American Express Company (AXP) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for this fireside chat with American Express CFO, Jeff Campbell. We have a number of prepared questions we'll be going through. But if anyone in the audience would like to ask a question, click on the Ask a Question button in the upper right-hand corner of your screen, follow the prompt to submit your question, and we'll do our best to address it in the time we have today. We've also prepared a number of audience polling questions that we would encourage you to answer during the presentation, and we'll be publishing the results and our report summarizing the takeaways from the conference.

With that out of the way, let's get to the discussion. Jeff, thank you for joining us. I wanted to start off with an update on the overall environment. What sort of trends you're seeing. Can you talk about recent trends you're seeing in goods and services spend.

Well, first off, good morning, Mark, and good morning, everyone. Thanks for having me. It's good to be here, it'd be even better to be in person somewhere, but I suppose that ties nicely to your question as we all try to figure out what's going on in the environment. So let me maybe, Mark, start at the top level, and then I'll go down to goods and services. So if you look at our quarter-to-date numbers, our overall spending volumes versus 2019 are now up about 3%, and so I'd remind you that's better than what we reported in the second quarter. Second quarter overall was down about 2%, and it's fairly consistent with the way we exited June, if you go back to the second quarter. So overall, when you think about our mix, and I do think it's important when you think about our numbers versus other organizations and companies numbers that you might look at to think about are heavily premium consumer mix in the U.S. and around the world and also our -- just getting rid of the little message there -- and also our mix of Small Businesses, particularly in the U.S. And I'd remind everyone that our Small Business mix tends to be small businesses that have actually done pretty darn well in the pandemic. So it's your contractors. I don't know if any of you have tried to get any work done anywhere lately, pretty tough. So our Small Businesses have been pretty healthy. If you then peel down to goods and services spending, that has remained strong this quarter. So quarter-to-date, overall goods and services spending is up about 17% versus 2019, and that's pretty much in line with where it was in the second quarter, which was 16%. So there's always some mix difference as you go across the world, although what I would say, Mark, and maybe this will be your next question, that's more evident when you look at travel and entertainment spending. One of the probably things that gives us comfort in the sustainability of the current levels of goods and services spending is the breadth we see. So you see it not just in the U.S., but you see it pretty much around the globe. You see it driven by that mix of Small Businesses we talked about, who remember are using the card really to run their businesses. And you see it with the significant step change function that not just us, but I think everyone has experienced during the pandemic in the way consumers have increased online and e-commerce spending. And the interesting thing that I think not just us, but the industry has seen is as physical spending has come back, e-commerce spending has stayed strong. So those are the things that give us some confidence in the sustainability of that goods and services spend.

Great. Well, you anticipated the next topic, moving on to T&E trends. You mentioned on the July earnings call that U.S. consumer T&E reached 98% of pre-pandemic levels in June with continued strength into July. So can you give us some color on what you've seen in August and also touch on what international T&E trends look like.

So again, maybe we'll start at the top level here. So on the Q2 earnings call, as you point out, we said that in June, globally, it's always very confusing because you have global U.S. consumer and commercial. So let me start with the macro number, global T&E spending overall. And what we said in the second quarter is that that spending had reached 67% of 2019 as we exited the second quarter. If you look at our third quarter-to-date number, that has actually ticked up a little bit. It's up to about 70% versus where we were. Unlike goods and services, though, this is a little bit of a tail of a lot of different countries and a lot of different trends. And so if you look outside the U.S., travel and entertainment spending has continued to steadily strengthen overall versus that second quarter number or the June exit. Now there's a mix, as you might expect, across company. So Europe has continued to steadily get stronger. Sadly, places like Australia have seen a little bit of a step back. But if you put all of it together outside the U.S., you've seen steady growth in T&E spending. Somewhat different from that in the U.S., and I think this is similar, Mark, to what many of your other guests have said, you saw a very strong July in the U.S. in terms of T&E spending, but then you saw some softness in August sequentially. And I think that's in line with what many of the airlines have talked about. It's in line with the rise of the Delta variant in the U.S. I will say that if I look at the early days of September, though, looks a little bit stronger in the U.S. So on balance, I'll go back to where I started, that global T&E number, which was 67% as we exited the second quarter, has strengthened, 70% quarter-to-date. We'll have to see. I think while the Delta variant impact in the U.S., particularly on airline spend is a watch out. When I step back and I think broadly about our overall portfolio of customers, our overall geographic footprint, I think it's too early to say there's been a change from the steady positive trend that we talked about in July on the earnings call.

Okay. Got it. So just to summarize on the U.S., in particular, July was even stronger than June, September -- or August, I'm sorry, weaker September...

If I focus very specific -- sorry Mark, because you did ask that. If I focus very specifically on U.S. consumer, I think the number, let me make sure I get it right. We cited on the July earnings call was that we exited the second quarter at 98% of 2019. July strengthened from that, August weakened. September, we only have a few days in September, but it actually shows a little bit of strength. I would point out there, you've got some unusual timing of the Labor Day holiday, it makes it a little harder to interpret. If you look at all of that quarter to date, though, for U.S. consumer, you're right at the 98% that we exited the second quarter at.

Okay. So the impact of Delta, if any, looks moderate at this point, maybe it's moderating some of the recovery trends.

Yes. I think that is certainly our view, Mark. And as you think about why I would say that, I'd start by reminding everyone that the overwhelming majority of our spend volumes now at 85%, depending on exactly what time period you look at are goods and services. And as I said at the beginning, that goods and services spend does not seem to be impacted in any way by the Delta variant. There clearly is some impact, I think, in the U.S. on T&E spend, but on the other hand, as the U.S. weakened a little bit in August, as I pointed out, across the globe, we saw spend strengthen. A little hard to know what to make of the early days of September since it shows a strengthening again. So there's nothing in any of that that particularly changes our view of what we expect as we exit this year. So we also talked about as we exit the year overall T&E spending being at 80% of pre-pandemic levels. I haven't seen enough, Mark, to cause me to change that assumption. The other point I would make in all of these financial comments that we have made both about the scenarios, low and high that we've talked about for 2021 and our view of 2022, which we'll talk about, I hope, in a little bit more detail later. There's nothing we've seen that would change any of those views. The minor relatively modest pull back in August in U.S. T&E is just too small a part of the overall business to have an impact on our overall view.

Okay. Great. Well, you just asked -- answered my next question. So turning to the commercial side of the business. Can you talk about the recent trends for SME and whether that segment's strong performance has continued? And what's the outlook into 2022?

So here, I do think it's important to start with the reminder that I mentioned a minute ago, which is we have a really strong Small Business franchise in the U.S. And if you go back to pre-pandemic, a very smaller, but high-growth Small Business franchise outside the U.S. In the U.S., I think we're probably larger than our next 5 competitors combined. But despite that breath, our Small Business customers are very targeted in certain industries that tend to be the ones that have done very well in the pandemic. So it is your doctors and architects and contractors and service professionals. And it is not your restaurants and some of the things that have been particularly some of the service industries that have been particularly hard hit by the pandemic. So that's why really throughout the pandemic we've talked about the fact that our collection of Small Business customers has actually been our strongest customer segment throughout the pandemic, and that remains true to the state to just maybe give you the numbers, Mark. If you look at our global Small Business spending quarter-to-date, it's up about 10% versus 2019, that's versus being up 6% in the second quarter. So it has not only continued to stay strong, but it's even strengthened a little bit. And just like you see overall, that is driven by goods and services spending. And that's what you would expect from our Small Businesses because they really use the card to run their business, to buy their inventories, et cetera. And so that goods and services spending quarter-to-date is up 19% versus 2019. That's very consistent with where it was in the second quarter. So our Small Businesses are roaring. The one thing they're not roaring on is they do at a modest level, used a card for some travel as well. That certainly remains down. It's only at about 70% of the pre-pandemic levels. But that was a modest portion of the overall spend by our Small Businesses on the card pre-pandemic. And so we feel great about the strength and we are aggressively now back marketing in the U.S. and around the globe in our Small Business sectors, and I would have to say, Mark, I'm pretty darn confident that just like it was pre-pandemic as we get into '22 and beyond, you will see international Small Business probably take its place again as the highest spend growth part of our business, highest spend customer type or in terms of growth. And I think U.S. SME will be very, very strong.

Okay. Before we move on, I got a clarifying question in from the audience. On the 3%, I think that was the -- on the goods and services growth. The question is, is that FX adjusted or non-FX adjusted?

So the 3% is the overall build business number. And that's a good question about FX adjusted and I'm going to tell you, I believe that number should be FX adjusted, yes.

Okay. Great.

But to be clear, because it's quite different. That's overall build business. Goods and services overall is up 17% versus 20% down by the T&E spend.

Yes. Thank you for that clarification. All right. Can you also touch on the large corporates here? Is there any change to your expectation of when T&E will recover there?

Well, so I'll answer this question with a little different tone. So there is really no sign of more life on the spending that our largest corporate card customers who use the card really strictly for travel do. Now as we talked about on the July call and probably on the April call as well, I would say that it's a little bit of a tale of different types of companies. Your consulting firms, your accounting and auditing firms, there's just no travel happening. If you look at some of the manufacturing firms, there is travel and entertainment spending happening because they got to keep the plants running. They got to have people moving around and salespeople moving around, et cetera. But overall, I think the number we cited in the second quarters, that the large and global travel and entertainment spend was only about 18% of 2019 levels. I'd say quarter-to-date, it's a little bit above that, Mark, but I would hardly call it a trend. I think quarter-to-date, they're at 24% of 2019 levels. So I would not pound my chest and say aha! the large corporate types and the large consulting firms are back traveling around the world. The challenges here are until you see cross-border travel restrictions ease, until you see really all companies, not just return to the office. But if you look at returns to the office, in most cases, companies start as they should, as we will, by saying we got to first worry about our own colleagues, let's get all of them back in the office, comfortable with what's going on. And then we'll begin to let in people who are from outside the company. So look, there's business dinners happening, and there's a little bit of travel happening, but there's no real sign of life. The important thing that I know you know Mark, but I just want to remind the audience, is the travel and entertainment spend by these really large corporations is only about 5% of our spend volumes pre-pandemic. It's not necessarily the highest margin part of our business. So we, in no way in any of our forward financial commentary are counting on a return of the spend. I will say it's an important foundational part of our business. It's an important part of our merchant proposition that we have so many of the world's greatest corporations using our card as they travel around the globe. But while we're confident someday will recover, we're not counting on any particular time line in terms of when it recovers.

Okay. That's helpful. Turning to loan balances. What have you seen with paydown rates recently? And how do you expect those to trend towards the end of the year and into 2022?

Well, you can look, of course, Mark, at some of the monthly numbers we and most other people publish. And I think if you look at our numbers, you squint a little bit, you see that we've hit an inflection point. We've started to see some sequential increase in overall loan balances. It's small, though, not a big trend. And so paydown rates really haven't moved around a lot from where they were at their strongest levels. And look, we see that as a good thing. It's a good thing in that it's a sight of how strong our Consumer and Small Business customers are doing economically. The flip side is, which we'll get to, I'm sure, is the strong credit results that we have. But I think the climb back to the kinds of overall AR levels that we had pre-pandemic is pretty slow. And it will certainly lag the recovery in spending volumes. And I don't particularly see any strong signs yet of an inflection point beyond the fact that I do think we've hit bottom and you'll see some modest growth to resume in lending balances. But I'm going to make a comment similar to what I just made, Mark, about the large and global corporate spending, which is that as you think about the comments we've made about our financial expectations for the rest of this year and into 2022, we're not counting on any huge surge in lending balances. Now in the long run, I would say that we would expect that our pre-pandemic performance on lending volumes versus the industry will return. In the long run, I don't see any reason to believe the Consumer or Small Business borrowing behaviors have changed. I just think it will take time to get back to normalized levels. As the industry does that, I would fully expect our growth rates to be a little bit above the industry as they were pre-pandemic, and that just stems from the fact that we have historically still underpenetrated our own customer base, and that's why pre-pandemic, 60% of our growth or so was coming from our own customers. I expect that to repeat itself. And we are making sure today, even though you don't see a lot of growth in lending balances that we're making all the right product, marketing and pricing decisions to achieve that same kind of outcome whenever lending volumes do begin to come back for the industry.

Okay. What do you think we need to see for paydown rates to come down and for that correlation between spend and loan growth to normalize?

Well, I think you need to see excess liquidity squeeze out of the system, right? So the levels of government support, and here, I'm going to make -- while there's government support around the globe, Mark, I'd remind -- as you know, our lending balances are predominantly in the U.S. We do a little bit of lending outside the U.S., but it's predominantly in the U.S. And whether you want to look at the Consumer, Small Businesses, there's just a lot of liquidity in the system right now. And so until we work through all that excess liquidity and I think until there is a clearer consensus view that we're finally passed the darn pandemic and we're finally back in a normalized world, I don't expect you're going to see the confidence in Consumers and Small Businesses to let their cash balances and their borrowing behaviors revert to pre-pandemic levels. But I'm pretty darn confident it will I just wouldn't want to hazard an estimate on exactly when, Mark.

Okay. Fair enough. On the full year guidance for revenue growth of 12% to 14%, how is that shaping up given all the pieces we've discussed. Can you talk about what can get you to the high versus the low end?

Yes. So I just kind of dial through the P&L in some ways, Mark. And so obviously, our largest revenue line is the discount revenue. At this point, well, based on what I've seen for some time now, I don't expect much variability in the goods and services spending level. I think it's sustaining itself at the very high levels we're at versus 2019, sustained itself as T&E has come back, it sustained itself as the Delta variant caused a little bit of T&E shortage. So I don't think there's much variability there. T&E is obviously a wildcard, right? So if if you were to see the situation in the U.S. and around the world dramatically get better, cross-border, magically, the medical situation gets better, governments ease cross-border travel restrictions, people in the U.S. get comfortable again doing the kind of travel they began to do earlier this summer. That could resurgence above that 80% level of global T&E by the end of the year would clearly drive us to the high end, if not a little bit above it. If you saw a dramatic drop in T&E, it could cause you to go to low end, although sitting here, what's today, September 14, it's hard to see anything that's going to cause a dramatic drop from where we are right now when I just think about the way people are behaving. If you go to the next line, net interest income, I don't think there's much variability between now and the end of the year, right? When that begins to rebuild, it will be a slow, steady rebuild, it's not going to dramatically change between now and the end of the year. The other thing, though, that could change are that there are a variety of other revenues, which normally we don't talk about a lot because it's a relatively modest part of our revenues. But if you go to the other revenue line, it's a lot of cross-border travel-related fees, things that have to do with travel commissions. And so to the extent you were to see a faster or sudden pullback of cross-border travel restrictions, the rebound there actually could vary enough to cause us in the case of restrictions easing to pop more towards the high end of our target or in the case of new restrictions, which seems very unlikely at this point, that cause us to go to the low end. So those are the big levers as I kind of walk through, Mark, the different parts of our revenue P&L.

Okay. That's very helpful. You also provided an aspirational EPS target of 885 to 925 for 2022 and previously guided towards the high end of that. Can you remind us what was embedded in that guidance? And also speak to how you feel about that right now.

Well, if I can quibble just a little bit on leverage. I think we started the year, Mark, using your exact words, saying our aspiration in 2022 is to get back to the kind of earnings range that we had in 2020. As the year has progressed as we've seen the strength that we have in goods and services spending across all customer types and around the globe, as we've seen the continued growth in card fees, and I would remind you that card fees have continued to grow at double digits right through the pandemic. And so as you think about 2022, your absolute level of card fees is going to be very nicely well above 2019. And as we have this year, begun to weigh back into the world of marketing to new customers and marketing new products to existing customers, all of those things caused us in July to say we are now confident. It's not an aspiration. We are confident in our ability to be at the high end of that range. And that confidence comes from all other things I just took you through. And if you think about the last what, 25 minutes of you and I talking a little bit about the Delta variant, there's nothing we've seen in recent weeks or with the Delta variant that is material enough overall given countervailing trends around the globe to cause us to come back from the confidence we have in that 2022 result.

Okay. Got it. Turning to credit. Obviously, it's been a bright spot. Can you talk about all the things you're watching currently and maybe provide a framework on how to think about credit as we head into 2022?

Well, certainly, we feel really good about the fact that we, of course, went into the pandemic with best in the industry credit metrics. And our distance versus the industry in our view, has even increased. And so we not only continue to have best-in-class credit metrics, but while everyone has seen improvement, we believe we've seen relatively more. So we feel great about all the steps we began to take a few years ago, long before the pandemic hit, thinking about tightening up some of our risk management policies. We feel great about the way our team was able to really pivot quickly when the pandemic hit to provide what we think are some of the best-in-class products to our customers to help those who did have some challenges as we've gone through the pandemic. So as we sit here today, goodness, we're at levels of write-offs and delinquencies, Mark, that I don't think anyone could have foreseen seeing in a pandemic or frankly, in any economic environment. We still have a lot of reserves, right? So we're still sitting on a lot of reserves. Why? Well, we still have the last of people who went into those best-in-class credit health programs, working through the end of those programs. So we want to keep an eye on how those exits and the subsequent performance of those customers goes, although, boy, every indication right now is really, really positive on that front. You still have the last of the government health in the U.S. that's trickling off. So some of the unemployment benefits just went away in the last couple of weeks. Although I think what we've seen Mark, is that's not particularly our customer base that's getting helped by that. And look, while we haven't seen in our volumes, some huge inflection point driven by the Delta variant. When you think about CECL accounting for credit, you do take into account the kind of perhaps continued uncertainty that the Delta variant causes. So still have a lot of reserves. You have record low levels of delinquency and write-offs. What does that mean for the rest of this year? We'll have to have a lot of debate in the coming weeks about what we do with all those credit reserves, certainly sitting here today, is probably a little bit more cautious about releasing those reserves than there was a month ago. On the other hand, boy, the metrics look strong. I think probably the more interesting thing on everyone's mind is, but what does all this mean for the next couple of years. We'll have to see. But one of the things I found myself thinking about lately, Mark, is, as you would recall, I joined American Express and really the financial services industry in 2013. And in 2013, when you look at the credit metrics at American Express, they were well, well, well below what the company had seen prior to the great financial prices. And so I spent the first several years of my time in this role at American Express with people saying, "Gosh, Jeff, when are your credit metrics going to get back to the kind of levels they were at before the great financial crisis?" And the interesting thing if you now reflect on 10 years of history is the answer is they never did. And in fact, we now have gone through the pandemic that ever getting back to the kind of levels we were at in 2006, 2007, and now we're back down at record lows. So as I talked to many investors, Mark, I'm now getting the question. So when are you going to get back to the levels you were at in 2019? We'll have to see, but I'm a little cautious about saying that is the right baseline. I think there's certainly a scenario because our risk management practices keep getting better because we do have learnings from the pandemic about things like what Small Business sectors and industries do we want to be most focused on. Because there is a little bit of the cleansing of the portfolio when you go through the kind of environment we've been in for the last 18 months. Certainly, there is a scenario, where I think our credit metrics remain below where they were pre-pandemic for some extended period of time. Reserves will probably be a little slower to follow that because there's some conservatism built into the way we approach our credit reserve accounting, but we'll have to see.

Okay. That was a lot of very helpful context. Just 1 last question on that. I mean I think you talked about the conservatism and it sounds like around the macro scenario. I mean, clearly, I think based on all your comments, it would seem reasonable to think that losses probably remain below normalized given where they are today, right? And the experience of the post-financial crisis period. You sit here with reserve ratios that are kind of above CECL day 1. So is it all -- is it right now just a question of greater clarity in the macro that ultimately probably gets you below that kind of CECL day 1 over the next year or so?

Well, I think there's 2 things, Mark, and this is probably true for us and the industry. You do need to get past some of the remaining macro uncertainty and kind of the -- if you think pre-pandemic, you tended to have a very tight economic consensus around everything from inflation to unemployment to growth. You have a wider range of estimates out there in the consensus today. And so you need that to come down a little bit. But I think the other thing that needs to happen for us, and I'm going to get a little bit wonky here, but look, CECL required us and the industry to build incredibly complex models to try to predict as we close the books each quarter, what all of our future losses were going to be based on what we saw ahead in the portfolio at that day. And clearly, those models have struggled to predict the unprecedented results that we and the industry have seen in the last 18 months. So that creates a little bit of uncertainty about how you should think about those models. So the other thing that needs to happen to get comfortable bringing reserve levels down is you need to get comfortable that enough time has passed, enough recalibration has happened, so that you are confident in what the models are telling you about future results. Today, we have a little bit of conservatism built in because of the macro uncertainty and a little bit of conservatism built in because of our -- the uncertainty over our modeling results. You really need both of those things to come down, I'd say, to get back to a pretty clear line of sight between, okay, I see how the credit metrics are performing and so that's going to drive this kind of reserve ratio. That will take some time. And I think that is a 2022 prospect at best.

Okay. Great. Turning to the competition. You had 1 major competitor exit the Premium Card category, another one Refresh its offering. Can you comment on the state of competition in the Premium Card market. And how you feel about AXP's competitive positioning?

Well, look, we are in, we believe, a super attractive part of financial services. And so when you're in a relatively attractive part of financial services, it understandably always has and I think always will attract a lot of competition. What I would say is the long-running comment, Mark, that by far, the U.S. consumer segment is our most competitive remains true. So when you go outside the U.S. and you look at the consumer competition, it's more fragmented, but less focused on Premium. When you look at Small Business, the market is not as competitive as what you see in U.S. Consumer. But U.S. Consumer is very, very competitive. And when we think about that competition, I always think about there's 2 different parts to it. There's value proposition competition. And so comments like one of our competitors pulling a product out of the market, another competitor raising their fees, but adding some benefits. Those go to the value proposition competition. And then there's a second avenue of competition, which is what kind of incentives and other bonuses are people offering to bring new customers into the franchise or to entice existing customers to put new products into their wallet. So in the U.S. Consumer segment, look, both of those areas remain very, very competitive. But our focus, Mark, is always on what can we do that are things that are very difficult for others to copy, right? So in the premium consumer segment, nobody has our scale. And so what are the kinds of things that allows us to do that are hard for others? Well, for 1 thing, it allows us to attract partners who want access to the unique breadth and strength of our premium consumer base and are therefore willing to help fund parts of our value propositions. So things like our hotel programs, some of the other parts of our value proposition are funded, not just by us, but also by our partners. And I think that is difficult for others to replicate because they don't have the scale of the premium consumer base that we have. Our scale also allows us to do things like have the unprecedented reach of a global lounge collection that we have because we have the ability to take the cost of building out that lounge collection and spread it over such a broad customer base. You see others beginning to kind of play a little bit in that space, but I think they will be challenged because they don't have the scale of not just consumer, but Small Business customer base that allows you to spread that cost and make economic sense across a really large customer base. And last, I think we do have a brand, Mark, and a reputation for service and quality that is hard for others to replicate, right? So in many ways, we try to -- look, we have to do some of the multipliers and 5x this, et cetera, that others do, but that's not our go-to move. It's kind of the last move, and we sort of do as little of it as we can while emphasizing these other types of benefits because in a hypercompetitive space, and look, U.S. Premium consumer is hypercompetitive and always will be. I think those are the things that are harder for others to replicate, and that's what we really want to emphasize.

Great. Well, we're running out of time, so I'm going to jump ahead, Jeff. Just turning to expenses. You guided to $5 billion of marketing spend this year, but noted it was governed by the set of investment opportunities you see. Has anything changed? And how do we think about that as we roll into next year?

Yes. The short answer is nothing's really changed, Mark. And we feel really good about the way that as this year has gone by, we've been able to reinvigorate our marketing efforts. We talked on the July call about bringing more Platinum and Gold members into the franchise than we had in almost any other quarter across most of our customer types. As you know, we have many, many Platinum products. In the U.S., I think people tend to focus on the Consumer Platinum product. We also have a Small Business Platinum product that is super important for our company. And we have Platinum products, of course, across the globe. So the quality, if you will, of the new cards that we're putting in the hands of existing customers or the new customers we're bringing in the franchise looks really well. And to focus for just a second on that U.S. Consumer Platinum franchise, as you know, Mark, we refreshed the product and raised the fee as we entered the third quarter. We feel great about the results so far. So the numbers of new cards that we're acquiring with that higher fee, but the expanded range of benefits is actually up from the pace that we were running at prior to the Refresh. If you look at our customer retention, which is just extremely low, it's actually been even lower since we refreshed the product. So we feel really good about where we are with our marketing efforts. And so that $5 billion or thereabouts estimate of marketing, I think, is still a good number. And I think it bodes really well for the kind of growth momentum that we're building and that we intend to try to continue in coming years.

Okay. Great. Well, I think we're out of time. So why don't we end on that note. Jeff, let me thank you for your time and insights. We really appreciate it.

Great. Well, Mark, thank you, and I look forward to doing this in person hopefully next year. Take care. Thanks, everyone.