American Express Company (AXP) Earnings Call Transcript & Summary

Hello, everyone. Up next, we are excited to have American Express once again. American Express have been putting up consistent high single-digit top line growth and double-digit EPS growth prior to the pandemic, and it was able to successfully pivot its business towards varying and value-enhancing propositions as it awaits for the return of travel and some more discretionary spending with the environment more stable and has begun to make investments to drive longer-term growth and value for its franchise. Here to tell us more about how they're going to accomplish this, we are once again excited to have Chairman and Chief Executive Officer, Steve Squeri. Today's presentation is going to be fireside chat. So Steve, thanks once again for joining us. I'm giving you a wave across the street.

And maybe I figured we would start big picture. 2020 has certainly turned out to be a year that I think is different than all of us we're expecting with the onset of the pandemic, political unrest and a wave of other things. Now you've laid out 4 priorities of how the company is going to navigate the pandemic. In addition, I believe one of the last times you spoke, you talked about being a little bit more pessimistic in the near term but optimistic as you look out over the longer term. So how -- one, how do you feel you're delivering on those priorities you set out? And second, as you look ahead to 2021, can you give us a sense for how you feel the business is positioned?

Yes. So Ryan, it's good to be here once again. Virtually across the street, I'll wave at you. But look, I think 2021 for everybody has been a real interesting year, not anything that anybody would have expected coming in. We started the year. We came out like a house on fire really with some great, great growth. And all of a sudden, sort of March hit and the world just turned upside down. And one of the things that I talked about when I had taken over originally was what do you do when there's a credit crisis. Or -- and while we didn't prepare for a pandemic, we put what we call our winning through the cycle playbook right into action, and we had sort of 4 priorities. And those 4 priorities, fortunately for us, worked as well for a pandemic as they do for a credit crisis, which we assume would be in a pandemic. And those 4 priorities were, number one, we wanted to take care of our colleagues and we wanted to win as a team. And that was really important for us because if you don't take care of your colleagues, you really can't take care of your customers. And so we pivoted almost 64,000 people virtually within a period of 3 weeks. We committed to no COVID layoffs. That got people's heads, I think, really sort of right on and kept them focused on what they need to do, which was their job and the customer. We also basically said -- and look, I'm not anticipating anybody coming back into the office. I'm in the office now. We've probably got about 8 people here. But we've got the majority of our organization going to be working from home probably until at least June, and we'll see what -- in June of next year, and we'll see what happens then. And then, of course, obviously, we had a focus on a lot of diversity and inclusion initiatives, which I think we've done a really good job on. But all of that was foundational to doing what we do best, which is take care of our customers and protect the brand. And we jumped out quick. We -- as you mentioned, we injected value into our card products. We really went out and tried to help small businesses. We did a 12-week, global, 18-country Shop Small initiative. We put in short- and long-term pandemic relief programs. And through the whole thing, we wound up winning our 10th J.D. Power award for customer service. The third initiative that we really focused on was financial stability. And having a strong balance sheet in these times is so critical. And when we look at our liquidity and we look at our capital position, we feel we're really well positioned, certainly even better positioned than we were during the financial crisis. And then finally, it was really about sort of structuring the company for future growth. And this is why I've always said, we would continue to invest to the extent that we can even in a downturn because the reality is you saw that we've started to restart card acquisition. We've kept our foot on the gas in terms of coverage. We went out and -- look, we launched China, our network, and we went out and we acquired Kabbage. And so while 2021 isn't -- 2020 isn't a normal year, 2021 is not going to be normal either. And I think you're going to see sort of an interesting ride, especially during the first half of the year. But our hope is, is that as we end 2021, 2022 becomes more normal. And what more normal looks like, we'll see, but we think more to what we saw in 2019. So look, as a company, I think the team has done a really good job. I think we've done a good job for our customers, and I think we've done a good job for our shareholders.

In terms of managing the pandemic, so you and Jeff laid out 3 phases. You talked about the first being stabilize the company; second, to more aggressively invest for the longer term, and hopefully, we'll see the fruits of the investments over time; and then the third, returning to the pre-pandemic levels of earnings and executing on your financial algorithm. First, can you maybe just talk about what you saw in the economy that allowed you to make that transition to the next phase? Second, as you continue to make these investments, what do you think the main metrics we should be looking at? And then third, I know you're not going to obviously give us a time frame of when you're going to transition from 2 to 3, but what are the few things that you would point to that we need to see in the backdrop to make that determination that we're on our way there?

Yes. So again, I think navigating -- Phase 1 was navigating the crisis, determine what the bottom was, and I think we saw that in April. As we went along, I think it was sort of mid-third quarter where we started to ramp up our investment a little bit, especially in card acquisition. I think what we saw there was a couple of things. Number one, we got our sense of what card members were sort of stable, what card member from a prospect perspective would be good to go after. From a small business perspective, it was becoming apparent with small businesses we're going to thrive in this environment and which ones we're going to continue to be challenged. And we also looked at our underwriting criteria. And so we felt that we had a really good handle on what sort of the credit prospect universe would look like. We had a really good handle on what we would do from an underwriting perspective, both from looking at a stressed and non-stressed environment. When we acquire cards, we look at the lifetime value of that card member. And that lifetime value is going to be different in a base case or a stressed environment. And as we went through, we felt that there was a good enough prospect pool out there to really ramp up our acquisition. And what you saw is in the second quarter, I think we acquired about 1 million cards; in the third quarter, about 1.4 million. And through the first 2 months of the fourth quarter, we have acquired almost 1.2 million cards. So if you just do the math, we should -- you could do the math, we should exceed the 1.4 million. And that was because we've started to invest again. So now what should you look for in terms of -- with these good investments, are we making progress? I think from a top line perspective, as we get into sort of -- look, out of the first quarter of next year, the first quarter is going to be a tough comp because you had 2 really good months. But I think that what you really want to look for is sequential top line revenue growth. And when you're looking at metrics underneath in terms of are our card member sort of acquisition numbers holding through, on card member acquisition, a lot of people focus on cards. We don't focus as much on cards. I just talked about cards, but we'll talk a lot about billed business acquired. That's a forward-looking number, but it's really all about fueling the model, right? I mean spend begets you lend, and so you need billed business to do that. I think from a card -- existing cardholder perspective, we're going to be very focused on retention. We've had retention levels that are probably better than we've ever had, certainly better than we've had in 2019. And we will continue to do that through product refreshes and what have you. So I think -- and then the other thing you're going to look at is organic spend. And we'll obviously give some color on that. So that's what I would say would be how you would look to see if our investments are paying off from a card acquisition perspective. Obviously, as coverage goes up, those investments count. So what are the things that get you from sort of Phase 2 to Phase 3? I don't think anybody is getting to Phase 3 without consumer travel coming back. I mean we were just talking before this. Normally, at this time, I'm wishing you having a good vacation as you go to Aruba with the family. And you mentioned to me that you're looking to take 8 vacations next year. So I hope all of my card members are like you, but I think that's what we're seeing. We did some surveys, and our cardholders are telling us that 60% of the people are looking to kick the 2020 vacations into 2021, and I think people are going to double down on vacations. We're looking at -- we're seeing bookings coming back from a TLS -- from our travel-related travel service. And we see card members constantly banking MR points, and our spending on our co-brand cards continues to be there as well as retention. So those are the things. I don't think we have to get back to corporate travel to get to Phase 2 -- to get to Phase 3. But consumer travel will be critical, I think, to say, hey, look, we've now entered Phase 3. So as I said before, I think 2021, more of a transition year. When Phase 3 starts, I don't think you want to think about this from a calendar perspective, but I think you want to think about it more vaccine distribution, less cases, more people feeling comfortable to travel, less government lockdown on borders.

And kindly don't share with my bosses at your next dinner that I'm going to take 8 vacations.

Well, I'm sure you're going to do a lot of weekend trips.

Yes, absolutely. So you touched on spending, Steve. Jeff recently in a conference provided an update, noted that non-T&E, I think, was up 3%, but T&E was still down in the mid-60s. Can you maybe provide a more near-term update of what you're seeing across the business, maybe consumer versus commercial, T&E versus non-T&E? And any observations you've seen from a geographic perspective? And then second, you've continued to believe that customers are looking to travel and there's pent-up demand to get out to travel. You talked about that a little in the last question. Are you seeing any early indications of this, whether it's bookings, searching travel site and customers beginning to more make bigger discretionary purchase, things that sure were closer to the end?

Well, just on the last point, as I said, I think -- the survey said 60% of our people that we surveyed are going to kick trips from -- into planning in 2020 into '21, and we're seeing an increase in our consumer travel bookings, not necessarily in our corporate bookings. I think as far as spending goes, we've hit a stabilization. I think what we saw in September is what we're seeing going through, obviously, October and November and early December. The trends haven't changed all that much. When you think about T&E, T&E is still down. I mean in the third quarter, we were down -- I think we were down 69% from a T&E perspective. That's probably right around where we are right now. Consumers making up a larger percentage of our T&E. It made up about 68% of our T&E spending in the third quarter. I think when you think from a geographic perspective, the U.S. has been more resilient than international. When you think about card perspective, our small business franchise has been certainly more resilient than our corporate card franchise. Our consumer franchise has been pretty resilient as well. And I think international will take a little bit more time to come back. It's a little bit more travel focused and it's a little bit more dependent on sort of these closures and border closures and so forth. As far as the holiday season, holiday season is really interesting because the holiday season really started October 9. I mean, I think the holiday season this year started with Amazon Prime days, the launch of the iPhone 12. We're seeing really strong consumer spending. The question will be, how much of that has been pulled forward? How much of that have we already seen? How much of that is to come? And so that story won't be totally written until December 24. But like everybody else, we're seeing big increases in online spends. Consumers have shifted their behavior. And so we're -- we feel good about where we are right now given this stage to the pandemic and given our dependence on travel, which is why I said we can't get to a Phase 3 until consumer travel comes back.

And you just mentioned the dependence on travel. The value proposition was always focused on travel and entertainment while obviously providing customers outstanding customer service. I think 30% of volumes pre-pandemic were travel. And because of this, many of the benefits of card membership, airline and Uber credits, leading hotels, hotel upgrades, breakfast for 2, which I enjoy. And when the pandemic hit, you needed to pivot a bit, adding things like streamline services amongst others. So as you think about the value proposition to customers on the other side of the pandemic, what do you expect to remain the same? And what do you think could change?

Yes. So I think, look, we've got -- we have a great core travel proposition. That is not going to change. I mean that is what's core to us. It is core to consumers. Consumers have very short memories. And as I said, I'll just go back, consumers are dying to travel. They're banking points. Attrition is at all-time lows. But let's talk about what we did, why we did it. We felt that the most important thing for us was supporting the brand and making sure we kept our customers and providing and injecting value and pivoting and making the determination to cut back on some of our marketing from a brand perspective, cut back on our marketing maybe from an acquisition perspective because we didn't have a line of sight. It was important to infuse value back into the products. And we did that. You mentioned streaming and you mentioned wireless. 75% of our customers that had Platinum cards in the U.S. took advantage of those credits. 60% of our small business customers, 40% of our co-brand customers, 90% of our international Platinum cardholders took advantage of value injection. And one of the statistics, as we looked at our Platinum cardholders, we had people -- so the 11% of our Platinum cardholders had not put wireless on their card, and 9% had not put streaming on their card. And so we now have that from a recurring perspective, and we feel really good about that. I think as you think about the value propositions overall, we've been on a journey to really refresh our value propositions on an every 2- to 3-year basis. And when you look at the value propositions, they're obviously different from a consumer perspective and a small business perspective. And from a consumer perspective, we were really focused on extending all those lifestyle benefits, and we will continue to do that. So I would look towards 2021 for the value refreshes. And the reality is we will be doing product refreshes in 2021. That was always the plan. We just felt that putting the value injection in at this point was a really good stop-gap measure. We're going to do the same thing from a small business perspective where we're focused constantly on more B2B. So we're not walking away from the T&E assets. I don't think our customers are going to walk away from the T&E that the -- having access to those T&E assets. But I think what you can think about is us constantly building out the organic core of those value proposition and even being more competitive in the future.

Yes, Steve, you mentioned a couple of times product refreshes. Product refreshes, along with customer acquisition, have allowed you to maintain double-digit card fee growth, even though it's slowed a tiny bit this year. How are you thinking about the price-to-value equation in future products and what this means for net card fee growth over the intermediate time frame?

Yes. So let's just talk about -- net card fee growth is driven obviously by card fees acquired. So you will continue to see double-digit card fee growth in the fourth quarter. That will dip down next year into the single digits because the story is, is that card fee growth is really not driven by increasing card fees. The majority of card fee growth is driven by new cards and by upgrades. And so as we put more value propositions out there, we add more value, we get more cards in. As we put more value into the product, we have people upgrade from Green to Gold, Gold to Platinum, Platinum to Centurion. And so if you look at this, the smallest percentage of our card fee growth is driven by fee increases. And so as we look at next year and we put in -- obviously, we focus more on acquisition. We do the product refreshes. We believe we'll continue to grow our cards, which will continue to grow our card fee revenue. But it's a -- you don't -- you book it over a 12-month period. So when you acquired a card, you then -- you sort of book it over that next 12 months. So hopefully, we get back into double-digit growth into 2022. But I think 2021, you could set expectations, you'd be looking at single-digit based upon the fact a card member acquisition went down this year.

Got it. One of the things that we've seen during the pandemic is just the acceleration of e-commerce. I think it's up over 30% year-over-year. I guess for many of us, this will probably be sort of a new way of life going forward. Can you maybe just talk about the steps Amex has taken to position itself for a world that were much more focused on e-commerce, contactless payments and other less traditional forms of engagement versus the old brick-and-mortar style?

Yes. Look, this is not a new thing. I think this just moved a lot quicker. I mean pre-pandemic, we're moving this way. Pre-pandemic, 60% of our volume was card-not-present or online. Right now, it's like 70%. So I think the way that people are shopping now, the way that people are interacting now, this is here to stay. But when you look at sort of the partnership that we have with people like Stripe, with people like Amazon and our small business co-brand card, what we've done with PayPal in terms of not only them being a merchant acquirer but integrating with Venmo and also having MR and Pay with Points and what we've done from a joint perspective with Visa, Mastercard and Discover with Secure Remote Commerce, over 65% of our cards now are contactless. So we've been on this journey for a while, and I think you just saw the acceleration of it, which means a lot of the investments that we've been making are going to become more fruitful earlier. So from a preparedness perspective, we were prepared because everybody was going that way. I think the industry has gone that way. We're not going back. It's here to stay. Online shopping is not going away, grocery delivery, so forth and so on. And we think we're positioned very nicely for that because we had been positioning ourselves prior to the pandemic.

Steve, if I think back over the past few years, you've done some small bolt-on deals, Cake, Mezi, LoungeBuddy, Pocket Concierge, Resy and more recently, acompay and Kabbage. For a while, you were targeting consumer-based capabilities, but more recently, you've moved in a slightly different direction with acompay and Kabbage. Can you maybe just talk about your strategy for these bolt-on deals? And what are the areas of the biggest focus for you?

Yes. I mean, so look, everything you just talked about is a capability. Every deal that we've done is a capability adder. And so we look at the capabilities that we need to continue to compete, to continue to be successful and continue to meet customer needs. And so the reality is that we do a build, buy, partner decision on the capabilities that we need. And we weren't going to build a restaurant reservation system. We weren't going to build a lounge access system. It was a lot easier to acquire them. In a lot of cases, we had partnered with people before we actually acquired them. And we focused in on consumer. And we're still looking at those kinds of deals that look at lifestyle extensions, extensions of travel and so forth because travel is coming back. It's not going away, especially for consumers. You can't do a Zoom vacation. You may be able to do a Zoom meeting, but you can't do a Zoom vacation. They do not work, okay? Don't even try it.

I do it with my kids.

And the reality is that when you look at what we've done from a capability perspective, from a small business, acompay was all about AP automation. And AP automation is important, especially during a pandemic. And what we've seen is people that actually do have AP automation installed, spending goes up almost 40%. So the more we can get, the more opportunities there are. And Kabbage, Kabbage was an acceleration of what we wanted to do. I mean we had an opportunity to buy what we think was a great fintech. We got it out at what we thought was a really good value and without their loan book, which was really not a good value. And so the reality is, is that puts us sort of into this digital banking platform, we'll integrate that in. And that will be the way that SMEs interact with us. Remember, our stated strategy from an SME perspective is to be the working capital provider to SMEs. And when you look at that Kabbage platform, we integrate our card. It's got a transaction banking account. It has working capital loans. It has term loans. It has cash flow analysis. It has everything that we were looking to build or everything that we had that was in a compartment within our company. And so having that platform really sped up -- sped us to our vision of where we wanted to be.

You mentioned that customers that use AP automation, spending goes up 40%. You recently noted that over 80% of your spend by SMEs is B2B. But this clearly remains still a big opportunity to automate and bring people up paper checks. So can you maybe just talk about the major investments and strategic initiatives you've embarked on in this space, whether it's the acquisitions like acompay, which you referenced, or some of the partnerships like Bill.com. And while I know this is growing at a very fast pace, what strategies are you putting in place to really accelerate this over the next 2 to 3 years?

Yes. So look, I think for every segment of the marketplace, you need a different solution. And Bill.com was really targeted for us by integrating working capital, integrating card payments at the small end. When you look at acompay, it's more the mid-market. Coupa a little bit that way, too. But when you look at Ariba and SAP, much more higher end. And so the integration of virtual cards in the procure-to-pay process is critically important. I think you'll see our corporate card business pivot a lot more to that as T&E will take a long time to come back from a corporate T&E perspective. But I think there's an opportunity for us from a B2B perspective. And I think our investments will be -- continue to be made in partnerships. We'll be looking at acquisitions in this area. And we'll be looking at building more and more capabilities to onboard people and use our merchant organization to really bring more noncard or others onto our rails. And the other thing that we've been doing, I get this question a lot as well, is how do we use our flexibility of our network to make sure we have value for both the supplier and value for both the buyer? And how do you use the flexibility of being a closed network to make sure the economics and the value work on both sides of the equation? So that's where you'll see some of the investment going forward for us.

You mentioned that corporate, we could see that pivot. Large corporate pre-pandemic was 9% of billed business. I think half -- about 5% of that was T&E. Given some of the things that you've talked about, the likely structural changes in terms of potential for less travel and some entertainment going forward, can you just talk about how you can restructure this business without having a sizable impact on the overall earnings of the company?

Yes. Well, I think, look, it's 9% of the billings but not 9% of the earnings, number one. Number two, 60% is T&E, 40% is B2B. And look, the reality is it's going to be the end of '22, maybe '23 before you see corporate T&E potentially get back to the levels that it was at. But I think when you start to think about corporate T&E, you look at it, and it's -- there's 3 different types of companies. There's the consulting companies, which have to be on the road. That will take a little bit of a while to come back. You've then got companies that just have salespeople. That, we're not seeing as much of a drop-off as others. And then you've got manufacturing, where people need to go to their plants back and forth, and they still do that. And remember, T&E is made up not only of air, but it's made up of hotel, it's made up of restaurants and it's made up of car rental, and you're still seeing a little bit of that. So I think for us, we're prepared to easily handle the decrease in T&E. But what's important to focus on is the relationships that we have with these corporations and the opportunities to make inroads from a B2B perspective. And that's one of the things we're doing. And the fastest-growing part of our corporate business was, in fact, the B2B pre-pandemic, and it's what is holding us up at this particular point as well.

Got it. Steve, maybe to pivot to the international strategy. We're coming up on 5 minutes here. International SME and consumer were the highest-growth businesses pre-pandemic. It was being driven by increased acceptance where you'd set out the goal of increasing it 20% over 3 years. Can you talk about how the international strategy is evolving in the wake of the pandemic? And maybe I'll just tag on to that. You recently noted the success of your launch in China. Can you maybe just talk about what some of the early milestones there? And I know you're rolling out debit. Is that something that could be a playbook for other countries?

Yes. So look, I think you're right. I mean pre-pandemic, international consumer was growing 14%. Small business was growing at 16%. And in our top 8 markets, we were gaining share in each one of these markets. Now obviously, our share is not anywhere near what our competitors are. But we are gaining share and we are growing. And look, the other reality is part of that reason we were growing is we were growing coverage. And in 2019, we added 2 million merchants in international across the world. And I think people will be surprised that year-to-date, through the end of October, we've added 2.5 million merchants this year. And so we're not walking away from adding merchants. And our coverage from an e-commerce perspective is much, much better internationally than our off-line coverage. And so I think that the reality is, is this pandemic can help to really accelerate our international efforts. We've been signing more merchants. We will continue to sign more merchants. And I think you'll see more e-commerce spending. So we feel really good about our small business and our international consumer. And I think at the end of this pandemic, we believe they'll go back to -- continue to be some of the highest-growth businesses within our business and continue to add value in earnings to the company. As far as China goes, look, China, we're not going to talk about volume, but we will talk about this, is that it's a little bit too early to talk about volume, but we have 12 banks now in China issuing American Express cards. Alipay and WeChat, from a digital wallet perspective, can accept the American Express cards and have an opportunity for our banks to put those cards in the wallet. And as you mentioned, we are building debit capabilities in China. We have debit capabilities in some other GNS markets, but we're modifying the network. And so it gives us degrees of freedom and flexibility to launch debit products potentially in other country.

Got it. Obviously, when you're building out the network and acceptance as much as you are, you need boots on the ground, and obviously, that costs money to do. During the pandemic, you were able to pull back on OpEx. You had a plan to reduce it by up to $1 billion. However, you've begun to make some investments, and now we're expecting a slightly lower decline. Can you just talk about where the OpEx investments, the major ones are being made? And then second, the last few years, we've had card member engagement costs growing much faster than revenues, but OpEx is making up the difference. How do you see the focus on OpEx evolving as we move through the next few phases?

Yes. So let's just talk about -- I think when you look at OpEx, we've had a pretty long history now. I mean if you go back to 2010, our OpEx has grown on an adjusted basis by about 12%, while our revenues have grown by 51%. So we feel really comfortable with that, which has allowed us to grow sort of our engagement expenses. I think that as you look at the $1 billion, we had -- when we decided to take $1 billion out, we just assumed we would be sort of where we were in April, all the way through the end of the year. It became apparent mid-third quarter we weren't. It made no sense to stick with that. And the reality is we continue -- look, we continue to invest in China. We -- obviously, Kabbage came on, brought some OpEx with it. Our salespeople are out selling, and we continue to invest in coverage and we continue to invest in technology. And so rather than pull back in those areas, we decided to invest. And I think the key thing about when we look at OpEx or when I look at OpEx, everybody looks at sort of what the growth rates are. And our growth rates have been as good as anybody. We have had a great opportunity. We've done a great job of controlling our OpEx. What's underneath the covers on that OpEx, though, is we've done even a better job pivoting the OpEx. And so to be able to onboard companies like Resy and Kabbage and acompay and invest in China and the network and invest in all this international coverage with not showing significant increases in OpEx means not only are you controlling OpEx, but you're able to take stuff out and put stuff in. And I think the team has done a really good job with that.

Got it. Okay. Maybe one other thing to hit on, we've got about 1.5 minutes to go here. You, like a lot of other lenders, have built large amounts of reserves in the first half of the year. And now we're kind of in this wait-and-see mode to understand where losses will likely go. Can you maybe just talk about your degree of confidence in the range of outcomes at this point? And second, how are you thinking about the potential impact that we could see white collar unemployment picking up?

Yes. So I mean, look, in April, if you remember, we talked about sort of AR at risk, which was delinquencies and financial relief programs. And that was about $11.5 billion that we had. In the third quarter, that came down to $4.3 billion, and it continues to come down. I think what's really critical is that sort of 97% of those that went into our short-term relief program are now current. They're either current because they're current or they're current within a financial relief program and making the payments. Our delinquency rates, as I said, are the lowest that we've seen. They're the lowest that we've seen from a charge card perspective and lowest probably that we've seen from a lending perspective in 4 years. Given where delinquency rates are right now, if you were looking at from a peak write-off perspective, you wouldn't see that happen probably until the fourth quarter of next year. And I think the unknowns here will be stimulus. It will be white collar layoffs in sort of next year. And as far as reserves go, we'll have to see. I mean what we've learned through this pandemic is what you know today may not be what you know tomorrow. And things change very rapidly. And so as we go through and go through all our processes that we have to go through, we'll determine what happens with our reserve level.

Great. Well, Steve, we're out of time. But once again, just wanted to thank you on behalf of myself and all the clients, and have a great holiday season. I look forward to connecting again next year.

You too. Hopefully, we'll see you next year in person.

Absolutely. Take care.

Take care, Ryan. Bye.