American Express Company (NYSE:AXP) Q4 2022 Earnings Call Transcript

American Express Company (NYSE:AXP) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q4 2022 Earnings Call. 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, Ms. Kerri Bernstein. Thank you. Please go ahead.

Kerri Bernstein: Thank you, Donna 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 discussed. 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 Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our financial performance. After that, we will move to a Q&A session on the results with both Steve and Jeff. With that, let me turn it over to Steve.

Steve Squeri: Thanks, Kerri. Good morning, everyone. Thanks for joining us today. It’s great to be with you to talk about our 2022 results and our outlook for 2023. As I go through our results, I will tell you why they strengthened my confidence in our plan to generate strong growth over the long-term. A year ago, we introduced our growth plan, which provided a roadmap for delivering annual growth rates for revenue and earnings per share at levels that are higher than the strong growth rates we were delivering before the pandemic. Our results over the last four quarters demonstrate that our strategy is clearly working. We exceeded the full year guidance we laid out in our growth plan for both revenues and EPS and we did so against the mixed economic environment.

Revenues, which reached all-time highs for both the quarter and the year, were up 25% for the full year, exceeding the 18% to 20% guidance we started the year with. An earnings per share of $9.85 was well above our guidance of $9.25 to $9.65. The momentum we saw through the year in Card Member spending, engagement and retention continued in the fourth quarter. Fourth quarter billed business reached a record quarterly high of $357 billion and was up 25% for the full year demonstrating our continued ability to acquire, engage and retain high spending premium card members. Customer retention and satisfaction remained very strong. In addition to strong internal metrics, we were recognized once again by our customers for providing industry best products and services, ranking number one in customer satisfaction in both the 2022 J.D. Power U.S. consumer credit card study and the U.S. small business card study.

The investments we have made in our value propositions continue to attract large numbers of new premium customers. We acquired 3 million new card members in the fourth quarter even as we increased our already high credit thresholds through the year. For the full year, new card acquisitions reached a record level, growing at $12.5 million and nearly 70% of our new accounts acquired are on our fee-based products. Millennial and Gen Z customers continue to be the largest drivers of our growth, representing over 60% of proprietary consumer card acquisitions in the quarter and for the full year. Credit metrics remained strong, supported by the premium nature of our customer base, our exceptional risk management capabilities and the thoughtful risk actions we have taken for the year.

Looking ahead to 2023 and beyond, let me tell you why these results increase my confidence that we are positioned to deliver on our growth plan aspirations. First, we are in a great business. We operate in the most attractive segments and geographies of the fast growing payment space. As highlighted by our leadership positions with premium consumers, including millennials and Gen Zers small and medium-sized businesses as well as serving the largest corporations in the world. We bring to this space a number of advantages that are very difficult for our competitors to replicate. These include our brand, our unique membership model, a premium global customer base and an integrated payments model. Forming the foundation of these advantages is our talented dedicated colleagues who deliver unparalleled service to our customers.

Put together, the marketplace opportunities we see and the competitive advantages we can leverage create a long runway for growth. We intend to capture these opportunities and building our momentum by continuing to invest at high levels in several key areas, continuously innovating our consumer and SME products, refining our powerful marketing and risk management engines and capturing our fair share of lending. Growing merchant acceptance with a particular focus outside the U.S. and expanding partnerships to drive customer value across the enterprise, continuing to introduce new digital capabilities that deliver seamless, intuitive customer experiences in their channels of choice and expanding into adjacencies that reinforce our core, such as new lifestyle and financial services for consumers and SMEs, which adds more value to our membership model.

All this investment happens while continually focused on gaining efficiencies in our marketing and operating expenses. As we have demonstrated consistently over the past 2 years, executing this investment strategy builds scale, which fuels a virtuous cycle of growth, it starts with a high spending, highly engaged premium customer base. These premium customers attract a growing network of merchants and partners who add more value to our membership model, which in turn enables us to attract more premium customers who attract more merchants and partners, which creates more scale. This scale enables us to generate more investment and operating efficiencies in our membership model making it more difficult for our competitors to catch up. So what does this mean for 2023?

Our plan for this year is built on continuing our investment strategy in the areas I mentioned while factoring in the blue-chip economic consensus for slowing macroeconomic growth. And as always, we have plans in place to pivot should the economic environment change dramatically. This translates into 2023 guidance consistent with what we originally laid out in our growth plan last year. Specifically, we expect revenue growth of 15% to 17%, which is higher than our long-term growth plan aspirations and EPS of $11 to $11.40. In addition, we plan to increase our quarterly dividend on common shares outstanding to $0.60 a share, up from $0.52 beginning with the first quarter 2023 dividend declaration. To sum up, our 2022 performance shows that our strategy is working.

And based on our performance to-date and what we see for 2023, I am even more confident in our ability to achieve our aspirations for double-digit annual revenue growth and mid-teens EPS growth in 2024 and beyond. I will now turn it over to Jeff to provide more detail about our performance. As always, we will have a Q&A session after Jeff’s remarks.

Jeff Campbell: Well, thank you, Steve and good morning, everyone. It’s good to be here to talk about our €˜22 results, which reflects steady progress against our multiyear growth plan that we announced last January and also to talk about what our 2022 results mean for 2023. I will also spend some of our time this morning focusing on our full year trends since it is year-end and since looking at our business on an annual basis is more in sync with how we actually run the company. Starting with our summary financials on Slide 2, full year revenues reached an all-time high of $52.9 billion, up 27% on an FX-adjusted basis. Notably, our fourth quarter revenues of $14.1 billion also reached a record high for the third straight quarter and grew 19% on an FX adjusted basis.

This revenue momentum drove reported full year net income of $7.5 billion and earnings per share of $9.85. For the quarter, we reported net income of $1.6 billion and earnings per share of $2.07, which did include a $234 million impact from our net losses in our Amex Ventures strategic investment portfolio. As I have said throughout the year, year-over-year comparisons of net income have been challenging due to the sizable credit reserve releases we had in 2021. Because of these prior year reserve releases, we have also included pre-tax pre-provision income as a supplemental disclosure again this quarter. On this basis, pre-tax, pre-provision income was $11.8 billion for the full year and $2.9 billion in the fourth quarter, up 27% and 23% respectively versus the prior year, reflecting the growth momentum in our underlying earnings.

So now let’s get into a more detailed look at our results, beginning with volumes, starting on Slide 3, we saw good quarter-over-quarter growth in volumes. I would note that we reached record levels of spending on our network in both the fourth quarter and full year 2022. Total network volumes in billed business were up 16% and 15% year-over-year in the fourth quarter and 24% and 25% for the full year, all on an FX-adjusted basis. Now of course, growth rates for quarters earlier in the year included more of a recovery on the lower levels of volumes in 2021. And we are now to the point where we have lapped the majority of this recovery. We are pleased with this growth and the fact that it is being driven across customer types and geographies.

On Slides 4 through 7, we have given you a variety of views across our U.S. consumer services, commercial services and International Card Services segments and the various customer types within each. There is a few key points I suggest you take away from these various perspectives. Starting with our largest segment, U.S. consumer billings grew 15% in the fourth quarter, reflecting the continued strength in spending trends from our premium U.S. consumers. Our focus on attracting, engaging and retaining younger cohorts of card members through our value propositions, drove the 30% growth in spending from our millennial and Gen Z customers on Slide 5, who you can now see make up 30% of spend within the segment. Turning to Commercial Services, you see that spending from our U.S. small and medium-sized enterprise customers represents the majority of our billings in the segment, supported by our strategic focus on expanding our range of products to help our SME clients run their businesses.

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We saw another quarter of solid growth in U.S. SME, though you can see that it was the slowest growing customer type this quarter, up 80% year-over-year. As you heard Steve talk about a bit last month at an investor conference, our SMEs have recently started to slow down spending in service categories such as digital advertising, so we continue to monitor spending trends. Moving to our U.S. large and global corporate customers, the one small customer type that has not come back to pre-pandemic spend levels, they did continue though their steady recovery this quarter with overall billings now 11% below pre-pandemic levels. And lastly, you see our highest growth in international card services as this segment is now in a steep recovery mode given it started its pandemic recovery later than other segments.

Spending from international consumer and international SME and large corporate customers grew 23% and 32% year-over-year respectively in Q4. Across all customer types, T&E spending momentum remained particularly strong in the fourth quarter. While we also saw a nice sequential growth in the amount of goods and services spending versus last quarter, so there were a few pockets that slowed, such as the digital advertising spend in SME that I mentioned earlier. So what do all of these takeaways mean for 2023? At this point, on a dollar basis, most of our spending categories have fully recovered. So I would expect more stable growth rates this year across spending categories with the exception that year-over-year growth rates for T&E spending will likely be elevated in Q1 as we lap the impact of Omicron from the prior year.

Importantly, all of the things that Steve just talked about that make up the strategy underlying our growth plan have created a foundation for sustainable growth rates greater than what we were seeing pre-pandemic. Now moving on to loans and Card Member receivables on Slide 8, we saw year-over-year growth of 24% in our loan balances as well as good sequential growth. This loan growth is now exceeding our spend growth as customers steadily rebuild their balances. Given the volumes, of course, have now lapped, there is deep phase of recovery, we do expect the growth rate of our loan balances to moderate as we progress through 2023, but to remain elevated versus pre-pandemic levels. The interest-bearing portion of our loan balances, which surpassed 2019 levels last quarter also continues to consistently rebuild with over 70% of year-over-year growth in the U.S. coming from our existing customers, which is about 10 percentage points more than what we saw in the years leading up to the pandemic.

As you then turn to credit and provision on Slides 9 through 11, the high credit quality of our customer base continues to show through in our strong credit performance. Card Member loans and receivables write-off and delinquency rates remain below pre-pandemic levels. So they did continue to pick up this quarter as we expected, which you can see on Slide 9. Going forward, we expect delinquency and write-off rates to continue to move up over time, but to remain below pre-pandemic levels in 2023 for Card Member loans. Turning now to the accounting for this credit performance on Slide 10 and to this year-end and because the pandemic has clearly impacted the timing of quarterly reserve build and release adjustments across the industry, I think it’s helpful to look at our full year provision results.

Full year 2022 provision expense was $2.2 billion, which included a $617 million reserve build, primarily driven by loan growth, the continued steady and expected increase in delinquency rates and changes in the macroeconomic outlook as the year progressed. The $2.2 billion number is of course still unusually low by historical standards relative to the size of our loan balances and card member receivables. Of the full year $617 million reserve build, we saw $492 million of it in the fourth quarter. Since earlier this year, we were still releasing a significant amount of the credit reserves we have built to capture the uncertainty of the pandemic. At this point, we no longer have any of these pandemic-driven reserves remaining on our balance sheet.

Moving to reserves on Slide 11, you can see that we ended 2022 with $4 billion of reserves, representing 2.4% of our total loans in Card Member receivables. This reserve rate is about 50 basis points below the levels we had pre-pandemic or day 1 CECL reflecting the continued premiumization of our portfolio and the strong credit performance we have seen. We view this consolidated reserve rate as more comparable to day 1 CECL than the individual loans and receivables rates. Because as we talked a bit last quarter, our charge products in many instances now have some embedded lending functionality. We expect this reserve rate to increase a bit as we move through 2023, but to remain below pre-pandemic levels. Taking all of this into account, in 2023, you should expect to see provision expense move back towards more of a steady state relative to the size of our loan balances and Card Member receivables for the first time since we adopted CECL in early 2020.

Given the combination of our strong loan growth and the unusually low level by historical standards of provision expense in 2022, I would expect a significant year-over-year increase in provision expense. Moving next to revenue on Slide 12, total revenues were up 17% year-over-year in the fourth quarter and up 25% for the full year. This is well above our original expectations, driven by the successful execution of our strategy and is part of which strengthens our confidence in our long-term aspirations. Before I get into more details about our largest revenue drivers in the next few slides, I would note that you see a 200 basis point spread between our FX-adjusted revenue growth and reported revenue growth for this quarter. While this is less of an impact from the strong dollar than what we saw in the prior quarter, it does remain a modest headwind.

Our largest revenue line, discount revenue grew 16% year-over-year in Q4 and 27% for the full year on an FX-adjusted basis. As you can see on Slide 13, this growth is primarily driven by the momentum seen in our spending volumes throughout 2022. Net card fee revenues continued to accelerate throughout this year, up 25% year-over-year in the fourth quarter and 21% for the full year on an FX-adjusted basis, as you can see on Slide 14. In 2023, I expect net card fees to be our fastest growing revenue line. I would expect growth to moderate from the extremely high level we saw this quarter. This steady growth is powered by the continued attractiveness to both prospects and existing customers of our fee-paying products due to the investments we have made in our premium value propositions, as Steve discussed earlier, with acquisitions of U.S. Consumer Platinum and Gold Card members and U.S. business Platinum Card members, all reaching record highs in 2022.

Moving on to Slide 15, you can see that net interest income was up 32% year-over-year in Q4 and 28% for the year on an FX-adjusted basis due to the recovery of our revolving loan balances. The rising interest rate environment has had a fairly neutral impact on our results in €˜22 as deposit betas lagged the rapid and steep benchmark rate increases during the year. However, when you think about 2023, deposit betas are now in line with more historical levels. So I would expect the year-over-year impact from rising rates to represent more of a headwind in 2023. To sum up on revenues, we are seeing strong results across the board and really good momentum. Looking forward into 2023, we expect to see revenue growth of 15% to 17%. Now all this revenue momentum we just discussed has been driven by the investments we have made in those investments show up across the expense lines you see on Slide 17.

Starting with variable customer engagement expenses, these costs, as you see on Slide 17, came in at 42% total revenues for the fourth quarter and 41% for the full year. Based off the Q4 exit rates, combined with our continued focus on investing to innovate our products, I would expect variable customer engagement costs to approach 43% of total revenues in 2023. On the marketing line, we invested around $1.3 billion in the fourth quarter and $5.5 billion in the full year. As a reminder, our marketing dollars mostly represent the things we do to directly drive the great customer acquisition results we are seeing. As we look forward, we remain focused on driving efficiency so that our marketing dollars grow far slower than revenues as we did for many years prior to the pandemic.

As a result in 2023, we expect to have marketing spend that is fairly flat to 2022. Moving to the bottom of Slide 17 brings us to operating expenses, which were $4.1 billion in the fourth quarter and $13.7 billion for full year €˜22. In understanding our OpEx results, it’s important to note the net mark-to-market impact to our Amex Ventures strategic investment portfolio that I mentioned earlier with reference to Q4. These gains and losses are reported in the OpEx line and totaled $302 million in losses for full year 2022, while in the prior year, we had a $767 million benefit in net gains. Even putting this aside, as Steve and I have discussed all year, our 2022 operating expenses do represent a step function increase compared to prior years as we have invested in key underpinnings to support our revenue growth and this inflation has had some impact on our expenses.

Moving forward, similar to marketing, we are focused on gaining efficiencies and getting back to the low levels of growth in OpEx that we have historically seen. For 2023, we expect operating expenses to be around $14 billion and see these costs as a key source of leverage relative to the high level of revenue growth in our growth plan. Last, our effective tax rate for full year 2022 was around 22%. Our best estimate of the effective tax rate in 2023 is between 23% to 24%, absent any legislative changes. Turning next to capital, on Slide 18, we returned $4.9 billion in capital to our shareholders in 2022, including $1 billion in the fourth quarter with $639 million of common stock repurchases and $389 billion in common stock dividends, all on the back of strong earnings generation.

We ended the year with our CET1 ratio at 10.3% within our target range of 10% to 11%. In Q1 €˜23, as Steve discussed, we do expect to increase our dividend by 15% to $0.60 per quarter, consistent with our approach of growing our dividend decline with earnings and our 20% to 25% target payout ratio. We will continue to return to shareholders the excess capital we generate while supporting our balance sheet growth going forward. That then brings me to our growth plan and 2023 guidance on Slide 19. 2022 was a strong year where we exceeded our full year guidance that we laid out in our growth plan last January for both the revenues and EPS. These results have strengthened our confidence in our 2023 guidance. First and most importantly, we expect the strategies that Steve laid out earlier to deliver continued high levels of revenue growth, leading to our revenue growth guidance for 2023 of 15% to 17% and setting us up well for 2024 and beyond.

As you think about the drivers of EPS growth in 2023, first, we expect to return to the low levels of growth we have historically driven in our marketing and operating expenses producing some nice leverage. Going the other driver, the two notable headwinds that should be just 2023 challenges are around the year-over-year impacts of provision and of interest rates, as I discussed earlier. Combining all of these factors together, it leads to our EPS guidance of $11 to $11.40 for 2023. There is clearly uncertainty as it relates to the macroeconomic environment. But as Steve discussed, our 2023 guidance factors in the blue-chip macroeconomic consensus, which is for slowing growth though not a significant recession. I’d also say that our guidance is based on what we are actually seeing in terms of behavior from our customers around the globe.

And of course, it reflects what we know today about the regulatory and competitive environment. We feel good about the momentum we see in our business and in any environment, remain committed to running the company with a focus on achieving our aspirations of sustainably delivering revenue growth in excess of 10% and mid-teens EPS growth in 2024 and beyond as we get to a more steady-state macro environment. And with that, I’ll turn the call back over to Kerri to open up the call for your questions.

Kerri Bernstein: Thank you, Jeff. And with that, the operator will now open up the line for questions. Operator?

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Q&A Session

Operator: Our first question is coming from Ryan Nash of Goldman Sachs. Please go ahead.

Ryan Nash: Hey, good morning, everyone.

Steve Squeri: Good morning, Ryan.

Jeff Campbell: Good morning, Ryan.

Ryan Nash: So Steve, maybe just to focus on the revenue growth, so obviously, 15% to 17% is much better than the market was expecting, given macro concerns. And there is obviously been a little bit of an uptick in white collar unemployment. So could you maybe just talk high level about how you’re able to put up this type of revenue growth in a somewhat weakening environment? Maybe just talk through some of the things that are idiosyncratic to Amex that Jeff just referenced, at the end of the call that maybe the market isn’t appreciating that should be big drivers of revenue growth in the year ahead. Thanks.

Steve Squeri: Well, I think Jeff really hit it. I mean, what he basically said was, and this is where we what we’re focused on is we can only run the business and forecast the business on what we’re seeing. And what we’re seeing is we’re still seeing high consumer growth. We’re seeing high consumer growth in international. We talked about some moderation in small business. Corporate spending still has not come back. Jeff talked about T&E. But I think when you think about the model, I think what €“ you have to get an appreciation for is we’re a small segment of the overall U.S. population, and it’s a premium customer base. And that premium customer base, while not immune to economic downturn, certainly, right now is spending on through.

And so the other thing that we’ve been doing is we’re constantly tightening up the card members that we’re acquiring. I mean, look, the card member base we have today is from a credit perspective, better than the card member base that we had pre-pandemic. And card members we’re acquiring today are reaching a higher hurdle rate than ones we acquired just a year ago. And because of the value, there is still a good pool of customers that are out there. As far as overall white-collar unemployment, what I would say is, yes, you’ve seen some headlines of individual companies that are going through layoffs. But the one thing that I would say is I think it’s really important to look at where these companies were pre-pandemic. And they are probably still at employment levels that are much higher than what they were pre-pandemic.

And so there is a rightsizing a little bit. But even with that rightsizing, we still have unemployment rates under 4%. And so look, we look at unemployment. But it has not, at this particular point in time, had any impact on our on our card member base. I mean, again, keeping our write-offs at 0.8 and 0.6 is sort of not sustainable and were 1.1, as Jeff said, it shows on the slides. And that will tick up a little bit over time. But that’s just normal for the business. So I think what you have to really €“ you have to look at is this is a premium card member base that appreciates premium products and is spending. And it is a €“ it is a small piece of the overall U.S. economy. And we’ve talked about the economy being bifurcated and it’s probably no better example of what we have here.