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ICF International Inc  (NASDAQ:ICFI)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the ICF International Fourth Quarter 2018 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. During the presentation, all participant lines will be in listen-only mode. Afterwards, you'll be invited to participate in a question-and-answer session. (Operator Instructions) Please note, this conference is being recorded on Tuesday, February 26, 2019 and cannot be reproduced or rebroadcast without permission from the Company.

I would now like to turn the program over to Lynn Morgen of AdvisIRy Partners.

Lynn Morgen -- Investor Relations

Thank you, Vanessa. Good afternoon, everyone and thank you for joining us to review ICF's fourth quarter and full year 2018 performance. With us today from ICF are Sudhakar Kesavan, Chairman and CEO; John Wasson, President and COO; and James Morgan, CFO.

During this call, we will make forward-looking statements to assist you in understanding ICF Management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our February 26, 2019 press release and our SEC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so.

I will now turn the call over to ICF's CEO, Sudhakar Kesavan, to discuss fourth quarter and full year 2018 performance. Sudhakar?

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Thank you, Lynn and thank you all for joining us today to review our 2018 fourth quarter and full year results and discuss our outlook and guidance for 2019. Our fourth quarter performance represented a strong finish to a record year for ICF. Revenues increased 18% year-on-year and non-GAAP EPS increased 50%. Revenue in each of our client categories grew, driven by increasing demand for our advisory and implementation services.

In line with our guidance, we reported an exceptional adjusted EBITDA to service revenue margin of 16.5% in the fourth quarter, benefiting from a 10% increase in service revenue, higher utilization and a favorable mix of business. Additionally, the value of contracts awards won during the year reached a record $1.8 billion at year-end, 40% above the prior year, resulting in an annual book-to-bill ratio of 1.4. And our business development pipeline was $5.8 billion at the end of the year, up 38% year-on-year and 7% ahead of third quarter levels. These metrics underscore our confidence in ICF's expected growth in 2019, as we continue to execute well across our diversified portfolio.

Looking at market dynamics, we see four key growth catalysts for ICF in 2019 and beyond. First, we expect growth in Federal Government revenues in 2019, based on our backlog, which includes a significant contract wins in the second half of 2018. We also believe that the additional time that our civilian agency clients have this year to plan initial procurements that allow them to spend their budget allocations in a more timely fashion. Additionally, there were record pipeline of qualified opportunities that we're pursuing.

Second, our disaster recovery program work for state and local government clients will be an important growth driver for ICF in 2019 and beyond. In addition to our contract wins to-date, we have submitted proposals for additional contracts that are expected to be awarded in the next few months. The acquisition of DMS that we completed in August last year has added to our bandwidth in this key area and has strengthened our competitive position. DMS also has brought new disaster planning capabilities, which will allow us to help state and local governments improve their response, planning ahead of specific natural disasters. And we have continued to build on our qualification in resiliency and disaster preparedness, which we believe will develop into an ongoing and sustainable source of revenue for ICF.

Third, in the marketing services area, digital channels continue to increase their share of marketing spend, reflecting growing demand to engage with customers and stakeholders in a focused and cost-efficient manner. We recently launched ICF Next, which brings together 1,700 technologists, strategists, marketing specialists, creative and communicators into a single integrated team to support our growing portfolio of public and private sector clients. This integrated offering has sharpened our ability to offer a more comprehensive set of capabilities and gives us considerable scale and a body of work that has garnered some of the industry's highest honors.

And fourth, we're looking ahead to continued growth in our commercial energy business, thanks to a robust pipeline that includes many energy efficiency program opportunities. On the advisory side, we believe our expertise in infrastructure security and resiliency has become increasingly relevant in the aftermath of five major hurricanes in the last two years. Additionally, we see significant growth potential for ICF in the areas of distributed and renewable energy resources, including storage, solar and electric vehicles. This trend also offers significant program implementation opportunities over the next several years.

So to summarize, while 2018 was a record year for ICF, we believe that 2019 will be even better. We remain active on the acquisition front, given our significant cash flow, we are focused on deploying these resources that we generate in a manner consistent with what we have done successfully in the past. We'd continue to look at opportunities in all ICF domains and in our functional areas of expertise, including the government arena, where increased specialization and scale is required to win larger multi-year contracts and in the commercial energy markets that deepen our expertise and further strengthen our offerings.

Now, I would like to turn the call over to ICF's President, John Wasson for his business review. John?

John Wasson -- President & Chief Operating Officer

Thanks, Sudhakar. And good afternoon, everyone. Business trends in the fourth quarter were in line with our expectations and reflected the positive momentum that we observed throughout the second half of 2018 and expect to continue in 2019. Revenue performance came in ahead of our forecast, driven by our disaster recovery work in Puerto Rico and increases in our marketing services work for both commercial and international government clients. From an overall business perspective, we were very pleased with our results and continue to see positive growth catalysts present across our key markets.

James will speak in a moment about some of the special items that affected our earning results for the fourth quarter. Revenues in our government business increased 22% in the fourth quarter and represented 60% of full year 2018 revenues. And each client category within our government market showed year-on-year revenue growth. Revenues from federal government clients in Q4 increased 2% year-on-year, bringing full-year revenue performance to just 1% below 2017 levels. This growth in the quarter was slightly below our expectations due to the slower ramp-up of a couple of civilian agency contracts, but importantly, represented an acceleration in our Federal business and return to growth that augurs well for 2019.

The revenue impact of the partial Federal Government shutdown was approximately $3 million for Q1 2019. We expect to be able to recapture the lost revenue by the end of the year. Although, we will absorb the cost of maintaining our staff in this year's first quarter. We are expecting revenues from Federal Government clients to achieve low single-digit to mid single-digit growth in 2019. Last year, we were awarded over $865 million in Federal contracts, most of which were won in the second half and over 55% of that dollar amount represented new business. This represented an annual book-to-bill ratio of 1.6 and sets us up very well for growth in 2019 and beyond. As we mentioned in last quarter, we see opportunities across a broad range of Federal agency clients, including at our largest, the Department of Health and Human Services, as well as with the Department of State, the Department of Defense, the Department of Energy and the Department of Homeland Security.

Additionally, we are bidding more aggressively on cyber security work, which is stated to increase at the Department of Defense and across civilian agencies, following our significant contract wins in 2018 at the US Army Research Laboratory and the US Air Force. And even greater growth driver this year will be our disaster recovery work following the 2017 hurricanes. In the fourth quarter, revenues from state and local government clients increased 115%, reflecting our execution on the FEMA funded contract, we were awarded by the Government of Puerto Rico in June of last year and the initial ramp-up of the several contracts that ICF was awarded to support post-hurricane housing and infrastructure programs in Texas that we mentioned on last quarter's call.

These contracts are with the Texas State General Land Office, in the City of Houston. Given the severity of the post-hurricane damage, we believe that each of these contracts has potential for expansion and we have a robust pipeline of the additional opportunities in Puerto Rico and Texas, on which we have submitted the proposals and are awaiting award decisions. Additionally, we are pursuing opportunities in Florida and the Carolinas following the 2018 hurricanes. For 2019, we expect revenues from state and local governments to increase by 30% or more compared to 2018.

Revenues from international government clients continue to show positive momentum, increasing 15% in the fourth quarter and 34% for the full year. While we do not expect to replicate that exceptional growth rate this year, trends in that market remain favorable for ICF. We have a solid new business pipeline and thus expect mid single-digit to high single-digit growth in this market for 2019. We continue to execute very well on marketing and communications work for the European Commission and providing policy, economic and problematic support to European Commission and UK government clients and supporting international development work focused on energy planning and clean energy sources in Asia and Africa for European development agency clients.

Moving to our commercial clients. The 12% increase in commercial revenues in the fourth quarter respective robust year-on-year growth in both marketing services and energy markets, the largest components of this client set. Commercial marketing services benefited from organic revenue growth in the October acquisition of UK-based, We are Vista. We continued to bring integrated solutions to clients in the fourth quarter, achieving more than $21.6 million in integrated sales, bringing the total to more than $177 million of integrated wins since we acquired Olson at the end of 2014. The average size of our contract wins continue to increase in the fourth quarter, and total sales were up year-on-year.

In early 2019, we unveiled ICF Next, a new global engagement and transformation partner for brands, public sector agencies and other organizations to help them take advantage of the breakneck pace of change in the marketing services industry. Few players of our size hit on for the breadth of services in an innovative way across areas as diverse as digital strategy and media, loyalty, technology and e-commerce, which differentiates ICF in the marketplace, and with aggregate revenues in excess of $350 million, an experienced management in place, we have the scale and gravitas to capture larger context with the private sector, regulated industries and governments.

Finally, our commercial energy markets business continues to perform well in the fourth quarter. Revenue growth benefited from large advisory assignments, supporting clients on restructuring and M&A activities in the power sector and our significant energy efficiency program implementation work for utilities. The majority of utilities plan an increasing spending on energy efficiency programs by as much as 10% through 2020 and we continue to maintain a strong pipeline. Several states are significantly expanding their energy efficiency goals, the new legislation or regulatory action, these include Massachusetts, New Jersey, Illinois, New York, Virginia and California. As you know, California offers considerable opportunities for us.

The first tranche of requests for abstracts will be released in Q4, as the state alters its approach to energy efficiency, renewable energy and greenhouse gas reduction. The ultimate goal by 2022 is to have 60% of the investor-owned utility energy efficiency budgets in California be outsourced to firms like ICF, up from historical outsourcing levels of 20%. Additionally, our distributed energy resources consulting business performed well as states and utilities address the impact of distributed resources on the grid.

These efforts involve utility pilot programs, testing distributed energy technologies, which points away to developing future utility implementation programs beyond traditional energy efficiency that will drive additional long-term growth. Given the robust performance of our commercial marketing services and energy business in Q4 and the general market trends discussed above, we expect at least mid single-digit growth in our commercial businesses for 2019.

In summary, we are pleased with our overall business performance in the fourth quarter. This together with 2018 contract awards and a record year-end pipeline positions us for another year of substantial growth in 2019. We're also looking ahead to margin the expansion in 2019, thanks to continued high utilization rates and our expectations at ICF's commercial business and our state and local disaster recovery work in the aggregate will account for an increasing percentage of this year's revenue. At year-end, our business development pipeline was at a record high at over $5.8 billion, there were 48 opportunities larger than $25 million and 89 opportunities between $10 million and $25 million. Our annual personal turnover rate was 16.2%.

Now, I'll turn over the call to James Morgan, our CFO for a financial review.

James Morgan -- Executive Vice President and Chief Financial Officer

Thank you, John. Good afternoon, everyone. I'm pleased to provide a more detailed look at ICF's fourth quarter and full year 2018 financial performance. Fourth quarter revenue was $377.9 million, up 17.7% from the $321.2 million in last year's fourth quarter, driven by double-digit revenue growth from both government and commercial clients. Our revenue mix by client category in the fourth quarter show considerable variations from the prior year fourth quarter.

This reflected the significant increase in revenue from state and local clients, which accounted for 16% of total revenue in this year's fourth quarter, up from a 9% last year. The other major change was on revenue from Federal Government clients, which represented 35% of total revenue in the fourth quarter of 2018 down from the 40% in December 2017 period. Both of these changes were driven mainly by our new work to support the disaster recovery efforts, which is classified as state and local.

Service revenue increased 10% to $239.6 million from $217.8 million in the fourth quarter of 2017. Gross profit increase -- increased 13.1% to $128.9 million from $113.9 million in the fourth quarter of 2017. Given the higher pass-through revenues, gross margin was 34.1% in 2018's fourth quarter compared to 35.5% last year. Conversely, gross margin on service revenue expanded a 150 basis points year-over-year to 53.8% in 2018, as compared to 52.3% in the fourth quarter of 2017.

Indirect and selling expenses for the fourth quarter increased 5.9% to $92 million compared to $86.8 million in the comparable quarter of 2017. As a percentage of service revenues and after exclusion of special charges, indirect and selling expenses improved to 37.3% of total revenue compared to 37.9% in the fourth quarter of 2017. EBITDA totaled $36.9 million to 36.1% ahead of last year's $27.1 million, and an adjusted EBITDA which excludes special charges, was $39.4 million, up 25.5% from $31.4 million reported in the fourth quarter of 2017.

In addition to the typical seasonal strength in the fourth quarter for adjusted EBITDA margin on service revenue, as expected and mentioned in our third quarter's earnings call, our 2018 fourth quarter reflected the confluence of positive factors, including the higher utilization related to the ramp up of new contracts, higher level of incentive fee payments and a significant increase in higher margin service revenue. These factors resulted in an exceptional adjusted EBITDA on service revenue of 16.5% in the fourth quarter of 2018. As compared to 14.4% in last year's fourth quarter.

Should be noted, that our fourth quarter EPS year-over-year comparisons were impacted by special charges, which totaled $0.09 per share after tax. And included a $1.24 million reserve for $0.05 per share, relates to the bankruptcy of Pacific Gas & Electric. The context, our work with PG&E is mostly on the consulting side and we are working to get critical vendor status as we provide environmental related advisory work that is required by the State of California. In addition to the $0.09 in special charges, our Q4 results were lower than anticipated due to three factors.

First, our tax rate of 29.8% in the fourth quarter was higher than anticipated, primarily due to valuation allowances of foreign tax credits. Higher than anticipated effective tax rate negatively impacted our fourth quarter EPS by $0.04. Second, we had a higher interest expense than anticipated due to timing issues related to collections on certain receivables. And third, our share count was slightly higher than anticipated. These last two items amounted to roughly $0.02 per share after tax.

As a reminder, in the fourth quarter 2017, we had a one-time tax benefit of $16.2 million or $0.85 per share, due to the revaluation of our deferred tax liabilities and deferred tax assets, associated with the implementation of the Tax Reform Act. Additionally, our fourth quarter 2017 EPS results reflected the impact of $0.13 in special -- in tax-effected special charges. Inclusive of these 2018 and 2017 items, we reported net income for the fourth quarter of 2018 of $18.7 million down from the $27.1 million we reported in last year's fourth quarter.

And diluted EPS was $0.97 per share compared to $1.41 in the fourth quarter of 2017, which as I -- as mentioned, included a one-time tax benefit of $0.85 per share associated with the implementation of the Tax Reform Act. Non-GAAP diluted EPS which excludes the impact of the previously mentioned special items and amortization of intangibles was $1.17 in the fourth quarter of 2018, an increase of 50% from $0.78 reported in the fourth quarter of 2017. Now let me give you an overview of our 2018 full year results.

We had record revenue of $1.34 billion, of 8.9% year-on-year. Service revenue was up 4.7% year-over-year to $925.8 million from $884.2 million in 2017. Pass-through revenues increased by 19.5% to $412.2 million. Adjusted EBITDA increased to $123.7 million and accounted for 13.4% of service revenue in 2018, as compared to 13.3% in 2017. This is in line with our objective of improving our year-over-year adjusted EBITDA margin on service revenue, while continuing to invest in business -- in the business to support future growth. Net income amounted to $61.4 million in 2018, compared to $62.9 million in 2017. As mentioned previously, the 2017 results include the one-time tax benefit with $16.2 million associated with the implementation of the Tax Reform Act.

Reported diluted earnings per share were $3.18 for 2018, inclusive of the $0.05 related to the bankruptcy, Pacific Gas & Electric that I'd previously mentioned. As well as an additional $0.12 in tax-effected special charges, comprised of office closure expenses, staff realignment charges and acquisition related costs. This compares to $3.27 per diluted share in 2017, which included in one-time tax benefit of $0.84 per share associated with the implementation Tax Reform Act and $0.24 of tax-effected special charges. Non-GAAP diluted EPS for the full year, which excludes the special charges I've just mentioned, as well as amortization of intangibles was $3.73 per diluted share for 2018, up 23.5% compared to the $3.02 reported last year.

In 2018, we had $74.7 million cash provided by operating activities, which was below our most recent guidance range. The shortfall was due to timing issues associated with the collection of more than $10 million of receivables, which have now been collected in the first quarter of 2019. And which are reflected in our 2019 cash flow guidance. Throughout 2018, we made significant investments in our infrastructure intellectual property, which resulted in a $6.2 million year-over-year increase in capital expenditures, that totaled $25.5 million in 2018. Borrowings on our credit facility at the end of December were $200.4 million.

Days sales outstanding for the fourth quarter, including the impact of deferred revenues were 77 days, within our typical range. As you heard today, we expect 2019 to be a year of considerable growth for ICF. For modeling purposes, we wanted to share our expectations for certain 2019 financial metrics, based on our current portfolio of business. As you saw in today's earnings release, we are expecting substantial revenue and earnings growth in 2019. We expect the realization of our revenues and EPS to follow a similar pattern to that of 2018, was about 45% materializing in the first half of the year and 55% in the second half. This takes into account the first quarter 2019 impact of the government shutdown for approximately $3 million in revenues and $0.05 in diluted EPS.

Second, we anticipate full year 2019 depreciation, amortization expense to be in the range of $20.5 million to $21.5 million for the full year of 2019. Amortization of intangibles to be in the range of $8 million to $8.5 million. Third, full year interest expense should range from $7.5 million to $8.5 million. Fourth, capital expenditures are anticipated to be relatively flat with 2018. And in the range of $25 million to $28 million as we continue to invest to support future growth.

Fifth, we expect full year tax rate of approximately 27.5%. And finally, we expect fully diluted weighted average shares of approximately 19.3 million for 2019. Please note that in 2018, we've repurchased 214,000 shares under our share repurchase program, for a total outlay of $13.9 million, partially offset the dilution from our employee incentive programs. Going forward, our capital allocation priorities remain the same. Investing in our business, making strategic acquisitions, paying off debt, making share repurchases to offset dilution caused by our employee incentive programs, returning capital to our shareholders in the form of dividends. On that last subject, today, ICF declared a quarterly cash dividend of $0.14 per share payable on April 16th, 2019, shareholders of record on March 29th, 2019.

With that, I will turn back the call to Sudhakar. Sudhakar?

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Thank you, James. In conclusion, we are very pleased with ICF position as we move ahead in 2019. Key to our success is the mission and results-driven culture that is reflected in a relatively low employee turnover rates and deeply committed staff. As part of this, we have invested at human capital by establishing the ICF Learning Institute for Leadership and Management Development and by bringing in senior experienced staff.

We have modernized our primary brand to reflect the broader scope of ICF services, we continue to invest in systems and processes to become more efficient and scalable. Through it all, we have maintained the agility and specialized our capabilities required to focus our resources and capabilities to capitalize on major opportunities. With this as a backdrop, we are pleased to provide full-year guidance for 2019 that reflects significant year-on-year revenue growth and further margin expansion.

We have good visibility into 2019 based on our existing contract backlog, which account for over 80% of our revenue guidance of $1.45 billion to $1.5 billion. This does not include any substantive new disaster recovery rate of contract wins that may occur nor any potential acquisitions. GAAP earnings per diluted share are expected to range from $3.75 to $3.95, exclusive of any special charges and non-GAAP diluted EPS should be between $4.05 and $4.25. Operating cash flow is estimated to be between $100 million and $120 million.

Vanessa, now I'd like to open the call to questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin our question-and-answer session. (Operator Instructions) And we have our first question from Joseph Vafi with Loop Capital.

Joseph Vafi -- Loop Capital Markets -- Analyst

Hey guys, good afternoon and congrats on the strong outlook here for 2019. I was wondering if we could talk a little bit about that Q4 service margin performance that was strong and I suspect there was two things going on, a combination of mix and utilization and I just want to get a little more color on what was driving that. And how we think about utilization into 2019, then I'll have a follow up.

James Morgan -- Executive Vice President and Chief Financial Officer

Hi, Joe, this is James. I mean really it's what I mentioned that it really was driven by higher utilization, we had our highest utilization for the year in Q4 with the ramp up of the new contracts that we have won in the back half of the year. And in addition to that, we had as you know, we typically have higher incentive fees associated with our energy efficiency work that get realized in the fourth quarter. So that certainly benefited the quarter. And those are, I mean, those are two of the biggest items, and the rest that was just doing controlling of an indirect expenses.

Joseph Vafi -- Loop Capital Markets -- Analyst

Got it. Is there more room for utilization upside from here or are we kind of that a comfortable level relative to utilization?

James Morgan -- Executive Vice President and Chief Financial Officer

Yeah, I don't think there will be much more increase. I mean, as you would expect, when you win new contracts, typically you're running a little bit harder on the front end and then you continue to adjust your staff and get back to an appropriate level. So that you can make sure you're investing and driving the long-term growth of the business. So, I don't think that there'll be much upside to that utilization we recognized in Q4.

Joseph Vafi -- Loop Capital Markets -- Analyst

Okay. And then, focusing a little bit on the Digital Marketing business that it sounded like you're expect -- I know there is probably a little less backlog there than other parts of your business, but just wanted to confirm that you were looking at potentially mid single-digit growth there in 2019?

John Wasson -- President & Chief Operating Officer

Yeah. Hi, Joe, it's John Wasson. I think that -- I think as we said in the guidance for commercial, we're spending at least 5% growth in our commercial business, and I certainly think that applies to our commercial marketing services business. Obviously we had a very strong quarter there. And so, but certainly for the year -- for last year that the marketing services business was in the mid single-digit range, and we expect that to stay there for 2019, in terms of organic growth.

Joseph Vafi -- Loop Capital Markets -- Analyst

Okay. And then since that business is kind of doing better now than it was say, a year ago, how's the margin profile in that business changed. Has it changed with more strength in the business or margin profile similar to where it was?

James Morgan -- Executive Vice President and Chief Financial Officer

Yeah, I mean I would -- as we've talked about the past typically or actually it's more than typical it is. Our commercial margins are a little bit better than on average in the rest of our business and we certainly expect that to be that way, in that case, as we move into 2019. And certainly as you would expect as you continue to have growth in the business, we were able to have some leverage and continue to improve our margins over what we realized in past years.

Joseph Vafi -- Loop Capital Markets -- Analyst

Okay. And then finally, just one last one on disaster recovery. It sounds like some of those down select in Texas have move forward. Are there still additional contract that have not been adjudicated in Texas and relative to that 2017 hurricane season and if -- do you have a feel for kind of dollar value that yet to be adjudicated contract that you may be eligible to win? Thanks a lot.

John Wasson -- President & Chief Operating Officer

It's John Wasson again, Joe. We certainly have opportunities in the pipeline in Texas, both at the state and local level, on the housing recovery front that awaiting adjudication or are in the proposal stage. As we talked about in our remarks, we've obviously won several opportunities in Texas that we talked about in our last quarter, I think we said there were $50 million in total over two years to three years. I would expect that opportunities are still out there to be in that magnitude range.

I would say, that we do see potential upside on those opportunities, if we perform well. I think there's a lot of work to do there. So certainly in Texas, there remains to be opportunities. I think initially they'd be like the ones we've won to-date, but there will be upside and as Sudhakar noted, we're still waiting on awards in Puerto Rico on our community development block grant housing opportunities. Those proposals are in and we're waiting. Award decisions and as we talked about those, those type of the potential to be significant overtime too.

Sudhakar Kesavan -- Chairman & Chief Executive Officer

And I think there also perhaps opportunities in the Carolinas and in Florida on the hurricanes of last year. So...

John Wasson -- President & Chief Operating Officer

Which will play out later next -- this will play out later this year.

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Later this year, in fact.

Joseph Vafi -- Loop Capital Markets -- Analyst

Thank you.

Operator

And thank you. We have our next question from Tobey Sommer with SunTrust.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. My first question also on the disaster recovery side. What does the -- if you could put the FEMA contract win in context from six months or seven months ago. What does that do to your -- the TAM and kind of the markets that you're able to address, because historically, the Company has kind of tapped into helping out with the distribution of this community development block grant money in public infrastructure, contract of the size is kind of a relatively new thing. How do we put that into context and think about how that changes the opportunities of the Company over time?

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Well, I mean, I think that the kinds of work we're doing on this contract are not dissimilar to what we've done on CDBG contracts in the past. So even there is -- it's just the -- they address a slightly different set of constituencies, small businesses and sort of public municipalities, public infrastructures. So the kinds of work we're doing is quite similar. I think the way it helps is that we have significant infrastructure experience now and performance in Puerto Rico, which obviously the clients they can see and so, hopefully that helps us position well for other contracts in other areas as we move forward.

And I think that it's a small community, so if we do well in one area, people talk about it at another state. So I think it's just strengthens our capability to win other work in other jurisdictions going forward, especially given that the disaster recovery world is moving more and more toward block grants, so even in the non-CDBG world and I think knowing how to do this work sort of helps us across the country as we have to deal with increasing number of disasters going forward.

John Wasson -- President & Chief Operating Officer

I would just also add that I think that, there is a shift in the market or an expansion in the market around resiliency in not only how do you rebuild immediately after strong whether it's housing or public infrastructure or public buildings. But how do you strengthen that infrastructure to prevent it from having damage and having to go through this cycle of repair after every storm and that's a kind of set of expertise we've been developing over the years. Given our broader set of work around infrastructure and climate change as how to really improve resiliency.

So I think what's also happening here, Tobey is that we can leverage that expertise and that capability we're developing both into the FEMA market and into the housing market. And so when as you see under some of the recent storms in 2017, there has been quite significant increase in funding pointed toward resiliency and infrastructure both within FEMA and within the community development block grant program. So I think that's a positive trend for us that I think allows us to play a larger role in those two markets over time.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. With respect to timing of the Puerto Rican opportunities. How are things progressing? It seems like, I'm curious if the shutdown may have delayed, if I'm not sure that the process was for on a multi-range by the shutdown? Thank you.

John Wasson -- President & Chief Operating Officer

Yeah, and I think we still expect these awards in the next couple of months, next two months to three months. I don't think we have any insights into on what the exact that these will come forward but I think -- we still expect them in the near-term and Sudhakar do you want to?

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Given the need and given the fact that there is a requirement to do this work, we do think that -- three months. Sometimes, these decisions just take time, longer than you would like, but will just take time.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

And Sudhakar, you referenced that the storms from last year potentially being opportunities for the Company later this year. So what kind of -- would you have opportunities both on the -- that the FEMA kind of work that you've already won in Puerto Rico as well as the residential side that you have -- I guess you have -- you hope to win at some point in the future?

John Wasson -- President & Chief Operating Officer

Yeah, I think it would be, as I said, I think it's both -- certainly on the housing side and under community development block grant around the whole resiliency and how to strengthen the infrastructure in the face of future storms which could expand both CDBG and FEMA. I think there's opportunities in both places and so we're certainly paying attention to those markets and nearing capture around the set of opportunities.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. One last question for me on the energy efficiency side and I'll get back in the queue. Are you noticing any increased level of competition or conversely sort of change in the size of projects that maybe helped the Company, because you are a scale provider and maybe changes in the size of the contracts reduced competition, any dynamics there that you think are occurring now and likely too in the future?

John Wasson -- President & Chief Operating Officer

I don't think we've seen any significant shifts in the competitive landscape in that market. I think we -- we're obviously a market leader in that area. It is competitive, but I think we won our fair share, I think we've talked at some lengths that as utilities look to bundle contracts and opportunities, it plays to our strength. We've seen that in certain markets and certainly in California as they look to outsource a higher proportion of their efforts, I think they will have to go to larger contracts over time and that will be a positive trend for us. But I don't -- wouldn't say there has been a significant shift in the competitive landscape or the set of players in those markets.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

And thank you. We have our next question from Lucy Guo with Cowen & Company.

Lucy Guo -- Cowen & Company -- Analyst

Hi everyone. Thank you for taking my question. First, just to clarify on disaster recovery, you talk about that some upside is not in your guidance. Is it the $310 million or so of contract awards to-date that's in the guidance?

John Wasson -- President & Chief Operating Officer

Yeah, I think the contracts that have been awarded to-date are in our guidance and potential -- and upside that we see on those existing contracts is reflected in our guidance range. There are no material new contract awards either in Puerto Rico or Texas, is in our guidance range.

Lucy Guo -- Cowen & Company -- Analyst

Got it. And the potential is roughly, it could be as much as a couple of hundred million or a few hundred million or so that was the -- what I remember that you've said before, is that still the case?

John Wasson -- President & Chief Operating Officer

I mean we haven't given -- I mean I would say that over multiple years, the potential opportunities could reach those kind of levels. I think that's correct.

Lucy Guo -- Cowen & Company -- Analyst

Okay, got it. And then maybe a question for James in terms of your EBITDA margin, Q4 was obviously very good execution plus some timing of potentially milestone payments and such. But once you just, I understand you're still targeting the 10 bps to 20 bps per year increase on the service margin, but overall EBITDA on an adjusted basis, any thoughts on what could potentially offset the higher pass through that you'll see on the state and local work?

James Morgan -- Executive Vice President and Chief Financial Officer

So I guess I would just say that as we move into 2019 and we do expect that we'll do a little bit better than the 10 basis points to 20 basis points of margin improvement that we've been doing over the last few years. It's probably more in the neighborhood of 30 basis points and actually that's after taken into account the impact of the government shutdown, which is impacting our margins in 2019 by, call it, 10 basis points to 15 basis points. So without the impact of the government shutdown, we would be improving margins year-over-year in the neighborhood of 40 basis points to 50 basis points. So that's really what we're targeting as we go forward, this coming year.

Lucy Guo -- Cowen & Company -- Analyst

Is that a factor of -- you mentioned the improved utilization. Are you projecting changes to your bid and proposal expense or business development expense and any other factors that you can point to, would be helpful.

James Morgan -- Executive Vice President and Chief Financial Officer

Yeah it's really a combination of factors, I mean it's everything from the fact that, Federal line as we continue to get more scale, we have the ability to leverage and improve our profitability. The other part of it is, just looking at our mix of our business. I mean, certainly as we've said before in our commercial business is a little bit more profitable than our government business and we're looking at that growing faster than our Federal business and then we've also talked about the fact that our disaster recovery work it's on the high end of the government margins. So the confluence of those two factors are helping to improve the mix of our profitability of our business. So those are two big drivers.

Lucy Guo -- Cowen & Company -- Analyst

Got it. That's helpful. And then just also looking for some color. I think earlier on in your commentary you mentioned there were some slower ramp on certain Federal civilian contracts. If you can talk about any details there?

John Wasson -- President & Chief Operating Officer

Sure. It's John Wasson. I think we had a handful of contracts that rental were slower. We had a water reclamation contract in California with the interior department that ramped a little slower as they were working out some policy issues. Had a contractor too at EPA that ramped up little slower. So it's just a handful of civilian contracts like there's any underlying trend they just ramped a little slower in the fourth quarter.

Lucy Guo -- Cowen & Company -- Analyst

That sounds great. Thank you for the color. Appreciate it.

Operator

Thank you. We have our next question from Marc Riddick with Sidoti.

Marc Riddick -- Sidoti & Company -- Analyst

Hi, good afternoon. Just wondering If you could take a moment and you had mentioned some of the bidding process and then some, maybe some changes as far as aggressiveness with bidding and cyber business I believe it was, I was wondering if you can add a little bit of color to that commentary?

John Wasson -- President & Chief Operating Officer

Well, I would just say that we're seeing a significant growth opportunities in the cyber market both on the defense side and in civilian markets. We do have a cyber security business and I just think that they have given the underlying trends in those markets and the focus across the government on cyber, we're seeing a lot of opportunity and we've been particularly successful here in the last year or 18 months both with the Army Research Lab and the Air Force and so we're winning work both on the defense side and obviously given the relationships we have through our civilian agencies as budgets go up to support cyber work, it's a generally positive trend for us and so that is a market where we are seeing increases in spend and growth. I've also talked -- and so I think that's really what's driving it.

Marc Riddick -- Sidoti & Company -- Analyst

Okay, great. And then I was wondering if you could touch a little bit, I know that the announcement around Next was only a little while ago, but I was just wondering if there is any sort of general feedback as to sort of the repositioning, if you will, with as far as feedback that you've received from clients. Also you mentioned some positive commentary around commercial, but I was wondering maybe if you could talk about some of the benefits that you foresee for clients and how that could help in gaining new business wins. Thank you.

John Wasson -- President & Chief Operating Officer

Sure. Yeah. And I think that what -- so I think we certainly are seeing benefits from ICF Next with our clients. I think, I mean, one is, as I think our clients, they didn't fully recognize kind of the full scale and set of capabilities that we can bring to market across our commercial, in our government, in our international markets and prior to ICF Next we used to go to market under several different brands in several different logos.

And so frankly, a big part of this was getting our customer sets to understand the full scale and set of integrated opportunities that we could bring and I think frankly a lot of them have been quite surprised and very positive as they've come to understand the breadth of capabilities and the scale and the depth of our experience. And so I think that's helped us a lot.

I think we're also very focused from an account perspective of leveraging all of the relationships we'd have in specific accounts, whether it's commercial accounts or government accounts of bringing the entire set of ICF capabilities into those accounts. Whereas before, we'll be going to market under these different logos, we didn't bring the full Company set of capabilities into each of those accounts and so we've had very positive feedback from clients.

I think they've been pleasantly surprised with all that we can do, and I've talked about some of the opportunities within that we've won that of an innovative nature since the Olson acquisition. I think this ICF Next announcement has accelerated that. I can't name clients, so we've had several clients where we've gone in with integrated pitches under the ICF Next brand here in the last month or six weeks, a couple of months and one -- much larger assignments with much broader set of work. So I think the signs are very positive and I think you're seeing that momentum and that activity in the results. So I mean, we're -- I think we've had now four quarters of growth in our marketing services business and I think this will only help further on that front.

Sudhakar Kesavan -- Chairman & Chief Executive Officer

I would also add to that Forrester Wave is something which we are benefited from being a leader in our loyalty business. Similarly, we -- there's been a Forrester Wave for mid-sized marketing services and digital services firms and we are part of that Forrester Wave, so that's a great way of generating, they came out with a report about a month ago and that's a great way of generating in almost leads associated with that. And we had to go through a whole song and dance there to be a part of that. And I think that, and that's as ICF Next, because I think we could showcase a broad range of skills and understanding of customer experience technologies which helped us there. So I think that it's a promising start and we certainly hope that that will generate leads and incoming calls on us being able to help those clients too.

Marc Riddick -- Sidoti & Company -- Analyst

Now, that sounds great. Thank you for the color.

Operator

Thank you. (Operator Instructions) And we have a follow-up question from Tobey Sommer with SunTrust.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you. In 2019, are there any changes to the composition for rating of incentive compensation for Executive Management or kind of the next level below?

John Wasson -- President & Chief Operating Officer

I don't think we're foreseeing any significant changes in Executive Management compensation or the next level below. I don't see, no, I don't think so.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

No changes in the mix or awaiting. Okay. Thank you. That was it for me.

Operator

And thank you. We have no further questions at this time. I will now turn the call over to management for closing remarks.

Sudhakar Kesavan -- Chairman & Chief Executive Officer

Thank you all for participating in today's call. We look forward to keeping you up to-date on development at ICF. Thank you again.

Operator

Thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.

Duration: 51 minutes

Call participants:

Lynn Morgen -- Investor Relations

Sudhakar Kesavan -- Chairman & Chief Executive Officer

John Wasson -- President & Chief Operating Officer

James Morgan -- Executive Vice President and Chief Financial Officer

Joseph Vafi -- Loop Capital Markets -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Lucy Guo -- Cowen & Company -- Analyst

Marc Riddick -- Sidoti & Company -- Analyst

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