American Express Company (AXP) Earnings Call Transcript & Summary

Thanks, everybody, for joining us this afternoon. I have a quick disclosure to read. For important disclosures, please see Morgan Stanley research disclosures at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Today, we are delighted to have with us Jeff Campbell, Chief Financial Officer of American Express. First time to our conference, Jeff, thank you so much for joining us today.

Happy to be here, Betsy. Thanks for inviting me.

So we're delighted to welcome Jeff Campbell, CFO of American Express to our conference. Thank you so much for joining us, Jeff.

It's great to be here and great to be able to hear you now.

That's awesome. So I wanted to start off high-level strategic question here on your 2021 EPS scenario range. You've got a $6 to $7.50 range. You've got an aspirational range for, I believe it's 2022 between $8.85 and $9.25 to be exact. Could you give us an update on what you're seeing and how you're feeling about these targets at this point?

Well, thanks, Betsy. I do think that's a good place to start. And let me be clear and remind people that our 2022 aspiration is very much what we are focused on. 2021 is really a year of transition and 2021 from an EPS or financial results perspective is a year, frankly, that will be shaped by what happens with all the craziness that frankly, all of the financial services have gone through with building up CECL reserves last year and releasing them at some degree. So that's the context, in terms of how we're feeling, let's start with 2021. So since it is a transition year and about building momentum for next year, I would say we're feeling pretty darn good, Betsy. On balance, there are some positives and negatives. If you think about the year for quite some time, I've said everything comes down to volumes credit and marketing progress. Volumes are looking good overall. There's some puts and takes, right? The U.S. looks stronger than not just we, but I suspect most of your guests have expected. Outside the U.S., the recovery probably is a little slower than we might have hoped on spending, but more or less balances out. When you think about credit, credit continues to look pristine, better than it perhaps ever has in our history. The one counterbalance to that is all the liquidity in the system that is causing that kind of credit result. It's putting a little bit of pressure on our expectations for a rebound in loan growth. But of course, as you know, Betsy, for us, loans are a relatively modest part of our overall business and revenue model, so that's a very manageable headwind. And we feel really good about the progress that we're making in terms of restarting the acquisition engine, bringing new customers into the franchise, particularly on our premium products and retaining our existing customers. So volumes, credit, marketing all make us feel really good about the progress we're making in 2021. I will say the EPS outcome for 2021 will be mostly shaped by exactly the pace at which we end up unwinding some of the credit reserves that we have put in, depending on how the economy evolves. More importantly, though, all of that fills us with confidence about the aspiration that we have for 2022, which is [ to look ] back at the kind of EPS expectations that we originally set out for 2020. To remind everyone, that was for our earnings to be between $8.85 and $9.25. So we feel good about our progress towards that aspiration. And we'll just keep focused as we are and see how the world evolves in the coming months.

Okay. Great. We're going to dig into some of the trends that underpin some of the comments that you just made. But before we go there, could I just get your point of view on what you view as the most underappreciated aspect of the American Express story?

Well, I can't resist, Betsy. Underappreciated, I happen to think we have a fabulous group of both sell-side analysts and shareholders who follow the company who, I think, understand the company pretty well. All that said, I do think one thing that is important to remember, as you look at American Express, in the context of the last 14 or 15 months of the pandemic, is that because our business model is a little more global than many of our competitors and markets outside the U.S. have been slower to recover. Because our model is a little bit more focused on travel and entertainment, which has been a harder hit segment. And because of our small but very important and foundational franchise with large and global corporations on their T&E spending, those 3 segments have all been hit in terms of volumes a little bit more than others. So our pandemic-driven volumes have been down a little bit more than the rest of the industry. However, we feel very confident in the long-term trends in all 3 of those. And in fact, we look at the learnings of the pandemic and say it has reinforced many aspects of our key strategic imperatives that we went into the pandemic with. In particular, when you look at our consumer business, we have been on the journey for a while now of expanding the concept of membership to evolve beyond some of its more travel-oriented focus to be more of a lifestyle focus. And I think the pandemic has only reinforced that existence [ if anything ]. When you look at our commercial segment, we were already moving to be more and more focused on B2B spend and less on T&E. Again, I think the pandemic has reinforced that. Our third strategic imperative was all about playing a larger role in the digital lives of our customers and card members and partners. Boy, the pandemic has certainly reinforced that one. And then when we think about our network, quietly during the pandemic, we're making great progress in China with the network we're building out there. We're making great progress on expanding our coverage internationally. So I think if there's anything underappreciated, it's that this dichotomy of while our spending volumes have been a little bit more impacted during the pandemic than others, I actually think the trends driven by the pandemic are very reinforcing of our long-term strategies.

Okay. Great. That's helpful color. Maybe we can dig in a little bit more on some of the activity that you're seeing in your business today that underpin your answers so far. First, in spending trends, can you give us a sense as to what you're seeing in the T&E space as well as in the non-T&E space?

Yes. And I think if you don't mind, Betsy, I'm actually going to start in what we're now calling the goods and services space. Because it occurred to us awhile back that since most of our business is spending by consumers and businesses on goods and services, maybe we should call it that instead of what it's not, which is it's not travel and entertainment spend. And when you look at that goods and services spend, Betsy, wow, it's really been resilient, right? And if you look quarter-to-date, it's up about 15% over 2019 levels, right? Year-over-year numbers are all very wonky now. But 2019, we think, is a good base. And that strength in goods and services you see in the U.S. on the consumer side, on the small business side and very powerfully and reinforcingly to us, you also see it outside the U.S. So goods and services spending looks really strong. Travel and entertainment is a little bit more of a tale of different segments. So when you look at the U.S. consumer, boy, that is building our confidence about the eventual rebound across all segments in travel because travel and entertainment spend for U.S. consumers quarter-to-date is actually at about 80% now of 2019 levels. And I will say airline spend is significantly below that, which tells you the other categories are looking very strong. And in fact, we now expect U.S. consumer T&E spend by the end of the year to be up at about 100% of 2019 levels. I think more importantly, it has just reinforced our confidence in the belief we've talked about for over a year now, which is that human urge to travel, that human urge to gather, it's insatiable. And so in the U.S., where you have seen restrictions increasingly lifted across the entire country, that human urge is spurring a real growth quickly and spend. And it gives us confidence that outside the U.S. where T&E spending is still lagging much more because restrictions are much greater, well, that same human urge is going to be there. So to put some numbers to all that quarter-to-date, the T&E spend globally is about 50% of 2019 levels. For context, in Q1, it was about 60% down from 2019 levels. So we feel good about goods and services trends. They've been strong for quite some time now, and they've stayed strong even as T&E has started to rebound. And because of that behavior we're seeing with the U.S. consumer, we feel increasingly confident in the eventual rebound of travel and entertainment spend around the globe.

That's a really good point you make about how the T&E's rebounding and goods and services is still holding in there. That's been a question at least of some folks in my model, gee, shouldn't you bring down G&S if T&E is rising. The answer, you would give us is now.

Yes. So it's fair to say, Betsy, we are very focused on that question because I think it's rational to worry about it. But we can't see any sign of that substitution. And of course, I think you and many of your speakers have talked about, particularly in the U.S. again, the amount of liquidity that has been pumped into the system. And of course, on the consumer side, we have an even more premium-oriented card member base, which is -- has been less hurt by the pandemic. The segment of small businesses that we serve as Card Members has been very, very resilient. So boy, the goods and services spend has stayed very strong as T&E -- as T&E has come back. And of course, the other aspect of that we have watched very closely is that within goods and services, what you saw is there is a tremendous spurt in growth in digital and online purchases, well above the long running trend of steady growth in those kind of digital and online purchases that you had seen for years. But as spending at physical retailers has come back, we have not seen that online spend go down. So we think that bodes really well for not just us, frankly, but for the industry because I think that long-running trend with both consumers and businesses, towards ever less use of cash and checks, we think has seen a step function change, and I don't think we're going to go back on that.

Okay. Just a couple of other questions digging into this. I think you had a target for T&E to reach 70% of 4Q '19 levels by 4Q '21. That includes the corporate angle. Is that still a target that you think you're tracking towards?

Yes. I would say our confidence in that target is really growing. To remind everyone, I don't know if I'd call it a target. I think I'd call it a benchmark we put out there that we're tracking. With U.S. consumer, which is certainly the most important and largest travel segment already at 80%, that 70% feels pretty good. Now to your point, large and global corporations are still down at much, much lower numbers. But we don't need the large and global corporations to come back. What we have said about 2022, maybe to go back to that subject for 1 second, Betsy, is that there are actually multiple ways to get to our 2022 aspirations. The only fairly general qualifications we put on that is we do need consumer, not business, not small business, not large business, but consumer travel and entertainment spending around the globe to be pretty much back to prepandemic levels. I feel pretty good about that assumption with the U.S. consumer at 80%. And then you just need a generally healthy economy. And sitting here on what is today, June 16, it's hard to see any particular driver that is going to cause the global economy and in particular, the U.S. economy to shift back down into a much lower gear.

Maybe you could give us some sense as to what you're seeing in recent travel booking trends. Anything there to highlight that might help our models?

Well, again, you have to draw a distinction between the U.S. and outside the U.S. Inside the U.S., if you look at our consumer travel agency and to remind everyone, as you would know, Betsy, we have one of the largest consumer travel agencies actually in the world. So our bookings, if you look at that, are actually up at about 95% of prepandemic levels quarter-to-date. Now the mix in there is different, right? Because the challenge, and certainly your airline clients are talking about it, the challenge is domestic travel in the U.S. and in other markets where there is domestic travel looks strong. But the level of cross-border restrictions has kept international traffic, bookings very low. And the corporations who pay some of the higher fares have not yet returned in great numbers. We'll have to see. Obviously, the world, I think, in the last probably 4 to 8 weeks, Betsy, has changed. In the U.S., more quickly than perhaps many of us had been planning, how that translates into behaviors and businesses, we'll have to see. I do see your CEO is leading the way in terms of saying it's time to get back to normal levels of business and business travel. So we'd love to see that example follow it.

Okay. Well, we're back here in Times Square. So rocking and rolling on that front. Question, just last one here for me on T&E. As T&E does continue to accelerate here over time, of course, how does that impact your discount rate? Should we be anticipating that there's a benefit there?

Yes. So as we've said for some time, certainly, if you go back to the second quarter of 2020, you saw our average discount rate, if you just calculate it off the base of the income statement come down in a significant way. And that's because, on average, with travel and entertainment merchants, we earn higher discount rates than we do on nontravel and entertainment merchants. So very naturally, a tailwind as travel and entertainment spend comes back is that average effective rate will start to go up again. And you even saw the first signs of that in the last quarter. What I would say, Betsy, is if you think about some of the comments I've already made about the lasting impacts of the pandemic, I'm not sure that our average effective rate does go back, though, to where it was prepandemic, but it's for a good reason. And it's because I do think you have seen a permanent step function change in the level of spending on goods and services, that's all incremental revenue. It doesn't all necessarily come at the -- at a similar average discount rate to travel and entertainment merchants, but it's very additive. So we'll take that trade all day. And we will also benefit from that tailwind of the average coming back up as T&E comes back up. I just don't think it quite gets back to where it was because I don't expect goods and services spending to fall as travel and entertainment comes back.

Got it. Okay. That's very clear. I wanted to flip to investments. You've talked about 2021 being an investment year for American Express. And I had a couple of questions here. One is, how have your Card Members been responding to the various rewards and offers you've been delivering to them? And do you see an opportunity to ramp the marketing, rewards, Card Member services, as we move into the second half of '21, given the fact that, to your point, at least in the U.S., people are anxious to get out and experience the reopening live and in person?

Well, I would say, Betsy, we're already ramping. And in fact, we talked even as we talked about the first quarter about the fact that the -- in the U.S., remember, U.S. is recovering more quickly than outside U.S. In the U.S., the numbers of premium fee-paying platinum Card Members is actually at to depending on exactly which markets you look at or consumer versus small business above where it was prepandemic. So we feel really good about the attractiveness of our value propositions. We feel good about the economics of the incentives we're putting into the marketplace, look it's a competitive market. It's always a competitive market in U.S. consumer. We feel really good about the economics we're getting. And then what you have seen more even since the first quarter ended is that as travel domestically in the U.S. has begun to rebound, you've now seen our travel co-brands begin to rebound. And in fact, in recent times, the Delta co-brand is back at about 90% of its prepandemic levels in terms of the new Card Members coming into the franchise. That is a real switch because it's those Card Member acquisitions that you saw really dropped dramatically last year because no one sitting in a Hilton or a Marriott hotel, thinking about their loyalty programs, no one's on a Delta plane. But as travelers have come back, demand for those products has really come back. So boy, I said earlier, it's about volumes, credit and marketing. We feel pretty darn good about the marketing progress that we've made thus far this year.

Okay. Let's switch to the commercial SME part of your business. Small, medium-sized enterprises. This has turned out to be a consistent bright spot for Amex with strong growth and strong credit. And really, it's very compelling here because just a little over a year ago, I was arguing with people night and day about the SME book of American Express. So congratulations on how that's been working for you. I guess part of the question here, and we saw it in the release yesterday, the growth has really been quite interesting and at least better than my expectations. Can you give us a sense as to what's going on there that's driving that very strong level of growth? And is it a function of client selection? How much does the PPP matter to you in this segment? And then just give us a sense as to where you're investing for the future there?

Well, I do think it's quiet selection, Betsy. And I think one of the reasons you probably had to have so many discussions a year ago with your clients about what how should they think about our small business franchises. We probably had not done as good a job as we should have before the pandemic hit about articulating who are our small business Card Members. And I think it's important for people to realize that when you think of American Express, sometimes you think about us from a network perspective, sometimes you think about us from an issuing perspective. From a network perspective, small businesses like restaurants are super important to all our card members. It’s why we have -- we bought Resy, it's why we love our restaurant partners. But they're actually not who our small business card members are. Our small business card members are small construction firms, they’re doctors, they’re lawyers, they’re architects. They're small businesses who, in fact, have really prospered over the last 18 months as spending in the economy has shifted across sectors. So it's really that self-selection process that has driven the fact that if you look at our small business spending even globally, and remember, outside the U.S., recovery is slower in general, than it is in the U.S. Our global small business franchise, even considering that T&E hasn't come back, quarter-to-date has grown about 4%. U.S. is clearly above that. Goods and services globally is all the way up at 17% growth year-to-date. So we feel really good about the health of our small business franchise. To remind everyone that franchise outside the U.S. was the fastest-growing part of the business before the pandemic, generally growing in the high teens kind of percentages. And in the U.S., there are years and years of it steadily being at the top end of our company growth rate. So we think this is another aspect of our business model that the pandemic has only reinforced. The sectors that we had as we went into the pandemic were the right sectors. I'd say we've been able to, Betsy, to even sharpen our focus now on those parts of small business where we want to be particularly aggressive with our small business card franchise. We think that the spending capacity we can give to those small businesses is tough for anyone to meet. We think the footprint that we have, particularly in the U.S., is hard for anyone to match and that gives us business insights that we can share with our card members that are hard for others to match. We are evolving the breadth of the product line we're offering to our small businesses. And so you've seen us in the last couple of months steadily ramp up some of our marketing efforts around our broader financial services offerings to small businesses. And just this week, we put out some new announcements about stepping up our marketing efforts with small businesses around our small business digital transaction accounts. So we feel great about this sector. It was one of the most dynamic sectors we had prepandemic. I think it has performed really nicely through the pandemic, and that positions us really well to resume the kind of growth we had prepandemic in the coming months and quarters.

Yes. The Kabbage acquisition was extremely well timed. It was a great opportunity that you were able to take advantage of that. And I would expect that that partnership is going to -- well, that ownership is going to continue to pay dividends for you. I guess my one question on the Kabbage products that you have out there. You mentioned the digital transaction account. Is that something that you feel is well aligned with your goals, the way it's currently structured? Or is there a need for you to build out your own checking account?

Well, just to level set, as you would know, Betsy, for everyone, though, so Kabbage was in the early stages when we acquired them of rolling out a business checking account. They partnered with Green Dot to do that. And that is the product that we are putting into the marketplace today. It is a product that is probably targeted at the smaller end of our small business customers. So certainly, there's lots of thinking that we're doing about whether there is an evolution in that product or a companion product that might have some functionality that the larger segment of our small business franchise might like. But whether we go there or not, this is really about capturing a bigger share of the financial and working capital needs of our small business customers, right? Our goal is to be the working capital provider to small businesses. We don't want to be the long-term capital provider, but we're all about working capital. And we do think that these digital transaction accounts are a very logical way to extend the relationship. We think pairing the tremendous innovation and strength of the Kabbage team with the tremendous footprint that we have across small businesses is a pretty exciting prospect in the coming quarters and years.

Okay. Great. Jeff, we have a few questions from the audience. Do you mind if we go through those?

No. Great.

Okay. First question here is in the U.S., the volumes look good. And as you mentioned, international has been a little slower to rebound. Loans from the managed trust, the managed book that you give us look great. Just wondering how you're feeling about that 9% to 10% revenue guidance for the full year given those pieces?

Well, I can't resist, Betsy, starting by saying, remember, our goal is all about 2022. We did try to give people some way to size 2021, put some scenarios out there on the EPS side. And I said if you're at that 70% T&E recovery by Q4, you're probably at about 9% to 10% revenue growth. I don't see anything sitting here looking at my calendar on June 16 that would cause me to change that 9% to 10%. I certainly feel good about it. I think you have a little bit of a balance right now. The U.S. volumes are clearly stronger than we expected, a little bit offset by weaker international. The loan growth is lower than we would have expected. That will be offset on the P&L side, the really strong credit results, but it will drag a little bit on revenues. I will say card fee growth has been probably a little stronger than we expected. And that goes to the earlier question you asked me, Betsy, around how -- what kind of reactions we were getting as we try to bring new Card Members into the franchise. We have been more successful than we had expected on the fee paying premium side of that, and that's driving that card fee growth. So you put all that together and look at this point of the year, I'd stick with the 9% to 10%.

Okay. Great. Another question just is on the competitive environment. What we've been seeing is some co-brand opportunities look like there imply there's been a kind of view on the street that now is a good time to put out the RFPs. Look, there's a couple of big names that have been out there suggesting that they might be looking for a new home. How do you think about the opportunities there? I mean you did, at one point, have a large co-brand that you did chose not to retain because you weren't interested in being as competitive as some on the field at that time. Has anything changed here? Would you be more competitive in this environment? Or maybe a better way of asking the question is just what are the hurdles that you have for signing up new co-brand partners?

Well, I think there are some really important learnings for us, Betsy, from -- I'm going to speak broadly in the last 5 to 10 years. And that is whether you're in the co-brand space or in the proprietary product space, we are not trying to be all things to all people. We are about a premium-oriented consumer and/or a small business that values a differentiated product. And that is not everyone. But that is where we think we have some unique strengths. If you think about our business model, which has a far higher reliance on card fees that people pay us than anybody else. It has a far higher reliance than our issuing competitors on spend, and we do far less lending than our competitors do. So whether we're thinking about the design of a new value proposition in our proprietary business or whether we're thinking about our choice of co-brand partners, those are our guiding lights. And so we look at a partner like Delta. And boy, we are extremely aligned around creating a differentiated set of products. It plays to our general strengths in travel. It plays to Delta's focus on getting front of the plane traffic. We think it's a fabulous partner, and we're working a lot together to make it even stronger post pandemic. So I'm obviously not going to comment on specific rumors and specific partners out in the industry. But that is our framework as we think about the places where we want to expand our resources and focus.

Okay. Great. One question on expenses. How are you thinking about the expense side and the tracking of the variable engagement costs being about 40% of revenues for the next few quarters?

So again, just to level set, Betsy, for everyone, you would know this. So our variable customer engagement costs. By that phrase, we mean our reward costs, payments we make to people like co-brand partners, what we pay for Card Member services like free bags, those kinds of things. As our volumes rebound, those costs are going to rebound. And there's a little bit of a hedge, both on the way up and down that those costs create. To simplify for people just trying to model out our financial results because there's a lot of noise because reward redemption patterns have changed a lot and are now returning back to normal. I threw out the -- look, for the next couple of quarters, those costs in total are going to be about 40%, and that's a good way to think about the modeling. Over a longer time period, they will asymptote back to levels depending on how the business evolves that probably existed more in the pre pandemic era. Since you brought up expenses, I can't resist because we're American Express, adding that the other big category of expenses are our operating expenses. And we remain laser-focused on always having those costs grow a lot less than our revenue and volumes are growing because getting leverage there is a key source of our business model, a key source of steady profitability.

Okay, Jeff, that's awesome. I have 2 quick questions left. One, I'm sure you'll be very quick on because it's a question around capital return. I just wanted to ask, you've got a CET1 of 14.8%, your target is in the 10% to 11% range. The SCB gives you a lot of flexibility. How should we be thinking about how you will utilize that flexibility over the course of the next several quarters?

Well, we have no desire to be anywhere other than our target 10% to 11% range for our CET1 capital ratio. We've gotten way up to 14.8% because of the Fed’s restrictions on capital returns. As those restrictions are eased and they probably, although I would point out it's not guaranteed, they probably will ease next quarter, you will see us begin to move much closer to that 10% to 11%. I will say we'll want to be mindful, Betsy, of the pace of that because I don't want to disrupt the marketplace, but we will get there reasonably quickly. Our capital objectives are as they always are that when there's an opportunistic opportunity to do some M&A as we did with Kabbage, we'll do it. Our dividend will more or less grow with our net income growth, and the rest just goes back to shareholders as quickly as the Fed allows us to. And because we have such an incredible return on equity every quarter, we're generating a tremendous amount of new capital. So there's no reason for us to sit on excess capital, thinking well, we need something in reserve in case an acquisition comes up. We generate capital at such a prodigious rate that our goal is just to operate within that range.

Okay. And then lastly, Jeff, what areas of the business are you most excited about as you look out over the next 1 to 2 years?

Well, I think we're a little over time, and so that's an unfair question because I could go for a long time. But look, I think, as I said earlier, the pandemic in many ways has reinforced the strategies we already had in place before the pandemic. I think the progress we have shown year-to-date on firing up our core engine again, volumes are coming back. Credit looks fabulous. We're bringing even more premium fee-paying Card Members into the franchise than we were prepandemic. I feel really good about all that core work, but we're also making progress in some longer-term things that, frankly, aren't going to affect our 2022 aspirations, Betsy, but I think are really important for the long term. So things like building out that network in China, things like building out the broader product line of Kabbage and things like moving our consumer offerings more broadly beyond travel to lifestyle, which I think you will see us make some stride towards in the coming months. I think that mix of let's make sure we're doing the things to hit the near-term financial results while working on some longer-term initiatives. I feel good about the balance right now, and I'm pretty excited about it.

That's great, Jeff. Thank you so much for joining us today, and we look forward to hosting you next year live and in-person.

Great. Well, thanks, Betsy, and thanks to everyone for their time.

Thanks. And we'll move on to the next session now.