SNC Lavalin looks to U.S. for growth, and M&As eventually

MONTREAL – SNC-Lavalin Group Inc. has its eye on the United States as ripe with growth potential for the company’s key focus areas, which helped it swing to a profit last quarter.

In the three months ended March 31, SNC rode its engineering services and nuclear divisions to net earnings nearly 15 per cent higher than a year earlier. The former segment boosted its backlog 25 per cent to a record $4.8 billion, while nuclear tacked on almost $1 billion more, upping its order list by 23 per cent.

The fresh figures pushed up the company’s share price by $3.71 or 11.6 per cent to $35.69 in mid-afternoon trading on the Toronto Stock Exchange.

SNC hopes to seize on its recent successes with further growth via mergers and acquisitions, particularly south of the border – but not immediately – said CEO Ian Edwards.

“We continue to achieve record-high backlog in this growing market. Our positioning in the U.S. is a key pillar of our pivoting to growth strategy,” he said, citing new contracts ranging from a Texas toll route to City of Baltimore wastewater facilities.

“Ultimately, we will get to an M&A program. It will be a sensible, step-by-step M&A program in the U.S. where we build on the business that we already have,” he told analysts on a conference call Tuesday, noting the Montreal-based company employs 4,200 workers in the United States. “We want a lot more than that to be equal to our peers.”

Edwards said he sees potential in the massive funding injection from the U.S. government via the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. He also cited electric vehicle battery manufacturing plants, as discussions continue with potential customers.

Canada and the United Kingdom also hold promise for sustainable energy as well as military contracts.

“The public sector focus on converting to a greener grid for baseload power, for greener infrastructure, has resulted in continued key wins across our core geographies,” Edwards said. “In the U.K. and Europe, we saw continued revenue growth which speaks to the focus of governments to spend on defence and energy … despite underlying uncertainties in global economies.”

Last quarter, SNC’s engineering service earned contracts to upgrade railways in the south of England and lead the design of a new subway in Dublin. Its nuclear division inked a deal with Ontario Power Generation in January to develop the country’s first small modular reactor at the Darlington nuclear plant. The six-year agreement comes after SNC helped oversee the generating station’s multibillion-dollar refurbishment.

However, the company’s challenges with so-called lump-sum turnkey (LSTK) projects continue to drain on its finances, albeit lightly. Adjusted earnings before interest and taxes in the segment saw a loss of $9.2 million in SNC’s first quarter. The outfit expects an LSTK loss related to overhead costs to reach a similar level as last year’s, when they totalled about $44 million.

Under Edwards’ stewardship since June 2019, SNC-Lavalin has shifted its focus to engineering and consulting services and away from lump-sum projects _ fixed-price contracts under which companies must pay for any cost overruns themselves. It also sold off the last of its flagging oil and gas businesses in August 2021.

In recent quarters, the three fixed-price construction contracts that bearing the bulk of the company’s adjusted losses in its LSTK segment were Toronto’s Eglinton Crosstown light-rail transit system, Ottawa’s Trillium Line and the greater Montreal area’s REM light-rail network extension. The first two are “largely physically complete,” while the latter is more than three-quarters finished, Edwards said.

Meanwhile, he continues to mull a sale of Linxon, a joint venture with Hitachi Energy that focuses on electrical substations. SNC launched a strategic review in March “to optimize our portfolio of businesses, including Linxon,” he said Tuesday.

The business eked out adjusted earnings of $800,000 last quarter after a loss of nearly $10 million throughout 2022.

Asked by an analyst why the company doesn’t speed up divestiture of some of its roughly $600 million in capital assets to shore up its balance sheet, chief financial officer Jeff Bell replied that its ability to “recycle” them immediately is “constrained.”

“The point is that we will absolutely continue to look at every one,” he said.

The company’s net debt stands at $1.45 billion, with a ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization of 2.9.

It maintained its 2023 forecast of five to seven per cent revenue growth across all services, and eight to 10 per cent per cent growth for adjusted earnings before interest and taxes.

In the quarter ended March 31, SNC net income attributable to shareholders was $28.4 million or 16 cents per diluted share. The result was up from a profit of $24.8 million or 14 per diluted share a year earlier.

Revenue totalled $2.02 billion versus $1.89 billion in the first three months of 2022.

The increase came as the company’s revenue from professional services and project management rose to $2.01 billion compared with $1.87 billion a year earlier. Revenue from its capital business totalled $16.3 million, down from $16.4 million.

On an adjusted basis, the company said its profit from professional services and project management amounted to 32 cents per diluted share, up from an adjusted profit of 22 cents per diluted share in the first quarter of 2022.
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