American Express Company (AXP) — Q2 2018 Earnings Call Transcript

Thank you, Lori. 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 second quarter 2018 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. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Steve Squeri, Chairman and CEO, who will start the call with some remarks about the company's progress and results; and then, Jeff Campbell, Chief Financial Officer, will provide a more detailed review of Q2 financial performance. Once Jeff completes his remarks, we will move to a Q&A session on the quarter's results, with both Steve and Jeff. With that, let me turn it over to Steve.

Thanks, Edmund, and good afternoon, everyone. As I have been meeting with shareholders and analysts over the past several months, many of you have said you would like to hear my views of the company more frequently. With that in mind, I plan to join our earnings call with Jeff moving forward to share my perspective on our strategic progress and quarterly results. Jeff will continue to cover our financial performance in more detail before we take your questions. As you saw in our release earlier today, we had a strong second quarter that built on the momentum we started the year with. Revenues grew 9%, and earnings per share were $1.84. We are a globally integrated payments company, and the power of our differentiated business model was evident throughout the results. Our revenue growth was driven by broad-based increases in card member spending and fees, and it also reflected higher loan volumes, which that spending growth helped to generate. Second, we are both strengthening relationships with current customers and attracting new ones through innovative products and services. Third, our disciplined control of operating expenses, combined with revenue growth, gave us the flexibility to make substantial investments in our global brand campaign, additional customer benefits, and digital capabilities that will help us grow our business over the long term. In addition to our business results, we completed this year's CCAR process with a green light to increase the quarterly dividend, and we are resuming our share buybacks this quarter. All in all, I feel very good about our results to date. Looking ahead, we expect 2018 revenues to be up at least 9%, and we are reaffirming our full-year EPS guidance at the high end of the range we set for this year, which is $6.90 to $7.30 per share. Coming into the CEO role earlier this year, I focused the organization on four strategic imperatives. You may recall that I first shared them with you back in October of last year. At the midyear mark, I am pleased to report solid progress on each. The first imperative is to expand our leadership in the premium consumer space worldwide. We once again delivered record performance on our U.S. Platinum card, and we continue to refresh our premium product line globally, with enhancements to our Platinum card in Mexico and Hong Kong, and our Gold card in the U.K. In addition, we announced new co-branded cards with Marriott and launched the new Cash Magnet card in the U.S. This follows the launch earlier this year of a new suite of co-branded products with Hilton. We are continuing to invest in differentiated value propositions that distinguish American Express from the competition. We provide our card members with global access to exclusive services and experiences. We continue to expand the global range of these offerings and have recently announced the expansion of our Centurion Lounges with new openings scheduled in Los Angeles and Denver, and a second one in New York, at JFK. Our official partnership with the Wimbledon Championship and a new partnership with Saks to offer value to our joint customers. Our second strategic imperative is to build on our strong position in commercial payments. Just last month, we announced a multiyear partnership with Amazon, which will include a new co-branded small business credit card in the U.S. This is an exciting opportunity and a great example of why we are the small business partner of choice, because of our ability to bring value to partners and their customers by leveraging our brand, innovative technology, data analytics and other unique assets. In addition, we also introduced new value propositions for Hilton and Marriott small business card members in the U.S. Our third strategic imperative is to strengthen our global integrated network to provide unique value. We introduced a new card with Wells Fargo, one of our larger GNS partners in the U.S. This is an important win and another validation of our differentiated benefits and services, like access to one-of-a-kind experiences and special offers that enable us to win in a competitive marketplace. We continued our progress towards parity coverage in the U.S. and expanded our merchant network internationally. Our fourth strategic imperative is to make Amex an essential part of our customers' digital lives. Technology and innovation on the engines that continue to fuel our brand, and customer value propositions, and we are making investments to enhance our capabilities in this space. We are developing artificial intelligence, machine learning, and blockchain capabilities to better serve our customers. Our mobile enhancements are being recognized, and we placed first in JD Power's 2018 Mobile App Competitive Survey, up from sixth in 2017. We expanded the chat-based servicing feature on our mobile app, as another way to serve our customers where, how, and when they want, and we are continuing to expand our capabilities, as we integrate two specialized platforms we recently acquired, Mezi and Cake, into our digital offerings. We are also experimenting with technology and recently announced a pilot with the online retailer Boxed, using blockchain and our membership rewards program to give card members more ways to earn points and merchants more ways to drive business. Two additional and important second quarter items are worth noting. First, we launched our new global brand campaign, which underscores the powerful backing of American Express. The campaign is being run across both our consumer and business segments, and it drives home what our brand is all about, building enduring customer relationships through their intertwined business and personal lives. Finally, my list of wins for the quarter includes the favorable ruling we received in a major antitrust case at the Supreme Court. The Court has found that our differentiated business model has spurred innovation in the payments industry. Their ruling was a welcome end to a long legal battle with the Department of Justice. All in all, it was a very good quarter. Six months into my tenure as CEO, I feel good about what we have accomplished. I am excited about the opportunities that lie ahead, and I am confident in our ability to deliver sustainable growth for our shareholders. Let me now turn the call over to Jeff, who is going to provide more detail about our financial results.

Well, thanks, Steve, and good afternoon, everyone. It's good to be here today to talk about another quarter with strong performance. To get right into our summary of financials, second quarter revenues of $10 billion grew 9%, another quarter of revenue growth at the highest levels we have seen since the financial crisis. Even more importantly, this result was driven by strong growth across all of discount revenues, fee revenues, and net interest income. Given the recent strength in the dollar, our reported revenue growth was pretty consistent with our FX-adjusted revenue growth, unlike the last few quarters, where the weaker dollar caused our reported revenue growth to be above our FX-adjusted revenue growth. Net income was $1.6 billion, up 21% from a year ago, and earnings per share were $1.84 for the quarter, up 25% from the prior year. Now, of course, our earnings growth this year reflects the passage of the Tax Act last December, but it also reflects our business model's steady and consistent earnings growth, along with the impact of our share repurchases, lowering the shares outstanding by 3%, despite the suspension of our share repurchase program for the first half of 2018. All in, these are results we feel very good about. Looking at the details of our performance, I will start with Billed Business, which you see several views of. I'd start by pointing you to the top right of where you see that there are two different trends impacting our overall billings growth. This quarter, our proprietary billings make up 85% of our overall billings, and growth in these proprietary billings accelerated to 12%, up from 11% in the first quarter, all on an FX-adjusted basis. This is another sign of the momentum we have in our business. You can also see that the other 15% of our overall billings, which come from our network business, GNS, is now seeing the expected impact of regulation in the European Union and Australia, and hence billings in GNS were down 3%, and this caused our total AXP billings to come in at 9% for Q2. As you turn to slide 5, I'd remind you that our results this quarter reflect the organizational changes Steve has made since becoming CEO, so we now have three reportable operating segments; Global Consumer, Global Commercial, and Global Merchants and Network Services. Although we are reporting financial results on a Global Consumer basis, we do want to continue to provide you transparency into both the U.S. and international consumer metrics. So here, you can see all of the diverse parts of our business maintaining or accelerating good growth rates, aside from GNS. Turning next to loan performance, our total loan growth was 16% in the second quarter and in line with the prior quarter, and once again, over 60% of our growth came from existing customers. On the right, net interest yield was 10.6%, up 30 basis points versus the prior year. For some time now, we have been saying that we expect year-over-year growth in net interest yield to moderate, and you can clearly see that playing out, while net yield is still growing over the prior year, the increase has moderated over the last few quarters, as we lap some of our pricing initiatives and experience higher funding costs. Lastly, I would add that we typically see a seasonal decline in net yield from the first to second quarter, as you did see this year, with net yield down 20 basis points sequentially in the second quarter. To spend a minute now on funding, I'd remind you that our funding strategy is to be active in three markets; deposits, asset-backed securities, and unsecured debt. Focusing on deposits, we have about $67 billion in total at June 30, with about $31 billion coming from sweep accounts and CDs, which tend to move in line with market rates. The remaining $36 billion in deposits comes from our online personal savings program, which in a rising rate environment, is generally our least expensive source of funding. We expect to continue to grow our online savings program steadily over the next few years, facilitated by the recent consolidation of our two U.S. banks. Stepping back, while we view a rising rate environment as a modest headwind, it is usually mitigated in part by a stronger economic environment, which is certainly what we see currently. Turning next to credit metrics; starting on the left with the lending portfolio, the loss rate for the quarter was 2.1%, up about 30 basis points from last year and 10 basis points from the prior quarter. As a reminder, we have been saying for quite some time that we expect these rates to drift up as they have, to back lending rates that were slightly better than we originally expected in our plan for the year. Looking forward, we don't see anything in the performance of our tenured customers to suggest any change in the broader environment. Given these credit metrics, provision was $806 million, up 38% in the second quarter, right in line with our full year expectation despite loan growth running a bit higher than we had originally planned. Making a brief comment on revenues, our revenue growth was 9% in the second quarter. This represents our fifth straight quarter of having adjusted revenue of at least 8%, driven by consistent growth from all segments of spending, fees, and lending. Turning now to our discount revenue, it was up 8% on an FX-adjusted basis in the second quarter, maintaining the strong momentum of the prior quarter. Overall, we feel good about the diverse sources of growth. We've been sustaining double-digit billings growth in U.S. consumer and U.S. SME, while also accelerating billings growth across both international consumer and SME, as well as with large and global corporate clients, thanks to our unique business model. Overall, we feel confident about the good results we have posted this quarter and look forward to continuing this momentum. With that, let me turn it back over to Edmund to begin the Q&A.

Thank you, Jeff. Before we open up the lines for Q&A, I will ask those in the queue to please limit yourself to just one question. Thank you for your cooperation. And with that, the operator will now open up the line.

Thank you. Steve, just a question on the page 2 of your strategic imperatives. Do you have specific measurements against each of those four that you are comparing yourselves to, and can you give any color on what you are looking at?

Yeah. So I think, as we look at the four strategic imperatives, we have looked at these over the longer term, and so while we are not looking at specific year-to-year growth targets, we really are focusing on capabilities and accomplishments. For instance, when we look at the premium segment, we are looking to expand our definition of premium. We have thought of premium from a premium wallets perspective, but we are really looking at those that seek premium service and access. So that includes expanding to more millennials; over half of our platinum card acquisitions have come from millennials. So it's an expansion of the value proposition. When we look at building on our competitive position from a commercial perspective, metrics like growth from an SME perspective and international growth are key. We are seeing continued growth from co-brand perspectives in the U.S. with Hilton, with Marriott, and the launch of the Amazon card. We are focused on expansion with more partnerships, and Wells Fargo is an example of that. Coverage initiatives are important for us too, aiming for parity coverage in the U.S. by the end of 2019. For digital, there are qualitative aspects at play like going from sixth to first in JD Power's mobile app competitive survey. The initiatives that I laid out are moving those business priorities forward for us.

Thank you. Appreciate it.

Hi, thanks for taking the question. To follow up on the U.S. car business, you mentioned a Platinum refresh last quarter. How much of that refresh impacted the second quarter? Looking ahead to the rest of the year, will you be increasing your marketing investments in the second half, and how will that affect U.S. business growth? Thank you.

Well, I think, Chris, to be clear, in the U.S., we refreshed both the consumer as well as the small business Platinum products in early 2017, and we have been thrilled with the reaction to both of those upgrades. One thing I cautioned about last quarter was that the second quarter was going to be the first quarter where we fully lapped all those changes, and that might cause a moderation in growth in those two products. We were particularly pleased to see on the consumer side that the growth rates did not slow at all, even though we have completely lapped all of those changes we made. I think it stems to our strategic imperative around differentiated value propositions. We have tremendous opportunities to invest and accelerate our growth across both consumer and commercial segments. So when we have good performance like we have year-to-date, it allows us to seize opportunities and that bodes well for long-term growth.

And to Jeff's point about continuing to invest in unique and differentiated services, we announced that we are going to implement three new lounges, which adds more value for our traveling Platinum card members. We've also added to the Platinum card merchant funded value offers from Saks, showing the power of the integrated model. Additionally, while we refreshed the Platinum card products in the U.S., we also refreshed the products in Hong Kong and Mexico, highlighting the importance of the premium segment outside the United States.

Great. Thanks guys.

Thank you. Steve, good to have you on and hi Jeff. Thanks for taking my question. I guess, as you mentioned, your top line expectations are now better than expected, and your EPS guidance didn't really change. Should we assume all of the incremental revenues are being spent, and that the marketing and business development line, that was up quite considerably, and you mentioned several reasons why. Should we expect that to continue to grow at the rate it is going forward, and maybe you could just talk about the payback on those returns? Thanks.

Let me make a couple of comments, and then I will ask Jeff to jump in. Again, we try to be as transparent as we can from an EPS perspective. We have adjusted at the end of the first quarter, as we looked out, we said we would be at the high end. But we feel really good about 25% EPS growth this quarter and 38% growth in the first quarter. Our objective is to make sure our revenue growth levels are sustainable and take advantage of opportunities as they present themselves. Jeff, do you want to add?

I think the second quarter marketing and promotion was a particular spike because we only launch a new brand campaign every couple of years. But to Steve's point, that is also the line where a lot of the things we do that, we think are about driving longer term growth. So we feel good about hitting the high end of the guidance range, and we feel good about the revenue growth sustainability we are building.

Thank you.

Thank you. Good evening. It looks like the contribution of your discount revenue as a percentage of revenues, net of rewards expense, increased to 50% this quarter from 48% last quarter, while your net interest income contribution actually decreased. That seems to mark a reversal in the trend that we have been seeing. So, my question is, as we look ahead, is it reasonable to expect that we will continue to see a growing mix of your revenues coming from spend versus lend? And if I may just tack on to that, could you comment on, whether, consistent with your philosophy of reinvesting gains in the business, that part of the reason for the increase in marketing and promotion was the opportunistic reinvestment of some of those releases? Appreciate that.

On the discount revenue side, you do have things like OptBlue, the regulatory impact in Australia and Europe, and some of the big strategic partner renegotiations we had last year affecting the discount rate this year, more than we would probably expect on a run-rate basis. As for reserve releases, I am a little puzzled by that. There is nothing unusual going on in our operating expense line. We are just focused on pumping revenue through our fixed cost infrastructure without adding costs. That reflects the momentum in our operating expense efficiency.

We are really focused on driving spend. And if you look at the second quarter, 25% SME international growth and 18% consumer growth internationally illustrates our success in those areas. The SME business in the U.S. and the consumer business in the U.S. are more mature and competitive, but we are seeing double-digit growth in both portfolios.

Thank you very much.

Good evening guys. How are you doing? Jeff, I wanted to ask a question on capital; you talked about the 10% to 11% CET1 as the binding constraint as you shift from CCAR to the rating agencies. I guess, given the lower risk and less NII dependency of your model, like why is that the right number, given that your model is less lend-centric?

You are correctly pointing out that the Fed sees this as the constraint on our capital, and I think it’s likely about the rating agencies. We are very comfortable with our current ratings, and maintaining them is important to us, which is why we need to stay at that tier-1 common equity ratio in the 10% to 11% range. I assure you that we are having lots of discussions on the unique strengths of our business model.

Got it. Thanks.

Thanks very much. Just pulling up on the top line discussion. It seemed that, except for the impact from regulation on discount revenue; discount revenue would have continued to accelerate year-over-year. So, what did your sense about some of the underlying drivers, such as the benefits of corporate tax reform on commercial C&E growth and that kind of thing, to the extent that these can continue to maintain accelerating discount revenue, as the comps begin to get a little tougher, relative to the back half of last year?

When you think about sustainability, I’d make a few comments. We can look at the acceleration in revenue growth we have seen over the last few years, and link it to changes we have made in the business, which builds confidence in sustainability. We are benefiting this year from buying the Hilton portfolio, which impacts growth, and last quarter I mentioned a modest acceleration seen in organic growth that began late last year. The confidence levels for the demographics we serve are evident, and we expect to monitor these closely as we go forward.

From an SME perspective, our coverage initiatives have allowed us to enhance card member acquisition, evidenced by our significant growth in international markets, each reporting impressive double-digit growth rates. This highlights our successful strategy and continued efforts to drive revenue generation through spending, which ultimately supports our lending environment. Overall, we maintain a strong operational outlook.

Thanks very much.

Yeah thanks. Was hoping to better understand kind of strategically, why you decided to add this new Shop Saks benefit to the Platinum card, at a time, I think where you'd indicated you are already very pleased with kind of the reengagement and the customer acquisitions you are getting from that card. What was the need to do that? And also, could you give us a sense of the cost? To you, I mean, presumably, you are not paying your merchant partner a hundred cents on the dollar for the benefit.

I'm going to give you a sense of what the cost is for Saks, zero. It's fully funded by the merchant partner. What happens is, that gives us more value for our customers, and in working with Saks, we came up with a $100 annual credit on Saks purchases. It fits both from a premium perspective and demographic perspective, and helps both sides—driving value for Saks and for our customers.

Okay, fair enough. Thank you.

Steve, I was wondering if you could talk a little bit about the commercial segment? The bill business is obviously performing well. You got the Amazon co-brand. Can you talk a little bit about the competitive intensity in commercial, maybe contrast it with consumer, and do you think there is more upside to the growth rates that you are seeing today?

In international markets, the SME segment is still an open playing field with significant penetration rates; as we've adapted our U.S. sales strategies to engage this demographic effectively. In the U.S., we see competition regionally, but it may not be as intense as in the consumer business. Opportunities still exist for growth in commercial, and partnerships like those with Amazon and Marriott illustrate our competency and ability to provide service to large and middle-market customers.

Thanks.

Great. Thanks. So maybe, could you talk a little about how we should think about the provision and reserve build over the course of the next year? Just given, you have still got 30% plus growth in losses on both the charge and the credit portfolios, and this quarter is a fairly small build. But if the double digit loan growth continues, like how should we think about that?

We entered this year expecting that provision would grow 30%, and it reflects the accelerating growth we have seen, particularly as we go through a seasoning process on some of the vintages from the last two years. Our provisions are in line with our expectations, and we feel comfortable as we assess loan growth moving into the future.

Thanks very much.

Thanks for taking my question. Jeff, I wanted to ask one question on Australia of all places. Just because I am trying to understand the dynamic there. I thought you said that billed business was up 20% year-on-year in Australia. But then you got the headwinds from GNS. Is there something in the dynamic or are we going to lap a pricing?

To clarify, what’s happening in Australia is with regulatory changes, we are in the process of shutting down our network business. Despite that, our proprietary side is seeing really high growth rates over 20% in Australia. Replacing network billings with proprietary billings is a good economic trade for us, and we feel positive about those overall trends.

All right. Thank you.

Hi. How are you? Wanted to drill down if I can, a little bit on what you are seeing in the U.S. From our vantage point, we have seen deceleration in all your competitors in the U.S. and their U.S. purchase volume. You guys have done an amazing job sustaining growth. So I guess, the question begs, who are you taking share from and in what categories in the U.S.?

From an SME perspective, we continue to grow, and even large market customers are performing well as evidenced by our impressive growth rates. We have also seen great response on the consumer side, with double-digit growth two quarters in a row and strength in our co-brand partnerships. Market share dynamics may be analyzed within the market reports anticipated next week. Overall, our results reflect our differentiated value proposition, sustainability, and continued commitment to investing in quality growth opportunities.

Thank you, Steve. So anyway, thank you everybody for participating today, and let me just give a couple of closing thoughts. Hopefully, what you have seen as a globally integrated payments company here, our business model and we hope that the commentary did this today, does set us apart from the card issuing and merchant acquiring competitors. I think Saks is a really great example of just what we can do, with relationships on both parts. It's different in the networks and it's certainly different in the pure Fintechs, which really don't have either relationships, the brand or the scale to do some of the things that we have been doing. We operate, we believe in an industry that has a long runway for growth, and we think that differentiated business model that we had, will provide us with many ways to take advantage of the opportunities that lie ahead. We feel good about the results we have generated, by focusing on the four strategic imperatives that Jeff and I discussed, not only in our prepared remarks, but certainly through the questions. And again, just once again, thanks for all of you for joining us today and for your continued interest in American Express. With that, we will bring the call to an end. Thank you, Jeff and Steve, and thank you to those of you on the phone. The IR team will be available for any follow-up questions. Operator, back to you.