American Express Company (AXP) — Q2 2019 Earnings Call Transcript

Thank you, Alan. Good morning. I appreciate all of you joining us for today’s call. The discussion today 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 risk 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 SEC. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2019 earnings release and presentation slides, as well as the earnings material 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 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 our second quarter financial performance. Once Jeff completes his remarks, we’ll move to a Q&A session on the financial results, with both Steve and Jeff. With that, let me turn it over to Steve.

Thanks, Rosie. Good morning, everyone. And thanks for joining us. As our second quarter results showed, we continue to build on the broad-based momentum we entered the year with. FX adjusted revenue growth in the quarter accelerated to 10% and earnings per share of $2.07 was 13% higher than last year. I feel good about these results, as well as the breadth and consistency of our performance. This is the eighth straight quarter we posted FX adjusted revenue growth of 8% or better. And our growth continues to be driven by a well-balanced mix of spending, fees, and loans spread across geographies and customer segments. We continue to see solid trends in Card Member spending led by consumers. This spending is occurring against the backdrop of an economy that is growing at a steady, more modest pace relative to 2018. FX adjusted proprietary billings grew 8% on a consolidated basis and loan growth remained strong with over 60% of that growth coming from existing customers. Credit continued to perform at industry-leading levels, driven by the premium nature of our customer base, our strong risk management capabilities and the opportunity we have to increase our share of our customers' lending wallets. The consistent growth we're seeing speaks to the strength of our differentiated business model and the success of our focus on our four strategic imperatives. It’s been a busy first half of the year and I thought it would be good to take a step back and reflect on some of the progress we’re making in each of our priority areas. In the Consumer space, we’re continuing our disciplined approach globally to upgrade our premium card products, enhancing our unique value propositions and pricing for the additional value that we’re delivering to our card members. In the second quarter, we launched new and refreshed Platinum Cards in the UK, Italy, Finland, Norway, and Sweden. And in early July, we launched an enhanced Platinum Card in Germany. We also made several additional enhancements to the Gold Card in the US and earlier in the year, we launched the new suite of co-branded Marriott Bonvoy cards. In each case, we’re leveraging our differentiated business model to offer unique benefits, services, and experiences to our card members in categories of travel, dining, and access to popular events and experiences. These are some of the aspects of our products that are more difficult for others to replicate, and they are the ones that our card members most value and are willing to pay for. In fact, nearly 70% of the new consumer cards we acquired this quarter carry an annual fee, and card fee revenue grew 17% year-over-year and accelerated sequentially quarter-over-quarter. In addition, we’re seeing strong results in attracting next-generation consumers to the franchise, with our most recent US consumer product refreshes showing more than 50% of our new card members are millennials or Gen Zers. I believe we have a long runway to continue this growth. Turning to Commercial Payments, scaling our B2B payment offerings is one of our key growth strategies. Expanding our network of strategic partnerships is a key enabler here, and we’re making great progress. Our commercial customers increasingly want payments integrated into their Procure to Pay infrastructure, and we’re developing a range of solutions that do that for businesses of all sizes and complexities. For example, we’re partnering with providers like Amazon Business, Tradeshift, and most recently SAP Ariba to help large and global companies track and reconcile payments within their ERP systems. Our objective is to provide payment capabilities and financing solutions that help our customers manage and grow their business. We want them to view American Express as an essential partner, whether they’re single proprietorship or a Fortune 500 company. We're still in a relatively early stage of this journey, but we’re making good progress in building out our B2B offerings, and we’ll continue to invest in this area going forward.

Well, thanks, Steve. And good morning, everyone. It’s good to be here today. Let’s talk about another solid quarter in 2019 and about another quarterly example of the consistent performance we have been delivering for some time now. Let’s get right into our summary financials. Second quarter revenues of $10.8 billion grew 10% on an FX adjusted basis. As Steve mentioned, I think it bears repeating this is the eighth straight quarter of having FX adjusted revenue growth of 8% or better. And importantly for the future, this growth continues to be driven by a well-balanced mix of growth and spend, lending, and fee revenues across geographies and customer segments. I would point out that we continue to see a stronger US dollar relative to last year against most of the major currencies in which we operate. So you again see a spread between our reported revenue growth of 8% and our FX adjusted revenue growth of 10%. As you recall, the year-over-year strengthening of the US dollar against the major currencies in which we operate began in the third quarter of last year. So assuming the dollar stays roughly where it is today, you should see reported and FX adjusted revenue growth levels become more similar in the second half of 2019. Our strong top-line performance drove net income of $1.8 million, up 9% from a year ago. And then aided by our assumption of a more typical level of share repurchases over the last four quarters, our EPS was $2.07, representing double-digit EPS growth of 13% in the second quarter. Looking now at the details of our performance, I’ll start with billed business. Our FX adjusted total billings growth for the second quarter was 7%, in line with Q1. As we continue to exit the network business in Europe and Australia due to certain regulatory changes, we think it's important to continue to break out our billings growth trends between our proprietary and network businesses. Our proprietary business, which makes up 86% of our total billings and drives most of our financial results, was up 8% in the second quarter on an FX adjusted basis. The remaining 14% of our overall billings, which come from our network business, GNS, was down 2% in the quarter on an FX adjusted basis. This is less of a decline than prior quarters as we are getting closer to lapping the impact of exiting our network partnerships in the European Union and Australia. Overall, we continue to feel good about the breadth of our billings growth and the opportunities we see across the range of geographies and customer segments in which we operate.

Moving on to our third imperative of strengthening our global integrated network. We’re on track to achieve our goal of virtual parity coverage in the US by year-end. We’re also making good progress on expanding merchant coverage internationally and building our network in China. In the second quarter, we announced that card members can now tap and pay with their contactless-enabled American Express Cards or digital wallets for subway and bus rides in New York City, as part of the MTA's new pilot program. This is just another example of the vast array of opportunities in the payment space, as contactless will convert more cash transactions to mobile and plastic. Once consumers have experienced the speed, convenience, and security of contactless payments in public transit, they are more likely to tap and pay at other establishments such as quick-service restaurants, retailers, and more. We’ll continue to expand our contactless capabilities in the US and internationally both through third-party mobile providers and through the issuance of contactless enabled cards. We’re making good progress on this front, and to accelerate our efforts we’ve acquired a number of digital companies over the past 18 months including Mezi, LoungeBuddy, Cake Technologies, Pocket Concierge, and our newest acquisition Resy, the US restaurant booking and management platform, which we announced in May. These acquisitions along with new digital features and content we’re continually building in-house will enable our card members to do more with their American Express membership directly from their mobile device, whether it’s getting a recommendation for a new restaurant, finding tickets to popular events, reserving a spot at the nearest airport lounge, redeeming rewards points for a wide variety of merchandise and experiences, saving money at some of their favorite merchants or booking travel. Today our card members are engaging with our app more frequently and on a wider range of activities in addition to performing traditional transactions by checking their spending and paying their bills. In summary, I feel good about the quarter and I like where we stand at the halfway point of the year. Our strategy of investing in share, scale, and relevance and leveraging the power of our differentiated business model is paying off across the enterprise. This strategy is driving growth in spending, lending, customer acquisitions, and engagement across businesses and geographies. Our results give us confidence that we’re on the right track to delivering on our goal of consistent revenue and earnings growth. As we look ahead, we’re reaffirming our guidance for the full year of delivering revenue in the 8% to 10% range and adjusted earnings per share of between $7.85 and $8.35.

Thank you, Steve. And good morning, everyone. It's good to be here today. Let’s talk about another solid quarter in 2019 and about another quarterly example of the consistent performance we have been delivering for some time now. Let’s get right into our summary financials. Second quarter revenues of $10.8 billion grew 10% on an FX adjusted basis. As Steve mentioned, I think it bears repeating this is the eighth straight quarter of having FX adjusted revenue growth of 8% or better. And importantly for the future, this growth continues to be driven by a well-balanced mix of growth and spend, lending, and fee revenues across geographies and customer segments. Looking now at the details of our performance, I’ll start with billed business. Our FX adjusted total billings growth for the second quarter was 7%, in line with Q1. As we continue to exit the network business in Europe and Australia due to certain regulatory changes, we think it's important to continue to break out our billings growth trends between our proprietary and network businesses. Our proprietary business, which makes up 86% of our total billings and drives most of our financial results, was up 8% in the second quarter on an FX adjusted basis. The remaining 14% of our overall billings, which come from our network business, GNS, was down 2% in the quarter on an FX adjusted basis. This is less of a decline than prior quarters as we are getting closer to lapping the impact of exiting our network partnerships in the European Union and Australia. Overall, we continue to feel good about the breadth of our billings growth and the opportunities we see across the range of geographies and customer segments in which we operate.

Thank you, Jeff. Before we open up the lines for Q&A, I’ll 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 for questions.

Thanks. Good morning. I guess, I’ll start off with where you ended, Jeff, on the guidance. You mentioned the middle part of the range and thinking through the $200 million and the favorable provision, it would seem to me like the provision, given the credit trajectory, has been trending better roughly in the $200 million. Perhaps you can just reconcile that for me? And then as far as the CECL numbers you gave in terms of the quantification, I was just doing the back-of-the-envelope on the percentage you mentioned. And if we were to assume a sort of similar environment this year, it would seem like the provision might go up low single digits percentage-wise. I know there are a lot of assumptions. Can you just help us think through that? Thanks.

So two good questions, Sanjay. Thank you for them. First, on the guidance. I’d really say there are three things going on, all of which I talked about in my remarks. You’re correct, the $200 million added is due to the tremendous new long-term agreement we have with Delta. It’s a great thing for shareholders long-term. Offsetting that provision is clearly much better than we had expected. I’d say you're right that benefit is probably a little bit bigger than the $200 million. But I think the third thing to recall is if you go back, Sanjay, to the January call when we first talked about guidance, I said at the time that in a world where 2019 turns out to look kind of like 2018 in terms of the economy, you should expect us to be in the middle or upper part of the range. So it's a little bit of softness in volume relative to our expectation. All that said, eight straight quarters of revenue growth above 8%, 10% revenue growth this quarter we feel tremendous about the momentum. On the CECL side, boy, predicting the ongoing P&L impact of CECL has so many moving parts right now, I am reluctant to give you a number.

Hi, good morning. Jeff, I think most financial institutions have put out a buyback discussion. I know you provided some general background. Is there any reason why you're not talking specifically about that? And then secondarily, what is your general thought on operating leverage or lack thereof? Obviously, your operating expenses are growing at a more rapid pace. But if you sort of layer in engagement costs, are your expenses going to grow faster than your revenues?

Yes. So, two things. First, on capital, Don, we’ve said for a while now that the governor of how we manage our share repurchase is that we intend to keep that CET1 ratio in the 10% to 11% range and that is actually more important than where we are with the Fed. And so depending on our earnings, depending on our levels of organic growth, that’s how you should expect us to move the share repurchase up and down. Now, all that said, that means share repurchase have leveled very similar to what you’ve seen since we’ve rebuilt the balance sheet post the Tax Act charge. But that’s really the way I encourage everyone to think about our capital return.

Yeah. Thank you. It seemed like the US consumer might have been the biggest source of strength in the quarter. I think you guys had proprietary billings and it actually declined modestly Q-over-Q, but your discount revenue growth accelerated.

Well, maybe I’ll start, Mark, on the math and, Steve, you might add a little bit of color. Look, I think, when you look sequentially, sure as you’ve heard from many people, the consumer is strong and you did see in the US Consumer business a little bit of a modest uptick in billings sequentially. You know, all that said, I think we see overall stability, but at more modest levels than last year. Commercial spending is still at a good level, but I exercise noted a little bit of caution. We just have our eye on that a little bit more than the consumer. So I don’t know, Steve, maybe you want to add a little bit of color.

Yeah. I mean, look, I think that international is still strong as well. I mean, you had 17% international SME growth, you have 15% international consumer growth. But just a comment on US SME. I think when we dig into the numbers in US SME, what I always look at is how are we bringing on new booked business from new signings and that’s been stable for a long time. How are we looking at the attrition and that’s also been very stable. But it’s still positive. So that’s US SME. And I think large corporate, you know, we’re pretty comfortable with large corporate as well.

And finally, on that point, we’ll go to the line of Jason Kupferberg with Bank of America. Go ahead please.

Hey. Good morning, guys. Maybe just to pick up on those comments with international SME. I know it’s been on a little bit of a decelerating trend here 17% is still a very strong number, but it was - I believe 25% is recently the year ago. So you’ve got some tough comps you’re working through.

Yeah. So I think I got the question with a little bit of the background noise. But look, I mean, if you look at what was going on for international SME for pretty much like six quarters prior to this, you had sort of the long run of 20% growth, but often relatively smaller base. I am pretty happy where we are with 17% international SME growth. Our performance there has been really outstanding.

So it’s really important to us. Moving on to some comments about the M&A strategy. You had some activity year-to-date. How would you describe the themes in M&A? I think you picked up on a really important point with Resy. If you really look at the last five acquisitions, while you can say they are consumer-related, consumer-driven, what they really are is all about embedding ourselves more in our customers' digital lives. So we’ll be opportunistic. We’ll continue to look for those companies to build-out our digital capabilities. And we’ll continue to look on the commercial side, but I don't want you to think it's all consumer.

Thank you. And good morning. You’ve been repositioning American Express in Europe over the last year principally winding down GNS. With the next wave of payment regulation coming, I'd be curious for your updated thoughts?

I don't see us introducing a debit card per se, and I think we’ll just continue on our path of increasing our value to our customers both from a small business perspective and from a consumer perspective.

Great, thanks. You started to kind of discuss some aspects of this. But could you talk a little bit about how you would expect the SME business to perform? Is it more or less volatile than the consumer side?

We feel really good about the breadth of our small business franchise. Our shares tend to be small and we think we have a very long runway to continue to grow. We always spend a lot of time thinking about how we manage the company through all aspects of an economic cycle.

Jeff, I wanted to follow up on some of your comments regarding the rate environment. I understand your point that there is a natural buffer in your business, but to the extent that the Fed is turning more accommodative in an effort to extend the cycle and not because economic conditions are deteriorating then wouldn’t that be a scenario where lower rates would benefit you?

I don’t see we’re falling behind at all, and I think we might have been a little bit ahead with the hybrid strategy that we have deployed.