American Express Company Q1 2010 Earnings Call Transcript

American Express Company Q1 2010 Earnings Call Transcript
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American Express Company (AXP)

Q1 2010 Earnings Call

April 22, 2010 5:00 pm ET

Executives

Ron Stovall – Senior Vice President Investor Relations

Daniel T. Henry – Executive Vice President & Chief Financial Officer

Analysts

John McDonald – Sanford Bernstein

Craig Maurer – Calyon Securities (USA), Inc.

Betsy Graseck – Morgan Stanley

Brian Foran – Goldman Sachs

Robert Napoli – Piper Jaffray

Meredith Whitney – Meredith Whitney Advisors

Christopher Brendler – Stifel Nicolaus & Company, Inc.

Bill Carcache – Macquarie Research Equities

David Hochstim – Buckingham Research

Donald Fandetti – Citi

Brad Ball - Ladenburg, Thalmann & Co.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Scott Valentin – FBR Capital Markets

John Stilmar – SunTrust Robinson Humphrey

P

resentation

Operator

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Welcome to the American Express earnings conference call. (Operator Instructions) As a reminder, today’s call is being recorded. I would now like to turn the conference over to our host, Ron Stovall. Please go ahead, Sir.

Ron Stovall

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

As usual, it is my responsibility 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 including company’s financial and other goals are set forth within today’s press release which was filed in an 8K report and in the company’s 2009 10-K report already on file with the Securities and Exchange Commission, in the first quarter 2010 earnings release and earning supplement on file with the SEC in an 8-K report, as well as the presentation slides, all of which are now posted on our website at ir.AmericanExpress.com. We have provided information that describes the company’s managed basis and other non-GAAP financial measures and the comparable GAAP financial information. We encourage you to review that information in conjunction with today’s discussion.

Dan Henry, Executive Vice President and Chief Financial Officer will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period where Dan will be available to respond to your questions.

Up until then, no one has actually registered to ask questions. While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

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

Daniel Henry

Thanks Ron. Let’s look at slide 2, summary of financial performance. If you look half way down the slide you can see diluted EPS from continuing operations was $0.73 compared to $0.32 last year, up 128%. That was driven by strong billed business and improved credit performance.

A number of line items impacted by the adoption of accounting rule ASU 2009 16-17 formerly known as FAS 166 or 167. The rule requires that securitized loans be brought back onto the balance sheet and the related revenue and expense go back to their natural lines. We have not restated 2009. For better apples-to-apples comparisons I recommend you compare the 2010 to the 2009 managed results.

At the top of the slide you can see revenue on that basis was down 1%. If we adjusted for FX it is down 4% as better discount revenue from billed business is offset by lower net spread. The difference on the growth rate that you see on continuing operations which is up 100% compared to the EPS growth of 128% is driven by the fact we had preferred dividends in the first quarter of 2009 and as you know we repaid that preferred stock in June of last year.

If we move over to slide 3, here we are going to show the impact of the new accounting rule on our balance sheet. We recorded $29 billion of loans that were previously securities and off balance sheet. We have a related credit reserve on these loans of $2.5 billion and that was established through equity, not the P&L. At the bottom of the slide you can see the after-tax impact of that reserve, $1.8 billion. Now investment securities are the B, C and D trenches for certain securitizations. Historically we would sell all of the securitized receivables but starting in the third quarter of 2007 because of the wide spreads we held onto certain of the trenches. Those are now simply part of the loan balance.

Other receivables represents restricted cash. When S&P reduced our rating the trust agreements required that we hold assigned cash related to debt that would mature in the near future, that now is moving from other receivables to other assets. When we get to slide 12 I will talk about some of the impacts of the new rule on those line items. So while this is something of a nuisance comparing 2010 to 2009 in the long-term it is a good change because the new rules provide a clear depiction of our financial results.

So let’s move to slide 4 and look at billed business. You can see here it has increased 16%, 12% on an FX adjusted basis. Significantly better than our other major competitors. This clearly demonstrates we have a differentiated business model reflecting the makeup of our customer base and the design of our products which are focused on spending. You can see cards in force are down 4%. If we exclude the inactive cards we cancelled last year it is down 1%.

We can see average spend was a major driver of billed business growth. On an FX adjusted basis it is up 20% and as we also factor out those inactive cards it is about 14%. When we look at card loans I recommend you look at total portfolio. You can see it is down 11% on a reported basis and 13% on an FX adjusted basis. This is in part driven by the credit actions we have taken and in part by customers de-leveraging just as we have seen across the entire industry.

Travel sales are strong, both business travel and consumer travel. It reflects higher ticket prices and higher number of transactions. It also reflects customers moving from the back of the plane to the front of the plane and people taking longer flights.

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