American Express Company (AXP) Earnings Call Transcript & Summary

Well, thank you, everyone, for joining. We're delighted to have Steve Squeri from American Express. I don't think the company needs much of an introduction. I would have bet at least half of you have an American Express card in your wallet or the other half, I would bet Steve would talk to you into getting one by the end of the session.

I'd say, if they qualify. I'm looking at this group I'm not sure.

You teased me last year about not having one. I'm an overachiever, so I got two.

Very good. It's the only reason I came back.

The credit line is a little tight though.

Well, we'll keep an eye on you.

Well, look, Steve has had a great run going into its seventh year now as CEO, probably highlighted by a transformation of the growth ambitions and aspirations of the company and delivery, frankly, of 10% plus revenue growth versus what historically in and of itself was a good revenue growth rate of 7% or so on average over time for American Express. I don't want to front run the strategies and tactics that have gotten us there. But maybe Steve, I'll start. You did an Investor Day. It was a great deck for anyone who hasn't seen it, 150 pages of really good stuff. You really kind of gave the meat of why you think that 10% revenue growth is correct, 10% plus the mid-teens EPS growth. And one of the big pieces is the product refresh cycle, which I know is near and dear to your heart. So maybe we could start in a twofold question. For those not as close to the story, why is the product refresh cycle so core? And then for those of us who are living and breathing, you're doing 40 this year? What are 1 or 2 things you'd highlight things that are working or learnings that you're putting into place with the most recent rounds?

Yes. Well, I think it's important to understand why we do it, right? And it really starts with a maniacal focus on the customer. I think when you look at our company, the customer is really king. And what you really need to do is to make sure you do not take the customer for granted and that you're constantly looking to innovate your value proposition so that you can continue to engage the customer. And so this year, it's 40%, I think over the last 5 years, it's probably been about 150. And prior to that, we would probably go maybe 10 years without refreshing a value proposition and wonder why the growth would sort of level off. But you have to understand, when you refresh a product, it does a couple of things. It reengages the existing base. It gives you an opportunity to take some of the learnings that you've had over the last few years with that product and change the products along the -- around the edges or change the product significantly. It also gives you an opportunity to attract new customers and it provides us as an opportunity. I mean one of the things that we're really proud of is we've been able to grow double-digit card fees consistently all the way through the -- prior to the pandemic and even through the pandemic. And part of that is really due to this refresh strategy. And when you look at refreshing a card, when we look at our card value proposition, there's a rational value and you can think about rational value as I'm getting streaming credits and so forth. There is an experiential value, whether that is dining or lounges or access and there's an emotional value to the card as well. And that takes -- that comes in the form of service. And so, as we think about this, I think part and parcel of our success so far has been our ability to refresh these products. And what it also does for us is it drives marketing efficiency, too, because when you have a product that is loaded with benefits, and you have a lot to talk about, you don't need to be as generous on the incentive side when you're trying to attract somebody. And I'll just give you a quick example of the Delta card that we just relaunched, I mean we raised the fee $100 but put over $500 worth of value in. And that value is co-funded. It's co-funded with partners, it's co-funded with Delta. And it has really helped, especially from a premium perspective, engage our card members.

So maybe one of the other big changes is the resonance and market share with the younger generation of customers now versus 10 or 20 years ago. The thing about younger people, they always get older. So a, when you think about the next generation or the younger end of Gen Z even into Gen Alpha, how do you continue to stay relevant and gain share with them? And then b, I thought one of the things that really stood out at the Investor Day was the discussion around lifetime value of these customers. So when you think about the lifetime value of the younger customers you acquired, what do you think the biggest upside and downside risk to that is?

Yes. So as you start to think about this, a lot of people had said a number of years ago, will your card base die out, right? I mean is your card base getting too old. And if you just go to 2019, and I'll go back to the fourth quarter of 2019, 19% of our spending was Gen Z and Millennial and I think in the first quarter this year, it was probably about 32%. And so that's a big switch in terms of, in the composition of our overall billings, and we've grown quite a bit in that particular -- from that time. But I think the fundamental thing to take away from the focus on Millennials and Gen Z, as you take a sort of 40,000-foot look at this is that strategically, we said we want our value propositions to be relevant across a wide range of constituents. And we needed to make sure that the value proposition had enough stretch in it that it would be attractive to Millennials. It would be attractive to Gen Zs and ultimately be attractive to the next generation and the generation after that. And so up until this point, we would wait for people to get old and then get them a card. Old defined, however you want to define old. But what we realize is that Gen Z, Millennials and so forth really resonated to the value proposition. And they'd be willing to pay for a premium product and so when you start to look at it, if you get somebody early, we've gotten a higher share of their wallet. They spend a little bit less. They'll spend a little bit less than a Gen X or a baby boomer when we first get them. But -- and just go back to the Investor Day, we had a slide at Investor Day that basically said from 2019 to 2023 every other group Gen X or boomers grew 20% since that period of time. Millennials and Gen Z grew 40%. And so you have built in organic growth as they go through their life cycle, and that's really important. The other thing is they're used to using their card everywhere. With parity coverage in the United States, it's not a situation where I'm not sure if I can pull out the cards. That's why you get a higher share of their wallet as well. And look, we believe that we're going to ask for 20 years of lifetime value, you got 20 years more of lifetime value. And so the risk that we have is taking it for granted. So the risk that we have in this is that you take it for granted. That's why I go back to the first question, that's why the value refreshes are so important. Because people want to be -- continue to be delighted, surprised and they want you to adjust the value proposition as their lives adjust and as lifestyles adjust as well. And if you look at the value proposition today versus the value proposition 7 years ago is very different, right. Core is the same, but we continue to expand it.

Let's talk about small business for a second. I mean, I think it's fair to call it a little bit of a sleeping giant right now. You've got 47% market share of U.S. small business credit card spend. But it's been stuck a little better than flat, 1%, 2% growth in the recent quarters. I know it's difficult to forecast maybe impossible. But like when you think about what needs to change from an environment, from a macro standpoint, what do you think needs to happen for small business spend to start growing again?

Yes. So I think small business, not just for us, but for everybody has been a little bit of a roller coaster ride. I mean when you go back to 2019 in small business, we always would expect -- there's 3 components when you think about billings, right? You think about who you're acquiring, you think about the organic growth, think about same-store sales and then your attrition rate, right? And our acquisition is really good, and we showed that in the Investor Day, and our retention rates are strong. And if you look at organic, organic traditionally would grow about 3% and then COVID happen. 14% down, then year after COVID, 19% up and then 13% up. And then we're down again. And so you've had this roller coaster effect within small business. And I think part of it is small business confidence. I think the other part of it is interest rates have risen. And so it now costs you a lot more money to buy and hold more inventory than it did when we didn't have -- we were limiting in an environment, we had no interest rates, right? I mean it was 0. Interest rates were as close to 0 as you can get. And so I think small businesses have been a little bit more circumspect about how they go out and purchase because remember, from a small business perspective, it's very different in the corporate card. About 80% of our small business spending is goods and services. And those are usually goods and services to run your business. And so I think people are watching inventory levels. And I'd say 2023 was probably a little bit more about, I had a backlog of stuff. I think as we're into 2024, it's almost -- I don't have supply chain issues anymore, so it's a little bit more just in time inventory. I think when you look at spending overall, look, spending overall for the last -- for the fourth quarter was about 6%. When you talk about our entire business, last quarter, it was 7%, but when you days mix adjusted with the extra day for the leap year, it was probably about 6%. And we're probably expecting 6% for this quarter as well. So we're in an environment of stability but not really high growth stability, right? And a lot of that is organic. And you're seeing, from a T&E perspective, T&E in the first quarter was strong as well, which is about 8% but you see a little bit of softness in lodging and entertainment spending as well. So I think we're at a stage right now where I would say spending is stable small business has really been stable from an organic decline perspective, right? We set that a 2% to 3% decline. And we're just going to have to just see how this all plays out. I think as interest rates come down at some particular point in time. And I have no idea when that is. It doesn't look like it's anytime soon, you might see more organic growth. But the reality is we're increasing our share from a small business perspective because we're still acquiring more and more customers. And we're not losing the customers we have any more than we had in the past.

And I want to dig into a small business a little more, but before I do the comment that the stability in spend growth rate, I mean my colleagues who cover other sectors have pointed out some of the potholes out there for me in terms of American or Kohl's or whatever. Are they any big shifts by category you're seeing? Or does the stability and growth rate kind of apply across the board?

No, I think it pretty much supplies across the board. I think when you look at that 6%, I mean, you could break the 6% down. International is still killing it, right? International -- with 13% in international. And U.S. consumer is sort of that 7%, 8% number. And so you then have small business at one, even corporate was up almost 5% last quarter. So it really is when you look at it, it's a little bit more of a small business phenomenon for us for that 6%. Everything else saw that in corporate. And we're very happy with corporate at 5% because corporate was just not moving for a long, long time. And it's a very small piece. It's a much smaller piece of our business now than it ever has been in the past. But international is very, very strong and both from a small business perspective and a consumer perspective as well as consumer, we're still really happy with what's going on there.

And coming back to the broader small business discussion beyond the current. The great thing about having almost 50% share as you dominate the tough thing is at some point, you become the market. So talk to us about that balancing act. How do you have 47% share, but continue to differentiate and to continue to acquire better-than-average customers in that segment?

Yes. I mean, look, we're still acquiring more customers, and we're growing our overall share, I think you're the hunted, right? I mean that's what you are. When you have 47% share, you are the hunted and everybody is coming after you, whether it's traditional competitors or whether it's fintechs and so forth. And it keeps you on your toes obviously. And if you look just over the last few, we've had to expand our product offering because what we're really trying to do is become much more relevant to small businesses, and that was part of the Kabbage acquisition. And prior to that, we got into working capital loans. We have term loans, we have a business checking account now, we have cash flow analytic tools on the Kabbage platform, and we have that Kabbage platform, which is a place now where our small businesses can live meaning they can sort out other products and what have you. So you really have to continue to, I think, reinvent yourself. You have to make sure that, again, same thing as small business. We relaunched the gold card last year. At some point, we'll relaunch the other products. We've done Hilton. We've done Delta, from a small business perspective. And that's what you need to do to stay ahead of your competitors. And what I think is really good for us is that not only are we staying -- we're gaining, we're still gaining share, which is a strong position. And when you look at it, it feels you say, well, you're only growing 1%, you're gaining share. But remember, everybody else has the same organic issues that we have, and we're taking business from other people, which is good. So the value proposition is that work.

And maybe to round this out, there are a lot of fintechs going after B2B broadly small business as part of that specifically. And I do sometimes hear from investors is somehow that part of the growth slowdown. So maybe talk to what you're seeing on the fintech side and how you react to that concern for people who are worried it's chipping away at your position.

Yes. Look, there's a lot of good fintechs out there. And some of them you learn a lot from as well. And a lot of them we partner with, too. I mean, when we launched a small business card with Square. So there's opportunities to partner with a number of the fintechs out there because so many of them are more interested from a software perspective than it is from using a balance sheet because most of them don't have balance sheets in there. They're really renting balance sheet. So I think there's opportunities for us to continue to partner with fintechs, not only on the B2B side, but on the expense management side. And look, if fintechs were taking more and more of our share, our share wouldn't be going up. So they're certainly out there. They're doing well and they're growing, but the bases are a lot smaller. But look, we've always got our eyes out on not only the traditional competitors, but the fintech as well and not only from -- to be wary of them, but to learn from them and to potentially partner with them as well.

So maybe shifting gears, one of the things you've talked about a lot is the flywheel for growth. And in some ways, the input to that in the P&L is the variable customer engagement expenses, VCE as you term it, those expenses were kind of high 30s pre-pandemic. They got up as high as 42% or so. I guess now they're more like 40%, 41%. How do you think about setting the right level VCE as a percentage of revenue going forward?

Yes. Well, look, it's only one component of our expense base, right, and not the largest component of our expense base by any means. And when you go back, if you're not refreshing products, your VCE is not necessarily going to go up, and it's not going to rise. And if you're not getting more premium cardholders it's also not going to rise. So I think the way to think about it is I think it will probably continue to grow a little bit more from a percent perspective than revenue grows. And we're okay with that. And again, because you have to look at the entire expense base and you have to look at what you are getting and as you continue to invest in that value proposition, going back to the product refreshes, what you're doing is putting more value into the cards, you are now having an opportunity not only to upgrade card members, but you have an opportunity to attract new card members and you're also retaining existing cardholders as well. And every time we do a refresh, acquisition goes up and existing spending from our cardholders go up as we put in those categories to do that. And what's important is that you have to understand is that it helps from a credit perspective because premium cards have a much better credit profile than some of the cash back cards that we have. And what it also does is it makes your marketing dollars a lot more efficient as well. And so again, I made that comment before, but it really is important because when you look at VCE and you look at marketing, as you are launching a new product, you may not have to be as aggressive. And I think that's really critical for us.

And maybe kind of sticking with that, and I think you referenced it earlier with the Delta refresh and some of that being partner funded. So you talked a little bit recently about partner-funded value within AmEx offers. I think you give us the status, it's $200 million or so today, and it could be $1 billion over time, $1 billion plus. Maybe explain what AmEx offers are and the broader opportunity for partner-funded value going forward.

So there are 2 things that we do. So if you look at for the 50% of you, and I would think the percentage is actually higher in the room to have a card, if you have a gold card, platinum cards, Centurion Card, you have value from other partners. If you've a Centurion Card. It's an Equinox value or it might be a Saks, same thing with platinum, it could be an Uber benefit, so forth and so on. And so those are usually co-funded in some way. And that's not part of the $200 million that we were talking about. So that is where we're going out to partners and getting them to embed value into the product. The other piece of it, the $200-plus million that we have, that is where you can go on to the app. You'll see in the AmEx offers, you can clip an offer and attach it, and it might be 20% off. It might be $10 off, whatever it might be. And from a high-end perspective, from a Centurion perspective, for example, we had an offer a number of years ago from David Yurman, where it was $1,000 off, no minimum purchase for Centurion cardholders. And that worked for David Yurman because what we did is we targeted those particular customers that bought jewelry, but they hadn't bought David Yurman jewelry in over 2 years. So that worked. And they had a higher ROI on that. So a lot of people talk about the ad business now and PayPal is in the ad business and Chase is in the ad business and so forth. And the way we're running this and have been running this is we are working with our merchant partners to provide more value, not only to them, but more value to our cardholders as well, and that's another component of that flywheel. And I think last year, we had close to 6 million card members that actually took advantage of an AmEx offer in the United States, and our goal is to drive that to -- we said that Investor Day to over $1 billion. So it's an important tool that we use, it drives value for our merchants and it drives value for our cardholders as well.

So maybe shifting gears, it's always tempting to ask U.S., U.S., U.S. questions. You mentioned international. I think you used the word killing it. I think you've given us it's $13 billion of revenues now growing faster than the overall company and talked about a lot of runway and a lot of opportunity going forward. What are the key things you want people to know, what's enabling the international growth so much faster? And why are you so confident in that future runway?

Yes. I mean, so the reality is, and we showed this at Investor Day, too, the American Express brand plays really well outside the United States. And in most markets the card fees that we charge are higher than they are in the United States as well. And a couple of other points about international, it's the fastest-growing part that we have right now. It was the fastest-growing part of our business pre-pandemic, both from a small business perspective and for a consumer perspective. It got hit a lot. There's a lot more -- even more lockdowns internationally than there were in the United States and so it got hit really hard. But if you look at the top 5 markets that we are in, we have less than 6% market share, less than 6% market share and small business is really nascent. We are really creating that category in small business in those key markets. And so we're really excited about that. The other thing that we're excited about is, look, our international coverage is nowhere near as good as our U.S. coverage, but it continues to improve and improve every single year. We've had -- we've talked about the steady focus. We've talked about the vertical focus, and we put up a bunch of slides at Investor Day about where we want to be from an international perspective. So when I look at -- so the investment that we're making in international, the organizational changes that we've made about 1.5 years ago where we really combined our small business and consumer businesses. And so we're able to leverage our marketing dollars even more I get really excited about international and the prospects for growth. And I think it is accretive above where our aspirational 10% goal is.

So favorite topic, regulation. Let's just go through every individual regulation out there. There's a lot on the table. There's a stress tests coming up. There's the late fee changes that may or may not come up. I don't even know what core it is in anymore. Liquidity rules coming through Basel III end game. When you look at all the stuff out there, maybe you could just like what are the ones that stand out to you as important for AmEx, where you're well positioned and where might there be a little lifting to do.

We'll give you context. That's just the U.S. So if you think about operating in another 29 countries or so, when you think about data privacy, you're thinking about AML, you think about data localization, which happens in India, Germany and so forth, you got to deal with all that. And I think we deal with that pretty well. When you look at -- just pick a few of them -- look, the stress testing as we're moving now from a Category 4 to Category 3, sooner on our way to Category 2, coming to a theory near soon. And we haven't done stress testing in a long time, but just for -- to remind people, when we do, do stress testing, we come out much better than any other of the other banks. And just to remind people, not only during the financial crisis, but during COVID, we were profitable paid the dividend and so forth. When you look at -- and we'll see what CFPB and now is a whole legal battle, it's less than 1% of our overall sort of revenue. And so it won't be a big, it's not a big hit for us, and we're not going to play around with interest rates and what have you to sort of claw that back. But when it does happen, if it's -- you go $29 to $8 or whatever it might be, you'll have a onetime step back and off you'll go. So I'm not all that concerned with it. Whatever happens, happens. It's going to be, I think, more daunting to some of the private label companies. It will be more daunting to more of the players that play more to the lower tier. Look, Basel III end game, here's what I'd say. We have a 30% ROE our CET1 ratio is anywhere between 10.5% and 11%. Our required capital that we have to hold is 7%. We hold more for the rating agencies. I think as everybody did the math, you figure out with the rules the way they were, we were hit disproportionately with that. But the reality is whatever is going to happen, it's going to happen and we'll go through with it and still be as successful as we are. The rules as they're written were written with the common period, they're not going to play out the way they play out. It's going to be completely -- they're going to be completely different. What they're going to be? I don't know, but they will be completely different than what they are because there were just so many fundamental flaws in this from an operational risk perspective, from a gold plating of charge -- of credit cards it just -- it didn't make any sense. And I think the industry did a good job of communicating that. And I think the Fed Governor has listened to that. I made many trips down to Washington to just talk about unity and equity and what we're really trying to solve for. And so we'll see how that all winds up playing out over some period of time. And so you continue to deal with all this stuff. But look, we've been around forever, and there's always going to be things that are going to change. And the biggest thing right now as we go through this, is really going through this transition from a Category 4 to Category 3 on our way to Category 2.

And maybe one I'll sneak in, and I should have mentioned at the top. Hopefully, everyone is used to this pigeonhole system by now. I think at some point a QR code will pop up on the screen if you're not. And they show up here for me. Interchange rates and what it's applied to, we had the Visa Mastercard settlement earlier this year. There was the Illinois budget thing on taxes and tips, I guess, 2 days ago to maybe it was last week, Friday. Is all this kind of in the normal noise around interchange rates in your mind or anything that's maybe bubbling up a little more to say.

Yes. Look, I mean, we'll see if the -- look, the Visa and MasterCard hold interchange things has been going on for about 20 years now. This is a 20-year-old case. We'll see how it all plays out. It basically holds interchange for a period of 5 years. It reduces a couple of points here and there, it doesn't impact Visa, Mastercard at all because they really just impacts the issuers. And I think around the edges, I don't really see this as having any impact for us. I think the Illinois situation is -- it's an operational nightmare. I'm not sure how you do it. Do you pay with your card? Is it 2 transactions? Do you pay cash for tips and taxes? I'm not really sure. But the way to POS systems are set up today, they're going to have to be fundamentally changed. And theoretically, this will go into place in February of 2025. So I don't think it's a really good -- I think it's going to be a really good consumer experience. I think the merchant lobby was one that took this on. And was able to get this through. And I think -- I guess the Governor of Illinois will sign this in the next day or so. But operationally, it's going to be challenging for the POS vendors to do this. And then I think when you do -- what it may be is just we're going to put in the -- with the overall check is, and then we're going to have another transaction for it and that transaction is going to have to be in either cash or another sort of credit trans type -- credit card transaction type would ought a fee on it. And I think we're going to have to see how that plays out.

Maybe on credit. You got the best credit, both on an absolute level and relative to pre-pandemic in the industry by a pretty decent margin. No good deed goes unpunished. It leads the constant conversations about when will AmEx's credit finally crack. A, what makes your advantage to the industry sustainable in your mind? And then b, there's always going to be risks out there any parts of the book right now that you're watching a little bit more closely?

Well, you just got to look historically, I mean, we've always been best-in-class credit, right? I mean, right now, we're running at 1.3. So the delinquency rate 2.1 from a write-off perspective and that's better than we were in 2019. We will continue to be better than it was in 2019? Probably not. It's probably going to creep up. But even if you creeped up 20% on we're 2.5 or 2.6. And when you look at the gap, I mean, when you look at this from a delinquency perspective, you took the average of the top -- of our top 5 competitors, we had an 88, 90 basis point gap. The cap is now 160 basis points from a delinquency perspective. And we have a huge, huge margin also from a write-off perspective. But I think the other thing that's happened, and the team has done a really good job. Our credit margin pre-pandemic was about 9%. It's now 10.7%. So -- but this goes back to the quality of the customers, the fact that we're able to engage our customers on premium products and they don't want to live without the -- they really don't want to live without the card. And so I think ultimately, it's where we play in the ecosystem that has really helped us out along with the reams and reams of data and the reams and reams of experience that we have, we've always been better than everybody else. I think we're just widening the gap right now. But it will climb up just because of sheer numbers and the economy is not as strong, even as it was probably in 2019.