There you go.
There we go.
All right, we're live. Yeah, good morning, everyone. Why don't we get started? My name is David Koning. I'm a senior research analyst at Baird. I cover payments and IT services. And very pleased to have Verra Mobility with us today. We have CEO David Roberts and then CFO Craig Conti with us. Verra Mobility, you know, a lot of you probably know who they are. If you don't, you know, they provide the tolling when you rent a car, and then they do security cameras, so when your kids get on the bus, you know, there's cameras kind of watching and enforcing speed zones and, you know, all that stuff. So, and they'll use words like, you know, vacation car rentals, and all-inclusive.
We'll talk about this, but it always kind of feels good 'cause all those words just bring vacations to mind. And so anyway, with that, I'll let Dave run through a few slides, and then we'll do some Q&A.
Yeah. Thank you. Thank you, David. Thanks for all of you for choosing to attend. So my name is David Roberts. I'm the CEO of Verra Mobility. Let me just kinda... For those of you that may not be quite as familiar with the business, let me just orient you very quick. Our TTM revenue of $835 million, of which is recurring. I'll talk about the sources of that on the next slide in terms of the portfolio of businesses that we run. We have adjusted EBITDA of $376 million, so our adjusted EBITDA of 45%.
So what you can see is that the business has continued to have very strong revenue growth and a very strong contribution to free cash flow and profitability, certainly leading in all of the segments with which we compete. We have around 1,700 employees globally, over 2,300 customers. Most vast majority of our business is here in North America, although we do operate in 17 countries around the world, mostly through our automated enforcement or our government solutions, and that's about 17 countries. So very quickly, I'll just go left to right. If you look at the total portfolio of our businesses, commercial services, we're the number one provider of toll and violation management for commercial fleets in North America.
You would best know us by if you happen to rent a car, and if you've ever rented a car from Hertz, Avis, or Enterprise, and you look up in the windshield, and you see a little box or a sticker that allows you to access a toll road, that is us. Everything related to that solution is offered by Verra Mobility. Everything from the integrations to the toll authorities, to the putting that transponder into the vehicle, to ultimately the payment of the toll and the billing of your credit card on account is all done by Verra Mobility. That represents, you know, roughly, call it 45% of our business. That business operates not only for rental car, but also for fleet-managed companies, where we provide both tolling, violation management, as well as title and registration services.
Next to that is, again, about roughly 45% is government solutions. We are the number one provider of automated enforcement in North America. What that shows up as is red light cameras, speed cameras, school bus stop arm cameras, and bus lane cameras. We work here with the city of New York, as well as other major cities across the United States and including places in Europe, Australia, New Zealand, and Canada. That’s highly recurring. That business is effectively about 60% fixed fee per contract per month, as well as the rest is variable based upon the specifics of the specific city that we're working with.
And then finally, the most recent addition is our parking solutions business, which is T2, where we work with universities and municipalities around parking. So this is a SaaS business. Principally, it does have some hardware, but we provide an ERP for universities to use for the management of their parking challenges. So we were actually, we were a SPAC, went out over a little over 5 years ago, and we're probably, if you do your research, you'll find that we're probably one of the top-performing SPACs that was. We have continued to have great businesses with high growth rates, highly, highly consistent quarterly and year-over-year performance for the business, and a very disciplined strategy around capital allocation.
We've done some M&A transactions, but we've also bought down about $325 million worth of shares over the last 5 years, as well as refinanced our debt and paid down debt, where we're operating now at about 2.5 or about 2.5 times leverage. So, it's a great business, and look forward to the dialogue today. So thank you for being here.
Yeah, thanks, Dave. And maybe we can kick off with the commercial segment, you know, the tolling with the rental cars companies. You know, what's the moat there? You know, for years, investors would say: Why couldn't Hertz do this themselves?
Mm-hmm.
Or, "Why doesn't Florida do this internally and give everybody a transponder?" What's the moat? And, I mean, it's been so good.
Yeah. So the way to think about that business is it's a story of integrations, and really, across our business, that's where we sit. There are 54 toll authorities in the United States, and each one of them requires that you have an account, so that you can allow your vehicle to access that toll road without making a violation. For rental cars, where vehicles are constantly moving across, that's a very difficult proposition. But it turned off there. So the integrations with those 54 toll authorities matter, so we have individual relationships with each of the toll authorities. And so that's number one.
Number two is that we prepay, so we have a fair amount of our working capital is on account because we pay the toll before we bill your credit card, and we carry that, and that's a significant amount of our working capital that we carry on a day-to-day basis. And ultimately, we are the market leader, meaning that we are the only company, in effect, both our own history, as well as through acquisition, that has ever serviced a fully outsourced toll management program for rental cars. So we have in-depth experience, we understand the unique aspects of it, and all that sort of creates, you know, some real strategic advantage as we think about the business.
Yeah. Okay. And you know, how hard would it be for the manufacturers of cars to put transponders into the cars originally, instead of you guys doing it, and then Apple Pay or whatever on my phone just being integrated, so anywhere I go, I just pay a toll right out of my phone?
Yeah, so, that isn't, what's the word? But that's not not possible. So the concept is a connected vehicle, and we are actually working today with a couple of OEMs around how do we take what we do to make that payment easier for them. But what I would say is, of all the things that vehicle manufacturers have to do, tolling is the least of their concerns at this point, related to some of the other challenges that they have and some of the other offerings that they want to bring to consumers. So that's not something that would be an immediate threat to us or even really a midterm threat to us.
Yeah. Gotcha. And Jacob and Robbie, my associates, they read the press releases from the, you know, the big three rental car companies very consistently. I know Hertz is struggling. I think Avis is doing pretty well. And, you know, but you guys are a pretty big chunk of their EBIT too. Like, you provide them an incredibly good service, driving some of their revenue, right? So is that part of the moat, too, that they're just very happy?
Yeah, I think what our rental car partners would say is that over the last decade plus, we've been a very strong strategic partner because we are... In effect, they fully outsource it, so we take all the costs. We, they generate revenue and positive cash flow as a result of that. And they, I think they realize that the subject matter expertise that we bring to the table, this is, while in effect, it sounds quite simple, that hey, you're just paying a toll, and in concept, that is quite simple.
But when you sort of double-click behind that, there's an enormous level of complexity that is required to get these vehicles, to make sure that you're billing the appropriate credit card, that you're providing a positive customer experience, and you're sort of adjusting to the new technology and the new regulations that apply to that. So overall, I think they would say that we have been a positive impact to their business.
Yeah. Yeah, I'm sure. And what are the biggest drivers over time? And we often think of more toll roads, more electronic payments instead of cash. Maybe just kinda talk through some of what drives it.
Okay.
Yeah, so we think about this business. We've talked about we expect high single-digit organic growth over term. I think the easiest way to answer your question, David, let's break that down to its components. About half of that high single-digit organic growth comes from what we call the secular tailwinds. So that's an increase in the number of toll roads, an increase in the number of toll roads that are fully cashless, which is a direct and it has a direct correlation to the adoption of our product. And then finally, the all-inclusive penetration that continues to increase on the rental fleets. That's about half of that high single-digit growth. About 25% of that high single-digit growth are our growth initiatives.
So this is continued expansion in Europe and the continued expansion of our fleet business, so non-rack fleet, fleet owners. And then the remaining 25% is kind of GDP-ish growth in the increase in travel year-over-year. So that's how we think about how we get to that high single digit for CS over term.
Yeah. Gotcha. And maybe how is travel... I know my guys look at travel almost every day, the TSA volume-
Yeah
... but has that been holding up okay, April and May, relative to guidance?
It is. It is. So April and May, I mean, the easiest way to think about it, look a lot like the first three months of the year.
Mm-hmm.
Where we sit on a year-to-date basis is about 106% increase over 2023.
Mm-hmm.
You know, I think if we rewind the tape a little bit, when we increased guidance for the back of the year, we're - that's exactly the same trend that caused us to increase guidance for the back three quarters of the year.
Yeah. Gotcha. And what's always interesting to me is when we think of, you know, payments companies, we think sometimes, you know, there's pricing pressure, there's competition at times. So whatever the TSA number, if we just think a generic company, we'd think TSA, and you'd probably earn a little less than that. But instead, you have TSA data, and you're growing way above it, right? Like, way above TSA data. Maybe describe that a little. I know one part of it is the all-inclusive pricing that makes me feel, like, tropical again. It's a great... I love the term, but, you know, maybe talk, like, why are you growing so much faster than TSA, and yeah.
Yeah, in effect, it comes down to the travel keeps the rental cars full. A couple trends. One is people are holding rental cars longer, so the more people in a rental car, the more they toll, the better for us. Two, all-inclusive, that you were mentioning, is a different product. So in effect, today, there's really two ways that you pay for the service in a rental car. The first one is usage day, where you pay an administration fee plus the cost of the tolls every day that you run a toll, or all-inclusive, where you decide, "Hey, I'm gonna be in South Florida. There's lots of toll roads. I'm just gonna pay a flat fee per day," and then it includes all the tolls.
That penetration, which is a really great product, that's really good for consumers because they end up getting the bill when they turn in their vehicle, is also very good for our partners as well as for us, so that's been a big part of it as well. Adding to what Craig said, there's an ongoing increase in the number of toll roads and the cashless roads, so that allows us to sort of outgrow just direct travel numbers.
Yeah. Gotcha. And maybe the last question here: so what, what I love about the business too, just from a numbers standpoint, is this commercial is very easy to, to kinda disaggregate. It's about a quarter Hertz, a quarter Avis, a quarter Enterprise, and a quarter everything else. Is there, are there any big differences? They all seem to grow really well, and maybe talk about the contracts with the Big Three.
Yeah, I mean, they're, you know, materially the same. Effectively, the contracts are all long dated. We don't have another renewal until end of next year. But again, we've been, you know, faithfully serving these customers for well over a decade in the history of the company. And so I would say that outside of that, you know, an area that we're very excited about is what we call our fleet management business. So these are companies that procure vehicles on behalf of, so say, your, you know, Johnson & Johnson needs to get 3,000 Camrys for their sales team, and they wrap services around that, things including, like, telematics.
Well, they also need things like violation management, title and registration, as well as tolling, and that's been an area that we've both invested in commercially and we're seeing a lot of growth in. So that's something that's in that other 25% you talked about that's really performing well.
... Yeah, yeah. And maybe one last one I just thought of: margins. Margins are really strong in this business. Incremental margins are probably close to 100%, I would imagine, but you know, maybe talk through a little bit of where do you expect margins to go over time?
Yeah, so when we talk about margins in the business, remember, as not quite 100% incrementals, right? So every time travel grows, we bring additional cars onto the program, we have processing fees, we gotta-- we have people at the airport putting transponders in, and of course, there, there's always a bad debt component as a consumer-facing product, right? So they are strong incrementals, accretive to the overall margin of the business trades at today, but certainly not 100%. If we think about where this goes, I expect this to grow by about 50-75 basis points a year.
Mm-hmm.
And where that comes from, David, I think it's really important, is that this is not price, this is volume leverage. So we've made the investment on this platform, and as the volume continues to expand from GDP-based travel and what David explained, in terms of additional toll roads and additional cashless roads, we continue to accrete margin from volume leverage while keeping our pricing consistent with our customers, which is a big reason that we've had those customers for as long as we have.
Gotcha, yeah. And in the volume leverage, in part, as you grow volume, you're getting some incentives back, the sort of I think of them like rewards points, but does that come from, as you grow volumes, is that the VCC issuer processor that you get some of those from?
Not necessarily. It, it's more on the fixed IT infrastructure that we've built in the company.
Yeah.
I mean, 'cause what you just said, I mean, there are certain relevant ranges here, but that really is kind of the definition of a variable cost, what you said.
Yeah. Okay, that's, that's fair. All right, so then the government business, pretty similar in size to the commercial business, 45% or so of revenue. New York City, you know, a huge client, you're the biggest client in the company. You know, maybe talk just a little bit about what you've kind of developed here with the school zone cameras. And you've got that as one big part, but then you also have the kinda core New York contract as well that does just other cameras.
Right.
Maybe just talk about that contract.
Yeah. So, New York is the, it's the largest customer for the entire company. We've been working them well, you know, well north of 15 years at this point. And we provide all of the automated enforcement in New York City. So it started off as red light camera. There are, I think there's approximately 150-some odd intersections with red light cameras here in New York City today. And the city over time really has developed a very thoughtful approach, which is attached to Vision Zero.
Vision Zero is a concept that was started in Europe, and Vision Zero says: "Hey, we want zero fatalities, pedestrian fatalities related to traffic or vehicles." And there are many tools that they can use to help deploy that, to hit that objective, and automated enforcement is one of them. Because there's a real proven correlation between people slowing down when there are speed cameras present and the reduction of fatalities and incidents and crashes. So about a couple of years ago, the city of New York decided to really lean into what we call purpose-built enforcement, which is in school zones, and they deployed cameras in around 2,000 school zones across the five boroughs. And we, and again, we've been providing that program. So they've also expanded into bus lane.
Bus lane issues, violations or tickets to vehicles that parked in the bus lane to help and that's more about traffic flow and safety as well. So that's the sort of the portfolio of what we do for the city today.
Yeah. Gotcha. And that contract ends at the end of this year.
Uh-huh.
I would imagine there's a very high likelihood, just like last time, that you extend it, but, yeah, what are kind of the potential outcomes?
Yeah, I mean, the way that we think about any contract, or deal with, you know, really any major customer is: Hey, we've worked hard to earn their business, we're gonna continue to do so. The city has publicly announced that there will be an RFP for this business, which is very, very common in government contracting. There's no surprise or missed expectation there. It hasn't come out yet, and so at this point, I really can't comment because it hasn't come out yet. You know, I think we'll just continue to partner with the city. When that comes out, we'll respond accordingly. In the meantime, we'll be able to continue to serve them the way we have for, you know, the past decade plus.
Yeah. Gotcha. And then probably the most exciting kind of part of the business right now, and we get probably the most calls on, is like in Florida and in other states, there's the opportunity for school zone cameras as well. And maybe, can you talk through a little bit about, you know, maybe what's the TAM potential-
Mm-hmm.
What could happen, what has happened, et cetera?
Sure. I think maybe just broadly for the audience, automated enforcement requires state-enabling legislation. So that means the state has to pass legislation that the governor signs and says: "Yes, cities, you can choose, you don't have to, but you may choose to participate and deploy a program." What we've seen over the last 3-5 years is a significant increase in the number of states and houses, house legislators that have approved this. And historically, there is always, and you probably know this, there's always been some tension around automated enforcement, and I think the industry did a nice job and pivoted to now what we call purpose-built, as I mentioned earlier, which is, let's put enforcement where it matters the most.
It matters most where there's precious cargo, so that's school zones, school buses, and work zones. State legislatures, including sort of the red state, blue state, have really been proactive in adopting these policies because they realize the efficacy of that in places like Florida, Pennsylvania, Colorado, and California, and others have either increased the number of use cases they have today, whether that's going from just red light to including speed or adopting a new policy themselves. So in Florida, we opened up school zone speed and school bus. That's about a $45 million TAM for us. California is something we're very excited about. There is legislation for a pilot program across six cities, and that's relatively small. It's only about a $13 million opportunity.
But if California were to move from pilot to full-blown, that's about a $150 million TAM opportunity for us. Places like Washington State have, now have all three, so they have both red light, excuse me, they have school bus, red light, bus lane, and school zone speed, excuse me, and that's about a $15 million opportunity. So over the last, call it 2 years, we probably opened up about a $125 million of new opportunity for the business, and if that were to go to full tilt, it's probably closer to $250 million.
Yeah. No, that's great to hear. And what's kind of interesting, I mean, it seems like safety is not really a political issue, right? About 100% of people like to be safe. You could probably be president on that platform.
I'm not running. But yeah, sure.
So, no, but, but yeah, that, that's great to hear. What about like, I mean, you listed off several states, but is there any reason the other 43 or whatever couldn't eventually do the same thing?
Yeah. Well, we operate in, I think, around 26, 27 states today.
Right.
So, and there'll be some states that won't do it because the need and congestion of population just isn't there. So, you know, North Dakota or something like that may not decide that that's it. So, you know, our goal is to work in the cities and the legislatures and the communities we already work today to open that up. And, you know, we really see school zone speed, work zone speed, and school bus as the sort of the forward view, because it's very, very difficult for people to say that you shouldn't be speeding in a school zone.
When you see some of the footage that we see of all these buses where people are blowing by school buses, that the stop arm is extended, the lights are on, and people are going by at 55 miles an hour, and kids are put in danger, there's a real reason to make sure that those schools are, those kids are protected. So we feel real positive about partnering with the communities around the country with that.
Yeah, that's a good point. I didn't actually think of that. That's a great point. Certain areas, like about a week and a half ago, I was fishing in the woods. I drove 25 miles, literally saw 0 other cars.
Yeah.
That's not a place where we need cameras.
Probably wouldn't put a speed camera out there, but yeah.
Exactly. Alright, margins in the government business. This one's, like, tricky for me to think about modeling, because when you put something new in, like, it seems like, well, margins could, for a short period, be a little lower, and then you get the leverage. And how, how does that all work?
Yeah, I expect the near term to look a lot like where we are, where we sit today. So I think if... You know, it is an investment year. I don't know if we'll talk about that, if we have time here to or not. But I do expect to close the year, you know, flattish to +20 basis points on margin. I expect next year to look like that, right? So I think at a high level, the answer to your question is, I expect that the new volume coming into the business is gonna look a lot like what we've got on the books today, and we're excited about that.
Yeah. No, that's great. And is there any change in terms of, like, in New York, they decided to buy the cameras, right?
Mm-hmm.
So that mix for a couple of years, product revenue went up a ton. In most... I just, I don't understand why they would do that, 'cause I would think in most municipalities, they would just say: Well, you fund the camera, and then we'll just pay you a service contract.
That is the standard out. There... New York City in the United States is really the only place that purchases the camera.
Mm.
Outside the US, it's actually slightly more common where municipalities or provinces decide that they want to own the cameras, and there's more of a maintenance contract associated with it. So it just kind of depends. But, you know, in general, it is our CapEx that goes in the ground, which we're happy to put forth because you know, the return on that investment is somewhere around 18 months per camera, so we get a very positive return. So something Craig sort of alluded to is our CapEx this year is gonna be a little higher. We're gonna be closer to around $90 million. There's two things associated with that.
One is, all the expansion that I just talked about requires us to make sure that our sales force and our account management, our deployment teams are ready to go to make sure we're capturing that opportunity. As well as we have, because of many acquisitions, we have, you know, we're gonna be consolidating our platform, so we're making some investments in the back-end software platform, which is critical to the long-term aspects of the business, both from a operational efficiency as well as a just feature functionality for our customers. So those are two things-
Mm
... that are a little heavier this year than they will be in the future.
Let me just tack on to that quickly, Dave, the $90 million, two-thirds of that is revenue-generating CapEx.
Mm.
So that's the camera spend. And if you're looking at Verra Mobility from a historical perspective, a good way to think about it is roughly two-thirds of the CapEx that we spend in a year is revenue-generating CapEx in the form of cameras that we give to a municipality to enact the program.
Yeah. Okay. And let's see, quickly, just international, 'cause you just brought that up. That's... And you guys do a great job in the filings. You actually give, like, the breakdown by Australia and Canada and U.K., and so you do a great job. But in both segments, you've had elements of international before. How's the tolling going, I guess, in, you know, parts of Europe?
Mm-hmm.
And then, how's the Redflex acquisition in the government business, kind of Australia and others? How is international going?
Yeah. So, I'll do the second one first, which is, so several years ago, we bought a competitor in the automated enforcement space, principally because it gave us an opportunity to grow internationally. So we had previously not operated abroad. Now we operate in New Zealand, Australia, principally Australia and Canada, and a little bit in Europe. And it's gone great. You know, we've gotten a lot of benefit from that. International market is a growing market, so it makes us relevant in that market, so we're excited about that. And we, you know, we have a decent chunk of business in Australia in particular, as a result of that acquisition.
In commercial services, we did, several years ago, we did a couple of acquisitions to create a platform for us to grow with our tolling solution for rental car. The difference is that there's more tolling, but less cashless in Europe, and so the adoption of that has been a little bit slower. But we're patient, so we are doing pilots and operating in places like Ireland and Portugal, where there is already free-flow or cashless tolling. We're starting to see a little bit more of that in places like France and Italy, where there's significantly more tolling, even than here in the United States, but still has barrier-based. But we're starting to see those convert to cashless, and we expect that they will over the short term.
Outside of that, we have a foreign registered vehicle collection business that we work on, where we partner with municipalities, collecting on those violations for them. And that's a growing business, very profitable. So, the investment for the tolling is quite small on a relative basis.
Yeah. Okay. And then parking, only 10% of revenue-
Uh-huh
... you bought T2 about two years ago now or so. Maybe just review that business model. It's, it's a little lumpy with the-
Hardware.
Yeah, the hardware.
Yeah.
Yeah, maybe just review that a little bit.
Yeah. So, as you look at broadly at urban mobility, parking obviously is a huge component of what cities, municipalities, and universities and others have to deal with, which is: where do we put these cars? How do we get payment for them? How do we issue violations? So that's why we bought T2. T2 is principally a SaaS-based business. They provide a software business to universities where they have, you know, approximately 50% market share of large universities in North America, where they help them handle all the unique problems. So, I have three kids in college, and all of them have gotten a parking fine at some point, and I'm sure if you you may know that story, too. Because parking is...
You've got administrators, you've got teachers, you've got football games and basketball games and concerts and all that, and the parking rules change. And it's actually relatively complex, and T2 has a software system that sort of is an ERP for those parking administrators to deal with. We also have hardware, so we do both pay stations, so in smaller municipalities, we have the ability to actually coin or dollar plus credit card-operated pay stations for cities, as well as access control, so for parking garages, ALPR operated, so they look at your license plates, and the gates go up and down. So we do that. So the lumpiness that you referred to is related to the hardware.
We really like the business 'cause we think the long-term effect is gonna be both on the software and SaaS portion, which continues to grow, as well as some of the transaction revenue that comes out of that business as well.
And can't you integrate kinda all of it together? You know, do parking lots with cameras that then send violations to people. Like, you can kinda integrate all the government and parking together.
Yeah. There's some crossover, but the reality is in our T2, we actually operate with smaller municipalities that may not have automated enforcement. And in addition to that, the technology that we use, the cameras are actually different, believe it or not. The LPR cameras that we use for parking are significantly smaller, and they're very specific related to license plate reading for the purposes of recognition and opening up and then issuing violations. So they're slightly different technology.
Yeah. Okay, gotcha. Let's see. Let's talk about, well, you have a swap expiring in about a little over a year from now. Craig, maybe what's the impact when that expires?
Well, the impact would be we would go to the market rate, right? And if you look at it today and you look at the forward curve, it would say that, you know, the expectation is that interest rates will be lower than they are today, so that would be a non-event. And I think, you know, the follow-on would be, well, what do we expect to do at that time? And I would say that would be 100% market dependent. You know, when we rewind the tape and say when we put it in place, it was at its... We did this to create certainty. It was an at-market hedge, which is deeply in the money today.
That's great, but we're in business to do all the things David walked through, not make money on the hedge, right? So we like to provide that certainty, but of course, we'll be, you know, give a nod to the macroeconomic backdrop when we get out there.
Yeah. Gotcha. Yeah. And then the leverage target was reduced recently-
That's right.
which was nice to see. I mean, what was kinda behind that?
The easiest way to think about it is it's a more contemporary level for the company.
Mm-hmm.
So when we had said 3.5, I think when... Well, I don't think I know. We did that at Investor Day about 2.5 years ago. At the time, companies of the same size and in the same space were 3.5, and today it looks like 3 is a more prudent leverage. So we're always gonna update that to make sure we're contemporary with peers in the rest of the market. It is no more complicated than that, David.
Yeah.
The nice thing is, even at that target, we still have... And our cash flow is so strong that even if we are doing acquisitions that may take us over that target for a short period of time, we delever very, very quickly, so we're super comfortable even a little north of that.
That's right.
Yeah. Is M&A still, like, the number one, if you can find the right things to invest in-
Yeah
for cash flow? Yeah.
Yeah, I mean, we're always looking. We have a team that's fully deployed on that. We've also been very patient. We're sort of disciplined in the way our financial framework for what we'll buy, and so we're gonna continue to be patient and, and but, you know, we're definitely, we're looking.
Yeah. Well, sounds good. Well, that, that's about all the time-