American Express Company (AXP) Earnings Call Transcript & Summary

Thank you for joining us. I have a brief disclosure. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to Morgan Stanley sales representative. Okay. With that out of the way, I am very delighted to have Jeff Campbell, CFO and Vice Chairman of American Express at our conference again. Jeff, so good to see you in the flesh.

Well, it's great to be here, and thanks, everybody in the room and those who might be listening for your interest in Amex. And I do maybe want to start, Betsy, by saying, I am accompanied by a few of my colleagues, including our new Head of Investor Relations, Kerri Bernstein, who's been in the job 48 hours. So she's an expert now and someone [ honored ] to Michelle Scianni. So let's get at it. And what would you -- how do you like to start?

Okay. So Jeff, I know before we were coming up, you were highlighting, oh, everybody it's Day 3, so you must have heard all of this before. I would say, absolutely not. You have a very special set of products and services and customers that we need to understand and dig into. But let's start first with the big picture. Your 1Q results were stellar, but there's clearly a lot of uncertainty in the macro economy. And I just wanted to get a sense from you on if you're seeing any impact at all from inflationary pressures, supply chains, that kind of thing on your business?

Well, let me make a few points, Betsy, because that's a good place to start. The first thing I'd say, and it's what, June 15 is you're correct. We had a very strong first quarter that we talked about in April, and you all would have seen the trends that we talked about at that time. And as we sit here today on June 15, all of those trends remain really solidly in place. So billings continue to be really strong, U.S., International Consumer, Small Business, Credit, and I think we just released our monthly credit stats this morning. For those of you who want to take a look, continue to be remarkably pristine. So when you look at the mix of our business, and I do think Betsy, you're making an important point, and we have a mix of premium-oriented consumers and small businesses around the globe. And then we have a very small slice of our business, that's still interesting of the Fortune 500 kind of customers who use our products, mainly for travel and entertainment. All of those segments look really strong would be the first point to make. The second point I'd make is when you think about all the discussion about the economy and what's happening in the economy for us in our business model, the 2 things to really think about are spending trends by consumers and small businesses and what's happening with unemployment. And I would point out, if you strictly think about the macroeconomic indicators, well, the U.S. economy actually shrunk a little bit in the first quarter. And we had a tremendously strong quarter because spending trends were strong, even in the GDP figures and unemployment is really low. And those are really the 2 things I would say we watch. Now we're not immune to inflation. So if you think about our cost structure, there is certainly pressure we are seeing, Betsy, on our cost structure from inflation. But I would say it's manageable. And the last point I would make is we do run the company always for the long term. When we bring new customers into the franchise, we are always modeling the money through the cycle basis because the nature of our business model is, boy, once we get somebody into the franchise, they're usually with us a very long time as a member. So when we model the economics of bringing someone in, we always model cycles and include a recession and bring people in whose economics were comfortable. So things look really strong, but we're always ready to pivot if we need to.

And do you have any recessionary risk in your outlook for 2023 at all? Is there any plans for that?

Well, what I'd say, Betsy, is we are not in the business of trying to forecast economic cycles. We don't have in-house economists. I think what all the work that we did back in 2018 and 2019 that any of you who follow the company would have heard Steve and I talk about, we did a bunch of work then, how exactly do we want to manage the company in a downturn. I [ suppose, somewhat ] sadly, we got to practice it, pandemic hit in the extreme. So we feel really good. We do know how to pivot if and when you saw a sudden spike dramatically in unemployment or a sudden dramatic macroeconomic slowdown. We know how to pivot if that happens, but there's no reason to pivot in advance because we feel like we know the playbook. Now you did bring up inflation. Certainly, even today, Betsy, from a risk perspective, particularly with our small business portfolio, we are being very thoughtful industry by industry, customer type by customer type about working through who is a little bit more sensitive to a spike in inflation in their business model, and we're probably doing some modest risk adjustments because that just makes sense to us because I would say we're no longer just in a mode where we're all wondering if inflation is going to spike. It's here, right? So that's probably the one area where we are tweaking models a little bit.

Okay. Strong stellar first quarter, stock market down a bit, right? Just wondering, from your perspective, what do you think the most underappreciated aspect of the Amex story?

Well, I certainly know that probably many people in the room and many people listening and my colleagues and I -- we managed the company for the long term. We obviously are always a little unhappy when we see the stock doing what it's done in the short term, along with the rest of the market. But I think what's really, really important for the way we run our business is that I know because of what's happening with the stock market, people are obsessed with what exactly is going to happen economically, when might a recession hit well [ at it ]? Will it be a small little [ r recession ], a big recession? None of that really changes the way we're going to run the company focused on our long-term growth plan. And I don't know if there's going to be a recession in 6 months, Betsy, or in 6 years. But when you think about the longer-term objectives we laid out beginning in January for our -- what we believe is quite aspirational growth objectives. It really doesn't change those aspirations or our belief in our confidence in getting there in the long term, Betsy, because our business is very resilient. Our customers stay with us a very long time once you get them into membership. Our merchants stay with us a very long time. And that's why certainly, in the absolute depths of the pandemic in 2020, Betsy, we slowed dramatically in terms of bringing people into the franchise. But I would say we began to bring people into the franchise again much earlier than most of our competitors because of that long-term view. So we are going to run the company for the long term. And look, when inevitably, again, don't know if it's 6 months or 6 years, the economy slows or unemployment spikes, we'll pivot a little bit. But if you were to look at a chart of volumes over the Amex network beginning of the year 2000, look at what people expect for this year, draw straight line from those 2 points. It's remarkable when you take that long-term perspective how 9/11, which certainly caused a little bit of an economic slowdown, the great financial crisis, the pandemic, all of those events start to recede if you really think about the long-term growth projective we've been on and that we're focused on. So I think that's the most underappreciated thing, Betsy, is that we believe our long-term growth objectives are the right ones. We know how to adjust it when a recession hits, but it doesn't change our belief and our confidence in what we're going to achieve over the next 5 to 10 years.

Okay. So that's a good understanding of how you're running the company. We're going to take it a little bit more near term now talk about quarter trends. So we're going from long term to current day. Can you give us a sense as to how the T&E spend has been trending Q-to-date? How is the growth trajectory changed since 1Q? And in particular, if you could talk to the International Consumer and the large and global corporate?

Yes. So boy, we've had a strong view really throughout the pandemic, the travel, including business travel, would absolutely come back to pre-pandemic levels. And I think if you look at every airline, every hotel, probably every speaker you've had at this conference, Betsy, travel has come back remarkably strong this year. And so in April on our earnings call, we talked about how in the first quarter sort of U.S. consumer travel, in particular, was well above pre-pandemic levels. As we sit here today and I look at recent weeks, really every customer type, including consumers outside the U.S. are now back above pre-pandemic levels. If you look at our largest Fortune 100 sort of clients, just in the most recent weeks, I would say their spending is at about 60% of 2019 level. So that's really the only group, Betsy, that's not fully back, although I have complete confidence, it will come back. Just like in April, I will say that the restaurant spend in the T&E category is leading. The airlines are coming on strong as an old airline CFO, certainly what the airlines is struggling with right now is they can't overnight create enough capacity to actually match the demand. And that has certainly had some pricing implications in the airline business. But I think there is significant runway in the airline business and that will, of course, help us, if you think about the next 12 to 24 months as they are able to better match capacity with what is really strong demand right now.

Right. So you're expecting that the airline part of the business should improve from here as capacity comes online. And it sounds like the International Consumer and the Corporate T&E has accelerated from 1Q?

Yes, absolutely. Because yes, to be clear, in Q1, International Consumer travel and entertainment spend was still well below pre-pandemic levels. And it has really come on strong.

And given what's going on in the airlines, you can see the bookings, right, as that's coming through. Can you give us a sense as to how that banner year that airlines are having is translating into your business, not only through account acquisition, but maybe spend growth and loan growth?

Well, first, I do want to put it a little bit into perspective, Betsy, because remember, most of the volume over our network at this point, 81% last quarter is just spending on goods and services by consumers and small businesses. Travel and entertainment is only 19%. And actually, airline spend itself was only about 5% in Q1. So it's important, but I don't want to overplay its importance. Certainly, it will be one of the recovery tailwinds because I do think you're in for, as I just said a second ago, 12 to 24 months of very strong growth in airline spend. But in some ways, I think what's more important is what it says about the robust level of spend by consumers and small businesses across all categories. Now there are other helps for us, right, because we certainly probably more than any other competitor have a large global portfolio of travel-related co-brands. And certainly, Delta, in particular, is a really important strategic partner of ours and they're the one that is material company overall. So as people have in great numbers begun to get back on Delta Airlines planes, you have seen that our acquisition numbers for Delta have now sorted back above where they were pre-pandemic. That was slower to come back, right? And then we talked about this even in April. In the first quarter, they were not quite back looking at the quarter overall at those levels because there just weren't enough people getting on planes. That has really turned around in the last couple of months.

Okay. Just digging into spend a little bit, consumer spend has been very robust. I think in 1Q, it was 39% growth year-on-year, is that right, with the highest growth coming from millennials and the Gen Z age categories. Can you talk about what you're seeing at this stage? And does the S&P year-to-date impact? Is there a wealth effect at all happening or not?

So maybe I'll work backwards on your question, and then start where you ended. We have exhaustively gone back many, many decades to try to find any direct correlation, Betsy, between gyrations of the stock market and spend levels, and you just can't find it. What you find correlation to is when the entire macroeconomic environment suddenly plummets and you see a -- not what I might call a technical shrinking of GDP, which is more what you had in Q1, but a dramatic slowdown like what you saw after 9/11, like what you saw in the great financial crisis, like what you saw in the early days of the pandemic, that's what our spend levels are correlated to, but you just can't find a correlation to gyrations in the stock market. To go to the first part of your question, you're correct that we have really going back 5 or 6 years, been trying to, in an evolutionary fashion, pivot many of our value propositions, many of our digital offerings, many of the more experiential things we do for our card members. We've been pivoting all of those things to try to attract a younger card member base. And we have been very pleased with our progress there, and we've been giving stats on that most quarters. And like anything in our business, Betsy, there's not one thing that drives that. It's certainly moving the value propositions to be more experiential. It's a little bit of a mindset shift inside the company because historically, the way we thought about our younger consumer card members is, okay, let's start them on maybe a no-fee lending-oriented card and like over the years, we'll solely move them up. What's remarkable is that if you look at our highest fee products, and I'll just use U.S. consumer as an example, it's really the Platinum and Gold products, those are actually the products now where the majority of the new people coming into the franchise are millennials and Gen Zers. And that is a shift dramatically from where we've been historically, and it's a little bit of a mindset shift for how we're running the company. We think it has tremendous implications and it's one of the many things that gives us confidence in our longer-term growth objectives because of our experience [indiscernible] once we get someone as a member, our ability to retain them is really strong and we've been talking really throughout the pandemic about the fact that our retention levels, which on these fee-paying cards is around 98% are actually above where they were pre-pandemic.

That's very impressive, especially on the millennial-Gen Z acquisition point, which I know you had been looking to counter the market concerns that maybe it was harder to get those types of folks in the door, but you did a bit of a mic drop on that at your Investor Day.

Well, we tried. And I think one of the -- when we look at industry data, so the premium -- the higher fee premium card market is the fastest-growing part of the market. And we are certainly a market leader in that segment. And there's also just a little bit of a [ tourism ] that when a category is expanding, which it is, that usually also helps the market leader in addition to everyone else. it's a great category.

So let's turn to spend in the U.S. small-, medium-sized business customer set that you have, and I'm asking because we get a lot of questions on the SME portfolio. You've had some really nice growth there. And just wondering if you could give us some sense as to what's driving it and how sustainable you think that, that spend growth can be in that category?

Well, I would remind, as you know, Betsy, for everyone, if you go back and take kind of a 3- or 4-year view pre-pandemic, both U.S. small business and our International small business segment, we're 2 of the highest growth in consistently growing segments of the company, and I certainly expect that to be true. Once we get out of the recovery phase that we're in right now, small business, you see tremendous growth rates because you're still recovering on the T&E side. This is an interesting space because you have to start by reminding everyone that in the U.S. small business space, we are actually larger than our next 4 competitors combined. So we have a very significant share. Now that's because we were sort of first to market, gives us a lot of great market insights. Now it also means everyone wants to shoot at us as well. So there's probably 3 things as I think about the drivers of continued growth in that business. First, you still just have tremendous structural benefits. Small business formation in the U.S. is at record levels. The pandemic only accelerated the long-running trend towards small- and medium-sized businesses, digitizing all their payment flows, but, man, they're nowhere near done with that process. We certainly, under Anna Marrs' leadership, have begun to broaden the range of products that we offer to our small businesses. And that is, in many ways, Betsy, less about operating business checking accounts and financial planning tools. Those aren't going to make us huge amounts of money. But it's -- it is about wrapping our arms more broadly around the customer in a very competitive environment to make them stickier. And then the third driver of growth, I would point out to you, is just like in the consumer segment because of our historical focus on being a purely charge card business, we are very underpenetrated with our own small business and consumer card members in terms of the working capital, small term borrowing that they do and that gives us a long runway as we begin to focus a little bit more on meeting that need as well to grow a little faster than the industry because we're just underpenetrated with our own customer base.

So you recently kicked off a new product there, right, a revolving credit line for small business. And I think everybody who follows you knows that you've had a significantly stronger SME growth out -- growth delivery on loans than your -- than the industry has been seeing, right? So is that loan growth that you're generating in SME today, can you point to 1 or 2 things that's really driving it? Because our question is, how long can it last?

Yes. Well, again, maybe I'll work backwards because I would say, no, I can't point to 1 or 2 things because I think it's 100 things, right? And I actually would take you back, Betsy, if you go sort of 2016 through 2019, so pre-pandemic, in both U.S. consumer and U.S. small business and most of our lending is still in the U.S. We do a tiny bit outside the U.S. but outside the U.S., our business is still mostly charge guard. So during that pre-pandemic period, we consistently grew about twice the industry rate. And we did that while maintaining best-in-class credit metrics. And we did that while actually, if you were to go back and look at that period, increasing yields over time. So I would argue that's a pretty strong trifecta that is possible because of our historical underpenetration. We're not having to go out and find new customers. It's -- most of that growth comes from the fact that you have customers who said, well, I always thought of American Express is they're a great financial partner, but they're the ones that pay back every 30 days. As we began with both consumers and small business to put in place many different products, and you mentioned one of them, but we are now shipping all of our U.S. consumer and small business charge cards with extended borrowing capabilities, that's certainly new. We have a variety of lines of credit or working capital products that are not card-based. We have pivoted some of our marketing. We have pivoted other aspects of the value proposition. So it's all of those things combined that drove what was happening from 2016 to 2019. And it's what -- it's really those same things that we think will give us years, Betsy, of growing a little faster than the industry in both U.S. consumer and U.S. small business. If you were to go back, I could be wrong. I think it was the 2019 Investor Day. I just did sort of a simple math, which is if you look at how underpenetrated we are in terms of our share of our own card members short-term borrowing behaviors versus our share of their spending behaviors, then you look at the fact, okay, we're growing, lending a little faster than the industry, how long would it take to equalize the spend share and the lend share? And the answer is decades. Decades, because we're not -- it's an evolutionary process. It's 100 different things. We're not going to do crazy things on the risk side, but it is a steady driver of a little faster than industry growth.

Okay. I do want to poll the audience for questions, so I'll do that after my next one. Just to let you know, if you have a question, let us know in a minute. Just on the -- last question here on the lending side. Yes, so you mentioned the guardrails. You mentioned not too crazy things. Can you just help us understand how you manage that risk because you do have an open-ended line construct on many of your products? And one of the questions that I've gotten from folks is, hey, what if there's a white-collar recession, we've seen layoffs in the tech world. So just understanding how you think through that risk management would be helpful.

Well, let me, boy, I could probably use the rest of our time. So let me make just a couple of points, Betsy, and I'm going to start most in general here for a second. With small businesses, in particular, and to a lesser extent, with some very high-spending consumers, from the day we launched into the card business in 1958, we have built every system, every process, every risk management tool, every bit of artificial intelligence, every bit of closed-loop information we get around creating a dynamic credit capability that allows us to literally with each swipe of the card make an independent credit decision. As opposed to you apply for a card, we say, okay, no, I think you said this kind of [ limit is a ] small business or a card member. If you're under that grade, we'll approve the transaction. If you're over it, we won't. So we have decades and decades of tuning every aspect of our company to make that dynamic credit capacity process work and it allows us to give our greater spending capacity, particularly to small businesses than our competitors, and that is particularly valuable to small businesses and to a smaller set of consumers who are particularly high spending that is also valuable. And we did that while right through to today, always having credit metrics that are far better than the rest of the industry. And in fact, if you were to take whatever basket you want of our U.S. competitors and look at their 2019 credit metrics versus us and their credit metrics today versus us, we've actually extended our lead versus the industry over the course of the pandemic. So we feel really strongly about our ability to thoughtfully manage that dynamic spending capacity model. There are others who are now trying to create, a couple of our competitors, that capacity. We've been at it for almost 70 years.

And what would you say that time when you went to the dynamic pricing? Like when was that? Was that like -- how long ago was that?

Well, the point, Betsy, is [indiscernible] from the day we launched the charge card model, that's the way every system, every risk management [ person ], every bit of training, it's a very difficult thing, I think, where I would view this as part of our moat versus our [indiscernible].

Okay. Is there any questions from the audience? I just want to scan. I've got a bunch of questions to go, but I just wanted to make sure we were answering yours. Okay. Very good. A couple of questions on payments. Well, everything you do is payments, but this is specifically around the Pay It and Plan It offering and on your recent BNPL capability that you added to the Amex travel and the Delta POS. Could you just give us a sense as to how -- what the uptake is on -- I mean, especially on the BNPL piece that's been recently launched?

So I guess let me make a few comments, and I might start at the beginning. First, when this subject comes up, Betsy, I usually can't resist pointing out that the original Buy Now, Pay Later product was a credit card, right? So -- and it had great utility because you could use it anywhere. And I started with that history partly because our approach to this is we want to give to our consumer and small business customers and members maximum flexibility to pay in lots of different ways. And so many of our customers still really like the charge card model and they really like paying off 100% of their bill every 30 days and incurring -- never incurring a transaction charge, and we love that. We have other customers, consumers and small businesses who carry a balance, and it always surprises people, as you know, Betsy, then when we say even Platinum Card members, they sometimes carry balances on their cards. We have added, and I think we were one of the first in the industry, long before the pure Buy Now, Pay Later players began to really grow, the ability for our card members to pick transactions after they have left the point of sale if they want to schedule them out. And in our view, that is providing more flexibility because you can pick a transaction, multiple transactions, you don't have to make the decision to point of sale. And then we offer a range of other borrowing products. So all of those are important to us in terms of meeting the broader payment needs of our customers. All of them are important in why we're able to grow lending a little faster than the industry. Back to your question is there 1 or 2 things, there's not. So -- and customer behavior really varies. Now I would point out, if you look -- just look at our loan balances when we report financial results, the overwhelming majority of that, Betsy, is still just card-based borrowing. And yes, do you see growth in the take-up on the many other ways, including, you're right, we've embedded both with Delta a more pure probably Buy Now, Pay Later capability, and we also have that capability as a kind of separate feature, if you were to use American Express travel to buy your travel. But the majority of what you see financially speaking like a CFO for a second is still card-based borrowing.

Okay. Let's move to expenses. Just a few quick ones here. We're thinking about the rewards expense because you've got that accrual accelerating with the spend that's going on and the utilization seems to be picking up as well. So how should we be thinking about that line item? Is there any change as people have increased their engagement?

Well, usually, this is a pretty easy line to talk about because usually rewards cost is more or less going to track with volumes. Because of the highly unusual nature of the pandemic, which completely disrupted normal patterns of how people earn rewards and how they use rewards. You've had a bunch of noise in that line as in a few quarters, when people suddenly stopped traveling, we had a few quarters where all of a sudden rewards costs grew a lot less than billings. I'd say now we're in catch-up mode where we've had some quarters and we'll probably have a few more. Although, frankly, there's going to be a little volatility, Betsy, unfortunately, from quarter-to-quarter to the next couple of quarters, where it will grow a little faster than billings. That will all sort itself out probably as we get into next year. I'd say we may still have a little bit of volatility this year. Because in the long run, it will go back to -- it's going to grow simply along with billings. But part of people exercising the pent-up demand for travel is they're redeeming a whole lot of travel rewards now. And if you really get into the details of some of our products, you would know some of our products have reward point accelerators when you use them to purchase in certain travel categories. And -- so those 2 things are probably, I would say, above steady state levels now, which is driving a little bit more rewards expense growth relative to billings.

Okay. And then on the marketing side, you've got the guide on the $5 billion plus, right? And so we are expecting that in 2Q, we get a little bit of an uptick Q-on-Q. I guess the question here is what would drive you to toggle that higher and what would drive you to toggle it lower?

Yes. So there is an important pivot here versus how we thought about growth pre-pandemic. And so I'd start by reminding everyone, if you look at the Amex results for 10 quarters before the pandemic here, we had 10 consecutive quarters of revenue growth between 8% and 10%, just like clockwork. [ I'd say ], each quarter, we have this great slide that was like a straight line, [ straight ] across 8% every quarter, and I'd say this is the most beautiful boring slide I love to show every quarter. But you would also have heard both Steve and I, during 2019, talk about how one of the great things about our business model is our marketing teams are always coming up with even more great marketing programs that we think will produce great returns that we're actually willing to fund given what our earnings objectives are. One of our conclusions from watching what happened in the industry and in our business over the course of the pandemic is that we really were underinvesting in the marketing opportunities if our goal is to maximize long-term growth. And so if you were to look at levels of marketing in 2018 and 2019, Betsy, and then look at what we've said, we plan to spend this year, it is a step-change increase. And it's because we've said we're all about maximizing long-term growth. We're all about the growth plan. We think we can do better sustainably than we were doing in that 2018-2019 period because we are going to invest really in all of the great marketing opportunities that we see. So that is an important fundamental strategic shift in how we thought about the company. And yes, it drives marketing spend probably a little over $5 billion, and it's driven by the opportunities we see. So back to we don't make economic forecasts. If the economy stays really strong, frankly, and we saw even more opportunities, I'd come back to you and say, you know what, that it's going to be even a little bit higher than that. If the economy tanks next month, well, we probably won't spend $5 billion. It's going to be driven by the opportunities we see because our eyes are firmly fixed on our goal of having sustainable revenue growth in excess of 10% once we get through the recovery phase that we're in this year and probably into next year.

Super. Well, Jeff, thank you so much for your time this morning.

Great. Thanks for having me, and thanks to everyone for your interest in Amex.