美國運通 (AXP) 2007 Q1 法說會逐字稿

Good afternoon.

My name is Valerie and I will be your conference operator today.

At this time, I would like to welcome everyone to the American Express first-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Stovall, you may begin your conference.

Thank you, Valerie, and welcome to everyone.

We appreciate all of you joining us for today's discussion.

As usual, before we begin the call, it is my job to remind you that the 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 included in 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 2006 10-K report already on file with the Securities and Exchange Commission.

In the first-quarter 2007 earnings release and supplement, which are now posted on our website at ir.americanexpress.com and on file with the SEC in an 8-K report, we have provided information that compares and reconciles the Company's managed basis financial measures with the GAAP financial information, and we explain why these presentations are useful to management and to investors.

We urge you to review that information in conjunction with today's discussion.

Dan Henry, Executive Vice President and Acting Chief Financial Officer of American Express, will provide some introductory remarks highlighting the key point related to today's announcement.

Once he completes his remarks, we will turn to the moderator, who will announce your opportunity to get into the queue for the Q&A period.

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.

Before Dan begins, I would like to acknowledge the change in the timing of our earnings announcement as of this quarter.

As we mentioned to you last quarter, beginning with this release, we are distributing our earnings announcement shortly after the market close and making both our earnings release and supplement documents available to you as soon as possible after the announcement.

While we are changing the timing of the release of our documents, we're not changing the timing of our earnings conference call, which remains at 5PM.

As you know, we typically release earnings on the fourth Monday of the month following the quarter end, but our first-quarter timing is often accelerated to the prior Thursday to accommodate the release of earnings before our annual shareholder meeting.

We apologize for any inconvenience this may have caused you this quarter due to the overlap of this earnings process with that of other companies.

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

Thanks, Ron, and thanks to all of you for joining us today.

I'm very pleased to address the results for this quarter.

As Ron mentioned, and consistent with our usual process, I will make some introductory remarks and then I will open up the discussion for your questions.

Before getting into the details, I would like to review some changes to our financial statements this quarter.

One set of changes deals with the format for presenting some of the items on the P&L.

The other deals with our reporting segments.

I will walk through each very quickly so that we all have the same starting point.

First, about three weeks ago, we issued an 8-K which revised our income statement to provide more details on interest-related revenues and their associated interest expense.

The new format provides gross rather than net amounts directly on the face of the income statement.

It also shows additional detail on interest-related expense as a component within the new Revenues, Net of Interest expense line.

The 8-K also moved our provision for losses and benefits to an expense category separate from overall expenses.

These reclassifications affected the presentation of revenues and expenses.

They did not, however, have any impact on our previously reported consolidated pretax income, income tax, net income, total assets, total liabilities or total shareholders' equity.

Our financial target of at least 8% revenue growth on average and over time is unchanged.

Going forward, we will measure our performance against the new P&L line item, Revenue, Net of Interest Expense.

This will have the effect of making our performance targets a bit more subject to interest rate environment.

In periods of rising interest rate, growth in this P&L line will be negatively affected, and in periods of declining interest rates, it will be positively affected.

To cite the impact of interest rate fluctuations, we remained committed to the 8% target on average and over time.

Secondly, you will note that our Travelers Cheques and Prepaid Services business and our international banking business have been moved to the corporate and other segment.

They had been part of U.S.

card services and international card segments, respectively.

Both the formatting and the segment changes are the result of a periodic SEC financial statement review that we mentioned in our 10-K.

We have resolved the formatting changes in time to give you a set of historic restatements in the 8-K.

The segment changes were resolved more recently as part of the finalization of our discussions.

None of the changes are material, but I realize that informing you only now through our quarterly earnings material is less than ideal.

We apologize for any inconvenience that this may be causing you.

This is the earliest date that we can provide you with new segment information, and we thought that going with the new format today was preferable than making the changes in a few weeks when we file the 10-Q.

With that, let me move to our results.

As you have seen in the earnings documents, our first quarter continued the strong business momentum we reported throughout 2006.

It highlighted the benefits of our multi-year investments in a broad range of business-building initiatives.

When you compare our results from continuing operations to the first quarter last year, net revenues grew 10%, income increased 22% and diluted EPS of $0.88 rose 26%.

In addition, ROE for the prior 12 months rose to 37%.

Significant items this quarter included an $80 million, $50 million after tax, gain in connection with the adoption of the new accounting standard known as FAS 155.

That requires us to report within the income statement any changes in the value of our retained interest in securitized Cardmember loans.

These changes were previously reported in shareholders' equity.

A $63 million, $39 million after tax, gain related to changes in our pension plans that reduced obligations to plan participants; and a $60 million pretax and after-tax reserve established for regulatory and legal exposures at a subsidiary of American Express Bank Limited.

In addition, both quarters included re-engineering costs, which totaled $32 million, or $21 million after tax, this year versus $25 million or $16 million after tax last year.

During the quarter, we returned 89% of total capital generated to our shareholders through share repurchase and dividends.

Since 1994, we have returned 69% of capital generated to shareholders, which is above our 65% long-term target.

The strong revenue growth in the quarter reflects increases in discount revenue, finance revenue and other card-related revenues.

These were driven by excellent growth in Cardmember spending, loans and cards in force.

Revenue growth would have been even higher without the revised presentation format, which now includes the impact of increased charge card-related funding costs.

If we want to look at our consolidated revenues on a basis more consistent with our prior recording methodology, as well as on a managed basis, you would add back the charge and other interest expense and also make the U.S.

card services GAAP to managed adjustments.

This would give you total revenues that are more in line with the level and method that some of you have historically used in your models.

[Field] business growth remains strong.

Each of our customer segments and every geographic region contributed to the 15% growth worldwide, 13% on an FX-adjusted basis.

Let me give you some more detail.

In our U.S.

proprietary business, consumer spending grew 12%, small-business spending rose 15% and corporate services volumes improved by 11%.

In total, U.S.

volumes for retail and everyday spend grew 15%.

This category represents about 66% of U.S.

billings.

The travel and entertainment-related spending, which accounts for the remainder, rose 9%.

Outside the U.S., proprietary billings grew 7% on an FX-adjusted basis.

This was driven by 4% growth within our consumer and small-business activities and 11% growth within corporate services.

As you know, these proprietary card comparisons outside the U.S.

were negatively affected by last year's sale and transfer of our Brazilian operations in Q2 and our Malaysian and Indonesian activities in Q3 to three bank partners.

Excluding the impact of sales, the spending on proprietary cards grew a strong 11% outside the U.S.

on an FX-adjusted basis.

Within Global Network Services, billed business rose 59%, driven by continued triple-digit growth within the U.S., as well as robust growth outside the U.S.

Excluding the impact of billed -- of the businesses transferred I just mentioned, GNS billed business growth was 38%.

Worldwide cards in force grew 10%.

We added 1.9 million net new cards during the quarter and 7.4 million net new cards since last year.

This reflects 4% growth versus last year on proprietary cards and 45% growth in network partner cards.

Again, if you adjust for the 1.5 million cards that were transferred from international business to GNS, proprietary cards grew worldwide 6%, and network cards' growth was 32%.

Spending per proprietary basic card grew 8% worldwide, even with the suppressed effects of the substantial card additions over the past few years.

Despite strong growth in cards and a slightly higher average fee per card, our net fee card revenue decreased 7% this quarter.

Consistent with the last two quarters, this reflects the reclassification of certain card acquisition-related costs, which are now reported as contra revenue within this line.

Prior to the third quarter of last year, these costs had been included in operating expense.

This reclass suppressed consolidated revenue growth rate by approximately 1%, but had no effect on net income and is not included in the average fee per card calculation.

Our average discount rate was flat versus last year at 2.58% and consistent with seasonal trends rose 3 basis points versus last quarter.

Travel, commissions and fees increased 5%, reflecting an 8% increase in travel sales.

Worldwide lending balances on an owned basis rose 29%.

On a managed basis, balances grew 18% on 20% growth in the U.S.

and 11% increase in our non-U.S.

portfolios.

This strong growth continues to reflect the attractive spending levels within our programmed and other lending portfolios.

It also reflects our successful acquisition effort surrounding these products.

Securitization income rose 18% as the impact of the initial adoption of FAS 155, the negative adjustment from last year's consumer debt repayment program, and a higher portfolio yield were partially offset by greater interest expense and a lower level of securitized assets.

Cardmember lending finance charge rose 44% on growth in our owned portfolio and a higher portfolio yield.

In addition, the Q1 '06 finance revenue was also negatively affected by last year's consumer debt repayment program adjustment.

Other interest income increased 22%, partially due to the recognition of interest associated with the Company's loan to Delta Air Lines that was placed back on accrual status.

Interest costs rose 44%.

This was due to a 57% increase in expense on the lending side and a 36% increase within charge card and other.

Much of this reflects volume increases within the business and higher market rates.

Interest expense was also driven by the expiration of some fixed-rate debt and hedges at year end.

Specifically, fixed-rate debt and hedges within our U.S.

card business declined by $11 billion.

The effective funding rate on that amount was 3.2%.

It was replaced with funding based on short-term rates of approximately 5.3%.

This resulted in about $60 million of incremental expense in the quarter that was solely related to debt and hedges that expired.

The marketing, promotion, rewards and Cardmember services line decreased 4% from last year, which included a $112 million charge related to the higher redemption rate estimates in U.S.

Membership Rewards.

This quarter's decrease also reflected lower marketing and promotion expenses, which were partially offset by greater volume-related rewards costs.

Among other things, marketing expenses reflect reduced levels of spending on various product-specific advertising, creative development and market research initiatives, as well as a reallocation of select acquisition investments to lower-cost channels.

Increases in reward costs continue to reflect strong spending growth, higher redemption rates and increased Cardmember participation.

Human resource expense increased 3%.

Merit increases and greater incentives, benefits and severance costs were partially offset by the $63 million pension benefit discussed earlier.

Growth in the remaining operating expenses reflects the impact of increased volumes within our technology and Cardmember services initiatives and the AEV legal costs.

The total provision for losses and benefits increased 30% as the lending provision increased 79% and the charge provision was flat versus last year, and the international banking and other provision declined by 40%.

The increase in lending provision was driven by higher loan volumes globally and increase past-due and write-off rates relative to the lower year-ago level that benefited from the impact of Q4 '05 U.S.

bankruptcy legislation.

The charge card provision remained flat, reflecting growth in volumes, offset by improved results within our collection activities in the U.S.

The decrease in the international banking and other provision was due to last year's Taiwan-related provision and a reduction in merchant-related reserves this year.

The consolidated tax rate of 33% for the quarter was comparable to the 34% rate last year.

With that, let me conclude with a few final remarks.

We again delivered strong revenue and earnings growth during the quarter while continuing to invest in key business initiatives and maintaining substantial balance sheet strength.

In fact, we exceeded $1 billion of net income in the quarter, a milestone not achieved since the Ameriprise spin-off.

Key business metrics' performance, like growth in billed business and loan balances, continue to be at the top of the industry.

This performance, along with our high average Cardmember spending, demonstrates the effectiveness and ongoing benefit of our marketing and rewards investments over the past several years.

Additionally, credit quality continues to be very strong.

As expected, losses are trending upward post the U.S.

bankruptcy [forum] benefits last year.

However, we continue to see the positive impacts of our historic focus on the premium sector and our rewards capabilities through top-tier write-off and past-due levels.

While our bottom-line results were very strong during the quarter, we continue to be cognizant of the near-term interest expense and provision rollover challenges we face.

Within interest expense, we anticipate some lingering impacts from the two items I mentioned earlier -- the reduction of $11 billion of fixed-rate debt and hedged positions and higher market rates.

The interest expense estimates for the remainder of the year are obviously dependent upon any further rate fluctuations.

However, assuming rates remain constant, the incremental expense over the next three quarters related to the hedges and fixed-rate debt that expired at the end of last year will be approximately $200 million.

Within the unhedged position of our portfolio, assuming rates remain constant, we expect higher interest expense again in the second quarter of 2007.

This will be due in part to higher year-over-year market rates.

However, we would not expect to have an unfavorable impact during the remainder of 2007 since the market rates today are generally in line with where they were in the second half of last year.

While we continue to have some hedges in place, they cover a relatively small portion of our total funding.

In addition, the beneficial provision impacts from the U.S.

bankruptcy law change that we enjoyed last year will be much lower in 2007.

The greatest impact of the unfavorable comparison is in Q1 and Q2.

As you know, we have made considerable efforts over recent years to implement flexible business plans.

These plans position us to pull back on spending when required by external factors or business performance.

They also allow us to increase spending if the environment permits.

This quarter, we have seen the impact of these flexibility plans, which focus on the more discretionary items within operating expense first, and secondarily within our marketing expense base.

In fact, growth in total expenses for the quarter was only 4%.

While we scaled back on our marketing and promotion expenditures, we continue to spend on high-impact investments such as card acquisition and spend promotion campaigns.

And you may be aware that we launched the new Are You a Cardmember?

brand campaign last week, which highlights the specific benefits of American Express Cardmembership.

As mentioned going into the quarter, we knew we faced some challenges in terms of year-over-year growth.

We delivered the same message internally that we talk to you about on the year-end conference call -- namely, that we're going to rein in some of our discretionary spending in order to compensate for the high credit and interest costs that we expected to see in the first part of 2007.

That is a message that our business colleagues took to heart and acted upon aggressively.

Our organization has learned to move quickly on expense control, and we have developed the ability to redirect investment spending toward the highest-priority projects.

And that is exactly what we did.

Looking back on the quarter, in light of the strong top-line growth we were generating, we probably over-flexed our cost control muscle a bit.

If we had perfect foresight, we would have invested significantly more in marketing and promotion activities.

In addition to our flexibility measures, we remain focused on re-engineering to maximize our ability to invest in key growth initiatives.

While re-engineering will likely generate some costs from period to period, it positions us to continue to effectively control underlying operating expense growth.

Overall, we leveraged our investment optimization and re-engineering discipline to allocate our resources to initiatives that will provide the greatest return on investment.

This tactic, combined with the benefit of prior-year investments and strong top-line growth, we believe will help to minimize the impact on business momentum while controlling expenses thoughtfully.

Despite some of the near-term pressures we see, we continue to have confidence in the outlook of our business for several reasons.

Our position within our targeted affluent and high-spending Cardmember base is excellent.

It is supported by our ability to leverage our direct merchant relationships, the unique information benefits of our closed-loop network and our attractive rewards program.

All of these enable us to deliver premium, differentiated offerings to our customers while driving incremental spend to our merchants.

We believe these advantages and our position within the marketplace are not easily replicated by our competitors.

We are also very optimistic about the broad growth opportunities within the payments industry.

We've spoken to you in the past about the plastic penetration upside we see, given the relatively low levels of spend currently on plastic throughout the geographies and customer segments in which we operate.

In particular, we also highlighted the opportunities within consumer, small-business, middle-market and GNS businesses.

Given our recent business success and our strong track record of innovation, product development and customer-focused marketing, we believe that we are well positioned to execute against these growth opportunities in a manner that appropriately balances our short-, medium- and long-term business and financial goals.

Thanks for listening.

We are now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Meredith Whitney, CIBC World Markets.

I had a point of clarification and then a question.

My clarification is it looks as if the numbers in the release today are different from the K that you guys put out late March.

Is that right?

No, they should be exactly the same.

Okay, because in the segmented analysis, it looks like the numbers are different.

So the one difference -- I'm sorry, Meredith -- so there is one difference.

The one difference is that in the K, we had not pulled the Travelers Cheque and Prepaid Services numbers out of the U.S.

consumer services business, and we had not pulled out international bank from the international segment.

So you have to pull those out to see the comparison to the 8-K.

So that is a difference, you are right.

And then just to try to get some -- you did a great job in terms of explaining your overreach for cost expenses, and I appreciate that; it clarifies a lot.

I wanted to get an understanding of the consumer spending trends you have seen.

You held on to a greater discount rate than I had estimated.

And I am wondering if that is an indication that the higher-end spend customers are spending more at your better merchant rate outlets, and then what that says about the lower-end customer that you also have as Cardmembers.

Can you provide any clarification just for general trends -- spending trends?

Our consumer spend in the U.S.

actually ticked up a bit, as you indicated, although I don't think the fact that we held our discount rate even as compared to last year has to do so much with a change in mix of where our customers spend.

What I think it has to do with is our merchant services group has really done a terrific job in something we call value recapture.

So we have looked at segments of the market, and if we are bringing great value to merchants, we have selectively repriced those merchants or industries up to a higher amount.

And what that has done is helped to offset some of the erosion we see where we are doing some selective pricing down or there is a change in mix to more of the everyday spend category.

And at least in this quarter, those offset each other.

Eric Wasserstrom, UBS.

Just a quick question -- should we interpret -- I'm just trying to think about how to interpret your comments about the marketing spend in the period that has just ended with relation to going forward.

Does that mean that there's an incentive to rev it up from here, or is this like a run rate that we should think about?

I don't want to do a forecast, but what I would do is share some facts.

So the first quarter is the most difficult on a comparison basis for interest and provision for the reasons I cited related to interest.

And as you know, while all of '06 was unusually low, the first half was particularly low.

So that is the period where we have to react more stringently in terms of controlling both operating expense and marketing.

And as the grow-overs for provision and interest change, then you can think about how we will change what we're investing in marketing.

So you would say that right now, you probably have a little bit of clarity about trends heading into the next few quarters than you did a few quarters ago?

I think we have a good idea of how provision and interest grow-overs will improve as we go forward, and we will reflect that in our thinking in terms of our overall business.

Sanjay Sakhrani.

Could I get a clarification on that $200 million impact from the hedges on a go-forward basis?

Sure.

So what I was simply doing is saying that we had a certain amount of interest we paid on the $11 billion last year, and I was saying if interest rates in 2007 stay exactly where they are today on that $11 billion, then the $200 million is the difference.

And so we will have $200 million of higher interest expense over the balance of the year, as predicated on the assumption that rates stay where they are today for the balance of the year.

Is it fair to say that it would be more in the second quarter than the remaining quarters on that $200 million?

So on the piece related to what was previously hedged, it will more or less happen evenly over each of the three quarters.

If you are looking at the unhedged piece, we do have some grow-over still in the second quarter because the rates in the second quarter of last year were lower than they are today.

However, on the unhedged piece, when you get into the back of the year, again, assuming that rates stay constant, then the rates that are in place today are the same rates that were in place at the back end of '06.

That is very helpful.

And just, I guess, a quick clarification on that restatement question related to the Travelers Cheques -- was that mainly in the discount revenue line, in the U.S.

card segment?

When we pull it out, it is really on one line within revenues, but it is not the discount line, where the TC revenues showed up.

I guess I could clarify that a little later on with IR.

Okay, thank you very much.

Richard McCaffery, Stifel Nicolaus.

Just a follow-up on the discount rate comment that you made -- typically, we would have expected it to drift down.

Has the ability to reprice some of these accounts maybe shifted the expectation for that?

Do you think we will continue to see the same trend, or is there a little bit more stability in that line?

I can't forecast the discount rate.

I think you should look at recent history.

If you look last year, we dropped 1 basis point.

If you go back to '05 and '04, we dropped 3 basis points.

The success that we achieved in '06 was because of this targeted recapture program that we have that was very successful in those periods.

But you really need to think of all those facts together when you think about discount rate going forward.

This recapture program is something fairly new over the last year?

It is something we have been working on for probably the last 18 months or so, yes.

One follow-up, if I could.

You talk from time to time about looking at your small-business portfolio, and small-business growth as being a little bit of a barometer for what is happening in the economy at large.

And I was just wondering if you could give any color on that -- growth looks good in the small-business segment.

Can you see at the margin any signs of weakening, or do things look strong?

Our small-business portfolio continues to perform very well, as it has over the last several quarters, and so we are very pleased with that.

We have a very a good position within that market.

Our business teams are constantly developing new products and value propositions that will appeal to that market.

So we are very pleased with the success that we have had and continue to have in small business.

Brad Ball, Citigroup.

Dan, I wonder if you could comment on the year-over-year growth in managed loan receivables.

You are growing much faster than the industry overall.

If you can give us some color as to what is driving that and give us a sense as to how sustainable that is.

As you point out, loan growth is excellent, certainly far above where our peers are.

So loan growth is not one of our targets.

Our focus is the spend-centric model.

But spend-centric doesn't mean that we are just looking for high spenders on our charge card.

We're looking for high spenders who use the charge product, co-brand and other lending products.

And in fact, our lending billed business is going faster than the overall average.

So what we are seeing is a spill-through of that higher volume into the loan growth.

I think that is what is contributing to it.

And as long as that loan growth -- as long as the billings continue to grow, I think you'll see a comparable amount on the loan side.

That is what we have seen this quarter, and that is really the basis for our performance in the first quarter.

But why does the lending billed business grow faster?

Is it due to marketing that you did a year ago or some different program you have in place?

I think as we market, we market to both the charge product as well as the lending product, and in fact, the number of cards we have brought in, that we are bringing in more of lending cards than we are charge cards.

And as those customers start to spend, we're seeing the benefit of that.

And just a real quick one -- the reserve for the legal exposure in the international bank, what is that related to?

As we disclosed in the 10-K, the Department of Justice, late in 2006, notified us that they were concerned about some of the practices related to anti-money laundering at a subsidiary of American Express Bank Limited, which is based in Miami.

And based on the recent discussions that we have had with the Department of Justice, we determined that it was appropriate to provide a reserve for actions they may take.

Just before we take the next question, let me go back to the question about Travelers Cheques.

On our income statement, the line item is called Discount Revenues, Net of Card Fees and Other.

And within Other is where you had the revenues related to Travelers Cheques.

And so that is why you have a question on that line, and that is the line that it is in.

So I'm ready for the next question.

(OPERATOR INSTRUCTIONS).

Ken Bruce, Merrill Lynch.

Two questions, if you would, please.

Could you tell us how much of the lending balances are coming from charge card products?

And separately, would you provide any detail as to how long it takes for new cards, whether those be charge or lending, how long it takes to see a new card turn into either a balance receivable or spending on that, just your typical seasoning, please?

Lending on charge represents between 20% to 25% of the loan balance.

With respect to how long it takes a customer to ramp up spending, it varies -- I think each customer is different, but it takes several months for the Cardmember to really start to spend.

And then I think it is based on our experience with them in terms of the interaction where it goes from there.

But it takes generally several months before it ramps up to a recurring level that they stay at.

And is there a change in either of those metrics recently?

I don't think it has changed radically in recent months, no.

There are no further questions at this time.

Thank you, everyone, for dialing in to the call.

We appreciate your participation, and if people have other follow-ups, our Investor Relations group is here to answer those questions.

Thank you.

This concludes today's American Express conference call.

You may now disconnect.