American Express 4Q15 Earnings Call Notes

American Express’ (AXP) CEO Ken Chenault on Q4 2015 Results

Ken Chenault on the call

” I’m joining the call today as I thought it was important to share my thoughts on the financial outlook and the evolving operating environment. Before Jeff begins, let me acknowledge that the performance we’re discussing today is not what we or you are accustomed to say from American Express, and that we are taking significant actions to change the trajectory of our business going forward.”

Changes are reshaping the payments industry

“our performance comes against the backdrop of changes that are reshaping the payments industry. These include a reset in co-brand economics, regulatory and competitive pressure on merchant fees and intense competition for customers.”

Economic headwinds have lasted longer than we expected

“A number of cyclical factors in the broader economy also weighed on our 2015 performance and influenced our outlook for 2016 and 2017. As Jeff said, the economic headwinds we cited last year including the stronger U.S. dollar and lower gas prices have lasted longer than we previously said.”

Took decisive actions in the go-brand space

“Over the past 12 to 18 months, we took decisive actions in the co-brand space, accelerating contract talks with partners, we focused on those where we can earn attractive returns and provide strong customer value, which led us to deals with Delta, Starwood, Cathay Pacific, British Air and Charles Schwab.”

Our closed loop system is an advantage

“Our integrated payments model runs about $1 trillion in spending through our closed loop each year. That rich data enables us to create value for card members and build the business for our merchant partners. This is a major advantage and that’s one reason why other card issuers are trying to cobble together a closed loop on their own despite only having a portion of the essential data.”

We recognized early that the economics of the co-brand marketplace were changing

“we recognized early that the economics of the co-brand marketplace were changing and certainly that competitor pressures throughout the industry were likely to increase”

Good growth opportunities with small business and international

“The second thing that I would say is that the nature of just focusing on specific customer segments and just focusing on one geography in the U.S. so what’s interesting is when you look at small business and I think you know this in 2014 $4.8 trillion were spent by small businesses, but only 10% of that was on plastic and where we are the market leader in small business. So I think that it’s not just the payment industry dynamics that we’re competing with in this case, we’re competing against cash checks and the fact that only 10% of 4.8 trillion is on plastic suggests there’s a strong opportunity, I can do the same thing in middle market. Then I go to international and I look at a range of markets where the penetration against plastic is relatively low and we’ve actually achieved pretty good growth rate, so 12% in billings growth in a number of markets we’re growing faster than the market.”

We think it’s increasingly important to have direct relationships with consumers and merchants

“On the merchant side, let’s be very clear Visa and MasterCard have different models at this point in time those models are working pretty well for them, but as I look at our opportunities going forward, I think there is a sea change going on in payments and commerce. So certainly they provide an important part of the payments process, but I think increasingly it’s going to be very important to have direct relationships with consumers and merchants and we think direct relationships in the inside, the information that we have from card members and merchants is going to be even more valuable as the convergence of online and offline commerce continues.”

We’ve been disappointed in corporate segment. Decline in T&E spending has tended to be an early indicator for a slowdown

“I think we’ve been very clear throughout the year that I would say the segments that I’ve been most disappointed in has been the corporate segment. And I think you have heard me say this before through the years that the easiest expense category to cut is T&E that’s the first thing you see. Then you start to see people cutting on technology investments. And we hope that we’ll see some improvements in that in 2016. But as I evaluate 2014, that was an area that in the beginning of the year we started off in a better place, and we saw a pretty consistent decline. And certainly what we’ve seen in my 30 plus years experience with the Company is cut backs in T&E tends to be an early indicator for a slowdown.”

We still see accelerating spending in 2016

“FX while still a headwind for us is not as big a headwind as you get into the first quarter. We’ll see what happens with oil prices. A couple of weeks ago I would have told you I think they’re going to — we’re going to get to a lapping point on oil prices although those have gotten a little bit of tougher. And then when you just look at some other things going on in our business including Costco Canada, the areas that we have been focused on throughout 2015 in terms of spending and the trends we’re seeing, we do think that as soon as Q1 you should see some acceleration in the year-over-year volume trends that you’ve been seeing. ”

We’re not seeing decelerating trends, but we’re not seeing an economic catalyst either

” what I would say, Bob, is we are not seeing decelerating trends. We’re certainly not seeing in the overall economic catalyst that would say that we think there are going to be improvements in GDP growth.”

Jeff Campbell

We have not seen the revenue acceleration that we needed to overcome the Costco loss

“as we have gone through 2015, we have not seen the revenue acceleration that we had expected to see. If you go back to our Investor Day in March, if you go back to the original conference call we did last February when Ken and I talked about our decision to walk away from the Costco agreement, we said we’re going to have to see how much other volumes ramp-up and what the pace is of that ramp and exactly what the final outcome is of when the Costco portfolio goes away and in what way, well we have those answers now and when you put all of that together with the evolving environment that we are in we concluded we need to be much more aggressive about all aspects of our cost base.”