American Express Company (NYSE:AXP) Q1 2024 Earnings Call Transcript

American Express Company (NYSE:AXP) Q1 2024 Earnings Call Transcript April 19, 2024

American Express Company beats earnings expectations. Reported EPS is $3.33, expectations were $2.97. AXP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Kartik Ramachandran. Please go ahead.

Kartik Ramachandran: Thank you, Daryl, and thank you all for joining today’s call. As a reminder, before we begin, today’s discussion contains forward-looking statements about the company’s future business and financial performance. These 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 statements are included in today’s presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter’s earnings materials, as well as the earnings materials for the prior periods we discuss. All of these are posted on our website at ir.americanexpress.com.

We will begin today with Steve Squeri, Chairman and CEO who will start with some remarks about the Company’s progress and results, and then Christophe Le Caillec, Chief Financial Officer will provide a more detailed review of our financial performance. After that, we’ll move to a Q&A session on the results with both Steve and Christophe. With that, let me turn it over to Steve.

Stephen Squeri: Thank you. Q1 was another strong quarter with revenues up 11% year-over-year to $15.8 billion and EPS up 39% to $3.33. The trends we’ve seen for the past several years continued through the first quarter of 2024. Our double-digit revenue increase was driven by strong spending growth, up 7% overall on an FX-adjusted basis, with U.S. consumer card spending up 8% in the quarter and spending from international card members up 13% on an FX-adjusted basis. Spending by U.S. SME card members continued to be soft, but new customer acquisitions, retention and credit on our small business products all continue to be strong. Fee revenues again grew by double-digits, up 16% on an FX-adjusted basis. We continue to attract high spending, high credit quality customers to the franchise with new card acquisitions accelerating quarter-over-quarter, adding 3.4 million new cards in the quarter.

Our fee-based products accounted for approximately 70% of the new account acquisitions globally and we continue to see strong demand from Millennial and Gen Z consumers, who accounted for over 60% of the new consumer account acquisitions globally. Finally, our credit metrics continue to be best-in-class. The ongoing momentum in our business is a result of the great work of our colleagues across the company and the loyalty and engagement of our premium customers around the world. Based on our performance and the trends we’ve seen through the first quarter, we are reaffirming our full year guidance of 9% to 11% revenue growth and EPS of $12.65 to $13.15. Our first quarter results continue to show that our strategy is working and we feel good about where we are and where we are heading.

In 10 days, we’ll be hosting our 2024 Investor Day. At that session, we’ll have a series of presentations from our senior business leaders that, taken together, will demonstrate why we are confident that our long-term growth aspiration is the right one. We will discuss our strategy for growing our premium consumer base in the U.S. through our membership model, our plans for winning the recovery in the U.S. small business space, our runway for growth in international, our progress in expanding merchant coverage and enhancing our network capabilities globally, how we are driving efficiency, growth and service through technology, and how it all comes together from a financial perspective. We’ll end our Investor Day with a Q&A session. Christophe will now take you through a detailed look at Q1 performance.

Christophe Le Caillec: Thank you, Steve, and good morning, everyone. It’s good to be here to talk about the first quarter results, which reflect another quarter of strong results and are tracking in line with the guidance we gave for the full year. Starting with our summary financials on Slide 2. First quarter revenues were $15.8 billion and grew 11% year-over-year. This revenue momentum drove reported net income of $2.4 billion and earnings per share of $3.33. On Slide 3, billed business grew 7% versus last year in the first quarter on an FX-adjusted basis, in line with the overall spend environment we have seen in the past few quarters as we expected. Looking by category, we saw 6% growth in goods and services spending and 8% growth in travel and entertainment spending.

There are a few other key points to take away as we then break down our spending trends across our businesses. Starting with our largest segment on Slide 4, U.S. Consumer grew billings at 8% this quarter, with growth across all generations and age cohorts. Millennial and Gen Z customers grew their spending 15% and continued to drive our highest billed business growth within this segment. In fact, we see that younger customers use their cards more overall and this is even more pronounced in certain spend categories. For example, customers aged 35 and under use their cards at restaurants over 70% more on average than other customers in this segment. Looking at Commercial Services on Slide 5, overall growth came in at 2% this quarter. Spending growth from our U.S. small and medium-sized enterprise customers remain modest, given unique dynamics seen by small businesses.

Lastly, on Slide 6, you see our highest growth again this quarter in International Card Services, up 13%. We continue to see double-digit growth in spending from international consumers and from international SME and large corporate customers, as well as strong growth across our geographies. Overall, while we do continue to see a softer spend environment, our spending volumes are tracking in line with our expectations to support our revenue guidance for the full year and we are pleased with the continued strong engagement of our customers as the number of transactions from our card members continued to grow double-digits this quarter. Now moving on to loans and Card Member receivables on Slide 7. We saw year-over-year growth at 12%. As we progress through 2024, we continue to expect this growth to moderate, but to still grow modestly faster than billings.

Turning next to credit and provision on Slide 8 through 10. First, and most importantly, we continue to see strong and best-in-class credit metrics. We attribute this performance to the high credit quality of our customer base, our robust risk management practices and our disciplined growth strategy. As we expected, our write-off and delinquency rates ticked up a bit, increasing very modestly quarter-over-quarter. Going forward, we expect to see these delinquency and write-off rates remain strong with some continued modest increase in 2024. Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter growth in our loan balances combined with a modest increase in our Card Member loans and receivables delinquency rate resulted in a $148 million reserve build.

This reserve build combined with net write-offs drove $1.3 billion of provision expense in the first quarter. As you see on Slide 10, we ended the first quarter with $5.6 billion in reserves, representing 2.9% of our total loans and Card Member receivables. We continue to expect this reserve rate to increase a bit as we move through 2024, similar to the modest increases we’ve seen over the past few quarters. Moving next to revenue on Slide 11. Total revenues were up 11% year-over-year in the first quarter. Our largest revenue line, discount revenue, grew 6% year-over-year in Q1 on an FX-adjusted basis as you can see on Slide 12. This growth is mostly driven by the spending trends we discussed earlier. Net card fees revenues were up 16% year-over-year in the first quarter on an FX-adjusted basis as you can see on Slide 13.

We are pleased with this growth and continue to expect to exit the year with some further momentum reflecting our cycle of product refreshes. In the quarter, we acquired 3.4 million new cards, demonstrating the demand we are seeing for our products and the investments we’ve made. Importantly, acquisition of our premium fee-based products accounted for around 70% of new accounts and the spend revenue and credit profiles of our new card members continue to look strong. Moving on to Slide 14. You can see that net interest income was up 26% year-over-year in Q1. This growth is driven by the increase in our revolving loan balances and also by continued net yield expansion versus last year. We do expect this growth to continue to moderate as we move through the year.

And I would remind you that, for our business model, we would not expect to see a meaningful impact from a lower interest rate environment this year. To sum up, revenues on Slide 15. The power of our diversified model continues to drive strong revenue growth momentum. I would note, as you think about the CFPB late fee rule, that late fees from our U.S. consumer segment make up a small portion, less than 1% of our overall revenue. While we have no specific plans to mitigate as of now, we are always looking at our pricing and policies in the ordinary course of business. Moving to expenses on Slide 16. Starting at the top of the page, variable customer engagement expenses came in at 40% of total revenues for the first quarter. As you look at these costs, I would note that Card Member rewards included a $196 million benefit as a result of enhancements to our remodels for estimating future membership rewards redemptions, some of which we reinvested for growth in our marketing line.

Looking forward, I still expect our variable customer engagement expenses to grow slightly higher than our revenue on a full-year basis as we continue to focus on our premium products and drive engagement from our Card Members. On the marketing line, we increased investments to $1.5 billion in the first quarter. We continue to be pleased with the strong, high-quality customer acquisition and engagement we see as a result of these actions, and we are on track to increase marketing spend in 2024 versus last year. Moving to the bottom of Slide 16 brings us to operating expenses, which were $3.6 billion in the first quarter flat to last year’s expense and in line with our expectations for the year. When you look at the components of our operating expenses, salaries and benefit grew modestly versus last year compared to the growth we’ve seen in this line over the past years.

This reflect the discipline with which we manage our expenses and is a great example of how we’re able to drive efficiency while continuing to grow our business. We continue to see OpEx as a key source of leverage and are focused on delivering low levels of growth as we have historically done. Turning next to capital on slide 17, we returned $1.6 billion of capital to our shareholders in the first quarter on the back of strong earnings generation. Our CET1 ratio was 10.6% at the end of the first quarter, within our target range of 10% to 11%. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. We do not expect any material near term changes to our capital management approach.

That brings me to our 2024 guidance on Slide 18. We feel really good about our first quarter results, which are tracking in line with our expectations for the year. These results continue to reinforce that our strategy is working and we plan to continue to invest to support our momentum. As Steve discussed, for the full year 2024, we are reaffirming our guidance of having revenue growth of 9% to 11% and earnings per share between $12.65 and $13.15 and we remain committed to running the business for the long-term. As a reminder, this guidance and the items related to the full year 2024 that I just walked through do not include the potential impact from the sale of our certified business that we previously announced. We expect to realize a sizable gain on the sale and to reinvest a substantial portion of the gain back into our business, as we’ve done with similar transactions in the past.

We still expect the deal to close in the second quarter and plan to provide more detail then. With that I’ll turn the call back over to Kartik to open up the call for your questions.

Kartik Ramachandran: Thank you, Christophe. 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 for questions. Operator?

Operator: [Operator Instructions] Our first question comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

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Q&A Session

Sanjay Sakhrani: Thank you. Good morning. I guess question for both Steve and Christophe. Christophe, you said that you guys are seeing a softer spending environment. I’m just curious, when you look at the data, what’s driving that? Is it inflation? Is it just a bit of tapering off after the post-pandemic spending? And I’m just curious, as we think about what gets that going again, what is it? Obviously, the comparisons get easier as well, so that should help. But maybe you could just walk through that. Thank you.

Stephen Squeri: Yeah. Let me start and then Christophe can jump in. But when you look at overall spending, our overall spending is 7%, but consumer spending is 8%. And I think consumer spending is relatively strong. And when you look at international, international consumer spending is up 14%. And overall, international is up 13%. Where you’re seeing some softness is in SME. And so SME is up approximately 1%. And so I think as SME comes back, which we look as an opportunity down the road, as SME comes back, that will drive some stronger spending. And I think the good things that we see from an SME perspective is that we are still acquiring cards, credit looks really good. And even though organic has come down, organic transactions have gone up. So I think in aggregate, we see softness. And I think a lot of that softness is driven from a commercial perspective, but 8% consumer growth in the U.S. is not too bad.

Operator: Thank you. Our next question comes from the line of Mihir Bhatia with Bank of America. Please proceed with your question.

Mihir Bhatia: Hi. Thanks for taking my question. I wanted to ask about the membership rewards expense. It looks like there’s a little bit of a change there with model enhancements and stuff. Can you just talk about that a little more? Did the estimate for the URR, the redemption rate change from the 96% at year-end? Like, should we think of this $196 million benefit as a one-time thing? Or is that going to be continuous?

Christophe Le Caillec: Hey, Mihir. Thank you for the question. So you should think about it as a one-time thing. And the URR is 96%. It’s still at 96%. What we do is, because it’s such an important model for us, we, on a regular basis, redevelop the model. And every time we redevelop the model, we try to enhance the model. So we feed the model with more data and try to refine their URR calculation. That’s exactly what happened. And when we did that in Q1, we came back with a little bit of a benefit. I say a little bit because you have to remember that the entire membership rewards bank is about $14 billion. It’s a bit less than $14 billion. So $196 million is very small compared to the size of the balance sheet. And so it’s a one-off, and we don’t expect something similar anytime soon.

Operator: Thank you. Our next question comes from the line of Mark DeVries with Deutsche Bank. Please proceed with your question.

Mark DeVries: Yeah. Thanks. Could you discuss what drove the reacceleration in the new card growth this quarter?

Stephen Squeri: Yeah. I mean, so we invested more. And I think when you go back and you look at the first quarter of last year, we had 3.4 billion — 3.4 million, excuse me, 3.4 billion would be a pretty sizable amount of cards to acquire in a quarter. 3.4 million cards acquired. And if you remember at that time, you had the SVB situation. And so there was a pullback. There was not only a pullback on our side, there was a little bit of a pullback in the industry. And I think there was some consumer trepidation as well. And so as the year went on, we started to build up, and it culminated this year with — in the first quarter of 3.4 million cards. We invested more in marketing, as we said we were going to do. But I’d also like to highlight that a key driver of that acceleration is the product refreshes that we do.

We’ve talked a lot how product refreshes really stimulate demand and how it makes our marketing dollars work a lot harder. And so we had the delta product refreshes. We had a product refresh in Japan. We had a Hilton small business card. We had a British Airways card. And we’re on our way to those 40 product refreshes that we talked about. And what product refreshes do, they do stimulate demand, and it stimulates upgrades and so forth. So that’s really what’s behind the increase sequentially of cards quarter-over-quarter. But we are sort of back to where we were at this time last year.

Christophe Le Caillec: The only thing I would add, Mark, is as we increase the NCA, the percentage of new cards that are coming at a fee-paying product remains stable, about 70%, right? So it talks about the quality of this 3.4 million new cards.

Operator: Thank you. Our next question comes from the line of Craig Maurer with FT Partners. Please proceed with your questions.

Craig Maurer: Yeah. Good morning. Thank you. So I wanted to ask about your assumptions on Page 23 of the deck. It looks like for quarters, the second and third quarter, you are assuming a better macro scenario in the U.S. So just curious within combination of the rewards.

Kartik Ramachandran: Please stand by. We are waiting for our operator.

Craig Maurer: Sorry. Were you guys hearing me or?

Operator: I’m here.

Craig Maurer: Okay, sorry. So what I was saying was with the what seems to be firmer macro assumptions for quarters, second quarter — second and third quarter, and the rewards benefit, how come EPS guide was held flat? I’m assuming there’s probably a bigger buffer in there. And second, if you could comment on what the trends have been in your loan workout program? Have you been seeing higher lower additions to that program? And how’s progress been in terms of getting consumers on good payment plans and maintaining them? Thanks.