Quanta Services, Inc. (PWR) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Quanta Services Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip Rupp, Vice President of Investor Relations. Thank you, sir. You may begin.

Great. Thank you, and welcome, everyone, to the Quanta Services fourth quarter and full-year 2018 earnings conference call. This morning, we issued a press release announcing our fourth quarter and full-year results, which can be found on the Investors & Media section of our website at quantaservices.com, along with a summary of our 2019 outlook and commentary that we will discuss this morning. Please remember the information reported on this call speaks only as of today, February 21, 2019, and therefore you’re advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quanta’s expectations, intentions, assumptions, or beliefs about future events or performance, or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond Quanta’s control and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the cautionary language included in today’s press release, along with the company’s 2017 Annual Report on Form 10-K and its other documents filed with Securities and Exchange Commission, which are available on Quanta’s or the SEC’s website. You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today’s call, including adjusted diluted EPS, backlog and EBITDA. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you’d like to be notified when Quanta publishes news releases and other information, please sign-up for e-mail alerts through the Investors & Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta’s President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services fourth quarter and full-year 2018 earnings conference call. On the call, I’ll provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta’s Chief Financial Officer, who’ll provide a detailed review of our fourth quarter results and 2019 guidance. Following Derrick’s comments, we welcome your questions. 2018 was another strong year for Quanta. We’re pleased with our results and strategic position in the marketplace. We believe our investments in craft-skilled labor and our strategy to strengthen our base business model over the last several years will continue to distinguish Quanta in the utility, energy and communications infrastructure industries. Upon transitioning into the CEO role in March of 2016, our five-year plan to create shareholder value, including – included the following key elements: focus on the base business to increase earnings stability; improve margins in each segment; generate $1 billion of repeatable and sustainable adjusted EBITDA; provide solutions to our customers through deep collaboration; and create growth platforms through service line expansion in the utility, industrial and communication industries. We have grown revenues considerably over the last three years, but more importantly, we have increased profits faster than revenues during that time and improved our return on invested capital. Many of the goals we accomplished in 2018 move us well down the path of achieving our five-year goals. Our accomplishments in 2018 include; we increased EBITDA by 27%, surpassing $900 million for the first time in Quanta’s history. We ended the year with record backlog of approximately $12.3 billion, which includes record 12-month and total backlog for our Electric Power segment. This is noteworthy and demonstrates the strength of our core operations considering we burned off significant backlog from the Fort McMurray West Electric Transmission Project in 2018, the largest project in Quanta’s history. We continue to lead the industry in safety, which we believe starts with training. We incrementally invested in our training efforts with the acquisition of Northwest Lineman College, or NLC. Since acquiring the College, we have complement their Lineman curriculum with new communications infrastructure and natural gas distribution services curriculum, which is allowing us to get employees out to the field faster and to be more productive when they get there. In 2018, NLC and Quanta staff trained more than 5,000 Quanta employees to various programs. We believe our industry-leading training and recruiting initiatives will ensure that we have the very best craft-skilled labor and enhance our ability to collaborate with our customers on future workforce needs. This further differentiates us in the marketplace as a strategic solutions provider. In response to several major severe weather events in 2018 and wildfires in California, we deployed more than 5,500 line workers to support and assist multiple customers’ power restoration efforts. We continue to focus on positioning our base business for long-term profitable growth, as evidenced by the 21% growth in master service agreement, or MSA revenues in 2018. We accomplished this through new program agreements, increased MSA share and service line expansions with many existing customers. We ended 2018 with communications backlog of approximately $760 million, a 20% increase from 2017. Our U.S. communications operations added 13 new customers, which more than doubled our U.S. customer count from prior year, and we also increased our penetration with a number of large communication providers. We believe several project and MSA opportunities could materialize in the near-term that could meaningfully increase our communications backlog. Importantly, our U.S. communications operations significantly improved their profitability in the fourth quarter, and we expect them to grow both top and bottom line results in 2019. Man-hours worked increased 18% in 2018 to record levels, and we ended the year with 39,200 employees, an increase of approximately 20% over year-end 2017. This is indicative of a strong level – levels of activity in our end markets and demand for Quanta solutions, which provide world-class execution and cost certainty for our customers’ maintenance and capital programs. And we demonstrated our commitment to stockholder value and our confidence in Quanta’s prospects by acquiring $451 million of common stock in 2018 and declaring an initial quarterly common stock dividend, the first in Quanta’s history. These are just some of our accomplishments in 2018 that put us on track to achieve our long – longer-term goals. While we are proud of these achievements, we remain focused on getting better. We continue to believe there is opportunity to create significant stockholder value, as we execute on our strategic initiatives, which include continued margin expansion, adjusted EBITDA growth and improved return on invested capital. Quanta’s end markets remain highly active, as evidenced by the double-digit revenue growth in both our segments in 2018, and we continue to believe we’re in a multi-year growth cycle. While larger projects capture the headlines and generate excitement, it is the smaller projects, maintenance services and everyday work that is driving much of our growth. We estimate this type of work grew more than 20% and accounted for approximately 80% of our revenues in 2018. Looking forward, we expect this activity to remain robust and currently accounts for approximately 90% of our revenue guidance in 2019, demonstrating the strength of our base business foundation. We operate in a variety of large addressable markets. And in the aggregate, these markets account for more than $100 billion in annual spend. We believe opportunities within our end markets could grow CapEx and OpEx spending at a mid single-digit compound annual growth rate over the medium-term, with opportunity for double-digit growth rate in some periods. The traditional electric utility model has evolved over the past 20 years for many of our longstanding customers from being heavily focused on fossil fuel-based electric power generation to an advanced integrated utility model, with a heavy focus on electric transmission and distribution investment, an increasing focus on gas distribution, as well as increasing ownership of pipeline infrastructure. Quanta has strategically evolved this business over time to meet these evolving customer needs. This has allowed us to collaborate with our customers and create unique solutions throughout the value chain that benefit the end users. Our utility customers continue to deploy capital in multi-year electric and gas transmission and distribution programs for grid modernization and reliability. Our utility customers are accommodating a changing fuel generation mix towards natural gas and renewables, replacing aging infrastructure, strengthening systems for resiliency and support long-term – and to support long-term economic growth. These programs are multi-decade modernization initiatives intended to create robust and reliable delivery systems for the future. For example, Duke Energy has a $37 billion capital plan for 2019 through 2023. Of that, 64% is allocated to electric transmission and distribution – gas distribution and integrity and midstream gas infrastructure, all core Quanta solutions. FirstEnergy's capital plan calls for approximately $2.8 billion of electric transmission and distribution investments per year through 2021. Dominion Energy plans to invest $800 million per year in the electric transmission, has a $3 billion, three-year grid modernization plan and a $2 billion multi-year strategic power infrastructure underground plan. Further, they expect to invest up to $600 million per year over the next several years for pipeline replacement and transmission pipeline modernization. All three of these utilities are meaningful Quanta customers, and we believe are representative of the multi-year investment programs across the utility industry. Additionally, over the past several years, devastating wildfires in California and hurricanes hitting the Gulf and East Coast have caused significant damage to property and life. These significant weather events have spurred our customers, state lawmakers and regulators to enhance the resiliency of the electric grid. For example, later this month, the three major California utilities filed their 2019 wildfire safety plans, which detailed approximately $4 billion of incremental strategic investments aimed at reducing fire risk and preventing future wildfires in the state. Quanta is embedded in the fabric of the North American utility industry and an important resource supporting our customers’ efforts to execute capital programs that are designed to benefit the ratepayer. These dynamics should provide Quanta with a transparent and large regulated end market that is growing and is resilient to economic uncertainty. It is important to note that more than 60% of Quanta’s revenues is directly tied to regulated electric and gas utility customers, which is core to our business. Within our Electric Power segment, our communications operations ended the year on a strong note, which contributed to revenues growth more than 50% in 2018, as compared to the prior year, led by our U.S. operations. We expect our communications operations to generate approximately $500 million in revenue in 2019, with mid single-digit operating income margins on a full-year basis. We continue to believe we have the opportunity to operate our communications business with a double-digit margin profile over time, as we continue to scale our operations. You have – you may have noticed in our earnings release this morning that we have renamed our Oil and Gas Infrastructure Services segment to Pipeline and Industrial Infrastructure Services. We believe the new name better represents the work we do within the segment and diversity of our service offerings. Our Pipeline and Industrial operations grew strongly in 2018, driven by base business activity in our natural gas distribution, pipeline integrity and industrial services operations, as well as significantly greater larger pipeline project activity. As we have discussed previously, we continue to optimize the segment and remain focused on improving its margin profile. Furthering these objectives, we have taken steps to exit certain oil-influenced operations and assets, which we believe is largely complete and will have a favorable impact on margins going forward. Our gas distribution integrity operations expanded our margins in 2018, as organic investments during the prior year began to payoff. Further, our industrial services group had a record year in 2018, and is well-positioned for another record year in 2019 and beyond. We anticipate activity levels for our larger pipeline project market to remain elevated for at least the next few years. As pipelines are required to move, the record volumes of hydrocarbons being produced throughout North America to demand locations. Additionally, the potential for LNG export could extend the pipeline cycle, as LNG facilities are the largest consumers of natural gas and many would require new pipelines to feed their facilities. However, at times, pipelines can face challenges, for instance. The Atlantic Coast Pipeline Project, or ACP, has been halted for the past several months due to permitting issues. The project owners are confident that these permitting issues will be resolved. However, at this time, we are not certain as to when the project may resume construction. As a result, other than the limited amount of work that we believe will be performed on the project this year, we have elected to exclude it from our 2019 guidance. We expect larger pipeline projects to account for less than 10% of our 2019 consolidated revenue guidance, and we do not need any additional larger pipeline project awards to achieve our guidance. That said, we are actively bidding and negotiating a meaningful number of other larger pipeline projects throughout North America. Quanta has strategically focused on diversifying its operations across service lines and geographies in a very deliberate manner. This approach is designed to help mitigate many aspects of risk in our business, including customer, labor, project, permitting, geography, execution, weather and other risks. I believe Quanta’s diversity, scope and scale and execution capabilities are unique in our space and set us apart, both operationally and as an investment. We believe our portfolio companies, services and geographic diversity position us to profitably grow through various cycles over time. In our earnings release this morning, we provided our 2019 guidance. We want to highlight a few items when comparing 2018 to 2019, which we believe demonstrate the strength of our base business and long-term strategy. Quanta’s 2019 guidance includes a little more than $1 billion of larger project revenues versus the more than $2 billion from larger project revenues performed in 2018. This indicates the expectation for our total base business to grow by double digits in 2019. Additionally, we continue to see in excess of $6 billion in aggregate larger electric transmission and pipeline project opportunities. We self-performed more than 80% of our 2018 revenue and expect to self-perform a greater percentage of our revenue this year. With our strong execution capabilities, we believe our ability to self-perform a high percentage of our work mitigates execution risk and continues to differentiate us from peers. Also worth noting, it is the first time the midpoint of our adjusted earnings per share guidance range has exceeded $3. We believe our 2019 expectations also demonstrate favorable end market trends, the impact of strategic initiatives, the strength of our operations, our ability to safely execute and our strong competitive position in the marketplace. As we typically do at the beginning of the year, we have taken a prudent approach to the revenue and margin ranges in our guidance to reflect what we believe are possible outcomes based on the risk inherent in our business. As the year progresses and we gain better visibility in our performance, project timing and industry dynamics, we anticipate being able to refine our expectations. In summary, Quanta performed well operationally against our strategic plan in 2018, which yielded record results. Our end markets and visibility are strengthening, and we continue to believe we are in a multi-year upcycle with the opportunity for continued record backlog and results in 2019. We expect our base business to continue to grow. We see opportunities for larger electric transmission and pipeline project opportunities to materialize over the coming quarters. There are continued opportunities for multi-year alliance programs over the near and medium-term, and we expect robust growth from our communications infrastructure services operations with improved profitability. We are focused on operating the business for the long-term and expect to continue to distinguish ourselves through safe execution and best-in-class build leadership. We will pursue opportunities to enhance Quanta’s base business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta’s diversity, unique operating model and entrepreneurial mindset is the foundation that will allow us to continue to generate long-term value for all our stakeholders. With that, I will now turn the call over to Derrick Jensen, our CFO, for his review of our fourth quarter results and 2019 guidance. Derrick?

Thanks, Duke, and good morning, everyone. Today, we announced record revenues of $3.1 billion for the fourth quarter of 2018, a 25.6% increase over the fourth quarter of 2017. Net income attributable to common stock was $56.8 million, or $0.38 per diluted share, compared to $113.6 million, or $0.72 per diluted share in the fourth quarter of 2017. Adjusted diluted earnings per share, a non-GAAP measure, was a record $0.96 for the fourth quarter of 2018, as compared to $0.45 for the fourth quarter of 2017. Certain items impacted the fourth quarter of 2018 and 2017 and were reflected as adjustments in Quanta’s adjusted diluted earnings per share attributable to common stock calculation, which I’ll discuss throughout my remarks. Discussing our segment results. Electric power revenues increased 5.4% when compared to the fourth quarter of 2017 to a record $1.66 billion. This increase was primarily due to increased customer spending aided by approximately $40 million in revenues from acquired businesses, $24 million of incremental emergency restoration service revenues and approximately $14 million of increased communication infrastructure services revenues. Operating margin in the Electric Power segment was 9.8% in the fourth quarter of 2018, which is relatively comparable to the fourth quarter of 2017. Our communications operations are included within our Electric Power segment and notably, the U.S. portion of these operations generated its first quarterly profit. On an annual basis, the Electric Power segment grew almost 15% for the year, with revenues at a record $6.4 billion and operating income grew over $110 million, or 21% to a record $628 million. Without the dilution from our communications operations, electric power revenues generated margins in excess of 10% for the year. Our Pipeline and Industrial segment revenues increased 61%, when compared to the fourth quarter 2017 to a record $1.45 billion in 4Q 2018, with the most significant contribution coming from higher revenues related to larger pipeline projects due to the timing of projects. Also contributing to the increase was continued growth in our gas distribution services, which have had steady growth throughout the year. Finally, industrial services experienced another quarter of strong growth, although, in part, due to the negative impact of Hurricane Harvey in the fourth quarter 2017. Operating margin increased to 3.7% in 4Q 2018, which excluding the impact of the asset impairment charge that negatively impacted the segment by 340 basis points, would have been 7.1%. This compares to 2.1% in 4Q 2017. As Duke mentioned in his comments, we have taken actions to exit certain oil-influenced operations and assets and as a result, we recorded asset impairment charges of $49 million, or $0.24 per diluted share. This charge offsets the otherwise strong performance across the segment. Compared to 4Q 2017, overall higher segment revenues also favorably impacted margins, as it improved fixed cost absorption in the segment. Corporate and non-allocated costs decreased $54 million in the fourth quarter 2018, as compared to 4Q 2017, primarily due to $58 million of goodwill and intangible asset impairment charges recognized during 2017, which were partially offset by $2.3 million in higher intangible amortization during 2018. With the enactment of the Tax Cuts and Jobs Act in December 2017, we initially recorded the tax benefit of $70 million, or $0.44 per diluted share in the fourth quarter 2017. Subsequent regulations and interpretations have been issued during 2018, which further adjusted the tax treatment of certain items. In the fourth quarter of 2018, we recorded a net tax charges of $36 million, or $0.24 per share, primarily related to reserves taken on previously recognized foreign tax credits in response to the new regulations. The fourth quarter 2018 free cash flow was approximately $80 million. For the full-year 2018, cash flows provided by operating activities were $359 million, net capital expenditures were $261 million, resulting in free class flow of $98 million, compared to $152 million of free cash flow in 2017. This decrease was largely due to higher working capital requirements, driven by the increase in 2018 revenues, particularly the increased activity in 4Q 2018, when compared to 4Q 2017. DSO was 74 days at year-end 2018, down from 78 days as of the end of the third quarter, which positively contributed to the fourth quarter cash flows and was improved from 76 days at year-end 2017. During the fourth quarter of 2018, we repurchased $234 million of outstanding common stock in the open market, acquiring 7.7 million shares. With these repurchases, we acquired a total of 13.9 million shares of our common stock at a cost of $451 million during 2018. We had approximately $299 million of availability remaining on our $500 million stock repurchase authorization at December 31, 2018. Additionally, during the fourth quarter of 2018, we announced an initial quarterly cash dividend of $0.04 per share, demonstrating our continued confidence and stability of our base business, long-term growth prospect and commitment to enhancing shareholder value. The first cash dividends totaling $5.8 million were paid in January 2019. At December 31, 2018, we had $1.2 billion in total liquidity. We ended the year with a debt to EBITDA ratio as calculated under our senior secured credit agreement of approximately 1.6 times, which we believe is prudent in order to support the working capital demands of our growing business and allow us to continue to pursue opportunistic deployments of capital for acquisitions, investments, share repurchases and cash dividend payments. Before I turn to backlog and our guidance for 2019, I’d like to pause and provide an update on a key customer relationship. As many of you are aware, PG&E, one of our larger customers, filed for bankruptcy protection on January 29, 2019. As of the bankruptcy filing date, we had receivables from PG&E totaling approximately $150 million. As a key partner to PG&E, we have continued to support them with services that we believe are important to the safety and reliability of their systems. We are monitoring the bankruptcy proceeding and maintaining communications with PG&E management regarding the treatment of our pre-petition receivables, as well as their need for our services going forward. We currently believe we will ultimately collect our pre-petition receivables. However, as with any bankruptcy, that belief is based on a number of assumptions that are potentially subject to change as the case progresses and therefore, our assessment of collectability could change in the future. We also believe that PG&E will have sufficient debtor-in-possession financing to fund its ongoing operations and therefore, are confident we will be paid for our post-petition services in the ordinary course. Turning to backlog and our guidance for 2019. As of December 31, 2018, our aggregate total remaining performance obligations were estimated to be approximately $4.7 billion, approximately 66% of which is expected to be recognized in the first 12 months. Our aggregate total backlog as of December 31, 2018 was a record $12.3 billion and 12-month backlog was $7 billion. These represent increases of 10.4% and 8.2%, respectively, over the prior year and reflect the continued strength of our end markets and opportunities and specifically, the continued growth of our base business, which Duke referenced in his comments. For the Electric Power segment, 12-month backlog was $4.6 billion and total backlog for the segment was $8.5 billion, both represent records with increases of 13% and 16%, respectively, when compared to 4Q 2017. 12-month backlog for the Pipeline and Industrial segment was $2.4 billion and total backlog was $3.8 billion, slightly decreasing from December 31, 2017. Turning to guidance. For the full-year 2019, consolidated revenues are expected to range between $10.8 billion and $11.2 billion. Our range of revenue guidance contemplates Electric Power segment revenues of $6.7 billion to $6.9 billion, which reflects our confidence in the continued momentum in our electric power and communications operations and particularly our base business. Of note, this represents segment revenue growth over 2018, which included a full-year of revenue contribution from construction activities on the Fort McMurray West Transmission Project, as well as above the average emergency restoration revenues of approximately $241 million. Our 2019 guidance contemplates a much lower contribution of larger project revenues and approximately $100 million of emergency restoration revenues, in line with historical averages. As it relates to seasonality within the Electric Power segment, we expect revenue growth in each quarter of 2019, compared to 2018, with quarter-over-quarter growth in the second quarter potentially exceeding 10%. We expect growth to moderate in the fourth quarter, partially due to the higher levels of emergency response services in 2018. We expect the high-end of our revenue range to represent greater revenue growth opportunities in the third and fourth quarters relative to 2018. We see 2019 operating margins for the Electric Power segment to be between 9.5% and 10%. We expect that seasonal effect on margins will be comparable to 2018, but first quarter operating margins expected to be the lowest for the year, growing in the second and third quarters and then experiencing a slight decline in the fourth quarter. Although the high-end of our full-year Electric Power segment expectations contemplate double-digit margins, our communications operations continue to ramp slightly diluting margins in the segment. However, we believe communications operating income margins could exceed 6% for the year and reach upper single digits on a quarterly basis by the end of the year. Pipeline and Industrial revenues are expected to range between $4.1 billion and $4.3 billion. We see double-digit quarter-over-quarter revenue growth in the first quarter, with revenues growing sequentially through the third quarter. Revenues as compared to 2018 are expected to be lower on a quarter-over-quarter basis for the second, third and fourth quarters, with fourth quarter revenues potentially declining over 30% relative to 2018. After two years, much larger pipeline projects contributed to $1.5 billion in revenues, our range contemplates a significantly lower contribution from larger projects, reflecting the impact of project delays on the previously announced large diameter pipeline project award, which Duke discussed in his prepared comments. The midpoint of our guidance for larger project work includes approximately $850 million of signed or verbally awarded work, the lowest levels we’ve experienced since 2015. While our ability to deliver on larger projects remains a strategic differentiator, we expect base business growth to partially offset this decline, as demand for our services in the gas utility and industrial markets continues to provide meaningful growth opportunities. Of particular note, our 2019 guidance requires no additional larger project awards in excess of the $850 million, I previously referenced, and contemplates base business revenues at a level 75% higher than comparable revenues in 2015. Overall, Pipeline and Industrial segment operating margins are expected to improve over 2018 and be between 5.5% and 6.5%. As we have discussed in years past, our first quarter traditionally has lower activity in our gas distribution business due to weather seasonality, which impacts our revenues and pressures margins. We expect margins will improve into the second and third quarters, but the decline in revenues and normal seasonality will cause margins to decline sequentially in the fourth quarter. We anticipate net interest expense to be approximately $42 million for 2019. As we have previously discussed, our other expense and income line includes the deferral of a portion of the profit on construction activity for projects in which we have an ownership interest. In the first-half of 2019, the Fort McMurray West Transmission Project is expected to be completed and placed in commercial operations. And at that time, we will recognize the deferred profit that has been recognized as a component of other expense in both 2018 and 2017. We currently believe this may happen at the end of the first quarter. Although this reversal will not contribute to operating income or EBITDA in 2019, as it has been included in our operating results in prior years, it will positively impact our earnings per share. We estimate the recognition of approximately $60 million of previously deferred profit into other income this year or the equivalent of $0.30 in diluted earnings per share. Overall, we expect other income for the year to range between $60 to $65 million. One more added bit of discussion for further color in evaluating year-over-year adjusted EPS growth. This diluted earnings per share contribution could be viewed operationally as $0.24 of diluted earnings per share related to profit deferred from 2018 and $0.05 of diluted earnings per share related to profit deferred from 2017. We are currently projecting our effective tax rate for 2019 to be 29.5% – to be between 29.5% and 30% for the year, with the first quarter rate being as low as 29.2%, due to the tax effect to stock-based compensation, the majority of which impacts the first quarter. These operating ranges support our expectation for net income attributable to common stock of $407 million to $473 million and adjusted EBITDA between $875 million and $975 million for the full-year 2019. For purposes of calculated diluted and adjusted diluted earnings per share for the year ended 2019, we are assuming around 147.2 million weighted average shares outstanding. We estimate our range of GAAP diluted earnings per share attributable to common stock for the year to be between $2.76 and $3.21 and anticipate non-GAAP adjusted diluted earnings per share to be between $3.30 and $3.75. We estimate our capital expenditures for the year to be between $260 million and $275 million. With revenues at the midpoint of our guidance leveling off after years of substantial growth due to the timing of larger projects and the corresponding reduction in investments and working capital, free cash flow for 2019 could be meaningfully improved from prior years. Over the last three years, due largely to annual revenue growth in excess of 10%, our cash conversion ratio and non-GAAP measure or free cash flow divided by adjusted EBITDA averaged around 20%. In 2019, we could see free cash flow growing to between $300 million and $500 million, or cash conversion ratio of up to 50%. However, similar to prior years, the addition of incremental awards or higher levels of revenue growth than currently forecasted could put pressure on our free cash flow expectations. As we close out 2018 and look ahead to 2019, I believe both years stand out. 2018 set records every quarter and ended with 18% revenue growth, 27% adjusted EBITDA growth and 43% adjusted EPS growth, a level of performance delivered by our employees that we believe deserves special recognition. Like the records for the year, the number of highlights are too numerous to mention, but include double-digit growth in both segments and base business activity, continued strong execution on the largest project in company history, margin increases in all major segment areas, and industry-leading expansion and safety and training efforts, all with the capital capacity and allocation backdrop of the expansion of our available credit by almost $800 million, the repurchase of $451 million in common stock, the acquisition of four companies for $146 million in total consideration and the initiation of a dividend, all while maintaining a well-positioned financial profile, a fitting year to celebrate our 20th-year of operations. Although 2018 was an exceptional year of record performance across our operations, I believe 2019 could be the most significant year in our history. One of our primary focus is, as we embarked on our strategic plan at the beginning of 2016, was to grow the base business and establish a more repeatable and sustainable EBITDA. As we have commented throughout our prepared remarks, with the push of various projects from 2019 to 2020, the roll out of significant projects and the decline in strong response revenues, we head into 2019 with over $1 billion of revenue headwinds. Despite that, our 2019 adjusted EBITDA expectations show an increase at the midpoint of our guidance and importantly, imply adjusted EBITDA growth of almost $400 million from the start of our strategic plan. Additionally, we expect almost 90% of our revenues this year to come from what we consider to be a base business, the highest percentage in a decade, which would represent a $3.5 billion base business revenue increase from the start of our strategic plan. Our goal has been to capitalize on the revenue growth opportunities within the business and have that translate into increased value to shareholders through margin expansion and capital allocation initiatives. At the midpoint of our expectations for 2019, our revenues will have grown at a 10% compound annual growth rate since 2015. More importantly, during the same period, our adjusted EBITDA will have grown at over a 15% CAGR and our adjusted EPS will have grown at well over a 30% CAGR. As 2019 kicks off our third decade of operations, I believe represents a type of year that Quanta was originally founded for 20 years ago and establishes a new base against we can measure ourselves. This concludes our formal presentation. And we’ll now open the line for Q&A. Operator?

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Alan Fleming with Citi. Pleased proceed with your question.

HI, good morning, guys. Duke, you talked about, obviously, lower levels of large diameter pipeline in 2019, $850 million lowest level since 2015. Maybe you can just talk about your confidence that this is only a low – temporary low in the current up-cycle and not a kind of cooling off of that cycle? And and maybe your visibility on the large diameter side and opportunities to redeploy some of the available capacity that you had for Atlantic Coast, both in 2019 and 2020, how are you thinking about that?

Yes, thank you. I think when we look at the segment itself and what we have this year, we’re confident the $850 million, we don’t need any extra awards to achieve our midpoint of our guidance. We’re looking at the company and the portfolio. We’re also looking at the segment with our large diameter pipe becoming less and less of that segment. It’s more steady. It’s less risk and we continue to perform underneath the large diameter pipe. And saying that, the opportunities are still there. We talked about $6 billion in total for both electric and gas. We continue to see opportunities this year and into the future. By no means that we think we’re at the bottom of the cycle, but it will cycle. It is a cyclical business in large diameter pipe. We continue to make that less of that segment over time and we’re growing underneath quite nicely. We’re real proud of where the segment sits. The opportunities are still there. We talked about the LNG exports. We talked about moving gas and – of the Permian down into the load centers. So there’s plenty of opportunity out there and there’s plenty of opportunity to backfill second-half of the year and on into next year. We still like that segment and still like that large diameter pipe business.

Okay. And Derrick, maybe you can help us with some of the puts and takes on the margin guidance in electric power and business is growing, but the midpoint of your margin guidance is kind of flattish year-over-year. So is there anyway to kind of quantify the impact you’re seeing from lower levels of large project work and less storm work and then the drag from communications that is continuing to grow? And besides operating leverage, is – are there any positive offset that are helping you to absorb some of those headwinds?

Yes, broadly, I mean, when you look through the communications dilution into 2019, I think it’s important to recognize that we so look at the Electric Power segment to have the ability to operate at a double-digit margin. That’s our target margin percentage. At the midpoint of the guidance right now, the electric power as a standalone is operating at double-digit margins, which considering the contribution that we’ve had from the large project here in 2018 that contributed being able to get to that performance. We’re still pleased with where that margin performance is overall coming out. We think long-term, that’s the target margin. Communications providing a little bit of headwind against that in – from a segment perspective. But to that end, we still think that can ultimately operated at around a 6% margin performance with a growing level of margin contributions through the year exiting, as we’ve said before, kind of in the double-digit margin profile as well. So, we’re – we feel like that the strength of the segment is still operating there. It’s important to think that – back on the large projects side, I mean, a large project component of electric power is ultimately the smallest contribution in a decade. And so to the extent that we’re able to operate at a double-digit profile of electric power. That’s that base business contribution and showing that the portfolio is still ultimately able to execute.

Thank you. Our next question is from the line of Tahira Afzal with KeyBanc. Please proceed with your question.

Hi, thank you and congrats on a very strong quarter by the way.

Thank you.

Duke, first question is, you talked about earlier in your prepared commentary about sort of a mid single-digit growth rate for the industry. Given what seems to be an edge that you have from all the training facilities, should be assume that should provide you an edge to really outperform the industry growth trends over, let’s say, a three to five-year time horizon?

Yes, thank you. I think I was speaking to us and the industry. Look, I don’t – can’t comment on that, you have to look at it. But when I see it – when we see our growth patterns, we say mid to upper single digits. You can go back through the years and look at our performance and look at what we’ve done based upon craft-skilled labor putting people in the field and our ability to do so. I like our chances to continue to grow that. We set up or to mid single digits over time. And if you’re coming off, let’s just call it, 90% in the base business and we’re growing to mid to upper single digits. You’re growing quite nicely and it’s repetitive, it’s resilient and we like the backdrop which is 60% of it is based upon utility spends.

Got it. Okay, Duke. And second question for me. It’s good to hear about your conversion rate to free cash flow. If I look at some of your peers and other industries that have more of the business base driven by base load activity, which is the way you’re converging. The free cash flow rates are 70%-plus, so I don’t know, but this is a question for Duke or Derrick. But over time, where do you see your conversion rates going?

I would just say in general – I’ll let Derrick comment. But in general, with the growth that’s underneath of the base upper single digits on, call it, $9 billion, it’s quite a bit of growth underneath. And that’s – and if you look at us, we self-perform about 85% to 90% of our business. So in saying that, we derisk our business from a labor standpoint and I hear quite a bit from peers and such that they have labor issues. I don’t think we have that. I think when you look at us, we execute quite nicely in our base business. So – and I’ll turn the rest to Derrick.

Yes. And on the base business side, I mean, to the extent that we see those levels of growth. I mean, one of things that we’ve always said is the high levels of growth will require a level of working capital commitment. So that base business is still you’re consuming that. And then the other thing unique to 2019 is that, as we commented, we do have some pre-petition receivables that are out there that we did not forecast to be turning to cash. In 2019, we think that’s conservative position, so that also weighs on the conversion rate unique to the year.

Thank you. Our next question is from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi, thanks, and again congrats on a nice quarter. first just – first on the electric side looking at the strong growth you’re expecting in the base business. Could you kind of give us a feel for your thoughts on just the general trends in the underlying end markets versus what you think you may be gaining through share gain? And then if you could comment on how some of the events – expand upon how some of the events like the wildfires in California and other natural disasters are impacting how utilities are thinking about grid resilience?

Yes. Thanks, Noelle. I think if you look at the data that’s out there, you’ll see many of our customers are investing in both CapEx for storm hardening, which is related to wildfires storms around the Gulf Coast, East Coast. So those things continue to happen, they’ve happened over time. It seems like it’s more frequently – I’ve seen it go both ways, where you have natural disasters that are quite prevalent for two or three years and then there’s a low. So, whether something we can’t predict, but we do see a lot of that today. I do believe that the most of the public is willing to pay for resiliency and that’s what you’re seeing with the grid. And in general, you’re also seeing different forms of generation going into renewables or natural gas. So the grid is moving around from a transmission standpoint to accept those that load on to the systems. And also the last thing I would just say is, the modernization is certainly taking place and it’s broad based. It’s not one customer, it’s across the Board and it’s necessary to have a modern system in a modern economy. And I think it’s – I think our customers and ultimately the ratepayer benefits from the investment that’s been done and continuing. I do believe we’re in early cycles as well.

Okay, thanks. And then you kind of touched on this a bit. But just given some of the regulatory delays in – on the large project pipeline side, pushing out some of that work. Are you seeing any kind of increased competition for small to medium type of work, as competitors or other players who may have been on some of those lines trying to fill their book?

I think, in general, we’ve really concentrated on that base and making sure that we’ve grown that and really at the customer level collaborating with them. We really see us just continuing to grow that out. As far as the FERC and all the decisions that are made thereon, let’s call it, MVP, ACP or whatever you would like to talk about. There’s plenty of opportunities underneath all that, that don’t make the headlines that are $90 million or $100. It’s not the big project that we tend to talk about everyday. There’s lots of those out there. There’s lots of opportunities for us across the Board on those projects. We’re pleased with where we sit, more pleased with how we’re executing. And I still think it goes unnoticed that last year we had about $2 billion of large projects. In the guidance this year, there’s about a $1 billion. All that is base business growth that you see into 2019 that I still think goes unnoticed. We continue to talk about a very, very, very small position of what we’re discussing in 2019. So I just want to reiterate, again, the growth of the company at the base level and the margins around it that are sustainable and resilient.

Thank you. Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning. Duke, I guess, my first question. If I look at your oil and gas margins in 2019 compared to 2018, your guide implies they’re up year-over-year, even if you add back the asset impairment charging in the fourth quarter, with significantly less mainline pipe business. So what I’m trying to understand is the profitability of your base business within oil and gas? And I guess, as I think over the long-term, is there a path to get your oil and gas base business margins more comparable to what we’re seeing in electric power, because your electric power margins are 10% with little large project work. So I’m just wondering if oil and gas can get to electric power margins in similar base business over time? Because if that’s true, that’s a pretty compelling story? My second question is, as I think about your 2019 guide again for electric power and oil and gas, you’re not assuming much in large projects. Is there less work you need to win to achieve your guidance in 2019? And then if we do get some larger projects, can you help me understand the operating leverage we should get within each of the segments? Thank you.

Yes. Thanks, Jamie. First to address the base business and the margins, I think, as a company as a whole, we work in a portfolio and many offices are consolidated. So when we look at that and we look at the company as a whole, we stated our goal, an adjusted EBITDA of 10%, we stand by it. And saying that, obviously, the gas margins are depressed. But you can see the guide from where we ended the year at 5.4%, ended the guide at 6%. That’s on less risk what we consider more sustainable margins going in. That being said, we’ve talked about mid to upper single digits and the base in the gas side and I still believe those are achievable. The large projects, as we – we’re talking about, we need – we’ve also taken a prudent approach in our guidance. We have to work through contingencies on the larger projects as well as the base. We’re in seasonality of weather and such. And so we do take all this into account. You don’t hear us comment too much about, well, Atlantic Coast pushed or this pushed. We don’t make a lot of press releases on that. It’s because we work through these things and we work through our contingencies. So we do understand the risk of those types and we have taken those into account. As far as the large projects this year, we have $850 million in our guidance. We feel comfortable with that. And as we go forward, there are certainly opportunities. We’re bidding work everyday. We’re negotiating work. I expect us to fill in on the back-half with work. We’ll talk about it as we get it. But again, I think, what you see is the very strength of Quanta coming together on the gas side and continuing to increase the baseline margins of the business in the gas side and ultimately, trying to achieve that adjusted EBITDA across the Board of double digits.

Thank you. The next question is from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.

Hi, good morning, guys.

Good morning, Chad.

Good morning.

Good morning. Can you give us a little more color on the guidance sensitivity relative to Atlantic Coast Pipeline? Does the low-end contemplate a full mobilization?

I think what we said is minimal revenue and operating income there in the Atlantic Coast Pipeline. I think it pushes into 2020, 2021, somewhere in there. Again, we think the project is good. It’s going to go. We will defer to Dominion on timing. But as far as 2019 stands, we have very minimal revenue in it.

And that’s actually, I’ll try to clarify. You’ve referenced it to the low-end, and that assumption that Duke made is applicable to low, medium and high-end of our guidance for oil and gas.

Got it. And then I also wanted to get more color on the $850 million of large pipeline for 2019. How much is fully permitted? And also how does that geographic distribution differ versus last year? Just trying to figure out if there’s higher Permian concentration, and what that mean for confidence that these projects may not get delayed, or held up by regulatory issues?

Yes. We’re extremely confident the $850 million either mobilized or have a high degree of likelihood of mobilizing or already on the jobs. So we’re very, very confident in the $850 million guidance, and it’s basically the same North American footprint.

Thank you. The next question is from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

Great. Thanks. I guess, Duke, just on the oil and gas parts of the business that you’re exiting with bunch of the impairment charges. I guess a little bit of detail as to what those were and why you exited them would be helpful just so that we can understand what’s kind of core today and what is – and what is not core?

Yes, sure. I think we stated all the way back to 2016, when I assumed the role as CEO that the energy-related assets and things that we do related to oil were core to us and we would continue to look for ways to exit that in a systematic way that was – that would benefit our shareholders and I think we’ve done that. When we look at the assets and they are basically supporting some of the Gulf Coast operations, marine type stuff and we exited that this year. We also wrote a boat off earlier in the year, so that was some of it and this is kind of a culmination of some of that as we move forward. I believe it’s largely complete and we like our portfolio going forward and like where we stand.

Okay, that’s helpful. And then just my follow-up here is, just on the terms and conditions around some of the pipeline awards that you’re at least looking at right now on the larger side. Clearly, there has been delays and permitting issues across the Board. We’ve seen, I think, in the public markets different contract styles that are negotiating. Under the ones that you’re looking at right now, are you still getting – or can you talk about the level of protections that you’re getting from regulatory or permit-induced stand-down, just so we can kind of evaluate the rest as those continue to fall into backlog?

Yes. I think our projects, I would say, we’re not incurring cost on any of our delayed projects, it would be cost-neutral at a minimum. So we feel like we have done a nice job of protecting ourselves against permanent risk. It’s a collaborative effort with their owners. We want to make sure that we’re both collaborative with them. We understand the risk and we’re certainly in a – discussions with them on a daily basis about those risks. So in general, we work together on trying to get things built.

Thank you. Our next question is from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

Hey, good morning, guys. First question I wanted to ask, what would you say is your strategy for nonunion pipeline? There’s so much work in the South, down in Texas. I know you have a small subsidiary that works in that area. Just curious what your thoughts are in growing that business?

Yes, we do quite a bit of work in the Texas areas. And so we continue to look at that segment, look at the base business in the segment. I think, we’re growing underneath nicely. I think when you look at us in the Permian Basin, you saw us make an investment in the Permian Basin this quarter. So it gives us some more looks at different workout there. We’ll continue to look at that. There’s some electrification that goes on. We do have quite a bit of nonunion midstream type work down in the areas. We like the business. We’re certainly opportunistic as it comes across.

Okay. And then second question in telecom. You said there was – I think it was telecom. You said there were several opportunities that were large and could get booked in. Just curious if those are in your $500 million of revenue that you’re expecting from communications in 2019?

Yes. I think in general, when we look at that communications segment and the business underneath, it’s not in the segment, it’s on the electric segment. But in general, we see lots of opportunity out there. I want to make sure that we can get to the field and get our operating margins where they need to be. I think with all the businesses that we’re looking at, the macro markets are good. We can certainly drive the top line. We’re highly concentrated on driving the margins and the risk. So we’re looking at the margins and the risks as well as the top line. But the macro market in telecom business is good. We continue to add customers and customer base. To the extent, there were sizable awards or whichever, a lot of those things are multi-year. And so we wouldn’t look at that being a large contribution necessarily to the 2019 relative to our current guidance.

Thank you. Our next question is from the line of Nick Amicucci with UBS. Please proceed with your question.

Hey, guys, good morning. So quick question around kind of just looking at the recent asset sales from pipeline operators. Just curious, because you guys have spoken a lot about the core business and how you’re looking to grow that. How does that affect – with these asset sales, is there a contract kind of run with the land, so to speak, or would you – would it be new negotiations that would be undertaken if those – if that – those assets were sold?

Typically, our contracts survive any kind of sale. And normally, they need us and we’ve worked on systems or with customers for a long period of time. We’ve not had any issues over time with assets being sold and our contracts not moving with them, typically that happens.

Okay, great. And then I guess, you kind of touched upon this. When you’re looking at these new types of projects? Are there a lot of – is there a lot of more Brownfield extension type of work, or is it more greenfield? And if you could kind of give us some more – I know you touched upon the LNG dynamic. I mean, are you seeing any opportunities in NGLs higher than normal or anything like that?

Yes. I think we see growth across the board and the gas side. I think those larger projects that we talked about in LNGs, they’re certainly out there. We’re looking at them. But the base of it is right around the utility space and the LDC business, the industrial business, critical path solutions around those things that are allowing us to grow underneath on the LNG exports and things of that nature. So that’s where the growth is that we’re seeing. Obviously, when you put large, large projects on top of that, it looks real nice and we can do great things with it. But in general, what we’re concentrated on is growing that base business in that segment.

Thank you. Our next question is from the line of Blake Hirschman with Stephens. Please proceed with your question.

Yes, good morning, guys. Just in light of the improving free cash flow outlook, I wanted to ask about how we should be thinking about your plans and use of cash? You’ve obviously been kind of buying back some stock, initiating dividend, doing some M&A as well. So I just wanted to get an update there?

Yes, I’ll let Derrick comment some. But just in general, the company has taken a position that we want to be able – we want to be flexible enough that we can lean into an acquisition, lean into our stock, our dividend or whatever it may be. So we want to make sure that we’re flexible with our balance sheet. And the opportunities here in front of us, we’ll certainly look at those. You’ve seen us big quite aggressive in our stock buyback, which I think is paying dividends for us now. But I’ll let Derrick comment on the rest of them.

I mean, I think, Duke hit it. I mean, our capital allocation priorities remain the same. We’ll be very focused on ensuring we can lean into any of the working capital requirements associated with the business. It’s always the number one priority we have. There are opportunities there. We’ll ensure we’re well positioned to lean into that acquisitions and investments. You see the investment as an example here in the press release today within Agua Blanca. Those type of things are things we’re always mindful of, and we will ensure we have a balance sheet in a good position to be able to lean into. And then just to lay out lastly, I mean, obviously, from a capital allocation, we’ve leaned into shareholder value with the stock repurchases and dividends quite heavily. And so that will continue to be part of our equation. We don’t forecast that into 2019 or forward, because we look at that as being born opportunistic, but largely against the other allocation areas that we have. We think the working capital, M&A and investments are long-term value creation, and we’ll continue to do that. Lastly, with the overall parameters of ensuring, we maintain a very strong and conservatively placed balance sheet.

Got it. thanks.

Thank you. We have reached the end of our question-and-answer session. So I would like to turn the floor back to management for any additional concluding comments.

Yes, I want to thank the men and women in the field. They’re performing at an extremely high level and I want to thank them. I’d also like to thank you for participating in our fourth quarter and our full-year 2018 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you, and we look forward to 2019. This concludes our call.

Once again, ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.