American Express Company (AXP) Earnings Call Transcript & Summary

We're joined once again with the CFO of American Express, Jeff Campbell, who's held his current role since 2013. You've seen quite a bit during your time. It's always a pleasure to have you at our conference, and thanks for being back in-person. And I know your Investor Day is upcoming, so I'll plug that in. It's probably going to be a great event, and we're going to learn a lot.

Given we're 2 months into the quarter, maybe, Jeff, you could start with giving us an update on what you're seeing. Obviously, there's quite a bit of stuff happening in the background. I'm just curious to get your perspectives on how you think it impacts American Express.

So first, thanks for having me, Sanjay and -- you and I were reflecting in the hallway on the fact that I believe KBW had one of the last conferences before everything shut down. And I might preface the remarks I'm about to make by saying, so I actually went back and read the transcript from what I said in the first week of March 2020. And of course, at that point, I said, yes, this COVID thing it's really impacted China, a couple of countries in Asia. We don't see an impact in the U.S. and Europe yet. We'll have to see. And that truly was how we felt on March 3, 2020, and we all know what happened. So I maybe start with that story just as a warning about everything I'm about to say. So -- but look, so we gave, I think in our view, back in January on our earnings call, we are back in our view, in a world where we can forecast. And we can plan and we have tremendous momentum. And that's why Steve and I laid out what we at least internally are referring to as our new growth plan back in January, and we provided specific revenue and earnings per share guidance for 2022, something we hadn't done in a couple of years. And we feel really good about where the business is. Now it's March 3 or 4. So what I would say is you think about the subsequent 5 or 6 weeks as things are just tracking. And the couple of things in the external environment, I'm going to save Russia Ukraine for a second. Sanjay, have been -- maybe I should comment on. So Omicron, obviously, is something that had this conference been held back January, you probably would have started your questioning with. But when you think about the kind of commentary we provided back in January about our expectations for spending for continued growth in travel around the globe, Omicron seems to have had a modest impact, more modest than the other variants that have happened over the last 2 years had. And frankly, fairly quickly fade in terms of the impact on our business with a pretty strong rebound in travel as you got into recent weeks. Probably the other thing that's externally -- again, putting Russia and Ukraine aside for a second, continued to move since that January earnings call is you continue to have inflation indicators show pretty high numbers, and you continue to have lots of speculation about how many rate increases the Fed here in the U.S. is going to do. When you look at our business, I'd just remind everyone that given the nature of our balance sheet, rising interest rates don't actually have that big an impact on us. There's actually a modest headwind and I think our 10-K disclosure is usually that if everything else in the world was equal and overnight, you had 100 basis point increase in all rates, it's a couple of hundred million dollar headwind for us. But in many ways, I think what you're seeing right now, Sanjay, reflects the thing I always add whenever I talk about interest rates, which is generally a period of rising interest rates is accompanied by a pretty strong economy, which is really good for our business and kind of dwarfs the impact of the modest change in interest rates. And when you think about inflation, the point I would make is that some level of modest inflation that is not so crazy that it's going to start to cause businesses to have trouble with debt levels, et cetera, a modest level of inflation is actually a positive for our business. So I would say we feel good about all the trends, maybe as long as I'm talking about what we're seeing, Sanjay, I would just make one other observation about specific to '22. We talked a lot on the earnings call about a series of what we call pandemic recovery tailwinds that are going to drive our revenue growth in 2022 and '23, frankly, way above even the already high longer-term trend that I expect. And so that's steady recovery in travel spend, steady recovery in cross-border spend and travel steady recovery in the larger business organizations beginning to travel a little bit. When you think about all those things and you think about the commentary we've given about 2022, I would remind people that I would expect our earnings to sort of sequentially strengthen as you go through the year as you think about the annual earnings guidance that we gave. So I'll stop there to let you get another question. I, obviously, have left Russia Ukraine off the table, which I'm happy to talk about.

Yes. Actually, I would love if you could just talk about what you think might be an impact, if any.

Yes. So I think anyone when you start on this subject has to start with, it's just a tragic situation for everyone who's involved. When you look at American Express, I'd make a few comments. So Russia and Ukraine are very small for us. We actually have no colleagues in the Ukraine. We just work through partners. And in Russia, we have a small colleague base. We have one partner who issues a few cards and a couple of other bank partners who acquire merchants for us. When you look collectively at Russia and Ukraine, it is far, far less than 1% of our global volumes and revenues. Important though, because we run a global network, and we need acceptance in 190 countries. But very, very small part of our business relative to some of the other numbers that others are throwing out. That said, I would say sort of the very complex web of sanctions that regulators around the globe, not just in the U.S. are asking us to implement, which we believe were very compliant with, although, boy, changing our -- Sanjay, it's hard to -- if the end result of all those things was that we had to really just completely wind down overnight, our business in Russia, you could have a write-off in the kind of low single-digit pennies of EPS. It's not a material number. But we'll have to see. Obviously, the larger question for us is what potential larger or longer-term impacts are there on the global economy. As I sit here today, and now I'm starting to get flash backs to March of 2020, Sanjay, as I say what I'm about to say. But as I look at our daily results today, spending around the globe, on travel, spending on goods and services, so I look at travel bookings. We run a really large travel agency. You don't see any inflection point outside of Russia and Ukraine in the recent days. But that's obviously what we all will be watching as time goes on here.

Can you touch just a little bit on inflation and sort of how it runs through the book. Is there a tipping point at some point where it negatively impacts spending? Or do you feel like it's generally a tailwind?

It's -- so as you would expect, Sanjay, we've done a -- updated all of our very thorough analyses, really going line by line item in terms of what -- where are all of our sources of revenue, which ones fairly naturally flow with inflation, whether it's consumer or producer price kind of inflation, done the same analysis on our cost structure. And it leads you to the conclusion that while the overwhelming majority of our revenues are going to float with inflation a much, much smaller portion of our costs do. And that's why, in general, inflation is a good thing for us. I think when I think about the tipping point, I would more go to credit, right, in that inflation is going to drive higher levels of spend, which is good for our revenues, et cetera. The point in which that could suddenly start to get overwhelmed is when you have skyrocketing interest rates and in particular, our business customers or consumers who have floating rate mortgages, start to see such massive increases in their interest rates that it starts to tip people into having financial difficulty. Sitting here today, boy, we're a long, long ways from that kind of inflation, and it's certainly remarkable the way the market for now, if you just look at interest rates, seems quite confident that the macroeconomic consensus, which would say, don't worry, inflation is going to come down quite soon. The market seems to be reinforcing that. We'll have to see. And certainly, I will say we're in the midst of a very comprehensive effort across the company to get all of our leaders at every level to be educated and think in a way they haven't had to think, Sanjay, probably in 40 years, but, well, how do you optimize our business if inflation does stick around. If that macroeconomic consensus is gone because we actually have very few people in our company who were there last time there was inflation. There's a few of us, old guys like Steve and I, who yes, I mean, I wasn't in payments. That was in another inflation-sensitive business in the airline business. But we actually have some work to do to get our people to think about how do you optimize in inflation. I would point out, this is one of those areas where being a global company is helpful because we do have some colleagues at American Express, particularly those in Argentina who have been running a business quite successfully in a hyperinflationary environment for some time. So there's a fair amount of trading of ideas around the company going on right now as well.

Great. So I want to move on to the aspirational targets you provided on 10% revenue growth, mid-teens EPS growth in 2024 and beyond. I was very encouraged by it. Definitely. It was really good to hear. And obviously, it's much higher than some of the targets that you guys have outlined over the years. So I'm curious, in your mind what gives you the confidence to give such a strong expectation and what might have changed over the course of the last several years because we've been through quite a bit over the last 5, 6 years, it feels.

Well, I think, Sanjay, as we move to thinking about the long term, this is the most important question. And I'd start by being very precise and that what we've said is that our aspiration once you get through '22 and '23, where you're going to have very high levels of revenue growth because of the pandemic recovery tailwinds. We've said beyond that, our aspiration is to consistently and steadily grow our revenues in excess of 10%, with mid-teens kinds of EPS growth. And it's really, I'd say, the confluence of the strategies we had in place before the pandemic hit. The execution of many changes we've made during the pandemic and the momentum that is created as well as a belief that there are some lasting secular shifts, driven by the pandemic. So if you'll indulge me, let me briefly touch on each of those three.

Sure.

And I think I would start by reminding you that the strategies we had in place before the pandemic had produced 10 consecutive quarters of 8% to 10% revenue growth with double-digit -- low double-digit EPS growth. Very effective. And we feel we were on a tremendous role. We think we could have continued that for a very long time. And then we had the KBW conference in March of 2020 and the world ended. But as we've also talked a lot about publicly, we have put a lot of thought over the last couple -- over the couple of years leading up to the pandemic. And how we wanted to manage the company through an inevitable economic downturn. And while we certainly had never role played a global pandemic, we actually had spent a lot of time as a management team role playing what we wanted to do in an economic downturn, which the pandemic really caused. And so as you think about our actions over the last couple of years on the consumer side, I think during the pandemic, we have really worked hard to build upon what we are now referring to as generational relevance of our consumer products. And so making sure that we have the products that appeal to someone in my demographic and someone in my 26-year-old son's demographic. On the small business side, we worked really hard. Our acquisition of Kabbage is a good example of this during the pandemic to strengthen the primary relationship that we have with small businesses that makes us so strong in small business here in the U.S. Makes us bigger than our next 4 or 5 competitors combined. It's about making tremendous strides on merchant coverage over the course of the pandemic, Sanjay. And I think sometimes -- and I'll take a little responsibility for this. I think sometimes we've underplayed the importance of our growth over the years. The importance of the role that growing coverage has played because you give people more places to use the card and spend, well, suddenly, you're going to get more spend. So we've made tremendous progress on all of those things during the course of the pandemic. And so we enter '22 with a level of momentum, Sanjay, that is far above what we had pre-pandemic. And so in the fourth quarter, we've talked about the fact that -- on the acquisition side, we are bringing in, in the U.S., which is where you have a healthier economy, relative to the rest of the world, record numbers of premium consumers onto our flagship product, the platinum product. When you look at our small business franchise in the U.S., you see the same success on acquisition in the fourth quarter. When you think about customer engagement, spending on goods and services, which is the majority of the way people use our card. I think sometimes there's still this misnomer that we're all about travel. And travel is a really important foundation, great strength of the company. But over 80% of what people actually use our products for is spending on goods and services. And when you look at the cumulative growth rate of that spend across the 2 years of the pandemic, Sanjay, it actually has grown faster than it was pre-pandemic. It's a sign of engagement of our customers. And then we also talked about the fact that from a retention perspective, we have -- we've always had extremely high levels of retention of our customers, very low churn, when someone joins the franchise as a member but they've gone up even further. So you start with strategies that were working great before the pandemic. Some execution that we've done over the last couple of years that has built that kind of momentum. And then you add the third leg of the stool, which is we really believe that the pandemic has permanently caused a step change function in the long-running evolution of the digitization of our economy. And that's both something that impacts consumers. And the portion of their spend that is done digitally, the portion that is done through e-commerce, it puts even more pressure on businesses, particularly smaller and midsized enterprises to accelerate the long-running challenges they've had in digitizing more of their payment flows. And all of that plays very strongly to our business model, right? I mean, just go back to coverage. When you go outside the U.S., look, our coverage at physical locations in most countries around the globe outside the U.S. is still is a vast land of opportunity, let's say, for further growth. But our coverage in e-commerce is really good, right? And so as you shift the businesses and consumers to more e-commerce and more digitization, we are better positioned to capture an even bigger share of their growth than we were pre-pandemic. So your role, the pre-existing strategies together with the execution and the momentum it's built during the pandemic and what we believe are some lasting secular shifts and our real conclusion, Sanjay, is, boy, if we didn't have greater aspirations for growth than we had pre-pandemic, then we're not doing our job.

So what do you think the risk is to those forecasts? Things have always popped up in the past that were unforeseen at sometimes. I mean, in your mind, what would be the risks outside of the economic ones, which fully understandable.

I guess I do go to -- when I think about the last 2 years or when I think about what's going on in Russia and Ukraine, Sanjay, the biggest thing I do worry about are externalities, global macroeconomic risk. I have a lot of confidence, though, in our execution. We -- the momentum we have is not a function of things we've done in the last few years during the pandemic or in the 12 months leading up to the pandemic, the company has been around for over 170 years. And the kind of brand strength that we build has been built over decades. And when you think about our market positions with premium consumers or with small businesses, there are positions that have been built up over decades. And inevitably, you're going to ask me a question about competition. And the lead we have, what allows us -- let me pick on small business to start, maybe to be larger in the U.S. than our next 4 or 5 competitors combined. It's nothing we've done over the last 24 months. It's something that over decades, we have built scale because we have a brand strength nobody else has. We have an integrated model which allows us to support the spending needs of small businesses in a way that others find challenging to meet. We have a digital marketing model. We've never had branches. We've always had to be on the leading edge of how do you digitally engage with card members with small businesses to grow your business. We have a varied product set that is strengthened by the fact that there's this virtual cycle, Sanjay, in that the small business or premium consumer customer base we built is stronger, larger and more attractive to partners and merchants than what others have. That then allows us to get merchants and partners to help fund making our value propositions even more valuable, which helps us keep building that customer base, which attracts the merchants and partners even more. So it's -- think of it as a virtuous cycle, that we've been at for a decade. So look, we have a lot of great people and our competitors all love to hire our great people away. Most of our competitors in the U.S. are run by Amex alumni, who are all in many ways, doing a fine job of trying to replicate many, many aspects of our model. But that brings me back to this virtuous cycle, which is -- it's why we constantly have to think about, are we innovating faster than others, are we adding new values because if we stand still, others will be able to catch up. But we have a huge lead because of the decades we have spent building this cycle and building the scale and the size of the premium consumer and small business customer base we have, and we have to sustain that lead. And in some ways, one of the underpinnings of why we also think it's important for us to launch an even more aspirational growth plan is that actually is a defensive weapon against our competitors. Because the more we can grow the harder it is for them to ever catch up on that virtuous cycle.

And I want to dig into that a little bit and I don't know, I don't want to foreshadow a ton ahead of your Investor Day. But like it's very clear that the couple of years preceding the pandemic and where we are today, you guys feel a lot better about your relationship with your customer engagement, retention, what's changed? Obviously, your products have changed. But what else has changed even around you from a competitive standpoint?

Well, maybe -- well, I can talk about that the rest of our time. So let me maybe make one internal comment and one external comment. So let me start internally, and I'm going to maybe take a little longer sweep of history here -- because I'm, in some ways, going to compare coming out of the pandemic cycle to coming out of the great financial crisis.

Right.

And I think coming out of the great financial crisis, the company took a more defensive posture. We said, oh, this lending borrowing on card stuff. I don't know that we really want to do that at all. We started -- if you go back and look at Investor Days from 2011 and 2012 and 2013, you'll see us saying, "Look, we can like cut our expenses so much that even with 3% revenue growth, we can still get okay EPS growth." And I think we might have lost a little focus on this virtuous cycle and the need to continually invest in the customer to drive higher levels of revenue growth that come with some higher costs, absolutely. But that's actually a better virtuous cycle than trying to kind of cut our way on value propositions and on cost to reasonable earnings growth. That is a fundamental shift, I would say -- as you pointed out, I joined the company in 2013. It's a pretty fundamental shift in our thinking. And it's been an evolution. It's not like we went from one extreme to another. I would say our belief in that value of being willing to spend on value propositions to build more customer loyalty, higher levels of revenue growth with a belief that we're better off with very high levels of revenue growth getting to the same EPS outcome. That's been a really important evolution in the company's thinking. If you go outside the company, I would say that if you read kind of business strategy, textbooks. They'll sometimes say that when a category grows, that's usually a good thing for the market leader. And with both small businesses and the consumers, I think that's part of what you've seen happen in recent years, which is it is a competitive environment. But in some ways, as our competitors go, boy, these are some attractive markets Amex is in, let's go hire Amex alumni and go after those markets. It's, in many ways, expanded the market. And one of our favorite examples to talk about is if you and I were to pull up a transcript for 2015 or 2016, thereabouts, you'd be asking me about the U.S. premium consumer market. Chase had launched their Chase Sapphire product and was publicly talking about huge numbers of new customers they were acquiring. And I think there was a tremendous concern amongst investors wow, those must all just be coming straight from Amex. Must be cratering your platinum franchise. And in fact, over the kind of 2015 to 2020 time frame, our Platinum franchise grew at levels it had never grown in its history and we achieved tremendous results. Something similar, I would suggest is happening on the small business side, which is we were probably much earlier than both in the U.S. and still outside the U.S. in realizing the value to small and midsized enterprises of using our products kind of at the center of how they run their business. Others have started to realize it's a pretty attractive business to get into. But there again, I would suggest that it's helped expand the market because -- and I think this is one where the pandemic has helped further accelerate it because it puts more pressure on business and say, wow, it wasn't great. when all of a sudden, I'm still trying to write checks to my suppliers and nobody wanted to come into the office in the middle of 2020, and they were forced to digitize -- and I think it's accelerated that trend. So internally, just to summarize, that evolution to, boy, invest in your customer even if you have to spend a little money to do it, it's going to pay off in the long run on the bottom line and the externality of frankly, growth in the premium consumer and small business markets are the two key drivers.

So I want to stay on growth, and I want to touch on B2B. Obviously, you highlighted that the commercial business had its strongest ever quarter for new customer acquisitions in the fourth quarter. I think your success in that market could be very consequential to the way people think about the long-term growth story. So maybe you could just talk about what you guys are doing there, what's driving the success, et cetera?

Well, so let's step back for a second. And to be clear, it's the best quarter ever in the U.S. Outside the U.S., you still -- when you look at our markets, they're recovering at different level in different places. And as a general matter, I would say the U.S. economy was recovering in 2021 more quickly than what we see outside the U.S. which is one of those tailwinds for us for the next years because eventually the other economies will recover. When you think about small business, though, I'd come back to the list I talked about a few minutes ago. We have a brand nobody else has. We have scale, which gives us insight in the cost structure, our integrated model that just provides spending capacity that is difficult for others to match. We have a digital marketing machine we could have finally honed because we've had to have it. Those are, I'd say, the cornerstones of our long-running success. Now what we particularly in the last few years, Sanjay, have tried to put on top of that is a little bit more of a -- we also want to really be the primary payments and working capital provider to our small and midsized enterprises. And our acquisition of Kabbage was really about capabilities, right? As you recall, Kabbage had a loan book, we actually didn't even buy. But they had a great team and they had some great technology, which has really become the centerpiece, the front door, if you will, for how we want our small to midsized enterprises to interact with us because it helps them manage all of their payment and cash. The launch of something like a business checking account is part of that. It's not because we're trying to drive tons of earnings growth with a business checking account. We will all lose money, but it's not a driver of growth. It is a driver, though of having a broader, more primary relationship with a small business. And I think if you think about the evolution of our small business franchise, it's been driven for decades by the long-running strengths I talked about, but this broadening of our relationship and in the U.S., which is really where the Kabbage capabilities for now are being rolled out. It's about building that stronger primary relationship and meeting more of the customers needs. That's the next evolution. Frankly, outside the U.S., our small business franchise, which pre-pandemic was the fastest-growing part of the company. I'd say it's sort of where the U.S. was many years ago. And we're not yet to the point where we're trying to do what we're doing with the Kabbage capabilities in the U.S. because we have such a runway for growth just doing basic blocking and tackling against a competitive set outside the U.S. that tends not to be as focused on the market, much less competitive than what you see in the U.S.

So you've made some tuck-in acquisitions over the last few years. Obviously, Kabbage was one of them. Are there any other transformational deals that you guys can make?

Well, boy, Sanjay, when I think of the word transformational, I would suggest we haven't done transformational deals other than if you want to go back to the 1990s getting out of being a financial supermarket. So getting rid of Lehman Brothers and getting rid of First Data. I'd love to remind people that we owned First Data at some point. Those are transformational deals. Our strategy for the last decade has really been about smaller acquisitions which are really about capabilities. And so Kabbage is an example of that. Resy is an example of that. Acompay, which is a capability we provide to small businesses to help them manage all of their payment flows as an example of that. And those are the kinds of things you should expect to see us to do. Look, when you think about the current political and antitrust environment, when you think about our size, scale and really more importantly than that, Sanjay, when you think about our unique business model, there aren't consolidation opportunities, right? We're not a regional -- traditional regional bank who often can create real value by combining with other traditional regional banks to help build scale. There's no one for us to do that. So what investors should think about when they think about M&A from us is a steady stream when we think the pricing is right or when we think there's a capability that can really add to the company. But transformational is a word I would shy away from.

Got it. We have like a couple of more minutes. I do want to see if the audience has any questions. If anyone does, they can raise their hand. There's one right there.

If you don't mind waiting for a mic.

Just a quick question on the noncard payment space. Your competitors have made a number of acquisitions in that space and are looking at it as, I don't know, I'm assuming as a way to diversify away from reductions in interchange fees that are being pressured elsewhere. Is that something that Amex is looking at as well?

Well, we look at everything, and we're very mindful of different things our competitors are doing. I would point out to you -- because I think the way you just used the word competitors was with reference to people like Visa and Mastercard. And for the most part, I actually don't think of Visa, Mastercard as critical competitors of ours. I think of our competitors as the JPMorgans or the Barclays. If you go outside the U.S., the small fintechs who people like Square, who start off with kind of one aspect of a merchant relationship and are now trying to grow that to do many of the same things we do. Visa, Mastercard, in many ways, we don't really directly compete with, on the other hand, we have to be super mindful of where they're going from a technology perspective and a capability perspective. So that we remain competitive in terms of what capabilities we're offering to our issuers, mainly ourselves, although there are a couple of other hundred banks who issue on our network as well as capabilities that merchants and card members would get. There's a key distinction, though, when you think about things like the B2B space and when you think about alternative noncard networks between us and Visa, Mastercard, because we're not operating an open network with tens of thousands of banks and millions of merchants with a table of interchange that has to be equally used by all the players in the system, we're able to do very bespoke deals. So we have B2B verticals and I pick on health care, for example, where we have a whole network of transactions where we have gone and we've worked with individual buyers, individual suppliers into hospitals, for example, and put in place a whole network of very bespoke pricing for transactions that just run over our normal Amex network. And it's more difficult to do that if you're Visa, MasterCard because you have interchange and you have to be careful about to almost need to create an alternative network, whereas we can run bespoke pricing and bespoke transactions, on our own network. And we do some of that. It's not a huge part of our business, but it's growing, and we certainly see it as an area of opportunity. So to maybe come back to the heart of your question, we're very mindful of the acquisitions that Visa, Mastercard have done in a variety of the noncard space. And we look at them all. But our lens is going to be a little different than theirs would be because of the different nature of the way we run our network versus what they're trying to do.

I guess we've run out of time. Thank you so much.

Okay. Well, Sanjay, thank you. And let's hope that...

This is the beginning of good things.

This is the beginning of goods things. Not a replay 2 years ago. All right. Thanks, everybody.