BUSINESS

SNC-Lavalin promises good governance, ethical behaviour amid allegations

08/03/2012 09:32 EDT | Updated 10/03/2012 05:12 EDT
MONTREAL - SNC-Lavalin Group Inc. said Friday it's committed to ethical behaviour and good corporate governance as it awaits the outcome of investigations involving former employees, including its previous chief executive officer.

No results or conclusions have been announced but justice must be served, interim CEO Ian Bourne said after SNC-Lavalin posted dramatically lower second-quarter profits of $32.7 million.

"If there are those who are found guilty of wrongdoing, they should be dealt with accordingly," Bourne told analysts during a conference call.

"I would like to reiterate that SNC-Lavalin is as committed as ever to demonstrating good governance and ethical behaviour as being the only way we will conduct our business."

Bourne said he was limited in what he could say about the allegations and added the search for a new CEO for the engineering and construction giant is on track.

SNC-Lavalin (TSX:SNC) has been feeling the fallout from investigations into $56 million worth of payments that were directed through its Tunisian office to unknown sales agents.

The rogue payouts prompted it to part ways with several senior executives, including former chief executive officer Pierre Duhaime, who stepped aside after a probe revealed he signed off on payments to undisclosed agents, breaching the company's code of ethics.

SNC-Lavalin has said Duhaime co-operated with its internal investigation, but he couldn't provide details of the payments.

Riadh Ben Aissa, SNC's former head of construction, sits in a Swiss jail. He hasn't been charged but is being held on suspicion of corrupting a public official, fraud and money laundering tied to his dealings in North Africa.

Ben Aissa was in charge of business dealings in his native Tunisia as well as Libya, where the company won lucrative contracts with the former regime of Moammar Gadhafi.

The RCMP executed search warrants at SNC-Lavalin's Montreal headquarters in April.

The raid followed an investigation into bidding on projects in Bangladesh that prompted RCMP searches of SNC's Toronto-area offices last September.

Two former SNC executives will be in court next year to face a corruption charge connected to the Bangladesh investigation. Ramesh Shah, 61, of Oakville and Mohammad Ismail, 48, of Mississauga are accused of trying to bribe officials in the country.

AltaCorp Capital analyst Maxim Sytchev said the investigations at SNC-Lavalin didn't have anything to do with its second-quarter results.

"So the miss the quarter had pertains to weaker than expected execution and not the issues that plagued the company since the departure of Pierre Duhaime," Sytchev said in a research note.

As a result, 2012 will be a "transitional" year for the company, he said, but warned of shareholder impatience.

"Our view is that if the actual results continue to lag relative to the again dialled-down expectations, probability of an activist-type shareholder participation increases dramatically.

"We have to remind investors that company’s very valuable concession portfolio and a very strong balance sheet are the life craft that keep SNC-Lavalin shares afloat."

In its financial results, SNC-Lavalin said that its net income fell to $32.7 million or 21 cents per share in the three months ended June 30.

That's down from $102 million or 67 cents per share a year earlier and far below a consensus estimate compiled by Thomson Reuters. Analysts had been looking for 59 cents per share of earnings.

The Montreal company said about $50 million in higher costs at a hydrocarbon and chemicals project in Russia and a power project in Tunisia contributed to lower second-quarter profits and a lower financial forecast for its 2012 earnings.

"The results in Q2 were affected primarily by the adjustments required in the two projects," said Bourne, who also serves as vice-chairman.

Full-year net income is now expected to be in a range of $325 million to $340 million.

"This revision is mainly as a result of unfavourable cost forecasts related to project execution in the second quarter of the year," he said.

Revenue was $1.9 billion — up from $1.7 billion in the second quarter of 2011 and $500 million ahead of a consensus estimate.

However, the company had $1.2 billion in cash and equivalents at the end of the quarter and its revenue backlog remained strong at $10.7 billion at the end of June, compared to $10.1 billion at the end of December.

In May, a shareholder suit was filed seeking more than $1.5 billion in compensation for a decline in SNC's stock price related to unproven allegations that three company officials had been involved with "improper or unlawful payments" to secure contracts in Libya during the Gadhafi regime.

Despite the controversy, SNC continued to receive numerous megaproject contracts during the quarter including a part of a $1-billion extension of the 407 toll highway in southern Ontario.

The company also made headlines when about 800 employees at its subsidiary Candu Energy went on strike.

Shares in SNC-Lavalin closed down $2.05, or five per cent, at $38.20 in trading on the Toronto Stock Exchange.