WEX Inc. (WEX) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the WEX Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to Steve Elder, Senior Vice President of Investor Relations for opening remarks. Sir, you may proceed.

Thank you, operator, and good morning, everyone. With me today is Melissa Smith, our Chair and CEO; and our CFO, Roberto Simon. The press release we issued earlier this morning and a slide deck to walk through our prepared remarks have been posted to the Investor Relations section of our website at wexinc.com. A copy of the release and the slide deck have also been included in 8-Ks we submitted to the SEC. As a reminder, we will be discussing non-GAAP metrics, specifically adjusted net income attributable to shareholders, which we refer to as adjusted net income, or ANI, during our call. Adjustments for this year's third quarter to arrive at these metrics include unrealized gains on financial instruments, net foreign currency remeasurement losses, change in fair value of contingent consideration, acquisition-related intangible amortization, other acquisition and divestiture-related items, stock-based compensation, other costs, debt restructuring and debt issuance cost amortization, ANI adjustments attributable to noncontrolling interests and certain tax-related items. Please see Exhibit 1 of the press release for an explanation and reconciliation of adjusted net income attributable to shareholders to GAAP net income attributable to shareholders. I would also like to remind you that we will discuss forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our annual report on Form 10-K for the year ended December 30, 2020, filed with the SEC on March 1, 2021, and subsequent SEC filings. While we may update forward-looking statements in the future, we disclaim any obligations to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. With that, I'll turn the call over to Melissa.

Thanks, Steve, and good morning, everyone. Thanks for joining us today. Before diving into our Q3 results, I want to thank our incredibly talented team around the world for their hard work and unwavering commitment to delivering value to our customers and partners. Despite the ongoing challenges of COVID, our team delivered another quarter of impressive performance. Turning to our results. Continued platform innovation and successful execution drove 26% year-over-year revenue growth, supported by double-digit increases in each segment. The top line performance also reflects 5% sequential growth versus Q2 as we continue to capitalize on positive trends across the business. Excluding the benefits of higher fuel prices and favorable foreign exchange rates, revenue growth was up 17% compared to Q3 2020. Total purchase volume processed across the organization in the third quarter grew 93% year-over-year to $26 billion, which is a record for the company. As customer spend patterns improve, mobility rebounds and we continue to win in the marketplace, our outlook remains very positive. This strong revenue growth, coupled with our ongoing commitment to scale our platform and realize operating efficiencies drove year-over-year and sequential adjusted earnings growth of 54% and 6%, respectively. Let me take a moment to unpack 2 of the key drivers that are supporting our strong year-over-year and sequential growth. First, customer spend patterns continue to rebound from the lows of last year. For example, we see a significant increase in travel-related volumes in Q3, which increased 85% from Q2 and were nearly 6 times last year's level. We're also seeing a rebound in mobility, leading to higher volumes for our North American fleet customers as more offices reopen. Second, we continue to win in the marketplace. During the quarter, we signed one of the largest U.S.-based multinational corporations specializing in package delivery, transportation, e-commerce and business services. This new customer made the switch to WEX because of our ability to deliver our unique platform, combined with industry-leading products for both over the road and local vehicles. We also continue to have great growth for smaller and midsized fleets. The new marketing technology stack, which includes a cloud-based digital marketing engine, targeted at acquiring small business customers, is proving very effective and resulted in a 94% increase in new North American fleet customers through September compared to the same period last year. We started expanding this marketing engine to other parts of the business to support improved conversion rates and increased customer engagement in the European region. Within health, we had a key win with a large higher education institution, encompassing the WEX benefits platform for CDH and COBRA administration as well as our fully outsourced benefit administration platform and services. This institution chose WEX to help drive employee engagement and deliver a world-class experience to their multigenerational workforce. I'd also like to note the signing of Stampli an AP automation company based in Silicon Valley and a member of the Fintech 250 with more than $20 billion of accounts payable under management. They chose WEX to the versatility and reliability of our platform as well as our payments expertise. The time of contract signing to the first transaction issued was only 2 weeks, showing the speed and ease of integrating with our technology. As we grow our addressable market, this strategy has resulted in strong market share gains and high customer retention rates. Through innovative technology and outstanding customer service, WEX provides a world-class digital experience that is resonating in the marketplace and underpinning our impressive results. We are nearing completion of moving the corporate payments card issuing technology to the cloud. This will complete having all pieces of the corporate payments platform in the cloud. Our cloud-first strategy remains core to our ability to quickly scale the business and drive profitable growth. This is also a significant step in completing the integration of eNett and Optal and allowing us to combine the platform. The strategic investments we've made over the past few years to sunset legacy platforms and expand our modern commerce solutions are paying dividends, increasing the breadth of our core B2B e-commerce offering and deepening our customer reach. Regardless of size or scale, payment ecosystems can be complex, which is why we work to seamlessly integrate into our customers' workflows and create an intelligent, secure, highly scalable and resilient infrastructure. With rapid expansion and adoption of the digital economy, our proven infrastructure enables customers to access our full suite of capabilities, including digital custom integrations, which simplifies and streamlines the user experience. We're investing ahead of our customers to anticipate their needs, which will contribute to our next wave of growth. An example of how we help simplify payments for our customers is the ease in which they can integrate our embedded payment technology and customize it to their workflows, meeting their needs for secure frictionless integration. This, coupled with our deep sector experience, made these types of transitions seamless for our customers. Beyond integration, we are maximizing the value of payment optionality for our customers by introducing new flexible rates, expanding the number of merchants willing to use the product. This service is a win-win for our customers and WEX. This simplifies the payment process for our customers and allows WEX to capture new spend opportunities. This is another example of how we work with our customers to offer solutions that meet their needs. The breadth and reach of our offerings make us the premier choice for B2B commerce. This is why we continue to win customers like AvidXchange, where we are now live with transactions. Another great example of the development of our tech platform is what we're doing to support electric vehicles. From our perspective, we believe the EV market opportunity for WEX is significant over the long term in that we are well positioned to support our customers through the transition. As our customers begin to transition parts of their fleet to electric vehicles, WEX will be ready for them, anticipating their needs. We will simplify the added complexity that is coming their way with mixed fleets, expand options to charge at home, solve as they need for data-driven solutions, reporting, benchmarking and payment systems. Our customers will need tailored solutions from a trusted partner. They will need support to meet their goals around carbon reduction and understand the total cost of ownership as well as the energy efficiency and cost savings of EVs. In addition, we will use our unique scale and purchase volumes to create further incremental value for our clients. Doing so will open new opportunities for WEX to continue to gain market share and to build on our unique and highly defensible position. One more example of progress in this space is the Element Fleet announcement earlier this month. Element is the largest pure-play automotive fleet manager in the world and will use the combined offerings from WEX and ChargePoint to serve its customers. WEX's technology and consolidated data will be integrated into Element's analytics and dashboard programs. This is a great demonstration of companies working together to meet broader environmental goals for fleet electrification. In the longer term, our customers and partners are looking to us as their trusted partner to provide solutions for the future. We are actively developing new integrated payment products to better serve fleet managers and remain their trusted partner for future solutions. We plan to develop additional products and related services as the market is further defined and expand. For example, given our market presence, we are exploring how WEX can further play a role in the reduction of carbon emissions or benchmark in the efficiency of an EV versus a gasoline-powered vehicle through reporting and benchmarking, which can also open up new revenue opportunities. Beyond positioning us for long-term growth in the EV space, we are proud to support the transition to electric vehicles, which has the potential to bring important benefits for the environment and for future generations to come. Lastly, I would like to highlight our efforts to increase penetration of HSAs by educating health care consumers at our National Health Savings Account Awareness Day held earlier this month. There are an estimated 31 million HSA accounts with significant growth projected over the next 3 years. HSA Day is an opportunity to explain the benefits of using an HSA to increase their buying power and plan for unexpected health-related expenses, leading to better health care outcomes. We all know that health care costs are top of mind for most Americans, and our goal is to help educate consumers at various life stages. For example, we have targeted information for young people just starting out about how an HSA has benefits to go well beyond covering health care costs. For this demographics, in particular, with benefits like triple tax advantages and investment accounts, an HSA can be a way to supplement both health care savings and retirement investment. Beyond end consumers, we are focused on helping the companies we work with to provide education, tools and resources to their employees so they can use health products to help alleviate rising health care costs and reduced income inequality. As we look ahead, the future is very bright for WEX. Strategic investment in innovation, combined with our customer-centric culture, has positioned us to continue to grow and capture market share. As volume continues to rebound and we leverage our best-in-class growth engine, we remain confident in our ability to achieve our long-term growth targets of 10% to 15% revenue growth and 15% to 20% growth in adjusted net income per diluted share. We remain committed to innovating across our technology platforms, accelerating our digital transformation and delivering tailored solutions to fit our customers' needs. To that end, we must continue to evolve our organization to ensure we are best positioned to capitalize on the tremendous opportunity that lies ahead. As you may have seen this morning, we announced some changes to our executive leadership effective on January 1 to align our teams to enable us to better serve our customers by offering a truly integrated solution across the entire WEX platform. These changes will allow us to move our business closer to our customers' needs and preferences, keep our individuality and what makes our products special and unique while sharing best practices and create a stronger go-to-market approach. Our goal is to create deeper customer relationships by offering them a one-touch experience as they make decisions across their entire product portfolio. I am confident that these changes will allow us to secure our next phase of growth and better position us to achieve our strategic priorities. We're excited about the growth opportunities that this will drive across the business and the value it will ultimately unlock for our customers, shareholders and other stakeholders. I look forward to continuing to update you on the success of our strategic initiatives and our expectations around the long-term impact they will have on the business. To that end, we're planning to hold an Investor Day in March of 2022. We will provide more details in the coming months. In closing, I'm incredibly proud of our team's performance this quarter. As I've discussed time and again, WEX's people and culture are a significant differentiator and have proven to be a key competitive advantage as we navigate the current environment. We'll build on this momentum and will continue to drive long-term shareholder value while supporting our employees, partners, customers and communities across the globe. With that, I'll turn the call over to our CFO, Roberto Simon. Roberto?

Thank you, and good morning, everyone. As you've heard from Melissa, the third quarter results were really solid, building upon momentum we saw in the year's first half. We had another record-breaking quarter with revenues surpassing the previous high by more than $20 million. The company's position for long-term sustainable growth, remaining agile in adapting to customer needs, effectively integrating acquisitions, driving innovation across the technology platform and scaling the business. Starting with the quarter results on Slide number 10. For the third quarter, total revenue exceeded the high end of expectations mainly due to better-than-expected volumes in the fleet and travel businesses. Total revenue came in at $482.8 million, a 26% increase versus Q3 2020. From an earnings perspective, on a GAAP basis, we had a net income attributable to shareholders of $48.3 million. Non-GAAP adjusted net income was $111.1 million or $2.45 per diluted share. This represents a 54% increase versus prior year, driven by higher revenues as well as robust adjusted operating income margin that I will discuss later. Turning to Slide 11. I'm breaking down the revenue by segment. Fleet Solutions grew 25%. Travel and Corporate Solutions posted a 42% increase. And finally, Health and Employee Benefit Solutions was up 18%. Now let's move to segment results, starting with fleet on Slide number 12. Total Fleet Solutions revenue for the quarter was $286.4 million, a 25% increase versus prior year, powered by strong volumes from new customer wins and renewals, higher fuel prices and the recovery in the existing customer base. Payment processing transactions were up 11% year-over-year. Over-the-road transactions maintained their strong growth up 17%. North American fleet was up 11%, and the international fleet business was up 4%. The net late fee rate decreased to 45 basis points in comparison to 48 in Q3 2020, continuing the trend of customers paying their bills on time. On the other hand, finance fee revenue was up 46% due to significant increases in volume and fuel prices. In fleet, the average domestic fuel price in Q3 2021 was $3.23 versus $2.23 in Q3 2020. This increased fleet revenue by approximately $39 million and was partially offset by lower European fuel price spreads. Turning to Travel and Corporate Solutions on Slide 13. Total segment revenue for the quarter increased 42% to $91 million. Additionally, purchase volume issued by WEX was $12.8 billion, continuing the sequential improvement since Q2 2020. Travel-related customer volume represented approximately 70% of total expense. Breaking revenue down, corporate payment customer revenue was up 17%, led by continued strength in the partner channel. Revenue from travel-related customers was up 153% versus Q3 2020 and also up 70% sequentially, reflecting seasonality, increasing demand and a significant contribution from eNett and Optal. We are pleased with these results and are well positioned to capture future growth as the travel industry continues its global recovery. Finally, let's take a look at the Health and Employee Benefit Solutions segment on Slide 14. We continue to drive a strong growth, resulting in Q3 revenue of $105.4 million. This represents an 18% increase over prior year and 27% versus 2019. The acquisition of Benefit Express contributed approximately $9 million in revenue, offset by approximately $2 million from Brazil which was divested at the end of Q3 last year. SaaS account growth was 16% in Q3, including new accounts related to Benefit Express and the temporary COBRA accounts we discussed last quarter. For the fourth quarter, the COBRA accounts will fall off as we are transitioning back to employment-related growth. Now let's move on to expenses and adjusted operating income margins on Slide number 15. For the quarter, total cost of service expense was $179.9 million, up from $156.9 million in Q3 last year. Total SG&A depreciation amortization expenses were $202 million, which is up $25 million. In the fleet segment, adjusted operating income margin for the quarter was 50.6%, compared to 44.7% in 2020 and 48% in 2019. This is the second consecutive quarter with fleet adjusted margins higher than 50%. The increase reflects revenue growth, higher fuel prices and the scale in the expense base. Of particular note, credit loss in the segment continues to be low at 5.9 basis points of spend volume, compared to 10.8 in Q3 prior year. Travel and Corporate payments delivered adjusted operating income margin of 34.1%. There has been steady improvement in the adjusted margin this year, starting with the 10% in Q1, 21% in Q2 and now 34%. As expected, we continue to see high drop-through of revenue increases as the cost base is primarily fixed and continue to see benefits from the eNett and Optal synergies. So far, we have implemented approximately $30 million of run rate synergies. The remaining $10 million of the $40 million target relates to platform consolidation and back-end processing. In the health segment, adjusted margin was 22.6% compared to 26.7% in 2020. It was down mostly due to the acquisition of Benefit Express and the timing of certain expenses. Finally, for the total company, adjusted operating income margin was 37%, which is up from 32.8% last year and up 70 basis points compared with Q2 this year. Let's discuss taxes on Slide 16. On a GAAP basis, the effective tax rate was 27.2% compared to negative 59.8% for the third quarter of 2020. On an ANI basis, the tax rate was 25% for the quarter and 23.4% for Q3 prior year. Changing gears now to Slide 17, I will provide an update on the balance sheet. We remain in a healthy financial position and ended the quarter with $533.8 million in cash, which is down from $852 million at the end of 2020. From a liquidity perspective, WEX got over $665 million of available borrowing capacity and a corporate cash balance of $145 million, both as defined under the company's credit agreement. At the end of the quarter, the total outstanding balance on the revolving line of credit, term loans and convertible notes was $2.9 billion. The leverage ratio as defined in the credit agreement stands at 3.7 times, which is level with the end of 2020. We will continue to take advantage of the free cash flow generation to reduce leverage until it is within the long-term target of 2.5 times to 3.5times. Once that level is reached, we will evaluate all opportunities to deploy capital. To close out the call, we are extremely satisfied with the third quarter results, which positions us for continued success. Revenue and earnings guidance for the fourth quarter and the full year are on Slide 18. However, before I get into the specifics of guidance, I want to note that we have renewed the contract of a significant corporate payments partner in Q4. This new contract will alter the accounting presentation from gross revenue recognition to net with a corresponding change in sales and marketing costs. There is no material impact on earnings from this change, but several of the segment metrics will change going forward. For Q4 2020, these have resulted in a reduction in both revenue and sales costs of approximately $15 million. In addition, although domestic fuel prices have increased significantly, we are expecting the benefits to be tempered by Express in Europe. All of this is reflected in the numbers I am about to give. Starting with the fourth quarter, we expect to report revenue in the range of $468 million to $483 million and adjusted net income in the range of $102 million to $111 million. On an EPS basis, we expect adjusted net income to be between $2.25 and $2.45 per diluted share. For the full year, we expect to report revenue in the range of $1.82 billion to $1.84 billion and adjusted net income in the range of $400 million to $409 million. On an EPS basis, we expect adjusted net income to be between $8.81 and $9.01 per diluted share. Now let me walk you through a few more assumptions. Exchange rates are based as of the end of September 2021. We estimate domestic fuel prices will average $3.45 per gallon for the fourth quarter and $3.12 for the full year. Both are based on the NYMEX future price from last week. The adjusted net income tax rate is expected to be between 24.5% and 25.5% for the fourth quarter and the full year. And finally, we are assuming approximately 45.4 million shares outstanding. And with that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Mihir Bhatia of Bank of America.

I wanted to just start with the interchange rate, I guess, in the corporate payment section. I imagine some of that is just being driven by the mix shift towards travel. But can you maybe provide a little bit more color on where you expect that to be? Because just last quarter, when we talked about this, the view was it should start stabilizing from here in the back half of the year. So just trying to understand what the drivers of such a big decline this quarter and your expectations for next quarter.

Yes, of course. So if you recall what we have discussed for 2, 3 quarters now, the rate is very much impacted by different reasons. But the most important one is, if you look where we were in Q1 this year, our travel-related customer volume was 40% of the segment in Q2 went up to 55% of the segment. And in this quarter, it's 70%. So as you can imagine, because the travel rate is much lower than the corporate payments one, it has a material impact on the rate take overall. The second thing is, as you know, as the customers and the volume increases, we also have some tier rebates that may kick in. So you see that from Q2 to Q3 we have improved travel volumes almost $7 billion. So that's also a very material component. And then what I would say to you is, if you think going forward, as we go into Q4 and into next year, I'm going to pro forma, what I'm going to say to you because, as you can know, we have renewed 1 contract with a corporate payment customer that will change the accounting presentation from gross revenue into net revenue. But if you pro forma for that, the Q3 and we go into Q4, the numbers are going to be very similar. And the last point I would say is, if you compare just the travel rate from Q2 to Q3, is just slightly higher. You don't see it on the overall because of all the reasons I said. But from Q2 to Q3, you see a slight improvement.

Can I just go back to the contract when you proforma? I guess I just want to make sure I understand exactly what you're saying. And can you provide a little bit more color there? Just trying to understand exactly what -- I mean, I understand what's happening with the contract where -- you're moving from gross to net to gross? I'm trying to more understand the impact on the rate and what you -- how that is affecting the rate next quarter.

Yes. So if you recall three years ago, we went through the revenue recognition changes. And through that process, some customers and some contracts that we had with some customers, we moved them from net revenue presentation to gross revenue presentation. Through the process of renewing a contract with a significant corporate payment customer, we have changed some of the clauses in the contract, and now the presentation is going to be net revenue. If you look on the appendix of our presentation today, which is on Page 20, what we have shown there is the pro forma -- all the pro forma of the KPIs and metrics for the segment year-to-date September with and without the pro forma adjustment. So if you look at the year-to-date numbers, the rate is down from 74 basis points to 55 when you pro forma that customer. So that's a 19 basis point reduction just by changing the classification from gross revenue into net revenue. The revenue goes down approximately $55 million. Operating expenses go down the same and operating income is exactly the same with an improvement in margin.

Understood. So that is -- and then because -- just my last question, just because Q4, you have proforma this into your Q4 guidance, fair to say, if this change had not happened, your Q4 revenue guidance would have been materially higher than -- well, if we take last quarter's numbers, $15 million higher last year numbers, you know right?

That is correct. Yes. So if you think about our Q4 guidance, we increased the midpoint $10 million. If we wouldn't have had the accounting change, it would have been $25 million, yes.

Your next question comes from the line of Ramsey El-Assal of Barclays Capital.

I was wondering if you could give us a little more color on the new deal win you mentioned, the large multinational corporation package delivery, e-comm. Is that an impactful deal in terms of we should be thinking about maybe like a timing and magnitude of a P&L impact? Or is it not sizable enough as to where it would be something that you would want to carve out or call out?

It is a direct customer on our fleet business. And so we'd like to talk about some of the larger deals that we signed. It's not the same magnitude of what you see as we sign a partner relationship that -- where you're getting a bunch of customers bundled together. We're proud of the win. We think that it adds to hitting our overall growth objectives, but I wouldn't say that you actually do anything specific for that one customer.

And Roberto, could you help us think through the -- and you gave us some good color on this already, but through the health segment, SaaS accounts sort of cadence understanding that COBRA accounts will roll off next quarter. How should we think about that in terms of both the revenue impact as well as sort of going forward just in terms of the cadence of those customer adds? Should it grind higher after Q4? Or how should we think about that?

Yes. So if you recall earlier in the year on the health segment, we guided an organic growth of 8% to 12% for 2021. And if you think where we are today year-to-date and with the guidance that we have provided for Q4, we are going to be in the middle. So it's going to be plus/minus 10% growth organically, which if you think how the industry has been doing in the year, we have to be really satisfied with that. On the SaaS accounts, so we reported 16% this quarter. Obviously, you have some noise on the acquisition of Benefit Express, which added approximately 500,000 accounts. And then the temporary accounts from COBRA that we added last quarter. As we sell last quarter, those COBRA accounts are going to tail off as we get to the year-end. But at the same time, we are going now through the enrollment season. And obviously, as we end the enrollment season, we are going to see some of those COBRA accounts or the COBRA account is going to disappear. But at the same time, we're going to be adding new SaaS accounts. So I would say to you that, if you think going into Q4 and then into next year, we should see growth rates similar to what we have experienced now in the past temper, obviously, for the growth rate that has been changing in the market.

Your next question comes from Georgios Mihalos of Cowen.

Just wanted to ask, as it relates to the fourth quarter and the corporate and travel business, obviously, I think you said this quarter, it was sort of 70-30 volume skewing towards travel. If I'm not mistaken, I think we talked about fourth quarter being kind of somewhat more similar in terms of the split -- excuse me, similar, more even in terms of the split. Any updated thoughts as to how we should be thinking about that?

Yes, of course. You know that, on the travel side, there is seasonality and Q3 is on the seasonality side is the highest. So you can see that on our reported numbers in this quarter with $12.8 billion of spend being almost $9 billion from the travel side. As you move into the fourth quarter, the seasonality tails off on the travel side, so we should expect the volumes from travel to compress because of the seasonality is still growing very nicely compared to last year, but compressed from a percentage, from a mix point of view in the segment. While at the same time, we expect the volumes from corporate payments to stay similar, if not higher than Q3. And obviously, still a nice growth from 2020 from Q4. So I would guess, if we had 70-30, this is going to go down to, say, between 60% and 65% on the travel side.

And if I could just sneak 2 more in. One, I'm just curious on the corporate payments business, if you're starting to see any sort of impact from supply chain disruption, if that is having an impact on some of your customers. And then related more long term to capital allocation, I understand you're still looking to delever here, but any updated thoughts around kind of perhaps more aggressively returning capital to shareholders? Just given the current valuation and the pressure we've seen on the stock recently.

I'll take the first one of those, and I'm sure we'll go tie in together on the second one. So supply chain is interesting because it's affecting our customer base disproportionately -- to talk to our customers in the over-the-road part of our business, it certainly had an impact and a pretty material impact on their business, a little bit less so across other categories. But again, then it gets pretty specific. We do business with companies that sit in so many different categories that it's disruptive to some, but not across all. We do also hear from our customers really across all categories and concerns around wage increases and labor shortages, and that's impacting businesses across really almost every category. And -- but corporate payments, specifically, it's not one of the major trends that we're hearing from that customer base. But again, it becomes specific to the type of customer. In terms of return of capital, Roberto said this in his prepared remarks, but we're still above our long-term leverage targets. And so our focus at the moment is to continue to pay down our debt, but we will continue to explore the best use of capital across the enterprise, like we have historically in our conversations with our Board.

Your next question comes from James Faucette of Morgan Stanley.

Can I just follow up quickly for clarification on the leverage point. So it sounds like you're looking to actively pay down debt, not just reduce the ratios via earnings growth, and make sure I understand that correctly. And my kind of more specific question is, from a segment perspective, particularly on travel and corporate pay, you seem to do quite well. I'm wondering how we should think about operating margins and where those are likely to settle out going forward. And has there been a structural growth element through the pandemic that should we expect that segment to settle at a higher growth rate than maybe we've seen previously? Just trying to get a sense for where that could end up, especially given how well it's done.

I'll start. On Travel and Corporate Payments across that segment, one of the things that we've talked about is the fact that when we added eNett and Optal and we picked up a number of redundant costs, and we've gone through a lot of effort to consolidate and integrate those businesses into WEX and at the same time making sure that we're taking care of our customers and we're focused on growth over the long term. So Roberto talked about the $30 million of run rate synergies we've had so far. We, again, expect to have $10 million more. And so that business, and you can see it coming through quarter-by-quarter as we've gone through the integration process. And at the same time, we've got the benefit of having a highly fixed cost structure, which was not helpful last year. It's been actually quite helpful this year and helpful going forward as we see volume coming into the business. It is affecting the margin and the margin profile positively. And we think that, that trend is going to continue into next year as we see more volume rebound within specifically our travel business, and we continue to grow our corporate payments business.

And then your other question was around leverage ratio, if I recall properly and do not pay down debt. So as you know, we are a high-growth company. We manage leverage ratio. The leverage ratio can be reduced or increased now both with earnings or with the amount of debt. If you look at what we have seen from Q2 into Q3, obviously, earnings are improving significantly. And at the same time, our total debt is down. Where we want to be is within the range and making sure that we have enough free cash flow so we can alleviate and have as much liquidity as possible. And then when we get to the point where we are between the 2.5 times to 3.5 times, as Melissa said, we are going to be exploring like we have always done any opportunity in front of us, from M&A point of view, from a return to shareholders, anything that is available, thinking, obviously, on the short and on the long term.

Your next question comes from Andrew Jeffrey of Truist Securities.

Melissa, a point of clarification in the Travel and Corporate Payments segment. Did you note that supply chain is perhaps affecting corporate payments volume? I think Roberto said was up 17%. I just want to understand if that number is being depressed by macro.

I wouldn't say that -- from our conversations that we're having with our customers, that's not like a prevailing conversation that we're having. But again, it gets pretty specific within customer categories. And so if you look at the growth of the business and how we're continuing to build, we're continuing to add on new customers and partners. And we talked specifically about the fact that we're starting to see transaction volume with AvidXchange. We've gone through that implementation, and we expect that to ramp. And so some of what you see for growth year-over-year depends on when things are signed when they're ramping in that portfolio. But I wouldn't say that there's been a significant overhang from a supply chain perspective within that part of the business.

So it sounds like that could accelerate with some of the new implementations. And then I wanted to ask specifically on the Stampli deal. Can you elaborate, is that a V card issuing deal? And who are the competitors in those RFPs? Are you seeing the cloud-native providers? How would you frame up your position in the industry?

Well, I would start with saying that when we're going into that business, we're providing a cloud-native offering. It's something that we have -- that we've built across the business. And so we feel the technology that we have can compete with anybody else out there in the marketplace, with also a really great history from a reliability standpoint. So I'd start with that. But as we're going into these portfolios, that was an example of something where we're doing embedded payments, which we do across a number of categories in that customer base. They are using our virtual card technology, our card technology capability. And so I think of competitors being -- there's a wide number of them, all names I'm sure that you're aware of. It's a highly competitive process whenever we're in there bidding and winning these businesses.

Your next question comes from Tien-Tsin Huang of JPMorgan Chase.

Melissa, I think you were talking about some pricing initiatives for modernizing pricing in corporate payments, I think you were talking about it sort of in the -- along the same lines as modernizing platform and moving to the cloud. So can you just maybe elaborate on that and what that means for your front book as well as your back book pricing-wise?

I think that, Tien-Tsin, think what you're referring to in the prepared remarks, we talked about introducing a new piece of technology to our customer base where we can give variable rates to the merchants. That's probably what you're referring to. And so -- yes, and that is really what we're doing is expanding merchant acceptance and allowing people to purchase through different schemes or products that we're using. And again, this is within corporate payments. I wouldn't refer to it as pricing modernization. It's more around increasing acceptance and so that we can have more volume pushing through the network. And as part of what is interesting when people come and want to partner with WEX, the ability to extend that network and network of offerings is part of the advantage. And so this is more important of our ability to sign new partners and the partners to be able to push through more volume across the business than -- I wouldn't describe it as pricing modernization. I describe it as product expansion.

Yes. Forgive me for that. So it sounds like it's for supplier recruitment and partner recruitment, this is a way to accelerate.

Large-ticket items. And so specifically, when you get into kind of some of the niche payments where you might not get acceptance, it allows other optionality for our customers.

Understood. Sorry if I misunderstood it upfront. Just on the -- I know George and others have asked about supply chain and driver shortage and whatnot. Is there a way to quantify that because we're getting questions about how to maybe frame that and consider the pluses and minuses there?

Yes. On the fleet part of our business, we were -- we would hear that, again, if you think across the category, for their over-the-road customers, this is something that we definitely are hearing from that customer category. And it's really affecting the ability for them to move goods. Goods are coming across in very expensive ways and unpredictable ways, and so that's definitely affecting the over-the-road part of our business. I'd say, again, the issue there is compounded by underemployment. We've got drivers that have moved from over-the-road into local categories. You've had a number of drivers that have chosen to retire. And so across the business, when we talk to customers, we hear more about that as a fundamental issue underemployment and the ability to recruit talent to meet the needs and the demands that they have in their businesses as more of a systemic issue as well as just cost of employment and how that's factoring through in terms of pricing and pricing changes across categories. And so that's kind of the broader issue. In terms of can we quantify that, I'd say it's -- that would be really difficult. It's something that you're hearing across categories, but it's not something that I would be able to give you a number on.

We'll just -- we'll be tracking it then.

Your next question comes from Darrin Peller of Wolfe Research.

Can we revisit the corporate payments segment for a minute? I know it's a key area that a lot of investors focus on as a differentiator long term potentially. And so first of all, just to remind us of the dynamics in your corporate payments volume, just looking at those Slides 6 and 7, it looks like there's a bit of a trend line down from third quarter versus '19. And then year-over-year, it was -- it looks negative a little bit. And I'm curious what the dynamics are there into October. And then if we can add on to that, probably more importantly, bigger picture, your strategy there, software-centric, virtual card-centric, just revisiting your view and vision for that business.

Yes, sure. So I'm going to talk first about your second question. So from a -- where we're going with that business, we -- if you look at it, where we've had a lot of success as this concept of embedding payments. And so we're doing that across multiple different customer categories. And we've really built out our capability around processing, doing that in a very efficient high-uptime, cloud-based platform, which allows our customers the ability to choose the pieces of functionality they can choose to use, our card issuing capability, our virtual card capability. They can go across and then choose to use processing as well. So what we're finding is that, as we go into the marketplace, people are selecting pieces and components of our functionality or bundling them together. And for our perspective, both are good. They both are -- it'll work well for us. We're to continue to bring in new volume, and that volume for us is highly profitable. In terms of software, we've really focused primarily to date around more of the infrastructure and how we can support that. We will continue to build out our capability over the long term. One of the places that is particularly interesting to us, if you look at our captive customer base that we have across the business, I think people know us as having large customers, and we talk a lot about those in these earnings calls, but we have over 400,000 small customers that sit in our business who've largely migrated to a digital world through our tools and are interested in doing more with us. We see that as a really huge opportunity for us in the future to continue to bring those customers along and to meet more of their needs over time. And so where we're going will evolve. But we've been pretty focused to date around this concept of the embedded payments. We're also ramping up our direct sales fleet. We've really grown historically through our partner channel. And we think it's time for us to have a larger direct sales fleet, and so we've been adding to that resource pool, and we'll continue to do so throughout this next year. If you asked about volume on corporate payments, so just remember, last year, we're coming off some big comps. Q3 grew 41%. Q4 last year grew 56%. Just illustratively, we had $2.3 billion in spend in Q4 2019 and $3.6 billion in Q4 2020 for corporate payments. So that had seen some tremendous growth year-over-year. We also have some partners that split volume with providers, and that can cause some variation. And then final reminder, I said this earlier, but with AvidXchange, new customer that we're just starting to ramp transaction volumes, they've gone through the implementation process. And so we'll see the benefit of that coming through more in the fourth quarter.

And then just when you think about the follow-up to the M&A discussion earlier, I mean, would this still be the primary area you want to focus on going forward when you're in the right leverage position or other -- would you put it -- you put other areas on top of it?

Yes. When we go through M&A, one of the things that we do is step back and look at how we want to deploy capital in aggregate. And so instead of looking at M&A transactions individually, we look at how would we like the business to evolve over time, and we stack a bunch of different transactions against that to get a view of do we like what that looks like. Does it push us closer to our strategic goals? And do we like how it looks from a financial perspective? And it's been part of the disciplined process that we've gone through historically. So I'd say we're still -- we go through that process on a regular basis. We're not solely focused on corporate payments. We have been increasing the amount of organic investment we have in that business because we think that we have a lot of opportunity there and some of the M&A within that category has been pretty expensive. So we've had a bias towards building within that category over the last few months. And that being said, we continue to explore options in the marketplace. We're always going to have an active M&A pipeline. And we will look across what's going to, again, move us closer to our strategic objectives, what's going to actually continue to build on our already strong growth rate and to continue to diversify the business. And corporate payments is one category of that, but I wouldn't say it's the only one.

We have time for one more question. Your final question comes from Sanjay Sakhrani of KBW.

I guess I'm going to follow up on travel and corporate a bit here, too. I guess my question is, if we think about future renewals, and I know it's sort of dynamic, how are they going to feed into the yield going forward? Are we going to have more of these types of accounting differences? And where do the yields stabilize? So -- and maybe we could just parse apart travel as well as corporate volume. Because I know Avid is coming on. Is that going to be good for volume, but maybe dilutive to the yield. I think people are trying to figure out sort of what the yield trajectory is on a go-forward basis as a baseline.

So Sanjay, I'm going to try and do my best here, obviously. The most important thing for us, as Melissa has said, and we have said, is growth and profitability. So we want to continue growing. We have been doing really well. Melissa gave a couple of the points on the corporate payments now when we compare to '19 volume-wise. And obviously, all of that has been reflected in revenue and adjusted operating income. So if you think where we are today, especially in these 3 quarters, you recall, Q1, we had an adjusted operating income margin of 10%. We went to Q2 '21 22% and now it's 34%. And if we adjust it for the accounting presentation, it's probably going to be another 3 to 4 points improvement. So the first thing is growth, revenue growth and profitability growth. Then if you enter into renewals, on the travel side, we don't have customers where the revenue presentation could be gross or net. So any renewal on that part of the business will not be subject to accounting changes. It's more on the corporate payment side. And what I would say to you is that as we move along, most probably most of the renewals or the new partners that we are onboarding are going to be on a net basis. And therefore, your margin is going to improve significantly because most of the revenue is going to fall all of it to the bottom line. But your rate obviously is going to be lower. But again, I don't think we need to focus on the rate. We need to focus on the revenue growth, on the profitability growth and on the margin growth. That's how we are ambitioning going forward or this part of the business for us.

And I guess -- and when we think about Avid and its impact on the corporate yield, like is there a significant one or it's not one that has a material impact?

I mean it's a net presentation. So obviously, in Q4, as Melissa said, we signed them 3 to 6 months ago, we were in the implementation phase, they starting not to really ramp up, but we are not going to see the real benefit until next year. It's net. Therefore, being net, the rate is going to be much lower than the overall corporate payments. But it will depend, as we have said, I mean, the travel business, how much it recovers next year compared to this year. That's going to have a significant impact on the rate. On the corporate payments, which customers are growing the most, the partner ones or the ones that we present the revenue on a net basis? So all of that is going to have a significant material impact on the rate up or down. And therefore, that's why we want to make sure that we give the metrics that are key for us, which is volume growth, revenue growth, profitability growth and, obviously, the profitability margin. And as you know, the more volume also that you have, the more purchase power you have as a company overall. So that's also very important for us.

Yes, 100%. I think there's a lot of confusion around how things have been given before and maybe just on a go-forward basis, if we can get more of that, that would be helpful.

Exactly. And I think that not talking about that, about the growth in dollars, not about their rate take up or down because. It's going to be very valuable. I mean, a customer in travel compared to a gross presentation is probably 20:1, the rate take. So it's very valuable, yes.

The only thing I'd add is that a lot of the work that we've done over the last several years was to create a more fixed cost structure with that part of the business. And we did that very intentionally because we wanted to make sure that we were able to be competitive, not just from a technology and a product perspective, but also from just a cost perspective. And so we feel really good about the cost that we have in that part of the business. And you can see that come through as we see incremental spend volume going through the business and that dropping through. So I think it's part of why we're not as focused around the actual rate is because of the scalability that we have in the model.

If you think to that end, Sanjay, in Q2, I recall from the numbers. So from Q1 to Q2, the margin or the drop-through was like 95% sequentially. And in this quarter, revenue was up $11 million and AOI was $40 million up. So it's like 130%. And that's what just Melissa said. That's where we are focused. Now we have a very fixed cost in that part of the business. Everything is -- all the technology is in-house, and it allows us not to play on that angle to get more volumes, revenue, et cetera.

And if you go into next year, as we have the ability to continue to take cost out specifically as we continue to integrate eNett and Optal and at the same time increase volume through the business and so you get kind of the leverage of both of those things, which is what Roberto was referring to in the third quarter.

Okay. Great. Look forward to more disclosure around that. Just a final question.

What exposure you want from volume revenue?

Like 5-year target. Just one last follow-up on the fleet business. I guess, where are we with the SME recovery? Because I know that's a big profitability driver inside that business. I mean, is it still pretty early in that? I mean, should we see further tailwinds as hopefully the reopening occurs?

The fleet business is interesting because it's such a compositive -- so many different kinds of businesses. So what we've seen -- in the over-the-road segment, the larger over-the-road companies did better, particularly in the kind of the heat of the pandemic. Smaller businesses right now are taking advantage of what's happening from a labor market perspective. And then in the North American fleet business, which is the more local part of the business, the smaller businesses actually did pretty well through the -- it was actually the larger companies, which shut down their offices and their travel that have lagged and continue to lag. And you can see that in our volume trends that we've had this kind of mix shift where they have volume has largely recovered, but their larger transaction sizes and they're skewed more to the over-the-road part of the business. So that being said, there still is some captive recovery that we have coming within the account base relating to office reopenings. And so we do think we have some opportunities still remaining there, even though our volumes are back to pre-COVID levels.

We really spent a lot of time for Q&A today. I will now turn the floor back over to Steve Elder for closing comments. .

Thank you, operator. Thank you, everyone, for hanging with us a few extra minutes, and we appreciate your time, and we'll speak to you again shortly when we release our fourth quarter earnings.

Ladies and gentlemen, this concludes today's event. Thank you for your participation. You may now disconnect.