SNC-Lavalin testing global program that will reduce reliance on agents

MONTREAL – SNC-Lavalin is launching a pilot program designed to transition the engineering giant into a truly global company by boosting its local presence around the world, a move intended to reduce its reliance on agent representatives that helped to tarnish its reputation.

Starting in January, it will test moving executives to an undisclosed region of the world. After fine-tuning the effort, the model will be rolled out to other areas, CEO Robert Card said Friday on his first quarterly results call.

Card started on the job a month ago amid reports that about $22.5 million of $56 million in questionable payments to undisclosed foreign agents was used to win a Montreal super-hospital project.

Disclosure of the scandal surrounding the $56 million in payments resulted in the replacement of former CEO Pierre Duhaime and several other leading executives and a substantial decrease in the company’s share price.

On Friday, Card said SNC-Lavalin currently functions as an international company, which is largely based from Montreal, but has business segments that operate relatively independently around the world. The system is less efficient because it duplicates spending with other business groups for such costs as marketing and local management.

By contrast, global companies like the world’s big four accounting firms, Coca-Cola and General Electric are viewed abroad as local because they have entrenched operations with high-level officials who are well-connected and can help direct the allocation of resources and prospecting for contracts, he said.

“Globalization is really more tidying up what we already have than launching brand new beachheads out there.”

The test program flows out of a full review of SNC-Lavalin that should lead to changes likely being unveiled at next year’s annual meeting.

In the month since he came on board, Card said he’s seen nothing to undermine his perception about the company’s key strengths and its ability to grow in underserved markets such as hydrocarbons, water, the environment and the United States.

“In risk management, I’m really quite pleased with what I’ve seen,” he said, applauding the improvements put in place over six months by interim CEO Ian Bourne. “I see some opportunities to improve that but it’s definitely well within the framework of what I would expect in a first-class company.”

Card wouldn’t telegraph possible strategic changes, but reinforced that SNC’s highly-profitable concessions such as toll route Highway 407 in Toronto remain a key asset.

“I can’t reiterate enough times how critical a differentiator that whole business is,” he said, adding that it is reviewing how to hand the asset base.

“The existence of it is something that’s highly appealing to us and part of our strategic review is looking at how do we best manage that asset base to grow the engineering and construction business.”

SNC-Lavalin’s third-quarter profits dropped from a year ago but still easily beat consensus estimates due to the strength of investments in infrastructure concessions.

Net income dropped to $114.9 million, or 76 cents per diluted share, in the most recent period.

That was down from $127.6 million, or 82 cents per share, in the third quarter of 2011.

Revenue increased, however, to $1.98 billion from $1.78 billion.

SNC-Lavalin was expected to earn 65 cents per share in net profits on $2 billion of revenues in the third quarter, according to analysts polled by Thomson Reuters.

Excluding the contribution from the company’s investments in infrastructure concessions, SNC’s net income was $84 million for the third quarter of 2012, compared with $98.9 million for the corresponding period of 2011.

Net income from the infrastructure concessions investments, or ICIs, increased to $30.9 million from $25.6 million in the third quarter of 2011. ICIs include holdings in airports, toll roads, bridges, cultural and public service buildings, power, mass transit and water systems.

Administrative expenses increased in the quarter partly due to $11.5 million spent on efforts to retain employees and $3.7 million on investigations.

SNC maintained its outlook for net income for all of 2012 in the range of $325 million to $340 million.

The main drivers of profit will be SNC’s power, mining and metallurgy and ICI segments.

However, the hydrocarbons and chemicals segment and the infrastructure and environment segments “will continue to be challenging throughout 2012,” it said.

SNC-Lavalin is one of the leading engineering and construction groups in the world ,with offices across Canada and operations in some 100 countries.

On the Toronto Stock Exchange, its shares closed at $42.17, up $1.89 or 4.7 per cent in Friday trading.