Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

American Express Company (NYSE:AXP)

Morgan Stanley Financials Conference

June 11, 2014 02:25 PM ET

Executives

Jeff Campbell - EVP, Finance and CFO

Analysts

Betsy Graseck - Morgan Stanley

Question-And-Answer Session

Betsy Graseck - Morgan Stanley

Okay, thank you very much for joining us this afternoon for our session with American Express. Before I introduce Jeff officially let’s go through a poll here. I just want to take the temperature of the audience on how you are thinking about American Express. So, first question over the next two to three years what do you think is the biggest growth opportunity for American Express; A, international expansion; B, improving merchant coverage through OptBlue; C, taking share from cash and checks and small business segment; D, prepaid. So let’s go through international, OptBlue, share from cash and checks or prepaid. International expansion, number one but followed by OptBlue, interesting. We should ask more international questions.

Okay. Next question is; when do you think American Express hit its on average and over time 8% year-on-year revenue growth target? Is that going to be in the second half of ’14; A; B, 2015; C, 2016; or D, not in the near term? So second half ’14, ’15 or ’16? Evenly split, ’15 and ’16. Okay. Well, we are pleased to have with us Jeff Campbell, CFO of American Express. Jeff became CFO of American Express in August last year. Prior to that he was CFO of McKesson Corporation, a healthcare services company for those of you who are not familiar with him.

We are await American Express at Morgan Stanley as we expect American Express’s new OptBlue program and upcoming investments in marketing as well as in improving consumer will drive strong revenue growth. Over the last year Amex has been one of the top performers in the group, up over 24% versus BTX at 17%. So we will be using the fireside chat format. As has been the case throughout the session, if you have a question during the topics that we’re discussing please feel free to raise your hands and chime in with the questions.

So Jeff one year-in, you’re relatively new to Amex with about a year under your belt and it would be helpful just for people here to understand how has it been? Relative to your initial expectations, what’s been the biggest positive surprise and biggest negative?

Jeff Campbell

Great. By the way I love the answers to the little poll. So I'm sure we can work in a little discussion of our own views on some of those. So you’re right, Betsy. I'm about a year in now at American Express and as you pointed out, this is actually my third round as a public company’s CFO because I started in the Airline business with American Airlines, where I was CFO; spent nine years at McKesson and decided to come to American Express because I really looked at three things. I think when you look at the combination of the tremendous regulatory change and technology change that is going on in the payments industry, going on with the way how commerce is done, going on in the merging of online and offline retail, it's a really interesting time I think to be in the businesses that we’re in at American Express and to me that kind of change creates opportunity. It creates challenge but creates opportunity. Second, this goes a little bit to the first question you asked, I saw tremendous growth opportunities at America Express, built upon a really solid core legacy business. And the third thing just on a personal level is culture and it’s a great brand and a great culture.

So a year in, with that as background, I would say a couple of things. The growth opportunities have probably even surpassed what I thought they were. When you look at most companies that are over 160 years old as we are at American Express that are going through lots of technological and competitive and regulatory change, I guess I would normally expect to see some things that are really struggling and are in fact rapidly declining, other parts of the business that are growing.

When you look at American Express, a little bit of the way I would have answered that first question is I would have said all of the above. We see tremendous growth opportunities internationally. Because when you look outside the U.S., we’re still mostly a niche player in each individual country. We are by far the largest global issuer or cards and our merchant network has a global span but in each individual country our modest -- there is still relatively modest which I view as a tremendous opportunity to grow over the years.

The OptBlue merchant coverage program I think has the opportunity in the next couple of years to dramatically change perceptions around coverage which will help all of our businesses. Small business, I probably would have voted a little higher than our conference attendees did because we look both in the U.S. and internationally at the very low penetration of plastic in the small business and see tremendous upside, particularly in our case where we can use the assets of our closed loop to help work on both sides of the equation, both what the small business can do with their card to help simplify their business site and what we can do to expand the merchants they want to interact with because of the closed loop and the fact we’ve got the merchant relationship as well. So the growth opportunities are tremendous. I would say if I balance that because, if I don’t balance -- if you probably ask me Betsy that come on, what has surprised you as being more challenging.

The regulatory environment which I actually saw as one of drivers of change, something that can create opportunity is a challenging environment obviously for financial services companies. And we have undertaken a tremendous amount of work as an organization over the last several years since we became a bank holding company. I would say we are well down the path on the journey to where we want to be, probably not quite all the way there and I actually think that while it creates some short-term challenges, it presents some interesting longer term opportunities for us. So that’s a little bit of a view one year in.

Betsy Graseck - Morgan Stanley

Great, thank you. Let’s talk a little bit about the performance versus targets. So there are -- over the past three years American Express has met the goals for the on average over time EPS growth and ROE growth, despite being slightly under on the revenue growth target. In a scenario where revenue growth does not kick back up to the 8% plus level. How do you keep hitting those goals, those EPS and ROE goals?

Jeff Campbell

Good question. So let me maybe provide a little bit of context. The interesting thing about the financial targets we have at American Express, which are long-term targets is they actually date back to 1994. So they certainly predate me. They actually predate Ken Chenault, our CEO. And while we’ve actually toyed a little bit with the ROE target as the Company has gone through various restructuring as in terms of the businesses we’re in, revenue and EPS targets have stayed where they were and if you take a 20 year view of the EPS target, you would actually see that other than in years when there was a severe economic downturn, the Company has been remarkably successful at hitting that target.

And I think that’s a remarkable track record and it’s a good lead and I think Betsy to your question, because we do start with the fact that the most important thing to us is to make sure we’re driving steady earnings per share growth for our shareholders. The ROE target is there to make sure we’re doing it in a thoughtful way in terms of how we deploy capital. And the revenue target is there, because it helps get us to the 12% to 15% in a normal economic environment and because when we look at the range of growth opportunities I talked about a few minutes ago, we think that is the right aspirational target.

Now if you look at the last couple of years, we have in pretty much every major country in which we do business seen economic growth that has been below what at least historically would be average trend growth rates. So we actually feel pretty good I would say about the fact that we have been achieving 5% to 6% revenue growth in that kind of economic environment. When you think longer-term about the global economy returning to its longer-term trend rates, when you combine that with the specific to American Express growth opportunities I talked about earlier, we continue to think the 8% is a very reasonable target for the on average over time target if you assume that economies will on average and over time grow with their long-term average.

But I would end a little bit with where I started, which is because we have a lot of different levers and a lot of different financial discipline in the Company, I think we have a pretty good track record of showing that even when the economic environment doesn’t allow us to get to that revenue target we’re very committed and have a lot of other levers to pull to get us to the EPS growth targets.

Betsy Graseck - Morgan Stanley

Yes. And you’ve done a great job with that in particular on expenses recently. But before we dig into expenses, let’s continue to talk about the top line and some of the new products that you have out there. Would love to get a sense as to how they are developing and how much you anticipate they’re going to be helping in the revenue growth that you are anticipating. So EveryDay card, the basic question is what’s the rationale behind it? Can you give us a sense as to how you’re seeing the uptick obviously? It’s been very recent. So not sure if that’s a really fair question. But would like to understand how you’re thinking about what the expectations are for EveryDay cards?

Jeff Campbell

So again, let’s start maybe by providing a little bit of context. If you think about our history, we started in the credit card business with one credit card, targeted at one particular type of demographic and one particular type of card member, who used it in a certain way. We have been on a journey for 50 years that has taught us that there's in fact of course many, many different types of customer segments who are all focused on a need for different kinds of value propositions and that’s why when you look at our product line today, it is quite a broad product line, because we start with a underlying philosophy that it’s all about having the right customer value proposition for each segment that we’re trying to target.

So that brings us to EveryDay. So as we continually scan the market, continually thought about all the different customer segments and where we have a product that provides a good value proposition where we don’t, there is a segment that we internally at least like to refer to as the multi-taskers, a lot of whom are moms, who when we would talk to this group would say well, American Express is a brand where your cards have fees and I got to pay it off every month and I got to earn, spend huge amounts of money on it until I can get to an airline ticket and those aren’t really products for me.

And so we felt there is a segment that absolutely meets all of our risk and financial profiles but we don’t have the right product from them. The EveryDay card is really about targeting that group of the U.S. population that is after our card with no fee if you use basic version, the ability to revolve, if you need to revolve, a simple rewards program that is actually based on number of spins, not necessarily in addition to how much you’re spending. And so as you say we’re very early on, but we certainly have been very pleased with the initial numbers. We have a lot of history of launching products as I explained about minute ago. So we have a lot of different history to compare even the very earliest returns to and so far so good, but it’s very early. And when you think about getting a meaningful contribution from one single product in our very broad portfolio, that is a multi-year effort. But so far so good. The key thing to think about it is this is about targeting a different demographic with the right value proposition that we probably didn’t have targeted well before.

Betsy Graseck - Morgan Stanley

And maybe we could add to that with the question on the Serve and Bluebird?

Jeff Campbell

So the Serve, Bluebird products really have grown out of an acquisition we did probably four or five years ago of a company called Revolution Money. It was really about buying capabilities and we have done a tremendous amount of work over the last number of years to evolve the platform that we acquired from Revolution Money and to being a platform that we think is really the next generation of using technology to provide people a way to move and manage all aspects of your financial life.

And so it does fall into the prepaid category and yet we think of it and what we’re trying to do with the marketplace is get people to think of that about it a little more broadly than perhaps the traditional term prepaid gets or the image that the term prepaid puts into people's fine. Now we’re very early into this. So we just re-launched the Serve product in our October of last year, Bluebird which we do jointly with Wal-Mart was launched about a year prior to that. And this is in many ways about creating a different category that almost doesn’t completely exist today. So that is a longer term proposition. And we’ve been very clear all along that we as we run the Company, think about taking the things we’re investing in, taking the products we’re developing and tearing or lattering them. So we always have things that are going to help us get to next quarters and next year’s earnings. But we also need to be doing things that are going to help us sustain that earnings growth, two and three and four years out and even beyond.

And so if our nearest term acquisition efforts on our existing product line are about helping this quarter, every day is about helping the next couple of years. And prepaid and the Serve Bluebird product lines are about helping the company in the three plus year timeframe, in terms of being very material to anyone sitting in this room who is a shareholder. But we think that’s the right mix as we balance our investment dollars and we’re very bullish about the long term prospects, albeit it's very early days.

Betsy Graseck - Morgan Stanley

So one of the questions I often get on American Express is that sounds great, expand the customer set. Will there be channel confusion because you're viewed as being a high end brand?

Jeff Campbell

So I'd can go back to 50 years of evolution. And we started as a very narrow high end brand, targeted at business, travelers who flew a lot and wanted to use the card on airlines and high end hotels and some high end restaurants. And for 50 years we’ve been steadily expanding the reach of the brand and expanding the reach of the customer demographic on both sides of our closed loop network. So that’s why we’ve gone from offering one card to offering a tremendous number of cards, right. We have a Costco co-brand that is a very successful product for us. We have the prepaid cards. We still have the traditional green and gold and platinum charge cards. We have small business cards. We’ve tremendously expanded the reach that we have demographically. We’re not destroying the brand.

On the merchant side, you seen the same steady evolution where we started out as being a card that you could use at high end hotels, airlines and restaurants but we have gradually expanded it to more and more categories over the years, often as I’ve learned the history and I’ve tried Betsy to spend a lot of time over the last year studying all the history because it’s important with huge debates, with people saying you were going to destroy American Express if you have it accepted at Walmart, right. Obviously Walmart is one of our most important partners and merchants. And so that’s all I think important background and context to understanding why we are very comfortable with what we’re doing with Serve and Bluebird and what we’re doing with the OptBlue merchant coverage acquisition program which is about not so much adding huge dollars because it’s very small merchant we’re targeting with OptBlue but it’s evolving that perception of coverage to be one of complete parity at some point in the future.

Now the last thing I'd say is we are very brand focused. We do a lot of research and a lot of work on these things and we track very carefully the perceptions of our most long term and most affluent card members and we have found it as we have expanded the reach of the Company, those perceptions actually grow stronger, and we take great comfort in them.

Betsy Graseck - Morgan Stanley

So let’s talk a little bit about the OptBlue program. You announced that recently. Was it only a few months back?

Jeff Campbell

February.

Betsy Graseck - Morgan Stanley

Right, so not that long ago. You had been testing it in the fourth quarter of last year and recently you announced another six or so merchant acquirers. So I think you’re up to 10 merchant acquirers who are acquiring on behalf of American Express, right. Just give us a sense as to how long you think it will -- what kind of pace of merchant acceptance you will be able to generate here over the next 12 to 24 months?

Jeff Campbell

So a couple -- and this is of course another step and a long evolution. In the history of the Company, we originally managed 100% of the merchant relationships ourselves and then we realized with smaller merchants it made sense to work in some ways with third party acquirers and we’ve been steadily expanding that and the market has evolved too. I would point out with aggregators who’ve been very successful like Square, I think also changing the game a little bit in terms of the pressure the acquirers feel to have a very competitive product to offer to merchants.

So if you look at the last couple of years, in a normal year in the U.S. we had been acquiring about 1.3 million small merchants each year and that’s not additive because one of the tough things about being a small merchant is boy it’s tough business and sadly a lot of them quite a business. But that’s the pace. When we look at what we would expect to get from the OptBlue program, which in about arming the third party acquirers with a better offering as they go to merchants. So they can go to merchants, say you can -- just like Square does. You can take all forms of payment, we’re going to give you one bill, it’s going to be settled one way, we’ll give you one rate. And that we believe and we have seen and the early going is very attractive to merchants. And once a few acquirers start offering that, we think it also puts tremendous pressure on other acquirers to do the same thing.

We’d expect at a minimum to see the numbers of small merchants that we acquire each year grow by at least 50% and so if you run that out over a number of years, we think this can make a tremendous difference in closing what I might call the last mile of the coverage gap that we have in terms of perception in the U.S. And we’re certainly doing similar types of things around the globe, different in every country and more challenging in some countries because of the way that the acquiring landscape works. But we have -- we feel pretty good about the coverage we have today. I would point out is been good enough, just so we had over $900 billion of sales running through our network last year, but we know we have to close this last mile and we’re very focused on it.

Betsy Graseck - Morgan Stanley

But you are at about 70ish percent of total merchant…

Jeff Campbell

Well I think we said a couple of different numbers in the U.S. So in the U.S. we talked about 90% in terms of dollars spend coverage and a lower number if you looked at locations. And obviously that’s where your perception comes from. When you go to your drycleaner or to the little bakery down the street and they don’t take the American Express card. And while there is not a lot of dollars there, there is a lot of importance in terms of perception and when we need to fix that and we think we’re on a path that will make tremendous progress in the next few years.

Betsy Graseck - Morgan Stanley

And with that improved perception wallet share.

Jeff Campbell

Yes, because the dollars itself in the program Betsy are modest in the overall scheme of the firm, because these are a smaller merchants and so there is a trade where we think we’ll get some incremental volume from those merchants and there is a very modest impact on the discount rate for the Company overall. What it’s really about as you say is changing the perception of coverage, which we actually think generates benefits throughout the issuing part of the business.

Betsy Graseck - Morgan Stanley

Okay. And then on the international side, given the fact that there is perception in the room that international is really likely to be one of the biggest revenue drivers. Maybe just talk a little bit about.

Jeff Campbell

Very astute audience you have.

Betsy Graseck - Morgan Stanley

What you’re focused on there in growing top line?

Jeff Campbell

Well the way to think about it is I've been describing the journey that perhaps took us 50 years in the U.S. as we went from being a small niche player and gradually expanded the reach on both the issuing side and the merchant side. And in many ways that’s the same journey we’re on country by country outside the U.S. So there is some countries and maybe I’ll use Mexico as an example where we have tremendous franchise, a very significant share, a very profitable business. It’s at a fairly mature state if you will in its development. But in most other countries, we’re still a fairly small or I might even use the word niche player. And yet the journey we need to go on is exactly the same as the journey I've been talking about in the U.S. And if you look at the UK as an example, I lived in the UK when I was with American Airlines 12 - 15 years. I did have the BA American Express brand card.

But at that point I think American Express's share in that market was in the low single-digits. And its card member base consisted of people like me at the time, someone who is really getting it because I flew BA all the time and I stayed at business hotels and that’s kind of what I used it for. When I travelled around elsewhere in London, it was harder to use. If you look today in the UK market through all the same kind of steps that I have been talking about in the U.S., expanding the product line, making steady progress on the merchant covered side, first in London, then in the outer regions of the UK, we’ve steadily grown our share in the UK to what is in the double-digits.

And so that’s in essence the model of what’s happening in every country around the globe. It’s very difficult to generalize about international. Because every market has unique characteristics, unique local competitors and a unique merchant landscape. But it’s that kind of opportunity that makes us very excited about international. Today it accounts for around 30% of the Company’s earnings. We would expect it over time to grow to be a more significant portion.

Betsy Graseck - Morgan Stanley

Okay, great. One of the things that market has anticipating is your announcement of closure of the joint venture. And you’ve discussed in the past that there should be a sizable gain that American Express benefits from when that closes. Can you give us a sense as to how you’re thinking about utilizing that gain, over kind of timeframe?

Jeff Campbell

Right. And so let me just quickly level set for everyone. So this is the joint venture that we first announced in the early part of this year, where we have some outside investors who are paying $900 million to get a 50% ownership stake in the joint venture. We will contribute our business, travel business and then there will be a separate management team that manages adventure going forward and we’ll take 50% of the earnings. So the value if you will of the joint venture is set by that capital coming in by the outside investors, which to remind you is not capital coming to American Express. It’s going into the joint venture as capital that will be used to grow that joint venture in the coming years.

So that’s the value add, significantly in excess of the values we have on our books today and that will produce a sizable gain. 600 million to 700 million is the number we’ve talked about. Publicly we are still, we believe one track to see the transaction close late this quarter. We’re just going through the normal a long list of regulatory approvals you need to get a transaction like this closed. We still expected to close quite late this quarter. In fact it will probably push our earnings release a little later than normal just given the complexity of dealing with the close in that process.

So we’ve said now since we first announced the joint venture that we would plan to take the gain and spend a substantial portion of that gain on things that are going to help us to grow our business with short, medium and long term just as we have in the past, when you saw some similar one time kind of gains arising out of the use. So MasterCard settlement arising out of some of the extraordinary credit provision release the company has had. And so what kinds of things are we investing in? Well many of the things that we’ve actually spent over the last 25 minutes or so talking about. So some very near term things. So a little bit of increase just acquisition efforts in terms of new card members around our system. More importantly some spending to really get firmly launched into the marketplace the EveryDay and the Serve products which we talked about. You will see us take in all likelihood a number of actions that are just next steps on our continuing journey to make the Company's infrastructure every more efficient and cost effective in a world where technology is changing every year just in terms of our own back offices and frankly the way our customers want to interact with us is changing constantly. So you will see us do all of those things. We will -- it will be a little complicated to get you and everyone through Betsy, but we will really clearly lay it out when we do the second quarter earnings release.

Betsy Graseck - Morgan Stanley

And I suppose the basic question is it a multi-year spend or is it?

Jeff Campbell

No. So these are things that are matched if you will to the one-time nature of the gain. So launching -- the initial launch of something like Serve and EveryDay is a good example where there are some things that we always do right at the launch that while you have continual marketing campaign, you don’t continue at the level that you initially run something. When we're making decisions about how to continue to evolve the Company’s infrastructure so it’s more efficient, those are episodic and we do those from time to time, but you will probably us match some of them to this quarter.

Betsy Graseck - Morgan Stanley

Okay. And then last question is on the capital ratio and payout ratios. Very strong capital ratio, 12.8% if I recall correctly.

Jeff Campbell

Yes.

Betsy Graseck - Morgan Stanley

And you have significant capital accretion annually. We are seeing this capital accretion with still very high levels of ROE. I guess the underlying thought here is there an opportunity at some point for you to go beyond the 100% payout ratio?

Jeff Campbell

Well I might go back to your very first question to me, Betsy, where I said that a good surprise since I joined the company is the full extent and the range of the growth opportunities. And the challenging surprise is where we are on the regulatory. So we feel really good about the capital strength of the company. And perhaps not just as important but perhaps even more importantly, we feel really good about the strength and stability of our business model and its ability to flex in different economic environments. So if you look at this year’s CCAR results, American Express had the highest net income in the severe stress scenario of any of the CCAR banks. And that’s a commentary on the resiliency and strength of our business model which we draw a lot of comfort from it. So when we look at our balance sheet today, we are certainly well above the tentative targets we’ve talked about for a few years and I do use the word tentative because you still have some evolution happening in the regulatory world. We are an advanced approach Basel institution and we’re just beginning that process. We just entered external parallel run.

So we to be a little careful because things will keep moving but we feel very good about the strength of our balance sheet. When I think about the longer term and we do manage the Company for the longer term, you clearly have to get to a point where we don’t continue to accrete capital every year. And you clearly have to get your point where we can manage the Company as we intend to, to our targeted levels. And I certainly have tried to spend a good chunk of my time over the last year making sure I'm developing the right knowledge, relationships with conversancy with all of the various groups that regulated. So I was actually in DC yesterday. And I guess I actually do feel confident that we’re going to get to the right economic outcome for our Company and our shareholders, and the overall financial system and the regulators.

But we’re on a journey, not just as a Company but even as an industry, right. The CCAR process is not a mature process yet, but it’s getting there. And when I look at where we are in that process, and when I think about what the correct very laudable and appropriate goals are of the Fed is they manage that process. I feel pretty good that we will get to the right place. Now when we get there Betsy in the next six to 12 months, that's harder to predict. But I think the process is headed in the right direction as it matures. And I think that we feel so strongly about the resiliency in our business model and the strength of our balance sheet that that should allow us to continue to be very thoughtful and robust in the way we use our balance sheet for -- to generate value for our shareholders.

Betsy Graseck - Morgan Stanley

Well, thank you very much, Jeff. I appreciate all of that.

Jeff Campbell

Well, thanks for your time and thanks for sticking around for the end of the conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Express Company (AXP) Presents at Morgan Stanley Financials Conference (Transcript)

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts