SNC-Lavalin: Shaping the Future

The Empire Club Presents

Neil Bruce, President & CEO, SNC-Lavalin: SNC-Lavalin: Shaping the Future

March 23, 2016

Welcome Address by Dr. Gordon McIvor, President, Empire Club of Canada

Good afternoon, ladies and gentlemen. From the Arcadian Court in downtown Toronto, welcome, to the continuation of the 112th season of the Empire Club of Canada. For those of you who are just joining us either through our webcast or our podcast or at home on Rogers Television, welcome, to our meeting.

Before our distinguished speaker is introduced today, it gives me great pleasure to introduce to you our head table guests.

Head Table:

Distinguished Guest Speaker:

Neil Bruce, President & CEO, SNC-Lavalin

Guests:

Mr. Peter Buzzi, Managing Director & Co-Head, Mergers & Acquisitions, RBC Capital Markets

Mr. Paul Fogolin, Vice President, Government Relations & Communications, Ontario Retirement Communities Association; First Vice President, Empire Club of Canada

Mr. Richard Horrobin, Vice President, Commercial Services, Bruce Power

Ms. Barbara Jesson, President and CEO, Jesson + Company Communications Inc.; Director, Empire Club of Canada

Mr. Jeff Lyash, President and CEO, OPG

Dr. Gordon McIvor, Executive Director, National Executive Forum on Public Property; President, Empire Club of Canada

Mr. Steve Michell, Managing Director, Head, Consumer & Industrial Products, RBC Capital Markets

Ms. Sandra Pupatello, Former Minister of Economic Development and current Strategic Advisor, Global Markets and Public Sector, PWC

Mr. Preston Swafford, Chief Nuclear Officer and Executive Vice-President, SNC-Lavalin Nuclear

Ms. Verity Sylvester, Vice President, Corporate Accounts, CMC + CO; Past President, Empire Club of Canada

My name is Gordon McIvor. I am the Executive Director of the National Executive Forum on Public Property. Ladies and gentlemen, your head table.

We are also very pleased to welcome a group of students who join us today from the Ted Rogers School of Management at Ryerson University. Students, welcome.

Introduction

Now, we are particularly happy, ladies and gentlemen, to welcome Neil Bruce, the President and CEO of SNC-Lavalin, to our podium today, as this company and its two predecessors, SNC and Lavalin, have been mentioned in countless speeches by business and world leaders visiting our Club over the years. Their references to this organization were always in regards to the large international presence that the company has established over the past century and speaks to how Canadian engineering firms have truly made their mark on the world. Now, perhaps, Pierre Péladeau said it best when he stopped by the Club in February of 1988 and spoke to this emerging business elite out of our neighbouring province to the east which had come to be known as—you will probably recognize this term—“Québec Inc.,” an elite that counted engineering firms, like SNC and Lavalin still operating as separate businesses, as two of their star performers. Here is what Mr. Péladeau had to say to our Club back in 1988:

A few years ago, the word “profit” was looked upon by the so-called elite as a synonym for uneducated and mercantile people, and French Canadian youth were oriented mainly toward the priesthood or the so-called liberal professions of law, medicine, dentistry, pharmacy, etc. There were few engineers and very few in our graduate business schools. Today, our engineering schools are bursting at the seams. Lavalin and SNC are world- known enterprises headed by the graduates of our engineering schools, and, as Matthew Fraser of the Globe said in his excellent book Quebec Inc., “The Québec business schools and management faculties are producing almost half of Canada’s business school graduates.

Now, when I had the honour of welcoming Her Excellency Gloria Macapagal Arroyo, the President of the Philippines, to a joint lunch of the Empire and Canadian Clubs back in 2002, she shone a light on the $1 billion finance, design and construction of Manila’s new Light Rail Transit extension by the recently amalgamated SNC-Lavalin. And I remember distinctly how impressed the audience was with the magnitude and the scope of this project. The Prime Minister of Tanzania, the Ambassador of South Africa as it shed apartheid, and countless other statesmen and business leaders have spoken about this company over the year, and we have even had executives from the company at head tables, such as Patrick Lamarre, when various business lines of the company were being discussed by others, but today is the first time that we welcome the CEO of this iconic Canadian engineering firm to our podium.

SNC or Surveyer, Nenniger & Chenevert Consulting Engineers was established by Swiss-born Arthur Surveyer in 1911 in Montréal, and the founder had a really tough start before becoming known for its excellent work in hydraulics. Well, he partnered with many third parties in the early years. It was not really until 1937 when he signed a ten-year partnership with Emil Nenniger and Georges Chênevert that the firm really took off, becoming known all over the world when it completed the Manic-5 dam on the Manicouagan River which, at the time, was the highest, multiple arch dam on the planet.

Lavalin, as for that half of the company, was formed in 1936 by engineers, Jean-Paul Lalonde and Romeo Valois with the legendary Bernard Lamarre rising to the President and CEO position in 1962. When I had the honour of starting my career there in 1981, as the Director of Communications, he was considered arguably one of the best and most successful business leaders in our country, and he stayed in that position for 29 years being, by all accounts, the largest competitor to SNC. In 1991, the two firms merged and gave us the basic foundation of the company that we all know today.

Mr. Bruce, the incumbent President and CEO who we are welcoming today, had a long history with the company and has over 30 years’ experience in the oil and gas, mining, energy and infrastructure industries. He already had 15 years’ experience with Amex prior to joining SNC-Lavalin making him a true global business leader and forcing him to add skill sets, like strategic acquisitions and shareholder value creation, to his already highly developed expertise in engineering and construction.

His time in the President’s chair has certainly not been without challenges and even the occasional setback. But the quality of his work is known around the world and led the Queen to appoint him an Officer of the Most Excellent Order of the British Empire in 2012.

So, ladies and gentlemen, we are really delighted to welcome to our podium of the Empire Club of Canada for the first time, the President and CEO of SNC-Lavalin, Mr. Neil Bruce, who is here to speak to us today on a very apropos topic which is the future and how it is shaped. But, before he takes the stand, I would invite you to join me in watching a short video.

Neil Bruce

Hello, everyone. After that introduction and the history of SNC-Lavalin, of which even I have learned some things today, there is clearly no pressure in terms of following on from all of that in history.

So, anyway, I am thrilled to have the opportunity to address you today. I felt that it was important that I make my first address of 2016 here at the Empire Club. Over the past decades, we have worked and delivered numerous major projects in Ontario that we are proud of. Close to 4,000 of our dedicated men and women continue to shape its future as designers, investors, constructors, operators of many of the iconic projects that contribute to this province’s growth. This makes my presence today all the more fitting as I wish to share with you my view on the role that our business plays in Canada’s growth and prosperity. Considering this is my first address in Ontario since my appointment as SNC-Lavalin’s CEO, I thought a brief introduction was probably in order. I would like to start by telling you a personal story.

Two weeks after starting my very first job in the oil and gas industry, I was asked to go to the Brent Charlie offshore oil platform. It is about a three-hour journey by helicopter from land in the northern North Sea. This was my first time on a helicopter and my first time on an off- shore oil platform. I want you to imagine a platform that holds 64 storage tanks, each with a capacity of four Olympic-size pools. It sits on a concrete substructure 150 metres above the ocean surface in a water depth of 140 metres and is designed to withstand storms with the ultimate 100-foot waves. The weather is just about as harsh as a traditional Canadian winter. I remember putting on my protective equipment with layers of clothing underneath, and I was thinking, “How can people do this all the time?” One of the guys came over to me and asked if I needed any help with my equipment. Let us just say that I looked like I needed help. He put me at ease. I was sitting in the helicopter, and, clearly, I was the only one concerned about what was to come next. I was the only one that was basically not reading a newspaper or sleeping soundly. The closer we got to the platform, the bigger it got, and a sense of nervousness set in. We landed, and I felt relieved, but, when I get off the helicopter, I realized how massive the oil platform really was. There were over 600 people on this platform, and there was an offshore, floating hotel moored alongside. I found it difficult to orient myself. I finally found my room that I would share with three other colleagues, and, at that point, I realized the importance of my role as a single person among many, each one of us doing our job, doing so to deliver this important project to our client, Shell, and also to our country, the U.K. This is the platform that gave the Brent international oil price its name. It supplied 13% of the U.K.’s oil and gas and 10% of the ultimate gas needs of the country.

At one point, I met with my supervisor who asked me if I could help with structural punch listing, so I pretended that I knew what structural punch listing is—at least until I would ask someone who explained that the top side of the platform was put together from 40 to 50 component parts, totaling over 30,000 metric tons. That is the equivalent in weight to about 180 Boeing 777s. ‘Structural punch listing’ means going to each of these parts that was built on land and sank to the offshore platform to see what has not been done. I had to document everything and miss nothing. This was crucial to make sure that when the right trade showed up to complete the work, they knew what had to be done, what tools were needed and what materials were required. To omit or incorrectly document a single, vital piece of information could delay the completion of the task and have repercussions on the overall schedule.

What I learned from this experience was how each person counts on the next one, how vital it is to work as a team, to help one another and look out for one another’s health and safety, to be efficient and effective because people count on you to do your job right and on time.

This is what it takes to achieve fantastic goals, such as installing and bringing into production a massive oil platform in the middle of the ocean built to withstand 100-foot waves. This experience marked me. It is a vivid memory I carry with me every day as a reminder of the importance of the work our engineers do and the importance of collective success. This is essentially what SNC- Lavalin is all about. We deliver important, iconic projects to our clients and communities here in Ontario and around the world.

I am an engineer by trade, and I am very passionate about our profession. Engineers have been shaping our world and advancing society since the dawn of time. Over time, our profession has grown, diversified in its specializations and delivered great accomplishments. When we consider what we have accomplished, how can we not marvel at the potential ingenuity? We can generate energy from wind, water or the atom that can be used to propel safe and reliable rail and transit systems to ferry people to an airport where they will embark on a plane to fly halfway across the world, thanks to the petroleum produced by an oil platform built to withstand storms of 100-foot waves.

At home or abroad, our employees tackle every project with fierce dedication. We aim to consistently deliver sustainable, cost-effective, engineering solutions that will have a lasting, positive impact for our clients, the environment and our communities. At SNC-Lavalin, this includes mines and smelters to access metals to construct buildings and operate our cell phones.

Take, for example, the Ambatovy mine in Madagascar that we designed and built. One of the largest in the world, it produces 60,000 tons of nickel and 5,600 tons of cobalt a year. During the construction phase, we integrated the local community through our local resource development initiative. Our program raised the employability of more than 6,100 Malagasys by training them in skills, such as brick laying, farm work, painting and welding. Since 1997, more than 16,700 local workers gained through our training and mentoring program real world experience working on some of the largest capital projects in the world.

Another area where we build what matters is in oil and gas, which fuels our homes, transportation, and a whole range of things that are important to our daily lives. For example, we are helping to build Gorgon in Australia, the world’s largest natural gas project. It will produce over 50 million tons of LNG a year and has generated 10,000 jobs in Australia. A few days ago, the project celebrated a historic milestone when the first LNG cargo safely departed Barrow Island.

A third area includes infrastructure, buildings, hospitals, bridges and transit systems that connects and meets citizens’ needs. An example you are certainly all familiar with is the Highway 407 that plays a key role in residential and commercial growth in the region. It runs some 108 kilometers and includes 197 on/off ramps, 156 bridges and 41 interchanges, all without tollbooths.

We are also the experts in light rail transit across Canada from Vancouver to Calgary and Edmonton. We built 180 kilometers of transit with 130 stations with a weekly ridership of three million people. We are also building, with our partners, the Ottawa Confederation Line and the Eglinton Crosstown LRT project, here in Toronto. Both projects will greatly contribute to these cities’ growth. The Confederation Line in Ottawa is the biggest transportation infrastructure project since the building of the regional Rideau Canal, which opened in 1832. Eglinton will be the largest transit expansion in the history of the City of Toronto, which has a potential of transporting 5,400 passengers per hour. It is worth noting that both of these projects are being delivered through the guidance of Infrastructure Ontario’s Alternative Financing and Procurement model. This approach has rightfully garnered international recognition for effectively protecting the public interest and successfully delivering iconic projects.

Recently, we were short-listed with our partners for the Finch West LRT project. It is an 11-kilometre light rail transit that will provide rapid transit to two of Toronto’s neighbourhoods.

A fourth area where our experts improve people’s lives is in power stations and grids that light our lives and heat our homes. Two months ago, we were awarded as part of a joint venture with Aecon, the contract for the execution phase of the Darlington nuclear refurbishment project. Our portion of the project is expected to create approximately 800 jobs here in Ontario. When the reactors are fully refurbished, the Darlington station, which produces 20% of Ontario’s electricity, will be able to provide safe, reliable, affordable and CO2-free energy to the citizens of Ontario for the next thirty years.

We are presently pursuing opportunities around the world in countries, such as China, Romania, and Argentina. Considering that our nuclear business has a strong foothold in Ontario, securing any of these opportunities would have a positive impact on the province’s economy.

Canada’s nuclear supply chain is supported by more than 180 companies. Many of them are small to medium enterprises who are forerunners in science-based research and development. We are also contracted by the Greater Toronto Airports Authority to design and build a power plant to meet the needs of Pearson International Airport. Today, we operate and maintain it, ensuring the airport continues to operate independently of the local power grid.

In 2012, we were awarded a $2 billion contract to retrofit and modernize the Vale nickel smelter complex in Sudbury with the goal of reducing atmospheric emissions. Once completed, we hope to have slashed sulfur dioxide emissions by 85% and dust and metal emissions by up to 40%. It is the largest, single, environmental investment in Sudbury’s history and one of the largest ever in Canada.

As Canada’s largest engineering and construction firm, the benefits of our projects are felt beyond our own activities. These are measured both at a macro or national scale and in local communities. This would also be true for future projects in Canada, such as the Energy East Pipeline which could contribute to the creation of natural wealth. To do so, it needs to be designed and executed to respect the strictest environmental standards, as well as in social, acceptable engagement with the First Nations communities.

Today, our in-depth environmental expertise imbedded in all of our sectors ensures projects are developed with the best environmental practices. We look forward to future sustainable projects that will contribute to the collective wealth of Canadian communities.

So where is SNC-Lavalin today? We are a company that has seen significant change and broad improvement over the past three years. We took charge and tackled head on the challenges of the past and remain fully committed to the ethics and compliance culture we have built. It is an integral part of the way that we work every day here in Canada and globally. Just like you do not choose between your children’s safety, health, education and future success, we do not make choices between ethics and compliance, health and safety, client satisfaction and profitable operations. We choose to do them all at the same time and always deliver in a world-class manner. Our commitments and concrete actions in ethics and compliance allowed us to enter an administration agreement under the Government of Canada’s tougher Integrity Regime. I would like to recognize our employees’ efforts and dedication to continuous improvement in ethics and compliance. They deserve the credit for meeting the difficult criteria of the new Integrity Regime.

When I took over as President and CEO, in late 2015, I had a clear mandate to improve our company’s performance and results. Recently, we have taken meaningful steps in the new chapter of our five-year strategic plan. We made smart, strategic, organizational changes to reinforce our position among the world’s Tier 1 engineering and construction firms. The strategic plan we developed and are implementing has already yielded concrete results. We stabilized our organization, improved our internal cost base, and aligned our businesses with market conditions. We have set clear priorities to guide us as we move forward.

Our first area of focus is creating a streamlined structure. We took meaningful steps to improve our operational efficiency and execution across all of our businesses. The STEP Change Program, which we successfully completed in 2015, has identified a significant number of cost reduction initiatives and increased our competitiveness and agility.

Our second area of focus is on delivery. Our focus is now on better execution and delivering sustainable results. We persist to reinforce our culture of continuous improvement, efficiency and execution to deliver flawlessly on all of our projects, regardless of their size, scope and complexity. The Shriners Hospital for Children in Montréal, the ongoing massive Gorgon Natural Gas project I mentioned earlier, as well as the EMAL megasmelter in Abu Dhabi are but a few examples. I cannot stress enough how proud I am of our employees who, day after day, deliver projects that enhance people’s lives and frequently exceed client expectations.

Our third area of focus is growth in our four strategic sectors. Our diversified backlog speaks to our strength in infrastructure, mining and metallurgy, oil and gas and power sectors. Despite the current economic downturn in some markets, our diversification and end-to-end capabilities are enabling us to continue to win projects around the world. Last summer, we were awarded Keys Energy Project in Maryland solidifying our position as a leader in the U.S. power market.

One of our consortia was selected to deliver Montréal’s Champlain Bridge Corridor, one of the largest infrastructure projects in North America, and we expect continued growth in the infrastructure sector. Different levels of government have recognized the pressing need to invest in infrastructure to sustain economic growth and meet the need of Canadians from coast-to-coast.

In Africa, our experts in mining and metallurgy are presently designing Ethiopia’s first green field potash mining and processing facility. We have also secured five oil and gas contracts with our long-standing client, Sasol, in South Africa. With close to 25% of our global workforce based in the Middle East, this region continues to generate great opportunities. We won four contracts in as many months, including an important $800-million oil and gas project in the Middle East just recently.

Our growth is further reinforced by our capital team. They continue to build our reputation as a partner of choice for large, complex projects and are extending our investment capabilities across our four sectors. Our last area of focus is building a performance-driven culture. We continue moving forward in our goal to improve performance across the board. We have launched a company-wide program to further improve our agility, our project delivery and make us even more client-focused. In turn, we are starting to see enhanced client trust and satisfaction as well as an increase in repeat business, new and long-term projects and a steady, healthy backlog. We expect that our strategic priorities will enable us to achieve clear targets including to deliver an annualized, adjusted E & C EBITDA margin of 7% in 2017.

Recently, I had the pleasure of delivering our year end results which highlighted our good financial performance in 2015. We delivered on our commitments and met our 2015 guidance. We maintained a strong balance sheet with cash and cash equivalents rising to over $1.6 billion, and we maintained a stable and diversified revenue backlog of $12 billion throughout 2015, unsecured an additional $2 billion in the first 60 days of 2016. Today, the diversity in our market segments, the broad offering within each of our sectors, the dedication and depth of our employees’ expertise, as well as our restructuring efforts, will lead us to continued growth and the realization of the full potential of our company.

Regardless of the head winds we face, we continue to tackle any challenge with the same energy and dedication that we invest in all of our clients’ projects because, at the end of the day, we are a people business. Our assets are our people who live our values and deliver our clients’ outstanding projects. We have an important role in delivering sustainable, cost-effective, engineering solutions that will have a lasting, positive impact for our clients, the environment and the communities that we operate within. Everything that we have done and the daily efforts of our employees will ensure that we continue to build what matters in Canada and overseas for the next one hundred years.

Thank you very much.

Questions & Answers

Q: It is Mike Yorke with the Carpenters Union, and, look, you have got a great room of an incredible industry and the city listening to your words. Thanks for the great history lesson, and I think your company has a great future. It is a great role model for other Canadian companies and other Québécois companies as well, so keep going.

I wanted to tie together a couple of elements there that I saw early on in your slides. You talked about transportation, improving quality of people’s lives and also one of your first slides looked at Madagascar, where you reached out to the local community in terms of bringing people in. I guess it was the trades people primarily. I would like to offer just a parallel to that. I would like to just let you know—maybe some of the other folks here as well—that, with respect to the Eglinton Crosstown, some of your other partners that are actually here today. We are also reaching out to youth in the communities. It is called “My Eglinton,” and it is an opportunity for young people, young men and women to receive trades training throughout the construction of the Eglinton Crosstown and that project. And I think that is a huge opportunity for the city, for young people. And I would like to commend the partners involved, from IO to the Province of Ontario to the companies involved. So it is just a comment, and thank you very much.

NB: It is a really interesting point, and I think, ultimately, if you really believe in developing a sustainable future then you need to be doing all these things because, ultimately, the days of thirty years ago where you had expats going overseas to do specialist things are finished if you are going to grow. It does not matter whether you are operating in Toronto or in Madagascar, in Québec. Wherever you work, you really need to build a local, sustainable business and, by doing that, it is about engaging with universities. It is about bringing the engineers through, and it is also working with our partners. It was only a couple of days ago when John Beck of Aecon, was in Montréal. We were having a meeting, and we talked about that very thing, about how we can do more to make sure that the community, younger people actually get apprenticeships and get training in order to get them started on the career ladder very much like sort of my story of how I started in the oil and gas industry. So, I totally agree, totally agree.

Q: Yes, Neil, I represent the supply chain that you said some kind words about in the nuclear sector, and I just want to applaud SNC-Lavalin for helping us lead a group of 17 companies to China next week to help that country manage its energy infrastructure in its battle to ensure that we maintain a good climate. So thank you much for your leadership in all sectors and, in particular, in the nuclear sector. Thank you.

NB: Thank you. That probably needs to go more to Preston than myself. Thanks.

Q: Hi, I am the CEO of the Ontario Society of Professional Engineers, and, to build on the comment you had or conversation you had with Mr. Beck, there is a big debate going on in the engineering programs across Canada around how to modify and build on the curriculum, so as the CEO of the largest engineering company in Canada, what recommendations would give to the deans of engineering when they are looking at their curriculum? What should they be adding, and what should they be modifying?

NB: I think that, in terms of the development piece, universities, education, companies of all governments have all got a part to play in all of that, and, if I understood the question right, I just see all of that from a company perspective. I see everything that we do in that arena as basically creating our future because it is a bit like a sports team. The best sports teams generally develop younger people coming through the whole organization.

And I think one of the things that I am certainly proud of when I was in the U.K. was the work that we did on the Determined to Succeed Program in Scotland. We got recognized for the work that we did which was all about really filling a bit of a gap between industry and education around career advice because what we found was that the academics at times were not the best at giving career advice, and business was not the best at some of the academic stuff. So we joined up with a number of schools, even primary schools, to actually explain what the opportunities were, and we were after lots of engineers, but we are after lots of different skill sets. People tend to look at what we do and say, “Well, it is all about engineering” or “It’s about wearing a hard hat,” and, no, actually if you are an accountant, you can work there. If you want to do marketing, you can do that there. If you want to do graphic design, you can work with us. If you want to do strategy, you can work with us. There is a whole, whole range of things, and I think the more that business and the education establishments—whether it is schools, universities or through the apprenticeship programs and working with the unions—get closer together and figure out how can we make this successful and bring the people through for them and for the business, the better. So we should be doing more of that.

Note of Appreciation by Peter Buzzi, Managing Director & Co-Head, Mergers & Acquisitions, RBC Capital Markets

On behalf of the Empire Club and RBC Capital Markets, I would like to thank Neil for joining us today. We appreciate hearing you speak about the countless, high profile and successful projects built and being built by SNC-Lavalin and your priorities for the future. SNC is one of Canada’s most prominent corporate success stories, a true global competitor who has brought the Canadian flag to all corners of the planet. You have clearly taken over the leadership of this company at a critical time in its history and hearing your thoughts on your strategic vision gives us great confidence in the future of this great Canadian-based but truly global company, and we cannot wait to see what successes you will achieve next.

Concluding Remarks by Dr. Gordon McIvor

Thank you very much, Peter, and thank you again, Neil, for a wonderful presentation. Thank you as well to our generous sponsors today—RBC Capital Markets for being the event sponsor. We would also like to thank the National Post, which is our national print media sponsor and Rogers Television, our broadcaster. We would also like to thank Mediaevents.ca, Canada’s online event space for live webcasting today’s event at the global level.

Follow us, ladies and gentlemen, please, on Twitter at @Empire_Club. You can also follow us on Facebook, LinkedIn and Instagram. We would also like to invite you to join us again in the coming weeks. We have some extraordinary events coming up: On April 4th, in this very room, the President and CEO of Air Canada, Calin Rovinescu, another wonderful businessman from Montréal will be here. Jan Wescott, the President and CEO of Spirits Canada/Association of Canadian Distillers will speak on April 5th about the extraordinary success of the Canadian distillery industry around the world, and, on June 3rd we have the Chief Justice of our Supreme Court of Canada, Beverley McLachlin, who will be talking about some of the very interesting things in store at the Supreme Court of Canada.

Thank you very much, ladies and gentlemen, for your attendance today. This meeting is now adjourned.