New services business complements Engineering Services, with profitability expected in 2021
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 2021.
- Expected to be profitable for full year 2021, reaching break even on a Segment adjusted EBIT 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 in the range of $15 million to $25 million for the remainder of 2020.
Source: Company Press Release