American Express Company (AXP) Earnings Call Transcript & Summary

First today is with American Express since 1997 and became CFO 2023. You agree [indiscernible] CFO in line or timing, along with other finance functions, [indiscernible] technology services company so what for being here.

Maybe let me start with looking back on the year so far. How would you characterize American Express' performance and the progress you've made in your strategic priorities? What's gone well at [indiscernible]

And thank you, Sanjay. So I characterize the year as or a very successful year on the [indiscernible]. First one is the financial performance. Second one is the purpose advancing our strategic agenda, which is on as visible to you this more quarter for us in terms of sustaining growth. And the third of them is that we answer -- probably it was the biggest question in mind investors at beginning of the year, which is the plan comp. So maybe just kind of go back to this 3 things. The first one in terms of the performance, it at the end of the year, we will have growth revenue by about 10% and earnings per share, again, in the teens range. What's remarkable to think about this performance is it's not what we did this year. It's the fact that we did it like 4 years in a row, right? The story of American Express financial performance or story of compelling. Just look at the last 4 years, we did grow at a CAGR of 10%, revenue-wise, and earnings per share in the mid-teens. So when you look at this over just 14 months, it means that we added about 50% of revenue to the company and something in the range of increasing the EPS by 85%, right? So the compounding effect of growing revenue in double digit and EPS in the mid-teens 4 years in a row is just remarkable what it does. The second thing I mentioned is the progress we made this year in terms of advancing our strategic agenda, we closed on the fork, which gives us a brand-new platform, similar to Resi and what we did in the U.S., like this time in the in Europe. We released a set of new features and products on the commercial side. We also renewed or extended some partnerships. I'm thinking about the hotel, the Hilton Card in Canada. And we announced -- or we made progress on our AI strategy, and you heard Steve talk a lot about it at the last earnings call. So we're progressing a lot on our strategic agenda, small moves every day, I would say. And the third thing is around the Platinum Card. At the beginning of the year, I think everybody was wondering what's -- how successful is it going to be and are you going to be able to maintain your leadership position in the premium space in the U.S. And we answered that question, I believe. It's yes, we did. The demand for the product, the engagement that we saw with the product, the incredible renewal rate in the 99% range that we saw in the Platinum Card, clearly, American Express there as the leader or we reinforce our leadership position, I should say. And so I feel good, right? So when I look back on this year, I feel good about what we did and the progress we've made.

Anything surprised you?

There's nothing that really surprised me outside of maybe how AI is picking up pace and how it's becoming more and more central to everything we do, whether it's how we are managing expenses, how we are thinking about product development. It's clearly taking a much bigger share of my own mind and in Steve's mind, you heard in talking quite a lot about it at the earnings call. For me, that's the big thing that was not -- maybe I underestimated at the beginning of the year, how big this could be, but now we've seen.

That's great. Glad, you're thinking about it because it's an important topic, of course. Maybe we could talk about spend trends. Like what are you seeing in the spending trends with the premium customer?

Yes. If you go back over the last 4 or 5 quarters, we've been growing spend in the 8%, 9% range. Last quarter was the same 9% -- 8%, sorry. And Q2 was elevated, but it was very strong, unusually strong. We referred to like it was a historical quarter for us. Q3 was also very strong. When I unpack the various categories here, travel and entertainment was -- is growing at 10%. Within T&E, which is like a very discretionary category, airline is growing at 13%, right? It is like very strong growth that we're seeing. Restaurant spend was like in the 9% range. And it's true about the U.S. It's also true about outside of the U.S. So a lot of momentum in that space. And when I look at the various segments or customer segments, U.S. consumer doing very well. Q3 billing growth was the third highest quarter we had in the last 3 years. So clearly, a lot of momentum there. You've seen the commercial billing as well. For the second quarter in a row, we were at 5% when you control for the sale of other -- of the 2 portfolios. And international, again, in double digit. It's been growing in double digit for 22 quarters. It's remarkable. And so I see a lot of momentum. I see a lot of stability. I see a lot of strength. I see a lot of discretionary spend, which is always a good combination, if you want, for our business, but also for the economies in general.

Okay. That's encouraging. So maybe if we could talk about the competitive advantage you guys have in the premium space versus traditional peers and newer entrants. Like how are you maintaining your edge? .

Yes. So competition has been strong. It's strong everywhere. There is like not one market that I think of where -- when we do a review of the market, they don't start with like competition is really strong here. It's true for the U.S.. It's true outside of the U.S. And if you look at our performance over the last 10 years, it has been probably the strongest we've seen in many years at American Express. And last earnings call, we shared a slide with our return on equity over 10, 15 years -- I forgot. But like -- not only we've been growing a lot over the last 10 years. But despite this competition, we've been improving the returns. We now have an ROE that is in the -- like north of 30%. It was 25%, 28%, say, 10 years ago. And so why that? I think there's a couple of reasons. The first one is the competition is very visible in the U.S. The competition is expanding the TAM. There's more and more people who are considering a premium card, a fee paying card now than there was, say, 10, 15 years ago. And that's a net good thing for American Express. Of course, it comes across is competition. But I see it as TAM because every time someone, anyone is considering a premium card, they will include American Express in the mix, and we get benefit from that. The second thing that this competition is doing it's forcing us to innovate, and that's a good thing as well, right? We refresh many products over the last 3, 4 years, the Gold Card, the Delta suite of products, either recently the Flatman Card. And every time we try to innovate. And when I look at what our competitors are doing, they're trying to emulate us, right? I mean they're literally taking the playbook that we laid out and they're trying to replicate it. And they are still very far behind, right? People talk about lounge. But it's easy to claim that you have a lounge benefit, but like how many lounges do you really have versus American Express. We have like 33 or something like that. People have a hotel program, but we have 3,400 properties in that program. People talk about access to restaurants through Resi, TalkingNow, in Europe. We have access and priority access to 75,000 restaurants. So it's easy to claim that you have a premium to flag to flash like your metal card. What's much harder to do is just to build this value proposition, this access infrastructure to build those partnerships with thousands of demanding partners across the world to deliver on that promise. And I think that we are still leading the charge by quite a huge margin. So competition is good. It's making us better. And I think that the distance between us and our competitors, if anything, is increasing.

So a hot topic, this year has been VCE growth. So maybe you could talk about the expectations in the fourth quarter and into next year as you lap the Platinum refresh. You've talked about some actions you can take to manage costs here as well. So maybe you could expand on that. .

Yes. So first of all, we talked about a full year VCE to revenue ratio between 44% and 45%, and it will be between 44% and 45%. So maybe just to answer your question, just like take a step back. Over the last maybe 10, 12 quarters and if you were to graph the VCE to revenue ratio, you would see like an upward trend, you would see a step-up that is directly attributable to the refresh of Platinum Card, which we're lapping now. And so the world we are going into like Q4 onwards, you should expect the kind of trend that we have pre the product refresh to kind of like be visible to all of you. And that trend was modestly increasing VCE to revenue ratio. And there are fundamental force behind that, is the fact that -- we have -- the VCE ratio by product varies a lot, right? It can be as high as 60% for some premium co-brand cards, to as low as 30% for cashback product. And as the portfolio is getting more and more premium, and you remember like last quarter -- 3 quarter, actually 76% of the new accounts that joined the American Express in Q3, we're on a fee-paying product. So the portfolio is slowly skewing more and more and more premium. So that's this kind of like upward trajectory that is creating this growth. Now I'll say to you what I've said as well on the earnings call, right, which is VCE is a useful metric, but it's an incomplete metric, because it doesn't factor into account the benefit we're getting on marketing. It doesn't factor into account the benefit we're getting on positive selection, and it doesn't into account the benefit we're getting on scale and OpEx and operating leverage. It's incomplete, but it's still a useful metric. So what are we doing? First, we are very focused on making sure that we have the right value proposition, and we have a value proposition that's going to be effective and profitable for American Express. And we are constantly innovating there. So you saw us recently, we added the Airbnb benefit, which is super popular. What we do as well is just create new redemption opportunities for our card members that are at a cost per point that is super compelling from a financial standpoint. So we introduced the amount-based reduction, which allow car members to use their bank of points to pay for their statement. We were surprised by the success of this option. And what it means is that people value convenience just as much as they value free [indiscernible] for instance. And so the team is very much aware of that dynamic, and we are creating redemption opportunities to control if you want this VCE ratio and redemption opportunities that actually going to improve that ratio. And the last thing that I will say is that we are always evolving the way VCE work and the programs. I told you about adding Airbnb. We also, as you know, introduced a minimum level threshold of $75,000 to take full advantage of their access to our lounges. So we know -- or like introducing the request for second night at the hotel to benefit from the hotel credit. So we are very much aware of all this dynamic and the team is constantly modeling what's the right outcome here. The objective being delight the card member, make him or her excited about having a Platinum Card or a Gold Card or cold rent card and at the same time, generating economics that are going to be compelling for us, with the objective function at the end of the day of improving the return on capital.

Got it. So Steve talked about how you're approaching AI across the customer experience on the recent earnings call, as you alluded to. Can we first talk about like payments and what's been your approach and what you're working on right now?

Yes. There -- this generates -- as you and I were talking, but this generates a lot of discussions internally in terms of how we transfer all these membership benefits and translate these benefits into the AI ecosystem, how we use that technology to propel some of these benefits and how do we make those benefits and membership benefits available to our customers when they are in these LLM and AI ecosystem. That's very much what we're doing, right? Just to give you some illustrations of how we're doing that. We're working -- we've been working with OpenAI to have in ChatGPT the ability to reserve for instance, Resi Restaurants. And if the card member decides to engage with either the restaurants through at ChatGPT as a boost to Resi, it's totally fine with us and kind of like work with Resi to make that happen, all the way to booking the reservation. We're working as well with OpenAI to build a plug-in that will enable our customers to browse, for instance, offers that are available to them and select those offers that are relevant to them. So the way to think about what we're trying to do here is just take this very successful approach that we have around membership and figure out what's the best way to make them available to our card members in the AI ecosystem. And that's very much what we're trying to do here. And I would say -- I'll add something to that, which is the fact that we have a ton of data, and we can use this data to make -- to work harder for us, right? So we are very sophisticated in terms of how we're thinking about our data and how to use it. We move to the Google Cloud to benefit from the AI infrastructure, to figure out what's the best way to do our marketing work, to do our servicing work to process payments to detect fraud. So it's very much where we're going with that.

And I mean is there anything with the data that you need more on the merchant, or you feel like you have sufficient data to give more context and informed?

We always take a lot more data. We also buy a lot of data to enhance our own data set. But I don't think that for us -- the opportunity is more to figure out what's the best use of that data more than just like, let's get a lot more data. I think that for -- and to translate this into something tangible that we can deploy at scale to our card members or to make our machine works better. So I think that, that's what the direction we're taking much more than just like let's get more data.

Got it. So another hot topic is rewards maximization, optimization. I mean how do you address concerns that AI will lead to customers optimizing their rewards and benefits?