American Express Company (AXP) — Q4 2017 Earnings Call Transcript

Thanks, Kerry. Welcome. We appreciate all of you joining us for today’s call. The discussion contains certain forward-looking statements about the Company’s future financial performance and business prospects, which are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s presentation slides and in the Company’s reports on file with the Securities and Exchange Commission. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the fourth quarter 2017 earnings release and presentation slides as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today’s discussion. Today’s discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter’s results through the series of presentation slides. Once Jeff completes his remarks, we will move to a Q&A session. With that, let me turn the discussion over to Jeff.

Well, thanks, Toby, and good afternoon, everyone. I’m pleased to be here to recap the strong finish we had to our two-year game plan and to lay out our expectations for 2018. Let me start with 2017. As you can see in this afternoon’s earnings release, like all U.S. companies, our fourth quarter and full year 2017 results reflect some one-time impacts stemming from the Tax Cuts and Jobs Act. Adjusted for the impact of the Tax Act, which I will come back to in a minute, we earned $1.58 in the fourth quarter and $5.87 for the full year, in line with the increased guidance we gave at the end of Q3 when we said we expected to earn between $5.80 and $5.90 for the year. Just as important as these EPS outcomes was the strong momentum we continued to see in the business, with success executing against each of the three priorities we set out in our game plan at the beginning of 2016: accelerating revenue growth; optimizing our investments; and resetting our cost base. In fact, billings and revenue growth reached multi-year highs in Q4 2017. And we are particularly pleased with the diversity of the drivers of our growth and the linkage between the many changes and investments we have made over the last couple of years and where we now see growth. So, we end 2017 with momentum and close out the two-year game plan period having surpassed the financial objectives that we laid out in early 2016. We now start a new chapter in 2018, and of course, starting in February, we will have a new CEO. We are all fortunate to have worked with an incredible leader in Ken Chenault, who has done a remarkable job over his 37 years with the Company. As we now turn the page to Steve Squeri, I would echo what Ken said in his comments in our earnings release: the Company is in very strong hands going forward. As we move ahead in 2018, we will be focused on the four key priorities that Steve laid out on last quarter’s call: strengthening our leadership in the premium consumer segment; extending our leadership in commercial payments and in particular with small and medium-sized enterprises; playing an even bigger role in the digital lives of our customers; and strengthening our global integrated network to provide unique value. Now, of course, beyond these core focus areas of business growth, 2018 will also benefit from a lower corporate tax rate, which I will come back to in discussing our 2018 guidance as we wrap up the call. With that, let me turn to the results, starting on slide two, where you see revenues in Q4 of $8.8 billion, growing at 9% adjusted for FX, reflecting accelerated growth in billings and continued strong growth in loans and fees. Net income and EPS for the quarter were both impacted by the passage of the Tax Act. I mentioned earlier, we recognized the Tax Act impact in the quarter of $2.6 billion, which is primarily composed of two pieces. First, given the global nature of our business, we recognized approximately $2 billion of taxes on deemed repatriations of certain overseas earnings; and second, we recognized a roughly $600 million charge related to the remeasurement of our U.S. net deferred tax assets to the lower rate of 21%. This $2.6 billion represents our current estimate, which is slightly higher than the estimate we previously disclosed. We will continue to evaluate the implications of the Tax Act as guidance and interpretations evolve. The $2.6 billion and tax-related charges caused us to report a quarterly loss on a GAAP basis. Excluding this amount, adjusted net income for the quarter was $1.4 billion and earnings per share for Q4 was $1.58, in line with our expectations. Turning briefly to the full year results, revenue of $33.5 billion for the year was up 4%. Adjusted revenue growth accelerated steadily through the year, starting at 7% in Q1 and ending at 9% in Q4. Our reported growth rate for the full year, of course, includes in the comparison two quarters of revenue related to the Costco relationship in the prior year. As you can see on the right side of slide two, full year earnings per share adjusted for the tax charges is $5.87. Moving now to our metrics...

Thanks, Jeff. Before we open up the lines for Q&A, I’ll ask those in the queue to please limit yourself to one question. Thanks for your cooperation. And with that, the operator will now open the line for questions. Kerry?

Hi, Jeff. On the discount rate, as you look sort of further out, has the kind of base case of down 2 or 3 bps changed to where it’s structurally higher or is 2018 just kind of based on some moves you’ve made?

That’s a great question, Don. I’d like to share a few thoughts. First, it's essential to keep in mind that our primary goal is to drive revenue growth. We’re very optimistic about the revenue growth acceleration we've experienced over the past two years, including the fourth quarter results of 9%, the highest in several years. This has occurred despite notable declines in the discount rate, which has gone above the historical range of 2% to 3%. The reason for this is that we are deliberately making decisions that not only enhance revenue growth but also help reduce the discount rate. We're expanding coverage in the U.S. through the OptBlue program and similar initiatives globally. Additionally, we are optimizing our partnerships with some of our larger associates, positively impacting revenue even though it poses challenges for the discount rate. Regulatory factors in certain regions, like Australia, are also contributing to lower discount rates while creating growth opportunities in our proprietary business, particularly in markets like Australia and the UK, which are both seeing growth in the high teens. These initiatives will certainly yield benefits over time. However, the OptBlue program in the U.S. is expected to wind down as we move into 2019, which will introduce some pressure. The effects of regulation in Australia and Europe, where we have been navigating changes for a couple of years in Europe and more recently in Australia since last July, will gradually lessen. Our focus will continue to be on strategies that maximize revenue growth, which may have variable implications for the discount rates over time. We have a clear perspective on what we anticipate for 2018 regarding revenue and are confident in our guidance of 7% to 8%, as well as the discount rate. Looking beyond that, we will need to evaluate the best decisions for overall company economics. Thank you for your question.

Hi. Thank you and good evening. My question relates to the guidance. I am hoping you might be willing to unpack the provision growth commentary a little bit, just in terms of what you are expecting in terms of the absolute rise in losses relative to the reserve building. It’s a pretty substantial growth that you are kind of pointing to on the provisions. So, I just want to make sure I understand that.

Yes. I guess, I’ll make a few comments. So, we’ve now been at growing our lending a little bit faster than the industry for quite a number of years. And of course, we have a platform for doing that because we have historically so underpenetrated our own customers’ borrowing behaviors. And so, I think we now have a multiyear track record of achieving above industry growth rates while still getting really good economics. Now, we’ve pointed out for a while that particularly with the shift that began in the third quarter of 2016 to less lending on cobrand products, more lending on proprietary products, those products come with little higher write-off rates and pricing that also is reflective of that risk as well, thereby producing really good economics. Given that’s when we started, we just as you got into the latter part of 2017 are beginning to hit sort of the key seasoning time period in a lot of the new lending that we have taken on and that’s why we have said for almost two years now, we do expect this steady trend upwards in write-off rates and provision. It’s been part of the plan all along. As we look at the great diversity in our lending portfolio, we draw a lot of comfort from the fact that other parts of our portfolio, the cobrand portfolio, some of the lending we do on our charge products or our lending on charge products, you see very little change in the write-off rates. So, what you see when you’re looking at the average is that mix shift to more proprietary lending and the seasoning effect of the fact that we began an earnest to make that mix shift as you got into 2016. So all of that will lead you in 2018 to continued really good strong growth in net interest income. Now, we’ll come with the same kind of growth in provisions that you saw in 2018 and the combination of those two should continue to produce really good economics for us. So, I guess, I’d like to leave it at that, Ken, as opposed to also trying to provide a write-off metric. But, we feel good about where we are and we feel good about the continued growth opportunities ahead of us in this area for many years.

Jeff, I wonder if we could talk a little bit about some of the customer-facing initiatives that you’re planning on using some of the tax windfall for the $200 million that you referenced in the press release and talked a little bit about. Be interested in understanding corporate customer-facing initiatives versus consumer and perhaps, you could give us a sense as to whether this is pulling forward what you already have been planning or is there something plus something new here that you’re considering with this $200 million?

Yes. All good questions, Betsy. Let me make a few comments. First, one of the luxuries, I suppose, of the diversity of the growth opportunities we have is that our constraint as a company on the levels of customer-facing growth investing we do each year is really not that we run out of opportunities with very attractive long-term economics, but more that we do manage the Company for a mixture of short, medium and long-term objectives. We believe, it’s really important as a company and for our shareholders to show steady earnings growth every year. And so, when you look at the opportunities we have to invest for growth, generally in any given year, there are a variety of unfunded initiatives with good economics that we choose not to pursue because doing so in the short run would not allow us to meet our financial objectives. That’s why, if you think about the history of our Company over many years, that’s why when we have from time to time have some kind of sudden financial windfall, upside, better than expected performance, we often put a little bit of that into our shareholders’ pocket and we put a little bit to work funding some of these initiatives that we can’t necessarily get to in the normal course of business. So that’s really the context in which you should think about our decision once the Tax Act passed to go ahead and increase in 2018 our customer-facing growth investing by up to $200 million. And if you think about where those next best previously unfunded opportunities are, they are probably where you would expect it. So, if you look at our consumer business, I did point out in my remarks that the highest revenue growth segment in 2017 was the U.S. consumer segment. And so, even in the face of how competitive the U.S. consumer segment is, there are some really good results we’re generating and some good opportunities we still have. When you look at the kind of growth we have with small and medium-sized enterprises, particularly outside the U.S. where we had 20% growth in billings in Q4 and you’ve been in the teens for a number of years now, there are tremendous opportunities to continue to accelerate our growth. So, those are the kinds of things that you will see us with the last incremental dollar of investment likely pursue. But I think the broader and important point here is we always tend to have a pool of rally good opportunities left unfunded. And what we felt was the right balance here was the majority of the Tax Act benefits fall through to the bottom line in 2018, but to take a portion and put it for work for the longer term.