Verra Mobility Corporation (VRRM) Earnings Call Transcript & Summary

I'm Craig Conti, I'm the CFO of Verra Mobility. Thank you for having us here today. I think Ryan is going to come on stage in a little bit and we'll do some question and answer. But I wanted to run through a few slides for some folks who may not be familiar with the business just to give you a brief overview, so if you'll bear with me here. A couple of things I'd like to tell you here. Number one is that we're a strong business that has some really good competitive moats across the business. We're a global company and we have an excellent financial profile. So if you think about the company with strong moats around the company, our Commercial Service business, we're the #1 provider of toll management to rental car companies, that's RACs and FMCs in North America. In our Government Solutions business, we're the #1 provider of what we call road safety cameras, this is photo enforcement in the world, talk through that a bit. And in our Parking Solutions business, we're a leading provider in North America to the large university sector of parking solutions up and down the ecosystem, and we'll go through that in a little bit of detail. 1,500 employees globally, over 2,000 customers globally. We operate in over 20 countries. A little bit on the financial profile of the company, $726 million of revenue in the TTM period. 91% of that is reoccurring revenue, and I'll go through what that means in a bit. This revenue comes at nice margins, 46% margins, EBITDA -- adjusted EBITDA margins in the TTM period and strong cash flow conversion. So $167 million of free cash flow in the TTM period, which is a 50% conversion of adjusted EBITDA. And we'll talk about that when we go through the financial profile of the company here in a few minutes. So I want to take a second to go through each of our businesses to make sure, again, if you're not familiar with the company, what it is that we do. Our Commercial Services business, about $315 million of revenue over the TTM period. And like I said, we're the market leader in toll and violation management for commercial fleets and for rental cars. And the way I explain this is think about if you've ever rented a car and you've run a toll in the United States of America, there's a very high probability that you were a Verra Mobility customer, you might not even have known it. So let's take that rental -- and I'll explain our 3 businesses in the context of you renting a car. I think that will help you understand it. So if you get into your rental car, and you see a transponder there for the tolling authority, a Verra Mobility employee put that transponder in. When you run that toll, when you go under the gantry, the toll is paid by Verra Mobility via funds that we have on deposit in the 54 tolling authorities in the United States of America. As you go under that toll gantry, our middleware identifies that, that car is owned by a rental car company and that you're the person driving it at that time. And then when you turn in your rental, your billed for that toll, again, identified through our system. So that's the toll portion of it. If you're unlucky enough in that rental to have a violation, to give you an idea, on toll processing, we process about 600,000 tolls a day in the United States alone. If you're unlucky enough in that rental to have a violation, there's a very high probability that Verra Mobility would have been involved in processing that as well. We process about 1.4 million violations per year. And in that same rental car, there's a good chance that, that car was titled when it was bought by the rental car company from the OEM and registered in the state that you're driving it on the rental car company's behalf by Verra Mobility. We register and title about 1.7 million vehicles a year. So I explained this in through your rental of a rental car. We also do this for corporate fleets. To give you an idea of the profitability of the business, 10% organic growth over the past 5 years. 65 or so -- 64 on the slide but going to 65% margins on a TTM basis. We expect this business to be a high single-digit organic grower over the long term. So that's Commercial Services. Business operates in the United States, Canada and Europe. Government Solutions is by far our most global business. This is our photo enforcement business. So 4 products that we've listed on the bottom of the slide: these are speed safety, transit bus lane, photo enforcement cameras, school bus safety arm and red light cameras. So to give you an idea of the size and scale of this business, about 11 billion vehicles drive by our cameras globally per year. We process approximately 110,000 events per day. So if you think about the growth here, about a 21% organic growth over the last 5 years at 35% margins. We expect this business to be a mid-single-digit organic grower over term. And I mentioned that this is our most global business. We go to market in the United States, Canada, Europe, Asia, Australia and New Zealand. And then finally, our Parking Solutions business, leading technology provider for end-to-end parking management solutions in North America. This is our newest addition. We purchased this business in December of 2021. Just to give you an idea of the size and scale of the business, they process about $2.5 billion a year of parking commerce through their platforms. This business was -- this business started in 1994 in the university space, which is still its largest market today. And to give you an idea of what the products are, I think the easiest way to think about the business is, first, let me tell you what it's not. Verra Mobility does not own parking garages. We don't own real estate. This is the hardware and the software associated with parking. So about 1/3 of the business is hardware, so think about pay meters, kiosks, gate arms; and 2/3 is the services and SaaS that allows that to talk to each other. So to give you an idea of the scale -- this business operates, by the way, in the United States and Canada. To give you an idea of scale, in the TTM period, about $66 million of revenue. That's not full TTM. Again, we bought it in December 2021. And about 20% consolidated margins is where we expect to be and where we are today, where we expect to be for the year. And we expect this business to be a high single-digit organic grower over the long term. Let me tell you a little bit about how we go to market. So we go to market in 2 different ways: one is as connected fleet solutions and the second is as urban mobility. And connected fleet solutions, this is where our Commercial business sits today. And the reason we put this slide in today, this is a good way to think about how we're going to grow in the future. So in connected fleet solutions, we talked about getting into fleet administration, telematics and vehicle payments, simplifying that ecosystem. In Urban Mobility, this is where our government solutions and parking solutions businesses sit today and we think about traffic management, parking and curbside management and road usage charging. That's where this is heading in the future. So as I promised, to give you a little bit of detail financially on the company, $726 million of revenue on a TTM basis. You could see we split out here T2, again, because we bought that in December 2021. This is a 20% revenue CAGR over the past 5 years. As I said on the first page, 91% of this is reoccurring revenue, which I think is a great fact. But if you drill into that a little bit further, 95% renewal rate of our contracts as they come up within that 91%. So the business is very sticky. From a profitability standpoint, I mentioned our EBITDA margins at 46%, that's $335 million. On a TTM basis, an adjusted EBITDA CAGR of about 15%, and I mentioned the conversion to free cash flow, 50% on the TTM basis. One thing I want to point out on this slide, though, and I think it will come up during our Q&A, is take a look at 2020. So as I talked about our Commercial Services business, it's highly travel-dependent, right? As you all know, post the first quarter of 2020, travel effectively went to 0, right? So I think it's kind of instructive to look at how did the business perform in that environment. So for 3 quarters of 2020, travel was effectively at 0, and the business still made $182 million of adjusted EBITDA, 46% margin and over $20 million of free cash flow. So something to think about how strong the financial profile of the company really is. And starting to wrap up here, I want to talk a little bit about the balance sheet. Let's talk about our leverage. So if you look at where we started in the fourth quarter of 2021, we did 2 deals in the back half of 2021. We were at 4.3x net leverage. We're going to bring that down to 3.4x by the end of 2022. Over that same time period, we also bought back $225 million worth of shares. So one thing I want to highlight on the left-hand side of the page is given the strong free cash flow of the company, we have the ability to delever over a period of quarters, not over a period of years. And let me talk a little bit on the right, where we're headed next. We put a press release out last Monday, if you had a chance to see that. and I'm going to hit the high points of that. So in terms of share buybacks, I talked about $225 million that we've completed in the last 5 quarters. We have a new authorization just as of last week to do $100 million over the next 12 to 18 months, and we'll do that opportunistically. I don't think it's any surprise for me to tell you that I believe that the share price that we have today is underneath the intrinsic value of the company. So we'll look to execute on that. Debt management. We're going to bring the leverage of the company down from 3.4x at the end of this year to 3x by the end of next year at the end of 2023. And we're going to look at also mitigating our interest expense, and we could do that in 1 of 2 ways. We can either look at that through paying down debt or potentially looking at a derivative solution, and those are 2 things that are under active consideration for the company. But that's new news for the company, going down to 3x net leverage, and we expect to stay there over the next couple of years. And I want to be crystal clear on number three, anything that we're doing on one and two is not at the expense of number three. So the organic investment of the company is going to remain the same. We'll be fully funded. We did between $40 million and $50 million of investment this year. I expect around that same range next year. And strategic M&A. We're always looking for the next deal for the company. Going down the 3x net leverage allows us to potentially play offense if something becomes available. So this is certainly a very major leg of the capital allocation tool for the company. And then finally, before we open up to Q&A, just really quickly on the guidance. If you had a chance to hear our earnings call, you heard this. For total revenue, we had guided to between $720 million and $740 million. We did that at our Investor Day back in July. We've gone to the upper end of that range for both revenue, and you could see we took to the upper end of the range in adjusted EBITDA as well. We've had a couple of headwinds that we've been able to overcome. Number one, we're all sitting here today in the state of Florida. The hurricane that came through at the beginning of the fourth quarter caused tolling to be shut down. That cost us about $3 million. And the continued strength of the U.S. dollar is causing some FX exposure, particularly in our Australian business. We overcame that and still brought our guidance up to the upper end of the range, which I think showcases the strength of the underlying core business. So that's what I had for prepared remarks. I'd like to invite Ryan up. We'll go through some Q&A and take it from there. All right, Ryan.

Thanks, everybody, for joining us. Craig, maybe just to start, we could dig a little bit deeper into the underlying secular growth trends that you expect to benefit the business across each of your 3 segments?

Yes. So let's take those one by one. So if you look at the Commercial business, a couple of things going on. Number one is the transition to cashless roads, right? So we laid out in our Investor Day, we think at least domestically, that's about 60 -- low to mid-60s percent of the roads that our toll roads are fully cashless, right? And that trend has been increasing. It was 50% just 5 years ago. So as that continues to increase towards cash flows, we're a net beneficiary of that trend. And I think the other one is just the addition of additional toll roads. Roads only go one way, they don't go from toll roads to free. They go from free to toll. So as those 2 things continue to increase, we're a net beneficiary of both of those in the Commercial business. If I look at Government Solutions, a bunch of things, really. I think the thing that comes to mind is there's some significant states where today, we have one form of photo enforcement that's approved, but not all forms. And those are pretty big opportunities for the company. The ones that come to mind specifically are the one that we're in today, Florida, and California where red light camera enforcement is something that's been the way of the world for quite some time. But when you look at school zone or speed or anything like that, that's still in the work. So as we continue to pursue those with the legislator, I think that's an opportunity for GS, especially domestically. When I think about T2, it's really the increasing complexity of that landscape. So what I really like about the T2 business is we have the ability to accept payments, whether it's cash, we have a mobile solution. We have -- we can interact with just about any kind of parking solution that a municipality or a university could want. So as that gets more complex, it gives us more opportunity to win.

Okay. Great. Maybe then pivoting, we could talk about how the competitive landscape varies across each of those segments and where you guys stand today relative to your competition, who your key competition is.

Yes, sure. So again, I'll just go kind of business by business. If I start with CS, we have a large market share on the RAC side. On the RAC side, we have the major 5 RACs today, so that's over 90% share here domestically. And I can tell you that we don't run the business like we have 90% share, that is for sure. But that happens to be what it is. If I look on the fleet side of the house for our Commercial business, we have 25% or less depending on how you cut that business. So a lot of white space for us to pursue there. When we look at competition on the CS side, it's really the ability to do that stuff in-house by some of the providers. And there are some competitors out there for sure that we take very seriously. Absolutely. On the government side of the house, we have about 70% share domestically and rest of that internationally, but of course, we have a pretty big international presence. And there's a myriad of competitors there. And when you look in that space, those are all competitive bid process. They're public processes, right? So when one of those comes up, everyone is going to kind of see it at the same time. And then when you look at the parking space, much more fragmented, especially in the United States. So I like our competitive position there. We continue to seek out ways to grow that business both organically and inorganically.

Okay. Great. How has that share trended over time? You guys have been dominant in the tolling for quite a while. But maybe on the fleet side and on the Government Solutions side, how is that trending?

Sure. So the trend on the -- you're right, so CS has kind of been what it's been for quite some time. On the GS side of the house, we have picked up some share here domestically. I wouldn't say that it's by a quantum that will certainly jump out and grab you but we have picked up share. And I would say the same thing on the Parking Solutions business. And where I really want to focus on Parking Solutions going forward is, as we look to take a business that's been very successful in the university space and bring that to the municipality space. So the T2 business does have some municipalities that it serves today. But being able to connect that with our Government Solutions business who addresses those large municipalities as a matter of course of business every day, the connection -- commercial connection between those 2 could pay really nice dividends for the company in the future.

Okay. Great. So digging into the Commercial Services piece of the business a little bit more, it would be great to expand on your relationship with the RACs, how integrated your operations are with them given the share you have in the market and this kind of strategic partnership with those clients.

Yes. That's something important, and we think about that every morning when we wake up. One thing that David, our CEO, likes to say is we serve our customers at the highest point of need, right? And that's how we approach the RAC. So the integration is deep. One thing I think about is if you wanted to set up -- let me try to answer it this way, Ryan, if you wanted to set up a competitor Verra Mobility, a direct competitor within the CS space, what would you have to do, right? So you'd have to go out and have integrations with 54 toll authorities. You have to have funds on deposit with all 54 of those tolling authorities, which is tens of millions of dollars of working capital. You need to have a 24-hour call center. You need to have integration, which we have today with each of the RACs and to their reserving system. Because, again, the key to this business is not necessarily identifying the car when it goes through the tolling gantry, anybody can do that. It's understanding who is driving the car because it's not the owner of the car, right? That's what we do and then have the ability to provide, I think, the RACs with the kind of data that we do. And then there's another couple of things that I think are really important. Number one is the title and registration business. right? The birth of that business was a request from one of our customers to say we have this issue, can you help us solve it? And that touches now all the RACs in some form or fashion and certainly other fleets. And then finally, expanding into Europe, right? So we have a pilot with Enterprise today in Ireland, which was through one phase. It's expanded to a second phase and been renewed. So when you think about that degree of interaction and integration, it's deep and it's long standing.

Great. Sticking to the RACs, can you provide an update of where you're at in terms of contract renewals or where your existing contracts stand currently with each of the 3 major RACs?

Yes, sure. Sure. So we just renewed Hertz for 5 years, which was the longest renewal in the history of the business. So that was a 2022 renewal that brings us through 2027. ABG is due for renewal. It was budget for the unindoctrinated. That brings us through 2025. And EHI, which is Enterprise, is due for renewal in the spring of 2023.

Okay. Great. And then what are the key drivers that we should be thinking about in terms of the long-term nature of those contracts and specifically the Enterprise renewal in the spring?

Yes, sure. I think it goes back to what we talked about earlier, right, really, which is the degree of integration with RACs, right? And the level of service that we provide. We've taken something that was a cost and turned it into a profit center for the RACs. And it's difficult to do, again, so those funds on deposit, 24-hour calls. So if there's a call or a question from a customer on tolling, it comes to Verra Mobility, not to the RAC. And the army of folks that can title and register the car, put the transponders and get those registered, have cars where they're supposed to be. So I think when you think about those renewals, you look at what have we done historically? So our relationship with each of the RACs is a decade at least, up to 15 years. And I think we've continually served those customers in different ways. We talked about T&R. We talked about the expansion in Europe. So when I think about that, I'd say let's look at what we've done over the last 15 years and how we've continued to serve those customers in new and unique ways over term.

Okay. Great. You mentioned the pilot program that you're doing in Ireland with Enterprise. So on the Commercial Services side, what are some of the key adjacencies that you guys are focused on expanding into, thinking about both end markets, geographies?

Yes. Sure. So Europe is one of them, right? So we continue -- we have 3 businesses in Europe. I think sometimes it's good to kind of point that out and make sure that's clear. So the first is the RAC and fleet tolling business, similar to what we have in the United States. We have a violations business. which is for cross-border violations within Europe. And then we have a direct tolling business in Spain. And I think if you think about the -- what's next for the Commercial Services business, it goes into 2 things. Number one is continuing to penetrate that fleet market, right, where we're not super penetrated today. Again, we have 25% share there and it's very complementary to what we do on the RAC side of the house. So that's one. And then the second is back in that connected fleet space. So when you look at things like using the car as a wallet, right? We have a partnership we announced at Investor Day with CarIQ to start to look at different ways of using the car as a payment for other services besides tolling. And then you look at things like potential vehicle charging and telematics, right? So continuing to use our middleware. And where we win is where there's a lot of complexity that needs to be solved from an IT standpoint, and that's what we continue to do.

Great. And then just a follow-up on the expansion into Europe. How much of that opportunity is driven by you guys just not really being in that space as much currently versus the market in Europe just being a little bit behind where it is in the U.S. in terms of those services being actually offered?

Yes. And at the risk of talking my own book here, I will tell you that it really -- it is 100% market. So there are 2 things in Europe. There's no secret. I would like to be a little bit further ahead of where we are today, and 2 things have happened. Number one, the recovery in Europe out of COVID was much slower than it was here in the United States. That's one idiosyncratic thing. I think the other thing for the -- and I want to be clear, so we have 3 businesses again in Europe, 2 of them are growing and performing as expected. It's really the RAC tolling business that's been a little slower. And the gating item there is cashless roads. So when you have the option as a renter to pay cash on a road, you're less likely to opt into a tolling program, right? So in the United States, that transition to cashless as I said earlier, is in the mid-60s percent of toll roads, much less than that in Europe. Now that's changing. You look at places like Ireland and Portugal where it's fully cashless. But to get to Central Europe, Northern Europe, where the population base is, the transition to cashless has taken a bit longer than we anticipated. But when it happens, we'll be a net beneficiary of it just like we were in the United States.

Okay. Great. Shifting to the T2 business that you guys acquired last year. Parking was a natural adjacency for you guys to expand into as well. Can you maybe just talk about how that acquisition has performed relative to your expectations this year?

Yes, yes. It's performed really, really well. I think we're going to close the year here with a 20% business, and that's after we've burdened that business with all kinds of public company cost, SOX, audit, director and officer insurance. So -- and we've continued to see the organic growth. And the business, it was founder-led for a long time and went through a couple of hands in PE before it came to us. And that entrepreneurial spirit is alive and well. They've got some really good ideas on how we can grow the business. And I think, as I mentioned quickly earlier, I think the connection between the Government Solutions business and our parking business is going to be big from kind of 2 ways. Number one is penetration of those large municipalities. You think about T2 standing alone as an $80 million stand-alone business, but didn't have the scale, right? It didn't have the scale to approach some of those larger cities, and Verra brings that scale. And the other thing, and we talked about this at Investor Day, is the activation of monetizing the curb in the urban environment. So when you look at that curb in the city, I lived in Chicago for 15 years, and on the curb outside of my house every day, there were Uber Eats drivers and FedEx drivers and Lyft drivers. And looking at -- and the city is making no money off of that and it's a big congestion point and it slows down traffic. So you look at how you solve that problem at scale, it's permitting and then enforcing that permit. Permitting is what T2 does, enforcing that permit via cameras is what GS does. So the combination of those 2 businesses could be great.

Okay. Great. And then it's a great transition right into GS. It would be great to just kind of -- you mentioned it at a high level earlier in your presentation, but dig into each of the safety solutions that you guys offer in GS, how big the market is currently, what you're expecting in terms of growth rates by product and how market penetration currently kind of compares across each of those solutions.

Yes. Okay. Sure. Happy to do that, Ryan? And so 1.6 -- so for the 4 solutions I listed, on the slide when I went through Government Solutions, let me just review what those were. That's speed, red light, school bus stop arm and then bustling. So between those 4 solutions, about a $1.6 billion TAM in the United States. So if I take speed and I take red light safety, $800 million TAM between those 2, I expect speed to be a mid-single-digit grower over term. I expect red light to be a low single -- 0 to low single-digit grower over term. We think we're pretty penetrated on red light safety. The other 2, so school bus -- when I say school bus, stop arm safety, that's essentially the stop sign comes down the school bus and you can't drive around it and if you do, you get a ticket. So that product and then bus lane, which is in metropolitan areas parking in the bus lane creates all kinds of safety hazards and congestion issues. Between those 2, another $800 million TAM. I expect high single-digit growth in each of those 2 over the next couple of years.

All right. Excellent. Shifting to capital allocation and the balance sheet. You walked through the press release that you guys put out last week with the $100 million share authorization and the updated thoughts around leverage. So maybe you could just talk about -- you mentioned you wanted to be at 3x now over the next couple of years. Maybe we could talk about how you're viewing this balance sheet, rightsizing and leverage target reduction over the long term and how that might fluctuate in the event of M&A.

Yes, yes, sure. So just maybe to say it as simply as I can, I still think 3.5x is the right flight path for the company over term. We're taking it down to 3x over the next couple of years because of this economic uncertainty, right? So -- and when I think about acquisitions, we go back to 2021, we do have the ability to bring up the leverage of the company to pay it down relatively quickly -- very quickly, actually, because of the strong cash flow generation. But I don't know if you're going to ask about the M&A market or not. It's no different for me than anybody else. It's been relatively slow. As of late, we have a great pipeline but I'm not seeing a lot transact. So if I think about the next couple of years, my best guess today is keeping it at 3x net levered until the macro economy picks up a little bit and we bring it back to 3.5.

Okay. Great. And then just -- I think we're getting close on time to just one more.

Sure.

You mentioned also some actions to reduce your interest rate exposure. What are you guys thinking about in terms of the right mix of fixed versus floating debt going forward in the business?

Yes. So I'm 70-30 today, and I'd like to get in a perfect world, probably more towards 50-50 if I don't get there, I'm not necessarily too bothered about that. I don't ever want to go 100% in either direction to be crystal clear. And as I'm looking today, we're looking at different options. We have the ability to pay down debt. and we do have the ability to go out and look at a derivative type of way to manage our or -- to at least cap our interest expense going into the future. So 70-30 today, I'd like to be a little bit more towards the fixed side. But I think we're pretty good shape.

Okay. Great. Well, that wraps us up. Craig, thank you so much for joining us. I really appreciate you making the time to get down here. Thank you.

Thank you, Ryan. Take care.