American Express Company (AXP) Earnings Call Transcript & Summary

All right. I think we're going to get started. Welcome, everyone, to the third day of the Barclays Global Financials Conference. My name is Terry Ma. I cover U.S. consumer finance at Barclays. I'm very pleased to have on stage the CFO of American Express, Christophe Le Caillec. So welcome, Christophe.

Thank you for having me.

Yes. Thank you for coming. So I think we'll just jump right into it. Maybe just to start off with the consumer. I wanted to get maybe a mark-to-market on what you're seeing on consumer spend quarter-to-date. The U.S. Consumer Services grew network volumes about 8% in the first quarter, but that did decelerate modestly to about 6% in the second quarter. So how is consumer spend shaping up in the third quarter?

Yes. So good morning, everyone. So maybe before I answer the question, I want to acknowledge that today is the 23rd anniversary of the 9/11 terrorist attack, and I've got a thought for those who lost their lives, including 11 American Express colleagues. So to your question about consumer. So we released Q2 earnings a few weeks ago, and the word that I used back then was "stable." It's stable in a slow growth economy. And really, over the last 6, 7 weeks, nothing has really changed much, right? So we're still in that same situation of stability. You mentioned a little bit of a decline. So Q1 was a little bit inflated by the extra day. It was a leap year. But so if you control for that and look at over the last few quarters, we're kind of like in the same range and nothing has really changed there. So that's on the spend side. What we're seeing though, on the consumer side as well, we're seeing consumers were very engaged with their American Express products. The level of transaction -- and transaction growth remains higher than billings. They're engaged with the products. They are signing up for cards. They are paying fees. I talked about the card fee line being up 16%, and we're expecting this to tick up a little bit in the balance of the year. And they're revolving, and they're paying back their balances, because our write-off rates remain with -- very, very strong and our credit metrics very, very strong. So in balance, I would say that nothing has really changed much from the second quarter. It's slow growth, as I said, it's a slow growth economy and it's very much stable in that environment.

Got it. Maybe just to dig in a little bit more, are you seeing any differences in T&E versus Goods & Services? And what about also, obviously, you're more levered to the higher-end consumer, but are you seeing any differences between generational cohorts?

Yes. So when it comes to the mix between Goods & Services and T&E, we've seen a little bit of a moderation in terms of T&E growth. It was stronger, I think about like the back end of last year, in particular, and we have lost a little bit of momentum there. But it remains very strong when you look at the details. Our card members are very engaged in terms of dining, which is the #1 category when it comes to travel and entertainment spending. And we see as well engagement across all generations. As you would expect, the younger generations, the Millennials, the Gen Zs, are more -- are growing at a faster pace, also because we're adding to that population. But I think the growth rate back in Q2 was 13%. So it gives you an idea of like the disproportionate growth we're getting from the younger generations. And so yes, that's what I would say. In terms of the spend by income level, as you would expect, right? I mean, I don't think it's specific to this economy or this time, card members who are -- who have a higher income tend to spend more and to be more comfortable than those who have a lower income. I don't think there is anything different at this time.

Got it. So just to touch on SME, that's an area of softness the last couple of quarters. You mentioned in the second quarter, you saw a slight improvement in U.S. SME. So maybe just an update there and maybe just talk more broadly about what it's going to take for this segment to fully lap some of the organic softness that you've kind of called out?

Okay. So listen, if there is like an area of American Express that we are analyzing and scrutinizing, it is that part of the business. And as we've said in the past, there are many things that are going very well in that segment, acquisition, the credit profile of those new small businesses that are joining the franchise. The credit performance of the portfolio remains very, very strong. The piece that is not as strong is the organic spend, which is, if you're not familiar with our terminology, this represents the kind of like same-store sales concept. So this is the incremental spend -- the spend growth coming from 10-year Card Members, it's that specific part of the portfolio that is -- that was negative for the last few quarters. Nothing really has changed there for now. You said right -- right to say that the last quarter was a little bit better. We're going to need a bit more than 1 quarter before we call it a recovery. But what I can tell you is that the team is working really hard to win that recovery, to make sure that we have the best product in the hands of small businesses. And when they're ready to spend, we'll be there for the recovery, and we'll be there with them.

Got it. Got it. And maybe just turning to the product refresh cycle. You guys refreshed the Delta portfolio of cards earlier this year in February. And more recently the Gold Card, you guys mentioned about 40 of the planned product refreshes for 2024 have been implemented. Maybe just talk about what you're seeing with respect to card acquisitions and also attrition so far?

Yes, for these products?

Yes.

So it's probably too early to talk about the Gold Card. What I can tell you is that it's performing very well. I was talking to the head of the U.S. Consumer business, and he was telling me that the main reason why Card Members and prospects were calling us was actually not to ask about the benefits of the products, but it was to -- or about the fee. It was predominantly to get their hands on the White Gold Limited Edition. So people like that form factor. It's a real success. On the attrition side, we've seen absolutely nothing. As expected, I would say we've done a lot of product refreshes, and we are committed to executing on that 40 product refreshes this year. It's something like 150 over the last 5 years, including during the pandemic. And so it's a bit of a machine for us at American Express, and it works really well. In the case of Gold, I think it's important to understand what we are doing here, right, with those product refreshes. So what we're trying to do here is just like to create more value for Card Members. And if you're familiar with the value proposition, we added a Resy credit on top of the dining credit that we had before; if you're familiar as well with the product, you would know that you get a $84 credit with Dunkin' Donuts. So we're trying to add value to the product and price for that. So this is very much the playbook that we've been using for all the products and all the refreshes. And the -- when we look at the past performance of these product refreshes, it works really well for us, right? It supports growth, it creates demand. It creates reengagement with Card Members who are less engaged with the products like those who are calling us to get the White Gold form factor. So it's really a success factor for us. And what it does across the entire business system is just -- it's just like -- it improves pretty much everything. It's accretive to almost every metric that we have.

Got it. And you called out the growth in net card fees and the guidance there. Maybe just talk about what the longer-term growth runway is for the net card fee line item. And then maybe just talk more broadly about, like, is there any sort of limit where consumers will say no to annual fee increases?

Yes. First, it's not an analysis that we've done, which is like give you a limit for that number. Because again, we're not trying to test the limit to see how far we can go in terms of pricing. Again, we are injecting value in the product and we're pricing for that value. If you are like a purely rational Card Member and you look at how much credits and how much benefit you can get, the fee is not an issue, right? The value is definitely justified. And when we look overseas and international, we have all sorts of product and history of product refreshes as well. And we've -- for that matter, we have pushed the price up to a much higher level. At Investor Day, we talked about the Platinum Card specifically that it's north of $1,000 in many countries outside of the U.S., and the demand is really there. So I think they're -- we're going to keep doing that. We're going to keep pushing that playbook and inject value and price for that value and -- as opposed to kind of like try to find the limit in terms of how much the Card Member can pay for a product. And so I think that there's a lot more growth to come here. And definitely, we've not been in a situation where we said, "Oh, we've been -- we priced that product too high." As I said, I've been in the company for 27 years. And I recall only once in those 27 years where we said, "Maybe that time, it was not a good product refresh." But outside of that -- and we learned from that lesson -- outside of that, it's just a very successful playbook for us.

Got it. And maybe just a follow-up on that. Historically, you've kind of injected value in the form of merchant-funded credits. With the recent Gold Card refresh, it seems like Dunkin's merchant-funded, but you also added a Resy credit, which Amex owns. So how should we kind of think about that? Can that be viewed as a rebate on the price increase?

They're -- for all the value proposition that is embedded in the product, some of it is funded by American Express, some of it is co-funded by the partner, and just like every possible construct in between those 2 limits, right? Resy is a way for us to -- you're right, we own Resy, right? -- so it's definitely a way for us to engage with the Resy platform. It's a way as well for us to partner with the merchants. And we have Resy -- because you're mentioning it -- it's a very important, one of the most successful acquisitions we've made. And we've grown tremendously. We've multiplied, I think, by 5, or like we have about 50 million users on the platform. So it's a very strong success, and we want to support that success even more. And what we're trying to do as well is just like get Card Members to engage with Resy, Resy to engage with Card Members, and just like find the synergies between the two. We introduced as well a few months back, the global dining product -- Global Dining Access, which is a way for Card Members, Gold and Platinum, to have access to tables in certain limited number of restaurants. So there's like a lot of synergies between that industry, dining, Resy and the card. And we thought that since the value proposition of the Gold Card is so focused on dining, that it was a way for us to just like to beef it up a little bit.

Got it. That's helpful. So now just to turn to loan growth. Receivables growth remains in double digits. Amex has made an effort over the years to recapture or to capture a larger portion of your customers' lend. It seems you've had success, just some stats from your Investor Day: you have 1.3x the revolving growth versus the industry since 2019; more than 70% of revolving loan growth coming from existing customers; and you're capturing 24% of your customers' borrowing. So can you talk about the things you've kind of done to generate this incremental share of lend? And how much higher can that share grow?

Yes. So first, we're typically under-indexed in terms of meeting the borrowing needs of our Card Members. And we've seen over and over that the Card Members would spend with us, and when they have borrowing needs, they would actually use a competitor's products. And we thought that that was a missed opportunity, because once we underwrite a customer, why not extend a bit of revolving to them. So that explains a little bit that growth rate. I will mention, though, that if you go -- because you mentioned in 2019, right, if you look at the spend growth from 2019 to now, it's higher than the AR and loan growth. So we still remain a spend-centric business model. So the way we're doing it is, first and foremost, we extend lending to our premium Card Members. We have a premium portfolio. And one of the questions that I get regularly is like, why do Platinum Card members revolve? And so when you look at this specific population, the way they revolve is typically in the 2, 3 months prior to entering revolving, we see a spike, and quite a sizable spike, in their spend. And when you kind of like unpeel the onion a little bit more, that incremental spend is DIY spend because people are doing work in their home, or it's travel-related spend, it's booking the vacation 3, 4, 5 months in advance of traveling with the family. Sometimes it's luxury spend as well. And what those Card Members do after increasing their spend is that they're going to revolve. And for those first-time revolvers, we see that they pay back their entire balance within 2 months. And 75% of the Card Members pay back their balances within 6 months. So the way to think about that borrowing is very short term, typically attached to premium Card Members, and it's going to have a very high paydown rate. That's the kind of borrowing, if you want, or loan, that has generated most of the growth over the last few years. And it's a very attractive kind of revolving, and we're still under-indexing in terms of the lending wallet of those Card Members. And you've seen the -- you've seen the credit numbers. You've seen the CCAR results, very, very strong portfolio, and it's a very attractive part of our business. And it's a -- I can tell you this as well, it's a way to meet the needs of our Card Members. When people ask, so why is American Express expanding credit? It's because that's what our Card Members need. So we listened to their needs. And we saw that they needed borrowing over a short period of time, and we thought that we would be best positioned to do that.

Got it. Makes sense. So maybe just turning to NII, the growth rate in NII has decelerated. Can you just talk about the drivers of NII growth? And at what point should we expect the growth rate of NII to kind of converge with the growth rate of loans?

Yes. So there are two parts here, right? One is volume, the other one is the margin or the spread. So I talked a little bit about how we're growing AR. So you're right, the AR growth rate is moderating. The dynamic here, I'm sure, is the dynamic you are familiar with during the pandemic. Everybody paid back their balances and people spent less as well. So the balances came down quite a lot. And since then, they have rebuilt those balances. So that generated a lot of growth over the last 2, 3 years. And since then, that growth rate is moderating. We are kind of like at a stage where we're starting to lap that COVID discontinuity. As I said, for us, lending starts with the premium portfolio that we have, the positive select products that we have. We attract a disproportionate percentage of low-risk credit -- low credit risk Card Members, and we extend credit to those, right? So that business is still going to grow a little bit faster than bill business because we're starting from a very low penetration. But -- it's -- as I said, it's a very profitable business for us. Especially because on the spread side, and I tried to explain it at Investor Day, we've done a better job at pricing. And also we've done a far better job over the years at funding those balances. So we have been able to increase the spreads on those balances quite materially, which contributes to this NII growth, right? If you look at the volume growth, it's a little bit higher than some of our peers, but not that much, right? It's kind of growing at the same pace as the rest of the industry. What makes the difference probably from an NII growth standpoint is the expansion in the spread that we've been able to generate. And you know why, right, on the funding side, it's because we are funding more and more of our balances with our high-yield savings accounts, which for us is the most effective funding source that we have.

Got it. That's helpful. So just turning to the topic of revenue growth. You guys have guided to 9% to 11% revenue growth for this year. First half average was about 10% on an FX-adjusted basis. That did decelerate to 9% in the second quarter from 11% in the first quarter. Maybe just remind investors, the assumptions that kind of went into the guide, and maybe just talk about how you're tracking for the rest of the year and what can maybe get you closer to the high end versus the low end.

Yes. So first, the reason why we give a range at the beginning of the year, the guidance, is because it's -- there is uncertainty, there's economic uncertainty. Remember where we were at the beginning of the year. Everybody was expecting the rates to come down, and then a few weeks or a few months later we learned that we needed to live with higher rate for longer. So that's an example, right, the environment changes, things happen. So we want to give a range. The second thing that I'll say about that range, before I comment on where we are, is the fact that in January as well, I remember this slide that I shared with you, it was about -- there was like 2 blocks of numbers, right? One was reinstating the ambition that we have about growing this business in double-digit revenue-wise and mid-teens EPS-wise. And that is the ambition that we still think is the right one for us. And we're in the process of doing the long-range plan. And I can see a path that leads us to that ambition, right? So it is the right ambition for us. And specifically for 2024, we guided 9% to 11%. And as you say, year-to-date, we are at 10%. Billing, the assumption in here is that billing is going to be kind of like where we are, stable at about the rate that you've seen in Q1 and Q2. We've said as well that NII should be growing at a faster rate than this. And I think in Q2, we were at 20%. And I made several times the comments as well that card fee, I think we were at 16% in Q2, you should expect card fee to kind of tick up a little bit, and we'll definitely be seeing that tick up in Q3. And so that has not changed. Where is that going to get us at year end? We'll see. And -- but that has not changed. And I think in the long run, it's still the right ambition for us. Now, if you take another step back, right, in terms of what it means from an earnings standpoint, I said on Q2 that the business model was actually generating more earnings than we initially thought at the beginning of the year. Credit is very, very strong. We've been able to control expenses in a better way than I anticipated at the beginning of the year. So definitely, we don't need -- like we are able to generate the mid-teens EPS growth under various revenue constructs, whether it's 9%, 10% or 11%.

Got it. And this is a good time to maybe just pause for the first polling question. Can you just prompt the question? So question one: do you expect Amex revenue growth for 2024 to come in below 9%; between 9% to 10%; 10% to 11%; or above 11%? And just register your responses using the controllers. [Voting] So 36% think between 9% to 10% and 39% between 10% to 11%, so pretty fairly evenly split.

Maybe they should come here for their next planning process just to see whether it's more accurate than the planning team.

Great. So we covered revenue growth. Let's talk about earnings power. So one of your strengths or the strength of the Amex model is that there are many levers you can actually pull to drive earnings growth. Can you maybe just speak to how the model works and the way to think about your long-term aspirational EPS growth?

Yes. So the way to think about American Express is to start, I think, with the very premium and pristine customer base that we have. I say it's pristine because it's also an incredibly loyal and engaged customer base that has a special relationship with the company and with the brand. And the product, the service we deliver to this customer base at the core of it is a technology product, right? It's a payment infrastructure that we deploy globally with a ton of sophisticated models, decision models to manage risk, to manage marketing, to manage targeting. And so we have this very attractive customer base. We have this very sophisticated, at scale, technology infrastructure propelled by very rich data. And we use that to meet the payments, the lifestyle, the borrowing needs of our Card Members. That's the way to think about American Express. And I would add to that that we have something like 75,000 colleagues who are 100% focused on that mission, day in, day out. Whether it's about servicing, whether it's about helping Card Members, whether it's about innovating in the product side. So that's the DNA of the company. And we are in an industry that is growing very nicely, and at Investor Day I shared some of the growth that we're looking at in terms of the revenue pool and profit pool. And we are a leader in terms of innovation. We define that space to a large extent. Most of our competitors, they benchmark themselves to us in terms of their product, their servicing and their performance. And marketing in here is the amount of money that we use to grow to attract new Card Members. The main part of this marketing line is going to be what we call the acquisition dollars, right? It's the money we spend to incentivize Card Members to join American Express and all the marketing that we do to reach out to prospects. And so that number is a number that we choose at the beginning of the year, right? It's a function of the demand that we have. It's a function of the return that we are expecting. But it's also a number that we choose. It can be that high or a little bit less. And it's a number that we use to adjust -- like to absorb whatever surprises or opportunity we see in the P&L. To give you an example, last year during the SVB event, we thought that it was wise to pull back a little bit on acquisition. There was a little bit less visibility. We needed a little bit of a margin of safety in terms of our decision models. And therefore we pulled back a little bit on marketing. And you saw exactly what happened in the P&L in Q3 and Q4, right? That number of marketing dollars kind of like went down. And once we had more visibility in terms of what was happening in the marketplace, we decided to kind of like invest a lot more. And we did so, right? And that's why you saw in Q1 the marketing dollar budget kind of like went up. And so it's a very sophisticated machine that we can use to dial up and dial down, and therefore the 15% or the mid-teens EPS that we are targeting is something that I think is the -- like it's the primary objective, if you want, that we try to achieve with that model.

Got it. So on the topic of marketing, you guided to $6 billion in marketing expense in 2024. Maybe just talk about kind of the areas you're going to spend that on, and are you still kind of tracking towards that number?

We are, $6 billion is still a good number for us. And as I said, a big part of this is the welcome incentives that we give to Card Members. And maybe I can talk a little bit about the things that we're working on and that I find exciting. So we are developing the technology, the science, the data to personalize those offers as much as we can. And we want to be able to personalize those offers without impacting the credit bureau of the applicant. So I'm sure that some of you -- I hope that most of you are American Express Card Members. And if some of you recently joined, you've seen the offers are up to a certain amount, and we ask you a couple of information. We do a soft pull from the credit bureau, which allows us to know more about you without impacting your credit bureau. And we can therefore calibrate the offer to exactly the amount that our decision models say is the optimum incentive for you in terms of the number of miles that we offer, for instance. So these are sophisticated technology that we are deploying at scale and that are a big chunk of that $6 billion. And we are subjecting those dollars to our profitability metrics that are elevated. As you know, in a normal year -- it's going to be the same thing this year -- our return on equity is in the 30% range. So we subject those marketing dollars -- we call them investment internally at American Express because we subject them to the same kind of like discipline that you would see with assets or with our capital investments, although it's an expense. So it's a very sophisticated engine to maximize the returns on that $6 billion.

Got it. And just to follow up, the $6 billion is a pretty big number. It's about 15% higher year-over-year. So that's a sizable budget. Is that kind of the level of marketing expense we should kind of think about going forward?

So the $6 billion is a good reference point. The 15% is elevated because, as I said, last year we cut back a little bit in the back end of the year, and this year we saw, with the launch of Gold, of Delta, opportunities, and with personalization opportunities to deploy more marketing dollars. I want to mention something as well is that that 15% year-on-year marketing increase represents $800 million. And so if you take a step back, we're increasing the marketing dollars. We're increasing the expenses by $800 million. And on top of that, we're going to grow earnings per share in the mid-teens range excluding -- and the certified gain is going to come on top of that. So the -- I was talking about the profitability of the business model, the strength of the business model. This is a good example, right, is that we can increase the marketing budget by $800 million and still grow in mid-teens EPS on a sustainable basis.

Great. I'll pause here and just queue up that last polling question. And so over the next year, would you expect to position Amex to: one, increase; two, decrease; or three, stay the same? [Voting] So 43%, stay the same; 30%, decrease; and 28%, increase.

Make sure that those who answered 27% (sic) [ 28% ] or 43% come back next year.

Okay. I'll pause right here. We have about 7 or 8 minutes left. I'll open it up to the audience for Q&A, if there are any. We have one here in the middle.

One of the things that stuck out in Q2 results, I don't want to spend -- I don't want to dwell on quarters, but there was some slowing by older spenders and also travel. I think you covered travel already. But can you talk about what trends you're seeing among older consumers?

And can you help me with like how you define old?

Sorry?

How do you define older Card Members?

I can't remember what [ the word ]...

It's like -- is that they're Gen X and they're Baby Boomers?

Baby Boomers.

So yes, I mean that's -- it's almost natural. When you look at the spend curve of the Card Members over time, it's exactly what you would expect, right? It starts very low, remember where we started in life, and then as we get families it goes up, and then it kind of like stays elevated for a while before it slows down until it gets down to nothing, right? That's their normal cycle. And so that's the dynamic that we are seeing. And so when we look at specifically the Card Members who are north of like 60 years old, there's definitely a lot less growth there. I need to say as well that it's -- we're not adding much in terms of like new Card Members in that segment. Those Card Members who didn't want to have an American Express card for 50 years, it's very unlikely that when they turn 55, or they retire, they're going to sign up for one. But this gives me the opportunity -- I'd just like to mention something which I think is just like an important point, and that's why we're talking so much about the younger generations, is that for years, for years, the #1 question we were getting from investors was about something like this, right? "You have a fantastic product and a fantastic brand with middle-aged people, but the card doesn't resonate with young people." We addressed this in a big, big way. Today, the card is the favorite for a lot of -- and for probably the favorite card for the younger generation. It's a big turnaround in terms of brand, in terms of value proposition even for us in terms of how we design the products. We have done a lot of work internally to appeal to the younger generations. And we're doing a lot of math on that. But the lifetime value of those Card Members is just like super attractive. So it's something that will carry the brand and will carry American Express for many, many years. And I also want to say that the way to think about this is not like we are declining, say, a 50-year-old applicant to make room for 28-year old. We're still attracting a lot of middle-age and 50-year-old successful and premium Card Members. What's different and what's new here is that to that population, we're adding younger Card Members.

Any other questions from the audience? So maybe we'll just keep going. Let's maybe touch on credit. So Amex's credit performance has outperformed the industry. It's done very well this cycle. Maybe just talk about what's driving the strength in your credit performance?

If our Chief Credit Officer was here, he would say the first thing, the single most important thing for us to maintain this, is to keep focusing on premium Card Members and attracting a loyal base of Card Members, people who are committed to the product. And that's the #1 thing. That's the #1 underwriter. Afterwards, in terms of selection and managing the credit lines, I think we have a best-in-class organization, talent, capabilities, system, decision models. But it starts with the premium-ness of the brand and the positive selection that we are creating, orchestrating, reinforcing with the product, with the brand that we have. It starts with that. I'll say this as well, because it's definitely a number that I watch in a lot of details, and not only every quarter, I can tell you, like every week, if not every day, is what's happening to these credit metrics. And the credit metrics that we have now are as good, if not better than where we were in 2019. And that's after generating all the growth that you're familiar with. If you compare and contrast with what our peers are showing in terms of credit metrics, not only we are of course best-in-class, but the distance between us and the peers is increasing further, which gives me confidence in terms of what we're doing is the right thing. It gives me confidence as well in terms of keeping deploying this playbook that works really well at attracting a premium base. And the last data point that I will share with you, which I'm sure you've seen as well, is that you can -- there's not a lot of detail, but there is some on the CCAR process, and when the Fed subjected our portfolio to the same stress test as they did for the rest of the industry, there's like no better portfolio in the country. And it's less volatile, it's more resilient. And you've seen as well that over even that kind of like very intense stress test, we remain positive and profitable. I will remind you that not only we are much better than back in the great financial crisis, but in that -- in 2009, we reached an ROE of 15%, which was one of the lowest we had in the last 25 years, probably the lowest we had, right? It was 15%. So it talks a little bit about the strength of the model, the quality of the portfolio and the quality of the portfolio now is just like much better than what we had back then.

Okay. Great. I think we're pretty much at time. With that, we'll just wrap it up.

Thank you for your questions.