05/03/2012 04:00 EDT | Updated 07/02/2012 05:12 EDT

Despite intense turmoil, SNC-Lavalin brass say client support solid

TORONTO - Client confidence in global engineering giant SNC-Lavalin remains strong despite intense turmoil resulting from an investigation into $56 million of mysterious payments that have tarnished its name, top executives said Thursday.

In an effort to calm jittery investors, they told the company's annual shareholders meeting that an updated code of ethics, along with stronger corporate governance and reporting lines have been implemented in the wake of the scandals.

"I'm not saying there's no damage done, obviously," chairman Gwyn Morgan said after the meeting.

"The fact is that we had very senior employees who were acting outside of the code of ethics, outside of the plan, outside of the communication with other senior management or the board."

Still, the company said it has lost no project renewals or seen bids pulled.

Despite an internal forensic audit, Morgan said the company still did not know who actually received the $56 million to unknown agents or what it was used for.

The scandals have hit SNC's shares hard, with its stock price plunging 34 per cent since January, wiping out $3.3-billion from the company's market value. Shares fell nearly two per cent to close at $37.31 Thursday on the Toronto Stock Exchange.

Three senior executives, including SNC's former CEO Pierre Duhaime, have resigned under a cloud or been fired since the debacle first came to light in February. The company said no other employees have been implicated.

Duhaime approved payments suggested by former executive vice-president Riadh Ben Aissa, SNC's former head of construction, who is in a Swiss jail on suspicion of corrupting a public official, fraud and money laundering tied to his dealings in North Africa.

Morgan defended a $5-million severance payout to Duhaime, saying the company's only choice was to litigate his contract or pay.

Despite the problems, the company's 11 directors were easily re-elected at Thursday's meeting, and only one shareholder, John Hanson, openly expressed frustration.

Hanson blamed poor communication at the highest executive levels for the problems.

"A lot of this could have been foreseen and may very well not have occurred," Hanson said. "You need to improve communication right at the top and right across this company."

Interim CEO Ian Bourne later told analysts it has already taken action and is working to ensure employees don't abandon the company to competitors who have lately come knocking at their door.

"We are committed to doing the right thing, making the adjustments we need to make and then turning the page so we can move forward," he said during a conference call.

Bourne said he hopes police will be able to use their powers to shed more light on events.

"Particularly with the arrest of Riadh Ben Aissa, I would be quite surprised if there weren't some more things that they surface through those investigations."

Bourne and Morgan defended the company's actions in light of concerns raised by SNC's largest shareholders — Jarislowsky Fraser Ltd. and the Caisse de depot et placement du Quebec — who have called for more transparency and stronger action.

They said the board had acted immediately when the problems came to light by initiating an independent and thorough forensic audit, which, for example, examined 1.8 million emails.

Even though Morgan said 2012 will be the most challenging year the 101-year-old company has faced, Bourne said SNC (TSX:SNC) was maintaining its 2012 outlook that net income will be in line with the full year 2011 net income.

Internally, he said, it was aiming for an improvement over last year.

It is also looking for ways to win its "fair share" of an estimated $300 billion worth of business that will be available in coming years in the Middle East region.

"We're actually looking at how to get back into Libya, for example, on the basis that the government there has a whole bunch of projects that were in progress that ended up getting disrupted."

SNC-Lavalin removed $900 million worth of Libyan projects from its backlog in 2010 amid the civil war in the North African country.

The company does not appear to be losing business over the scandals. In fact, the backlog of projects was $10.1 billion at the end of March, up $400 million from the end of 2011. The company also had $1.1 billion of cash at the end of March.

SNC-Lavalin, with 28,000 employees in 100 countries, has reported net income for the first quarter fell to $67.3 million or 44 cents a share, down from $78.8 million or 50 cents per share in the year-before period.

Revenue was nearly $1.8 billion, up from $1.6 billion.

Excluding $5.4 million in investigation-related expenses and $5 million in payments to Duhaime, results from its core non-concessions business would have been in line with forecasts, said Pierre Lacroix of Desjardins Capital Markets.

Maxim Sytchev of AltaCorp Capital said SNC's very public problems present a stellar investing opportunity because its business model remains in fact and shares are trading at half the valuation of U.S. peers.

"It is our belief that the current valuation dislocation observed in the case of SNC-Lavalin shares represents one of those rare 'fat patches' that value investors are waiting for."

Bourne said the board believes that value "will take care of itself" if it continues to deliver projects and grow its backlog over the next couple of quarters.

— With files from Ross Marowits in Montreal