SNC-Lavalin Group’s profits tumbled last quarter, falling short of expectations due to weak margins at its flagship engineering division, as the company scrambles to plug cash drains from construction contracts fixed price.
Posted at 5:45 p.m.
Although it returned to profit after posting a loss in the fourth quarter, the engineering company saw rising auctions and business development costs squeeze its bottom line. Meanwhile, sick workers and supply chain issues continued to delay key projects.
The first quarter results led to a more than 13% drop in the Montreal company’s share price, which fell $3.84 to close at $24.99 on the Toronto Stock Exchange.
“A market overreaction? Yes. But investor fatigue is palpable,” Laurentian Bank Securities analyst Troy Sun said in a note to investors, referring to the executive conference call he was on with colleagues. “Another messy quarter. »
Chief executive Ian Edwards spoke of “very, very high demand” for SNC’s engineering expertise and renewed interest in nuclear power amid the tear in global energy markets caused by Russia’s invasion of Ukraine. The company continues to make “good progress” in refurbishing parts of the Darlington and Bruce Power projects in Ontario, he said.
Under Mr. Edwards’ leadership since June 2019, SNC-Lavalin has focused on design and engineering services and moved away from turnkey, so-called lump sum projects — fixed-price contracts under which companies must absorb any cost overruns. But these projects continue to weigh heavily on SNC’s results.
Although Mr. Edwards has reduced the backlog of those contracts, COVID-19 and supply issues helped drive a quarterly loss before interest and taxes of $30.5 million for that segment.
On one of its two major Ontario projects, some 62% of workers stayed home at some point in the quarter, affected by the Omicron variant, Edwards told analysts.
“Obviously we need people to be physically at work,” he said.
Supply chain issues are causing delays in getting products made in China, postponing the completion of projects.
“There are therefore delays, because we obviously cannot equip the stations, we cannot finish them, we cannot do the mechanical and electrical work. »
SNC’s fixed-price contracts include Toronto’s Eglinton Crosstown light rail transit line, Ottawa’s Trillium Line rail extension and Greater Montreal’s REM light rail transit network. The three massive projects are expected to complete in 2022, 2023 and 2024 respectively.
Outlook maintained
Despite a difficult quarter, the company maintained its outlook for organic revenue growth in its services segments of 4% to 6% and an overall margin of 8% to 10% for earnings before interest and taxes, in line with its objectives for 2022-2024.
Rather than generating free operating cash flow last quarter, SNC-Lavalin spent $134 million, leaving its operating cash flow to fall far into the negative. This measure was positive 5.6 million a year ago.
SNC said its profit from continuing operations attributable to shareholders was 24.8 million, or 14 cents per share, for the three months ended March 31.
This result compares with a profit of 67.7 million, or 39 cents per share, in the same quarter last year.
First-quarter revenue totaled $1.89 billion, up from $1.82 billion in the first three months of 2021.
Revenue from professional services and project management rose to $1.87 billion from $1.80 billion last year, while revenue from capital activities fell to $16.4 million from $21. .7 million a year earlier.
On an adjusted basis, SNC-Lavalin said its professional services and project management businesses earned $39.4 million, or 22 cents per share, down from $83.4 million, or 48 cents per share, from the same period last year.