Q2 2022 Verra Mobility Corp Earnings Call
Ladies and gentlemen, you're currently on hold for today's Verra mobility second quarter 2022 earnings Conference call.
At this time, which doesn't mean additional participants we do plan to be underway momentarily. We appreciate your patience as he plays you made him a lot.
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Please standby were about to begin.
Good day and welcome to the Verra mobility second quarter 2022 earnings Conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Mr. Mark <unk>, Vice President Investor Relations. Please go ahead Sir.
Thank you good afternoon, and welcome to Verra mobility second quarter 2022 earnings call.
Today, we'll be discussing the results announced in our press release issued after the market close.
With me on the call are David Roberts, Verra mobility, Chief Executive Officer, and Craig Conti, Our Chief Financial Officer.
David will begin with prepared remarks, followed by Craig and then we'll open up the call for Q&A.
During the call, we'll make statements related to our business that may be considered forward looking including statements concerning our expected future business and financial performance, our plans to execute on our growth strategy.
The benefits of our strategic acquisitions.
Our ability to maintain existing and acquired new customers.
Expectations regarding key operational metrics and other statements regarding our plans and prospects.
Forward looking statements may often be identified with words, such as we expect we anticipate or upcoming these.
These statements reflect our view only as of today August three 2022 and should not be considered our views as of any subsequent date, we undertake no obligation to update or revise any forward looking statements.
Forward looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations for.
For a discussion of material risks and other important factors that could affect our actual results. Please refer to those contained in our annual report on Form 10-K, and our Form 10-Q for the first quarter 2022, which are available on the Investor Relations section of our website at IR Dot verra mobility dot com and on the.
<unk> website at SEC Gov.
Finally during todays call well refer to certain non-GAAP financial measures a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is included in our earnings release, which can be found on our website at IR Dot verra mobility dot com and on the SEC's website at SEC Gov.
With that I'll turn the call over to David.
Thank you Mark and thanks, everyone for joining US today, we had a very busy and productive second quarter as well as the first few weeks of the third quarter, including our recent Investor Day I'll.
I'll spend a few minutes recapping. These events and then turn to the trends that are influencing our strong results in each of our business segments.
I'll begin with a brief recap of our Investor day on July 19th.
First we announced an increase to our guidance for total revenue and adjusted EBITDA based upon our performance to date and outlook for the remainder of the year.
Following that announcement, we had what we believe was a successful well attended Investor day, which we articulated our long term growth strategies provided a deep dive into each of our business segments discuss our M&A criteria and concluded with our long term financial outlook and capital allocation priorities.
The event also provided the opportunity to communicate our long term vision of operating in the broader connected fleet solutions in urban mobility markets and how these emerging opportunities provide upside to the long term outlook provided by Craig in his presentation.
My goal is to leave investors and analysts with one key message there.
Mobility is a great business with a bright future and our results and outlook validate that message. If you werent able to attend Investor day in person or virtually I encourage you to review the presentation materials and webcast replay available on our Investor Relations website.
Prior to Investor Day, we announced several key developments and commercial services as you'll recall when we announced first quarter earnings we signed a five year contract extension with Hertz for our U S operation and also signed a contract with her to Spain for new European tolling pilot.
Moreover, immediately leading up to Investor day, we announced several new partnerships, we expect will contribute to core business growth European expansion and long term emerging opportunities.
These partnerships will not lead to significant revenue generation in the near term. They are the building blocks to drive the future of our connected fleet solutions portfolio over the long term.
Now moving on to our results, we had an outstanding second quarter highlighted by strong revenue growth and free cash flow generation commercial services delivered exceptional topline and Bottomline results driven by continued strong demand for travel in the U S. In addition, government solutions continued to drive strong year over year growth fueled by the New York City schools on speed camera implementation.
And T. Two systems delivered results in line with our deal thesis.
Going into a little more detail beginning with commercial services. The team again delivered a strong quarter.
Full advantage of the surge in travel demand across the U S revenue of approximately $85 million for the quarter represented a 28% increase over the same period last year and compared to pre pandemic levels, we achieved 25% growth over the second quarter of 2019.
As we noted during our Investor day presentation. We achieved these results. Despite the fact that rental car fleet volumes and TSA traveler throughput is below 2019 levels. This was predominantly due to increase in cashless tolling and customer adoption across the U S.
Moving to our government solutions business, we generated total revenue of $84 million representing growth of 34% over last year and.
In addition to 265 camera installed commitment for New York City remains on track through the first half of the year, we've installed 121 cameras and plan to complete the remainder of the installations by the end of the third quarter barring any supply chain risks, which we do not currently anticipate.
Finally, <unk> systems delivered $19 million of revenue for the quarter directly in line with the deal model and they remain on track to deliver full year results in line with our internal expectations.
Q2 was another strong quarter of growth in free cash flow generation, we're excited to build on the momentum of our Investor day and continue to drive extraordinary results across the portfolio now I'll turn it over to Craig to guide us through our financial results.
Thanks, David Good afternoon, and thanks to everyone for joining us on the call.
First I'll start out by providing an overview of our second quarter 2022 results then provide commentary on our current financial guidance, followed by a recap of our Investor day.
Let's turn to slide six which outlines revenue and adjusted EBITDA performance for the consolidated business.
Total revenue increased approximately 46% year over year to about $187 million for the quarter driven by strong operating performance across the company and the inclusion of Redflex T. Two systems in our financial results.
As a reminder, we closed the redflex and key to systems acquisitions in June and December of 2021, respectively. So Q2 2021 is not a full quarter for Redflex imperatives.
Q2 service revenue grew about 50% over the same period last year of which 26% was organic growth.
This growth was attributable to several factors first commercial services revenue grew 28% year over year second government solutions service revenue increased by about 50% over the prior year of which 23% was organic growth and finally <unk> systems contributed 17 in <unk>.
$15 million of service revenue respectively.
Product revenue was $13 million for the quarter of which $6 million was from Redflex and <unk> systems.
Finally from a profit standpoint, consolidated adjusted EBITDA of $89 million increased by approximately 29% over last year.
Moving to commercial services on slide seven we delivered revenue of about 85 million, increasing $18 million or 28% year over year.
The improvement was driven by continued strong demand for travel, particularly in the U S and the resulting increase in demand for rental cars.
As David mentioned, while rental car volumes remained below pre pandemic levels the percentage of cashless tolls pull rates and billable days are all increased.
In addition to continued strength of the rental car market, our ongoing growth initiatives within the commercial fleet management space drove a $3 billion increase in tolling related revenue versus prior year levels.
Adjusted EBITDA in commercial services was 57 million, representing a 32% year over year growth.
Let's turn to slide eight and we'll talk we'll take a look at the results of the government solutions business.
Driven primarily by our New York City photo enforcement expansion efforts total revenue increased by $21 million or 34% over the same period last year to $84 million for the second quarter <unk>.
Service revenue for the second quarter was $75 million, which grew $25 million or about 50% year over year.
Organic service revenue growth, excluding redflex was approximately $11 million or 23%, which was primarily driven by the aforementioned expansion of the New York City School Zone speed program.
In addition, adjusted EBITDA grew 13% year over year to approximately $29 million for the quarter.
Let's turn to slide nine and we'll review the results of <unk> systems, which is our parking solutions business segment.
Revenue was $19 million and adjusted EBITDA of about $3 million was in line with our expectations for the quarter.
As I discussed last quarter, we expect Q2 to drive sequential revenue and adjusted EBITDA growth through the balance of the year and anticipate low double digit growth for their top line and bottom line results this year in.
In addition, we expect <unk> to generate margins in the low 20% range, which are modestly lower than their pre acquisition levels due solely to allocations for costs, including audit and Sox fees D&O insurance and other corporate public company costs that the business would not have incurred prior to our acquisition.
The company reported net income of approximately $30 million in the quarter compared to net income of $4 million in the same period in the prior year.
Adjusted EPS, which excludes amortization and stock based compensation and other noncash and nonrecurring items was 29 per share for the current quarter compared to <unk> 10 per share in the second quarter of 2021.
The tax provision for the quarter was about $13 million, representing an effective tax rate of approximately 30%.
As a reminder, our tax rate is impacted by permanent differences related to mark to market adjustments for our private placement warrants.
Before I close out the financial review for the quarter I'd like to give you an update on where we stand on the material weaknesses, we addressed in our most recent 10-K.
Specifically these weaknesses were associated with monitoring controls and accounting activities over the acquisition of Redflex and in the design and maintenance of reporting controls related to a third party application utilized to perform certain control activities and in the preparation of our consolidated financial statements.
In response to the Redflex related items, we have implemented new controls over the monitoring and recognition of revenues by acquired companies and have hired additional qualified personnel to perform month and oversight activities, including the selection and application of generally accepted accounting principles.
In response to the third party financial reporting application item, we have instituted a series of compensating controls designed to independently confirm the accuracy and reliability of the data utilized in our control activities and in the preparation of our consolidated financial statements.
At this time, we expect the remediation of these material weaknesses to be complete by December 31, 2020.
While our remediation work is materially complete the new controls are required to operate for a sufficient length of time and will undergo additional rigorous testing to ensure they are operating hasnt tenant.
And now back to our financial results.
Moving on to cash generation for the second quarter, Janet we generated approximately $65 million in cash flow from operating activities, resulting in $54 million of free cash flow for the quarter or 61% conversion of adjusted EBITDA.
In addition on a trailing 12 month basis free cash flow per share was $1 31.
Free cash flow benefited from higher than average cash collections attributable to the growth in commercial services and the back end of the first quarter that was subsequently collected in the second quarter.
Additionally, New York City accounts receivable has declined to $43 million at the end of the second quarter compared to $63 million at December 31, 2021.
Our.
Patients for the business is to drive roughly comparable levels of free cash flow in the third quarter and to slightly level off in the fourth quarter.
As you can see on slide 10, we ended the second quarter with a net debt balance of less than $1 2 billion.
Resulting in net leverage declining to three five times for the quarter. This is down from four three times net leverage at the close of 2021.
Next I'd like to give you a brief update on the share repurchase program. The Companys Board of directors authorized on May seven for up to an aggregate amount of $125 million over the next 12 months.
During the quarter the company paid $50 million, which represented the aggregate amount authorized for an accelerated share repurchase or ASR and received an initial delivery of two 7 million shares.
The final settlement is expected to occur during the third quarter of 2022 at which time a value of volume weighted average price calculation over the term of the ASR agreement will be used to determine the final number at an average price of shares repurchased and retired.
In addition, the company paid about $5 million to repurchase over 336000 shares through open market transactions during the second quarter, which we subsequently retired.
Of the $125 million approved repurchase program. The company authorized an aggregate purchase amount of $75 million related to the open market repurchases of which about $70 million is available for future repurchases as of June 32022.
Next let's take a look at our current guidance on page 11 in conjunction with our Investor Day on July 19, we increased guidance as follows total revenue in the range of $720 million to $740 million and adjusted EBITDA in the range of $325 million to $335 million.
Our guidance implies modest sequential growth in comparing the second half of the year to the first six months. This is consistent with historical trends as we typically experienced strong tolling revenue in the third quarter driven by summer travel demand in a sequential reduction in the fourth quarter.
You'll also note we experienced strong adjusted EBITDA margin expansion in the second quarter of this year compared to the first quarter of 2022.
In commercial services, we benefited from volume leverage as the business continues to scale.
We expect commercial services margins to remain at comparable levels in the third quarter, and then to level off in the fourth quarter in line with normal seasonality.
And government solutions, we also experienced strong margin expansion in Q2 compared to Q1 of 2022. This.
This was primarily primarily attributable to the revenue mix impacted by New York City camera sales, we expect margins to remain at elevated levels in the third quarter for the same reason and then the level off in the fourth quarter.
The macro trends that help drive the outperformance in commercial services over the first half of the year continue to exceed our expectations.
If the current trends continue in the third quarter, we will likely revisit our guidance again, assuming the rest of the business performs consistently with our plan, albeit in incorporating the historical the historical leveling off of rack tolling, we typically experienced in the fourth quarter.
Additionally, based on achieving the midpoint of the adjusted EBITDA guidance range and as expected free cash flow conversion rate of about 50% of adjusted EBITDA for the year, we expect net leverage to be three five times or less by year end 2022.
This net leverage result includes the full completion of the stock repurchase program discussed today.
Lastly, I'll provide a brief recap of the financial overview discussed during Investor day, and reiterate some of the key takeaways.
We provided a long term financial outlook, which we believe we can generate 6% to 8% annual organic revenue growth through 2026.
This topline growth. This topline growth will result in 8% to 10% annual adjusted EBITDA and free cash flow growth again on an organic basis.
These forecasted results yield about $1 2 billion of cumulative organic free cash flow by 2026, and assuming we maintain net leverage at a target of three five times over the forecast period that provides for up to $500 million in incremental re levering capacity.
With this one $7 billion in deployable capital capacity over the next five years, we provided a range of capital allocation scenarios focused on stock repurchases and M&A.
The central message of our that our Investor day was that organic free cash flow is our strongest value creation lever.
Coupling this with our capital allocation priorities. The company has multiple paths to double free cash flow per share by 2026.
This is the end of our prepared remarks. Thank you for your time and attention today and at this time I would like to invite <unk> to open the line for questions.
Thank you if you'd like to ask a question Glenn preseason by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to later signal to reach our equipment.
Once again that is star one if you'd like to ask a question.
And we'll go ahead and take our first question from James <unk> with Morgan Stanley . Please go ahead.
Hey, guys. This is Jeff Hey, guys. This is Jeff Goldstein on for James.
Just thinking about your revenue growth by segment in the back half should those growth rates generally lineup with your Investor day guidance around long term growth, maybe if we strip out the New York City benefit to the government business.
Just trying to understand if there's kind of other factors in play right now that would cause you to under or over perform those long term targets right now.
Yes.
Theres a couple of things when you look at a year. So this is craig by the way thanks for the question.
The.
When you look when you look at variable ability you can't really look at the back half and you compare it to an annual target for the reason is that.
Our each of our quarters are so different so the business grows sequentially with Q1 being the lowest quarter will grow sequentially to Q2.
<unk> is the highest quarter and then fourth quarter is the second lowest quarter. So you can't really take the highest quarter second lowest quarter compared to an annual target what I would say is as we look at the back half of the year.
The rental car business continues to surprise us with how strong that said.
One way to think about that is to kind of take a look at the TSA throughput. If you look at how the TSA throughput has behaved in the first half versus the second half of the year, maybe even better let's drill in on the first to the second quarter back pre pandemic 2019 that was a 17% grower from Q1 to Q2 in 2019 as.
We come into 2022 that same metric is a 27% grower. So as I look at the back half of the year I Havent brought in all of that favorability yet because they wanted to look for another 60 days and see if it actually comes through top line. So what I would say is we have we do have growth in the back half of the year.
What we have in there from a total revenue standpoint today grows in the third quarter again shrinks in the fourth quarter as it has historically, but we will probably take another look at guidance. If the rental car strengths continues to be a strong as it was in the second quarter.
Got it Okay that was all very helpful. And then as my follow up you talked a lot about at your Investor day at the bus stop camera opportunity. So maybe you can just remind us of how much revenue you're currently doing there and how you view. The pipeline is that is that a six to 12 month opportunity and move the needle or more like a 4%.
Five year opportunity.
The and you said bus stop just to clarify where tomo crossing guard, which is our school bus stop arm, but yeah. We're talking the same thing okay. Great. Okay. Yes, so thats a business that has really been in recovery because as you can imagine during the pandemic. It effectively went to zero because the schools are out and things like that so it is actually growing <unk>.
Now and I would anticipate that that.
The business is performing well, we're continuing to see opportunities, especially kind of up in the northeast category. So.
<unk>.
Not a large large business for us what I would say is that over the next two to four years is probably where we'll see the optimization of that business.
Okay Fair enough. Thanks, guys yeah, yeah. Thank you.
Thank you we'll take our next question from Dan Moore with CJS Securities.
This is stefanos crist, calling in for Dan Thanks for taking our questions.
Sure.
Could you just talk a little bit more about T. Two maybe.
Maybe that's the integration so far to date and maybe some updates on cross selling opportunities you expect to achieve.
Yes, so as a reminder, the integration for <unk> is actually very very light, we looked at it as a.
As a portfolio company not something thats going to be sort of brought into any of our other businesses at this time.
And so outside of some of the costs that we burdened onto the business that Craig mentioned in his remarks related to Sox and sort of public company costs.
It's continuing to grow we're seeing a good recovery of that business coming again out of.
It was a business that was also pretty severely impacted related to the pandemic and so we're seeing strong recovery.
What I would say right now is that.
Large parking opportunities are not necessarily super quick and the manifestation of those so they are building a pipeline now and there's a lot of collaboration between the businesses to help generate those opportunities. We don't have a marker as of yet that we can point to that that was the one so we're still in the early phases of that.
Got it thanks.
And then just in terms of your racks customers. What are you hearing about their willingness and ability to grow their fleets looking out to 'twenty three 'twenty four and beyond.
Yes, I mean, I think the best.
We try to not comment on those companies in terms of their specific plans because we want.
Two of them are publicly traded and there is plenty of information available to them.
What I would say is that they are being super responsive to the demand and they are continuing to be very active in re fleeting.
They are as of yet not back up to 2019 levels that has not impacted our business at all but I would say the trajectory is to continue to get to.
Align those assets to the demand as quickly as possible.
Perfect. Thanks, so much.
Yes. Thank you. Thank you.
Thank you we'll take our next question.
The alloy with Deutsche Bank.
Well thank you.
I just wanted to touch on government solutions could you just remind us what the puts and takes around service and.
Product revenues at least for the rest of this year and what the margin implications of that might be.
Look at the back half for government solutions.
Yes sure.
So this is Craig I'll try to take that one one piece by piece so.
We talked about installations are fixed speed installations for the business being 265 units for the year.
So.
This is the product piece of government solutions, the legacy business I will go into the international piece of the second So let me let me pace that out for you on that 265, we've done roughly one half of those in the first half of the year. The remaining tasks are going to be done in the third quarter.
So as you look ahead to the third quarter for government solutions Youre going to see another another strong quarter of product sales when when you think about that from a margin standpoint.
The core the core business is at about it's in that mid to high <unk> and I think it will be there for the third quarter pretty flat to the fourth quarter as well, maybe a small pullback in the fourth quarter.
The product sales that I, just talked about are slightly incremental from a margin standpoint, but not materially not enough to move the entire segment by more than a point.
Does that help with some with cement.
Yes, yes.
That does help.
And then just as it relates to <unk>.
<unk> margins I know you talked about it being mostly allocation.
Is this sort of I know this quarter was a little bit different because you didn't get the full of Robyn.
But how should we think about margins for Q2 sort of exiting exiting the year or like are you able to offset some of these costs I mean, I imagine that should benefit if it is just allocation that should benefit some of the other segments, because you're allocating lower cost to those segments, Dan maybe just walk us through like how we should think about.
Tito margins from here.
Yeah, Yeah, I think I know Craig again, I think I think I know, where you're going with with that one so when we think about the key to business on a fully allocated basis, including the cost will be talked about we think about something around 20%.
In the back half of the year and I think thats the number youre looking for for the exit rate of.
2022, this business is a sequential grower and to the point, where our revenue in the fourth quarter is 75% more than it was in the first quarter and the composition of that revenue starts to favor the higher margin products. This is a trend that is held for two decades.
It starts to favor the higher margin things that are that we sell in the bag in the back half of the year. So if you look at the revenue trajectory here in the first half of the year. This is still on plan, we expect the back half of the year to be materially higher.
It may be the high teens, very high teens or around 20%, but we expect to exit the year at 20% for <unk>.
Great. Thank you so much.
You bet.
Thank you we'll take our next question from Louie Dipalma with William Blair.
David Prog on Mark good evening.
Hey, Louie.
Rental car providers on David you just mentioned how two of them are publicly traded.
Courted record revenue and disrupted revenues, partially as a result of the travel rebound.
Also partially a result of our price increases.
I was wondering is there an opportunity for the $5 95 a daily.
Daily fee charged to use your tolling service.
The tariff that could be increased on the future.
Yes.
I mean, potentially what I would say, though is the pricing of what goes to the renter is completely 100% set by our customers.
We are not we don't provide any influence on that whatsoever. So if they believe that that is a better value proposition and sort of matched to the cost and everything else I think they would make those types of decisions. They certainly have made increases in the past.
But I would just say that we're not.
To show the ones that drive those decisions.
Great.
When you say an increase in the past has there been increased.
The past 12 months such has any of your like really strong growth over the past year from Microcar, calling has it come from.
Nice increases or has that come from those factors.
Restaurant.
Yes in terms of.
Volumes on the shift to electronic tolling.
Yes, the answer the direct answer is no and just as a reminder, the pricing is very geographically dependent and it's also a product dependent meaning if it's an all inclusive in the northeast are significantly different than an all inclusive in Florida. So it really is very dependent upon the both the product the brand the location and so there isn't as an example, theres not one.
I'll, just do a $1 increase across all products, that's not how the business works for our customers.
Alright that makes sense.
Another.
Question, David Thanks for that.
Two days ago from New York City School book Runner program went into effect.
Four seven.
So Paul I'll unpack.
On your contract for that program or should we expect there to be any impact on our future associated with this.
Yes.
Sure.
We will be the one thats operating the camera is 24 by 7% so.
It wasn't comprehended in the initial contracts. So we're just going through the process to make sure that it gets appropriately paper.
Great So would that have.
A positive impact of that positive impact already in your guidance.
It would have.
We don't have the pricing yet so I honestly don't know when we Havent as David said, we haven't finalized the contract. So I'm, assuming it would have a positive impact it's not in there anyway.
Great.
Thanks, Paul.
Thank you thanks Louie.
Thank you once again Thats star one for questions. We'll hear next from Keith <unk> with Northcoast research.
Good afternoon, guys I appreciate the opportunity.
Correct me walk us through the ASR and you're kind of like being in terms of the timing of that the life in the third quarter and if we understand it right you've got $2 7 million shares that came out of the diluted share count in the second quarter does it come out in the third quarter.
Yes, yes. So the short answer is yes. So let me let me give you the top of the waves here again Keith.
As I as I read what I prepared today, maybe I gave a little too much information it wasn't super clear. So the ASR was $50 million in the way that an ASR works is they're funded upfront at 80% of the value and then the remaining <unk>.
20% settles later right. So what was captured in the second quarter was the 80% of the value. So it was actually it was a $50 million check this company grow but it was $40 million worth of shares retired and when our Q comes out you'll see that we did that at $14 60.
So thats the $2 7 million shares there is another piece that will be true up here for the remaining 20% are another $10 million in the third quarter. That's the ASR is that wasn't clear Keith.
So in that $10 million.
The average value of those shares from a debt you guys answered it whenever it concludes I'm, assuming maybe its 60 or 90 days is that a fair. So have you got it exactly.
Exactly that's exactly correct.
Okay cool thanks I appreciate it.
This is a follow up the commercial services segment, you've got obviously, the three segments. The toll management the violations that Tayo registration business can you kind of unpack how each one of those three little vertical is that.
In terms of the quarter.
Yes, I mean, obviously I am assuming full management was the biggest driver of the growth here based on the size and success, but how did the violations title registration deal.
We don't have or we don't give detailed at the product segment level within each of our business units, but obviously the principal driver of our growth has been the commercial services on the rack tolling, but the other businesses are continuing to perform as well right.
Great Fair enough appreciate it thank you.
Thank you and at this time there appears to be no additional questions in the queue that does conclude today's conference.
And thank you all for your participation and you may now disconnect.
Thank you. Thank you. Thank you.
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