Verra Mobility Corp

NASDAQ:VRRM

Earnings Call Transcript 2020-Q3

[Operator]

Good day, everyone, and welcome to the Verra Mobility Third Quarter 2020 Financial Results Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Marc Griffin. Please go ahead, sir.

[Marc Griffin]

Thank you. Good afternoon, and welcome to Verra Mobility's Third Quarter 2020 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is David Roberts, Verra Mobility's Chief Executive Officer; and Tricia Chiodo, our Chief Financial Officer. They'll begin with prepared remarks, 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 plans to execute on our growth strategy, our ability to maintain existing and acquire new customers 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 statements reflect our views only as of today and should not be considered our views as of any subsequent date.

We undertake no obligation to update or revise these 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 a discussion of material risks and other factors that could affect our actual results, please refer to those contained in our annual report on Form 10-K or our quarterly report on Form 10-Q, which are available on the Investor Relations section of our website at ir.verramobility.com and on the SEC's website at sec.gov.

Finally, during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the press release issued after the market closed today, which is located again on our website at ir.verramobility.com and the SEC's website at sec.gov.

With that, let me turn the call over to David.

[David Roberts, executive]

Yes. Thanks, Marc, and thank you to everyone joining us on the call today. As you are all aware, the global pandemic continues to evolve. And while we believe we are most likely through the worst of it, the residual effects on part of our business are still present. Our third quarter performance showed modest signs of improvement in our Commercial Services segment, continued strength in our Government Solutions segment and was highlighted by a return to profitability, strong cash generation and EBITDA margin levels that are consistent with our historical average.

Overall, the trends across the business during the quarter were similar to what we experienced in the latter part of the second quarter. That said, signs of optimism are appearing as travel-related activity continued to trend up throughout the quarter, a good sign for tolling activity in our Commercial Services segment as well as for variable rate photo enforcement in our Government Solutions segment. While it is too early to tell if this trend will continue, we are certainly encouraged by the upward trajectory.

While our business is facing extreme challenges like most of the global economy, we continue to believe we have built a highly resilient business that has incredible upside. Moreover, our ongoing commitment to serving our customers at the highest point of their need alongside strong fiscal discipline, helped deliver Q3 results that were above our internal plan. Third quarter revenue came in at $96.9 million, and our adjusted EBITDA came in at $53.5 million or 55% of revenue.

As we described in detail last quarter, we took aggressive action to rightsize our cost structure, and we were pleased to be able to return the business to profitability. Additionally, I would like to highlight that we ended the quarter with $129.2 million of cash on the balance sheet without the use of our lines of credit and anticipate remaining cash flow positive for the year, demonstrating our prudent use of capital.

Now I will move on to our Q3 results by segment. Our Commercial Services segment reported $44.2 million and adjusted EBITDA of $31 million, both healthy improvement sequentially. We continued to see month-over-month revenue increases throughout the quarter. As a reminder, the largest portion of revenue in the Commercial Services segment is highly correlated to rental car volume. And while we are optimistic in the trend line we are seeing, we still anticipate ongoing pressure to this business segment until late 2021, a view that is widely shared by many companies in travel-related industries. That said, traction with our fleet management customers remained strong. In our U.S. rental car business, we continue to work with our rental car partners to optimize our offerings as they navigate the COVID crisis. On the fleet management side, we renewed a number of contracts, including one of the largest automotive retail chain and another with one of the largest specialty commercial trucking operators.

Similar to the U.S., the European rental car market has been negatively impacted by COVID-19. The result of this has been slower decision-making and a lack of resources for our partners to help accelerate the implementation of our tolling solutions. Last quarter, we announced the rollout of a rental car toll management program with Rent A Car in France, and we are very pleased with the progress and look forward to providing more detail as this program develops. Additionally, we are continuing active discussions with a number of large rental car companies and expect to sign another tolling program by the contract by year-end. That said, we are not expecting to launch any more pilots in 2020, but instead queue up commitments for 2021 when the industry has a better line of sight into a post-COVID world.

During the quarter, we continued to expand the capabilities of Pagatelia and we renewed an important agreement with [indiscernible], a toll road operator in Spain and Portugal for 7 years.

Our Government Solutions segment reported revenues of $52.8 million and adjusted EBITDA of $22.5 million, both solid improvement sequentially as well as year-over-year. Growth in the Government Solutions segment continued to be driven primarily by the expansion of the school zone speed program in New York City, which included additional product revenue and subsequent service revenue associated with the newly installed cameras.

Our work with the New York City Department of Transportation to execute on the city's expansion of its number of school zone speed enforcement areas continues ahead of pace, and we are pleased to be able to bring this important public safety initiative to fruition even during these challenging times. During the third quarter, we installed 180 cameras and expect to install the remaining 127 in the fourth quarter, which would fulfill the entire order of 720 cameras. We also maintained our consistently high renewal rates again in Q3. During the quarter, we renewed a dozen contracts, including key customer programs in San Francisco; White Plains, New York; and Austin, Texas to name a few. In addition to the renewals, we had a number of program expansions, including an increase in the number of speed cameras in Baltimore, Maryland.

Finally, last month, we announced a partnership with 3 counties in the State of New York to deploy CrossingGuard, our automated stop arm photo enforcement solution for school buses. We are pleased to announce that a number of contracts have moved out of the RFP process and some have been executed. And overall, these contracts cover approximately 2,000 school buses. As we mentioned earlier in the year, we pulled our guidance given the uncertainty of the ongoing impacts to the overall business caused by the pandemic. As noted in our last earnings call in Q2, we engaged a third party to help us better assess and align our internal forecast to critical macroeconomic drivers. We are pleased to be performing ahead of our internal forecast in both business segments, and we will continue to employ this more data-driven view as we navigate the uncertainties caused by COVID.

In summary, the foundation for a thoughtfully constructed and accurate forecast is still challenging, and therefore, we will refrain from offering guidance in the near term, but we can offer some qualitative thoughts on our business going forward. We continue to anticipate a slow recovery in our Commercial Services segment and expect a return to 2019 service revenue levels by late '21 or possibly early '22. The primary cause of this is the reduction in air travel and related rental car volume decreases, both for personal and business purposes. But as these industries return to pre-COVID levels, we should see a correlating increase in our tolling revenue. Additionally, the school environment remains challenged as some schools physically closed, while most others are online or hybrid, and so we would anticipate an ongoing reduction in revenue associated with the school bus programs and variable rate school zone speed programs. We continue to believe our balanced product portfolio provides stability in these uncertain times and for growth in the future.

Before I hand it over to Tricia to walk through the financials in more detail, I want to welcome Patrick Byrne to the Board. Mr. Byrne is currently the CEO of GE Digital, the software division of the General Electric Company. He previously served as the Senior Vice President of Fortive Corporation and previously served as an independent Director of Micron Technology from 2011 until earlier this year. Mr. Byrne's significant technological and operational experience makes him well qualified to serve as a member of the company's Board.

With that, I'll turn it over to Tricia.

[Patricia Chiodo, executive]

Thanks, David, and good afternoon, everyone. I'll provide a more detailed overview of our third quarter financial performance, and then we'll open up the call for questions. We've provided a short earnings deck on our website that provides some insights into the quarter and has some reconciliations from GAAP to the non-GAAP results. If you're following along in the earnings deck, I'm on Slide 2, which outlines revenue and adjusted EBITDA performance for our Commercial Services segment. Total revenue for this segment declined 43% to $44.2 million in the third quarter of 2020 from $77.6 million in the same quarter of the prior year. This business segment derives the majority of its revenue from tolling services provided to rental car companies, which continue to feel the effects of reduced travel due to COVID-19. Although we are still experiencing the impact of COVID-19 on the underlying industries we serve, you can see from the graph on Slide 2 that we have seen increasing month-over-month revenue from April through September. The revenue for September of $16.2 million was more than double the revenue at the April trough. In response to the revenue decline, we took decisive actions to reduce costs, decreasing operating expenses and SG&A by $10.5 million in Q3 of 2020 compared to the same quarter in the prior year.

There are 2 discrete items that impact Commercial Services results in the quarter. As you may recall, last quarter, we reserved nearly $3 million in credit losses associated with the Hertz bankruptcy. We're happy to report that in October, we negotiated a [ pure ] amount with Hertz on the pre-petition receivables, whereby they assumed all our contracts and paid $7.8 million of the $9.5 million past-due receivable. The $1.7 million loss was lower than we anticipated, and the reversal of our credit reserve is reflected in SG&A. Hertz has been paying post-petition receivables timely, and we continue to perform services under our contract. This is a fantastic outcome and highlights the importance of the program to our large rental customers.

Additionally, we recorded a $2.8 million benefit to other income, relating to rep and warranty settlement associated with the 2018 acquisition. The settlement repays expenses we incurred in prior years and should be considered onetime in nature. The combination of these sequentially improving revenue, reduced -- reductions in cost and onetime settlement resulted in adjusted EBITDA for the quarter of $31 million and adjusted EBITDA margin of 70%. Faced with uncertain demand, this business segment has done a great job of creating flexibility in their cost structure and preserving margin.

Turning to the next slide. You see the results of the Government Solutions business. This segment operates photo enforcement programs for municipalities and school districts with end-to-end solutions. Total revenue for this segment was $52.8 million in the third quarter and grew 4% year-over-year from $50.6 million in the third quarter of 2019. As a reminder, total revenue is comprised of service revenue, that's the monthly fees that we generate from the operation of photo enforcement programs; and product revenue, which results from selling and installing camera systems. I think it's important that we talk about these 2 sources of revenue separately.

The service revenue for the quarter was $38.8 million and grew 17% year-over-year from $33.1 million in the third quarter of 2019. Service revenue growth is driven by our expansion of the school zone speed program, which increased by $7.3 million over the same quarter in the prior year. Expanding our speed portfolio will continue to be our focus for the remainder of 2020. And during the third quarter, speed surpassed red-light as our largest product line, representing 45% of the service revenue for the quarter. This growth was offset by the impact of COVID-19, which has halted virtually all of the revenue from school bus stop arm programs. As schools return to in-person learning, revenue should return to this program. We also see lower impact on the number of paid citations for our variable rate clients.

Product revenue of $13.9 million for the quarter declined $3.6 million or 20% from $17.5 million for the same period of last year. We installed 180 cameras in this quarter compared to 176 in the same quarter of the prior year. The decreased revenue resulted from price concessions provided to New York City.

Adjusted EBITDA of $22.5 million increased $2.7 million or 14% from $19.8 million for the same period in the prior year. Adjusted EBITDA margins for this business increased to 43% from 39% in the prior year. We're very proud of the performance of the Government Solutions business during these difficult times. Their work in installing cameras in the back half of 2019 and throughout this year will drive service revenue growth to the high single digits for the full year 2020.

We continue to execute against the existing order of 720 camera systems. COVID-19 has not impacted our supply chain or installation cycle, and we've installed 593 camera systems in this year and expect to do the remaining 127 in the fourth quarter.

Turning to the next slide, we show our consolidated results for the quarter. The combined results of the business segments we just discussed generated total revenue of $96.9 million for the third quarter, a decline of $31.3 million or 24% from $128.2 million in the same period in the prior year. Adjusted EBITDA of $53.5 million decreased by $17.3 million or 24% from $70.8 million in the prior year. Third quarter adjusted EBITDA margins were 55.2%.

Earlier in the year, we initiated cost-cutting measures. We halted investments, cut discretionary spending and reduced our staffing levels to align with demand. These cost control measures, recovering revenue and two discrete events in our Commercial Services segment allowed us to be producing best-in-class margins during the worst of time.

The company reported net income of $6.7 million in the quarter compared to $17.8 million in the same period in the prior year. Adjusted EPS, which excludes amortization, stock-based compensation and TRA revaluation, was $0.15 per share for the current quarter compared to $0.22 per share in the Q3 of 2019. Tax expense for the quarter was $4 million, representing an effective tax rate of 37%. The year-to-date tax rate is 277%, which takes our pretax net income of $1.1 million to a net loss of $2 million. Although the book income is low, there are several large permanent differences such as our TRA expense, disallowed executive comp and disallowed lobbying expenses, which are driving the unusually high year-to-date tax rate.

I want to spend some time discussing our liquidity position. The company generated $21.7 million in cash flow from operating activities during the quarter and $44.4 million for the 9 months ended September 30. This is compared to $95.6 million for the same period in the prior year. The change resulted from the reduction in net income and was further impacted by increased AR. Our current year installations of camera -- or cameras are under a new contract, which due to administrative hurdles has not generated payment. We are hopeful that we will have cleared this process and will start receiving payments in late 2020 or early '21. Given the -- given this headwind, we are pleased with the cash flow generation in the quarter.

Free cash flow, defined as cash flow provided by operating activities less CapEx, was $26 million in the year-to-date period. As of September 30, we had debt of $867.9 million. Net of $129.2 million of cash on hand, our net debt was $738.8 million, which was 3.8x trailing 12-month adjusted EBITDA of $195.6 million. We anticipate being cash -- being free cash flow positive for the year and will have sufficient liquidity to operate the company for the next 12 months and beyond.

As we turn to the future, uncertainty surrounding the global outbreak of the COVID-19 virus, its duration and overall business impact makes it difficult to provide guidance. Our ability to predict travel and rental car demand is limited. And however, we believe that our Q4 service revenue will be in line with Q3. Considering that Q3 has historically been our seasonally high quarter, this is a strong ending to a difficult year and reflects continued recovery from COVID-19 impact. We are very close to completing the New York camera installation and would expect to record product revenue on the final 127 units in Q4. We installed 180 units in Q3, so you should see lower product revenue in the sequential quarter.

In summary, we're pleased with our free cash flow generation despite net working capital headwinds and very pleased with our EBITDA margins of 55%. We continue to believe that Verra Mobility remains well positioned for the long term and has the operating discipline to manage through the current volatility in our business.

And with that, I'll open the line up for questions.

[Operator]

[Operator Instructions] We'll take our first question from Steven Wald with Morgan Stanley.

[Steven Wald, analyst]

Maybe a good place to start is, Tricia, you sort of left off there talking about the trends coming into fourth quarter and expecting to be even with the seasonally stronger third quarter. I'm curious, you can't provide specific guidance, but it sounds like you guys are using some internal work there and what you're seeing in terms of -- I guess, what mechanically drives that? Are we seeing an uptick or behavior shift towards rental cars? Are we seeing a gap out in our performance relative to the rental car industry? I know you were outperforming examples like Avis Budget? And so could you maybe talk us through how you're thinking about that? And the potential for that to maybe not quite come to fruition if we have a second wave impact, how are you thinking about the sensitivity there?

[Patricia Chiodo, executive]

Yes. So what we're -- what we've done is we've looked at those -- we had a third party come out and sort of do their predictions of where rental car demand would come out in relation to airline, travel or revenue passenger miles. We've taken that along with the fact that, David said, we used that forecast for our Q3, and we over performed that. We've taken those trends in what we see our rental agreements from our customers to sort of get a look to what the next 2 months are really going to hold. And based on that, that's where we're coming out. When you think about the overall impact of COVID in closures, you see a lot of Europe closings, but not a lot of closures within the U.S., and we don't think that that's going to have a huge impact, at least, in the next 2 months in relation to that. We have done some analysis over sort of the top 25 airports and what they look like. And when we look at our adoption rate at the combined -- the combination of those airports, it's right around this sort of call it, 46 percentage mark, which we think is very strong and actually fairly consistent with where we were in 2019. So we're holding our fair share of the rental agreements that are coming in. Our product is still being adopted at the same rate, which we view as positive.

[Steven Wald, analyst]

Got it. Okay. That's very helpful to hear. Maybe switching gears to the Government side. It sounds like you had some renewals, you had some incremental ones and you announced the upstate New York counties and pointed to the amount of school buses that, that affects. Any thoughts around some of the other -- or I guess, where we're trending in terms of states like Georgia? I think you guys had previously mentioned some parts of California looking at expanding their map in school zone, and I believe D.C. had passed a mandate, and I wasn't sure if you guys were bidding for that. Or maybe just more generally, could you comment about what you're seeing in terms of movement towards more cameras as states start to look at their budgets coming through the pandemic?

[Patricia Chiodo, executive]

Yes. I don't think we're -- really, our primary focus has been in Georgia and Virginia, which have the newer legislation related to school zone speed. I think what we've noticed is consistent with what we shared in the previous call, which is related to -- the implementation of school zone speed is not the #1 priority for these schools right now. Given the pandemic, they're going to be continuing to focus on the safety of their kids, especially if there isn't uptick in their particular area. And that we would anticipate that that's going to keep things slower than we would like, probably until the first of the year.

[Steven Wald, analyst]

Got it. Okay. That's helpful. And if I could just squeeze in 1 quick one, 1 last one, on the margins. I know you mentioned that it was helped out a little bit by some of the timing or I guess, reversals on some of the receivables that were out of bad debt expense. Obviously, even without that, it would have been somewhat elevated relative to what I think it was back in sort of 2Q or where we were kind of troughing out. I'm just kind of curious how you're thinking about the normalized margin here. Obviously, you took a lot of cost out of the business. But as you think about 4Q, that could be even to 3Q, are we sort of back towards thinking closer to the low 50s than the sort of 40 -- low 40s range that it looked like at the worst of the pandemic condition?

[Patricia Chiodo, executive]

Yes. So we're -- you're talking company as a whole or the segment?

[Steven Wald, analyst]

Yes, I'm speaking more on a consolidated basis.

[Patricia Chiodo, executive]

Yes. If you think about on a year-to-date basis, that -- really it's only that 1 discrete item that matters, which was the settlement that we had for $2.8 million. That's really only like 2 percentage points on the overall margin when you look at the year-to-date basis. So I would think from the -- I'm sorry, in the quarter, it's at 2 percentage points in the quarter. So I think we could move out in the sort of 54% to 55% range. As we move into the -- fourth quarter would be -- still be a strong result for us.

[Operator]

And we'll move next to Dave Koning with Baird.

[David Koning, analyst]

And I guess, first of all, when we look at the Commercial business, can you give us kind of a mix of Q3 revenue by the RACs and then the FMCs? And maybe how close did the RACs kind of mirror the PSA type volumes through the quarter and into October, just as we think of that segment?

[Patricia Chiodo, executive]

So I think the -- well, so the RACs are by far and away, the majority of the revenue that we have within that quarter. So they're the strongest player within the Commercial Services segment. As we look, I think what we're seeing is that we are still outperforming the underlying downturn in rental agreements that our customers are seeing, and that's sort of bolstered up a wee bit from the FMC business that we have there as well. The FMC business is generally fairly a small percentage of our overall business.

[David Koning, analyst]

Okay. No, that's helpful. And then when we just think about the cost in the Commercial segment, it was about $14 million or something around there, which benefited obviously from the items. But when we look at Q4, like, if revenue is just flat sequentially, give or take, that $14 million goes up by how much? How much were those 2 items in total? Is that a good way just to think about just elevate expenses sequentially by those 2 items?

[Patricia Chiodo, executive]

Yes. The 2 items. One of them was $2.8 million, one of them was closer to $1.5 million. So those 2 items would be not reflected in the cost structure again. One of them was in SG&A and the other one was in other income. Sorry, what was the other part of your question?

[David Koning, analyst]

Well, I guess, is it fair -- if in Commercial Services, if the reported expenses were about $14 million in sequentially, if revenue is flattish, let's just say, give or take, I mean, does expenses just go from $14 million up by that $2.8 million that was in the segment? Like obviously, you don't get the reversal again. So do we just move it up by that amount sequentially?

[Patricia Chiodo, executive]

Yes. Yes, you could do that. I'm not expecting any other unusual items coming through in the cost structure.

[David Koning, analyst]

Okay. Good. And great job on cost.

[David Roberts, executive]

Thank you.

[Patricia Chiodo, executive]

Thank you.

[Operator]

And we'll move next to Justine Forsythe from Credit Suisse.

[Justin Forsythe, analyst]

A couple for you here. So first one, I wanted to dig in a little deeper. And I know you mentioned, and I appreciate this that costs in the Government segment, especially related to speed has slowed due to schooling at home or hybrid, as you mentioned. But I just wanted to dig in a little bit more on the RFP process broadly and potential for new wins there kind of out into 2021. I know in the past, you've noted Redflex and Conduent as competitors that you would come up against every now and again. Maybe you could compare and contrast what they do? Are they even in speed? Or are you competing with them solely in red-light? Who do you come up against? Why do you win? Is it through violation rate? Or is it something else that that drives that maybe on the cost side? Or if you could just unpack that a little more.

[David Roberts, executive]

Yes, sure. So when we compete -- no, both of those competitors offer the capabilities of new programs like we do. There are other companies as well, smaller companies that operate in the category in photo enforcement. When you win an RFP, it's going to be a combination of a couple of different things. One is your reputation and your ability to deliver and the ability to have referenceable clients that can say that you do a good job. Two is going to be the efficacy of your technology as well as the price value equation. So I think in general, we have a great reputation with our clients. We deliver really strongly. Our speed cameras are the best -- are best-in-class. And so that often wins as well, meaning that we have a higher violation throughput than some of our competitors. And those would be the kind of the standard reasons that we would win.

[Justin Forsythe, analyst]

Got it. Super helpful. And on length of those contracts, are they typically 3 years? I'm trying to remember.

[David Roberts, executive]

They could be 3 to 5 years. It just depends on the municipality. They will often have sort of automatic renewals if the city chooses to use them. So they could be a little bit longer. But 3 to 5 years is kind of the average across our portfolio.

[Justin Forsythe, analyst]

Got it. Got it. And I know you said that there, a lot of talks have stalled, and you mentioned some renewals, some new wins. Is there -- despite that, is there anything in the pipeline that you see coming through, whether it's in Virginia or Georgia? Or is that largely put off until sometime in 2021?

[David Roberts, executive]

Yes. There are several RFPs that we've responded to primarily in Georgia because that's a little older than the other. But -- so -- but again, I think the decision-making in terms of when they're going to install and/or perhaps complete RFP -- the RFP process have been delayed. And again, right now, it's just not there -- it's not the top of their priority list to finish those off given the challenges that they're facing in terms of operating schools.

[Justin Forsythe, analyst]

Perfect. No, that's great. And just 1 more if I could squeeze it in on the Government segment here. Given the election and all of the stuff that's happening over the last few days, I just wanted to ask if there's anything on the ballot. I know red-light in Miami and Texas has seen some upheaval. I don't know if there's anything that's specifically on the ballot with regards to any of your government programs or if there's any, call it, flipping of state houses or things that you might have on the radar that could go either in your favor like a speed legislation bill or maybe additional toll roads or something like that or negatively?

[David Roberts, executive]

Yes. In general, the photo enforcement legislation doesn't happen during a primary election. It's going to be usually connected to once a session is in. We haven't fully embedded the -- given that the election was just Tuesday, we haven't sort of looked at the shift of members in each one, but we don't anticipate any material changes to our relationships with each of the states with which we work. So we would imagine pretty much steady as she goes.

[Justin Forsythe, analyst]

Got it. Got it. And 1 final one. I know you mentioned something regarding the Hertz relationship and then paying off that receivable. That's obviously amazing news for you guys. I think I heard you mention that the lag in payment was impacting revenue. Can you unpack that a little bit? Because I would be thinking kind of once you recorded the revenue, meaning once the rental agreement has happened that, that would hit revenues. So I was thinking that would maybe just be a cash movement thing instead of a revenue thing, but I love hear a little more on that.

[Patricia Chiodo, executive]

Yes. No, so there's nothing that has -- is happening with Hertz that's impacting revenue. So we've recorded the revenue. We had pre-petition receivables that were caught up in the bankruptcy. We were able to negotiate a cure through the bankruptcy court on that, where they assumed our contracts, and assuming they have the option to assume or reject contracts during bankruptcy court. And one of ours is the ones that they assumed and they assumed early. And I just think that, that just proves out the value proposition that we have to these large rental car companies. What you may be talking about is that we have a headwind in our net working capital, where we have a large contract, where we're not currently getting paid due to some administrative hurdles. Once again, that's not impacting revenue, it's impacting cash flow.

[Operator]

Next, we'll move to Dan Moore with CJS Securities.

[Stefanos Crist, analyst]

This is Stefanos Crist calling for Dan. So first, Avis recently reported a very nice earnings, but I also believe they reported a 30% reduction in their fleet. So really, the question is as demand recovers in your experience in prior downturns, how quickly are the RACs willing and able to expand their fleet? And is there typically a lag between a recovery in demand and then the overall fleet?

[David Roberts, executive]

Yes. Okay. Yes. I mean I think there's always going to be a lag because I don't think that they're going to be overly aggressive to put new cars in until they figured out what the demand curve is. And I certainly wouldn't say that we've been through a cycle that looks anything like COVID-19. But you did see just recently that Hertz even acquired, I think, debtor-in-possession financing related to expand their fleet. So they're putting their eyes on growth and putting new vehicles in as they also dispose of older ones. So I think it's going to be a little bit of TBD, but it's probably -- from the time they start to say, OEM, I'd like some more vehicles, it's probably about a 12-week turnaround.

[Patricia Chiodo, executive]

And they will expand their utilization of their existing fleet first. And then once that utilization hits threshold, they'll be able to buy and get new fleet to continue to expand.

[Stefanos Crist, analyst]

Got it. And then one more, if you don't mind. I believe on the last call, you said you expect volumes to return to pre-COVID levels on a run rate basis exiting '21. Is that still your expectation? And what gives you that confidence?

[David Roberts, executive]

Well, as we've said, these are definitely moving targets. That's based upon kind of what we're seeing now, and it certainly has some asterisks by it, which are the availability of a vaccine, sort of overall adoption of that comfort level and those things would be consistent. So it may -- as I said earlier on the call, it could be the end of '21, but it could also be the first part of '22. But -- so there is some definite flexibility in there.

[Patricia Chiodo, executive]

Yes. And I think a lot of those words are really just designed so that people don't have an idea that it's a V-shaped recovery that is going to look more like a Nike Swoosh, right? It's going to take us a while to return.

[Operator]

And we'll move next to Keith Housum with Northcoast Research.

[Unknown Analyst]

This is Trevor filling in for Keith. With the European business, could you provide an update on the efforts to expand the tolling business into Spain, Portugal and Italy with the Pagatelia acquisition? And what is the current status there? And how has the COVID pandemic impacted all of that?

[David Roberts, executive]

Yes. I mean, as we said in the call, a lot of our efforts there have been slowed significantly. The -- if you just look currently in Europe, they're shutting it back down again, in particular, in places like France and the U.K., and it's starting to spread across Europe. So what we had said in the call was that it was going to be -- it's slowed everything down. We are still in the process of expanding the frac implementation -- excuse me, the RAC implementation side of France as well as we're continuing to have good dialogue, but we would not anticipate -- we're hoping to sign some agreements that we would do pilots in the early part of next year, preferably Q1, but that's -- so we don't anticipate any pilots to be launched this year.

[Unknown Analyst]

Okay. Great. And then 1 last one. With New York City, has Verra been engaged to install any speed zone cameras in 2021? And if so, how many?

[Patricia Chiodo, executive]

Yes. We don't -- we currently don't have another, what they call, notice to proceed, which you can sort of equate that to a purchase order for the 2021 cameras. I don't know -- our expectation was that we'd have that before we finish the current order we're working on.

[Operator]

That does conclude our question-and-answer session. At this time, I'll turn the call back over to our speakers for any final or additional remarks.

[David Roberts, executive]

I think we're done.

[Patricia Chiodo, executive]

Yes, I think...

[David Roberts, executive]

I think we're done. Thank you.

[Patricia Chiodo, executive]

Thank you, all.

[David Roberts, executive]

Thanks, everyone.

[Operator]

Well, thank you. That does conclude our conference call for today, everyone. Thank you all for your participation. You may now disconnect.