SNC-Lavalin Group Earnings Call Insights: E&C Gross Margin, Libya Situation

SNC-Lavalin Group recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

E&C Gross Margin

Yuri Lynk – Canaccord Genuity: Bob, the gross margin in the E&C business, when you strip out the charges in the quarter, really took a step back this quarter. Can you provide some additional color as to the puts and takes there on the gross margin in the E&C business on kind of a normalized basis? Where you see that true up the next couple of quarters?

Robert G. Card – President and CEO: So I was thinking about net. While we had – this quarter we had a smaller number of project issues. So if I look at our growing concern again as I have said in previous calls, the engine was there to produce the outcome. But I am encouraged that the handling of the issues is improving inside of – I will certainly I will turn it to you, inside of our organizations. Alain, do you want to…

Alain-Pierre Raynaud – Chief Financial Officer: In term of gross margin to revenues, if you – you try to determine the normalized gross margin to revenue ratio we can target is without any doubt above 15%. As I mentioned to you, we have been hurt by two exceptional items. If we eliminate these two items, our gross margin to revenue, we would stand is a range of 13% this quarter. On a normality basis, and if we refer to the historic performance of the group, we can be and we can consider as our normality gross margin as to be stood above 15%.

Yuri Lynk – Canaccord Genuity: That’s just in the E&C business you are talking about?

Alain-Pierre Raynaud – Chief Financial Officer: Yeah.

Robert G. Card – President and CEO: Did that answer your answer question or are we getting at what your asset?

Yuri Lynk – Canaccord Genuity: Yeah. That’s helpful perhaps just tied in with that, but I guess my second question I just want to talk a little bit about the oil and gas business. Revenue and backlog in the quarter were at pretty low levels here. Can you talk about the situation there specifically employee retention and the outlook for bookings in the next couple of quarters there?

Robert G. Card – President and CEO: In the oil and gas?

Yuri Lynk – Canaccord Genuity: Yes. Correct.

Robert G. Card – President and CEO: Specifically, I’m only thinking because I’m trying to make sure I stay on the right side of the wall here. First of all, we are having good success, so employee retention. We are having good success in recruiting leadership and to that group and hope to be able to conclude some transactions in the very near future, so I’m a bit impressed with the candidate flow that we’ve got. There is – if you’re referring to the leadership turnover we had, Neil has then stepped into that. He’s quite a senior player and I think we haven’t really missed a beat, not those were great people that were doing the job before, but we haven’t really missed a beat, and then we continue to prosecute the issues that we would have been dealing with over the last year quite effectively in my view. In fact, we made some good progress on dealing with the backlog that we’ve been challenged with. So, I’m not seeing anything there that gives me particular concern and we – as I mentioned, we are also positioning – I can’t disclose exactly what, but with some features that should make us more competitive in that market.

Alain-Pierre Raynaud – Chief Financial Officer: Okay, because you know, it’s C$60 million in revenue in the quarter and a year and a half ago, this business was doing C$1 billion on…

Robert G. Card – President and CEO: Yeah, and but again, our goal is to have the right kind of revenue. So, the revenue wasn’t that good, that we’re looking at before. So, we’re in the process of trying to replace backlog and revenue with higher quality product.

Denis Jasmin – VP of IR: This (indiscernible) one of the provisions that we took is actually against the revenue. So, when you see C$50 million in the quarter, it’s actually C$120 million because you’ve got a C$70 million provision against it.

Libya Situation

Frederic Bastien – Raymond James: I’d like to dig deeper into the Libya situation. Was the draw successful? The C$47 million draw that you highlight was this successful and if not why did you feel the need to record this provision.

Robert G. Card – President and CEO: It was not successful and our accounting standards requires us to record I don’t know if Alain-Pierre you want to shed any light on that. They didn’t get the draw which they did then why did we go ahead and…

Alain-Pierre Raynaud – Chief Financial Officer: First, as you know we face to an attempt to draw this letter of credit even if it is not successful because we talk all actions to prevent that. Nevertheless even if we are reasonably confident in our ability to prevent and to find the right conclusions, discussing with our customers or let’s say taking more legal actions for instance. We consider that we are first to be free correspondence towards the market and second to adopt a conservative position from that continued (indiscernible). So it has been decided currently by the SNC-Lavalin Group and its external auditors to register this letter of credit even if the conclusion of this item is really uncertain.

Robert G. Card – President and CEO: Our client interface was not able to explain or even fully understood that this had occurred.

Frederic Bastien – Raymond James: Alain-Pierre what line item does this fall under on your balance sheet, and I was wondering what is the total amount of letters of credit outstanding tied to Libyan projects?

Robert G. Card – President and CEO: We have other letters of credit but I don’t think we are at liberty to disclose the total amount. We don’t have a, we’ve had actually quite good relationships with the new Libyan governments, which comes, as a complete surprise to us. It’s happens to be in a different group than most of our work and for this point we are not viewing this as a system-wide or a country-wide matter…

Alain-Pierre Raynaud – Chief Financial Officer: I think we can – we may add that we never received yet any signal or any information questioning neither our project on the field either in in terms of performance or delay all has been out from let’s say when the – we have seen the war start in Libya. So, we see spends in all operation in full agreement with the customers to let’s say we – at this moment we have no information of the reason why they would like to drop. So, that’s why we are pretty confidant first on our let’s say position into field and second from our contractual terminal condition in our (appraisal).

Frederic Bastien – Raymond James: My last question Robert, it seems like the more you guys dig through the rubble the more stuffs seems to pop up. How far along are you with your diagnosis of the Company and how much confidence do you have that we are nearing the end of this sort of negative surprises?

Robert G. Card – President and CEO: Yes. I do think we have a fairly clear view of the level of field to continue with your analogy. We had identified these issues that came up as risks and we are actively managing towards them and in fact the Algeria one we’ve had an active dialog and team on since shortly after I started with the Company. But it is an evolving political situation in both environments, so it’s a very difficult call what to make. So, as far as the things that we are under control over, I think our control panel has all of the stuff on it. So we were surprised of the action, but we weren’t surprised of the risk. I guess would be a good way to describe that. I can’t sit here right now and promise you everything is smooth sailing from here on now. We have, as I said in the previous calls, we have large amounts of upside and still significant downside opportunity out there. My hope is that the pendulum isn’t locked in place, it will swing eventually. But we are doing we’re moving heaven and earth to make sure that we can try to bring some of this over on to the right side of the income statement and balance sheet.