American Express Company (NYSE:AXP) Goldman Sachs U.S. Financial Services Conference Call December 5, 2018 9:20 AM ET
Stephen Squeri - Chairman and CEO
Unidentified Company Representative
Hi, we are going to get started. Up next, we are excited to have American Express. Over the past year, Amex has delivered accelerating top-line growth, as its leveraged its premium brand across a handful of different channels and markets. This along with strong OpEx discipline has led to improving EPS and its shares are one of the best performing large cap stocks across financial.
Here to tell us more about the strategy for the first time is Chairman and CEO, Steve Squeri. Today's presentation is going to be a fireside chat.
So Steve, first off thank you very much for coming. I believe this is the first time you present at our conference. So thank you for that. Just to maybe kick off, you've now been in your seat for almost a year. Can you tell us about what surprised you the most in the role, what has proven to be the most challenging things and what are you most excited about, going forward?
Yes, so first thanks for having us and having me. It's been interesting, I mean thinking about sitting in the seat and sitting in this seat, it’s like three different things, not even two, it's three different things. And it's tremendous different demands on your time, investors, analysts, media, so forth and so on.
But having said that, when you look at our business, I've had a lot of opportunity to spend a lot of time with other CEOs, and in particular spent a lot of time with our partners. And in spending time with partners such as Delta, Hilton, Marriott, what I'm continually impressed with -- and PayPal and Amazon and so forth. What I'm continually impressed with is the strength and depth of our relationships and the way that we're able to use our unique assets, whether that be global business travel, business travel, our small business reach, our payward points bank [ph], to really embed ourselves within these partnerships. So that's been really terrific.
The other thing is look we are in an industry that's growing. And it's growing for us in many geographies, it's growing across the consumer and the commercial business, and that's been exciting as well. I feel really good about the team that we have. I have got a great executive team. And as I travel around the globe, the colleagues that I meet are not only quite skilled, but very passionate about continuing to move American Express forward.
Q - Unidentified Analyst
When you took over you laid out four priorities, expanding leadership in premium space, build your strong position in commercial payments, taking the network and make Amex a more essential part of customers’ digital lives. As you think about these, where have you had the most success over the past year and what have been the biggest challenges?
Yes. So, I think what was important in putting those priorities out was to make sure that the organization could focus and to make sure that we would focus on our investments. And if you just -- if I just tick down a few of them, when you look at our consumer business, we continue to gain share not only in the United States, but in the other markets that we operate in. And we’ve done a really good job enhancing our value preposition. So I am very excited about that.
From a commercial perspective not only we have enhanced value prepositions, but you look at our growth in international, we’re growing four, five quarters in a row 20% to 25% international SME. Our coverage in the United States, we’ve made this -- we’ve had the stated objective to get to virtual parity, by the end of 2019 and we’re on track to do that and we continue to make coverage strides in the international markets.
But I think the thing that at times is the most challenging, but to me is also the most rewarding is as you continue to become more of a digital company and let me just spend a minute on this. When we look at that focus and one of the reasons I put that priority there was I just thought it was important that as a company, we were embedded in what in peoples' digital lives. And if you're not on the first page of your phone, if people aren't using your mobile app, if you're not where commerce is, you're not going to make it longer term.
And so as we focused on all the aspects of what that means, most of our acquisition now comes through mobile, 70% of our acquisition comes through digital channels. We engage through the mobile app, we spent a lot of money on our mobile app, and we've moved from JD Power from number six to number one, we've acquired Mezi, we've acquired Cake, which are AI based restaurant and travel recommendation systems and booking systems. From a payments perspective, partnerships with Apple, PayPal, obviously with Android Pay as well.
Servicing, our servicing from a digital perspective continues to increase. We're up to almost 44% and we're at a tipping point now where you're seeing less calls into our service center and more being sort of adjudicated online, I think that's very exciting. And look, we're excited about the partnerships that we've been able to enter into the partnership we just entered into with PayPal, the Amazon co-brand and lots of other little partnerships that we have entered into as well. And we continue to test new technology. And I think this is an area that and I get asked this a lot how long will this priority stay. I think this is one that'll be there for a couple years, but ultimately I wanted ingrained into all three of the other priorities that we have.
You have a bird's eye view about U.S. consumers, corporate and as well as global, big and small. Can just give us a sense of what you're seeing across each of these verticals. And how are you thinking about the broader economic backdrop as we look into 2019?
Yes, so look, we operate across many geographies, diverse businesses, whether it’d be merchant, small business, obviously consumer large commercial midsize companies. And so it's hard to look at one, sort of, macro-economic indicator. But, if I look at it right now, we still see strong growth in all of those segments in all of those geographies that we operate in.
Having said that, I think it's important that, we look at what's going on from a trade perspective. Obviously, we look at rising interest rates as an issue as well. And, we also make sure we watch credit. And I think as you hear from others, what you'll see is there is a slight deterioration in credit at the low FICO bands. And for us, that's not where we really play. But what I can say is that as we do look at it, we do see a slight deterioration in that segment of lending as well.
But as -- and I think we've said this many times before, the economy has given us a kick of anywhere from 100 to 150 basis points, which we started to see in the fourth quarter of last year. And we see that that continuing, but the rest of the growth has been from focusing on those priorities and investing and getting good returns.
I guess, before we go through business performance, can you maybe just give us your overall perspective on the financial model of the business going forward?
Yes, and I think this is important. Our objective is to deliver consistent double-digit EPS growth. But how do you do that? And the way we've been doing that lately is through high revenue growth. And the reason we've been doing it through high revenue growth is because to get share, to get scale, to be relevant, I believe that we need high revenue growth. And the revenue growth that we've been getting is really 2x what we've seen coming out of the financial crisis. And if you think about sort of the environment that we're in now vis-à-vis pre-financial crisis, this has become a lot more attractive space to a lot more people from a competitive perspective; it's also become an attractive place from a regulatory perspective as well.
And so, with that high revenue growth you'll see some margin compression, but I also believe will leverage our -- we've done a good job leveraging OpEx over the years, we'll continue to leverage our infrastructure. But going forward you will see high revenue -- much high revenue growth than you used to in that 8% to 10% range, which will deliver consistent double-digit EPS growth for us.
Thanks for all the color, Steve. Maybe just digging into that, if you put up top-line growth of around 10%, the six straight quarter you've been above 8% and to your point, you're talking now about maintaining 8% to 10% top-line growth. Can you just talk about some of the main drivers of actually maintaining that?
Yes. So look, acquisition is essential. And so, as I said before, almost 70% of our acquisition now comes through digital. The advantage of it coming through digital is, lots of test and learning, lots of opportunity to become more efficient and we've been working on that not only from a U.S. perspective -- not only from U.S. consumer perspective, but across all of our businesses. So international consumer and small business, U.S. and internationally.
I think the other thing that you've seen is, you've seen a recommitment to value proposition refreshes. We've been doing a tremendous amount of value prop refreshes just over the last two years and we will continue to do that. We just announced goals about a month ago, we just announced a new business Platform Refresh this week. And we're going to continue to do that. We've done that internationally.
And then finally, I think, it's really about -- it's about coverage. We need places for our card members to spend. And we are committed to improving coverage. And if you get coverage you'll get spend. If you get more spend, you have an opportunity to work with those customers to get more of their lending as well.
I wanted to maybe dig in a little bit to U.S. consumer, which gets the most attention of your businesses, 32% of bill business and contributes to the lending. So maybe just talk about what you're seeing competitively here in the U.S.? We had some issuers yesterday saying competition could be leveling off and your ability to drive continued growth even in the face of stiff competition.
Yes. So look this is the most competitive segment that we operate in anywhere in the world. And yes, from the frenzy I think that we had, look about 18 months ago, you could say it's leveled off, but it is still highly competitive. We feel good about where we are, I mean, we're growing billing is about you know 10%, that's allowed us to pickup share in the U.S. and that's first time in a long time, we've picked up share and we've done that for three straight quarters.
But, I think that the key for us is not only to continue to work within the channels that we work, and our co-brand partnerships are really important here in these channels, because it's a great way to acquire cards and it's a great way to reach customers with specific value propositions.
But as we go out there, we look at a couple of things. We look at not only the rewards component, but we really look to invest more and more in that experiential component, which is card member access, the lounges that you see, working with our merchant partners to provide joint value to our customers. And we're going to continue to do that. And we think that, look, the competition I don't think is going to slow down here. And I believe that we just need to be constantly prepared for it to ratchet it up at any moment.
In small business and middle market have been two really big growth opportunities here in the U.S. Maybe just talk about what you're doing strategically to win business in the U.S., given you already have 50% market share in small business. What are some of the key features you're utilizing things such as no preset spending limits that are giving you competitive advantage over other competitors.
Yes, I think that the biggest thing that sort of helps us out from a small business perspective is our ability to provide spending power to small businesses. Because when you take a step back and you think about why does a small business use this product? They don't use it for T&E and just for restaurants and things like that, they use it as a component of working capital. And so, providing them with spending capacity is really important. And when you look at on average, we provide almost 3 times more spending capacity to our small business clients than our competitors do. 90% of our book is actually a charge book today.
And when you look at the larger small businesses, a little bit of an oxymoron, but the large and small businesses, we're providing almost 11 times more spending capacity. Now, you couple that with value propositions, whether that be at Delta, Hilton, Marriott, Amazon, Lowe’s it runs the gamut. And you look at some of the things that we've just done from a value proposition perspective, even which is the refresh of the Business Platinum Card, where we are able to raise the fee as well. It was a $200 credit if you book -- buy things from dell.com, there's a one year credit for WeWork.
And so, things that our customers want, we try and put things in those value propositions that they want. And that's why you've seen sort of a movement away from the consumer Platinum Card looking exactly like the Business Platinum Card because of different constituency. And then finally our reach and scale, I've got people out in the field all over the United States both from an acquisition perspective and a client management perspective. We acquire a lot digitally and we manage not only digitally, but we also manage and acquire through telesales as well.
You referenced Amazon, you recently announced the Amazon Small Business Card, which is Amazon's latest offering they do have obviously other offerings on the consumer side, Synchrony and JP Morgan. Can you just talk about what do you think differentiated this product in this offering and how should we think about its contribution to Amex over a period of time.
Yes, look, how it once playing out, we'll see. But Amazon has had tremendous success obviously in the consumer space. They've got a business marketplace as well. We are -- look the number one commercial issuer on a global basis and they were pretty pleased with the way we reach small businesses and the spending power. So when you think about again this product there’s a couple of features I'll point out.
Number one, the small business has the opportunity to take advantage of the rewards or the deferred payment for 60 days. There is data that flows back from Amazon through our system to small businesses to help them manage.
And again you go back with spending power and reach and I think that's what really differentiates this product from -- look there is Chase product out there, you've got Synchrony product out there as well. But again, I think it's important again to focus from a small business perspective, they need products that meet their needs and they need spending capacity that meets their spending needs as well.
Amex has been growing lending for the past couple of years at a pretty fast pace, mid-teens as you refocused on driving growth across the existing customer base. Maybe just talk about what you're seeing on the lending side within your portfolio and the thought process of the pace at which growth could continue for the next few years?
We’ve got 17 minutes in before the first lending question.
That’s good news, I mean, we are not worried.
Look, here's the reality, right. The reality is, is that on a year-to-date basis we've grown our lending book about 16% and it's the fourth straight year in a row that we're growing faster than the industry. When you start to break down that book, 10% of that is U.S. consumer and I’ll focus on U.S. consumer in a minute you've got 2% international consumer, 2% growth coming from commercial and then 2% growth coming from working capital, merchant financing and really small term loans.
But when you look at that U.S. book, you have to put it in perspective. Number one, we have about 45% to 50% of share of our card member spending. We only have about 25% of their lending. And so, out of that overall Amex 10% contribution, 60% of our growth is coming from existing customers that are borrowing with our competitors or are actually borrowing with us today. And so, when you take that apart our growth from new customers is pretty much average with the industry.
Now, if you also look over the last period of time our write-off rate has been obviously continues to be top in the industry, risk adjusted returns are 200 basis points higher than they were over a period of time since back 2010-2011. And if you look at where the -- if you look at the sort of the characteristics of our book vis-à-vis 2007 pre-crisis, when look we were growing a little bit you know retrospectively obviously irresponsible, which is why the question always comes up now.
But 45% of the loans that we have today, we have less low FICO loans by 45%, almost 45% to 50% less low tenure loans, which are two years or less and 85% less balance transfer, which is really what in my opinion got us into trouble pre-financial crisis.
So, look, as I said -- as I started out, we're in the lending business because our customers are going to borrow and we need to meet our customers’ spending and lending needs. But having said that, we are still spent centric and only 20% of our revenues still come from lending with 80% coming from fees and from spending.
I guess, just as a thought that you talk about all the changes that we've seen in the portfolio given concerns in the market at this point in the cycle. Has there been any thoughts on changing the pace at which you're growing, the underwriting process any changes that you guys are making at this time?
So, look, we constantly are changing the processes, we're constantly -- a lot of our stuff -- a lot of your acquisition just like our competitors acquisition comes through various affiliate channels and so forth. And we’re increasing that safety net and we’ve done that probably over the last 12 to 18 months. And so with machine learning, which we introduced into the U.S. about two years ago after testing it out internationally for the last four you learn more everyday. But we constantly look at it and we constantly adjust it and even with those adjustments we’re still growing at that rate.
Just two questions on credit and I’ll look to something else. Steve international growth has been a huge part of the growth story for as long as I’ve been covering Amex it was something that historically was talked about, but you guys have really accelerated growth over the past couple of years, particularly in small business and consumer. Can you maybe just talk about the competitive dynamic internationally and how you feel about the run way for growth over the next few years?
Well, I mean, the first -- the real -- the question you didn’t ask is why? So why all of a sudden international growth and the reason we’ve had this international growth is at the end of 2015 we reorganized the company into global business units.
And so as big as we are, we’re not that big and to be able to take advantage of centers of excellence in the U.S. for commercial, centers of excellence for consumer, which is not only lending centers of excellence, acquisition centers of excellence and by also reorganizing the company such that international consumer and U.S. consumer went together, but more importantly international small business, which was sort of a step child for us for the consumer business went into the commercial business.
So we have really focused not only our talent, but we’ve also focused a lot more investment in those areas. From a competitive perspective it’s different. You don’t have a global player that is playing across all those segments or able to leverage our scale. You -- the competition in these markets is not at a frenzy pace there was competition. but it’s not at the frenzy pace that you see in the U.S. premium segment.
We do have a premium discount rate in most markets and our brand is very, very powerful. And look we do -- we run the same playbook, refresh the products in fact that playbook came from international and we’ve moved that to really the U.S. refresh that playbook, make sure that we’re providing value other than just rewards and we see a long runway for growth not only in premium consumer, but also in small business as well and that’s been consistent and I think will continue.
B2B has been an area that you’ve been highlighting is a big growth opportunity just given how much e-commerce is still transacted by both cash and checks? How are you thinking about the B2B opportunity where are the biggest areas of growth in the B2B space ramp up?
Yes, so I think look you see a lot of B2B right now on our commercial card, you see it in small business, you see it in Middle market. But I think this is a longer term play and if I just take a second here you really got to think about the B2B market in sort of three segments. You’ve got to think about it from a small business perspective, middle market perspective and large and global.
And from a small business perspective we’re starting to even make more headway because there when you think about their B2B payments they traditionally pay that either with a check register or online banking, bill.com into it and so forth. And what you’re seeing us doing now is integrating some of our products and services not only to bill.com, but into it so you see the card integrated, working capital terms integrated.
When you look at the middle market space these are companies that are a little more automated, more sophisticated, they may be moving to cloud based procurement. They may have all procurement systems that they’re leveraging and here what you see is us working with AP automation players so people like Wex, Mineral Tree, RegalPay things like that.
And then when you move to the large and global accounts and these are accounts that are using people like Ariba SAP, Oracle and home grown systems. These are a little bit harder to get into, but that’s the holy grail of B2B payments because what happens in that space is that trillions of dollars run through it and this is not a card -- necessarily a card payment opportunity, but it’s a payment opportunity.
And we’re working hard in this area from a technology perspective to develop to look to work and partner and develop those solutions to integrate into these systems because you can’t have systems that ride side-by-side, it needs to be integrated in. And I like our position here because we have a large percentage of the Fortune 500 on our corporate card [ph] large relationships. I’ve got 3 million -- over 3 million small businesses in United States that actually use my product. I’ve got millions of small businesses in the United States that accept my product and I have that close loop.
And so being able to connect buyers and sellers and having that economic flexibility and not having to worry about issuer, acquire a network economics, I think once we can get the technology components going it will be a huge advantage for us as we move forward. So more to come in this space, but it's a space that we look to invest in and stay close to, but you'll see it small moving up to large.
I guess other than credit, I wanted to ask on your other favorite topic, which is the discount rate. There seems to have been a shift in philosophy over the past few years regarding pressure on the discount rate versus driving revenue growth, which inevitably pays the bills. So I know you've spoken in the past about the need to look at it on a category-by-category basis. So when you take out all the noise and things like regulation, App Blue [ph] like what are you actually seeing under the surface and what is the philosophy there?
So I spent 10 years in a merchant business, few years running the merchant business. And you've got it right, I've always said I'm focused on geographic discount rates and I'm really focused on industry by industry discount rates. One of the things that we've done over the years is trained everybody here to look at the discount rate as a proxy for margin for the company. And it's not, and the reality is, is that the discount rate for us is really a tool for growth. And so, as we look at it why does the discount rate go down and why don't I get exercised about it?
Well, it goes down because we make some investments from a coverage perspective. App Blue has been a huge win for us in the United States where we wholesale the discount rate out and we're very comfortable with that price level. You're seeing more B2B spending. And so you have a mix of business. And as I say to the finance team, would we -- would you take a trillion more dollars of billings at a 1% discount rate, provided we had a profitable spend margin even though that would drive our discount rate in half. And obviously the answer is, yes. So why focus on that?
You also see there's some discount rate obviously regulation. We've seen what happened in the EU, where interchange is capped at 30 basis points for consumer. And obviously our value, where our discount rate is higher, but our value didn't improve, so you have to bring the discount rate down to be able to compete.
We do deals, we do strategic deals with Delta and Hilton, Marriott and so forth where we look at the entire aggregate of the economics of the deal and you'll see some play there. So all-in-all, those are things that really drive the discount rate and these are all very thoughtful strategic and moves that we make and we feel really good with. And that's why you're seeing accelerated discount revenue and that's the path that we'll stay on.
You talked before about the potential for margin compression marketing and rewards membership services. I think we're up 13% year-over-year, OpEx was up obviously much less than that. How do you think about the relationship between card member costs and billings and where are the big areas that are being invested in across the...
Yes. So look, rewards cost usually pretty much move in lines with proprietary billings. And I think you'll see that that continue. I think from a card member services perspective we've invested in lounges, we invest in other value, we -- some -- again some of the offers that we have a merchant funded, some are funded by us, some are split. And so we make --we'll continue to make investments there as well as investments to access to events and sponsorships and things like that.
Marketing, you saw probably spike up a little bit this year because of the launch of our new marketing platform and our brand campaign, which we feel has gone very, very well. So, I think, where we are is probably where we're going to stay, but you will see movement between maybe marketing and rewards marketing and card member services as we get to -- as we think about the various components that we have.
But we've been really good with OpEx and we've been really good with OpEx for a very long time. I mean, our adjusted OpEx has grown 3% in the last eight years, not year-by-year in total. And we're going to continue to use that as leverage. Now it doesn't mean, that it might not be a year that we invest a little bit more in OpEx and bring it down. But I think we've proven and having led sort of three restructurings, I think that we've proven we know how to take OpEx out of the system and a large part of that has been the work we've done with centers of excellence and the efficiencies that we're getting out of our operating model.
You talked about the centers of excellence. You were a key driver behind the billion dollars of cross semis that Amex had, I guess that finished last year. Can you maybe just talk about where the company is in terms of using technology to streamline middle and back-office functions? And what do you think this means for the OpEx for the company?
Yes, look, like everybody else robotics, which basic means take it out of the spreadsheets and automate the process and take people out, right. And so, we continue to do that. But one of the comments that I made early on with our priorities is that due to digitization we're seeing less calls coming into our service center.
And so technology is getting cheaper, we will continue to look for centers of excellence within the company, we’ll continue to automate middle level functions and like any company there's always opportunity there. And that gives us a lot of confidence that we'll be able to continue to leverage our infrastructure and our operating expense base as an offset to some of the growth in some of the other expense lines.
I have few more questions, but I want to see if there was any questions from the audience at this point. Gentlemen over there.
When you look at the lending business are the fundamentals of its returns in terms of requiring equity and requiring balance sheet. Does it have a lower ROE and do you expect over time that that will depress your ROE or is it every bit is profitable from a return on equity perspective?
Well, I mean, just the lending business requires more capital. So obviously lending has a lower ROE. But we don't see our ROE moving anytime soon. I mean, because when you think about it even if we grew lending at the way we're growing for the next 10 years or so you'd probably see a revenue mix of 25-75 versus 19 or 20 and 80. So you'll continue to see that ROE in the mid-20s.
If the GNS business has come under some pressure due to regulation particularly in Europe and Australia. Can you just talk about the strategy in that business, as you look ahead for the next two years?
Yes, I'm still excited about GNS obviously in Europe really regulated out, in Australia regulated out, but in Europe that was the EU we still count on GNS in other parts of Europe that are not in the EU and Africa, Asia and Latin America. And not only is it to get more cards and more scale, but mainly to get more coverage. You see a big focus on GNS from a coverage perspective. And so that's really important. And look there's still opportunities in the U.S. and we're really happy with the partnership that we have with Wells Fargo from a GNS perspective.
And so, you're going to see GNS while it’s taken a dip this year if you exclude it sort of the EU and you excluded Australia we're growing at about 8%. So we expect that to come back up and continue to grow and provide scale for us.
I wanted to ask you a question on disruption; you had made remarks earlier in the year that you do worry about the digital giants Facebook, Amazon, Google amongst others. How do you feel Amex is positioned relative to these companies and what specifically do you think are the biggest competitive threat that concern you and from who?
Yes, so I mean, look, I mean, I think, the biggest thing here is -- and which is why we're focused on partnerships with as many as if not all of them I mean obviously Apple Pay, Android Pay, the Amazon co-brand, PayPal, so forth and so on and I think we'll continue to do that.
The biggest fear I have from digital giants is really being collateral damage to a strategy or an initiative that they have to move it forward. Will they get into the financial services business with all the regulation bank holding company status a little bit -- I think a little bit difficult. But I think they've done a really good job, Amazon has done a fantastic job and what you just said, when we talked about it before, Synchrony product, the Chase products and American Express product, for mortgages and so forth they have reversal auctions.
I think they've done a really good job in managing their cost of acceptance and also providing value to their customers. And so, what I worry about constantly is there are technology that could disrupt us or that you become collateral damage for somebody else's strategy. So I think being close and having as many partnerships as you can and providing value that they can't otherwise get themselves is the way that we're approaching it right now. But always making sure that we're on a watch out.
The way that the company has approached capital has been aggressive on buying back shares. Just given shares I think traded at a discount to fundamental value for an extended period of time. Stock has done well recently, you've done -- you’ve referenced earlier you've done a few small bolt-on deals Cake and Mezi, which brought to you different capabilities. Can you just talked about what the capital priorities are from here what is the appetite for M&A, would it be small bolt-on, would you look at something larger?
Yes, so, I mean, look I think as you think about growth to grow three ways, you grow organically, you grow through partnerships, and you grow through acquisition. I think we've done a nice job from a bolt-on capabilities perspective. But we're always out there looking for opportunities that are going to give us step function change. And so, I think to set expectations, I think you probably see more both-on acquisition, capability acquisition, portfolio acquisition types, then sort of transformational acquisitions. But opportunities come up, we'll look at them.
But I think, it was really important to understand is that they have to be within those lanes of those strategies for the businesses that we run and that's how we're starting to look at it.
Great. Well, we are through out of time. But please join me in thanking, Steve.
Thank you very much.