American Express Company (AXP) Earnings Call Transcript & Summary

All right. Up next, we are excited to once again have American Express joining us. I can't think of a company that did a better job pivoting its business model during the pandemic than Amex, providing value prop enhancements and outstanding customer service, which is developing [indiscernible]. More recently, the company has shifted back to growth mode, accelerating customer acquisition and preparing what could be a long runway of growth. Here to tell us more about how they are going to accomplish this, we are excited to have Chief Financial Officer, Jeff Campbell. Today's presentation is going to be a fireside chat.

So maybe to kick it off, to start big picture, Jeff, the year has obviously proven to be very different than I think most of us expected, with billings accelerating to record levels across goods and services and T&E rebounding nicely. And in order to drive growth, we've seen you also accelerate investments in the business. So first, as you look ahead to 2022, can you give us a sense for how the company is positioned? And then second, you've reiterated several times you expect to be on the high end of your 2020 guidance in 2022. Can you just remind us what's included in that from a recovery perspective across the different parts of the business? And what could be the sources of upside?

Well, good morning, Ryan.

A lot in there, Jeff.

Thanks for having us. And maybe I'll break your question into 3 parts because I think it's important maybe first to talk a little bit about what are some of our learnings about the business and the way it's performed in the last couple of years in the pandemic; two, what does that mean for 2022; and then three, what are we trying to do as we look beyond 2022 into the long term. So let's start with probably the learnings from the pandemic. And I think, in many ways, Ryan, we feel that the last almost 2 years now have validated many of the strategic focuses that we had, even as we entered into the pandemic. If you think about the consumer side of our business, as we went into the pandemic, we were already in the process of taking our very long-term focus on travel-related benefits, but broadening it to be a little bit broader around lifestyle value propositions, a little broader into other areas like dining or wellness or financial services. And I think that strategy has actually been reinforced by the learnings in the last 2 years. If you think about what we were doing on the commercial side of our business, the growth engine for us over the last couple of years has really been the small and midsized enterprise part of our commercial segment. We have a legacy business, which is actually an only modest part of the company at this point, less than 5% of our volumes, serving the largest corporations in the globe, mainly for their travel and entertainment needs. But the core of our commercial business prepandemic, where our growth is coming from, is really all about small to midsized enterprises who, in contrast, use our products to run their businesses. It is all about B2B spend with those small to midsized enterprises. That, of course, has turned out to be a very resilient part of our business over the last 2 months and is leading growth. So once again, we see a reinforcement of the strategy we were on, so we feel really good about the learnings we've had from the pandemic. Now what does that mean for 2022? You're correct, Ryan, that we have said for a while now that our expectations next year in terms of earnings are that our earnings would be at the high end of the range we originally thought we would get to in 2020 before the pandemic hit. It was $8.85 to $9.25, and we've really put only 2 very general conditions around that, Ryan. One, that we have a reasonably healthy economy, and that's certainly where we are today; and two, that in terms of global consumers that their travel and entertainment spending would be roughly back to where it was prepandemic, and we're actually already there on that one. The U.S. consumer is actually spending a little bit more than they were prepandemic internationally. Because you have more border closures, you still see spending a little bit below where it was prepandemic. The other very important thing, though, about 2022 is that if you look at this year, we have now said, as you know, Ryan, that we expect to spend over $5 billion on the marketing line this year. That is well above what we thought we would spend as we went into the year, and it's because we have achieved much, much stronger results than we expected and then we were getting before the pandemic in terms of bringing new premium customers into the franchise and in terms of putting new products into the hands of our existing customer base. That has really emboldened us about the strategies we have and our ability to drive longer-term growth. So if we had been having this chat 6 months ago, I would have said, "Well, as we get into 2022, I'd expect our marketing spend to come back down to levels closer to where it was prepandemic." I'm actually not saying that anymore because we see a real opportunity that we're taking advantage of here. And that really leads us, Ryan, to the third part of my answer to your question, which is, so what does all this mean beyond 2022. And as you will recall, if you look at the 10 quarters before the pandemic hit, we had 10 consecutive quarters of executing on what we liked to call our financial growth algorithm, which was achieving 8% to 10% revenue growth, like clockwork every quarter, driving double-digit EPS growth. 10 straight quarters, we very successfully executed on that algorithm. Then the pandemic came along. The opportunity we see right now is to actually use the next several years where there will be some tailwinds for several years, right, because you're not going to see a full recovery in business travel next year. You're not going to see a full recovery in cross-border travel. You're not going to see a full recovery in terms of the lending balances that our customers have. But we don't need any of those things to happen to get to our financial goals for next year. But eventually, all those things are going to recover. So you have these tailwinds in '22 and '23 that are going to drive our revenue and earnings growth rates up to very nice levels, but we see an opportunity to use that period to build towards a sustainable level of revenue and earnings growth that is greater even than what we were achieving prepandemic. And so that is the key strategy, that is really the key underpinning of the comments we've made about what we expect for 2022. So long-winded answer to your question, but I think it's really important to level set right at the beginning about what we're really trying to do as we think about the way we're running the company for '22 and beyond.

In fairness, it was a long-winded question, too. So -- but a lot of good stuff in there. So you spent a lot of time talking about the intermediate to longer term. Maybe for now, we could focus a second on just the very short term. And when you spoke earlier in the quarter, you talked about continued momentum you saw in October billings. Steve was on CNBC, gave a sort of a half update when comparing to 2019. I guess, now that we're 2 months into the quarter, can you just give us an update in terms of how things are progressing on the spend side and maybe what your expectations are for the holiday season? And maybe any differences you're seeing globally?

So happy to do it. And yes, Steve was on CNBC with Lin-Manuel Miranda. So it wasn't the ideal forum to give a detailed financial update. So look, as a general matter, if you think about what we have seen thus far this quarter across all of our customer types, across all of our geographies, in general, you see a continued strengthening of spending patterns in line with our expectations. It's not necessarily greater than our expectations. What does that translate to in numbers? Well, if you look at our overall billings volumes, quarter-to-date, they're about 11% above where they were in 2019, which is probably a better base than last year. I'd remind you is that's well stronger than what we saw in Q3. If you look at our goods and services billings, they're up 24%. And then if you think about consumer retail spending around the globe, which is probably the best corollary we have to holiday spending, which I know a lot of people are focused about, that is up about 30% versus 2019 quarter to date. And if you were to look at the most recent weeks, that -- all those trends on consumer retail spending continue to look very consistent, Ryan, with those kinds of numbers, including in both the online world and the offline world. So there's been a little bit of, at least to us, probably noise in the marketplace, in different data sources, different people have different cuts that they take trying to think about how the consumer is approaching holiday spending. But from what we see, it looks very, very strong. And I'll save you asking the question about whether we've seen any changes in the most recent days from -- on the economy, and the answer is no, but it's early, right? I don't think goodness -- the markets are gyrating every day based on the latest headlines. And I was saying to a few of my colleagues, I've been traveling in the last few days. I haven't been in my office in a few days. And when I opened my computer, it still had The Wall Street Journal headline from late last week, which said market plummets on Omicron worries. And then I hit refresh, so it went to this morning's headline, market soars, easing concerns. It's early. We'll have to see what happens with Omicron.

So one of the things you laid out in your -- in the first question was that T&E is normalizing at different -- at a different pace. You guys had laid out a goal of reaching 80% of 2019 and based on -- as you said, you're on track to hit that. I guess, once all the restrictions are lifted, based on what you're seeing in bookings, how much pent-up demand is there to travel? And is inflation helping or hurting billings?

Well, let me actually break that into 2 questions because I think inflation is important, Ryan, and probably worth addressing a little separately from travel and entertainment spend. So look, since the very earliest days of the pandemic, our view as a company has strongly been that the human urge to travel and gather is insatiable. And it may get delayed for a little bit by the medical restrictions, by cross-border restrictions, but that urge is there, and it's going to come back. And as you will recall, Ryan, I was the CFO of American Airlines. If you go back many, many years, post 9/11, nobody thought people would get back on airplanes post 9/11. And instead, you saw the greatest surge in travel really since air travel began. So we remain highly confident that both consumer and business travel will eventually come back. Business travel will certainly be the last. And there's lots and lots of indicators of that, right? So one of the things that we talked about a little bit on our October earnings call is that if you look at different demographics, right, in the U.S. consumer base are younger customers, the millennials and Gen Zs, they're already back traveling above where they were in 2019. And then as you go to older demographics, you see a little bit more caution in their behaviors. But to us, that's a sign they're going to get there. If you look at our consumer travel agency, and I'd remind you all that we also operate one of the larger consumer travel agencies in the world, those bookings are highly responsive to any change in the way governments around the world are restricting things. So if you were to look at the quarter-to-date bookings in our consumer travel agency, they're up 30% versus 2019 levels. Now I would not extrapolate from that, that we're predicting that travel is going to go back to being 30% in general above where it was 2019. There's some good things happening with our travel agency, and I think our customer base probably is a little quicker to travel. But it's also a response to the fact that you have this window where restrictions started to ease across the globe, where you had people comfortable about making travel plans for the holiday. And so to us, it's just another indication, Ryan, of the pent-up demand that is there. Now certainly, that also works in the reverse, right? And so you've seen cross-border restrictions begin to come back if you look at the most recent couple of weeks in response to the Omicron variant. And you see a very quick reaction in terms of cross-border travel bookings. But look, the bottom line on travel is we remain highly confident in that human urge to travel and gather. It will just take time. Let me go to part 2 of your question, which is really about inflation. And I would remind all of you that very unusually, when you look at American Express, we have what we like to call a spend-centric business model, right? And in one of the results of the pandemic is now you have well over 80% of our revenues that come from the spending patterns of our consumer and business Card Members as well as the fees that we collect from our consumer and small business Card Members. So with that business model, with lending a very modest part of our overall business, a little bit of inflation is actually a positive thing for our business because of the way it drives greater spending without having any equivalent effect on our overall cost structure. So as we look at the current trends you see around inflation, they're probably mostly positive for our business. Now obviously, the risk we all need to be worried about is, does inflation get completely out of our controls, does it start to cause other broader economic challenges. And those are things like all of you that we're focused on, but a little bit of modest inflation is generally a positive for us.

One of the things you referenced before millennials and Gen Zs, I think you guys noted at earnings that it's roughly 27% of billings, and they were up 38%, well in excess of the 9% overall increase in global consumer. And I think this is starting to dispel the rumor that millennials don't like credit cards. But maybe can you just talk about what you're seeing across this cohort in terms of customer acquisition growth and spending patterns? And how big of a secular tailwind do you think this could be for the top line over the next few years?

Well, I have to react to one thing you said, Ryan, which is the idea that you can make a sweeping statement about any demographic group, I guess, I'm a little cautious about it. I mean, we probably have baby boomer who particularly don't like credit products. And we probably have some millennials who don't like credit products. And there's lots of room in the marketplace for lots of innovation. But when we look at our business, there are clearly lots of millennials and Gen Z-ers who are very attracted to the kind of differentiated value proposition that we offer, right? We are not trying to be all things to all people. We are with both consumers and with our commercial customers about people who care about a differentiated value proposition, the level of service they get, the kind of spending power they get, if they're a small business, the kind of travel and lifestyle benefits we offer. And when you look at -- let's go back to Q3 because I've got a full quarter there, Ryan, to talk about. We had our most successful quarter in our history in the U.S. at bringing new customers, both on the consumer side and the small business side under our premium Platinum and Gold products. And when you look at the consumer side of that, 75% of those new customers are millennials and Gen Z-ers. So it's a pretty strong demonstration to us that partly as we have pivoted our value propositions over the last couple of years towards being more lifestyle-oriented that is very attractive to the portion of the millennial and Gen Z demographic who do care, back to this phrase, about differentiated value propositions. I'd also point out that when you think about what has happened during the pandemic, as I said earlier, that is the demographic that by far has been the quickest to rebound. And so that 38% statistic that you cited for Q3, which is the spending of that millennial, Gen Z consumer demographic versus what they were spending in 2019, quarter-to-date in Q4, it's up 50, 5-0, percent. We'll see if that sustains itself through December. We'll tell you in January. But we feel really good about the way that our value propositions are resonating with the younger generation. We think that means very positive things about our longer-term growth potential. I would say it is one of the things, Ryan, that has emboldened us to make the statements I made earlier that we are going to spend in terms of marketing at record levels this year because we are achieving record results in terms of bringing new customers into the franchise. And because those customers are so predominantly from the younger generation, that is one aspect of what gives us the confidence that to aspire to build towards even higher levels of sustainable revenue and earnings growth, once we get to some sort of new steady state, which is probably '24 or beyond, we think that's the right aspiration.

And I'll wait for the earnings call to ask you how much marketing you're going to spend in 2022.

That -- you would get the answer that I'll tell you in January.

So you talked about pivoting more towards lifestyle-oriented items on the consumer side and additional business-centric benefits on the small business side, which, obviously, given some of the numbers that you threw out, seems to be really resonating with your customers. Do you feel that you have the right balance in your value props at this point? Or what are some of the additional areas you could look to target as you become more lifestyle-oriented?

Well, I think, really critical to continuing to succeed and grow is that we should never be comfortable that we have the right balance, Ryan, particularly in the U.S. Look, it is a very competitive space in the U.S. on both the consumer and small business side, less so outside the U.S. where our competitors are more fragmented, but it is very competitive in the U.S. And so as quickly as we innovate, we often see our competitors watching what we're doing and finding ways to try and replicate. So it is really critical to our business model that we constantly be innovating around both our consumer and small business value proposition, so we can always stay ahead on what our competitors are doing. Now as we do that, we also spend a lot of time thinking about what are the unique things about our business model and about where we are today that allow us to innovate in ways that are harder for others to replicate, right? And so one of the things, Ryan, that you and I have talked about in the past is sometimes, people will do really simplistic mathematical comparisons where they say, "Well, I can compare different products on the credit side in terms of how many points they offer." And sometimes when people do those simple mathematical comparisons, they go, "Wow, it doesn't always appear that Amex is leading." It's because we're really not focused on those easy-to-replicate benefits. What we're focused on are what are the kinds of ways we can work with partners who want access to our uniquely strong premium consumer and small business space. And so we can offer to our partners access to a very attractive set of customer base. They're often as a result willing to help fund parts of our value proposition. So our partners are winning because nobody else can offer them access to the kind of customer base we can. Our customers are winning because we're able to offer them value proposition, frankly, that are greater than what we could afford to do on our very own. And we're winning because we're able to get -- sorry, I'm going to show my age and talk about Jim Collins' Good to Great for any of you who've read that book, which is probably getting a little dated, but he talks about you get a flywheel going and you want to keep that flywheel spinning ever faster. The more we work with our partners and build the customer base, the more attractive we are to our partners. And the harder that is, we believe, for some of our competitors to replicate. So this all started with you asking do we think we have the balance right. Look, clearly, our results year-to-date would suggest that on both the consumer and small business side, our value propositions are resonating. But the point I want to leave you is -- leave you with is we can't stop innovating. And as we do that, we're constantly thinking about how do we build upon the scale, the brand that we have that probably nobody else has to do things in a way that are more difficult for others to replicate.

Maybe sticking with the topic of refreshes, you paused during the pandemic. Now you've resumed them, including Platinum more recently. Maybe just talk about how the product refreshes have been received from both new and existing clients.

Well, so to ground everyone, in the U.S., I mean, once you call outside the U.S., you have many, many products, many countries, and we're continually refreshing those as well. But in the U.S., our 2 probably most important flagship products are the Platinum product in both the consumer and the small business side, which sometimes, I think, Ryan, people don't focus on perhaps as much as is warranted. So the first comment I'd make is that both of those products, if you were to look at the earlier part of this year, we're going incredibly strong. And we were having, if you looked at, say, the second quarter or the third quarter for the small business product, we were having some of the strongest quarters we've ever had in terms of bringing new customers [indiscernible] the franchise on those product. Right in the face of those -- that strength, though, we said, back to my theme, if you got to innovate constantly to refresh the product, so we launched a refreshed U.S. consumer product early in the third quarter, and we launched a refreshed small business Platinum product early in the fourth quarter. In both cases, working a lot with a range of partners to put more value into the product for the Card Member. And in both cases, I will say, having the courage to raise the fees commensurate with the incremental value that we're offering to our Card Members. So the early results look really strong. In the third quarter, the consumer Platinum product had its best quarter ever for customer acquisitions. And if you look at the business Platinum refresh, it's early days. We really only launched it early in October, but we are very pleased with the early results, and it looks really strong. And on both those products, you both look at how many new people you're bringing into the franchise on the products as well as the retention you're getting with existing customers. And retention levels on both products remain above where they were prepandemic. So we feel really good about those 2 refreshes, even though it's still a little bit of early days. But as you say -- I will say they're just 2 examples of a strategy that we employ across the globe with many, many products and that you will see us continue to employ.

Maybe just to round out on product refreshes, maybe just talk about how you think about pricing for value across the customer base. You talked about retention and new customers as things are monitoring, maybe if there's anything else. And how do you feel if you're striking the right balance in terms of what you're charging in the benefits? And then, I guess, lastly, what do you think all this means for the pace of card fee growth over time?

Well, let me almost work backwards. So I would point out to you that if you look at the third quarter, the fees we generate from our Card Members were 27% above where they were in the third quarter of 2019. So in other words, right through all the challenges of the pandemic, we have grown by 27%. The willingness of our both consumer and small business Card Members to pay for the value they get from our value proposition, well, we feel really good about that, Ryan. And it's part of what makes us grow in our confidence that our value propositions are resonating and that our growth opportunities are tremendous. When you get to any particular refresh, certainly, what we're always thinking about is how much incremental value are we and our partners putting into the product for what our Card Members are going to get. And this is a little bit like just when we work with partners, we want them to win. We want to win a little bit. We want everybody to wait. Well, we want our Card Members who appreciate the value to also pay a little bit more for some of that value. We're not going to increase the fee by the total amount of the incremental value we put in, but we will put it in increase -- or put the fee increase at some portion of the value increase. But the other thing that I think that is sometimes lost on people is that if you think about the number I started my answer, which is card fees are 27% in the third quarter, above where they were in the third quarter of 2019, the predominant driver of that increase is not us increasing particular fees. It's just actually adding more people into the franchise who have those fee-paying cards. If you think about our results this year, for those of you who follow us very closely, at the beginning of the year, I did talk about how I thought that our card fee growth year-over-year would start to decline a little bit as we got into the latter part of this year before accelerating again. In fact, it hasn't. It stayed in the double digits. And it's because we've been more successful than we expected because the -- this goes back to where you've started the whole conversation. The economy in many ways has reignited, particularly in the U.S., more quickly than we expected. And so it's those incremental Card Members on the fee-paying cards who have actually kept our card fee growth strong, not really the impact of any particular fee increase.

Maybe switching gears to talk a little bit more about the corporate side. So we learned during the pandemic the importance of digitizing, and I think 85% of your customers are digitally engaged. . I think one area you've been active to partner and acquire has been B2B across all different parts of the markets. And I think you've even announced a partnership with a big financial services company that will remain unnamed. Can you maybe just talk about how your B2B initiatives are progressive? And are we starting to see growth accelerating in this space?

Well, so I'd start by grounding everyone in just the fact that our commercial segment is about B2B payments, 85% of the volumes that you see us report in recent quarters. Our business is spending with other businesses, not travel and entertainment. Small businesses put some travel and entertainment on the card. That is not the predominant use. That's point 1. Point 2 is you could probably go to almost any presentation at this conference, maybe other than the crypto presentations, and you'll have people talking about the incredible opportunity around B2B payments, and it is an incredible opportunity. I don't think I need to probably go on about that because we all agree. Maybe we measure it different ways. But the digitization of commercial payments around the globe is still remarkably nascent, right? And it's remarkable how much of commercial payment processing is still done with antiquated technologies, like ACH check. So it's a huge opportunity where, in our view, frankly, and lots of people are going to have great growth opportunities. And it has been an engine of our commercial growth. So given that landscape, part of our strategy is to have many, many different kinds of partnerships because we don't want to be all things to all people. We don't want to necessarily be a software provider, a broader payments technology that companies use. So we partner with all kinds of companies to embed our card and our virtual card products to go to market in a coordinated way. So for smaller customers, that means partnerships with people like Bill.com or a Tradeshift. For our larger or more global customers, it means partnerships with people like SAP, Ariba or Goldman Sachs, who we have a partnership with to go to our largest clients because Goldman has a great transaction banking product that they are rolling out. That's not a business we have an interest in being before. By putting what Goldman is doing and what we're doing together, we think we can both win. So that's our strategy really around B2B because of the size of the opportunity and the many very needs, the different sizes of companies, different industries have, it's why our partnership approach is so fundamental to us.

We're under 5 minutes here, and there's a couple of other topics that I wanted to hit on. So several years ago, you really refocused on small businesses as the engine of growth for the company. You're already a market leader in the space. I think spend was up 13% in 3Q. And I was wondering if you could talk about what you're seeing driving continued growth from here, right? Is it greater product penetration, leveraging Kabbage, the rollout of debit products? What do you see as driving the next level of growth for SMEs?

Well, the next level of growth first starts with what we just talked about, which is the antiquated nature that still many small to midsized enterprises used to manage their payment processes, creates a huge opportunity for us and for many other people. Second point I'd make is I'd remind everyone that we started in the U.S. with a tremendous advantage. Our card business in the U.S. is larger than our next 4 to 5 competitors combined, and that scale gives us some tremendous advantages in terms of working with our customers to bring best practices to them, et cetera. When you think about what the next drivers of growth are for the next several years, there's probably a 3-part strategy I would talk about, Ryan. There is the, part 1, traditional keep refreshing our value propositions, keep being best-in-class in terms of the basic card propositions we offer. Second strategy is keep expanding the range of partnerships, keep embedding ourselves in lots of different kinds of payment software that lots of different companies are offering, keep working with different partners, that's a whole new avenue of growth. Number three is expand our range of products, what we call beyond the card. And so last year, of course, you would recall, Ryan, that we acquired Kabbage, who brought to us a fabulous set of technology that the smallest businesses use to really run every aspect of their financial lives, including a business checking account, including debit access, et cetera. And so pairing that with also some short-term working capital-oriented lending that is not done on a card basis is kind of the third leg of the stool that we think gives us a many, many year runway to continue the kind of growth that we've had with small business.

Maybe if I could squeeze in one last question here, Jeff, in the final 2 minutes, and I have so many questions left. I'm trying to figure out where to go. But maybe I'll wrap 2 of them in. And hopefully, we can get through it. But international was clearly a big part of the strategy before the pandemic. A big part was driven by increased acceptance. Can you maybe just talk about the progress you've made there? And how are you thinking about it post pandemic? And where does China fit into that?

Okay. Boy, I could...

This is the second time in the presentation I've given a very long question to end.

Yes, and we're out of time. So let me try to touch briefly on all of those things. First, to remind everyone, it's important our Card Members can use their cards in over 180 countries around the globe, and we do business in over 180 countries, but there's probably 20 countries where we issue our own cards that drive the majority of our profits outside the U.S. And in those countries, in general, we still have modest market shares. Our competition is very fragmented and generally not as focused on the card business is what you see in the U.S. And it's why both the consumer and small business part of our business outside the U.S. was -- those were the 2 fastest-growing parts prepandemic. And I think the opportunity for them to resume that position post pandemic is very strong because in many ways, you can almost think of our business in those 20 or so countries that drive most of our profits, they're sort of where the U.S. was 25 years ago. So we know the playbook. Long runway to run that playbook. Growing coverage is a part of that. Our coverage outside the U.S. is not extensive like it is in the U.S., but we've still produced good results, and they only get better as we grow coverage. And then to briefly touch on China, I would remind everyone, we are the only non-Chinese entity now allowed to run a separate network in China. In China, we -- it's the one unique country for us where we actually do just operate like Visa and Mastercard. So there, we just run the network. We have over 18 issuing products. We have issued over 60 Amex products. We have 16 million merchant accepting locations. Particularly once borders open and you have Chinese citizens back traveling the globe, we think it's a real growth opportunity for us. So that was an incredibly quick answer to your last question.

We'll save it for the earnings. So anyway, please join me in thanking Jeff.