AXP
#Well, thanks, <UNK>, and good afternoon, everyone
Earlier today, we published our second quarter results and with our earnings per share for Q2 at a $1.47, and with adjusted revenue growth for 2Q of 8%
We believe that our results continue to reflect solid progress against our priorities, laid out again on Slide 2, accelerating revenue growth, optimizing investments and resetting the cost base
Since early 2015, we have made many changes to the company and have been investing in a broad set of growth opportunities generated by our unique business model
As we have made these changes, we have always thought to balance the short, medium and long term
We are certainly encouraged by our current revenue performance and the near term payoff we are getting from our actions
But to be clear, we are making decisions and generating sustainable revenue growth and we've remained focused for the years beyond 2017 on the 6% revenue growth scenario that we shared at our Investor Day in March
In addition, we are clearly seeing the benefits of our cost reduction efforts and continue to return significant amounts of capital to shareholders through our dividend and share buyback programs
Our efforts across these areas are driving the simple model we have shared over the last couple of years
We have a diverse range in growth businesses as a business model that provides steady operating leverage plus a balance sheet that shows tremendous capital strength all of which contribute to steady EPS growth
Now, I know our numbers have been difficult to interpret over the past two years of repositioning the company, but Q2 does mark the end of the need for the quarterly adjustments we have sharing with your comparison purposes since the beginning of 2016. I know we are all looking forward to next quarter on that front
Indeed more broadly, in many ways the end of the first half 2017 is a milestone for us as we complete the transition from repositioning the company and managing the related volatility to executing plans focused again on delivering steady revenue and earnings growth
Of course the environment we operate in is challenging but we believe we are well positioned to compete effectively across our diverse customer segments and geographies
With that let me turn to the detailed results starting with the summary financial performance on Slide 3. Revenue of $8.3 billion for the second quarter increased 1% versus the prior year, reflecting primarily higher year-over-year net interest income
Excluding Costco-related revenues from the prior year and the impact of FX, adjusted revenue growth was 8%
The second quarter also included growth in provision in rewards expense above the growth in loans and billings respectively as we would have expected, both of which I will come back to in a few minutes
Net income of $1.3 billion was down 33% versus the second quarter of 2016 largely due to the $1.1 billion gain recorded last year upon the sale of the Costco cobrand portfolio
Earnings per share of a $1.47 reflects our net income performance and also the benefits of our strong capital position
Over the last four quarters, we have returned $3.2 billion of capital to shareholders through our share repurchase program, which is resulted in a 5% reduction in average shares
These results brought our ROE for the 12 months ended in June to 22%
This ROE performance is below our recent performance of approximately 25%, primarily due to the uneven quarterly earnings we experienced in 2016. If you simply look at the math of our expected earnings range for the full year 2017 and our equity position, our ROE should trend back towards our recent performance level as we progress through the year
So let me move to our metrics starting with billed business performance trends, which you see several different views up on Slides 4 through 7. Worldwide FX adjusted billing grew 1% in the quarter versus the prior year
As we move to Slide 5, you can see the Q2 billings growth adjusted for both the impact of Costco and changes in foreign exchange rates remained consistent with Q1 at 8%
We are encouraged by the continued momentum in billing this quarter, which reflects broad based growth across our diverse segments and geographies, with adjusted U.S
billings steady at 6% and international billings growing the low double-digits
Turning to the segment perspective, in GCS, which grew at 5% year-over-year consistent with Q1, we continue to see healthy performance in the small business and middle market client segments, which I'll refer to as SMEs in my remarks
Just to remind you, at our Investor Day, we defined SMEs as clients with less than $300 million in annual revenues
Adjusted volumes from our SME client segment in the U.S
grew in the low double-digits in the quarter
And outside the U.S
, SME client volume grew in the mid-teens
In the large and global GCS client segment, volumes were up a bit as compared to last year though
As we've said for a while now, we expect the large and global client segment to remain slower growth rates as corporations look to manage their travel and entertainment expenses
In addition, we do not yet see any significant complexion point in macroeconomic trends that has caused a shift in spending patterns for these large and global customers
In the international consumer and network services segment, the FX adjusted billings growth rate was 8% in line with the previous quarter
Looking at the two parts of the segment, FX adjusted volume from proprietary cards grew at 12%, up from an 11% in Q1, reflecting continued strength in several international markets
In GNS, the FX adjusted growth was 5% in Q2, down modestly versus the prior quarter, primarily due to China as well as Australia and the EU, which were impacted by changes related to regulation
Moving to international in total on Slide 7, our billings growth rate is down slightly sequentially, but remained healthy with double digit growth in FX adjusted terms
As we look our few key markets for example, we see continue double-digit FX adjusted growth in the UK up 15%, Mexico up 12%, and Japan up 17%
While we have been showing strong growth across international, the regulatory environment in markets like Europe, Australia and China will continue to evolve and we will continue to adopt our business model as the regulatory environment unfolds
Stepping back, we are pleased with the continued strength of our adjusted billings growth rate
The momentum in the first half of the year reflects the investments we have made in a verity of growth opportunities over the last couple of years
Although we face intense competition in the U.S
and the regulatory environment in uncertain in many markets around the world, we've remained focused on driving more volume under our network, we feel good about the diversity of our billings growth
Turning to our worldwide lending performance now on Slide 8. Our total loans were up 11% versus the prior year and are solid quarterly performance
We continue to steady grow loans faster than the industry as we capture the particular opportunity we have to growth loans with existing customers while also adding new customers
As we look forward, we believe we have a long runway for growth given our existing customer opportunities, while maintaining best in class credit performance
Looking at the right hand side of the slide, you can see that net interest yield is again up significantly year-over-year
The improvement in yield is driven by a number of factors, including a shift in mix to non-cobrand customers who are more likely to revolve, having fewer revolving loans at introductory rates, specific pricing actions taken in recent quarters and a benefit from increasing in benchmark interest rates without a similar increased in our overall funding cost
As a quick reminder, our online deposit program personal savings is a little over $30 billion in size
In our 10-K interest rates sensitivity analysis, we assume that as benchmark rates increase, our personal savings rate increases with a deposit data of 1. However, if you look over the last couple of years, the prime rates has increased by a 100 basis points, while our own personal savings rate has only increased by 25 basis point
Now that change to our rate has come in just a last couple of months and we will continue to adjust our deposit funding rates to stay competitive in the deposit markets
In general though, the personal savings program continues to be a very cost effective and attractive source for us
Looking out to the balance of the year, if you consider the list I just went through, many of these drivers will persist, however the year-over-year change in the yield should not be as pronounced as we move through the coming quarters
Before turning to provision expense, let me tough on our credit metrics on Slide 9. Again this quarter, delinquency and loss metrics in our portfolio were best in class
In the worldwide loan portfolio, you can see that the delinquency rate was consistent with Q1 and up modestly versus the prior year
Loss rates as we would have expected also continue to be modestly higher year-over-year
Going forward, we continue to expect loss rates to increase gradually due to the seasoning of new accounts and a shift towards non-cobrand products, which have slightly higher loss rates but also generate greater yields
As loss rates gradually move higher and loans continue to grow, the growth rate in provision will exceed the growth rate of loans, which is you can on Slide 10 was in fact the case for Q2 as provision increased by 26%, while loans grew by 11%
Turning into our revenue performance on Slide 11. FX adjusted revenues were up 1% and revenue growth adjusted for both Costco and FX increased by 8%
Clearly, we are pleased with another quarter of accelerating adjusted revenue growth
And in particular with the broad based contribution to that growth from our diverse business segments
If you take a step back, we have taken clear and different actions across those diverse segments to drive growth
Let me take you back here for a second to Slide 12, which I first shared in our Investor Day in March
On this slide, I talked about the growth opportunities we have across our different segments and I stressed that we have made specific changes in the way we operate to better seize these opportunities
As I look at our results this quarter and in indeed over the last several quarters, I see progress against each of these growth opportunities as we realize the returns on the changes and investments we have been making
Today, we have a consumer segment generating strong internationally and in the U.S
where we have strengthened our product offerings in the premium sector
And lending efforts that have broadened our card member relationships and successfully balanced growth, the strong credit quality and industry leading presence with SMEs who use our cards for an expanding portion of their payments needs, a larger merchant network that accommodates a greater share of our card member spending, a card acquisition engine that has successfully been redesigned for digital age and the more agile technology infrastructure that brings customized products and services market more quickly and efficiently
All of these are driving our performance as we come back now to the components of revenue on Slide 13. First, discount revenue was flat year-over-year and grew by 7% on an adjusted basis
The discount rate in Q2 was 2.44%, up 1 basis point for the prior year due to lower rate volumes coming off the network
As we stated in Investor Day, once we move to the second half of 2017, you will see the discount rate trend shift back to down year-over-year due to the ongoing impact of merchant negotiations particularly in a regulated markets like Australia and Europe and the continued rollout of OptBlue
Of course as always, the mix of our billings across industries and geographies will also impact the rate year-over-year as we go forward
I know many of you also focused on the ratio of discount revenue to build business, which in addition to the reported discount rate also includes the impact of certain contra revenue items and also how we account for our GNS business
In the quarter, this ratio was flat year-over-year at 1.79% as growth in corporate client incentives and co-brand partner payments and the shift in our billings mix towards GNS were offset by a year-over-year decline in cash rebate payments
Net card fees grew by 8% in the quarter, driven by continued strength in the U.S
Platinum and Delta portfolio as well as growth in Mexico and Japan
Given the competitive environment especially in the U.S
consumer segment, we view steady growth in card fees as indicative of our Card Members recognizing the breath and strength of the value propositions we offer on our products
In addition, I would remind you that the increased Platinum fee for existing U.S
Consumer Card Members does not start to contribute to card fee grow until September of this year
Other fees and commissions grew 7% in the second quarter while other revenues declined by 19%
The decline in other revenues was primarily driven by a contractual payment from a network services partner in the prior year second quarter and the sale of a small business in Q4 of last year
Net interest income grew by 6% and on an adjusted basis grew by 24% as the higher net interest yield I described earlier and higher adjusted loan balances combined to drive significant growth in net interest income
Turning now to expenses on Slide 14. Performance vary across the lines and I'll discuss the changes to marketing and promotion rewards in Card Member Services expenses when I come back to Card Member engagement spending in just a minute
But first our operating expenses
Total operating cost during the quarter were up 39% versus the prior year excluding from the prior year the $1.1 billion gain from the Costco co-brand portfolio sale, which was treated as a contra expense
And a $232 million restructuring charge, adjusted operating expenses were down 4%
And this marks the fourth consecutive quarter that adjusted operating expenses have declined year-over-year
We continue to make solid progress on our cost reduction initiatives and we are confident that we will remove $1 billion from the Company's cost base on a run rate basis by the end of 2017. We are steadily executing on our plans to improve our efficiency and get costs out
This progress along with our revenue performance today is allowing us to selectively reinvest some of those savings in areas that will help drive continued revenue growth going forward
Our effective tax rate during the quarter was 31.2% compared to 33.2% in the same period last year, reflecting both discrete items and proportionally higher earnings from lower tax rate international market than in the prior year
We now expect the full year tax rate to come in slightly below our previously stated range of 33% to 34%
Moving to the summary of our Card Member engagement spending on Slide 15, total engagement spending in Q2 was $3.1 billion or 10% higher than the prior year in the quarter and up 7% year-to-date
Looking at the components of that spending, in the first half of the year, M&P was up 1% versus 2016. As a reminder coming into 2017, we expected marketing and promotion to be down significantly from 2016 levels as we found efficiencies in our marketing spend and moved past some of the unique investment opportunities we had in 2016. And you will see that year-over-year reduction in the second half of this year
I would also remind you that consistent with our historical practice, we will continue to evaluate investment opportunities and monitor our business performance and saving initiatives and balance our financial commitments with driving long term value
As we look at the effectiveness of our marketing spend, we continue to see good traction in attracting new customers for the franchise
In the quarter, we added 2.7 million new proprietary customers globally and in our global consumer business close to two thirds of new customer acquisition came through digital channels and 35% of new customers
Rewards expense increased 9% in Q2 despite a small decline in proprietary billing volumes versus the prior year
Excluding the Costco co-brand volumes in the prior year, adjusted rewards expense would have increased in the quarter by 20%, while adjusted proprietary billings grew by 6%
This growth in rewards resulted in a ratio of rewards cost to proprietary billings of 86 basis points were roughly in line with the prior quarter
The greater year-over-year increase in rewards expense during the quarter reflects the impact of the enhancements to our U.S
Platinum products that we implemented at the beginning of Q4 2016, as well as continued strong growth and our Delta co-brand portfolio
Cost and Card Member Services in the quarter increased 24%, reflecting higher engagement levels across our premium travel services including airport lounge access and co-brand benefits such as First Bag Free on Delta, as well as usage of the new Uber and benefit on Platinum
We continue to believe that this is an area where we can offer differentiated benefits and we will continue to invest in Card Member Services
To focus for just a moment on U.S
Platinum, you already know we have made a series of changes to our U.S
consumer and small business platinum product offerings over the last several months both in rewards and other more experiential benefit
The yearly results from these changes look good and we are seeing both increased engagement from our existing U.S
Platinum Card Members as well as higher rates of new customer acquisition since the introduction of the new benefits
Turning now of Slide 16 in touching on capital
We continue to use our strong balance sheet to return a significant amount of capital to shareholders
Over the last four quarters, we have returned 94% of the capital we have generated
I think this shows the commitment we have over time to leveraging our business model and capital position to steadily create shareholder value
As you all know, we have recently received a notice of non-objection from the Federal Reserve on our 2017 adjusted CCAR submission
We have both increased the dividend payout for the next four quarters as well as significantly increased the share buyback versus the prior CCAR authorization
We remain confident in the strength of our business model and our ability to drive shareholder value through capital returns
Of course, we also use capital to support business building activities such as growth in our loan balances and potential M&A activity in addition to returning capital through dividends and share buybacks
Stepping back now in conclusion
Over the past several years, we've embarked on a series of initiatives to reposition the company and drive sustainable and consistent revenue and earnings growth
These efforts have been targeted at providing a mix of returns over the short, medium and longer term
Looking forward we are encouraged with the trends that we've seen in our business metrics and revenue growth
And believe that these initiatives are driving real momentum across our diverse business segments
Even though revenue performance of the first two quarters, we now expect full year adjusted revenue growth to be above the top end of the 5% to 6% range I discussed in our Investor Day in March
While this is clearly a positive development
I would remind you that our recent revenue growth is benefiting from certain drivers that are likely to stabilize somewhat in future quarters such as growth in yield and increased customer engagement particularly on the platinum card
In addition, as is our historical practice, we will continue to balance delivering earnings to the bottom line and investing for the moderate to long term
I would also say that as moved the back half of 2017, the uneven year-over-year comparisons from the last few years have discontinued partnerships, large restructuring charges and portfolio sales will be behind us
And results in the second half of this year should therefore provide a clearer picture for all of us of the progress we have made towards producing steady and consistent results
Against the backdrop of all these moving pieces and given that we are at the midpoint of the year, we are confident that we will deliver full year earnings per share between $5.60 and $5.80. With that, let me turn it back over to <UNK> as we move to Q&A
