American Express Company (AXP) Earnings Call Transcript & Summary

Hopefully, everyone can hear me. I get a message that my video has been disabled. Okay. There we go. Hey, Doug. Great to see you, and thanks, everyone, for joining. This is Brian Foran from Autonomous. We're delighted to have Doug Buckminster from American Express. For those of you who attended the conference in the past, you'll know Doug well. He's been a big supporter, and we're very grateful for that. Doug currently runs Vice Chairman of the firm and Group President of Global Consumer, a role he's been in for, I guess, going on 4 years now. So Doug, as always, thank you, and thank you for taking the time to do the conference today.

Pleasure to be here with you, Brian. Thank you.

So I guess maybe to start, an open-ended one. I mean I guess it goes without saying it's been an unusual year. I mean we've gone from the depths of the pandemic last winter to what felt like a full recovery and back to normal maybe in the spring and maybe now, a little bit of a step back with the Delta variant and people hitting pause on certain types of spend. If we could start just at the highest level, you've got maybe the most unique view of the consumer globally out there. What's really stood out to you? What are the trends you'd highlight for investors right now?

Yes. Thank you for the question. I mean maybe a few things. The first thing, it is no surprise to anyone and it's much talked about within the industry, and that is I don't think anyone would have anticipated with 10s of millions of excess first-time jobless claims in the U.S. credit to be as robust as it has been. And I think we all know the reasons, right? We know that consumption was forced down during the pandemic. And then there were some extraordinary sources of liquidity infused into the system from both public and private sources. But I think it caught most of us by surprise, and all you have to do is track the change in reserve levels from the beginning of the pandemic through to today to see that it has been nowhere near what we expected in terms of the credit event that it could have been. I'd say maybe 1 or 2 other things. I think consumers are called consumers for a reason, and they find a way, right? And when travel and entertainment were not as accessible in person, you saw food delivery, you saw e-commerce, you saw streaming and other entertainment services that are digitally delivered really, really boom for us and for many in the industry. And maybe one thing specific to our consumers, we do not take for granted one of our most precious, if not most precious asset, is the trusted relationship we have with a scaled premium customer base. And our idea of loyalty is a reciprocal one, right? We get a lot of loyalty from our customers, and we feel we need to reciprocate that. And we did during the crisis. If you look at the $1 billion in value we infused back into our products when some of the travel-related value was compromised. If you look at the work we did on financial relief programs to help customers through the pandemic. But I think we are exceptionally gratified to see the engagement levels, the retention levels and the way our customers prioritized their membership with us even when they bumped into cash flow difficulties, right? So it was an extraordinary time. And those would be my comments on that.

That's great. I mean you mentioned the travel issue in particular. I think in earnings, if I got the numbers right, you were up about 18% versus 2019 baseline in consumer on goods and services, but still down by about 20%, 25% on the T&E side, just for the consumer, not the corporate. Maybe you could speak to a little bit what you're seeing there? Are you seeing people hit the pause button again? is it being reallocated? What other areas are benefiting just with the current trends? Any commentary you can give on consumer T&E would be great.

Yes. On the consumer side, I would say, the goods and services spend remains -- the growth rates remain very stable in Q3 versus Q2 and Q2 exit. On the T&E side, throughout Q3, we've actually seen growth. So you cited 75% Q3 to date. I think through first week or so of September, that number is an 87%-type number, 98% in the U.S. and more modest outside the U.S. And I'd say it's been relatively stable. We did see in August a tick-down in air spending in particular. Early September looks a little bit more robust. So I think -- I'm expecting that there's going to be some fragility or some volatility to air travel in particular as we track the health-related issues around infection rates and such. And I think you see that in commentary from some of our airline partners and others as well. But I would say on balance, Q3 still looks like a continuation of the trends we have seen in Q2. And interestingly, I would add, internationally, we did not see that August tick-down in air. And international, which has heavier T&E mix for us in general, is further behind in the recovery, but that recovery kind of month-on-month has continued throughout the third quarter.

I always feel like in this routine, it's been 2 years since I've gone farther than Connecticut. So I've got 2 states and 1 bridge that I travel on. Maybe some opportunities for American Express, I mean, obviously, product refresh, a key strategy for you hit a pause maybe a little during the pandemic, but we're back in gear. And I know this is something near and dear to your heart given how important it was when you ran the international businesses as well. Maybe just for people who aren't as familiar or even those who are, why is this such an important strategy for Amex? And how do you think about the benefits and the payback of a big product refresh over time?

Yes. Well, we cater to an extraordinarily sophisticated customer base. And we like to think of ourselves as a financial services product set that's wrapped in a distinctive lifestyle type of brand. And we feel the imperative to continue to make our own products and services obsolete, if for no other reason than we know we've got a range of competitors that are focused on what's working for us, whether it's in the dining space or the lounge space and adopting some of those tactics, right? So for us, it's as much about maintaining relevance in sort of that leadership role in premium payment products and membership services that causes us to push the pace on this. And the benefits, I think a lot of people misread the benefits and think it's about being able to take price on the card fee line. And look, that is a source of financial value for us. But if you were to look at, say, our last Platinum refresh and you were to look at how much card fee growth came from repricing the back book versus the demand that we unleashed with that new superior product, it's easily 4 to 5x tilted towards creating demand for the product, right? And that's how we think about it. It's not about harvesting more margin from existing customers. It's about living up to their expectations in terms of service innovation, and it's about creating new sources of demand for our product. In our last Platinum revit over a 4-year period, in a very competitive environment, we roughly doubled the size of that customer base, even though we increased the fee by 20%.

Maybe we could stay there. I mean, on the Platinum refresh. Clearly, you're a leader in prestige and luxury products. Can you talk a little bit about the decision behind the fee increase and the shift from a travel card to a lifestyle card as you refresh Platinum in the most recent round? And on the earnings call, early acquisition results exceeding expectations was one of the comments made. Any update on the progress there?

Yes. So first, I don't think of it as moving from travel to lifestyle. I think of it as a broadening or a diversification of the value proposition. I think we have -- travel has always been a very powerful characteristic of our brand and our products and has been a real moat for us in terms of these value propositions. This most recent revit certainly did focus on how do we expand at-home utility, right, whether it's entertainment, whether it's dining, whether it's retail-type benefits. But we also did a lot of work to strengthen the travel-related part of the proposition as well because we recognize that's core to our brand and our customers expect it from us. And we've seen a lot of competitive activity in the travel space as well, so I would describe it as a broadening. In terms of the taking price, in a lot of ways for me, the taking price is part of the product development discipline. And what I mean by that is it tests us throughout. When we move price from $550 to $695 on one of the most consequential portfolios we have, it really pushes us to say, are we adding adequate value and can we communicate that value well to customers, right? So it really forces our hand on dialing up our innovation energy. And for me, that's one of the most powerful components of taking price. The other thing I would say is price is a powerful signaling device in marketing and in product positioning, right? And part of the reason we move it is we believe our products are different and superior to some of the ones that have come afterwards and tried to co-op that positioning, right? So this is the signaling aspect of it as well.

A little like colleges, I guess. No one wants to go to the cheapest college. And maybe broadening out from the product refresh specifically, but just kind of marketing and rewards overall. I mean for both you, for the industry, we've seen a big step up. Obviously, some of that's the base effect because of what happened in 2020. But it's getting more competitive out there. It certainly speaks to some of the opportunities to attract deepened customer relationships, but also on the flip side, the specter of a competitive war. Maybe to start on the good side, can you speak to where you're most excited about investing right now, where you're seeing the most opportunity to go after customers and relationships?

Yes. Well, I would say, I'm excited both about the work we're doing attracting new customers, what we would refer to as prospect marketing as well as the marketing activities decked against existing customers. I talked about the power and affinity of our installed customer base. We estimate that they account for about 1/3 of all U.S. financial activity, right, whether that's new mortgage originations, credit card spend, credit card borrowing. And they are a surprisingly efficient and robust source of growth for us from a revenue point of view. Pre-pandemic, when we had 2x the loan growth rate of competitors, we often noted that 60% of that growth or more came from existing customers, came from tenured customers, right? And that kind of real-time, low-cost, data-rich marketing reach to that premium customer base is a really powerful asset for us. I think the other thing that I'm excited about on the marketing side is our ability to move away from some of the commodity levers like rewards accelerators and move into other sources of value and whether that's partnerships with retailers, whether it's partnerships with travel companies, whether it's building out our lounge network. We like those because they're differentiating. They also happen to have like some more margin leverage to them than kind of doubling down on cash back, right, which, essentially, is very difficult to get real margin leverage from. So we love what we're doing in the service expansion space. And I think we're especially encouraged by the work we're doing, whether it's with some of the online publishers or streaming services or Wheels Up or Saks or Equinox or any of these other providers the ability to kind of exchange our marketing reach to these customers for differentiated and, in many cases, partner-funded value that we can push through to our customers, right? It helps diversify our offerings. It also helps us manage margins as well.

And maybe sticking with the same theme for investors out there who may be worried or taking a more pessimistic view that could this be the beginning of a rewards war maybe somewhat akin to what we saw back in 2015. What would you say to assuage them that either the industry or Amex or both can sidestep that rewards war risk? In marketing, why don't we make it just about rewards?

Yes. Well, I mean I think if you look at some of our most recent product updates, including Platinum, you'd see that we did not pull the rewards lever in that revitalization. We looked for other sources of more financially viable and sustainable investment into the product set. And I would expect that we'll continue to play that card. Having said that, we see really substantial attractive investment opportunities, both within the existing customer base and in the prospect world. And that is why you've heard Steve and Jeff and others talk about the expectation of elevated marketing levels for the balance of the year. The one thing I would say to reassure investors, we have an extraordinarily disciplined approach to allocating marketing resource and measuring the financial impacts on a discounted equity cash flow basis. We have real machinery around that and we're committed to that. We make the adjustments we need to change incentives, move channels, move marketing mix to pursue the differentially high returns that enable us to have 30% ROE year-over-year.

Yes. Maybe sticking with the theme of the conference, I mean, the future of commerce. I mean obviously, probably the most striking thing about the pandemic has been the shift to all things digital. You put up a great slide back in July showing that online consumer spend on Amex cards was up nearly 40% from a 2019 baseline, while off-line was basically flat. And that was an improvement, and it clawed its way back to flat. So maybe 2 questions. I mean on the online side, on the digital side, what's the biggest thing Amex is doing and can continue to do to support the rapid growth of e-commerce? And then second, for physical retail, where things are obviously tougher, what are the key opportunities for Amex in off-line spending as the pandemic eases?

Yes. Well, on the online side, you're right, we've seen some -- and the whole industry has some very dynamic growth there. And whether it's e-commerce or whether it's digital self-serve, we would estimate that the pandemic probably accelerated pre-existing trends by 18 to 24 months in terms of self-service levels or e-commerce engagement levels and such. And we're very focused on continuing to win as that commerce digitizes. And I think you'll see it in our marketing activities, the way we shift acquisition incentives towards e-commerce engagement, if you look at some of the work we did in value injection with Paypal credits on the Platinum side, if you look at some of the work we did revitalizing Platinum with streaming credits and such. So we'll continue to kind of tune and adjust our marketing tactics as well as our installed value propositions to try and capitalize on digitization. I'll give you another example of that, which is we had a partnership with Equinox ahead of time that largely was focused on club membership, and it's morphed quite substantially into kind of remote or digital fitness-type opportunities. We're also -- there are really -- there are 10 merchants and aggregators and wallets that are super important in the e-commerce space. And with each of them, we're working a road map in terms of marketing activities as well as integration, right? I would call out Paypal again as a good example of that, right, the way we've worked on provisioning of credentials between the 2 platforms, the way we worked on some unique customer experiences like Send & Split from within the Venmo and Paypal platforms. And some of the work we've done even on Pay with Points, where virtually every Paypal-accepting merchant can now also accept membership rewards points in lieu of credit card payment as well, right? So we're going to continue to work those road maps. The way we think about it is we are 100% committed to make sure that we have parity acceptance experiences there so that our superior value propositions are not burdened with friction in those channels. And at the same time, like we do with PayPal, say, are there opportunities not only to get to parity, but to build some preference or some unique experiences in those channels as well.

And on the off-line side, anything you'd highlight to help the tougher side of the equation?

Yes. I mean I think, look, one of the things that's been powerful off-line pre-pandemic, and frankly, it's powerful online as well, is our Amex Offers platform where we allow merchants to market through in a targeted fashion to our customer base. We deliver that marketing digitally. We allow them to target the segments they're most interested in with offers and discounts and rewards accelerators. And then those offers are redeemed simply with just the swipe of the card. And we do this with proprietary content as well as we partner with some third-party offers platforms to bring that to life as well. Final thing I would say is, I think we have had a real advocacy position with small businesses and off-line small businesses for many years. And we stepped that up during the pandemic as well with some of our Shop Small activities, some other resources like Stand for Small online. And it's not for us like kind of a one-off, opportunistic marketing position. It's a real commitment to that segment. I think you'll see that continue. You'll see us continue to innovate in that space.

And maybe sticking with some of the trends that have emerged in digital commerce, buy now, pay later has obviously been a big one. How it all -- how, if at all, do you think about that impacting American Express? Are there any opportunities or risks that are created by the shift in the way some consumers seem to be paying?

Yes. Well, it's where I have any meeting these days that doesn't involve some commentary on buy now, pay later. I mean I would split it into 2 different phenomenon, right? You have the pay in 4 type phenomena where you basically pay 25% of the ticket at POS. And then every 2 weeks, you're debited another 25%. And then you've got the longer-term merchant-subsidized type term loan, buy now, pay later type applications. The first one, I don't worry about very much. And in fact, most of the uptake has been for debit users and for more marginal credit quality customers, right? There are plenty of stats out there around the differential delinquency rates. And even just from a customer value proposition point of view, if you're a transactor on a charge card or a credit card, on average, you're getting like 42 days of free float. And on average, with one of these pay in 4, you're getting about 3 weeks of free float and you have that biweekly debit, too, right, which as those things stack can be, I think, quite tricky for customers to manage. So I don't see the value proposition there for transactors. For revolvers, a lot of time, you're looking for greater flexibility than just over a 4- or 6-week period, right? And so I tend to think that even for revolvers who have access to credit, it's not an especially compelling value proposition. I think the merchant-subsidized, longer-term loans are a different matter. And I think we've done a lot of work over the last 4 years on our installment-type functionality, both in terms of term loans and personal loans as well as our Plan It feature, right, which was the first widely available U.S. feature where you could turn a card transaction or balance into a closed-end term loan. And I think we have a real opportunity there to continue to drive adoption of that, trialing of that and partner with merchants to bring value to customers at the point-of-sale or help them attract new customers. I think the one enduring thing that will come out of buy now, pay later is I do believe millennials, Gen Z have a strong preference for more structured or closed-end type financing options. It doesn't mean they won't revolve. But it means disproportionately, they will opt into installment-type features that are more predictable and closed end. And we certainly see that even with our Plan It feature, which has had very strong adoption, but disproportionately strong adoption from those under 35.

That's great. We've got about 15 minutes left. I've got a couple more questions. But for those of you on the line, if you want to drop something in Zoom or e-mail it to me at [email protected], I'll do my best to get through some investor Q&A as well. Maybe let's spend a minute on loan growth and credit quality, Doug. I will say at the outset, your business model, one of the enduring benefits is that it's so diversified. And so while lending and credit are important, if I was speaking to any of the other credit card companies I cover, there would have been questions 1, 2, 3 and 4. For you, they're question 9. Still, I mean in your results and everyone else's results, payment rates have just been so remarkably high for the better part of 12 months. And it's not necessarily a problem. I mean if someone is paying you, you can't charge off, but it certainly has changed the normal equation of spend volume activity leads to loan growth that leads to net interest income. Maybe you could just give us your thoughts how do you see that playing out over the coming quarters, even in the coming years? Is this something where you think it's just a matter of time, the return to normal? Or is there any signs that there's been anything more structural that's changed?

Yes. It's a great question, Brian. It is one of the big questions in the industry. My own personal view is it's not a question of if loan volumes come back. It's more a question of when and in what form between, say, credit card and installment loan-type volumes. As you noted, we're -- we have a very balanced 3-legged revenue stool in the consumer business between merchant fees, card fees and net interest income. And if anything, that became a bit more balanced towards the fee-based revenue streams during this crisis. What I would say is we've seen over the last 4 months a stabilization of revolve rates, repayment rates and such and some modest sequential regrowth in revolving balances. My expectation is -- it's obvious if you look at our customers and you look at their total wallets, inclusive of what they spend with competitors, that their spending is basically back. It's back at pre-pandemic levels. And we feel good that we actually believe we've gained some real wallet share during that regrowth. Lending is lagging. There's no question. But I expect it will recover. And that's a real opportunity for us, which is as it regrows, how do we gain wallet share of our customers' lending balances. And if you'll remember, as I said, precrisis, we're growing 2x, 3x the industry average. That delta was largely coming from existing customers. And that's going to be our disproportionate focus here as we move through this recovery phase on the lending side. And as you say, I mean it's -- there's been a very, very strong natural hedge there that has played out during the pandemic between credit costs and NII. And so the real question is, how do those 2 lines recover? What's the lag? What's the trajectory over the next several years and the normalization of those 2 factors?

That's great. I've got a couple of investor questions. One last one before we go there. International, it's so easy to get solely U.S. focused, especially for someone -- I don't even have a passport right now. I got caught up in the renewal fiasco, so I couldn't leave the country if I wanted to. But it's a big contributor for you. It's over 10% of revenue. It's a business you led for a long time. If there's one thing you wanted investors to know about the international side of the business, the non-U.S. side of the business right now, what would it be?

Well, I would say 2 quick things. One is we still have very large growth opportunities outside the U.S. And we have large growth opportunities as you've seen in pre-pandemic times in the small business space outside the U.S. where we're rerunning the U.S. playbook. I would say international small businesses are nowhere near as well served from a payments and lending point of view as U.S. small businesses are. I think that's a real opportunity for us as is the lending side outside the U.S. But the thing I think people don't realize probably about international is international for us is also a great source of innovation. If you look at the first Centurion Card, was launched outside the United States. If you look at our current mobile app user experience, that was developed outside the United States. If you look at one of the more powerful marketing channels for us that we call Member Get Member, which is an existing Amex member recommending membership to one of their friends or family, and that's a channel that is responsible for a double-digit contribution to our acquisition volumes. That was pioneered outside the U.S., right? So the opportunity to learn from a diverse range of competitors and cultures, try things at a level that if they don't work, don't do real damage to the franchise and then import those winners into the U.S. is really powerful.

That's great. One I've got here, and it's kind of one that was on my mind, too. I mean as you spoke to some of the shifts you're seeing in younger customers, the predictability of payments, the favor of installment, it made me feel old because I feel like every cycle I've lived through, the lesson has been don't do installment. But I guess now the lesson is do, do installment. Maybe you could just flesh out a little bit more your comments. And then one investor add-on that came on is, is there any opportunity in debit given that shift as well?

Yes. Yes, those are both top of mind. I remember in 2015, when I first started working on the U.S. Consumer business, I remember there being tons of anxiety among investors about our generational relevance. And as the millennial generation ascended, would we still be relevant? Would our products and services still be as relevant? And if you look at our Platinum acquisition volumes over the last 18 months, more than 70% of those new acquisitions are millennial or Gen Z customers. And I think common wisdom 10 years ago was if you want to do business with younger customers, you needed a low-priced, easy yes-type of product that people would trial and then you could kind of bring them up. And I think what we've learned over the last decade is that's not necessarily true. And some of our premium products, Platinum and Gold, have the richest mix of Gen Z and millennials, which we love because obviously, it gives you a very long runway to capitalize on that relationship as well. And those are the customers that are most likely to recommend our products and services to their friends and family as well. They're the ones that really power that Member Get Member type model. So we like some of the dynamics we're seeing right now in the younger generations. And we're pushing hard to make sure, whether it's digital servicing, some of our travel capabilities, installment, you mentioned, live up to what they expect and what they prefer. On the debit side, look, we actually just -- our joint venture in China just announced their first debit product earlier this week. And we have done a lot of work on our network to ready it fully to process debit. Will we look for opportunities in other markets outside of China? Yes, probably, we will, right? I mean I think it's undeniable that in the U.S., somewhat accelerated by the pandemic. And outside the U.S., that debit is outgrowing credit over the last decade in a number of these markets. And we're continuing to assess what our role and what our right to win and our ability to differentially serve customers with debit might be.

So one big picture one, but it's a good one. How do you see competitors like Square connecting their wallet cards with their merchants? Is there a risk that they displace card networks over time?

Yes. The trend, I would say, that we've seen -- if I think back to the days of Apple Pay and some of the other digital wallet initiatives, I think there was a lot of concern about would they displace card-based rails. And we've seen it's kind of the contrary, right? We've seen the number of players double down on card-based rails. And I think at the end of the day, consumers are going to decide. And I think the reason they choose credit today is rewards, flexibility in financing and recourse, right, the ability to rely on a trusted intermediary when things don't go right, whether that's in the travel space or whether it's in the e-commerce space. And so I'm not complacent about whether it's open banking in Europe or other nontraditional rails in the U.S. But I think 10 years ago, as a company, we might have predicted that there would have been more activity off card rails than there actually has been. A number of players have decided those rails are fit-for-purpose and doubled down with their wallets or their currencies on those rails.

Maybe one last one in the final few minutes here. A couple of weeks ago, we hosted a bank technology spend webinar with some industry experts. And my favorite investor quote at the end was, so basically, banks are spending $300 billion a year on technology. We have no way of telling who's a leader and who's a laggard, which I sympathize with because some of the banks I used to think were a leader are now probably in last place. For investors who are struggling with that, clearly, American Express has been investing in technology heavily for a long, long time. If you were to give 1 or 2 tangible examples or a little bit of a flavor, if someone's saying, hey, how do I get convinced American Express is on the front foot and at the forefront in the industry in technology, what would you highlight?

Yes. I mean I'd say our approach has been largely to try and find scale opportunities to deploy our technology across multiple businesses and multiple markets, whether that's AR systems, whether it's loyalty systems, new customer origination systems. And I think we've done a -- I think done a really good job of that. If you look at our mobile app, where we used to have it fragmented across a number of markets, we have a single mobile instance that runs across every Amex proprietary market. So whether you're in Australia, whether you're in Mexico, whether you're in the U.S., you've got that same mobile app infrastructure and the same web infrastructure as well. The bigger question for me is, is it working? Is it driving leverage for you, right? And is it driving customer preference? And I think if you look at the U.S., I could look at internal stats around adoption of our mobile products and how that's taking volume off of analog channels like servicing. I could also look at external validation, right? If you look at J.D. Power which ranked us first in both mobile and web product last year. And so I would say I feel like, look, it's always a struggle and there's always more demand for technology development than there is supply and the resources to execute on it. But I think the globalization approach and the customer-led approach that we're taking to it is providing real leverage for us. So the final example I would give is our risk infrastructure, right? I think we have long been a leader in building algorithmic risk solutions, both for new originations and existing customers. And there's a reason why we have industry-leading loss rates and fraud rates, right? And it's about our commitment to that type of technology deployment on a global basis.

Speaking of technology, I've been told I need to leave a couple of minutes for our webcast to switch over to the next speaker. So I'll keep us on schedule. For everyone listening in, I think there'll be a 3- or 4-minute pause before the next one. Doug, I want to thank you as always. I hope someday, hopefully, next year, we get to do this in person. But we do appreciate you joining in a virtual format and appreciate your support of this conference over time.

You bet. It's my pleasure. Great to be with you, Brian.

Thanks, everyone.

Cheers.