American Express Company (AXP) Earnings Call Transcript & Summary

Up next, I'm happy to be welcoming back the CFO of American Express, Jeff Campbell, who has held his current role at Amex since 2013. Boy, it feels like yesterday, Jeff. We appreciate you returning once again to our annual conference as we really enjoy hearing your perspectives on the state of the industry.

And maybe I'll start with a high-level question. I've observed American Express through 3 recessionary cycles, I guess, I'm showing my age. And I know we're not necessarily out of the woods on this one. However, I was pretty encouraged that you guys gave us some sense of where you might be out to 2022 if progress is made in the broader economy from here. Could talk about what gave you the confidence to provide your aspirational target for EPS in 2022? Because I assume if you had no idea, you wouldn't have given us a perspective.

Well, thank you, Sanjay, and good morning to everyone. Look, it's the end of February in 2021. The reality, Sanjay, is we've all been living with, managing through the pandemic now for at least a year. And as a result, I think we have certainly learned a lot about how our customers are behaving in the midst of the pandemic; how small business is behaving; very importantly, how governments are behaving. And there is a pretty clear pathway in our view now for how the world will find its way back to normality, albeit that's a pathway who's exact pace we're still cautious about, but we feel very good about the pathway. So that's sort of the overarching thing, Sanjay. And then if you think very specifically, over the course of the past year, I've consistently said that in this environment what really matters is you got to look at volumes, you got to look at credit. And as you look to 2022, Steve and I added a third thing to that list last month, which is our success at rebuilding growth momentum and getting our marketing efforts back aggressively. So let's talk about each of those 3 things, right? So if you start with volumes, if you look at the last 2 quarters of 2020, spending outside of travel and entertainment has resumed growing. And it's a real demonstration, I think, of the flexibility that our consumers and our small business customers have shown in terms of how they're managing their lives and their businesses in the midst of the pandemic. So it's pretty clear to see the pathway for that just continuing when you think about volumes. Now travel and entertainment spending continues to be down much more dramatically. It was down about 65% in the fourth quarter and not much has changed, I would say, Sanjay, as we sit here, what's today, February 23. But our strong belief in the pent-up demand for consumer travel continues. And it's just a matter of getting to the point where various countries in the world have made enough progress medically, and that progress is now very clear, I think, Sanjay, or the pathway even clearer than it was when we did our earnings call a few weeks ago. So it will happen. I'm not going to give you an exact call on the exact pace, but we're very confident it will happen. So as you go all the way out to 2022, it's very clear that volume should look good absent some new disruption in the world. That's your first key thing to look at. The second key thing is credit. And so goodness, I think, everyone, including us, has been surprised, I might even use the word shocked, by how strong the consumer has been. I'm sure all of you look at some of the statistics. If you look at the U.S. consumer, just to use that as an example, saving rates were actually way up last year. And if you look at current government trajectories in the U.S., it's pretty clear that we're about to, even in the midst of those very high saving rates, inject a whole bunch more money and liquidity into the system in terms of stimulus. So we took a very conservative stance as we closed the books on Q4. But credit continues to look strong. And sitting here again, Sanjay, on February 23, there's nothing that looks any different than what we talked about a month ago on the earnings call. We just published our latest monthly stats as we do every month, looks really good. And if I think about what I believe the U.S. government is about to do, it's pretty easy to be optimistic about credit. The third thing that then brings you to is rebuilding growth momentum and getting the marketing engine going. And so the fourth quarter was really the first quarter where we began to put our toe back in the water, if you will, in terms of going back to a little bit more of a normal cadence of how we bring new customers into the franchise as well as how we try to put new products into the hands of our existing customers. And so as I talked about a month ago, in the fourth quarter, we brought in a number of U.S. consumer platinum and U.S. consumer gold customers. It was actually pretty consistent with what we were averaging in 2019, sort of back to pre-pandemic levels. And it's very early days admittedly, but the behaviors of those customers that we brought in look pretty darn good so far, Sanjay. So that gives us a lot of confidence in volumes, a lot of confidence in credit and a lot of confidence in our efforts to rebuild growth momentum and get the marketing engine going. So that's really what, I think, you heard from Steve and I a month ago. As the last 4 weeks have gone by, if you just think about the way the world has progressed, there's certainly nothing that changes our view. I'd say if you think about the last month, U.S. looks perhaps a little bit better than we might have expected and places like Europe look a little tougher, but it sort of nets out. I guess I'd end, Sanjay, by just saying, when you think about what we said about 2022, overarchingly, there's 2 key assumptions which is a reasonably healthy economy. So far, I don't see any signs that something is going to disrupt that. And then having consumer, not necessarily business, but consumer travel be back in 2022. And I can't actually point to specific signs of that yet. I mean travel continues to be down about like it has been now for many, many months. But we see a very clear trajectory when we think about the medical situation. And boy, do we see a lot of pent-up demand. So that's what we were trying to communicate. That's what we're really focused on as a management team, Sanjay, as we think about how we manage the company in 2021, setting us up for 2022.

Well, I, for one, appreciate it, at least some insights, understanding and we can't hold you to it, given all the qualifiers. I guess you sort of hinted at some of the spending trends that you've seen in January and February. Do you want to elaborate a little bit more in terms of those spending trends and how they're tracking to your expectations?

Yes. While this whole pandemic has been unprecedented in so many ways, including in my experience, unprecedented for the way it really has impacted the entire world in somewhat similar ways, but there are differences, right? And if I think about the progression thus far this calendar year, some of the differences start to come out, right, where Europe has managed to put itself back into a little bit of a stall versus some of the momentum you saw in the fall and probably early part of the winter. And that shouldn't surprise anyone on this call when you think about the level of lockdowns. We routinely do sessions as a management team with our country management teams around the globe, and we've done a couple in the last week or 2 with several of our European member management team, colleagues. And it's just a different world they're living in, really relative to what you would find anything anywhere in the U.S. If you go to Australia, right, domestic spending and activity in Australia looks remarkably normal. Of course, they've also completely cut themselves off from the world in terms of travel and international travel. So when you look at our business in Australia, you see tremendous performance on the non-T&E side, like many of our non-U.S. markets, cross-border travel, though, is actually a little bit more important to our Australia business than it is to our U.S. business. So you see these kinds of differences, Sanjay. But in general, I would say, all of the trends that we talked about in the fourth quarter really have continued now through about February 23. One of the things I said a few weeks ago is put it all together, I'd expect volumes in Q1 to be in the ballpark with where they were in Q4, and I think that's probably still a reasonable statement to make. I just want to emphasize that, that is a tale though of non-T&E growing modestly. And we feel good about that and expect it will continue and only get strengthened by some of the added stimulus we expect to see in the U.S. and perhaps in other parts of the world. And that brings you back once again to, do you think that travel and entertainment spend will come back as you get into the latter stages of this year? I think I would say I feel better about the trajectory of the world's efforts, particularly the developed world's efforts. The countries most important to us from a business perspective to make real progress on the vaccine as we get and on letting people travel as we get into the summer and fall months.

And how much of the T&E rebound has to be about border reopenings? Like how much of it could rebound without that happening?

So that is a good question. So while certainly, if you look across the globe, and you look at our travel spending, the largest part of it is domestic travel, particularly in the U.S., of course, just given the size of the market. Cross-border travel is still a significant part. And of course, just like -- I'll put my old airline hat on, just like the airlines will tell you that they can do okay as domestic travel or at least a U.S. airline, British Airways isn't going to do so good with domestic travel. But you do need cross-border travel to come back. You don't necessarily need it to come back in every part of the world to the exact degree that it was pre-pandemic. But if you look at border restrictions today, Sanjay, as you know, boy, they're actually remarkably extensive, remarkably restrictive. And we do need to see that change as we get into 2022. I think the -- I'm going to come back, though, the consumer demand for that change is pretty strong. And you see it when you look at any part of the world that does not have those restrictions, right? U.S.-Mexico travel, which is one of the few places where you don't have border controls, and I could make a political comment right now but I won't about recent events. You see lots of travel there. Within the U.S., while airline travel is still slow, of course, you see tremendous demand at resorts that people can drive to, whether you want to look, I think, for a New York-based conference. If you want to look at the ski resorts that are open in the Northeast where all my colleagues tell me the problem is you can't get a reservation because there's so much demand. So humans want to travel, humans want to gather, humans want to travel across borders. We just need to continue to make progress on the medical front so governments will allow it. Gosh, it's only February 23, Sanjay. And if you look at the curves over the last month or so, I think we're certainly headed in the right direction here.

I want you to keep your airline hat on for one more question, sort of unrelated, but capacity has come down significantly. So it would seem to me like when the demand comes back you don't need the same amount of unit demand to get to the same volume outcome that you guys are sort of looking for. Is that a way to think about it? Because like there's probably going to be pretty significant inflationary pressure on T&E spend. No?

Well, boy, that's hard to speculate on. Certainly, in the early days, I think, quite the converse, you're going to see airlines trying to entice people back on to planes, you're going to see average ticket prices down, you see average ticket prices down now for the travel that is happening. And if you look around the globe, I would suggest, starting with the U.S., but going to most of the other countries that are most important to our business, the governments have generally been pretty supportive of the key airlines in terms of helping them manage through the crisis financially. And part of the logic for that is that you can't lay off or furlough a whole bunch of pilots, mechanics and flight attendants and then snap your finger and have everything running back to capacity. You have to think about training issues, you have to think about keeping things at the ready, if you will, to ramp capacity up. And I actually think the kinds of support that governments have provided around the globe are helping not every airline, not necessarily the smaller airlines, particularly once you get outside the U.S. but are helping the major airlines be in that position. So I actually suspect -- and I do think this will have some implications for our business, that you will initially see as load factors come back up average ticket prices fairly low. I think because of our expectation, which is mirrored by most of the major airlines, our expectation that business travel will lag consumer travel in coming back, that will also put some pressure on average fares. So the whole question of inflation, I think, in, and I'm not going to play economist here, but I think it's a longer-term question for all of us to ponder despite maybe treasury yields inching up a little bit in recent days. But I don't think that's an issue as you think about 2021 and early '22, particularly as regards to fares. I think for fares to really get back to where they were pre-pandemic, you're going to have to see business travel come back, and it will just a lot more slowly than consumer travel. And I think we continue -- I would say we continue to think based on talking to lots and lots of our customers that getting to pre-pandemic levels of business travel will take quite some time.

Great. I want to talk a little bit about learnings through the pandemic. It was almost a year ago we were sitting next to each other at the [ Mangrove ] sort of talking about this, right? And I know that we didn't know what was on the [indiscernible] at the time. Just knew something was, right? And now we've seen a lot happen over the course of last year. I'm just curious sort of what your learnings have been in terms of consumer behavior that you've seen, the merchant behavior, your merchant partner behaviors and then maybe more broadly on sort of your own evolution over the pandemic because I would argue you guys have pivoted quite significantly away from T&E into other value props for customers because that's what's relevant for them in today's world. And I think if we go back to the Costco days and the competitive threat days, you guys were labeled as sort of a T&E card and nothing more than that. I'm just curious if there's any learnings and evolutions that can actually stay with you on a go-forward basis that helps you deal with maybe new trends on the [ come if people ] demand so, maybe you could address that full host of topics?

Well, boy, yes, there's a lot there in that question around learnings and around how we think about value propositions. I can't resist but start a little bit by reflecting on -- you are right. I believe that the KBW Conference last year was the certain last public conference that we did, and I suspect many people did. And if you port yourself back to that time, yes, we all knew something was up and maybe we should be behaving a little differently, but didn't quite seem clear and certainly didn't seem normal. Boy, it's -- I would suggest we've all become much more flexible, Sanjay, in terms of how we have adapted to the virtual environment that you and I are doing this conference in and the way we're living our lives. But let me maybe start with value propositions, then go a little bit to learnings, Sanjay, because I think something and maybe we're partly responsible. I think sometimes people forget the sheer breadth of the product lines that we offer to consumers and to small business. And we tend sometimes to focus on particular value proposition. So we focus -- because you and I are in the U.S., we focus on the U.S. business, but we're a very global business. Tend to focus more on consumer, and we talk a lot about our consumer platinum product, which is a super important product to us. It's probably a flagship product. And it is travel-oriented historically. But I would point out to you, Sanjay, that we actually began to pivot a couple years ago from travel to what we would call lifestyle, more dining, more wellness, more about retail. And if anything, the pandemic has reinforced that. But if you look at our value propositions, we also have a tremendous cashback product line in the U.S. and across the globe with consumers. We have a range of co-brands. I think some of these people forget, when you look at our small business franchise, Sanjay, we have an Amazon co-brand and a Lowe's co-brand in our small business segment that, of course, have little to do with travel and are all about helping small businesses run their business. So we actually view the breadth of our product line as a strength of ours because people all have very different things that they're going to value. But even the travel-oriented propositions we do have, what we've learned in the pandemic is that the pivot we were already making towards more lifestyle orientation as opposed to pure travel is a good pivot. And you will see us continue that, not abandoning travel, but continuing to pivot more broadly. When you think about learnings from the pandemic, I think now a year in, what we would say is that you really haven't seen dramatic and new changes in customer behavior. What you have seen is a speeding up of the long-running evolution that was already occurring in a few ways. Most fundamentally, I would start with the fact that the long-running trend toward less use of cash and more use of digital forms of payment has certainly been accelerated, and it's not going to go backwards. And that is a really good thing for us and for that matter for the industry as consumers use less cash and as small businesses, say, "Boy, we have to find a way to operate more digitally is tremendously good for us." If you look at contactless, right? And we're up as an issuer now to the point where about 70% of all our cards have that capability. We're ramping it up as quick as we can. But there's clearly been a speeding up of the long-running evolution towards the use of contactless around the globe. And as we and many others have talked about over the years, as people get used to using that digital form of payment in their everyday life, even for small dollar purchases. While those small dollar purchases themselves may not add up to a lot for us, it's creating a behavior, it's creating a norm that then is reflected in how people manage all their digital lives. And the last thing I'd point out is one of the several things that has helped us for many, many years to hold our infrastructure costs and I usually think, Sanjay, as you know, our infrastructure cost, broadly speaking, is what we would refer to as our operating expenses, and those costs really are about today where they were a decade ago despite adding new capabilities, buying companies like Mezi, Resy or Kabbage, et cetera, because we're able to constantly find efficiencies, but then redeploy some portion of those efficiencies to help us do the new things we need to do. Well, one of the things that has allowed us to do that is the relentless march of our customers and our merchants wanting to interact with us evermore digitally. And certainly, that has also been sped up by the pandemic. And once someone gets used to using that app, using the chat function, finding ways to interact with us digitally as opposed to making a phone call, those behaviors are generally set. So this has been a tough year for our shareholders, tough year for our earnings potential. And 2021, make no mistake, is a year of rebuilding. We called it a transition year. And certainly, Steve and I are disappointed that it takes us to 2022 to have a realistic aspiration of saying that's when we're back to where we thought we would be at the beginning of 2020. So that's sort of a 2-year pause. But on the other hand, there are things about this 2-year pause that I do think play well to our business model and will help even accelerate the company's continued growth further as we go out into 2022 and beyond.

So I want to talk on 2021 and the $4.5 billion in marketing that you guys plan to spend. Maybe you could just elaborate on where those dollars will be spent? What kind of returns and how quickly we might expect to get them? I know the investments you make take a long time to sort of pay off as do your customers stay on for a very long time? I know that's sort of engrained in my head. But just maybe you could dimensionalize that and just how much flexibility to the extent that conditions change or evolve, you have if need be?