SNC-Lavalin Forges New Strategic Direction with Corporate Reorganization

Exits Lump-Sum Turnkey Contracting

Q2 2019 Financial Results Lower than Anticipated

2019 Financial Guidance Withdrawn

MONTREAL, July 22, 2019 /CNW Telbec/ - SNC-Lavalin Group Inc. (TSX: SNC) today announced that it is exiting lump-sum turnkey (LSTK) contracting and will reorganize the Company's Resources (Oil & Gas and Mining & Metallurgy) and Infrastructure Construction segments into a separate business line following continued poor performance of these segments. The Company is also exploring all options for its Resources segment, particularly its Oil & Gas (O&G) business, including transition to a services-based business or divestiture.

The decision to reorganize the Company will allow SNC-Lavalin to focus on the high-performing and growth areas of the business, which will be reported under SNCL Engineering Services. The Company will fulfil the contractual obligations of its current LSTK projects, including full commitment to the Réseau express métropolitain (REM) and be reorganized as SNCL Projects, while providing separate ongoing operational and financial disclosure to the market on this business line.

The reorganization and exiting from LSTK contracting is the first step of the new strategic direction for the Company that is focused on de-risking the business and generating more consistent earnings and cash flow. Together with the recently announced sale of 10.01% of Highway 407 ETR for $3 billion, the Company's goal is to strengthen the balance sheet and enhance financial flexibility, while removing volatility. SNC-Lavalin will provide further detail on the strategy and host an investor day in early fall. 

"Lump-sum, turnkey projects have been the root cause of the Company's performance issues. By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source, and as a result we expect to see a material improvement in the predictability and clarity of our results," said Ian L. Edwards, Interim President and Chief Executive Officer. "We have a very impressive integrated professional services offering in EDPM, Nuclear, Infrastructure Operations & Maintenance (O&M) and Linxon, as well as a robust investment in Capital, the results of which have been overshadowed by LSTK projects. Going forward, the reorganization will allow us to focus on leveraging growth opportunities and end-to-end project management capabilities that we have in SNCL Engineering Services, delivering consistent earnings and cash flow, with a leaner capital structure, to our shareholders."

The Reorganization

The table below presents the preliminary revised 2018 revenues and Segment EBIT⁽²⁾ figures, based on the new structure following the reorganization:

Preliminary Revised Segment Disclosure^(3) (unaudited)
	For the year ended December 31, 2018
(in thousands of Canadian $)	Revenues	Segment EBIT^(2)
		E&C	E&C %	Capital	Total
SNCL Engineering Services
EDPM	3,676,397	354,745	9.6%	-	354,745
Nuclear	932,616	143,858	15.4%	-	143,858
Infrastructure Services*	912,704	52,854	5.8%	-	52,854
Capital**	264,657	-	-	224,975	224,975
	5,786,374	551,457	9.5%	224,975	776,432
SNCL Projects
Resources	3,001,365	(256,595)	(8.5%)	-	(256,595)
Infrastructure EPC projects	1,296,267	19,298	1.5%	-	19,298
	4,297,632	(237,297)	(5.5%)	-	(237,297)
Total	10,084,006	314,160	3.1%	224,975	539,135

*Includes Infrastructure O&M, MENA, and Linxon. The Company will continue its unique, repetitive Engineering, Procurement and Construction (EPC) offerings that are lower-risk, standardized solutions with regards to district cooling plants and substations

**The Capital segment EBIT will reduce following the Highway 407 ETR partial sale of 10.01%. As the proceeds of this sale are to be used to reduce leverage, this will result in lower financing expenses.

Lower than Anticipated Q2 Results and Goodwill Impairment

The Company expects significantly lower results in 2019 than previously anticipated, due in large part to LSTK construction project cost reforecasts required at the end of Q2 on projects in the Resources (O&G and Mining & Metallurgy) and Infrastructure segments. The Company will be aggressively pursuing its project claims through the contracts' protocols. Due to the above, the Company expects that the Q2 2019 adjusted EBITDA from E&C⁽¹⁾ to be in the range of negative $150 million to negative $175 million. Complete details of the Company's Q2 2019 results will be released on August 1, 2019.

The Company will be taking an additional non-cash, pre-tax, goodwill impairment charge and an intangible assets impairment charge relating to the Company's O&G business, specifically Kentz, totalling approximately $1.9 billion. This non-cash charge is largely attributable to the Company's decision to cease bidding on LSTK projects, as well as lower than expected performance by Resources in the first half of the year.

Given today's announcements, the Company is withdrawing all previously issued annual financial guidance for 2019.

It is important to note that the reorganization described above will reinforce the Company's strong EDPM and Nuclear segments, which will form the backbone of the SNCL Engineering Services business line. In 2019 the Company's SNCL Engineering Services are expected to deliver Segment EBIT⁽²⁾ margin consistent with prior periods. Now that we are exiting LSTK contracting, the Company will run off the vast majority (over 80%) of its $3.2 billion of LSTK backlog by the end of 2021 with the remaining two projects estimated to be fully completed by 2024. We expect that reasonably anticipated reforecasts in SNCL Projects will be reflected in Q2 results. The Company's objectives in relation to the SNCL Projects reorganization are to mitigate risks and intensify the Company's focus on claim receivables and recoveries while enhancing transparency on performance.

Our new strategic direction - Video message from the Interim President and CEO Ian L. Edwards

The state of our industry – The Interim President and CEO's viewpoint

About SNC-Lavalin:

Founded in 1911, SNC-Lavalin is a global engineering professional services and project management company and a major player in the ownership of infrastructure. From offices around the world, SNC-Lavalin's employees think beyond engineering. SNC-Lavalin's teams provide comprehensive project solutions – including capital investment, consulting, design, engineering, construction management, sustaining capital and operations and maintenance – to clients across the EDPM (engineering, design and project management), Infrastructure, Nuclear, and Resources businesses. www.snclavalin.com

⁽¹⁾ Adjusted EBITDA from E&C is defined herein as earnings from E&C before net financial expenses (income), income taxes, depreciation and amortization, and excludes charges related to restructuring, right-sizing and other, acquisition-related costs and integration costs, the net expense for the 2012 class action lawsuits settlement and related legal costs, the GMP equalization expense, as well as the gains (losses) on disposals of E&C businesses. The term "Adjusted EBITDA from E&C" does not have any standardized meaning under IFRS. Therefore, it may not be comparable to similar measures presented by other issuers. Management uses this measure as a more meaningful way to compare the Company's financial performance from period to period. Management believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company's performance.

⁽²⁾ Segment EBIT consists of revenues 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. Expenses that are not allocated to the Company's segments include: 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, acquisition-related costs and integration costs, amortization of intangible assets related to business combinations, the net expense for the 2012 class action lawsuits settlement and related legal costs, and the GMP equalization expense, as well as gains (losses) on disposals of E&C businesses and Capital investments. The term "Segment EBIT" does not have any standardized meaning under IFRS. Therefore, it may not be comparable to similar measures presented by other issuers. Management uses this measure as a more meaningful way to compare the Company's financial performance from period to period. Management believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company's performance.

⁽³⁾ Numbers disclosed in the table reflect the presentation changes that were made in Q1 2019 on the 2018 segment disclosures, as well as today's announced new structure. As disclosed in the Company's Q1 2019 financial statements, effective January 1, 2019, the Company changed the definition of segment EBIT, its measure of profit or loss for its reportable segments, to reflect a change made to its internal reporting. As such, segment EBIT includes: i) the contribution attributable to non-controlling interests before income taxes, whereas in the past it excluded such contribution attributable to non-controlling interests before income taxes; and ii) an allocation to the segments of certain other corporate selling, general and administrative expenses. The Company believes that such inclusions improve the measure of profitability of its reportable segments by better reflecting the overall performance of its reportable segments. At the same time, the Company's simplified its structure and resulted in a change to the Company's reportable segments, which were: i) Engineering, Design and Project Management ("EDPM"); ii) Infrastructure; iii) Nuclear; iv) Resources; and v) Capital. See Note 2C of Q1 2019 financial statements for more details. The preliminary revised segment disclosure also reflects a further split of the Infrastructure segment resulting from today's announcement.

Forward-Looking Statements:

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; and ii) business and management strategies and the expansion and growth of the Company's operations. 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 2018 MD&A, particularly in the sections entitled "Critical Accounting Judgments and Key Sources of Estimation Uncertainty" and "How We Analyze and Report our Results". The 2019 outlook also assumes that the federal charges laid against the Company and its indirect subsidiaries SNC-Lavalin International Inc. and SNC-Lavalin Construction Inc. on February 19, 2015, will not have a significant adverse impact on the Company's business in 2019. 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) outcome of pending and future claims and litigation; (b) on February 19, 2015, the Company was charged with one count of corruption under the Corruption of Foreign Public Officials Act (Canada) (the "CFPOA") and one count of fraud under the Criminal Code (Canada), and is also subject to other ongoing investigations which could subject the Company to criminal and administrative enforcement actions, civil actions and sanctions, fines and other penalties, some of which may be significant. These charges and investigations, and potential results thereof, could harm the Company's reputation, result in suspension, prohibition or debarment of the Company from participating in certain projects, reduce its revenues and net income and adversely affect its business; (c) further regulatory developments as well as employee, agent or partner misconduct or failure to comply with anti-bribery and other government laws and regulations; (d) reputation of the Company; (e) fixed-price contracts or the Company's failure to meet contractual schedule or performance requirements or to execute projects efficiently; (f) contract awards and timing; (g) remaining performance obligations; (h) being a provider of services to government agencies; (i) international operations; (j) Brexit; (k) ownership interests in Capital investments; (l) dependence on third parties; (m) joint ventures and partnerships; (n) competition; (o) professional liability or liability for faulty services; (p) monetary damages and penalties in connection with professional and engineering reports and opinions; (q) insurance coverage; (r) health and safety; (s) qualified personnel; (t) work stoppages, union negotiations and other labour matters; (u) information systems and data; (v) acquisitions or other investment; (w) divestitures and the sale of significant assets; * 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) global economic conditions; (hh) fluctuations in commodity prices; (ii) inherent limitations to the Company's control framework; and (jj) environmental laws and regulations.

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 2018 MD&A, and as updated in the first quarter 2019 MD&A.

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.

SOURCE SNC-Lavalin

Media: Daniela Pizzuto, Director, External Communications, 514-393-8000 ext. 54772, [email protected]; Investors: Denis Jasmin, Vice President, Investor Relations, 514-393-8000 ext. 57553, [email protected]

Related Links

www.snclavalin.com