American Express Company (AXP) Earnings Call Transcript & Summary

Good afternoon. Good afternoon, everyone. We're pleased to be hosting American Express and Jeff Campbell at our conference, I believe the last session. And as usual, we have saved the best for last. I think this is the second time that American Express is closing out our conference. And let me start by first thanking Jeff for being here, and we'll just get started straight away with the questions unless you have any opening remarks, Jeff?

No. I appreciate the opportunity to be here and thank everyone who's tuned in for their interest in Amex. So let's go at it.

Great. So why don't we start with, 2020 has been a most unusual year, to say the least. Hopefully, we're turning the corner here with the vaccine news. And so -- but what are some of the key learnings that you have found at American Express from the pandemic? How will that shape American Express over the next few years?

Well, I think that's a good starting question, Mihir. And let me kind of summarize a whole lot of stuff by saying the learnings are probably around being prepared, moving flexibly and fast, thinking in phases and thinking about what it all means for your long-term strategy. And so to blow each of those out a little bit, being prepared for us really comes down to the fact that we spent a lot of time, as a senior team, in 2018 and 2019 thinking through how we wanted to manage the company in an economic downturn. Didn't think about a pandemic, but we thought a lot about a downturn. And that allowed us to very quickly communicate with 65,000 colleagues and with our shareholders about what our priorities are: supporting our colleagues; protecting the customer and the brand; selectively investing for long-term growth; and remaining financially strong. So that's sort of learning 1. Learning 2 is that I think, like most companies, we have been surprised at how fast and efficiently the company and our decision-making have worked in a completely virtual environment. While we now have the majority by count of our locations open to some number of colleagues, including our headquarters in New York, we still have very small numbers of people in our offices, probably in the low single digits around the globe on average. But the pace of decision-making, our ability as a global company to work in a really coordinated fashion with people who are all over the globe, frankly, it's been better. And so we are spending a lot of time thinking about how we sustain that. The third learning for us is, like many things, you have to think in phases. And Phase 1 for us was just stabilize the company back in March and April as we all tried to understand just where the environment was going. Phase 2 is where we are now, and Phase 2 is about we understand how our business is going to react in this environment. We have a better understanding of how governments, consumers, small businesses are reacting. So that allows us to begin more aggressively, selectively doing some things, spending and investing for long-term growth because we want to get to Phase 3, which is being back at our pre-pandemic levels of earnings and executing on our financial growth algorithm. I can't tell you, so I'll head off the question now, Mihir, how long Phase 2 is. There's still too much uncertainty medically, too much uncertainty economically, perhaps too much uncertainty politically. But we're clearly in Phase 2 at this point. And the last thing I would say is we have obviously spent a tremendous amount of time thinking about what all of this means for our long-term strategy as a management team and with our Board. And there are certainly some tweaks that we no doubt will talk about in the next 36 minutes, looking at your countdown clock here. But in general, we think our long-term strategy remains the right one, playing off some really unique strengths that American Express has. And so that's what we're focused on. So being prepared, being flexible and fast, thinking in phases and ensuring that you have the right long-term strategy. Those are the big learnings, Mihir, that I would really point out from the last 7 or 8 months.

Great. So maybe like we'll start digging in a little bit more, just let's -- thinking through where we are in the year, we're entering the holiday season. We have some good news from the vaccine, but I suspect too soon to see what the impact from that is. At least a little bit more clarity, a little bit more clarity on the political side, it feels like. Maybe you can just comment on the health of the consumer. Are billing trends -- maybe give us an update, if you can, through the quarter so far. Are early billing trends into 4Q similar to what we saw exiting 3Q? Anything that you can share regarding what you're hearing from corporate partners or from retailers just regarding 4Q expectations? Any changes, any kind of update you can provide on billing trends and what your expectations are?

So there's a lot there. So if I forget any of those, come back at me. But can I start by just making one comment? I mean certainly, yesterday's news about a vaccine is good news. I will tell you that it's really in sync with what we have for a while been planning for as a management team. And that we have long, listening to lots of the experts, believe there will certainly be a, or in all likelihood, several vaccines that have approval by the end of this year, early next year. That still leaves you with a long road of getting through the challenges of distribution, trying to get people to actually take the vaccine, the manufacturing challenges as well. So that's why, as I said earlier, I can't tell you how long for us Phase 2 is. But the vaccines are a step, not a surprising one to us, but there's still quite a ways to go. When you look at our -- so now let me go kind of to trends. So we gave quite a bit of detail back in -- on our earnings call in October through September. What I would tell you sitting here on November 10 is the trends we saw in October as well as the early days of November actually look, on balance, pretty consistent with what we saw in the month of September, in other words, the exit month of Q3. And so what does that translate to? It means that our overall billings were down about 18% in the month of October. Our non-T&E spending continues to show growth, up 3%. And T&E continues to, of course, be much weaker. It was down about 65% in October. Now there's a little bit of days mix noise, Mihir, when you compare October to September. And I think we probably have a little bit of caution because the October numbers probably don't fully reflect some of the things now going on in the U.K. and other parts of Continental Europe. We'll have to see where the trends in the U.S. go. So I think the overall message to us is things are fairly stable. So while we were seeing very sequential improvement, that paused a little bit in recent months. They still continue to improve in some areas, and it was a little offset in others. And the kinds of trends that we talked about back on the earnings call are absolutely still going strong. So retail online spend for consumer is still tremendously strong year-over-year. Small business spending, still our strongest of all the spending. And when you look at the components of T&E spending, restaurants really showing up the best, with cruise lines and airlines probably showing the biggest challenges. I think all of that, just to come back though to my characterizing we're in Phase 2 and we're thinking about Phase 3 and long-term strategy, look, we continue to believe that the consumer desire to travel is insatiable. We continue to see all the markers of people just fending up demand that will come back as further medical progress, or the vaccine as a step, comes back. And we continue to see more caution with our largest corporate customers on travel. They will clearly, as we've said many a time, now be slowest to come back. Although the one interesting thing that we do see when we look at our largest corporate customers is the large consulting firms, the large accounting firms, boy, travel is still really de minimis. The industrial firms that are making stuff around the globe and running their global supply chains, they're certainly down, but their travel is not down nearly as much as those big firms. So it's just an interesting anecdote that shows that business travel will be slow to come back, but there is travel that has to happen and will happen and will come back. So I don't know if I got all of the components of the question you asked a few minutes ago, Mihir, but hopefully, I did.

Yes. Yes. No, no, no, you definitely did. But maybe we'll just stick with travel T&E a little bit, that it's clearly been a big topic of interest from investors, from everyone really related to American Express. And understanding the vaccine news is pretty new and that there's not -- it's hard for you today to make a call on when Phase 2 ends. But what are your expectations just in general related to overall T&E spending, right? If we were to say benchmark 2019 as a normal year, when do you get back to 2019 levels of billings from T&E? Is it 2022? Or is it 2025? Is there -- because I think you made the comment that corporate T&E, for example, may never come back to the levels you had before, but there's still going to be growth in consumer, things like that. And related to that, if you can just talk about travel in general from a strategic perspective as a category. American Express has really built a niche for itself, if you will, focused on that category. So just -- maybe just talk about the importance of the travel category to AXP from a strategic perspective, both on the consumer and on the commercial side, too.

Yes. Well, let's start with consumers, right? So we really do believe we have a uniquely strong brand, a uniquely strong set of value propositions around travel and a uniquely strong set of partnerships around the globe in the travel space. We went into the pandemic with that. We have it today. You then combine that with our really strong view based on history, based on how did consumers react over time after the horrific events of 9/11. I would remind all of you, I was an airline CFO at the time at American Airlines. The human urge to travel, to gather, to explore is insatiable. So we absolutely believe that consumer travel will be back at the level it was at in 2019 and resume the kind of growth it was at. As you would probably expect from me here, despite you asking the question, I'm not going to give you the quarter that happens. But when you look at the way people who have our travel co-brand cards continue to spend and are just accumulating miles, when you look at the way that customers in our proprietary loyalty program, membership rewards are just stocking up points right now, they're not choosing to redeem for online retail, which they could, they're just stocking up the points to travel. And even when you look at the patterns of travel you do see right now, right, many, many borders are closed around the globe. You really can't travel in many cases. But when you look at close-in vacation places that people can drive to in their own country, many of those places actually have very high occupancy right now. And so all of that really makes us believe that consumer travel is going to come back as soon as the medical situation allows it. You combine that with our historical unique strength in travel, and it tells us we would be crazy to try to dramatically pivot the whole company because of what we view as a fairly temporary change in the way people are going to spend around T&E. Now we're certainly doing things from a value injection perspective, to use our phrase, to make sure that during this temporary period, our fee-paying Card Members feel they're still getting good value. And so we feel great about the fact that attrition levels are actually below where they were pre-pandemic on our fee-paying cards. And that's indicative to us of the fact that we're doing a pretty good job of putting a temporary value in. But we don't think the right thing to do is to pivot permanently. We think we have unique strengths. We should stick to them. And from a shareholder perspective, that's a really important belief that you have to have with us because we're not trying to pivot the company to maximize next quarter's results because we don't think that's representative of our long-term opportunity. Let me pivot now to commercial. So I want to start by reminding everyone that our commercial business is really built around B2B spend. And it's really built around small business, which has been the highest growth area and constitutes, pre-pandemic, 75% of the business. And that small business proposition is really based upon some of the unique focus we've had on small business, some of the unique expertise we have, some of the unique spending capacity that we're able to give to small businesses because of our charge card model. And so travel is less important in our commercial sector. When you look at that small business segment, 80% of their spend is B2B. And of course, this is an instance where the pandemic has really helped accelerate, in our view, the focus of all businesses on driving more and more of their spend into digital channels. Boy, that plays right to our strengths and right to what we were doing pre-pandemic, right to what we're doing now. And it makes the return of travel commercially, frankly, less important to us than the return of travel in the consumer segment. And we do have a part of our business that is the corporate card business, where those customers who tend to be the really large corporations do use the card predominantly for travel. So when you look at the 9% or so of our pre-pandemic billings that were in the large and global segment, roughly half of that spend was on T&E. And that spend, so now we're down to talking about 5% of our pre-pandemic billings, that that's the spend where we will say that's going to be slower to come back. Now it will still eventually come back and because of growth, at some point, be above where it was in 2019. But Mihir, we've said for years, that's not a growth engine for the company. It's an important foundation for the company, and we absolutely want to maintain our leadership with the larger corporations around the globe in terms of being their T&E supplier. But the growth comes from using that to pivot, to also being a key provider of them in their B2B payments.

Got it. No, that is helpful. If I could -- maybe we'll talk a little bit about -- to some of -- something you mentioned in your answer about just retaining your customers with some of the enhanced value propositions, temporarily maybe. But that was a topic that maybe was a little bit of a surprise for, I think, investors coming out of 3 -- third quarter earnings, was your decision to lean into growth a little bit earlier. And can you just talk a little bit about that? What do you see in your data that made you think that now is the time to do that? Is it really focused on just retaining customers? But I think you also talked about going out and trying to acquire more customers. You did see a nice 40,000 -- 40% increase in the new card acquisitions acquired. So how are you prioritizing that spending between those 2 categories? And how do you judge success? And related to that, I wanted to ask about the new customers that you are acquiring. What -- can you give us some, maybe some anecdotal data, some kind of -- what are the characteristics of these customers? Are they prepaying? Are they millennials? Are they -- do they look like the customers you used to acquire pre-pandemic? Or is there something we should be aware of with this best cohort that you're acquiring right now in this environment?

So again, that's a multipart question, so I'll try to get all of them, Mihir. Let me start with existing customers, then go to new customers and do it in that order. So when you look at what I called, a few minutes ago, value injection, so these are some of the changes we've made temporarily through our value propositions on fee-paying cards so that people feel they can -- are continuing to get good value. And I'm going to simplify a little bit. On the consumer side, a lot of what we did was add some wireless and streaming benefits. Take up on those has been tremendous. So if you look at our U.S. card -- Platinum Card Members, for example, 75% of them are using some portion of those new temporary benefits. If you look internationally at Consumer Card Members, it's about 90% who are using them. And the good news, we think, long term is while some of those members were already spending in those categories, there's a chunk of those members who actually never previously spent in those categories on their cards. And experience would tell us it's really sticky, right? Once you say, I'm going to put my wireless service on my Platinum Card, you tend to just keep it there even as the incentives go away. So we feel really good about the way customers have taken to the value injection we've done. But the real measure is what I also talked about earlier, which is attrition levels on our fee-paying cards are below where they were pre-pandemic. We feel great about that. We're very focused on that metric. And that's what we're going to watch. Now what began to change a little bit in Q3, Mihir, and which perhaps surprised some people, but I'm not sure it should have, although maybe we didn't talk about it enough, is that we are through Phase 1. We understand now more how the world behaves in a pandemic, consumers and businesses. We understand how our business behaves. And so that has allowed us to thoughtfully begin to acquire new Card Members on the consumer and small business side in a way we really couldn't back in April, when we weren't quite sure what was going to happen with different sectors. And so we did begin to acquire. I would point out, Mihir, I don't think we were unique in it. It is -- this industry has always been competitive. It's competitive now, and it always will be competitive. But we did begin to acquire customers a little more aggressively in Q3. Part of that is beginning, therefore, to do some marketing, beginning to offer some incentives to customers. And then you saw that reflected in our results in Q3, and we're going to continue to grow that a little bit as we get into Q4. The Card Members we're acquiring, the changes versus where we were pre-pandemic, Mihir, I would say, are directionally exactly what you might expect, which is do we have a few less people on fee-paying cards and a few more on Cashback cards? Yes. Do we have a few less on co-brands? Yes. Interestingly, we have a few more in terms of the mix who are in the millennial category. So those are changes that I think are probably in line with what you would expect given the environment. I think longer term, you'll probably see a trend back to towards our pre-pandemic levels. But we'll have to see. But we feel good about the thoughtfulness that we're now able to put from a risk management perspective into our acquisition of new Card Members on both the consumer and small business side. And we feel good about the retention levels that we're seeing with our existing customers who are on fee-paying cards. So hopefully, I got all the parts of your question there.

You did. You did. Maybe just sticking with that topic a little bit, just on card fees. When I -- when we think about card fees, you've typically done them with your value proposition, refresh cycle, if you will. Can you just remind us, did you suspend that cycle in 2020 given the pandemic? And now that we're in Phase 2, is that when you start-up that cycle again? Or is that a Phase 3 item, whether you start refreshing value propositions, maybe start taking some of those fee increases? Or should we expect that in Phase 2? Or is that a Phase 3?

Good question. So let me step back and remind everyone that, of course, going into the pandemic, card fees had been, by far, our fastest-growing revenue line. We've been very focused on it. I think what people sometimes forget is that growth comes from a couple of things. While it does come from some steady increase in fees on products around the globe, much more of the growth just comes from acquisition of new fee-paying Card Members. And so you are correct that we have stopped for a little bit this year in light of all the uncertainty in the environment our menu of we're going to steadily refresh all of our fee-paying products every couple of years. You should absolutely expect to see us resume that in what we're calling Phase 2. So that's, since it's November 10, we're practically at the end of this year, so that's -- in 2021, you will begin to see product refreshes again. And as we just finished talking about, you see us beginning again to crank up the new Card Member acquisition effort. Now I would remind everyone that we've talked the last couple of earnings calls about the fact that the way that fee revenue line works. We generally amortize the revenues we get from fee-paying Card Members over a 12-month or 4-quarter period. What that means is there's a little bit of stickiness. Even though we've stopped or greatly slowed our rate of acquiring new Card Members, even though we have slowed our rate of card fee increases, you still saw double-digit growth the last couple of quarters in card fees. That well sequentially weaken the next couple of quarters even as we begin again to acquire new Card Members, and then it will slowly asymptote back up over the number of quarters to where we were. So I would anticipate that as you get into what we're calling Phase 3, card fee growth will be as important as it was pre-pandemic. You are going to see a little bit of this, maybe to use a phrase we're all using to talk about the economy today, a U shape to the way card fee growth will go as we go through our phase this year.