Credit Suisse 23rd Annual Technology Conference

Dec 4, 2019

Okay. Good morning, everyone. My name is Tim Chiodo. I'm the Payments Processors and Fintech Analyst here at Credit Suisse for The U. S. Business. We have here with us today Dave Roberts and Tricia Chiodo, shares his last name as me, but we're not related. Full disclosure, right? Yes, full disclosure. Okay. So first, thank you for being here. Yes, thank you. This is easy for us. We're our office is down the street here. Local company. Okay, great. So for anyone that might be new to the story, let's start out just by level setting with sort of an introduction, maybe just a high level overview of the two big segments, the Commercial Solutions and the Government Solutions segment? Sure. So VeriMobility is a leader in smart transportation that manifests itself in the way that we serve two principal customer segments. About 60 approximately 60% of our business is in what we call commercial fleet or commercial services where we serve rental car companies and other commercial fleets with tolling, violation management and title and registration services. We're most notably known or the best way to sort of connect with us is if you've ever rented a car from Hertz or Avis or Enterprise and run a toll and seen that box called Plate Pass or sometimes called other names as well, we were part of your journey because that's a fully outsourced program to what that is fully outsourced to us at Verra Mobility. The other part of our business where we serve local governments, we are the in The United States, we are the leader in photo enforcement, photo enforcement meaning red light cameras, speed cameras, school bus stop arm cameras. So for I suspect many of you are probably from New York and made your way out here. So we are the provider of the speed cameras within New York City and are part of that expansion that's going on currently. And again, that's about 40% of our business. Great. Thank you. All right. So let's talk a little bit about the commercial business specifically. I think it's important to highlight the decade long effort to set up the infrastructure related to that. So maybe we can talk a little bit about what that took, make it real to people, bring that to life. What was the process over the course of a decade to build that in The U. S? Yes. So maybe to kind of give you a little bit of context, so how do we actually affect the tolling operations for our rental car customers is we have integrations with all of the major toll authorities in The United States. There's approximately 54 of them. And an integration means that we have the ability to register vehicles on our account. So when those vehicles when rental car customers' vehicles go through a toll, they actually register it on our account, then we pay that toll on their behalf and then we bill back the renter. The reason that's really important is that all of those toll authorities sort of make decisions on their own. They have different levels of technology that they're working with. So some were doing real time, some were doing batch, and none of them move quickly. So to be able to work with a top tier rental car company, you have to have a nationwide footprint. And so it actually took us the legacy companies, it took us approximately ten years to build out all those relationships. It's not because it's hard technology work. It's hard to get the relationships set up so that you can then have a connectivity and then build the connection to the toll authority. Okay. So related to that, it's clearly a barrier to any other competitor. Let's talk about the acquisition that you made of HTA, which was your largest competitor and to the extent there's anyone else out there doing anything even remotely like this? Sure. So a little bit of context. We sold our the business was originally founder led. We sold to Platinum Private Equity in May of seventeen. And then as with Platinum's help, we got really invested into a couple of things. One of them, the former name of the company was ATS or American Traffic Solutions. We bought our closest competitor in the tolling space, which was called HTA or Highway Toll Administration. To give you some perspective, ATS had served Hertz previously. HTA had Avis and Enterprise, and we were able to combine those to give us a nice position in the marketplace. We also bought a company called EPC. EPC is a Europe stands for Euro Parking Collection. We do violation management for issuing authorities inside of Europe, but that also is our beachhead. We'll probably talk about that later in terms of our expansion into Europe. Very nice. Okay. Let's talk about in terms of the core customers that you serve in The U. S, you talked about the rental cars and also the FMCs. Let's just talk about those three major customers. What portion of the market do they make up and how you serve them, some of the activities you Yes. So if you look at rental car, we serve the big three. The big three are approximately give or take 90% to 95% of the rental car volume in The United States. There are other smaller tier players, Advantage, Fox, other sort of what we call off airport rates. So typically, the ones that you all probably use are the ones that you go and you walk directly to your car, they're right at the airport. Then they're the ones you have to take a bus a couple of miles away and you get your vehicle. Those are called off airport brands or discount brands. Those are all of them are our customers. The fleet management companies are actually companies like Element, ARI, Donlin, Wheels, LeasePlan. These are companies that lease vehicles to corporations and they put services around those vehicles, everything from telematics to tolling, violation management and Title I registration. And so in general, what we provide outside of the tolling where we again are fully outsourced provider, everything that happens inside of tolling in a rental car is done by Variability. That includes the integrations that we spoke about, that includes procuring the transponder, putting in the window, making sure the right vehicle has the right transponder. So we have people at airport locations that are doing all that work. We then we bill the renter. We pay the tolls order. We bill the renter. We make collections. So we all that work is done by Variable Mobility. We have in addition to that, we do violation management. So when you rent a car, if you were to get a parking ticket in New York, that ticket actually comes to us and then we build it we pay the fine and then we build the driver of the vehicle. And then finally, one of our most recent acquisitions that we did in 2016 is a company called it was called Sunshine AutoTAG, which is title and registration. So if you've ever had to go down to the DMV to register your vehicle, that's not a wonderful experience. And if you had to register 3,500 vehicles on the same day and those vehicles need to be producing revenue the following day, that would be stressful and probably problematic. What we do is we have integrations with DMVs, some direct, some through third parties, where we're processing registrations in bulk on behalf of our customers. That includes both rental car as well as the FMCs. So those are sort of the portfolio. And all of that, a lot of people come back and say, well, if you guys already have all the major rental car companies and a lot of the second tier car companies, how is the company growing like it is? And the real answer to that is that it's connected to the industry in which we serve. So tolling in and of itself is expanding. And then there's trends with inside tolling that move people to our product. If you're renting a car and want to avoid using our product, there used to be only two ways to do it: Don't drive on the toll road or pay cash. As the industry has moved to more and more cashless lanes, meaning there is no way to pay cash, there's just gantries on the road, people will opt in to the tolling program rather than try to avoid the toll road altogether. Those trends in the industry, along with the underlying stability of the rental car companies, has created really nice growth in the segment. This segment of our business has been growing at 15% to 18% since 2015. This year, we've said that it will grow in the low teens. So those tailwinds in those industry will take us going forward for a long time. All right. Great. Actually, that's a good point. Maybe we should just recap sort of the medium term growth outlook for the two segments, and then we'll move on to Europe. Sure. I think to Tricia's point, so tolling in and of itself is what you would consider a future growth area. Even if you look at things like congestion pricing for those of you again that are in New York are going to be introduced to that sometime next year or in 2021, so congratulations on That is a that's a tolling program. It just has specific dynamics around it. Given the infrastructure deficit, the increase of emissions and congestion, you're going to see a lot more programs like that. So cities like San Francisco and Seattle and Los Angeles and Washington and Philadelphia are all doing studies right now to assess how they would do that. So tolling in The U. S. As well as abroad is going to increase. That's a natural tailwind to our business because A, an increase in the number of toll roads equals more opportunities for revenue. And then to Tricia's point, the conversion of the current infrastructure which some still have barriers and still collect coins if that goes cashless that increases what we call adoption of our program. So those are two sort of fundamental tailwinds. Then we'll talk about Europe in a minute. Sure. In terms of you want to do Government Solutions too? Yes. Okay. For Government Solutions, right now, where what we have said is that the red light portion of that business will be flat over the kind of over the medium term. But where we're seeing an increase in interest is in we call purpose built photo enforcement or speed, speed specifically in school zones. So right now New York City passed legislation last year to expand their photo enforcement for school zones. It's the largest increase in photo enforcement in the world and they'll have more cameras than any city in the world at the end of the program of which we are the sole provider. They're going to add 1,200 cameras total to the program between they started this year and that will go through 2021 excuse me, through 2020 and probably into 2021 as well. Other cities are starting to see that and say, hey, while photo enforcement certainly has a narrative around it that people don't always get excited about, it's very difficult to say that kids shouldn't be able to walk safely to and from school. It also is difficult to say that they shouldn't be able to walk safely to get on and off the bus. And so what you're seeing is an expansion. So Georgia passed legislation for school New York is expanding. New York also added school bus. Other cities are looking to expand their footprint of those programs. So that in The U. S. Is an area that we see is going to be growing. Again, it's a government related entity, it's not going to grow in it will grow significantly next year. But over time, we still see mid single digit growth there for the long term. Okay, great. All right. So we talked about getting back to Europe. So let's talk about that a little bit. So you mentioned earlier the acquisition of EPC. You've also recently had the acquisition of Pagatelia. You've talked about how these acquisitions are very strategic in terms of the relationships and how they might speed up the process that took a decade in The U. S. So maybe let's talk about how you're recreating that in Europe through these So I think it's important to know that there is no third party provider that does fully outsource toll management for fleets inside of Europe. That's just not something that has taken on there. So we plan to be that. And what we have been doing is laying our ground kind of our ground game, if you will, which is we needed a footprint inside of Europe. And the good news is our customers have asked us, hey, can you come do in Europe what you've been doing here? The complexity of Europe is certainly more significant than it is in The U. S, but there's also more tolling. So the opportunity is still pretty significant as well. EPC and then Pagatelia both give us opportunities to both to have relationships with toll authorities to expand that. We announced earlier in the I think it was in Q3 that we have a relationship now with APRR, which is the primary French toll authority. Then we also closed on the acquisition of Pagatelia. Pagatelia does toll management both for they actually work with toll authorities, but they have interoperability capabilities inside of France, Italy, Spain and Portugal. If you look at the density of tolling in Southern Europe, that's a big deal for us because that allows us to provide tolling in a high density of area of tolls in an area that could have taken us a decade or more or never to get into. We now have those relationships with all of the major toll authorities inside of those countries. So that was a very, very strategic acquisition, sort of an asset if you will that will allow us to go quicker, faster and to have a more comprehensive solution with an interoperable solution inside of Southern Europe. Okay, great. Why don't we put some rough numbers to that just to give sizing context for the audience. So you talked about potential TAM in Europe. Let's put a number around that, a rough time frame, and then compare that to the existing revenue base. Yes. In comparison to the existing revenue base, it's going to be much smaller. So what you have in Europe is you have more toll roads. I think there's more toll roads in France than there are in all of The United States as far as toll gantries, so much more tolling everywhere within Europe. But you've got a fewer number of rental car companies I mean, rental cars that are being used, and they're scattered among more companies. So where you've got three concentrated players here, you've got usually five there and sometimes a regional player who divide up the market. So when you think about our tolling segment or our commercial services segment, which is greater than $200,000,000 annually, Europe is going to be a much smaller piece than that. And what you're going to see is probably the profit margins are going to be slightly lower. When we say that, everybody is like, Oh, your margins are going be lower. For those of you who don't know the company, the margins for this business segment were at 66% in Q3 on the so EBITDA to revenue. So it's really hard to expand any new product or buy a new company that's going to be margin accretive from that perspective. But that being said, we do think this is a great growth opportunity. So this will be meaningful in probably the next three years or so. It will take us to build it out to meaningful revenue. Okay, great. All right. One more and then we'll go to questions from the audience. I want to hop back to government and the New York City project that you mentioned. So you talked about the number of cameras. Let's talk about the recurring revenue. So there's two parts. There's the product revenue and there's the service revenue. Let's talk about the recurring portion. So and it is we'll talk about the recurring portion. I do want to put a caveat on the product. New York is one of the few cities that actually buys their equipment from us. So we always say the product revenue is lumpy, and that it will be for the next few years because if they're going to go and buy 1,200 cameras over the next few years, we're going see spikes up in our product revenue. But really how you should think about the company is about recurring services revenue, which happens in both business segments. But for the Government Solutions segment, it's really about once a camera is installed and it's in the ground, it will produce revenue well into the future, so call it seven to ten years into the future. Most of our speed cameras produce about 3,800 per month in revenue. So when you think about the expansion of New York City, you've got 1,200 cameras that are going to be installed in the next, call it, across a two year time period. At $3,800 a month, which is the average of our portfolio, just that installation would create $54,000,000 of annual recurring revenue in the future. So this is on a base of a business segment that has approximately $145,000,000 in recurring revenue right now. So and that revenue stream would then just continue on. So the nature of this business is that you've got long term contracts. You've got once the cameras are installed, they produce revenue well into the future. And so it's a really nice business model. Okay. Great. We've got plenty more here, but I want to pause and see if there are any questions from the audience. We're being broadcast. We got to be able to hear you. No problem. Have a pretty loud voice anyway. The nature of your recurring revenue, is it driven off of this dollar per this camera per month? Or is it driven off of we generate this much revenue and fees? Or how does that work? Yes. We do both. So some of our programs are fixed fee. We get a base amount per camera for the maintenance operation and processing of the citations. Other ones we actually can get paid on a transaction fee based on paid citations or other things. And then penetration of tolling systems within The U. S, I might not have caught that. Are you guys essentially fully penetrated of tolling systems in The U. S? There are some probably individual bridges for access toll authorities that we're not connected to, but it doesn't impact our ability to have a nationwide program. Thank you. Yes, sure. Great. Thank you. Anyone else before we move on? We'll circle back for more questions towards the end as well. All right, great. Let's talk about competition within the Government Solutions segment. So when we talked about commercial, it was a little bit different. But in government, there are a few competitors. You have roughly 50% share you've talked about. Maybe just talk about the overall market, the other competitors, what's in that other 50% of share and how do you differentiate? Sure. So principally, there are two major competitors inside of Odinforce in North America. The first one is a company called Conduent. Conduent, former Xerox, ACS joined together. They have a and I don't know exactly, I would call them approximately 20% market share, maybe a little bit more than that. They've been around for quite some time. Then there is an Australian manufacturer called Redflex. Redflex has been around for quite some time as well. And they may have, call it approximately 20%. And then there's a couple of other very small players that may literally have one program or two programs, but they don't have much. But those are the ones we always see in terms of a RFP. In terms of differentiation, there's really there's a couple of things. The first thing I think really important is reputation. If you're going to roll out a program of size, we are the gold standard for that. Because if you look around The United States and you look at the major programs that have been deployed, we are the provider. If you look in New York City, we're the provider. And if you look in Chicago, we're doing speed. If you look at Seattle, also San Francisco, we are the de facto standard and we are known for both our ability to execute. And then within that, our technology has a higher violation rate which means that we're able to produce more prosecutable images from our cameras than do our competitors which means more change in behavior plus more revenue to the customer. And then I would say those two sort of in general are the primary differentiators as we go to market. Okay. All right. Let's you mentioned this earlier, but I want to come back to this. So New York City is obviously a great big customer for you and a little bit unique in terms of the product revenue. Let's talk about some of the other areas. Obviously, the school zone speed is something that I think resonates with a lot of people. And you mentioned Georgia opportunity. Maybe frame the Georgia opportunity and perhaps talk about some other states that might be considering similar legislation. Sure. So we opened up Georgia in I think it was two years ago and which is really pretty interesting because this is a very broad statement. In general, traditional red states are not pro photo enforcement whereas traditional blue states are. That's just sort of but Georgia being I'm from Georgia, so it's a red state, grew up there, actually has really embraced photo enforcement as a way to change behavior and increase safety the expansion there. So we calculate the TAM. So when you look at and basically the TAM is every school in the state of Georgia has two cameras, is about a $50,000,000 opportunity. Clearly, that's the most optimistic view of the world. That's what a TAM is. We've really been focusing our efforts on the city of Atlanta and the five counties that surround it, which would probably be the lion's share of that. And we're just now in the process of getting RFPs or sole sources are happening as we speak. Okay. Great. Okay. And another one that we alluded to a little bit earlier I want to come back to is the congestion pricing opportunity. So Philadelphia, Washington D. C, Seattle, all cities that are either considering or in motion on projects. Can you talk to us a little bit about how the mechanics would work on that, how the revenue opportunity would look and what the how it would be priced differently? Yes. So just to go back to things we made statements last year, we actually decided to not bid on the New York congestion pricing scheme. The reason for that was, one, we don't have the technology stack today to go provide that program. That's a tolling program. That's gantries and cameras and things that we don't the different types of cameras that we don't do today. Now while we could have partnered that and we do some of the back end systems, we really wanted to focus on the delivery of the speed expansion program, which is so significant both to the city, to our customer as well as to us. So that being said, we took a pass on that. So what congestion pricing basically is, is a toll program inside of a certain city. I believe in New York, it's below Sixtieth Street, I think. So basically, the Southern End Of Manhattan is going to have cameras all over the place. You'll either use your EasyPass when you come across one of the bridges or if you're already in the city, they'll have cameras that will just like EasyPass, they'll look at your license plate or they'll have a reader, I don't know what they had been on if they've decided to attack And they'll bill your account for being inside of the zone and the cost of that will be higher during rush hour and lower when it's not rush hour. And that's going to that will be the way it works. There's really only three other major cities that have congestion schemes today. London being probably the most prominent, Singapore and Stockholm. But you will see cities that's I mean that's like that's one of those things where you're pretty sure about that you're going to see that expand because of the impact. It actually works. Drive times increase, congestion decreases, emissions decrease as a result of congestion pricing. And that's what these cities need given the environmental impact and some others. So for us, we're sort of taking a wait and see approach. Given that the first city to actually do it was New York, it's probably not the one that you want to be you'd like to see if somebody else can be successful there than you trying to do it and not do That would be a problem. So we're going let somebody else with more experience. And then we're going to watch and then we'll determine later where we see the most of the volume going to be. I suspect more of it will be outside of The U. S. Than in The U. S. In terms of opportunities for new programs. And then we would have to look at either partnerships or acquisitions to help us round out a portfolio where we could deliver a comprehensive solution. I do think it's important to note though that even though we're not going to be involved in congestion pricing from running the program for New York City, but it's because it acts as a toll road or a toll mechanism, that it still increases our overall volume. So all those trends we talked about in the tolling industry, more toll roads, more cashless, this will play right into that. And that any rental car that has our product in it that goes into the congestion zone, we would be the one who's creating those billing mechanisms for the renter. Good point. Thank you. Okay. Why don't we take one more and then we'll go back to the audience for some final Q and A before we wrap up. We've got about five minutes left. Actually we were just talking about this earlier, but recently in terms of M and A, you brought in Mike McMillan to be the VP of Corporate Development and Strategy to lead your acquisition efforts. You've talked about this a lot on your calls, but let's dig into a little bit more the angles and what you're looking for in M and A. I know part of it is about services that your customers are actually asking for. And you listed title and registration earlier as a great example of that. So maybe we can go into that a little bit more. Sure. So Mike's been with us a little less than a year and done this maybe or we closed the deal a month and a half ago. The way we think about M and A is, one, it's a primary lever of our future growth and we want to do a couple of things. One is we want to accelerate bets we've already made. So anytime that we can expand share of wallet with our current customer, offer a new solution to a current customer, That's always the easiest way to go. And if there's solutions that make sense for us and are adjacent, that's where title and registration came in. Two is we want to accelerate bets that we've made. We've made a pretty huge bet inside of Europe, and so Pagatelia was an accelerant to that. So we had already bought one company, we bought another because it's going to make us go faster. And then three, you would look at diversification. I mean we certainly have a couple of key customers that make up a good chunk of our overall revenue. So we're always looking for ways to diversify. Inside of Government Solutions, we've talked very clearly about what are some of the other categories that are interesting to us. Things like parking are highly adjacent to us, traffic management and congestion pricing. Those are platforms that have a lot of overlap with both the customers that we serve and the value that we provide. So those are areas that we're going to be watching closely as we look at as we fill our M and A pipeline. And then on the commercial service side, there's we're going to continue to look for, hey, are there other areas or other parts of the world that we should be doing same program for rental car or commercial fleets? We would look at that. And then I think in addition to that, you would look for how do we diversify within commercial fleets. We have a really good we have great relationships there. What are the other services we could provide? And that could be things interesting as telematics or other areas like that. So it's a pretty wide field, but we do have, I think, a very strict financial discipline as we think about really a DCF view of the world. We may make a bet here and there, but they won't be giant bets. We want to be disciplined in the way we approach the market. Great. Thank you. Let's see if there are any other questions from the audience. Thanks. So when I think about the revenue profile over the next couple of years, you've got what seems like a big boost coming from New York buying cameras. Yes. Now that's 40% of your business and that's in the government business. When you go past that, is it sort of the notion that you're hoping to add more things just stacked up so we continue to see that nice revenue profile growth and those additional adjacencies? And then within that, why would New York be buying the cameras from you versus other folks? That's just the way that New York does it. They like to own the cameras. They like to own the equipment that's by their roadside. They always purchase their equipment. It's just how the city runs. They also have the ability that they can afford to. Many other programs can't. So that's just how they run. But the way that you're thinking about the growth is right, that you're going to see an uptick in the overall growth of you're going to in total revenue because of the product sales and then a continued growth in service revenue on our Government Solutions side because of these installations that we're doing. It's important to keep in mind, we talk a lot about New York, but New York is not the only place we're installing cameras. So but longer term, as you get out of this cycle so now I'm talking like in 2022 or 2023, the growth rate of the Government Solutions business should be around this 2% to 4%. That's generally how it's going to grow. And that's what we think it will go back down to after the cycle is done. But in the meantime, we're still installing cameras all across the country, not in New York, in order to create those growth cycles and that long term cash generation from those cameras being installed. And then when you look on the other side of the business, the Commercial Services business, it's been growing very nicely. Like I said, 15% to 18% is going to be in the low teens this year. We've said that as a longer term, as we hit sort of this ramp, as we're going into more and more of these roads returning cashless, it's really hard to jump over that type of growth rate years over years. We'll probably be a 6% to 8% grower from the core business as it is today. And then when you look out and say, what are we going to do next? You said, well, we're growing in Europe, and that will become meaningful. And then we will acquire one of the things we haven't talked about is we, as a company, generate a lot of free cash flow. Our EBITDA conversion to free cash flow is between 4550%, and we estimate that we'd generate in this year $110,000,000 of free cash flow. And so we have the ability to either delever quickly or to acquire into our next growth strategy. Just real quick on the capital requirements of the business. Absent New York who would buy their own cameras and when I think about others where you're deploying cameras, when I think about the little transponders or whatever in the rental cars, sort of ongoing capital requirements are there? I mean, guess you talked about free cash flows. Yes. So CapEx is actually is very isn't that large. It's between 25,000,000 and $30,000,000 a year, and that would include not only the cameras that we're buying, which generate growth, so those are revenue generating, to our tech and our IT that goes forward. Can I ask one more quick one? Yes. Yes. The structure of management long term incentive compensation, what are the key drivers of that? For our compensation? We are in the middle of we do not have an executive plan right now. It's being built out. It will be launched in February. So they're going through that. But it will be a performance based award that's friendly to shareholders. Driven by like ROIC total shareholder? Yes. I don't we don't they haven't decided the metric, but that's in flight right now. Yes. Okay, great. David and Tricia, thank you so much for being here today. Yes, absolutely. Thank you.