American Express Company (AXP)
Q2 2010 Earnings Call Transcript
July 22, 2010 5:00 pm ET

Executives

Daniel Henry - Chief Financial Officer, Executive Vice President and Member of Operating Committee
Kenneth Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc. and Chief Executive Officer of American Express Travel Related Services Company Inc.
Ron Stovall - Senior Vice President of Investor Relations

Analysts

Craig Maurer - Credit Agricole Securities (USA) Inc.
Michael Taiano - Sandler O’Neill & Partners
Meredith Whitney - Whitney Advisory Group
Kenneth Bruce - Bank of America/Merrill Lynch
John McDonald - Bernstein Research
Christopher Brendler - Stifel, Nicolaus & Co., Inc.
Robert Napoli - Piper Jaffray Companies
Bill Carcache - Macquarie Research
Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.
Donald Fandetti - Citigroup Inc
Scott Valentin - FBR Capital Markets & Co.
John Stilmar - SunTrust Robinson Humphrey Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2010 Earnings Release. At this time all participants are in a listen only mode. Later, we will conduct a Question-and-Answer Session. Instructions will be given at that time. If you should require assistance during the call please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.

Ron Stovall

Thank you, Greg, and welcome to everyone. We appreciate all of you joining us for today’s discussion.

As usual, it is my job to remind you of certain legal aspects around the call and tell you that this discussion today contains certain forward-looking statements about the company’s future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company’s financial and other goals, are set forth within today’s earnings press release, which was filed in an 8-K report, and in the company’s 2009 10-K report, already on file with the Securities and Exchange Commission, in the second quarter 2010 earnings release and earnings supplement on file with the SEC in an 8-K report, as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com. We have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today’s discussion.

Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period, where Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions. While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

With that, let me turn the discussion over to Dan.

Daniel Henry

Okay, thanks Ron, and let’s start on Slide 2. See total earnings are up 13%, but the more appropriate line to look at is managed total revenues, which is down 1%. The reason for that is in ‘09, revenues did not include interest related to those receivables that had been securitized. If you exclude the ICBC gain that was in ‘09, revenues are actually up 2%. Income from continuing operations was $1.017 billion. ‘09 included two one-time items. One was the ICBC gain of $211 million pretax, and we also had re-engineering costs of $182 million pretax. So those more or less offset each other. EPS was $0.84, and that compares to $0.09 in the prior period. But you will remember that in the second quarter of ‘09, we had a charge that was about $0.18 related to our repayment of TARP. So the better comparison is $0.27 last year compared to $0.84 this year, up significantly. ROE was increased up to 23%.

We go to Slide 3 and look at Billed business. It increased 16%, or 15% on an FX-adjusted basis. It is now approaching the pre-crisis levels in Billed business that we had back in ‘08. Cards-in-force are relatively flat with last year. GNS is up 7% and proprietary cards are down slightly. If we look at average Cardmember spending, it has increased to 20% on an FX-adjusted basis, but if you exclude the card cancellations of 2.7 million cards last year in the second quarter, average Cardmember spend would be up 16%, which is very much in line with the increase in Billed business.

Loans on a managed basis are down 9%, driven primarily by Cardmember behavior as well as our strategy which is changing the mix of receivables, as we are focused on premium lending in co-brand. Those customers tend to be more transactors and have higher pay-down rates. However, loans are down less than competitors and that is because we are having higher growth in spending by our Cardmembers and we have lower write-off rates. Travel is benefiting from a growth in transactions as well as higher prices in Airline.

If you look at Slide 4, there is more detail on Billed business. The bars represent Billed business each month. The lines represent growth rates for both reported and FX-adjusted. On an FX-adjusted basis, April and May grew 15% and June grew 14% for the average of 15% in the second quarter. July month-to-date growth is in the double digits and the growth rate is down slightly from June due to a tougher rollover in 2009.

If we move to Slide 5, this is information on network spending and you can see that transactions are growing 8% and transaction size is higher by 6%. So they are both contributing to spending growth.

If we move to Slide 6, this is growth by segment. And you can see that we had strong growth across all of our segments. The highest growth is in GNS and this is being driven by partners issuing additional cards. Promotional Card also had strong growth, and this is in part due to new signings, as well as higher level of spending from existing clients. International Consumer had growth of 9% on an FX-adjusted basis, and while it’s slightly lower than the other segments, this is due in part by the fact that it dropped less in 2009. So we have broad-based growth in spending. We have to wait until all the statistics are in, but it would appear that we will gain share in the second quarter.

Moving to Slide 7, this is some new disclosure that we thought that you would be interested in. It’s spending by region. You can see that JAPA has the highest growth and this is in part driven by new GNS signings in Australia. We also expect that EMEA growth would be slightly below the average, but it’s still strong at 11% on an FX-adjusted basis.