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MasTec (NYSE:MTZ)
Q4 2018 Earnings Conference Call
March 1, 2019 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to MasTec's fourth-quarter 2018 earnings conference call initially broadcast on March 1, 2019. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the call over to Marc Lewis, MasTec's vice president of investor relations. Marc?

Marc Lewis -- Vice President of Investor Relations

Thanks, Patrick. Good morning, everyone. Welcome to MasTec's fourth-quarter 2018 earnings conference call. The following statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995.

In these communications, we may make certain statements that are forward-looking, such as statements regarding MasTec's future results, plans and anticipated trends in the industries where we operate. These forward-looking statements are the company's expectations on the day of the initial broadcast of this conference call and the company does not undertake to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in our press releases and filings with the SEC. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may be different from results expressed or implied in the communication today.

In today's remarks by management, we will be discussing adjusted financial metrics, as discussed and reconciled in yesterday's press release and supporting schedules. In addition, we may use certain non-GAAP financial measures in this conference call. A reconciliation of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measures can be found in our earnings press release, our 10-K or are posted in the PowerPoint presentations located in the Investors and News section of our website located at mastec.com. With us today, we have Jose Mas, our chief executive officer; and George Pita, our executive VP and chief financial officer.

The format of the call will be opening remarks and announcements by Jose, followed by a financial review from George. These discussions will be followed by a Q&A period. We expect the call to last about 60 minutes. We had another great quarter and a year, and we have a lot of important to talk about today, so I'd like to turn the call over to Jose.

So let's get started. Jose?

Jose Mas -- Chief Executive Officer

Thanks, Mark. Good morning, and welcome to MasTec's 2018 fourth-quarter and year-end call. Today, I'll be reviewing our fourth-quarter and full-year results as well as providing my outlook for 2019 and the markets we serve. I'm happy to report that our financial results for 2018 were again at record levels.

2018 marks the third consecutive year of record financial performance. More importantly, we are again providing record levels of revenue, adjusted EBITDA, net income, cash flow and EPS guidance for 2019. I must say, I am truly humbled and privileged to lead such as great group of men and women. The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great-quality project at the best value.

These traits have been recognized by our customers, and it's because of our people's great work that we've been able to deliver these outstanding financial results. Now some fourth-quarter highlights. Revenue was up 20% in the fourth quarter to $1.9 billion. Fourth-quarter adjusted EBITDA was up 52% to $196 million, and fourth-quarter adjusted EPS was up 128% to $1.07.

For the full-year, 2018 revenue was up 5% to $6.9 billion, 2018 adjusted EBITDA was up 12% to $721 million, 2018 full-year adjusted EPS was up 29% to $3.77 and cash flow from operations for the year was $530 million. In summary, we had an excellent quarter and a great year. A few highlights stand out for me in 2018. Commodity pricing differentials due to takeaway capacity constraints in a number of shale markets have significantly improved the long-term outlook for our oil and gas markets.

Our experience dealing with the complexities of large-scale oil and gas projects and the associated environmental and permitting challenges uniquely positions us to execute future similar projects. This same experience has helped us as we managed larger-scale telecommunication projects in both the wireline and wireless markets. The requirements for a 5G rollout in the United States will create significant opportunities for MasTec. While we'll benefit from this in 2009, the larger opportunity will be in 2020 and beyond.

Our Power Generation and Industrial segment enjoyed a 122% annual revenue growth, primarily organic, in 2018, and we expect growth to exceed 30% again in 2019. On margins, we delivered solid improvements in both Communications and Oil & Gas. Communications margins were up 120 basis points year over year, and Oil & Gas improved 220 basis points. And finally, I think the biggest highlight of 2018 was our ability to predict and execute financially despite all of the project challenges that we faced during the year.

As I think about 2019 and beyond, I couldn't be more excited about the opportunities ahead. For example, in the oil and gas market, we have excellent multiyear visibility on project activity. We are at the very early stages of a 5G deployment, which will be bigger and more complex than previous technology deployments. We expect considerable future growth opportunities.

We're making significant investments today in people and equipment to prepare ourselves for what we think will be a very sizable, multiyear opportunity. As the largest wireless contractor in North America, we are uniquely positioned to execute on these challenges. This will have a negative margin rate impact for us in 2019. The size and scale of this impact can be managed and adjusted as the opportunity plays out.

On the wireline side, a significant increase in construction activity will start across the country on fiber expansion projects. These projects will also present multiyear opportunities. Competition for these resources will be strong, and those with in-house capabilities will be well served. We have been and will continue to invest in having these in-house capabilities.

Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $649 million, and for the year, revenues were $2.55 billion versus $2.4 billion last year. EBITDA margins for 2018 were 11.4% versus 10.2% in 2017. While we had 120 basis point improvement year over year, we did have some margin weakness in the fourth quarter.

Activity in both wireline and wireless is increasing, and competition for resources has increased. On our last call, we talked about the need for additional personnel. We heavily invested in the fourth quarter and will continue to do so throughout 2019 as we expect significant opportunities for growth in the years to come. For 2019, we expect approximately 20% growth in both wireline and wireless, offset by about a 10% decline in our installation fulfillment business.

We expect Communications segment margin to approximate 10% as we continue to invest in resources for the expected growth opportunities in 2020 and beyond. Moving to our Power Generation and Industrial segment. Revenue was $222 million for the fourth quarter versus $96 million in last year's fourth quarter. Full-year revenue was $665 million, compared to $300 million in 2017.

EBITDA for this segment improved 79% to $40 million. Current backlog levels support a strong year for this segment. And with our improved financial performance over the last two years, we expect 2019 to be an excellent year. We've done a great job diversifying this segment.

We have strong opportunities in the wind, solar, small power gen and civil markets and expect this segment to have solid, consistent long-term growth. Revenue in our Electrical Transmission segment was $100 million in the fourth quarter, and for the year, revenue was $397 million. We enjoyed solid backlog growth in 2018, ending with $610 million of backlog versus $354 million at the end of 2017. We expect mid-single-digit revenue growth in 2019 with a number of recently won projects kicking off construction at the end of 2019 and in early 2020.

We believe, we are well-positioned to further grow backlog in 2019, and expect to revenues in 2020 to be at record levels for this segment. Our Oil & Gas segment had revenues of $947 million for the fourth quarter, compared to revenues of $740 million in last year's fourth quarter. For the full-year, Oil & Gas segment revenue was $3.3 billion. EBITDA margins in our Oil & Gas segment were 13.7% for the year, compared to 11.5% in 2017.

We expect mid-single-digit revenue growth in this segment, coupled with slightly better margins for 2019. Year-end backlog was approximately $2.1 billion, compared to $2.5 billion at year-end 2017. Not included in our backlog is approximately $1 billion of recent awards that will be added to backlog in the coming quarters. The pipeline market is very strong.

Activity levels for both long-haul pipelines and shale-related work remained high. We're also seeing a greater diversification of both number and geographic concentration of projects for 2019. We are actively pursuing opportunities for 2020 and 2021 and are in several discussions with clients about long-term resource needs and planning. We expect significant long-term demand for our services.

Subsequent to year-end, we also acquired Kingsley Constructors. Kingsley focuses on water management and water pipeline systems for the oil and gas market. We welcome the Kingsley team to the MasTec family. To recap, we had another record year in 2019, and we expect 2019 to be even better.

While the last few years have been excellent, we're even more excited about our future. We have significant long-term growth opportunities across our different segments and feel we are well-positioned to execute on these opportunities. It's definitely an exciting time to be part of MasTec. I would like to take this opportunity to again thank the men and women of MasTec for their commitment to safety, their hard work and their sacrifices.

Our people are our most important asset, and it's because of them and the opportunities that they've created that I'm so bullish about our future. I'll now turn the call over to George for our financial review. George?

George Pita -- Executive Vice President and Chief Financial Officer

Thanks, Jose, and good morning, everyone. Today, I'll cover fourth quarter and annual 2018 financial results, including cash flow, liquidity, working capital usage and capital structure as well as our initial guidance expectation for 2019. As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. It is worth noting that fourth quarter 2018 GAAP results reflected a noncash goodwill asset impairment charge of approximately $48 million related to Canadian oil and gas and oil sands facilities construction operations acquired in 2014 as part of our periodic fair valuation process.

Reconciliation and details of non-GAAP measures can be found in our press release, on our website or in our SEC filings. In summary, we had strong fourth-quarter 2018 results that capped off a record 2018 year by virtually all adjusted financial measures. During the fourth quarter, as previously communicated, we generated record cash flow from operations, normalized our working capital investment levels and significantly improved our year-end 2018 leverage profile. Fourth-quarter 2018 leverage reduction and leverage ratio improvement were achieved despite approximately $120 million in investment associated with 2.9 million shares repurchased during the quarter.

Lastly and importantly, during the fourth quarter, our board also approved a new $100 million share repurchase authorization, reflecting our continued confidence in growing demand for our services as well as our commitment to generate long-term shareholder value through opportunistic share repurchases in periods when the company believes its share price represents a significant value. Here are some comments regarding our fourth-quarter 2018 consolidated performance. Fourth-quarter 2018 revenue of $1.9 billion grew 20% and represented the largest fourth quarter in MasTec history, primarily driven by strong increases across the Oil & Gas and Power Generation and Industrial segments. Fourth-quarter 2018 adjusted EBITDA was approximately $196 million or 10.2% of revenue, representing the largest fourth-quarter adjusted EBITDA level in MasTec history and a $67 million or 52% increase over fourth-quarter 2017 levels.

Fourth-quarter adjusted diluted earnings were $1.07 per share, compared to $0.47 per share during the fourth quarter of 2017, representing a 128% year-over-year increase and the largest fourth-quarter adjusted earnings performance in MasTec history, with this year-over-year increase due to the combination of adjusted EBITDA growth, the benefit of a lower share count due to 2018 share repurchase activity and lower 2018 income tax rates. Year-end 2018 backlog was approximately $7.7 billion representing the largest fourth-quarter backlog level in MasTec history. And as Jose indicated, this backlog does not include multiple expected 2019 project awards in the process of being signed. Now let me get into some more detail regarding our fourth-quarter 2018 segment results.

Fourth-quarter 2018 Oil & Gas segment revenue increased approximately 28%, compared to the same period last year to approximately $947 million. Fourth-quarter 2018 Oil & Gas segment adjusted EBITDA margin rate was strong at 14.8% of revenue, an 860 basis point improvement over the 6.2% of revenue reported during the fourth quarter of 2017. This marks the second consecutive quarter of Oil & Gas segment adjusted EBITDA margin rate performance approximating 15%, which is representative of this segment's performance potential. Fourth-quarter 2018 Communications segment revenue decreased approximately 2%, compared to the same period last year to approximately $649 million.

Fourth-quarter 2018 Communications segment adjusted EBITDA margin rate was 6.2% of revenue, compared to 11.2% of revenue during the fourth quarter of 2017. Fourth-quarter 2018 Communications segment revenue results reflect continued strong double-digit growth in wireless and wireline project activity, offset by lower year-over-year levels of storm restoration; work and install-to-the-home activity. Fourth-quarter 2018 adjusted EBITDA margin rate reflects, as previously communicated, ramp-up costs related to wireless and wireline fiber true capacity initiatives as we prepare for sizable 2019 and 2020 growth in these areas. Fourth-quarter Power Generation and Industrial segment revenue grew 132%, compared to the same period last year to approximately $222 million, with virtually all of this growth occurring organically.

Fourth-quarter 2018 adjusted EBITDA margin rate was 7.3% of revenue, compared to 8.1% of revenue during the fourth quarter of 2017. And fourth-quarter 2018 Power Generation and Industrial segment results continue to reflect the trends exhibited in this segment's backlog with a very active bidding and construction activity. Lastly, fourth-quarter 2018 Electrical Transmission segment and other segment results were generally in line with our expectation. Turning to a recap of full-year 2018 consolidated results, which, much like our fourth-quarter performance, represented record levels by virtually all adjusted financial metrics.

Annual 2018 revenue of $6.9 billion grew approximately 5%, representing the largest annual revenue level in MasTec history, primarily driven by increases in Communications and Power Generation and Industrial segments. Annual 2018 revenue of $6.9 billion also exceeded our initial revenue expectation of $6.75 billion when we entered 2018. Annual 2018 adjusted EBITDA was approximately $721 million or 10.4% of revenue, representing a $75 million or 12% increase over annual 2017 levels and a 60 basis point adjusted EBITDA margin rate improvement. Annual 2018 adjusted EBITDA of $721 million represented a new annual record level for MasTec and exceeded our initial guidance expectation of $685 million when we entered 2018.

Annual 2018 adjusted diluted earnings were $3.77 per share, compared to $2.92 per share in 2017, representing a 29% year-over-year increase. Adjusted diluted earnings of $3.77 per share represented a new annual record level for MasTec and also significantly exceeded our expectation of $3.45 per share as we entered 2018. In summary, 2018 was another record year for MasTec, significantly exceeding our initial expectations at the beginning of the year, and our record year-end 2018 backlog gives us continued confidence toward an exciting future. Now I will cover a summary of segment performance for both our annual 2018 period and our initial 2019 segment guidance expectation.

Annual 2018 Oil & Gas segment revenue of approximately $3.3 billion decreased approximately 6% compared to the same period last year. Annual 2018 Oil & Gas segment adjusted EBITDA margin rate was strong at 13.7% of revenue, a 220 basis point improvement over the 11.5% of revenue reported in 2017. Keep in mind when comparing Oil & Gas segment annual results during 2018 and '17 that 2017 Oil & Gas segment reserves included approximately $500 million in revenue on a cost reimbursable basis, thereby, generating 2017 revenue with no corresponding adjusted EBITDA. Excluding the impact of $500 million in 2017 cost reimbursable work, Oil & Gas segment annual 2018 revenue levels grew approximately 10% when compared to 2017.

We continue with the strong belief that we are in the midst of a multiyear cycle of pipeline project activity that will drive significant demand for our future Oil & Gas segment services, affording us the opportunity to generate segment adjusted EBITDA margin rate in the mid-teens for several years. As we look forward, our 2019 guidance expectation for the Oil & Gas segment is that 2019 revenue will grow in the mid-single-digit range over 2018's level. This assumes a mid- to late spring restart of selected 2018 large project activity to be completed in 2019 and summer starts for 2019 project awards in the process of being signed. Based on this timing, we would expect first half 2019 Oil & Gas segment revenue levels to approach first half 2018 levels, with 2019 revenue growth occurring during the second half of the year.Our 2019 Oil & Gas segment adjusted EBITDA margin rate expectation assumes improvement in first half 2019 adjusted EBITDA margin rate when compared to first half 2018, particularly during the first quarter of 2019, which is expected to benefit from the combination of higher-margin smaller project activity and the nonrecurrence of lower-margin, large project cost reimbursable work from the prior year.

Annual 2018 Communications segment revenue of approximately $2.6 billion increased approximately 5% compared to the same period last year. Annual 2018 Communications segment adjusted EBITDA margin rate was 11.4% of revenue, a 120 basis point improvement over the 10.2% of revenue reported in 2017. Annual 2018 Communications segment revenue growth is characterized by increased level of construction activity in wireless and wireline fiber services as projects ramped during the year, approximately $75 million of first quarter 2018 Puerto Rican storm restoration services and decreased levels of install-to-the-home satellite services throughout the year. Annual 2018 Communications segment adjusted EBITDA margin rate of 11.4% of revenue included a benefit of approximately 60 basis points from first quarter Puerto Rican storm restoration services, and we had some EBITDA margin rate pressure during the fourth quarter of 2018 as we invested in ramp-up costs related to wireless and wireline fiber crew capacity initiatives to prepare for expected significant 2019 and 2020 project growth.

As supported by our record Communications segment year-end backlog, and as Jose indicated in his remarks, we believe we are in the early stages of a significant telecommunications infrastructure investment cycle as carriers move toward the implementation of transformational 5G wireless and dedicated first-responder networks, which would create significant multiyear demand for tower, small cell and fiber deployment construction services. As we look forward, our 2019 guidance expectation for the Communications segment is that annual 2019 segment revenue will grow in the low to mid-teen range over 2018's level. This expectation assumes mid-to high 20% increases in wireless and wireline construction services, partially offset by a continued decline in install-to-home services and a $75 million first quarter headwind from the nonrecurrence of storm restoration services. Accordingly, we expect the first quarter 2019 Communications segment revenue levels will be slightly below 2018, with revenue growth occurring during the balance of 2019, including the assumption of slightly higher second and third quarter 2019 revenue growth rates.

We also expect first half 2019 Communications segment adjusted EBITDA margin rate to be in the high single-digit range as we incur ramp-up costs to increase wireless and wireline crew capacity to support expanded levels of work activity for 2019 and beyond, with second half 2019 adjusted EBITDA margin rate improving to the low double-digit levels and annual 2019 segment adjusted EBITDA margin rate somewhere between 9% to 11% of revenue, depending on the level of investments required to build crew capacity for 2019 and 2020 growth. Annual 2018 Power Generation and Industrial segment revenue of approximately $665 million increased approximately 122% compared to the same period last year, with 83% of this growth occurring organically. Annual 2018 Power Generation and Industrial segment adjusted EBITDA margin rate was 6.1% of revenue compared to 7.5% of revenue during 2017. As we have previously indicated, we continue to see a very active renewable power bidding and construction market, as evidenced by our elevated backlog level as of year-end 2018.

Based on this outlook and backlog, our 2019 annual revenue expectation for the Power Generation and Industrial segment would anticipate 2019 revenue growth in the 30% to 40% range with segment adjusted EBITDA margin rate performance approximating 2018's level. Annual 2018 Electrical Transmission segment revenue of approximately $400 million increased 5% compared to 2017. Annual 2018 Electrical Transmission segment adjusted EBITDA margin rate was 26% of revenue compared to 4.8% of revenue in 2017. During the latter part of 2018, we secured a large project award, of which only a portion is in our year-end 2018 18-month backlog due to expected project start timing.

We continue to experience active, large-transmission project bidding activity, which we expect will set this segment up for sizable growth opportunities in 2020 as project construction activity ramps. Thus, we view 2019 as a backlog build year and anticipate a slight annual top line and adjusted EBITDA margin rate improvement during 2019 with this trend developing during the back half of 2019. Annual 2018 other segment equity and earnings from our equity interest in Waha operations was approximately $24 million, and we anticipate 2019 will approximate 2018's level. Annual 2018 corporate segment adjusted EBITDA was a net cost of $95 million or 1.4% of consolidated revenue, and this level included approximately $18 million in charges related to estimated changes in earn-out liabilities.

For 2019, we would anticipate corporate segment adjusted EBITDA costs to moderate some and approximate 1% of consolidated revenue. Now I will review a summary of our top 10 largest customers for the annual 2018 period as a percentage of revenue. AT&T revenues derived from wireless and wireline fiber services were approximately 16% and install-to-home services were approximately 7%. On a combined basis these three separate service offerings totaled approximately 23% of our total revenue.

It is important to note that all of these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe. EQT was 20%; Energy Transfer affiliates was 14%, representing multiple separate projects; and Verizon Communications, Comcast, Georgia Renewable Power, Duke Energy, the Southern Company, EPIC Y-Grade Pipeline and Plains Holding were each at 2%. Individual construction projects comprised 65% of our annual 2018 revenue, with master service agreements comprising 35%. And this mix is similar with our prior year-end trend.

At year-end 2018, our backlog represented the highest year-end level in MasTec history at approximately $7.7 billion compared to approximately $7.1 billion at the end of 2017. As a reminder, and as we have indicated for years, quarterly backlog amounts tend to be lumpy as large projects burn off each quarter and new large contract awards only come into backlog at a single point in time. Our record year-end 2018 backlog includes the elimination of Puerto Rican storm restoration services backlog, and we excluded Puerto Rican storm restoration services from our 2019 revenue expectations. Lastly, as Jose mentioned earlier, year-end 2018 backlog does not include approximately $1 billion of recent awards to be signed and added to backlog in 2019.

In summary, our record level of year-end 2018 backlog highlights the strength of our end markets and supports our expectation of additional revenue growth in 2019 and beyond. Moving on to the topics of cash flow, liquidity and capital structure. As previously noted, we had strong fourth-quarter 2018 cash receipts, which normalized our working capital investment level, improved our leverage and led to a record level of annual 2018 cash flow from operations. We entered 2019 with a solid capital structure that allows us to take advantage of the various growth opportunities our markets afford us.

We ended 2018 with net debt, defined as total debt less cash, of $1.38 billion; year-end book leverage ratio, defined as net debt levels divided by trailing 12-month adjusted EBITDA, of 1.9 times; and ample liquidity of approximately $580 million. For the annual 2018 period, MasTec generated record level of $530 million in cash flow from operations while generating free cash flow of $389 million or approximately 129% of adjusted net earnings. For the sake of clarity, it is important to note that our 2018 cash flow from operations performance is representative of typical and repeatable performance. As we started at the end of the year with a similar level of working capital investment and equal levels of year-end DSOs, or day sales outstanding, at 81 days, thus, we expect our 2019 operations to continue this strong cash flow profile, affording us the opportunity to generate yet another record level of annual 2019 cash flow from operations and 2019 free cash flow in excess of adjusted net income.

It should be noted that our fourth quarter and annual 2018 leverage profile improvements were achieved despite significant share repurchase investments. During the fourth quarter of 2018, we repurchased 2.9 million shares for approximately $120 million, and annual 2018 share repurchases were 7.2 million shares for approximately $319 million. We entered 2019 with approximately $129 million in open share repurchase authorizations as well as continued confidence in a growing demand level for our services and a commitment to generate long-term shareholder value through opportunistic share repurchases. Regarding our spending on equipment, annual 2018 net cash CAPEX, defined as cash CAPEX net of equipment disposals, was approximately $141 million, with an additional $76 million equipment procured under capital leases.

We expect 2019 net cash CAPEX to moderate some from 2018 levels to approximately $75 million to $85 million, with an additional $150 million of equipment procured under capital leases. Moving on to our 2019 initial guidance. We are currently projecting annual 2019 revenue of approximately $7.6 billion with adjusted EBITDA margin rate at 10.3% of revenue or $780 million and adjusted diluted earnings per share at $4.34, with all of these projected metrics representing new record levels for MasTec. As we have provided some color as to 2019 segment level expectations, I will now cover other guidance expectations.

We expect annual 2019 interest expense levels will approximate 1.1% of revenue with the benefit of improved working capital investment levels and effectively offset by annualization of 2018 share repurchase activity and 2018 and expected 2019 short-term floating interest rate changes. We anticipate 2019 depreciation and amortization expense will approximate 3.2% of revenue with a dollar increase over 2018, primarily due to the annualization of 2018 capital expenditures and the Kingsley acquisition Jose mentioned earlier in his remarks. We expect our annual 2019 GAAP and adjusted income tax rate will approximate 27%, compared to an adjusted income tax rate of 29.3% for 2018, with this improvement due to the benefit of changes in mix of our foreign operations. Our estimate for annual 2019 share count for diluted earnings per share is about 75.8 million shares, a four million share reduction from 2018's year-end level, reflecting the annualization of 2018 share repurchase activity.

This share count estimate does not include the impact of any potential share repurchase activity in 2019. And for the sake of clarity, our expected 2019 share count of approximately 75.8 million shares appropriately incorporates the full impact of 2018 share repurchase activity and best represents our outstanding share count for current enterprise value modeling purposes. And lastly, annual 2019 net income attributable to noncontrolling interest should approximate 2018 levels, and for modeling purposes, simply break this down equally by quarter. We currently estimate first quarter 2019 revenue of approximately $1.4 billion, with adjusted EBITDA of approximately $126 million and adjusted diluted earnings at $0.43 per share.

This expectation incorporates an overall flat level of revenue when compared to the first quarter of 2018 due to the nonrecurrence of first quarter 2018 storm restoration services in our Communications segment and lower levels of expected first quarter 2019 large-project Oil & Gas project activity due to the timing of project restart operations when compared to the first quarter of 2018. Our first-quarter 2019 expectation also includes improved, consolidated adjusted EBITDA margin rate performance when compared to the first quarter of 2018 comprised of improved first quarter 2019 Oil & Gas segment adjusted EBITDA margin rate performance. And this is from the benefit of higher-margin, smaller-pipeline project work and the nonrecurrence of 2018 lower-margin cost reimbursable work, partially offset by lower expected first quarter 2019 Communications segment adjusted EBITDA margin rate due to the nonrecurrence of high-margin first quarter 2018 storm restoration activity and expected ramp-up costs as we build crew capacity. In terms of some additional color on the expected timing of 2019 consolidated revenue performance, we expect first half 2019 revenue will grow in the high single-digit range, with second half 2019 consolidated revenue expected to grow in the low double-digit range and annual 2019 consolidated revenue growth expected at 10%.

We expect first half 2019 consolidated EBITDA margin rate will slightly exceed first half 2018's margin rate level while being slightly lower than our annual consolidated adjusted EBITDA margin rate expectation of 10.3%, with second half 2019 adjusted EBITDA margin rate expected to slightly exceed our annual 2019 margin rate expectation of 10.3%. And this trend is generally consistent with our historical performance. In summary, we are proud of our record performance over the past three years and look forward on executing on multiple multiyear growth opportunities that our markets afford us for substantial growth in 2019, 2020 and beyond. That concludes our prepared remarks, and now we'll turn the call over to the operator for questions.

Operator? 

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Alex Rygiel with B. Riley FBR.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Thank you. And another fantastic quarter.

Jose Mas -- Chief Executive Officer

Thank you, Alex.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Jose, can you talk a little bit about the timing of FirstNet? And how you expect that to ramp up, and when it might peak? And seeing with sort of 5G, I know you addressed it a little bit on the call, can you dig a little bit deeper on these two items?

Jose Mas -- Chief Executive Officer

Sure. FirstNet is going well. Obviously, last year was a ramp year for us in FirstNet. I think this year is a more consistent year on a full-year basis, and I think we're going to continue to see a lot of FirstNet activity over the coming years.

The real growth opportunity in the wireless business because that -- at the end of the day, FirstNet is only really an AT&T initiative. When you think about 5G, every carrier in the country is working extremely hard to figure out how they're going to deploy 5G and how can they deploy it faster. It's more complex, as I said earlier, than any of the other deployments that we've done because it's multifaceted with both tower and small cells. I think that what we've learned over the last year is we think that, that opportunity is going to be significantly bigger than what we previously thought and probably last a lot longer.

And we're really trying to prepare ourselves this year as that begins. I think we're going to see 5G activity in 2019, but quite frankly, we won't see the bulk of the activity until 2020.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

And on that comment, you had a little surge in Communications backlog a few quarters ago. It's kind of flattened out here. Would you anticipate sort of another surge in 2019 as you get into some of these 5G projects?

Jose Mas -- Chief Executive Officer

I think as we start getting orders, right, especially toward the second half of '19, I think that's probably our expectation. It's also important to note that a lot of the Puerto Rico work was distribution work that was in our Communications backlog. So a lot of that drop came in Communications. So while it looks flat, when you take in consideration the reduction of Puerto Rico, it's actually a lot better.

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Great point. Thank you very much.

Thank you, Alex.

Operator

[Operator instructions] We will take our next question from Adam Thalhimer. Please go ahead.

Adam Thalhimer -- Thompson Davis and Company -- Analyst

Thanks. Good morning, guys. Great quarter. And Jose, what are your long-term thoughts on Communications margins once you get through this ramp-up here?

Jose Mas -- Chief Executive Officer

Definitely better than what we did last year. I think we can -- I think a lot of the investments we're making today is specifically around trying to improve margins long term. So I think we had a good margin year in 2018. It -- we've always said that our goal is to beat 2018 by, hopefully, a couple of hundred basis points, and our thought process around that hasn't changed.

Adam Thalhimer -- Thompson Davis and Company -- Analyst

And then on the oil and gas side, you guys have done a great job of benefiting from the Permian growth and all of the projects done in Texas. Just curious, I mean, is there another kind of shale percolating that you see out there?

Jose Mas -- Chief Executive Officer

I think all the shales are having takeaway capacity issues. To a lesser extent, some more than others, I think you can track it based on cost differentials. It is not just a Permian problem, it's a multiple-basin problem, and we're seeing activity across a number of different basins. That's why we think this is going to last -- this cycle is going to last a lot longer than people think because it's not one thing that's driving this market, there's multiple initiatives that are driving the strength in our oil and gas markets.

Operator

We will take our next question from Noelle Dilts with Stifel Financial. Please go ahead.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

thanks, and again, congratulations on a good quarter. So just expending a little bit on that shale comment, you mentioned in your remarks that you are seeing some geographic concentration of the work, and I think you guys do have a really good position down in the Permian. So one of the questions I often get is folks are kind of looking out and saying, OK, we're going to have a lot of Permian build here in 2019, maybe into 2020, but then we'll be in an overbuilt position. How are you guys thinking about that? And how are you thinking about the multiyear opportunity around -- in the Gulf Coast? And then if you could combine that with kind of the rationale behind the Kingsley acquisition, and how you see that fitting into your offering?

Jose Mas -- Chief Executive Officer

Sure, a couple of things. So it's not about geographic concentration, it's actually about geographic diversification, which is what we're aiming for 2019, which see as a huge benefit, right? I think for the last couple of years, obviously, a couple of large projects have somewhat steered our Oil & Gas business. We're very bullish on large projects. It's in our wheelhouse.

It's something that we do well because of the complexities associated with those projects. We think we're the perfect fit to do those, and I think we're going to continue to benefit from those. And there are a number of those that are going to continue to happen for years to come. I think we're going to see a lot of activity across all the basins again.

I think the Permian is going to be very healthy well beyond 2020 because there's just a lot of activity and a lot of different things happening there. A lot of new wells being produced, a lot of different areas being produced. When I think about the Kingsley acquisition and they're predominantly in the Permian basin, so when you think about the Permian basin, E&P operators in the Permian basin produce about seven barrels of water for every barrel of crude that they produce. So if you think about that in numbers, it's just mind-boggling.

There's about 30% savings in pipelines over water hauling. What we know is a water hauling market, and it's about $13 billion a year market. And very small portions of that have been converted to pipeline, although that activity has started in a pretty significant way. So we think we're coming into this industry at a perfect time and one in which we're going to see considerable growth.

And like in a lot of the acquisitions that we made in the past, we buy a relatively small company with what we think are great prospects for growth, and hopefully, we can execute on that.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Thanks so much. OK. And then shifting over just to the Communications segment. Any chance you could give us kind of the dollar -- where you end up in terms of dollar revenue for wireless, wireline and ITPH so we're all kind of set there in terms of your growth expectations? And then in terms of the Puerto Rico contract around some of the distribution work down there, are you thinking about that still potentially coming through, it's is just higher risk at this point? Could you give us a feel for the options around that work?

Jose Mas -- Chief Executive Officer

Sure. Our wireline business is about $1 billion, our wireless business is about $1 billion and our installation fulfillment business is about $500 million. So if you think about our 2018, that's kind of how it played out. In our script, we talked about 20% growth in both wireline and wireless, with about a 10% decline in our fulfillment installation business.

So I think that math works out pretty easily. When we think about Puerto Rico, I think it's an -- it's still an awesome opportunity. There's billions of dollars that are going to be spent on the permanent fix of what they did during the storm. The -- it's not a work-related issue.

The work is there. We have great relationships. We think we're in an incredible position to win a sizable amount of work and to, hopefully, execute not just on the amount of awards that we previously had but on something much greater. The question all becomes about funding.

And there's a lot of -- you can actually Google Puerto Rico and FEMA and the governor in FEMA, and there's a lot written about the issues that they've had and the funding issues that they've had and the things that they're currently doing to try to fix it. So we're hopeful that something is going to break there at some point in 2019. Again, we're well-positioned. But at this point, we've taken it out of guidance, so whatever happens would be upside there.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Got it. Appreciate it. Thanks.

Operator

We will take our next question from Andrew Kaplowitz with Citi Bank. Please go ahead.

Andrew Kaplowitz -- Citi -- Analyst

Good morning, guys. In calendar Q4, we saw a major margin pickup from the competitor in wireline, and they're talking about significant additional complexity associated with a large customer we know you do work with as well. When we look at your Communications margin, we did record the lowest margin in that segment in the quarter into early '17. And now we know your incurring extra costs from hiring and the general ramp-up in the business.

How should we think about the risk that Communications margin could be disrupted and be at the low end or even lower than that 9% to 11% guidance that you gave us for '19?

Jose Mas -- Chief Executive Officer

Sure. So if you think about 2018 Communications, we did 11.4% margins for the year. George talked about a 60 basis point impact related to storm. And since we're backing storm out of guidance, if you take that out, you can kind of call a normalized Communications rate for 2018 being 10.8%.

We've guided next year between 9% to 11%. So obviously, that's somewhat of a wide range, and for us, it's a really wide range from what we're used to give in guidance. And the difference is, how fast and how hard are we going to ramp relative to the opportunities. If you take the fourth quarter, for example, we think we were probably impacted by somewhere around $6 million in ramp costs.

So if you take some storm activity that happened in Q4 '17 with the ramp costs, you probably have somewhere between 150 to 200 basis points of impact related to that. To kind of put it in numbers, right, we added in the fourth quarter -- and this is almost specific to wireless because we added about 250 tower technicians in the fourth quarter. We talked about that on our last call. We've already hired that amount in the first quarter in the first two months.

And to be honest, we're going to continue at that rate as long as we see a runway to kind of place those crews. So in a perfect world, in 2019, we'll add about 1,000 new head, right, or new positions relative to that opportunity, which we think will pay off in 2020 and beyond. That's a lot of people, right? Whatever number you want to assign to that for inefficiencies and start-up costs, whether it's $20,000, $30,000, $40,000 a head, which it's probably somewhere in that ballpark, that's kind of what we're thinking about as we think about ramp-up costs specific to that. We're not -- on the wireline side, there's obviously an impact as well.

I'd say It's smaller than what we're seen on the wireless side today, and we're probably facing more of an impact on the latter -- on the wireless than the wireline. And that's how we're thinking about it, right? We start at 10.8%. We know we've got some headwinds, great opportunities. And if we can execute and ramp up and get the people that we need, then we're going to be in an incredible position in 2020 to not just take advantage of the revenue opportunity but then to turn that into positive margins and, hopefully, significantly exceed what we did in 2018.

Andrew Kaplowitz -- Citi -- Analyst

And just to be clear on that, you don't see any out-of-the-blue new complexity issue? I mean, this ramp up is -- you've seen it coming, right? There's nothing new there?

Jose Mas -- Chief Executive Officer

There's nothing new, right. It's -- again, these projects require a lot more program management. So they're different, right? Historically, companies like ours did construction, now we're doing program management and construction. We've done that for a long time, right? That's how we've kind of built our wireless business.

So we think we're well-positioned for that. So yes, there's unquestionably more complexities in what we do today than there's historically been. But again, we think we're uniquely positioned to benefit from that.

Andrew Kaplowitz -- Citi -- Analyst

I just want to ask you about your Oil & Gas backlog. You mentioned it being down to 2.1 to 2.5 last year. We know you talked about Oil & Gas backlog potentially exceeding '17 levels. Is this just timing? I mean, you mentioned $1 billion of work.

Is it one project being a little slower to sort of develop? And could you talk about 2019 enter to your backlog, could it be similar to '18 levels or higher in Oil & Gas?

Jose Mas -- Chief Executive Officer

So the difficulty with the question is timing of a month or two months, obviously, makes a big difference relative to a quarter. It has no impact on us as a business, right? So I would say that we expected to finish 2018 at higher levels than '17, we obviously didn't. But we've won -- in our minds, we have because today, we feel that we have more backlog going into 2019 than we did going into 2018. The work has been awarded, whether the contract is actually signed or what the issues are from a contract perspective.

They're somewhat irrelevant to us because we know what we're going to be doing. There is an enormous amount of activity in that business today. And we think that going into 2020, we're going to be as strong or stronger than we are today.

Andrew Kaplowitz -- Citi -- Analyst

Thanks, guys.

Jose Mas -- Chief Executive Officer

Thanks, Andy.

Operator

We will take our next question from Tahira Afzal with KeyBanc. Please go ahead.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

I guess, my first question is on the Electric Transmission side. You've shown that you have really mastered and become the blue chip name in a lot of the business you've gotten into. It seems like this is still a $1 billion revenue opportunity for you, making it maybe one of the more interesting ones. Do you still think that's the case? And is there a change in time line there?

Jose Mas -- Chief Executive Officer

The short answer is yes. And in our script, we talked about 2020 being at record revenue levels. We think that's achievable. Obviously, this was a market that we got into via a somewhat small acquisition and we built that business somewhat organically, so we're pretty proud of what we've done in our transmission business.

We think it's got great long-term potential and opportunities. We think we're competitive and participating on some of the largest and more complex jobs in the country, and we're in the race just about every time. So we feel good about it. We're going win our fair share, and we feel good about the future of that business and the potential to be $1 billion business like our other platforms.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Got it, OK. And then, Jose, just going back and belaboring the point on the whole telecom side. Obviously, you and I and everyone listens to the common feed from the carriers and -- that they've been struggling somewhat in terms of the 5G that just clicks. You guys are at the heart of it.

What gives you confidence that the pushouts we've seen are coming to an end?

Jose Mas -- Chief Executive Officer

Tahira, I don't think carriers are pushing out. I think if you talk to the carriers, every carrier wants to have a 5G system up and running. There is a race to be first. There's a race in the market.

It's -- it will -- there is no question that 5G is coming, and that's where the wireless industry is heading in this country. I can't imagine that anybody would argue that point. The issue is the timing toward it, right? Everybody has realized that it's become more complex and harder than what people originally anticipated. That creates incredible opportunity for companies like ours.

And we're seeing -- every day we're seeing different types of opportunities related to that, that we couldn't have imagined six months, 12 months ago. We're in a great spot. We've been saying all along that this wasn't a 2018 driver, that this would be a partial impact in 2019. It's coming.

It's going to be big, and it's not here yet. And I think, like everything else, people get excited. And to some extent, people anticipate things happening prior to when they're going to start. But there's no question it's coming.

It's in the -- it's right on the other side there. and it's tangible. We're feeling it in '19, but we're just going to -- it's just going to be a lot bigger in 2020 and 2021 than it'll be in '19.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Thanks. That's pretty helpful.

Jose Mas -- Chief Executive Officer

Thanks, Tahira.

Operator

We will take our next question from Chad Dillard with Deutsche Bank. Please go ahead.

George Kasiaras -- Deutsche Bank -- Analyst

This is George Kasiaras on for Chad. Wanted to see, in the last few months, you've seen some LNG projects pick up. Wanted to see what the associated pipeline opportunity could materialize in the next year? And how big the opportunities could be there? And also, what your visibility is on fiber-to-the-home spending in the back half of the year? Thank you.

Jose Mas -- Chief Executive Officer

So the LNG projects are very large in size and scale. The pipelines associated with these projects are large in size and scale. Those are projects that we actually don't expect to see until 2021, 2022. They're out there.

They're going to happen. So it's a very exciting opportunity for us as we think about the ramp in Communications. I think our wireless business will ramp pretty consistently throughout the year. When you think about our wireline, it'll probably be more second half loaded as more of the fiber cities actually start into construction versus just being in engineering.

Some are in construction, but a lot of them will still be in engineering until midyear.

George Kasiaras -- Deutsche Bank -- Analyst

Great. That's helpful. Thank you.

Operator

We will take our next question from Jamie Cook with Credit Suisse.

Jamie Cook -- Credit Suisse -- Analyst

Hi, good morning and nice quarter. I guess back to the Communications side, understanding the investment that you're putting in and the growth that's to come, I'm Just trying to understand how you're approaching the investment. One, how do you characterize the risk of what's on the horizon that this increased spend could sort of leak into the back half of the year? And then when you're thinking about spending, how much work are you sort of being guaranteed by your customers versus your view of sort of what's on the come? And then my second question, can you just talk about on the Oil & Gas side, just terms and conditions, whether you've seen any level of improvement? And how sustainable do you think your market share is, given you've probably won more than most others out there? Thanks.

Jose Mas -- Chief Executive Officer

Sure. So on the Communications side, I mean, quite rightly, there are no guarantees, right? We see a huge market opportunity, and we're trying to position ourselves to take advantage of it as best as we can. When we think about history, right? We've, obviously -- we went through a period of time where we added people, and we went through a significant tower-climbing initiative a few years back, which didn't go well for us. I think there's significant differences between that and where we are today.

That was driven by one customer on one customer's needs. What we're doing today is driven by every single carrier's needs and our discussions with every single carrier. So we feel a lot more comfortable on what we're doing today than what we've ever done relative to that. On the Oil & Gas side, we've been saying for a long time that we think tease and cease are good.

We think our customers are being fair with us. There's a very -- there's really a partnership approach these days to projects because they're so complex. The difficult permitting challenges are significant and environmental challenges are significant. So we think terms have being good, terms will continue to be good.

And we haven't seen any incremental change in those, and I think we've demonstrated that with our financial results in the business.

Jamie Cook -- Credit Suisse -- Analyst

And then sorry, just a follow-up question. Longer term, as we think about your free cash flow conversion as the Communications business ramps. Is there any change in terms of how we should think about free cash flow conversion? Maybe it's a better question for George, but any color would be appreciated.

George Pita -- Executive Vice President and Chief Financial Officer

No, there's no real change to the working capital profile or a fixture with increased Communications work. We indicated that we expect record cash flow to be generated in '19. We continue to expect to generate free cash flow well in excess of earnings, a little less capital intensive than most. And Communications, frankly, is a little bit less capital incentive than most -- than some of the other business that we do.

So our cash flow profile is going to continue on a very strong basis. And as I mentioned earlier, our performance in '18 is really not extraordinary, it's repeatable and typical of where we should be.

Jamie Cook -- Credit Suisse -- Analyst

Great. Thank you.

Operator

We will take our next question from Brent Thielman with D.A. Davidson. Please go ahead.

Brent Thielman -- D.A. Davidson -- Analyst

Great. Thanks. Congrats as well. Jose, in the tower business, you guys seem pretty bullish there.

How realistic is it to think that as a billion dollar revenue business in the next three years? And can you do that organically?

Jose Mas -- Chief Executive Officer

Well, I think we have, right? I think it did $665 million. This year, we're talking about 30% to 40% growth. Next year, at the higher end of that growth. It is a billion dollars business, and we continue -- and we expected to not just sustain there but, hopefully, grow over time from that base.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And then, I mean, the Permian activity looks pretty good for you. I mean, are you starting to use your resources outside of that region, I guess, elsewhere in that Oil & Gas segment to address that demand or is it still there if you need it?

Jose Mas -- Chief Executive Officer

It's probably still there if we need it. It's a little bit of both. But probably still there if we need it.

Brent Thielman -- D.A. Davidson -- Analyst

OK. Great. Thanks.

Operator

And we will take our next question from Andrew Wittmann with Baird. Please go ahead.

Andrew Wittmann -- Baird -- Analyst

Great. Thanks. I guess, my question is for George. George, this year, your financing more of your CAPEX under capital leases rather than cash CAPEX.

Can you talk about the rationale behind that, please?

George Pita -- Executive Vice President and Chief Financial Officer

Yes, as we look forward really, at the end of the day, one of the things we look at there is very attractive rates on some of the leasing that we're seeing. And also when we look at some of the CAPEX going forward, it's a -- we're always evaluating how much of our capital structure should be fixed versus floating to the extent that we move some CAPEX into the capital leases that puts it on a fixed basis so we think in a potentially rising environment over time, but that's a prudent move. So we're adjusting our thoughts a little bit relative to the mix of our capital, really, to try to address that fixed-floating percentage of our overall capital structure.

Andrew Wittmann -- Baird -- Analyst

OK, great. Juts to dig a little bit more on that. When you -- if you would've -- how should I put this? If your CAPEX would have been more cash-driven like it has in the past, would you still be comfortable saying that your free cash flow would be in excess of net income this year? Or is that one of the drivers that gives you some of the confidence to make that comment?

Jose Mas -- Chief Executive Officer

Sorry, Andy, it's Jose. If you look at our five-year free cash flow, so not just 2018 but if you take the last five years, we've done about 119% of free cash flow versus net income. So this is not a 1-year trend. This is what we've been able to deliver over five years.

Over that five-year period, we've had usually spent considerably higher rates on CAPEX. So again, to George's point earlier, this should be a repeatable performance level for us for years to come.

Andrew Wittmann -- Baird -- Analyst

Thank you very much.

Operator

We will take our next question from Blake Hirschman with Stephens. Please go ahead.

Blake Hirschman -- Stephens Inc. -- Analyst

Good morning, guys. Just a quick follow-up on all the free cash flow commentary. Just wanted to get your thoughts on how we should be thinking about your kind of use of cash priorities versus -- or I mean, if it's buybacks, acquisitions because you've kind of been doing a little bit of both. So just your thoughts there, and that's good for me.

Thanks.

Jose Mas -- Chief Executive Officer

Sure. Thanks, Blake. So last year, we bought 7.2 million shares, we're about $319 million. Obviously, that's the highest level of share buybacks we've ever done in the company's history.

We're going to continue to look for opportunities to buy back shares over time, depending on where the price is, that's kind of been our stated goal. We obviously made an acquisition here at the beginning of the year. We are seeing somewhat more attractive M&A market than we've seen in the last couple of years. We think there are a lot of opportunities out there.

So we're trying to balance what we're thinking about and stock buybacks show us the opportunities that we can to position the business. And those are probably our two drivers of cash used on a go-forward basis.

Operator

It appears there are no further questions at this time. Mr. Mas, I'll return the conference back to you for any additional or closing remarks.

Jose Mas -- Chief Executive Officer

All right. So this concludes our 2018 year-end call. I would like to thank everybody for participating, and we look forward to updating you on our first quarter call. Thanks, and have a great weekend.

Operator

[Operator signoff]

Duration: 70 minutes

Call Participants:

Marc Lewis -- Vice President of Investor Relations

Jose Mas -- Chief Executive Officer

George Pita -- Executive Vice President and Chief Financial Officer

Alex Rygiel -- B. Riley FBR, Inc. -- Analyst

Adam Thalhimer -- Thompson Davis and Company -- Analyst

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Andrew Kaplowitz -- Citi -- Analyst

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

George Kasiaras -- Deutsche Bank -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Andrew Wittmann -- Baird -- Analyst

Blake Hirschman -- Stephens Inc. -- Analyst

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