lavalin shareholders equalled $12.07 per diluted share, which compared with a year-earlier profit of $83 million or 47 cents per share.
SNC’s net loss from its core engineering and construction business was $2.18 billion or $12.44 per share, partially offset by $65.5 million, or 37 cents per share, of earnings from SNC Capital, which includes proceeds from the toll road north of Toronto.
Revenue dropped 10 per cent to $2.28 billion in the quarter ended June 30, compared with $2.53 billion during the same period in 2018.