American Express Company (AXP) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining this session. I'm pleased to -- I'm Mihir Bhatia. I'm a [ Research Analyst ] here at Bank of America and I'm pleased to welcome American Express CFO, Jeff Campbell in Bank of America's Financials Conference. Jeff, good morning and thank you for joining us this morning.

No, thanks for having me, Mihir.

Now we've prepared a number of questions that we'll be going through. Also, if anyone in the audience has any questions, please send them in, and I can sprinkle them in through the discussion. With that, why don't we just dive in, Jeff? So to start, Can you give us an update on quarter-to-date trends? Maybe give us a tour by geography or segment of the overall spending environment?

So I'm happy to start there, Mihir, although the general comment I will make is that if you look at almost every geography, almost every customer segment, we are seeing more strength in October and the early days of November than we saw in Q3. And that's really exactly what we expected. It's what we built into the comments I made a few weeks ago on the earnings call with Steve when I said when we think about the rest of this year, we're probably headed towards having annual revenue growth for '21 over '20 of around 15%. If you break that down a little bit, though, I will say we're encouraged because it truly is pretty commonly true in every segment in every geography that October looks a little stronger, right? So overall billed business in October and all these, Mihir, as we have been doing for a while versus 2019 because it's I think easier base to understand. Overall billed business is up about 8% in October. That is versus the 4% that you saw in Q3. If you think about goods and services spending, and we've been talking for a while now about the fact that, that is really what's driving our business and constitutes the majority of the spending on our network. That goods and services spending in October was up about 21% over 2019. That number was 19% in Q3. And when you think about geographies, what I would say is while every geography around the globe pretty much is showing improvement in October versus Q3. I would make the point as we did on the earnings call that this continues to be a U.S.-led recovery. So the U.S. continues to look stronger than the rest of the world. And in particular it is still a consumer- and small business-led recovery with consumers just on fire, small business looking really steady and strong. And for that modest part of our business that is large corporations using our products, mainly for travel and entertainment spend, that is certainly the weakest part. A little stronger in October than it was in Q3, but still well, well, well below 2019 levels.

Great. Maybe it's definitely encouraging with the recovery accelerating, so I think that's a good sign for everyone. Maybe just sticking with the trends, maybe just talk a little bit more about travel and entertainment, T&E. Obviously, a big part of your business, though not as big as goods and services, maybe that was a surprise for some people when you came out with those statistics in March last year. But are you still on track to reach the 80% recovery this quarter? Maybe share what you're seeing in the recent booking trends, any potential impacts you've seen from the U.S.'s new pandemic rules that went into effect this week?

So I think as we sit here, what's today, Mihir, November 10? I would say I am very comfortable with the assumptions we've laid out in Q4. Overall T&E spending or the company will be at around at least 80% of 2019 levels in Q4. And of course, that's the tail of lots of good things. So the global consumer business will actually be well above that. I think it will be fully recovered this quarter with the U.S. consumer even stronger than they were in 2019. International. Because, well, you still have a lot of restrictions internationally. International is lagging. Our largest and most global corporate customers are probably the slowest to return to travel. And your small businesses are somewhere in between. You see such a pattern though, Mihir, of the pent-up human urge to travel and gather is huge. Steve and I and Doug and Anna have been talking about that really since the beginning of the pandemic, I will say we're probably gratified that almost every day, you see new data points around it, right? So the most recent, of course, lifting of cross-border travel restrictions were the U.S. opening up a little bit. And boy, if you talk to our partner, Ed Bastian at Delta, he'll talk about completely full planes lined across the transatlantic. I was watching Scott Kirby at United this morning at Squawk Box. He talked about 100% load factors in the first day of Europeans being able to come to the U.S. If you look elsewhere in the globe relative to probably where we were when we talked on the earnings call a few weeks ago, you began to see Japan and Australia ease up some on the very intense restrictions they had on travel in those 2 countries. And accordingly, you see our numbers start to go. And if you look at bookings, because remember as you know of course, Mihir, we also run one of the larger consumer travel agencies in the U.S. You see very dramatic and sudden shifts in booking as soon as restrictions start to ease. So we remain very confident in the 80% for Q4. I would say we remain very confident in the eventual recovery to pre-pandemic levels of travel in every customer segment and every geography. The pace, though, is going to be driven by the pace of cross-border travel restrictions being eased and the pace of the medical situation continuing to improve in various countries around the globe. But every data point that we have tells us that it will return because that human urge to travel is just so strong.

Great. Well, that's definitely encouraging. Maybe let's talk a little bit more about just a little bit longer term, maybe thinking about 2022. Your comments about EPS expectations feels like they have increased throughout the year. I believe the latest commentary is you are increasingly confident that you will get to the high end of the range, so around 9 25 versus the start of the year where that was an aspiration. Can we just talk a little bit about the assumptions you are making, particularly as it comes to the ongoing recoveries in corporate spending and also just around your marketing expense, because I know that's a big focus that we'll probably dive into in a bit too.

Well first, let's step back. If you think about the way the world has evolved since last January and February, I think sometimes it's -- change has been so constant and so dramatic, I mean it's just useful, at least to me, to step back and think, okay, what was in our mind? What did the world look like when we first began in January of this year, to make some comments about our expectations for 2022? And so in January when if you try to perch yourself back to the world at that point, Mihir, boy, there was -- the vaccines were just beginning to be introduced. The U.S. and much of Europe was in a very tight situation, very difficult situation medically with very tight lockdowns. But through that, we still felt like the right aspiration back in January was to say we think we can get back into the same range we originally thought would be in 2020, in 2022. But boy, if you think about the subsequent 10, 11 months, every single month we have seen data points that further validate our confidence in the value of our products, our confidence in our ability to resume very rapid growth; our confidence that, as we just talked about, travel will eventually come back; our confidence that the goods and services spending that has been so strong throughout the pandemic is going to continue. So that's why we did not say a few weeks ago we were increasingly confident, Mihir. We just said we're confident now that we will, in 2022, be at the high end of the range that we originally had for 2020. Now the only real conditions we put on that are a reasonably healthy economy and the return of global consumer travel to pre-pandemic levels. Those are 2 pretty easy assumptions to get confident about as we sit here on November 10. Now I would say we haven't given people specific guidance because there are still multiple ways we could choose to get to the outcome here that we've talked about for next year. So we're working through the detailed planning process literally as we, you and I, speak here. And in January, Steve and I will come out and we'll talk in more detail, but we're very confident in the outcome. A couple of other comments I would make are we have been really pleased this year and really pleased throughout the course of the pandemic with what we feel is a real validation that many of the strategies that we were executing on even prior to the pandemic, we think have become even more on point; even more valuable as results of the learnings of the pandemic around consumer behavior and around small business behavior and the intersection of our value propositions with the needs and desires of those 2 customer segments. And so that's why you've seen us each quarter get a little bit more aggressive this year about our marketing spend. It's why you have seen us talk so frankly with such excitement about the kinds of new customers we're bringing into the franchise and the kind of new products we're putting into the hands of existing customers. And so that's why our expectations this year for marketing costs have gone up each quarter. Now we think they'll be over $5 billion this year. And as we think about next year, Mihir, to be very clear, we're all about driving the highest possible level of sustainable revenue and steady EPS growth that we can. We're going to have, in 2022 and probably into 2023, a series of tailwinds that are going to produce very strong results. Because if you think about the discussion we've had so far this morning, different parts of the world, different parts of our business are recovering at different paces. And so to some extent, I don't think everything will be fully recovered until you get well into 2023 and beyond. But what we're focused on as a management team, what are all the things we can do to build towards the highest possible level of revenue and sustainable growth post the recovery. And part of that is taking advantage of the window we see right now to really bring a lot of new customers into the franchise. And that's why as you think about next year, we're very confident in the EPS expectation we've talked about the high end of the original 2020 range. We're working through all the different pieces, but the one thing I would say people should expect is that we will continue to be very aggressive about marketing because we're just so pleased with the results that we're seeing right now.

Maybe I'll stay on that topic just for one second in terms of just your marketing. And we've seen, I think over the last few years, a little bit of an evolution in the American Express brand. I think you've talked about this too as you're trying to become a little bit more lifestyle focused versus just being travel-oriented previously maybe. Where are you in that journey? What are the signs -- some of the signs of success that we can see from the outside that this evolution is taking place in consumer minds too?

Yes. And if you don't mind, Mihir, I might broaden your question a little bit because I think I'd like to talk about both consumers and a little bit about small business.

Yes.

And so let's start though with consumer. And so certainly, the American Express brand for decades has been associated with being particularly strong in the travel segment and having value propositions that are particularly valuable for people who travel a lot and who want that to be a critical part of the proposition of how they get the payment and services that we provide. But some years before the pandemic, we sat down and said, boy, the kind of brand strength that we have, the way our consumers attach to the brand -- and that's a word I like to use, Mihir, because it was just so striking to me when I joined the company 8.5 years ago, the way our card members attach to the brand in a way I think is quite unusual in financial services, and I would argue quite unusual in almost any industry. And so we began to say, we have the brand permission, if you will, to broaden out a little bit and appeal to other aspects of lifestyle. So you've seen us work hard pre-pandemic on our dining proposition and acquiring a company like Resy as part of that. You've seen us begin to tiptoe into things like wellness, begin to tiptoe on the consumer side into a little broader set of financial services. Although I want to be clear as I say that, we're not trying to manufacture lots of different products, but we think we can bring value to our card members and to our partners. And in many ways, that journey has been really validated for us by the experience of the last 18 months because that -- while keeping our travel proposition strong, we're not walking away from travel, but clearly expanding it into these other broader sets of lifestyle benefits has been very powerfully validated in the pandemic. And so you look at the fact that on our premium consumer products, which really are about the Centurion line, that platinum and gold green card. We have seen customer retention levels, which were already extraordinarily high, reach even higher levels. We have seen our ability to bring new card members to the platinum and gold franchise in the consumer world in the U.S. at all-time record levels last quarter. That happened, of course, right in the face of us doing a refresh of the U.S. consumer platinum product. Which raised the fee because we provide a lot of value, and we think we can get people to realize that value and be willing to pay more. And so we feel tremendously good about the journey that we really started 4 or 5 years ago on the consumer side. I would actually argue here, we're probably pretty early in that journey. And I think we are -- have only begun to tap into the range of lifestyle and dining and wellness and with little broader set of financial services products that we can bring to consumers. So I'm very excited about the growth for us next. The reason I wanted to talk just a minute about small business as well is because I do think there's a little bit of an analogy on the small business side, right? So on the commercial side of our business, the growth is all about small business. We have an important segment of large and global customers that are important to us. They're foundational. It's not necessarily a source of growth. So pre-pandemic, we began to really focus on that small business segment as the engine of growth. And for small businesses, they're really using the card not for travel and entertainment, they're using it to run their business. We are the main provider of working capital and payments to those businesses. And that was the journey we began pre-pandemic. Now of course, what are the learnings here in the pandemic? As you know, that small business segment really has been the most resilient customer segment throughout the pandemic. You saw us acquire Kabbage last year because that is all about taking another step on the journey of being a little bit broader in the range of things we can do with small businesses, to be their key provider of payment and working capital services. And once again, we think the pandemic experience has therefore reinforced the journey we were already on. We think we have a long ways to go, though, in terms of strengthening our franchise with small businesses. So I'm very excited about the longer-term growth prospects in both of those areas, and I think the learnings the pandemic only reinforces.

Sure. You mentioned small businesses, so maybe we'll just jump ahead a little bit and we'll come back to consumer. On the small business side, you just announced I think last week the launch of your business checking accounts and your first proprietary debit offering linked to that account. Talk a little bit more about how that offering fits into your commercial strategy, what does it really add for American Express? And more broadly, what is the opportunity in debit for American Express?

So a few comments, if you could just build here on what I just said. The journey we're on, on the commercial side is a, what growth is about the small business. Again, I don't want to discount the large and global customers, but the growth is on the small business side. Our unique strength is particularly evident on the small business side. Remember in the U.S., we are larger than our next 4 or 5 competitors combined. It's a tremendous starting position we have. But the journey is about broadening the offering to small businesses, so we can really be their key provider across all payment and working capital services. And so if you think about that journey, the introduction of a little broader suite of products, including the fabulous set of digital tools, cash management, other things that Kabbage brought to us; and the business checking account are a very logical extension to say, boy, for that small business, we should be wrapping our arms around all of their short-term working capital and payment needs, and we need a little broader suite of products to do it. I will say the drivers of profitability here are likely to remain the payment volumes that we get from small business; and then to a lesser extent, the short-term working capital organic lending to do. I don't see business checking accounts or debit as huge profit pools, but I think -- not -- there's not some profit there, but they're not huge profit pools. It's really about building that broader relationship with the small business that we're excited about. And so it's just a very logical co-extension to us, and that small business needs the debit capabilities if you want to be really the primary provider.

Just one follow-up on that -- on the debit. I believe you're not going to be the [ Durbin ] cap. Like the interchange is not going to be capped on the debit product, so you can offer rewards. That seems like it would be extremely enticing maybe for a consumer too. Is that the logical next step or the extension of the debit strategy?

Yes. And the only reason I'm hesitating a little bit, Mihir, when I answer this is that I don't particularly like the term debit strategy. Because on the consumer side, I would say I prefer to use the phrase part of our broadening and saying we can be a broader lifestyle provider; saying, look perhaps traditionally, people associated our products on the consumer side to travel. We think we have brand permission to offer a broader set of lifestyle services, and to us or now could expand over time. When I use that term lifestyle, it means a little bit more dining, a little bit more wellness, a little bit more financial services. And so when I think about any potential launch in the future of a consumer product along the lines of what small businesses offered, we wouldn't view it as, oh, we now have a debit strategy. We would view it as a logical extension of the journey that we've been on, to take our consumer offerings and make them a little broader and a little bit more lifestyle oriented. So we'll have to see, but that strategy is very foundational for us on the consumer side.

Right No, I appreciate that. That makes sense. Maybe just [ toasting] -- coming back to consumer for a second. A lot of your growth in the last few years has come from millennials and younger consumers. You've highlighted that too. But talk about how the segment is different. We keep hearing about how this segment doesn't like credit, and -- but what are you seeing in your data? Like clearly, they're responding, and it's driving a lot of our growth. So they do -- they ask -- people in this segment are still getting credit cards. But maybe just talk about how this segment is different, how you needed to adapt your strategies and your business for this? And how that's going to impact American Express over the next few years?

So one of the things, Mihir, as you know that we did a few weeks ago on our earnings call is for the first time, we started to give people the facts, the data on the consumer side about the portion of our business and, more importantly, the portion of our growth that is coming from different demographics. And I think a lot of people were quite surprised to realize that wow, the growth right now is just driven by that millennial and Gen Z population. And it's not surprising to us because we've been focused on that segment for some years, but I think it surprised a lot of people. But when you think about that segment, obviously, they're more digitally engaged. That translates to also being a little bit more social. I would point out one of our biggest sources here of new consumer card members is what we call our Member Get Member program. People who are existing customers, who are so attached to our brand, get their friends to get cards. That is a real commentary on the way people attach to the brand. It produces customers on both ends of that equation who tend to be more loyal and spend more. And that feature, that phenomenon is predominantly a millennial phenomenon, right? It's not the older baby boomers like me who are using that product. So it's an interesting intersection of the way the younger generation is both very digital, because all this happens digitally. Also very attached to sort of social media and experiences. And experiences is the key word there. Because if you think about the discussion we've been having this morning about our consumer effort to broaden -- to a broader set of lifestyle experiences, that's all about what the younger generation is buying the card for. The last comment I'd make is we are an aspirational brand, right? We are not trying to be a mass market brand which has every consumer in the world using one of our products. We are an aspirational brand. And that is true with younger people as well. So while there may be a segment of the younger generation, and perhaps there's always been a segment of the younger generation, that is a poorer credit quality, that is tiptoeing into how they make payments or how they take out loans; and there are other products that perhaps are very well suited to that segment; that's not really our segment, right? And the millennials and Gen Z-ers that we are bringing on to the gold and consumer -- gold and platinum consumer products are high FICO, big spending, people who value the kind of value propositions that we have and the range of things and experiences that they get and are willing to pay for it. And we don't really see different behaviors from that group than we do from the older demographics.

No, that's certainly interesting. And I'll go back to one of the things you mentioned about some younger consumers using newer products. And clearly, one of them is buy now pay later.

Yes.

Now as you pointed out, it's probably not your core customer is not the one who's out there trying to get buy now pay later. But one of the lessons I think that for a lot of people in the industry, for payments industry, from buy now pay later's growth seems to be a little bit that merchants will pay up if you can drive more incremental traffic to them or you can deliver some value. Given your consumer base of high-spending premium customers, is there an opportunity for American Express to be maybe doing a little bit more with merchants and getting some more value for the kinds of customers you can drive to them?

Well look, Mihir, we forever have this unique business model that is all about having what some might call a 2-sided market, right? And the strength of our model is that as we provide value to merchants, that allows us and funds our ability to provide more value to consumers and card members. And as we can provide more value to card members, suddenly that [indiscernible] provide more value to merchants. And there's a virtuous cycle, a virtuous flywheel to go back maybe to Jim Collins in Good to Great, that we've been working on for years. So there's a tremendous amount of value that today, Mihir, we offer to our card members that is funded by our merchant partners because of the value that they save. If you look at our offer ecosystem, which has tremendous value for our card members, if you look at many of our value propositions, it is partners, not Amex, who is often funding the cost of a key part of our value propositions. Whether you want to talk about our fine hotels and resorts program or some of the specific product features that we've launched around the globe lately on our gold and platinum products. So absolutely, we think there's a way that we can keep providing more value to merchants, which entices them because it's good for their business to provide more value to our card members. Now the only maybe other comment I will make though, because of the way you phrased the question is well, that's a core part of our business. Look, the willingness of merchants at point of sale to fund higher rates, whether you want to call them what they're paying, funding in a BNPL provider or through a discount rate. But part of our value to merchants forever has been that we're bringing a high-spending card member base who will spend more than others. All that said, there is some limit. And as we think about the BNPL sector, I think a lot of that -- so there's different ways to think about it. One way to think about it is it is perhaps a very slick digital evolution story, right? So retailers forever have been willing to, through their store card programs, provide pretty generous subsidies to extract new customers, perhaps to attract customers who can't get credit elsewhere. And the one way I look at the BNPL sector is that's probably a lot slicker way to do that, than asking people to carry around 10 different pieces of plastic because I've got my plastic from 10 different stores. So that's a very interesting use of the product. And look, we're -- when you think about American Express, I'd also point out, I think people forget this, Mihir, that we actually have had a buy now pay later feature in our product set, we call it pay it plan it, for -- I think we introduced it first in 2017 or thereabouts. And so for the consumer who wants to make specific decisions on specific purchases and say, "I want to take this particular purchase and fund it over time," that feature is now available on almost every American Express card, and you can make the choice on every single purchase. So the way we think about it, that is kind of getting at the heart of one of the attributes of the buy now pay later functionality. But we're providing it to people with just one product that they can use at over 10 million merchants where they can exercise that functionality pretty much on any purchase, not just a subset of merchants. And so we feel pretty good about where we sit. [ You need to understand ] by saying we are, though, focused on who is our customer. And on the consumer side, our customer is that person who values a differentiated value proposition and a differentiated level of service. And on the small business side, it's about the small business that wants to value the kind of spending capacity that we're able to bring and the kind of insights into their business that we're able to bring because of our scale with small businesses around the globe.

Sure. That's great. Maybe I'll switch to credit, yes. We only have about 7-ish, 8 minutes left. But I'll bring up your favorite topic, CECL. Maybe just talk a little bit about the outlook today versus -- one of the things we've heard at this conference from a few different companies is talking about day 1 CECL maybe being a little bit of an anchor. Think about it. Now in your case, you're actually below day 1 CECL already. So maybe just talk about the path of the reserve outlook from here. Maybe just give some of the puts and takes that we should be thinking about as we think about it? Because you're clearly pretty -- it seems like given the credit environment, you're still very, very well reserved. But the fact that is that you are below day 1 CECL unlike a lot of your peers. So maybe just help us with that, just think about what the reserve puts and takes from you are on the reserve and on the credit side.

Well, Mihir, if you don't mind, I'll actually probably be fairly brief. I won't use the 7 or 8 minutes on this, whereas a year ago I might have. Look, credit for us remains incredibly strong. And if you look at our actual credit performance, it is far stronger than perhaps it's ever been, far stronger than it was day 1 CECL. And yet okay, I hear, our reserves are a tiny bit below where they were day 1 CECL, not a lot. And so that doesn't really make sense until you add the fact that as we close the books on the third quarter, look, there's still plenty. If you want to worry about the medical and economic situation to worry about; you still, as you close the books September 30, did not have every single government and industry for parents program rolled off. You still have -- and roll your head back to where we all were September 30, greater concerns in the U.S. about whether there would be another way from a medical perspective. And so we thought it prudent and appropriate to leave a pretty significant level of reserves that certainly does not match the actual credit performance. So as you think about 2022 and 2023, Mihir, absent some dramatic change in the economy of the world, look, our view is that consumers and small businesses will eventually, at a modest pace, get back to the kind of borrowing behaviors that they were engaging in pre-pandemic. So our loan balances will begin to rebuild, although they'll rebuild more slowly than spending levels. And as they do that, we will need to build some modest level of new reserves. But also as time goes on, each quarter there's going to be less and less uncertainty, I think, about if some big negative out there in the economy. And so the -- probably the reserves that we're holding today because of that, I'm [ certainly ] need to come down. Now predicting for you the exact pace or shape of those 2 curves, right? Because one is going to cause reserves to go up, and another one is going to cause them go down. Look, I don't think any of us, with certainty, can do that today. But we feel great about our risk management practices. We feel great about the customer relationships that, frankly, we've even strengthened during the pandemic because of some of our customer health programs. And I feel great that we will be able to grow our loan balances back a little faster than the industry while keeping best-in-class credit performance.

Great. Maybe just switching just very quickly on to super apps. We're hearing a little bit more about that from investors, but more importantly from other companies or fintechs, if you will, talking about focusing on building a super app here in the U.S. What is American Express' view on this? Is this an area of interest that you all spend a lot of time on? Or is it more, "We're going to focus on our card members, and our card members like to use our card. So we'll just be available in anyone else's super app"?

Well boy, I could probably take an hour here on the subject. That is something we think a lot about. I will say I think that term is used in lots of different ways, so let me maybe make a couple of distinctions here. In some ways that term super app, I think was first used in the context of China and what Alibaba and Tencent were able to do. And I think there are some unique features of the point in time that China was at that led them to be able to do what they would do, because their super apps are broad across different industries, different applications. [ So that's point ]. And I don't think that kind of super app gets replicated in probably most other countries in the world. The second use of the term though is more of it as a financial super app. And here, I'd make a couple of comments. On the small business side, if you think about our discussion over the last 40 minutes around our acquisition of Kabbage, why we're launching a business checking account, we absolutely think that we are well positioned to be the one place that a small business owner can go digitally to manage almost all of their financial needs. And we are absolutely down that path. We're very excited about it. On the consumer side, it's a little bit more complicated. So on the consumer side, our view -- this is why I think the term digital app sometimes gets a little bit confused with digital wallets. And I'm -- look, I'll look at my clock here just to make sure I don't go long in this, Mihir. Look, in our digital wallet view is we want to be in everybody's digital wallet. But we're not trying to be a digital wallet player. Why? Because I don't want to provide ACH capability and checking capability and all those kinds of things. I'm not trying to be the primary provider of payment services for people. So I -- so we want to be ubiquitous in everybody else's digital wallet. But on the consumer side when you think about a super app, though, I will say we have the debate that we have a lot of capabilities and I'd kind of argue perhaps more than anybody else right now that we in fact offer, right? We own Resy, a key dining app. We own one of the largest consumer travel agencies in the world that you can book through digitally. We have our own mobile app with some great capabilities. So we do have debates about whether you should bring those things together more and more of a super app approach. I think the debate though will be in the future on the consumer side in a highly developed market like the U.S., does the consumer want one app where I've got kind of a top layer and then I'm going to different sectors? Or actually our best-of-breed individual apps going to continue to dominate? And we think we're well positioned to kind of watch the evolution and we'll have to see where we go. We'll have to see where the market goes.

Great. I think that brings us to a close. There's obviously a lot more questions, but we will continue the discussion. Thank you so much for your time being very generous and look forward to a great day of meetings. Thank you.

Thank you, Mihir. And thanks, everybody, for listening. Bye-bye.