WEX Inc. (WEX) Earnings Call Transcript & Summary

Good morning. This is Sanjay Sakhrani, and I lead the payments and consumer finance research efforts at KBW. I'm so glad to have the opportunity to have this discussion with Melissa Smith, Chair and CEO of WEX; Jagtar Narula, who's CFO; and Steve Elder, Head of IR. The purpose of this call is to dig deeper into some of the commentary that management provided with fourth quarter earnings. And that included refreshed outlooks for the growth algorithm, and that was lower than previously articulated and clearly caught some in the investment community and us, to some extent, by surprise, and that obviously sent the stock significantly lower towards historically low valuations. To remind you, the new targets are as follows: revenue growth of 5% to 10% versus 8% to 12%, EPS growth of 10% to 15% versus 15% to 20%. Obviously, contrary to the weaker recent stock performance, management maintains a high level of conviction on the refresh targets, and we're going to walk through why on this call. We're going to make this call about an hour long. I'll spend half the time asking my questions that I prepared. And then I'd love to get questions from the audience, namely investment community. [Operator Instructions]. Also, we're going to be discussing forward-looking statements. So please refer to WEX's fourth quarter press release for disclosures. So thank you, Melissa, Jagtar and Steve. Let's get to the questions.

First, let's talk about the long-term targets. Maybe we could talk about what factors led to the changes and maybe you can pinpoint when you realized something needed to be changed, I assume over the last several months?

Well, thank you, Sanjay. It's great to see you. First, I'd like to point out that in terms of our near-term guidance, one of the things that we were really focused on was derisking the guidance as best as we could. When we step back and look in 2024, we had some uneven performance related to our expectations. And if you put that in perspective, of us having a long history of achieving the guidance we set, we want to make sure that we were learning from that. And I think that's an important context point as we're talking about the long-term guide as well. I would also add in our recent announcement to buy back stock is just a display of our confidence, both management and Board and the future outlook of the business. So getting back to your point on the long-term guide, when we actually gave out the 8% to 12%, which was our former organic growth rates, they were proper when we discussed them. It was within the context of the market at that time and things have changed. And one of the point I think that -- getting lost though is that the markets that we operate in are healthy, they're fertile. We have an opportunity to continue to harvest those markets. We've made some minor pivot points in terms of the investments that we're making make sure that we can harvest the growth across those markets. But if you look back at how we set the long-term growth targets, there's really 2 primary things that have changed. The first is in the Benefits business. So within our Benefits segments, the market growth rate right now, which is HSA growth rates according to Devenir, and think of the Devenir as the Gartner equivalent in HSAs, it's low to the mid-single digits. And we have really penetrated within our portfolio, the custodial opportunity that we've had much faster than we expected, honestly. And so when we revised the guidance for this part of the business, it's with a view of we've made that migration, so we will continue to add new customers that are using custodial products. But within our base of business, we've made that transfer over. So that's more fully penetrated. So economics going forward will naturally have a slower growth and more aligned to the market growth rate. And then the second point, which is the lesser point is within our Corporate Payments business. Over half of our business is still in travel and travel-related customers. We've had this tremendous lift over the last couple of years, in part by further penetrating our accounts, but also post-pandemic, and we're in a much more normalized environment right now. So we're saying we expect to see a more normalized growth would be akin to the growth of the travel market in that part of the portfolio. So I want to make sure that I emphasize the fact that we do think that we're leaving some opportunity on the table. That's why we added in more sales and marketing. That's been a combination of both adding marketing dollars into some of our product offerings as well as [indiscernible] carrying salespeople, and we have a lot of confidence in the returns that, that will drive over time.

And I guess, like you kind of answered a little bit of my next question, but I want to make sure we dig a little bit deeper into this. I think what caught people by surprise is that all this segment growth rates were kind of comparable, right? And I think if we looked historically, some of the segments have grown faster than others, healthcare care was one of them, right? Maybe you could just talk about the growth algorithm as you see it right now. Are all of them 5 to 10? Do you think some -- I mean, I know those are long-term targets, right? So over maybe the near to intermediate term, those growth rates vary. Maybe you can just talk through each of those segments and sort of how you see them unfolding over the next 3 years and then maybe over the long run?

Yes. So we've definitely had a lot of conversation about this, talking to investors. I think it's a reasonable pushback. If you peel back the onion, I'll talk about each of the individual segments and why we believe they're 5% to 10% right now. In mobility, there really hasn't been a lot of change. There's still tremendous market opportunity for us, lots of vehicles that are not using a specific -- fleet-specific provider. They're either paying with cash or general purpose credit card. So a lot of opportunity for us to continue to penetrate that marketplace. On top of that, we're rolling out new products. We've talked about our [indiscernible] product, our enhanced acceptance product in EV. We see all of those just increase market opportunities, and we will continue to roll out new products into that marketplace. So the net of all that is we expect that to be in the 5% to 10% range, normalizing for foreign exchange rates and currency, recognizing the fact there is some economic sensitivity in that part of the business. In Corporate Payments, there's a number of pieces in this business, and the growth rates are a bit different. So I want to talk about this just for a bit because I think there's a lot of conversation around this part of the business. In total, we're seeing at 5% to 10%. There's 2 primary products that sit across this business. There's the embedded payments product and think of that as a product where you're doing API calls to create virtual card payments around the world with lots of control at scale and issuing in many currencies, in fact, over 20 different currencies, which are some of the competitive moats that we have. It allows our customers to avoid really expensive cross-border fees that would normally get charged and passed on to them. And if you think about an example of that, the technology would power a customer that could be Expedia. If there's a hotel payment, we're able to keep track of all the chargebacks associated with it in the details with a high amount of volume as we make a payment on behalf of Expedia to that hotel. Another example would be Avid Exchange, which is another customer of ours. We're doing the exact same thing. It's the same API call although what we're paying in that point is an AP invoice with our virtual card technology rather than a hotel room. So all these customers are operating at tremendous scale, given their large volume of transactions. We want to make sure that when you think about this part of the business, some of those larger customers tend to share this platform with multiple providers that creates some movement in time. It's one of the things that I know that we hear about not liking. But if you step back and look at over the first of the year, actually, you see great growth. It's pretty much a fixed cost business. And so our objective function is to grow volume. And think about those contracts, they're structured in ways that the balance of the volumes, they're wholesale in nature and from a pricing perspective, which means that as our customers get to higher spend volumes or they get to contract renewals, we're doing that at lower rates. And so we've always been okay with the fact that take rates are going to inch down, but we make that up with a tremendous amount of volume because it's such a scalable part of the product. And then when the rest of the Corporate Payments, we have these AP Direct products where we're selling to customers of sizes of $20 million to $1 billion in revenue. What we're able to do is automate their supplier payments using our virtual card technology. So I think it's the same technology stack with a team of supplier enablement specialist that sit in the background of that. And so we're making much easier that payment flow for that customer segment. That is a different model where we get really full economics associated with that. So it's a place that we've been adding in more and more of our sales over time. It's still a relatively small sales group, but it's been great and what we're solving from that customer is making sure that we're -- the timing of their payments, we're optimizing their working capital by helping them in time when the payments are getting made and improve their overall cash flow. So if you look across that business, when we say it's 5% to 10%, we've got some parts of the business that are growing tremendously and still anchored by over half of that part of the business right now is travel and travel-related payments. We do think that will change over time. And then benefits, we're saying 5% to 10% range. And again, that's anchored off the Devenir 5% growth rate. So if you look across, we're at this point in time saying 5% to 10% makes sense across all of our segments.

I mean it's still a pretty wide range is what I would say. So like what are the variables that sort of get you between one end or the other?

Yes. When we think about this business, we think about it almost like as a revenue role across the business, what are we bringing in for new customers every year, what our retention rates look like and then what's happening with the base of the business. And if you look across the portfolio, what we're bringing from new business has much more of an impact on future years as opposed to the current year you're in. And -- so the things that can cause volatility in range, clearly what's happening with the base of our customers. And then increasingly, over time, as we're rolling out new product and product capability, that's a place that we believe that we're going to continue to see an increase of the revenue stream coming from those new products. We will, over time, as we've increased sales and marketing, we should see a benefit associated with that as well. And so it's really, in my mind, kind of 3 different variables that could affect that. First, what's happening within the mix of the portfolio. So as the parts of the business outside of Corporate Payments -- outside of Travel and Corporate Payments becomes bigger, then that will help skew the growth rate up. The second thing is what's happening with the underlying base business in the portfolio. And the third is sales and marketing product investments that we're making right now.

Okay. Great. And then I guess like when we think about these investments you're making right now, I mean, like do they add to the growth that you guys have articulated? Or how should we think about what -- or do they -- are those necessary to sort of get to these growth rates?

So the growth of each of those investments that we're making, and they go across multiple categories, I think that's just another important point. We've said we're going to invest $25 million of incremental sales and marketing in this year and it's pro rata across each of our segments. In our Mobility segment, it's really primarily directed towards marketing for our small business offerings. It's a place that we've seen really high returns associated with that, and so we're adding more into that. We have more feet in the street in the other 2. So in our Direct business and Corporate Payments and our Benefits business. We're adding more feet on the street because we're seeing really high -- lessen 2-year paybacks across those portfolios and really high close rates associated with that. So we've been adding in there. So when we think about that -- it's going to take some time for those to pay back. So it's not an immediate return. So I -- we've included it in our long-term range. It's certainly a component of where we sit in that range, though.

Got it. And I'm so sorry, just to the audience. I know there are some technical issues that we're working through. So hopefully, you guys just relog back in and it's working, but there will be a replay available. So not to worry about that. Maybe just moving on, I was planning to ask about being more aggressive with the share repurchase. But with the news this week, it seems you've done that. So maybe we can just talk about where we go from here in terms of capital allocation?

Well, first, I think just to double-click on what you said, the management team and the Board have a tremendous amount of confidence in the future of the company, and that's what we're using our capital to demonstrate. We're excited about the tender offer that we have in the marketplace. I thought it would be good actually for Jag to talk a little bit more about the mechanics of that.

Yes, sure. Thanks, Melissa. So it might be useful just for Sanjay, for you and other folks on the phone from a modeling perspective. So we did announce this week in conjunction with the tender offer. We went into the market to raise $1 billion of debt. We announced yesterday that we priced the bond offering, we priced the Term Loan B. We'll close those shortly. On the bond side, we raised -- announced that we've upsized it, so some $550 million on the bond. We priced that at 6.5%. So we've got really good demand, really good economics on the bond deal. So we're very pleased with that. On the Term Loan B side, that was the remainder of the $1 billion, $450 million raise there. And I would say on that one, the pricing on that sort of in line with our existing Term Loan B stack. So that should give you kind of some perspective on the debt costs associated with this. And then on the tender offer, it will somewhat depend on what we see from the tender offer. The tender will be open until roughly March 25, and then we'll see what tenders come in. But we're expecting within the range that we've set assuming full demand for the $750 million, we'll end up repurchasing on the order of 4.4 million to 5.1 million shares. So that should give you some data for modeling purposes.

Great. And as we think about other uses of capital understand it a levering up to do this, but as we think about other actions you might want to take, including M&A, maybe just talk about that? Maybe this part lays a little bit into my next question. That revenue growth target is, I believe, on an organic basis. Can M&A be additive to the growth in the backdrop of some of the capital actions that you already talked about? Where would you consider M&A maybe as well? So maybe just talk a little bit about that.

M&A has been an important part of the growth, if you look at the history of the company. So yes, Sanjay, at the point in time right now what we're saying is that we think this is the highest and best use of our capital, which is why we're going full force with the share buyback right now. But over time, it is a place that we continue to expect to be active. We have a great history of being able to achieve synergies associated with the transactions that we've added into the portfolio. The places that we're looking are still the same. We're still looking at primarily product extension. So we're in the markets right now, where do we want to build or do we want to buy. And then historically, we've looked at scale plays. This is a place we've been using capital to buy back stock instead over the last couple of years. And then the third place for us has been international expansion opportunities, just where can we put a footprint that we don't have right now. But I would say, in this next year, we're going to be very focused on delevering from this point forward. And we'll continue to look at product opportunities compared to what we want to build in the marketplace like we have historically.

Okay. Maybe we could just talk about the growth -- like reassessing the growth profile of the business and thinking about various parts of the business. Have you thought about like if some of these businesses don't make sense as a part of WEX, does it mean -- health care is one where people have questioned whether or not you're getting an appropriate valuation for that asset because it is a really good asset as you articulated. I mean, should those -- should that business be core to WEX? And have you thought about the other segments as well?

Yes. I mean this -- from a Board perspective, we're always stepping back, we're looking at the business. We're looking going through the strategic review, at least annually. And that looks at composition of businesses, including what opportunities do we want to create through strategic transactions both ways, frankly. We have fielded questions on their Benefits business. We like the fit of the business to WEX. It's a payment business. The technology processing is really enabled by great technology. So it's a complicated market where we're simplifying it, it's payments business and technology is an important part of that. And they are all things that we do well. We monetize the business through our bank, which is a way to accrete better than market economics associated with that, and we like the predictability of it. But to kind of go back to your first question, this is something that, obviously, our Board has a regular conversation about.

And as we think about the other segments as well, like what -- are there pieces of those businesses that you think don't fit versus others? Like as we think about the online travel agency business, obviously, it's a very -- it's been quite a significant growth story. But do we feel like it's going to become a lot more competitive on a go-forward basis where it makes sense to sort of build more around it? I'm just curious because I think that -- those are the questions we're getting a lot of just -- the sustainability of the growth because it's really competitive and in some cases, commoditizing?

So Sanjay, when we look at our Travel business, it does create a lot of volatility. We don't like that, and then the market doesn't like that. But when you step back and look at that part of the business, it gives us the scale in order to really operate at tremendous economics and then use that platform as we go into more of the AP Direct offerings and taking that same technology outside of travel into other markets. And we talked about the fact we've continue to build upon that product technology. And now we're offering products in the marketplace that enable a lot more flexibility to the end customer using our embedded payments from workflow management. We've signed 5 new customers at the fourth quarter of last year. So we think it's an important foundation for the rest of the business. And will see the fact that you see volatility from quarter-to-quarter, what we're really focused on is making sure that we're increasing the volume of growth that's going through that part of the business because it has such great unit economics. And other point I would make is, we're also going through this kind of extraordinary time where one of our customers is in-sourcing some of that technology. We really believe that, that's an outlier based on the specific both scale and assets owned by that customer as opposed to a market trend. And that's certainly clouding some of that conversion right now. And we believe that it's a transitional stage that we need to go through, it's the customer we continue to grow with, and we'll grow with over time once we get through this period of reset, which we think will have through the next couple of quarters on Q1, Q2 this year.

Okay. I'm going to have a few more questions on Corporate Payments later, but let's maybe just segue into the investments that are being made. The 5% headwind to adjusted net income related to the sales and marketing investments, maybe you could just talk about where those investments will go? I know, Melissa, you talked about the payback being short on the earnings call. So just talk a little bit about that and where the dollars are going and how we should measure that on a go-forward basis?

Sure, sure. That 5% is about $40 million worth of expenses, $25 million are going to sales and marketing. And again, I think of this as pro rata across the business. I think one of the misperceptions was that it's all going to Corporate Payments, it's not. The biggest part to going from the Mobility business, which is specifically increasing marketing dollars. That part of our business, a large amount of new customers are coming through our digital channels. So they come through online, all the way through that are marketing led in terms of their origination. And so that's a place we've got really great returns. We want to add more juice to that. It will be the quickest result of all of the 3. The second 2 areas are feet on the street, both with our Benefits business and with our AP product in our Corporate Payments business. And if you think across each of these, the other 2 requires us to add the people and build the pipeline and sell. But we still have a very rapid payback period of 2 years. So we'll -- it's going to take a period of time before you actually see that coming through. But we -- our confidence comes from a deep amount of analysis that we've done across the business to look at where do we have the highest likelihood and highest returns. So we feel like we can add more in and harvest more in these markets that we're in because we're seeing in all of those cases, like really good pull-through when we put more in.

Okay. And then like, how have the discussions around these investments better with your Board, your larger shareholders? How has the reception been related to that?

Well, the Board we've had, obviously, multiple conversations with the Board, highly supportive of this idea. They also -- they're in the data with us. From an investor perspective, I think that it's a -- want see the return associated with that which is fair. And the third part I didn't talk about is product investments, $15 million of largely depreciation for products that we have been working on in Corporate Payments. Again, it's broadening what we're doing in both embedded payments and our AP Direct offerings in the marketplace. We're in the market in Europe. We're in pilot and actually selling now in the U.S. for some of those product offerings and then more to come, which is really focused on stickiness of that customer segment and pulling through the functionality that we have in embedded payments across to our AP Direct offering as we roll more and more features out this year. So it's a place in the business we're really excited because we see pipeline is ramping, we could see the success of -- at least early success of these products being in the marketplace and sales happening. And so from our Board perspective, they have a lot more insight. From an investor perspective, like I said, I think it's much more about I want to see evidence of that and again, I think that's fair.

Okay. We're starting to get some investor questions, and I'm going to ask one key one that I wanted to make sure I asked and then I'm going to get into some of these investor questions. Just on the Corporate Payments segment, could you just drill a little bit more down into the moats there? As I think about like the OTA business, a lot of people have sort of written it off as a commodity business and assume like the take rates are going to 0, right? And I know you've talked about how you have to sort of separate the businesses even inside of that to think about where the value is, and then there's obviously an enterprise level value as well. And then inside of sort of the non-travel Corporate Payments business, maybe just break that apart a little bit more because I know there's a direct piece that you want to beef up a little bit more to invest in, and obviously, that's a little bit where the puck is headed when we think about some of the growth that the investment community is thinking about. So maybe just talk a little bit about all of that because some people look at that as a piece that's missing inside your story?

Sure. So let me start -- let me talk kind of broadly first. So when you think about the segment itself, the places that we really think about from a moat perspective, the technology and product breadth, and I would say, in particular, within our embedded payments products and the scale that we operate at, which allows us to have tremendous economics and tremendous leverage around our economics. When you get into the product itself, the fact that we can settle and issue in more than 20 currencies, and we're able to do that, if you look at our technology stack, we have more than 150 combinations of interchange rates and currency that sit within that platform, which allows tremendous complexity to run through at scale. And so would you look specifically within the travel marketplace, the ability to have that technology stack is really important because these are people that are operating globally. And with a tremendous amount of [indiscernible] around which individual products they want to use in each of the regions of the world. If you compare that 150 to our competitors, they're typically less than a dozen. So there's actually quite a bit of differentiation across that. If you kind of take that outside of travel and think about that more specifically, we have that same capability. And if you get outside of travel, customers are typically looking for -- they're looking for the scale of the economics, but they're also looking for reliability and ease of use. And the ability to come to one person as opposed to having multiple providers is something that we see increasingly. And we see that increasingly as a moat because it derisks. If you think -- if you're a customer and you have to work with several different people, including an issuing bank, that just puts more stress into the system being able to come to one provider and having access to everything and with a tremendous product capability and strong economics and a really strong history of reliability, which is really important with -- particularly with our embedded payments products because they're integrated into the workflows of our customers. So all of those are really important moats for us across embedded payments, not just within travel. And then when you think about the AP product offerings that we have, we are selling into the marketplace really successfully. We have seen tremendous scale from that part of the business. I think it's a combination of being able to leverage the scale that we have in the rest of the business. So that allows us to negotiate tremendous rates from the networks, again, to be able to do this at a highly reliable way and we brought in some world-class payment talent that are using their networks in order to add in new customers. So I would say without a hitch in it so far, we have continued to see tremendous growth in our AP Direct offering. And it's a product we believe that we can continue to build upon over time. But again, the functionality we have right now is selling into the marketplace, and it's hitting more than our hurdle requirements.

I guess, like maybe just to double click or press on the take rate dynamics, right? I think what's been very difficult for us and the investment community sort of pinpoint how we should think about the take rate dynamics eroding over time versus the economic value proposition being there. I know there's a lot inside of the numbers, but how do we get comfortable that is, in fact, additive to like earnings growth in the future? Because I think ultimately, that's what really matters. And I'm just trying to think about how we best get comfortable around that because it would seem like a lot of the competitive issues have been focused on some of the larger OTAs inside of travel. But there's still this long tail of the smaller ones, which I don't know how to think about what kind of competitive pressures could arise in the future there?

Yes. The way that we think about this is we split the 2 and actually, we show -- it's not a perfect split in what we show externally because investors have cared more about travel outside of travel. The way that we think about this is embedded payments and then other. And in the embedded payments product, what we're looking for is, are you driving margin growth over time. So you might have some pressure in terms of rate. But are you getting enough volume that's coming through the business, so that you continue to see strong scale economics. And again, that may not be perfect in any particular quarter in that part of the business because there is more volatility. But if you look back over time, you've seen tremendous margin expansion. And then with the AP Direct offering, it's almost a flip we're looking at and we continue to bring in business that is profitable, but we're looking more on that and part of the business is what's happening with the rates overall. And so I guess what I would encourage is look at the combination of what's happening with the take rate, but also in terms of what's happening with the margin profile of the business. It's pretty unique to have an asset of that size in Corporate Payments that has the profitability that we're able to accrete. And we're able to do that because we have such tremendous scale that's running through the business and because we have boats that protect the ability to take away all of the volume. There might be pieces of things that you can take away over time. But when we look across that business, it's been a really great asset excluding the volatility.

Anything you want to add, Jagtar, on that point or...

I would emphasize that like if you look at the margins over the last few years, in if you go back 4 years, we've accreted margins from mid-20s to north of 50% last year in the Corporate Payments business. And while there's been kind of a fixation on take rates, you got to really think about what's the volume that's happened and what's the resulting revenue, and how is that -- when you have a business as Melissa kind of emphasized with, fairly fixed cost and high opportunity for scale. Like our point strategically has been to get more volume into the platform because it costs us nothing what we do, right? And that's inherent in the moats that Melissa talked about, and it's an inherent economic and business model of that business. And so we've been trying to drive that. The results have been fairly successful as a result. And we think with the investments that Melissa talked about in the Corporate Payments business, both on the embedded and direct side, we'll be able to continue driving volume into that platform and continue to see the positive economic benefit that we've seen over the last few years.

Okay. So let me switch a little bit to the investor questions. And I guess, like just following on the line of questioning I had at the end here, there's a question about the travel and the Corporate Payments business. And so the question is basically, there's maybe less than a dozen competitors that can realistically service the travel payments companies on a global basis. I don't know if you agree or disagree. But how has that number changed over the past 5 years? Is it relatively small? Or has that number grown? And has the product set improved? Or has the gap narrowed between what you guys can offer and the others can offer? Maybe guys talk about that a little bit?

I'd say, the list of people who can service those global customers is much smaller than that, where we have seen more competition over time, and I would say, incrementally more as opposed to a lot more, has been individual country like very specific, much more simplified workloads. And so we do see some of that. But I'd say, largely, if you look across the markets that we're in, from a competitive perspective, it's largely the same people. It's mostly the bigger banks, I would say, that we compete against and that's been true over time. In terms of development we've done in the platform, when we bought eNett, we combined the functionality that eNett had with the functionality that we have. And what that's enabled us to do, and we did it in an even more modernized way, which allows us to really work with the customer in a way that allows them to maximize the spend volume that's going through the network and tying up the least amount of capital to do so. And it's incredibly complicated because we're doing that across the world and consistent with all the different compliance requirements that are needed. And so from a -- I'd say, from a competitive perspective, it has been a place we have been investing. It doesn't just help our travel customers. It helps across the portfolio because that's functionality we can use anywhere, but we have continued to invest in that. So from a competitive perspective, I feel as good, if not better, than I would have historically about the position we have in the marketplace from a competitive perspective. And again, we have a great team that's very focused on continuing to work opportunities we have across the globe and make sure that we're maturing the relationships that we have with our existing customers.

And those hands full of bank or maybe even smaller than that, that can sort of do what you guys do and some have been there. Like can they do what you would do? Or is there a difference there as well?

No. I mean, there's a difference both in terms of -- when I talk about the number of products and that across, no one has that product depth that we have in our currency capability. I think of the combination of those plus the scale by which we operate, all of those things are distinguishing for us. And in particular, the ease to use our platform and the complexity that we removed that enables our customers globally to have access. We hear consistently that our underlying technology is the best.

Okay. Great. I'm sure there's going to be questions on the economics, and we'll talk about that later. There's another question about delevering. Do you expect to delever via growth in EBITDA only or do you expect to generate meaningful cash flow to be used to reduce actual dollars of debt, free cash flow has been kind of volatile for you guys?

Yes. I'll take that one, Sanjay. So we generate a healthy amount of cash flow. If you look at earnings reports that we published the last couple of years, $500 million plus of free cash flow generation, adjusted free cash flow generation last couple of years in '24 was higher than '23. I think -- and that cash, we will use with the announcement of this week. As Melissa said, we intend to deleverage and we intend to use our cash to reduce debt. So it will be -- cash will be used to reduce debt over the next 12 months or so. I think the reference to the volatility of cash flow may be looking at, right, our 10-K filed financial statements or our Q, which consolidates like the WEX Inc. and the bank, and there's a lot of activities that go through the bank from a funding perspective that maybe the muddy the waters a little bit when it comes to what's the actual free cash flow of the business, which is why we provide the disclosure on what is the adjusted free cash flow that WEX Inc. and management actually figure out, which is, I think, more consistent on a year-to-year basis.

And then maybe just on the -- there was a question on the buybacks. Just if we like -- could you just talk about -- if you do resource the whole $750 million, the assumption is you probably couldn't do more for the year, maybe just talk about sort of pro forma leverage. I'm not sure if you mentioned that before, Jagtar?

Yes. So pro forma leverage, so if we take leverage, 2.6x pro forma for the debt raise was taking us to 3.3x. And we will -- our range is 2.5x to 3.5x, and we will be focused on deleveraging as Melissa said.

Okay. So we would probably assume any additional would happen next year to the extent....

Yes. And we'll be running up against Board authorization. So obviously, that will be a conversation from the Board as well.

Okay. Great. And then there's another question about -- a statement saying very appreciative of the Dutch offer, great capital allocation. But just on the growth, you talked about the untapped growth potential on the fourth quarter that these investments unlock. Maybe -- I think the time line piece you've kind of talked about a little bit, but is it next year or the following year? How long does it take to reach the 7.5% long-term midpoint? Is that gradual? And to what point is it dependent on -- and I kind of asked that before, but just how -- is it dependent on these investments paying off? Or do you think you could do that without it and there's some upside if these investments pay off?

Yes, why don't I take that one. So the range is there because of the range of scenarios, right? So I think the impact of these investments and the and products investments, et cetera, will put us one end of the range or the other, but I think we're very, very confident within that range. Melissa talked about that a portion of the investments are going into the digital marketing area of our Mobility business, which is fairly easy for us to flip on. We spent a getting ready for this last year. So fairly easy for us to flip on. The other areas where we're kind of ramping sales teams, they're building pipeline, that's a little more time to get going. So what we've sort of set expectations are as these sales investments go into place, we expect the impact to start hitting in 2026. And really, the bigger piece of it, I think, will be the back half of '26 because especially on the direct sales side, as these salespeople, right, ramp up this year, as they ramp up their pipeline, as they start to close deals, we see them closing deals going into late this year, beginning of next year. And so that's where you'll start to see their revenue impact going into the back half of next year.

I guess there's another question that's sort of similar to this one, but about the investments you've made as a result of the cost cutting. So you've talked about $110 million of cost cuts over the last 18 months. About half of that was invested back into the business in the second half of '23, and I think the first half of '24. So are we seeing the benefit of those investments come through in 2025, but the growth rate is still sort of lagging? Is that the way we should look at it? And like how do we measure that on a go forward basis?

Yes. One of the big areas that we invested in for an example is our credit and product capabilities, right? We saw back in 2022, some elevated fraud losses. We invested heavily there, right, machine learning, getting AI-type capabilities so we could more proactively adjudicate credit decisions, more proactively monitor the portfolio and adjust credit limits to avert any potential -- any large credit losses. And I think we've absolutely seen the impact of that in the portfolio. We've seen credit losses come down pretty dramatically over the last couple of years. Even if you look at the credit environment today, a lot of other companies are talking about, right, consumer defaults increasing. We've been seeing credit losses decline, and I think that's an outcome of the investments we've made in that area.

And Sanjay, just to kind of keep in mind, we've put this in the supplemental information we put out there, but this year's results are being impacted more by the transition from our online customer to in-sourcing some of their services. That has a pretty dramatic impact to profitability. So we're buffering that and part of how we've been able to buffer that which has impacted both '24 and '25 is through some of the cost work that we have done and continue to do. Frankly, it's just a muscle that we have across the business. We're really focused around this as a program. We're very focused around places that we can create automation, that creates better customer experience at a lower cost. And there continues to be a lot of opportunity for us on that front. It's something as a management team that we talk about on a regular basis and have action steps against with the idea that we think that we can use technology to be our friend, but also to create a better experience for the end customers that's choosing our products.

And I wanted to double on that kind of supplemental material. We did provide a walk in the guidance section that shows the puts and takes of revenue and in EPS relative to the one customer transition that Melissa mentioned as well as the investments we're making this year, it does show the underlying growth of the business, very healthy, very much in line with the guidance rates that we put out there with striking distance on the revenue side. So we feel really good from where we are from the starting point to achieve what we set out.

And I mean along the lines of this discussion, there's another question about the volatility in the Travel business. I mean, we've talked a little bit about it throughout this conversation. But just as we look ahead, right, now we've got this one-off transition in-house, understanding not many of the rest can do that type of stuff. People are worried about another large participant and maybe there's another renewal coming out, like how do we get comfortable that there's some stability in that business on a go-forward basis? Understanding the take rates over time just come down and their scale offsets, but just thinking about like revenue growth and profitability growth in that part of the business. It's been quite volatile. How do we get comfortable with that? And do we need to worry and I'm asking this question again, Melissa, I'm sorry. Do we need to worry again like about a renewal anytime soon of a large OTA?

So we're always going to have things that are renewing. And when I think about that part of the business, we should expect as they go through renewal that we are going to renew things at lower rates. That being said, we have made some pretty significant adjustments over time. And so the degree of those changes become smaller just by default. And so if you think about those larger customers that come up for real -- yes, that will happen, but it won't be quite as painful as what it has been historically because what's happened over time is the net take rates have gone down. And the other thing I'd say is, we when we put together our guide, we were very thoughtful about any of those things that we thought could impact the year because we're really focused on derisking the guide that we put out for the year and doing it very intentionally.

Okay. That's helpful. Maybe we could just -- let me just see. And obviously, audience, please continue to send in your questions if you have any. There is a question on like stock-based compensation. Like some of the peers have started like removing that. I mean, is there any thoughts around stock-based compensation that you guys have? Because the industry sort of convention now is more going towards GAAP anyway, but just curious if you have any thoughts on that? That was the question I got.

What's interesting is we look at it both ways. We look at it both on -- and thinking about it, when we look at stock-based compensation, we look at burn rates, we look at total expense as well. And if you look across our peer group, at least right now, they're generally excluding it. But just because we exclude it from ANI doesn't mean that we don't pay attention to the number associated with it. And obviously, that goes into our compensation committee and as they're looking at what's happening from a market perspective, they're thoughtful of that. The other thing I would say is a large amount of the -- particularly the executive comp is tied to performance-based incentives. So there is a correlation between what's happening from a performance perspective in terms of how that translates into actual realization of stock.

Okay. Great. There's another -- this is my question actually. Maybe we could just talk a little bit about the competitive landscape in each of the segments because I know it's evolved over time. We talked, I think, enough about OTA. Get it. But maybe we could just talk about mobility, sort of the EV push there as well. It sounds like that's still an important component of the story. Anything that you could talk about in terms of enhancing your market position in either of those segments?

Sure. So let's start with the mobility. Mobility is a place that if you look at the competitors, think of it as there's 2 primary competitors here in the United States. There's an entity owned by U.S. Bank called Voyager and then Corpay in the U.S. and then others, obviously, outside the United States. And when we think about our ability to compete in that marketplace, the biggest moat continues to be the closed-loop networks that we have because of that -- that product is so dependent on data. And I think of the places that we continue to invest in that product is largely around how you can take the data that you're getting associated with the customer, help them have confidence in the payments they're making so that there is elimination of fraud or misuse and doing it in a way that helps actually control costs. And so you look at this marketplace, we continue to invest in that moat, not just the closed-loop network, but products that surround it and thinking about ways that we can add in market adjacencies like what we're doing with our enhanced acceptance product, which takes our open-loop product set and combines it with our closed-loop one and gives our customers the best of both or 10-4, which is the ability for our customers in the over-the-road space to leverage our discount network in order to purchase fuel. And so we've been really focused on not only do we continue to really pay care and attention to the things that Jagtar was talking about earlier, which is the credit capabilities, the fraud capabilities, which are increasingly important and the underlying product set, our digital marketing capabilities, the user experience as they go through the process but also looking for places we can continue to increase the TAM. So from a competitive perspective, we feel really bullish about the continued market opportunity you have there. I talked at length about Corporate Payments. Then the benefits business, the 2 primary competitors we have is HealthEquity, which investors know more and then a company called Alegeus, which is owned by private equity. And you think about both of them, HealthEquity is more of a direct offering into the marketplace, Alegeus is more of a partner offering, we do both. And so then when you think about the competitive advantages we have versus the underlying product in the marketplace, the ability to have multi account types on 1 technology stack, which enables an employer like WEX who has multiple types of medical plans with different account types that sit behind it to easily leverage 1 technology base, continues to be a core differentiator that we have in that market. And then on top of that, we have just breadth of distribution and so that both in mobility and in benefits, we have just tremendous breadth of distribution because we're going into the marketplace, both with partners and directly. And so you just have lots of options for cash or for customers coming to us. And so from a competitive perspective, I would say, across the business, there have been some new market entrants over time. They're generally very subscale. And not -- just don't have the breadth of offering that we have in the market. And so it's primarily that we're competing against the same people that we've been competing against for many years.

Got it. There's a question on my tariffs. I think mobility, obviously, the over-the-road trucking business has been in a recession for some time now. And obviously, that's been a headwind on the segment. But as we think about like tariffs and all this discussion of tariffs, have you seen any changes in behavior? How do you guys plan for that? Is that built into the ranges that you guys have articulated?

Yes. And we think about -- we're in this interesting land where you wake up and every day is a new day. And for us in tariffs is certainly one of the things that we're working through. I mean if you look across the over-the-road business, where you see the largest impact, there aren't -- there are specific ones that sit within our portfolio that probably have an impact as opposed to being broad-brushed across everything. And so when we think about the guidance range, this is certainly something that could impact overall. I think in general, what we're seeing, although again, it's the minor, not the major, but maybe a little bit more pull of volume into kind of pushing forward and having shipments coming through earlier as opposed to later in the year to avoid some of the tariffs. But it's on the fringe for us. It's just not a big enough part of the portfolio to have a meaningful impact.

And you don't think it like extends the pain in the over-the-road segment?

I think it will -- I think it could extend the pain for certain customers that are more reliant on cross-border trucking. If you talk to that customer base, they feel more bullish on rates than I would say on volume right now. And so for us, that is -- that's not -- that will make a difference to us if they're earning a higher rate. But I think it does help if you look at the overall profitability of the industry, if they're starting to pick up on rates, it's a positive for us indirectly because it just means there's more people that are viable that are in that space. And so I'd say, they're a little bit more hopeful than they were, but I do think tariffs will have an impact on some subsection of that marketplace.

Okay. A couple more questions. On the fleet business, like do you see areas where you can expand the product breadth? A couple of names were cited, Transporeon, W.A.G. Payments. Do you see any -- do you have any ambitions to expand to adjacent offerings?

We are expanding, I would say, in places where we think we have a clear, not just right to win, but there's a customer pain point. So I would think of it as very targeted as opposed to kind of like broad brush expansions. And so as we fill -- if we go through a process where we fill a funnel of ideas across the business of things that we want to -- problems we want to solve for customers. And that's coming through conversations that we're having in the marketplace within our product team, and then we go through early-stage testing and kill, frankly, a lot of the ideas to come through. But those that make it through are places that we have confidence that it's real customer problem that we can solve and that we have a unique ability to do that based on the assets that we have in the marketplace. And so I would think of that as -- there are places we will continue to expand the product over time, but it's going to be very, very targeted.

Sanjay, I'd say, Melissa talked about a little bit on our last earnings call, right, with the 10-4 product as an example of something that we went through exactly that process.

Got it. Okay. Last question from the audience, and it's a good one. I would -- so the question is, since it took us so long to talk about mobility for this audience person, which is fair. Like are you spending too much time talking about Corporate Payments since the other businesses, Mobility and Benefits are 85% of the company? Do you feel like, I guess, it should be deemphasized?

A wonderful question. I think if -- when I think about what I spend investor time on, it is largely Corporate Payments, which so I think we are trying to make sure that we're getting enough information out and so that we're providing information on that part of the business because it causes a disproportionate number of questions in terms of how we spend our time in the business, no it's much more pro rata, across the size of the businesses and the opportunities that we see in each of them. It's a fair question.

All right. We'll end it right there. Thank you, guys. I appreciate the candid responses, Melissa and team, and thank you to our investors who've hopped on, and I'm sorry for those that had the technical issues, but we will have a replay available. So please look forward to that. And then if you have any questions, feel free to follow up with myself or Steve Elder in IR, and he can connect it with the management team if needed. Thank you, guys.

Thanks, Sanjay.

Thanks, Sanjay.