Q3 2021 WEX Inc Earnings Call
Ladies and gentlemen, thank you for standing by at this time I would like to welcome everyone to the 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. If you would.
Like to ask a question during this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question simply press Star one again.
Thank you 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 chairman 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 <unk> Dot com.
A copy of the release and the slide deck have also been included in 8-K, 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 NII 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.
Change in fair value of contingent consideration.
Position related intangible amortization.
Other acquisition and divestiture related items stock based compensation other costs debt restructuring and debt issuance cost amortization.
NII adjustments attributable to Noncontrolling interest.
Certain tax related items.
Please see exhibit one 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 32020 filed with the SEC on March one 2021.
Sequent SEC filings.
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 result.
Continued platform innovation and successful execution drove 26% year over year revenue growth supported by double digit increases in each segment.
The topline 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 rate.
<unk> growth was up 17% compared to Q3 2020.
Total purchase volume process 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 rebound 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.
Yeah.
Let me take a moment to unpack two of the key drivers that are supporting our strong year over year and sequential growth.
First customer spend patterns continued 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 six times last years level.
We're also seeing a rebound in mobility, leading to higher volumes for our North American fleet customers, it's more offices reopen second.
Second we continued to win in the marketplace.
During the quarter, we signed the largest U S based multinational corporation specializing in package delivery transportation E Commerce and business services.
This new customer made the switch to whack because of our ability to deliver our unique platform combined with industry, leading product for both over the road and local vehicles.
We also continue to have great growth for smaller and midsized fleet.
The new marketing technology stack, which include the 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.
Port improved conversion rate and increased customer engagement and the European region.
We then Hell, we had a key win with a large higher education institution.
Compass thing the web benefits platform for CCH, and Cobra administration, as well as our fully outsourced benefit administration platform and services.
This institution chose <unk> to help drive employee engagement and deliver a world class experience to their multi generational workforce.
I'd also like to note the signing of Stampley and 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 wax to the versatility and reliability of our platform as well as our payments expertise.
The time of contract signing to the first transaction issued with only two 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 <unk>.
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 haven't 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.
It is also a significant step in completing the integration of Ethernet and optical and allowing us to combine the platforms.
The strategic investments we've made over the past few years to Sunset legacy platform and expand our modern commerce solutions are paying dividend, increasing the breadth of our core b to B e-commerce, offering and deepening our customer reach.
Regardless of size or scale payment ecosystem 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 are proven infrastructure enables customers to access our full suite of capabilities.
<unk> 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.
These type of transitions seamless for our customers.
Beyond integration, we are maximizing the value of payment optionality for our customers by introducing new flexible rate expanding the number of merchants willing to use the product.
This service is a win win for our customers and wax.
Simplifies the payment process for our customers and allows <unk> to capture new spend opportunity.
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 BTB of Commerce. That's why we continue to win customers like avid exchange, 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 wax is significant over the long term and that we are well positioned to support our customers through the transition.
As our customers beginning to transition parts of their fleets to electric vehicles wax will be ready for them anticipating their needs. We will simplify the added complexity that is coming their way with mixed fleet.
Band auctions to charge at home.
Rather they need for data driven solutions reporting benchmarking and payment system.
Our customers will need tailored solutions from a trusted partner.
I'll 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 <unk>.
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 whack there.
We need 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 as the largest pure play automotive fleet manager in the world. It will use the combined offerings from works and charge point to serve its customers.
Breakfast technology, and consolidated data will be integrated into elements analytics and dashboard program.
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're 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 west can further play a role in the reduction of carbon emissions, our benchmark and the efficiency of an EV versus a gasoline powered vehicle for reporting and benchmarking, which can also open up new revenue opportunities.
Beyond positioning us for long term growth in the EV space, we're 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 HSA educating health care consumers at our National Health savings account awareness day held earlier this month.
An estimated 31 million HSA account with significant growth projected over the next three years Hs.
HSA day, as 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.
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 that go well beyond covering health care costs for this demographic in particular with benefits like triple tax advantages and investment account in HSA can be a way to supplement both health care savings and.
Retirement investing.
Beyond the 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 wax.
Strategic investment and innovation combined with our customer centric culture has positioned us to continue to grow and capture market share is.
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 1st to align our teams to enable us to better serve our customers by offering a truly integrated solutions across the entire web platform.
These changes will allow us to move our business closer to our customers' needs and preferences keep our individuality and what makes our product special and unique while sharing best practices and create a stronger go to market approach.
Our goal is to create deeper customer relationship by offering them, a one touch experience as they make decisions across our 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.
Excited about the growth opportunities that this will drive across the business and the value it will ultimately unlock for our customers.
Our holders 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 is that.
Discussed time, and again working with people and culture are a significant differentiator and have proven to be a key competitive advantage as we navigate the current environment.
We will build on this momentum and we will continue to drive long term shareholder value, while supporting our employees partners customers and communities across the globe.
With that I will turn the call over to our CFO Roberto Simone Roberto.
Thank you and good morning, everyone.
As you heard from Melissa the third quarter results were really solid.
Building upon momentum we saw in the year first half.
We've got another record breaking quarter.
With revenues, surpassing the previous sky by more than $20 million.
The company is positioned for long term sustainable growth.
Remaining deal.
I've been to customer needs.
Effectively integrate an acquisition.
Driving innovation across the technology platform.
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 <unk> commented on $82 8 million or 26% increase versus Q3 2020.
From an earnings perspective on a GAAP basis we.
Net income attributable to shareholders of $48 3 million.
Non-GAAP adjusted net income was a $111 1 million or $2.45 per diluted share.
This represents a 54% increase versus prior year.
Driven by higher revenues.
Well off robust adjusted operating income margin.
With that I will discuss later.
Turning to slide 11.
Taking down the revenue by segment fleet.
Fleet solutions grew 25%.
Travel and corporate solutions posted up 42% increase.
Finally.
Unemployed 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 two commented on $86 4 million.
25% increase versus prior year.
Powered by a strong volumes from new customer wins and renewals.
Hi, Yes field prices.
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%.
The International fleet business was up 4%.
The net late fee rate decreased to 45 basis points.
In comparison to 48 in Q3 <unk>.
Continuing the trend of customers there.
Their bills on time.
On the other ton finance fee revenue was up 46%.
Due to significant increases in volume and fuel prices.
Do you need fleet the average domestic fuel price in Q3, 2021.
Was $3 23.
Versus $2 23 in Q3 2020.
These 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 works was $12 8 billion.
Do you mean, the sequential improvement since Q2 <unk>.
Okay.
Travel related.
Customer volume represented approximately 70% of total expense.
Breaking revenue down corporate payment revenue was up 17% led.
Led by continued strength in the partner channel.
Revenue from trauma related customers was up 53.
3% versus Q3 2020.
Also up 70% sequentially.
Reflecting seasonality increasing demand and a significant contribution from units on optum.
We are pleased with these results and are well positioned to capture future growth.
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 our 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.
So as I can growth was 16% in Q3.
Including new account related to benefit express.
And the temporary code accounts, we discussed last quarter.
For the fourth quarter, the Colbert accounts will fall off.
We are transitioning back to employment related growth.
Now, let's move on to expenses on adjusted operating income margins on a slide number 15.
For the quarter total cost of service expense was a comment about $79 9 million.
Up from a comment at the $56 9 million in Q3 last year.
Total SG&A depreciation and amortization expenses were two commented on $2 million, which is up $25 million.
In the fleet segment adjusted operating income margin for the quarter was 56% comp.
Compared to 44, 7% in 2000 2040.
<unk>, 48% in 2019.
This is the second consecutive quarter with fleet adjusted margin higher than 50%.
The increase reflects revenue growth.
Higher fuel prices.
This scale in the expense base.
Of particular note.
The loss in this segment continues to be low at $5 nine basis points of spend volume.
Compared to $10 eight in Q3 prior year.
Travel and corporate payments.
We delivered adjusted operating income margin of 34, 1%.
There has been steady improvement in the adjusted margin this year.
Starting with a 10% in Q1 'twenty.
21% in Q2 are now 34%.
As expected, we continued to see hybrid ops through of revenue increases.
The cost base is primarily fixed.
<unk> continued to see benefits from the in it or not.
Synergies.
So far we have implemented approximately 30 million of run rate synergies.
The remaining $10 million of the $40 million target relate.
It relates to platform consolidation.
Again 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 on the timing of certain expenses.
Finally for the <unk>.
Total company adjusted operating income margin was 37%, which.
Which is up from 32, 8% last year.
And up 70 basis points compared with Q2 this year.
Let's discuss DOCSIS on slide 16.
On a GAAP basis.
We expect the rate was 27, 2% compared to negative 59, 8% for the third quarter of 2020.
On an eni basis.
The tax rate was 25% for the quarter.
On 23, 4% for Q3 prior year.
Okay.
Changing gears now to slide 17.
We'll provide an update on the balance sheet.
We are remaining a healthy financial position and ended the quarter with $533 8 million in cash which.
Which is down from eight commented on $52 million at the end of 2020.
From a liquidity perspective, <unk> got over $665 million of available borrowing capacity on our 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.
Finding the credit agreement stands at three seven 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 two five to three five times.
One is the lateral 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 on slide 18.
However, before I get into the specifics on guidance I want to note that we have renewed the contract of a significant corporate payments partner in Q4.
These new contract with all Thursday accounting presentation.
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 of 2020.
This would travel resulted in a reduction in both revenue and sales cost.
Approximately $15 million.
In addition, although domestic fuel prices have increased significantly we.
We are expecting the benefit to be tempered by your spreads in Europe.
All of this is reflected in the numbers.
To give.
Starting with the fourth quarter, we expect to report revenue in the range of four commented on $68 million to $483 million.
On adjusted net income in the range of 110 to two.
Who are candidates and $11 million.
On an EPS basis, we expect adjusted net income to be between $2 25.
And $2 45.
Diluted share.
For the full year, we expect to report revenue in the range of one eight to 218 4 billion.
On adjusted net income in the range of <unk> to accommodate a $9 million.
On an EPS basis.
We expect adjusted net income to be between $8 81 on.
$9 on one page.
The 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.
Mm $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.
Four year.
Finally, we are assuming approximately 45 4 million shares outstanding.
And with that operator, please open the line for questions.
Ladies and gentlemen, the floor is now open for your questions. As a reminder to ask a question. Please press star one on your telephone keypad.
Question comes from the line of Mihir Bhatia of Bank of America.
Hi, Thank you for taking my question and good morning wanted to just start with the.
Interchange rate I guess in the corporate payments section.
I imagine some of that is just being driven by the mix shift towards travel, but can you maybe talk a little bit more color on where you expect that to be because I talked 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 was.
Expectations for next quarter.
Yes of course good morning.
So if you recall, what we have discussed.
Two or three quarters now.
It 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 a 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 on the rate take overall the <unk>.
Second thing is as you know as the customers on the volume increases. We also have some tier rebates that may kick in so you will see that from Q2 to Q3, and we have improved travel.
Well volumes almost $7 billion. So thats also very material component.
Then what I would say to you I see youre seeing going forward.
We go into Q4 and into next year I'm Gonna pro forma what I'm going to say to you because as you know we have a new one contract with a corporate payment customer that will change the accounting presentation on firm ground revenue into net revenue, but if you pro forma for that that Q3, and we go into Q4.
The numbers are going to be very similar.
And the last the last point I would say if you compare adjusted travel rate from Q2 to Q3, it's just a slightly higher yield on saved on the overall because of all the reasons I said from Q2 to Q3, Youll see a slight improvement.
Okay, sorry can I just go back to the contract when you pro forma.
Yes.
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 understand what's happening with the contract with.
Moving from gross to net the gross I'm trying to more understand the impact on the rate than what your comp how that is affecting the rates next quarter.
Yes. So if you recall three years ago, we went through the revenue recognition changes and through that process. Some customers on some contracts that we had with some customers. We move them from net revenue presentation to gross revenue presentation.
Through the process of renewing our contract with a significant corporate payment customers. We have changed some of the clauses in the contract and now the presentation. He is going to be net revenue.
If you look on the appendix of our presentation today, which is on page 20, we have shown there is the pro forma of the pro forma of the Kpis or metrics for this segment year to date September with and without the pro forma adjustments. So if you look at the year to date number.
The rate is down from 74 basis points to 55, when you pro forma that customer. So thats, a 19 basis point reduction just by changing the classification from where our revenue into net revenue that revenue goes down approximately 55 million.
Operating expenses go down the same on operating income is exactly the same with an improvement in margin.
Understood.
And then because just my last question just because Q4, you have pro forma boost.
Into your Q4 guidance stay to see if this change does not happen to your Q4 revenue guidance would have been materially higher okay.
Pete.
If you take last quarter's number was $15 million.
Lost deals.
Great.
That is correct, yes. So if you think about our Q4 guidance, we increased the midpoint 10 million. If we wouldn't have got the accounting change it would have been $25 million yes.
Thank you.
Yes.
Your next question comes from the line of Ramsey El <unk> with Barclays capital.
Hi, Thank you for taking my question. This morning, I was wondering if you could give us a little more color on the new deal. When you mentioned the large multinational corporation package delivery E com.
Is that an impactful deal in terms of should we should be thinking about maybe like a timing and magnitude of a P&L impact or is it not.
Not sizable enough as to where it would be something that you would want to carve out or call out.
Yes.
Hi, Good morning, it is a direct customer on our fleet business and so.
Like to talk about some of the larger deals that we sign.
It's not the same magnitude as what.
You can see if we sign a partner relationship, though where youre getting a bunch of customers bundled together.
We're proud of the when we think that you know it adds too.
Hitting our overall overall growth objectives, but it wouldn't I wouldn't say that you actually do anything specific for that one customer.
Okay.
And.
And Roberto could you help us think through.
And you gave us some good color on this already but I think 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 of those customer adds grind higher after Q4 or how should we think about that.
Yeah.
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 are seeing what 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 South accounts, so we reported 16% this quarter. Obviously you have some noise on the acquisition of benefit Express, which added approximately 500000 accounts.
Then the temporary accounts from <unk> that we added last quarter as we saw last quarter. Those corporate 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.
So obviously as we and the enrollment season, we're going to see some of those corporate accounts or the corporate account is going to disappear, but at the same time, we are going to be adding new <unk> accounts. So I would say to you that as 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.
Stanford obviously for our for the growth rates that has been changing in the market.
Okay got it thank you so much.
Your next question comes from George <unk> with Cowen.
Great. Thanks for taking my questions guys 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 <unk>.
70, 30 volume skewing towards.
Towards travel.
If I'm not mistaken I think we've talked about fourth quarter being kind of.
Somewhat more similar in terms of the split excuse me simpler 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 in Q3 is on the seasonality side is the highest so you can see that on our reported numbers in this quarter now with $12 8 billion of spend.
Almost nine.
From the travel site as you move into the fourth quarter the seasonality sales off on the travel side. So we should expect another volumes from travel to compress.
Cause of the seasonality is still growing very nicely compared to last year, but compressed from a percentage now offer a mix point of view in this 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.
70, 30, this is going to go down to say.
Between 60, and 65% on the travel side.
Okay. That's helpful.
I could just sneak two more in one I'm just curious on the corporate payments businesses.
If youre starting to see any any sort of impact from supply chain disruption if that is having an impact on some of your customers.
Then related more long term capital allocation I understand you're still looking to to Delever here, but.
Any updated thoughts around kind of.
Perhaps more aggressively returning.
Capital to shareholders.
Given given the current valuation and the pressure we've seen on the stock.
Recently, thank you.
I'll take that.
The first one of those and I'm sure. We'll go time and together on the second one so supply chain is interesting because it's affecting our customer base disproportionately.
You were to talk to our customers and over the road part of our business. It's certainly have an impact in 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 to all we.
We do also hear from our customers and really across all categories and concerns around wage increases and labor shortages.
It's impacting businesses across really almost every category.
But corporate payments specifically it is 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 and across the enterprise.
Like we have historically in our conversations with our board.
Okay.
Okay. Thank you.
Your next question comes from James Faucette of Morgan Stanley.
Thank you very much.
Just follow up quickly for clarification on the leverage point, so it sounds like Youre looking to actively pay down debt not just reduce the ratios.
Earnings growth make sure I understand that correctly.
Kind of a 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 on where those are likely to settle out going forward.
And has there been a structural growth element through the pandemic that is should we expect.
That segment to settle at a higher growth rate than maybe we've seen previous I'm, 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.
<unk> segment, one of the things that we've talked about is the fact that when we added a net nominal and we picked up in a number of redundant costs and we've gone through a lot of effort to consolidate and integrate those businesses into whack.
And 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 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 and 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 its been actually quite helpful. This year and helpful going forward as we see volume coming into the business.
Is affecting the margin and the margin profile positively.
That that trend is going to continue into <unk>.
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.
Recall properly.
Don No pay down debt. So as you know we had a high growth company, we manage leverage ratio the leverage ratio can be revealed.
The increase now both with earnings.
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 what do we want to be within the range.
Making sure that we have enough free cash flow. So we can alleviate uncover as much liquidity as possible and then when we get to the point, where we are between the two and a half to three <unk> 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.
Return to shareholders anything that is available thinking obviously on the short term on the long term.
That's great. Thank you very much.
Okay.
Your next question comes from Andrew Jeffrey of <unk> Securities.
Hi, Thank you I appreciate you taking the questions.
Melissa 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% just want to understand this.
That number is being depressed by macro.
I wouldn't say that there's no from our conversation 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 were contained to add on new customers and partners and we're talking specifically about the fact that we're starting to see transaction volume with avid exchanges, 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 sign when they're ramping.
In that portfolio, but I wouldnt say that theres been a significant overhang from a supply chain perspective within that part of the business.
Okay. So it sounds like that could accelerate with some of the new implementations and then I wanted to ask specifically on <unk>.
On the stamp we 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, let's start with saying that when we are going into that business, we're providing our cloud <unk> offering.
And it's something that we have.
We have built across the business and so we feel that the technology that we have can compete with anybody else out there in the marketplace.
With Alto it really great history from a reliability standpoint.
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.
We are using our virtual card technology.
Our car technology capability and so on.
Think of competitors being.
A wide number of them all of the names and I'm sure that you're aware of it's a highly competitive process whenever we're in their bidding and winning these businesses.
Great that's a nice win.
Okay.
Okay.
Your next question comes from Tien Tsin Huang of Jpmorgan Chase.
Sure.
Thank you so much Melissa I think you were talking about some pricing initiatives are modernizing pricing.
And corporate payments I think you were talking about is sort of along the same lines as modernization platform and moving to the cloud. So could you just maybe elaborate on that.
What that means for for your front book as well as your back book.
Pricing wise.
I think that tinder.
Tien Tsin, I think what youre, 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 yes, yes, and so yeah.
That is really it.
What we're doing is expanding merchant acceptance.
And allowing people to purchase through <unk>.
Different.
Schemes are products that we're using and again this is within corporate payments.
I wouldn't refer to it as pricing modernizations more around increasing acceptance and so that we can have more volume pushing through the network.
And it is part of what is interesting when people come.
And want to partner with wax the ability to extend that network and network of offerings as part of the advantage.
And so this is more important is our ability to sign new partners and the partners to be able to push through.
More volume across the business and I wouldn't describe it as pricing modernization I tried to describe it is product expansion.
Forgive me for that so it sounds like it's yes for supplier recruitment partner recruitment.
Yes to accelerate yes got it. Thank you for that so quickly when you've got large ticket items.
And so specifically when you get into kind of some of the Nishu payments were.
You might not get acceptance.
Allows other optionality for our customers.
Sorry, if I misunderstood it upfront just under <unk>.
I know George and others have asked about supply chain and driver shortage and whatnot is there is there a way to.
Quantify that because we're definitely getting questions about it.
How to maybe frame that and consider the debt.
Pluses and minuses there.
Yes.
On the fleet part of our business.
There we were we would hear that again.
If you think across the category further over the road customers. This is something that we definitely are hearing from that.
From that customer category, and it's really affecting the ability for them.
To move goods goods are coming across.
And very expensive ways in unpredictable ways and so that's definitely affecting the over the road part of our business I would say again the issue there.
There is.
Compounded by.
Underemployment.
We've got and 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 it take cross the business when we talk to customers we.
We hear more about.
That is a fundamental issues underemployment and the ability to recruit talent to meet the needs and the demands that they're having their businesses.
More of a systemic issue as well as.
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'd be really difficult to and something that you're hearing across categories.
It's not something that I would I be able to give you a number on.
Well just be we'll be trucking. It then thank you for the time.
Okay.
Your next question comes from Darrin Peller of Wolfe Research.
Alright, thanks, guys.
Can we revisit the corporate payments segment for a minute just because I know, it's a key area of it that a lot of investors focus on as a differentiator long term potentially and so first of all just just to remind us of the dynamics in your corporate payments volume just looking at those slides six and seven.
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 is software centric virtual card centric just revisiting your view and vision for that business.
Yeah sure so I'm going to talk first about your second question.
Where we're going with that business.
If you look at where we've had a lot of successes. This concept of embedding payments since and we're doing that across multiple multiple different customer categories.
And we really build out our capability around processing doing that in a very efficient.
High uptime.
<unk>.
Cloud based platform, which allows our customers the ability to choose new pieces of functionality. They can choose to use our card issuing capability, our virtual card capability. They can go across and.
And then choose to use processing as well so what we're finding is that as we go into the marketplace people are <unk>.
Selecting pieces and components of R. R.
Functionality or bundling them together.
And and for our perspective, both are good that both are worked well for US we are continuing to bring in new volume and that volume for us.
Daily profitable in terms of of software.
Really focus 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.
No us is having large customers and we talk a lot about those in these earnings calls, but we have over 400000 small customers that sit in our business, whose largely migrated to a digital world through our tools on are interested in doing more with us we see that is it really.
A huge opportunity for us in the future to continue to bring those customers along and to meet more of their needs.
And over time, and so where we're going we will evolve, but we've been pretty focused to date around this concept of the debt in 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 until we've been adding to that resource pool and we'll continue to do so throughout this next year.
You asked about volume on corporate payments. So remember last year, we're coming off some big comps Q3 grew 41%.
Q4 of last year grew 56%.
<unk>, we had $2 3 billion in spend in Q4, 2019, and $3 6 billion in Q4 of 2020 for corporate payments. So.
<unk> 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 avid exchange new customer that we're just starting to ramp transaction volumes have gone through the implementation process and so on.
We'll see the benefit of that coming through more in the fourth quarter.
Okay.
And then just when you think about the follow up to the M&A discussion earlier, I mean would there still be the.
Primary area you'd want to focus on going forward. When you are in the right leverage position or other or would you put it.
But other areas and Jonathan.
Thanks again guys.
Yes, when we go through M&A what are the things.
That we do.
Step back and look at how we wanted 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.
I mean do we like what that looks like does it does it push us closer to our strategic goals and.
And do we like how it looks from a financial perspective.
Been part of the disciplined process that we've gone through historically.
So I'd say, we're still go 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.
That being said, we continue to explore options in the marketplace will always going to be have an active M&A pipeline.
And we.
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.
Okay. Thank you.
Okay.
We have time for one more question. Your final question comes from Sanjay stock Ronnie <unk>.
Thanks, Good morning.
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 in where do the yields stabilize so maybe and maybe we could just parse apart travel as well as corporate volume because I know avid coming on is that going to be.
Good for volume, but but maybe dilutive to the yield I think.
As 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 theme for us as Melissa said and we have said he is growth and profitability. So.
We want to continue with OE and we have been doing really well Melissa gave a couple of points on the corporate payments now when we compare to 19 volume wise and obviously that's been reflected in revenue.
Adjusted operating income. So if you are seeing where we are today, especially in these three quarters now Youll recall Q1, we had an adjusted operating income margin of 10%. We went to Q2 'twenty one of 22% and now it's 34.
If we adjusted for the accounting presentation, it's probably going to be another three to four points improvement. So the first thing is growth revenue growth and profitability growth than if you entered into renewals on the travel side, we don't have customers, where the revenue bridge.
<unk> could be gross or net so annual 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 use that as we move along most probably most of the renewals saw the new partners that we are on board and are going to be on the.
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 you are right. Obviously is going to be lower but again I don't think we need to focus on the right day, we need to focus on the revenue growth on the profitability growth and on the margin growth that Scott we have ambition.
And in going forward not this this part of the of the business for us.
Okay.
I guess when we.
Think about avid and its impact on the corporate deals is there a significant one or it's not.
On the P&L.
It has a material impact.
I mean it.
It's a net presentation. So obviously in Q4 as Melissa said, no we signed them.
Three to six months ago, where we were in the implementation phase they are starting to really ramp up but we're not going to see the real benefit until next year.
It's net therefore being net debt rate is going to be much lower than the overall corporate payments.
But it will depend as we have said.
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 customer started growing the most the partnerre one.
Are the ones that we present the revenue on a net basis. So all of that is going to have a significant or material impact on the rate up or down and therefore, that's why we want to make sure. Another we gave the metric is that it.
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 there.
More purchased power you have now as a company overall. So that's also very important for US yes, 100% I think I think there's a lot of confusion around.
How things a bit yes.
Given.
And maybe just on a GAAP basis, if we can get more yes that would be helpful exactly and I think.
They're not talking about that and about the growth.
It's not about the rate take up or down because its going to be very valuable I mean, our customary in travel compared to a gross presentation is probably 20 to one another rate hike.
So it's very valuable.
Yeah, the only thing I'd add to that.
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.
No I think.
Part of why we're not as focused around the.
The actual rate is because of the scalability that we have in the model.
Yes, if you think through that in.
Sanjay in Q2.
Recall from the number so from Q1 to Q2 the margin.
<unk> developed.
The drop through was like 95% sequentially and in this quarter revenue was up 11 million in NOI was $14 million up so it's like 130%.
And Thats, what Jeff Melissa said Thats, what we are focused and always have a very fixed cost.
In that part of the business everything is all the technology using 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.
We have the ability to continue to take cost out and specifically as we continue to integrate <unk> and at the same time increased volume.
Through the business since you hit kind of the leverage of both of those things, which is what refer Roberto was referring to in the third quarter.
Okay great.
Great look forward to more disclosure around that just final question.
What part of it.
One from volume revenue.
Yes.
Yeah.
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.
Stability driver inside that business I mean is it still pretty early in that I mean should we see further tailwind as hopefully reopening occurs.
Yeah.
<unk> business is interesting because it's such a composite of.
So many different kinds of businesses, so what we've seen.
In the over the road segment of larger.
The larger over the road companies did better in and particularly in the kind of the heat of the.
The pandemic.
All our 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 local part of the business the smaller businesses actually did pretty well through the.
It was actually the larger companies, which shut down.
You know their offices and their travel that has 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 they're larger transaction sizes and they are skewed more to the over the road part of the business.
So that being said there still is some captives.
The recovery that we have coming within the account base relating to office reopening.
And so we do think we have some opportunities still remaining there even though our volumes are back to two.
To pre COVID-19 levels.
Okay, great. Thank you very much.
Sure.
We've reached the allotted 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.
We appreciate your time and we'll speak to you again shortly when we release our fourth quarter earnings.
Yes.
Ladies and gentlemen. This concludes today's events. Thank you for your participation you may now disconnect.
Yeah.
Okay.
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Yeah.
Okay.
Yes.
Yes.