American Express Company (AXP) Earnings Call Transcript & Summary

All right. I want to welcome back Jeff Campbell, CFO of American Express, who's held the role for almost 7 years now. We really appreciate you coming back over these last few years. We really enjoy hearing your perspectives. I'm excited to get through some of these questions here, but let me lead off with the topic du jour.

Maybe you can just talk about sort of what you guys are seeing as a result of the coronavirus and the spending trends.

Great. Well, first, thanks for having me, Sanjay, and thanks to all of you for coming and listening. And since you brought up my history, I've now been at Amex almost 7 years. Some of you will recall that I have had 2 other CFO gigs, one at McKesson in health care and one at American Airlines. So I want to say I'm glad I'm not an airline CFO right now. But look, let me step back a little bit. So we ended 2019, Sanjay, with tremendous momentum as a company. 10 straight quarters of 8%-plus revenue growth, 2 straight years of double-digit earnings, and we enter 2020 with that same momentum. And we have gone through January and February maintaining that same momentum. Now when you look around the globe, we are a global company, you will see that in the markets in Asia most impacted by the coronavirus, so we're talking Mainland China, Hong Kong, Taiwan, Singapore and Japan, you do see, for those countries, material reductions in travel, both inside the countries and in and out of the country. And that has caused a moderation in spending trends in those countries that for those countries is material. But for our overall company, that is not a material part of our business. And so if you were to look at our filings, you would see that what we broadly call our Asia Pacific region is 9%, 10% of our revenue in PTI. But that actually encompasses a lot more than just the companies I just talked about. Australia, for example, is part of our Asia Pacific region. And actually, Australia has been particularly strong. And for reasons I'm not sure I can fully explain, even stronger in the most recent weeks than it was in February. So sitting here today, in terms of the impact on us, we really see nothing that would cause us to have a materially different view of our plans for the year than we started. However, the obvious question that we're watching every hour, every day, and that all of you and all of our competitors, like when you just had on the stage, are watching is, are the impacts the kinds of impacts that we have seen in those 5 Asian countries I just articulated? Are you going to see that impact spread into Europe and into the U.S.? And if it does spread, how long does it last? And as we sit here today, we don't have material factual evidence of that spread. We have lots of anecdotes, right? And certainly, we have, if you look at just the last couple of days, a little bit of softness in some of the T&E bookings. But again, let's put that in perspective, for our company, about 8% of our overall billings volume globally come from airlines. And I am an old airline CFO. I would remind you when airlines stop flying to China, they actually generally redeploy the plane somewhere else and consumers often do the same thing. And if they're not going to go to Europe, often they go somewhere else in the U.S. So airlines are only 8% of our billings. T&E in total is down to 25% of our business. And I think, Sanjay, that's -- at least in the U.S., I think that's something people sometimes forget. I suspect you'll get to a question about, gee, do we have any learnings from SARS? Well, SARS was 17 years ago. Even our -- the general lesson that SARS, I think, teaches us is these things end and there's a strong rebound afterwards. We were also a different company back in the SARS era where T&E was a bigger portion of our company. And in the interim, we've had 17 years of much higher growth rates outside of T&E, particularly in our commercial business. The last comment I might make or maybe 2 other comments. One, when you look at what T&E we do have, certainly it is a little disproportionately coming from our very strong corporate card franchise, where we have about over 60% of the Fortune 500 globally who put their T&E spending on their card. As you've heard us say for some time though, that's a modest part of our business, about 9% of our billings. You've also heard us say it's a lot less than 9% of our profits. It's an important part of the business because of the foundation it provides, particularly for our merchant value proposition, it is a low-margin part of our business. Why do I mention that? Because while that certainly is probably the most impacted customer segment right now, the P&L impacts of that are much, much more modest. Just in the interest of completeness, I'm going to go ahead and make one other comment, which is, I will say that I think an unfortunate confluence in terms of timing for the financial services industry, at least the issuing part of the industry, is that as we close the books at the end of this month, you will have across the financial services industry, all of us executing on the first quarter ever of accounting for how we think about credit reserves under a new accounting provision, CECL, that we all have spent a lot of time talking about. And sitting here today, we see nothing but continued strength in our credit performance across the globe, nothing but continued strength. But one of the aspects of CECL is you're looking at lifetime losses and you have to factor into your equation economic forecasts. And so one of the questions we will all wrestle with is everyone in the industry did a January 1 initial adoption of CECL based on what economic forecast looked at -- on that date. It's going to be very interesting to see what judgments we're all going to have to make about what economic forecasts look like at March 31. Now I just want to emphasize, we see no change in our actual credit performance. You've heard me say in multiple forums that one of the many, I think, unfortunate attributes of this new accounting pronouncement is it's going to cause more volatility quarter-to-quarter. So I'm really encouraging people to take a little more of an annual view here, but I think this will be an interesting one to watch.

And you guys used like a consensus benchmark in terms of the...

Yes. So we do not have in-house economists. So we generally use a mixture of an external provider, the same one, frankly, that many banks do, who you would all know. But we also look at consensus economics forecast. We're not in the business of trying to come up with an economic forecast. And I think one of my competitors said on the stage a little bit ago. And anyone who thinks they have enough data to make a forecast right now, I would dispute that.

No, I appreciate that. I guess one of the things that we're hearing a lot about is travel bans implemented by corporations and many personal plans being pulled -- pared back internationally. I guess you're not seeing it inside your numbers. Any sort of material impact as a result of that?

Well, again, to be clear, in those 5 impacted countries, absolutely, we're seeing the impact of bans to travel in China. And it's dramatic...

In the United States.

In China. In the United States, February was a strong month. If you look at the last couple of days, really starting with all the market hysteria that started last Monday, I would suggest, certainly you saw a little bit of falloff as you got into the last couple of days. Boy, the data is too noisy and it's far too early, though, Sanjay, to call that a trend. But sure, we all -- believe me, we're tracking every anecdote as well. But one of the questions is, when you dig down a few layers, for the most part, while there are some exceptions, what most larger organizations have done is ban. The most common thing is to do what we have done, which is ban travel only to and from the most impacted countries. So that's the 5 Asian countries I mentioned plus Italy. That's the most common structure. And frankly, if I just use our organization, that causes people not to want to go to those countries, but instead focus on things like domestic travel. So it doesn't necessarily cause travel to go away. There are some companies that have instead imposed a global travel ban. That is still in a small minority. And when you talk about things like, not again to be anecdotal, but people thinking about spring vacation plans, that is incredibly nascent. And I think we're all -- I suspect, if I looked around this room, I suspect you've all had a conversation in the last 96 hours with someone who's like, I don't know, what should I do? But I do want to come back to one other point, maybe back to the lesson of SARS, the lesson of MERS, the lesson of 9/11. These things rebound, right? Our long-term prospects as a company look as strong as they did a month ago. And we are all about running the company for the long term. And while I can't predict whether there will, in fact, be any material European and/or U.S. slowdown in travel, what I am very confident in predicting is that it will rebound and we want to be well positioned for the rebound.

No, that's fair. I guess when we think about those past lessons, is there any more elaboration you want to provide on SARS and MERS?

MERS to -- you've all seen the numbers, it's actually very small in comparison to anything going on right now. And particularly, what is potentially unusual here is if you get a truly global footprint of impact, that will be unusual. It's certainly far greater than MERS. SARS was so long ago, Sanjay. And also, if you think about it, you had economy still rebounding from the aftermath of 9/11, you had an Iraq war, a lot of noise in there. But all that said, you had 1 soft quarter of Asian bookings when you look at our business, and 2 quarters later, we were roaring back in double digits. There.

So I'm going to kind of shift gears and talk about things you can control, because I know those are sort of the tough ones to isolate. I guess you guys have been able to sustain very strong revenue growth for 10 straight quarters. You guys are really confident of that level going forward. What gives you the confidence?

Well, the confidence comes from many things. Number one, we really set about, Sanjay, as you know, a large number of steps to reposition the company that go all the way back to 2017. So we can trace changes we made in our strategy and how we were running the company to the kind of performance that you began to see over 10 quarters ago. Second, you do have 10 quarters of history here. Third, you see our revenue growth coming from a broad range of sources. So it's growth in spending. It's growth in our card fee income, which is now the fastest-growing revenue line we have in the P&L. And it's coming from just steady progress for about 5 years now and getting a little bit higher share of our customers' borrowing behaviors. It's also coming broadly from both the consumer segment and commercial segment. And it's coming broadly from both the U.S. and from our international business where, in fact, our international business, both on the consumer and small business side, has been growing much faster than what we've got in the U.S. So that breadth, combined with the very identifiable reasons that we can trace back to things we changed to what give us great confidence, Sanjay. In a steady-state economic environment, we'll have to see where the economic environment goes and the sustainability of our high revenue growth strategy. And just to remind everyone, it is a pivot for our company, and we have reached the conclusion that, boy, having steady and sustainable high levels of revenue growth even at the cost of a little bit of margin compression when you look at what we spend on customer engagement, that is the right trade for our shareholders in order to build the best platform for long-term value creation.

Output expenses is under the things that you can control. And obviously, to the extent that there are things happening in the macro environment that you can't control, how flexible are you on expenses?

So look, we have all the flexibility we've ever had on our expenses. And certainly, we'd like to remember some things happen naturally. So when spend, as it has, lightens up a little bit in Japan or in Hong Kong, so the reward costs -- so there's certain card member services costs, particularly since many of them are travel related. And of course, we're doing sensible things as we speak. So I'll pick on Japan. Certainly, have we pulled back in recent weeks from the kind of advertising spending we're doing in Japan? Yes. Because it doesn't particularly seem like the ideal time in the Japanese market to be spending advertising dollars trying to encourage people to get travel-related card products. So those are very natural levers. And the perhaps more important lever to the long term is, I want to be very clear, that when I say we're willing to trade off a little bit of margin compression for steady, high revenue growth, what I'm talking about are the costs that we collectively lump into what I call the customer engagement costs: marketing, rewards, payments to our key marketing partners and others. And that's where you're seeing a little bit of margin compression. Mitigating that margin compression, though, is the fact that we have a scale business, where as we grow, we need very little growth in operating expenses. And if you look since from 2010 to 2019, the operating expenses of the company, what it cost to run the machine if you will over that 10-year period are up 12%, not a CAGR, the actual growth over a decade. And that's because our model allows us to become more efficient every year, take bigger advantage of technology, take bigger advantage of changes in card member and merchant behavior who want to interact with us ever more digitally, take advantage of just tremendous advances in the cost to efficiency ratio of technology. So we are very confident of our ability to control those kinds of operating expenses. And I'm going to come back to customer engagement, those expenses somewhat naturally moderate in a dramatically different economic environment.

But there's a lot of investments you guys are making within that engagement field segment. Could you just talk about like where you might have a little bit more discretion over the near to intermediate term versus not cutting back over the long term?

Well, I am going to come back to over the near to medium term when the environment dramatically changes, we are extremely nimble in the way we move dollars around, what we spend our marketing dollars on and how many we choose to spend. And so I'm going to go back to the Japanese example. The reality is because we don't have branches, we have, in my view, had to over the years always stay at the leading edge of being really good at digital marketing because all branches, we can have an argument about whether they're worth the cost or not. If you have them, they are great and efficient source of new customers. We don't have that. I think we've always been at the leading edge of digital marketing. But what that means, though, is we are incredibly analytical and efficient of knowing what am I going to get for the next dollar I spend in the small business market in Japan versus in the consumer market in the U.K. versus putting something into the consumer Platinum Card here in the U.S. And we can pivot, because it's digital, incredibly quickly. As we have just in recent weeks, pulling money out of Japan and, frankly, a lot of it has come here into the U.S., where we continue to see very robust opportunities. So I think that's just one example, Sanjay, of our ability to pivot very quickly. In a more serious economic downturn, also, you just have fewer opportunities for marketing that are going to hit our hurdle rates. Again, there's a natural moderation there. Rewards naturally moderate with billings levels or spending levels. And as I said earlier, certain card member services naturally moderate in a dramatically different economic trend.

So you mentioned the consumer looks pretty strong for you guys. I'm just curious, I mean, obviously, we hear late cycle and we've been hearing it for quite some time. What are you looking at to sort of ascertain how the consumer is doing and how you're underwriting and...

Well, if you go back, I know I have to look at Rosie. I think it was the July earnings call last year where I first made some comments that perhaps got more attention than I intended. But I pointed out at the time that you had a little bit of a divergence between the really strong consumer performance we were seeing, particularly in the U.S., and a little bit more caution amongst our small business customers, again these are mostly U.S. comments I'm making. I think as you got into 2020, it's clear that in the battle of, well, where consumer is going to become weaker or where business is going to say, boy, there is demand, we need to spend to meet it, the consumer went out, right? And I think the concerns that we may have had -- and this is all putting the last couple of days of coronavirus aside, the concerns that we may have had of, boy, is the consumer going to come down to where businesses were in the middle of 2019 or business is going to get a little more confident? I think, clearly, businesses have gotten more confident. Now back to the last 96 hours, we're all going, well, has anything changed about the long term, do I need to make any short-term adjustments. But boy, I'm just going to keep emphasizing that from our perspective, there is nothing that has changed about our medium- to long-term outlook. And all I would say about the outlook for the very short term is we'll have to see, right? But we don't gyrate our strategy as a company because of anything I might see over the next few weeks.

And I guess, where people have become a little bit more concerned is this commercial credit, and you guys are a small business lender, a big one. So what are you looking towards in terms of any weakness to the extent there? What kind of metric are you looking at there?

Well, first, I might quibble a little bit with your choice of words. I would remind you, a, relative to other issuing competitors, we are very small in lending, right? And 80% of our revenues come from the fees that we charge to our card members, to our merchants, and net interest income is about 20% of our revenues, which is about the same amount it was literally 20 years ago. And when you look at the lending we do, do, it's mostly U.S. consumer. So yes, I'm not sure relative to regional banks and others who are very active in the small business sector that I would call us a significant small business lender. But because we have such a strong card franchise, we're certainly for card-based lending to small businesses in the U.S., that's the one place I would accept your characterization that we're a significant player. But boy, believe we, are scrubbing those portfolios exhaustively right now. And in fact, as you went through 2019, as we got into the first couple of months of 2020, we have been steadily surprised at the strong credit performance and just don't see any signs in terms of delinquencies, in terms of write off. We look by segment. We think about, well, what sectors might be most impacted by supply chain issues in China? And things continue to look strong right now.

That's great. You mentioned fee income increases as being a driver of good revenue growth. And obviously, you've had quite a bit of success on your refreshes. I mean the one question I get a lot of is, like how long that can persist and whether or not you're seeing any change in consumer behavior as a result of those pricing changes? Could you just talk through all of that?

Yes. So we have -- when we talk publicly about our company, I think, sometimes, we're a little overly U.S.-centric. And so people are, by far, most familiar with our U.S. business. If you look at our consumer business outside the U.S., we've actually been running the playbook for many, many years very efficiently, Sanjay, saying, with any product, you should, every 3 to 5 years, be thinking about how has the world changed, how is our ability to get partners to fund value for our card members changed, how do we evolve our value proposition in a way that will make it more compelling for consumers and then we make sure we have the courage to price for that. And so we have a long track record of knowing how every 3 to 5 years, you can, in any given country, refresh a product and continually drive more engagement, more new card member acquisition. And those kinds of behaviors lead to better spending patterns and, of course, good credit quality. We are late bringing that to the U.S. And I think this is one of the pivots in our strategy over the last years that is very essential. But we have a long track record of running the playbook of adding value. We have become more focused over the last 3 to 5 years on the parts of our value propositions that are more difficult for others to replicate. It's why the rewards line has actually been our slowest growing line in card member engagement because we view that as that's harder for us to differentiate. There's a certain level we have to kind of match, but it's really about the value-add and the broader lifestyle-oriented services. Those are the places we can really differentiate ourselves. And that's what we've become very focused on. The other 2 points I'd make is I think sometimes people look at the growth we have had over the last couple of years in the card fee line, I think it was 19% in fourth quarter, they think, oh my gosh, you're raising prices 19%. Well, in fact, the majority of the fee increase comes from the fact that -- on the fee revenue line comes from the fact that we are attracting more customers into the higher-fee product. We're getting more people to upgrade from a lower-tier product to a higher-tier product. And oh, yes, there is a component that is the fee went from X to Y, but that's actually a smaller part of the total. And so I think that's the piece -- and maybe this is our fault for not being a little bit more explicit, Sanjay, on what the components are that are driving the revenue and we'll try to do a better job of that going forward. But it's all of these reasons that make us pretty confident that we have a long runway here to run this play. And the last comment I'd make is we have very low attrition rates. And I would suggest our attrition rates, if you were to go outside of the payment industry, are probably the envy of most subscription-oriented business models and that's another aspect of our model that makes us pretty confident in the sustainability of what we're doing.

And maybe to that point. As you're benchmarking your products in the marketplace relative to peers, I mean, it would appear to us like the gap has widened a little bit in terms of your product actually being enhanced as others have sort of pulled back. I mean how do you guys look at it?

Well, it's hard to generalize, Sanjay, on that. Because remember, we have a consumer business, a commercial business, we operate, really important -- we operate in 170 countries around the world, but there's probably 10 outside the U.S. that are particularly material. And in those 10, we face a different competitive set in every one of those 10 countries. In general, outside the U.S., a less competitive set because we tend to not have people as focused on the card business as you do here in the U.S. And so our most competitive marketplace continues, as it has been for a while, to be the U.S. consumer side. No question. And look, there, we have some really good competitors. But part of what we have concluded, and I'm not sure this is our initial conclusion, is certainly Chase is one of those really good competitors, and they made a lot of noise in the marketplace with Chase Sapphire a few years ago. Sitting here now in hindsight, I actually think their launch of the Chase Sapphire Reserve card was tremendously positive for us, because it helped focus the entire consumer marketplace in the U.S. on the value of premium products. Chase may have done fine, I don't have access to that. You'd have to ask Gordon, of course. But in fact, our performance with our kind of equivalent product, the Platinum, has been stronger than it has ever been since the launch of that. And I attribute part of that just to the growing focus in the market on those kinds of products.

Okay. So I'm going to open up to the audience after this question. So please think of some questions, and we'll go around the room. I guess when we think about B2B, that is a really strong component of the story. How significant of a contributor could it be 3 to 5 years from now in terms of the pure B2B? I understand it's a big component today, but when you think about sort of the enterprise business and maybe other middle-market opportunities, how big could it be?

So I do think sometimes that we're a little misconstrued here. So remember, if you look at billings, we have a global consumer franchise and a global commercial franchise that are roughly the same size. Consumer is a little bigger, but commercial is close. And when you look at that commercial franchise, it is predominantly B2B spend. Now yes, we have this small portion of it which is the Fortune 500 who, actually, yes, they're mostly doing T&E. But 75% of our commercial business, the growth segment, the profitable segment, is all about the SME market. And that sector does not use the card for T&E, even as much as some of our consumer products do. It's predominantly B2B spend. It's the bike shop who's saying, I need to buy inventory for summer and then tuck it, and I'm going to use my card to fund the inventory until the customers show up and I can pay it back. And so when we talk about the B2B opportunity, we see it as an extension of what we have been doing for years. And part of what makes us confident in our ability to sustain steady, higher levels of growth in the SME segment is the vast untapped nature of much of that spend. But we've also said, particularly as you get into larger kind of mid-market companies, that's a slow slog. We made a very small acquisition last year of a company called acompay, which is about us being able to work with certain customers who want to get our help in providing a solution that better links their procurement and their accounting systems and their treasury systems. And we work with lots of partners in this space, right? We work with Bill.com. We work with SAP. We work with Ariba. And we find that when we embed ourselves into their equivalent systems for their customer base, we get huge upticks in the uses of our products. There are occasions where we find that it's helpful for us to have our own product. But we're in no way trying to compete, frankly, with the many partners we have or turn ourselves into a big software player. But we think it's a good tool in our arsenal. And the point of all that is it's a real slow evolution, right? CFOs, particularly CEOs, don't wake up and say, "Wow, my next big investment is going to be our procure-to-pay system and getting better at how we manage all that." It happens over time. But we look at that and say, "Well, yes, it does happen slowly and over time, and that's part of why there's a long runway for steady growth." But what I don't see, and I think I do want to be clear on this. I think some of those people look at some of the opportunity numbers and the size of the untapped market, look at how many in the U.S. B2B payments are still made on checks or ACH and think, wow, there should be some huge inflection point upward in the next 6 months. I don't see that. It's just not a market that moves quickly. I just see a long runway for steady growth.

Fair enough. Audience, questions?

I think they think you've got it, Sanjay.

All right. I do. So geographically, I think you've mentioned U.S. has been a great opportunity. You guys have made a big push into the U.K. What are the next major geographies? I mean you mentioned Australia, but...

Yes. When you look at our business, as I said earlier, we do business in 170 countries around the globe. We need to, right? Our card members need to be able to use their card everywhere in the world. When you think though about what drives a material amount of economics for us, you really come to a much smaller group of countries. And when you think about the nature of our product, which is on a consumer side about appealing to the premium consumer who cares about a differentiated product; and on the commercial side, it's about helping small businesses with their working capital needs. That is a strategy or product set that is most appropriate in a more developed economy. So it wouldn't surprise anybody in this room when I rattle off the countries that are really material to us outside the U.S. and then I would expect will be those countries for the next 5 years. So it's the U.K. as well as the rest of Continental Europe, it's Mexico and Canada. It's Australia and Japan, Singapore and Hong Kong. And once you get beyond that, and I'm kind of leaving China aside because that's a unique issue given some of the regulatory issues there, those are where the big opportunities are. And our shares in those countries tend to still be in the single digits. And our growth rates in almost every one of those countries well exceed the market. And we see a long runway for those growth rates on both the consumer side and the small business side to exceed the market because of our relatively small share, because of the different competitive set and because of the nature of our strategy and our products.

But maybe you could tie in where there's acceptance gaps and sort of where the growth might be thereafter.

Yes. Yes. So look, we're very proud of the fact that in the U.S., we have achieved what we refer to as technical virtual parity. One of the things I want to be clear about is perceptions don't match the reality. And we just see that as opportunity for us over time, but it will take a lot of time to change perceptions. Outside the U.S., our coverage is much lower and yet we're growing in the double digits. So one of the things we've talked a lot about over the last 2 years since Steve became the CEO is we are much more focused in a more targeted way on growing coverage outside the U.S. And by targeted, I mean a little bit focused on the reality of we know exactly where our consumer and commercial customers go. The spending is focused on a smaller number of countries and cities. We want coverage in 170 countries, but there's 35 or 40 cities that are particularly key. There's a smaller number of countries that are particularly key and we're particularly focused on those. So from where we sit, Sanjay, we just see this as upside. So we're achieving the growth rates that we have now, even though our coverage outside the U.S., and many of you who are card members have experienced this, is not where we would like it to be. But it is getting better at a rapid rate, so it's all upside from here.

That's fair. Last question from me. M&A, you guys haven't really done a lot of big deals. Do you feel like there might be some deals that you could do as things are evolving in the payment space? Your competitors are doing big deals. I mean I'm just curious.

Well, let's be very precise still. So obviously, we look at anything and everything and we're just about trying to create value for our shareholders. And we've made a series of very small, very tactical acquisitions that are mostly about capabilities. The couple of comments I'd make. When you say our competitors are being very acquisitive, well, our real competitors are the issuers. And the issuers, for the most part, aren't doing deals other than if you look at smaller, more regional banks that are consolidating, well, we're not -- there's no one for us to consolidate and we're not interested in being a bank or a more traditional bank with branches, so we're not going to go start rolling up smaller banks. Visa and Mastercard are not our competitors, right? And so yes, they've been more acquisitive, they also have nice valuations and PEs that help them. But they have a very different strategy and they're really in a different business than we are. We have to be very cognizant of what Al and Ajay are doing. And I think you have Ajay's successor here later today. Because our network, which our issuing businesses operate on, needs to be aware of what kind of capabilities and reach do Visa and Mastercard have, are we staying within some kind of competitive set with them? But I'm not trying to compete with Al Kelly or Ajay for global scale or to serve 20,000 banks. That's just not our business. So we feel -- I don't think you should expect world-changing acquisitions because there's sort of nobody for us to consolidate. You should expect a continued string of smaller, more capability-oriented acquisitions, and we're always looking at anything and everything else. But I wouldn't -- I don't see a lot.

Appreciate it. All right. We're out of time. Thank you.

Great. Appreciate it, Sanjay, and thanks to all of you.