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KICTalkingPoints080608

KICTalkingPoints080608

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Published by: russ8609 on Aug 07, 2008
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06/14/2009

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FINANCIAL COMMUNITY MEETINGKen Chenault – Talking Points August 6, 2008 TITLE
Good afternoon, and welcome.Given that we’ve got both short and long-term topics to cover today, I’ve opted to modify our regularmeeting format.
 AGENDA 
I’ll open with a brief review of our 2008 performance, along with my perspective on the company’sposition, and a summary of our reengineering plans. Al Kelly will drill down into the performance and trends in U.S. consumer spending and credit. Both of these issues are top of mind for us, as we know they are for you. Al will share some of the data andanalysis currently supporting our credit actions, and give you a sense of how cardmember behaviors havechanged over the last few months. He’ll look at our relative performance, the actions we’re taking tomitigate our risk exposure, and how we’re targeting investment dollars within U.S. consumer in light of thecurrent environment.Despite the weakness in the U.S., as an organization we’re still very focused on moderate and long-termgrowth. And one area that has significant opportunity is business to business.Our B2B businesses include Global Commercial Card, Global Merchant Services, Global Network Services and Global Business Travel. Ed Gilligan leads these businesses and will give you an update ontheir historical performance, as well as their growth potential. You’ll see that B2B hits the trifecta by offering high growth, high returns, and low credit risk. We’redirecting a growing share of our investment dollars into B2B, so we want to give you a better sense of thisopportunity, and what it could mean to the company’s overall profile. We’ll then end with Q and A. Dan, Al and Ed will join me on stage to answer questions on today’spresentations, or on any topic you wish.
* * * * * * * * *PERFORMANCE VS. TARGETS
So let me start with an update of our 2008 performance. As I discussed in our release and on our investor call, our results through June were disappointing.
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 The credit reserves added in the second quarter led to diluted EPS from continuing operations being down(21%).Revenue growth, however, remained strong over the last six months, up 9%, and return on equity was alsohealthy at 31%.Now, rather than go through the business metrics as I usually do, in the interest of time I’ll instead giveyou a quick sense of my perspective on our company-wide results. As I look at our overall performance, Isee both positives and negatives.
2008 NEGATIVES & POSITIVES
Deteriorating Economic Environment The largest minus is clearly the environment. As I noted in my second quarter comments, the economic environment in the U.S. has deteriorated sincethe beginning of the year, beyond what a number of economists had thought, and beyond our internalexpectations. The combination of rising fuel prices, rising unemployment, record low consumerconfidence and – most critically – housing declines, have made this economic cycle unlike any other. These environmental challenges have had a substantial impact on two of our most important businessmetrics – U.S. consumer billings, primarily in discretionary spend categories, and consumer and smallbusiness credit losses. In combination these indicators had a substantial negative impact on our resultsthrough June. As we saw in the second quarter, and particularly in the month of June, weakness in these metrics spreadover time. We’re now seeing this weakness across all consumer segments, even at the high end of our base. This speaks to the pervasive impact that the collapse of housing prices is having on our cardmembers,particularly in certain parts of the country.Our year to date performance also included a number of positives. While clearly not equal in scope to thenegative impact of the environment, I believe these positives show that a number of our businessfundamentals remain quite strong.Solid Billings GrowthOn the plus side we saw solid billings growth across international, commercial card and Global Network Services. In combination, these units generated spend growth of 22%, a trend that’s been relatively consistent throughout the year. Acquisition of GE Corporate Payments Services Another plus was our purchase of GE’s corporate payments portfolio. While the acquisition didn’t addbillings in the second quarter, it did generate top line growth, which should accelerate as we convert GE’sclients onto our network over the next several quarters.Card GrowthCard growth has also been quite strong, up 10% through June. Across our franchise we continue to makesignificant investments in new card acquisitions. In light of the current weakness in the U.S., we’ve usedour flexibility and diversity to target specific segments of prospects in the U.S., as well as to redirectacquisition funds into Commercial Card and international.
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Revenue GrowthBillings and cards in force helped drive our top line growth of 9%, which achieved our on average andover time target, despite weakness in the environment.I’m very pleased with our revenue performance this year. To me it’s indicative of the continued success of our multi-year investment strategy and is also evidence of our continued focus on growth. I believe itshows the diversity of our payments business and also demonstrates that, even as we’re dealing with the weaker U.S. environment, we’re not distracted by it.Return On Equity (ROE)On the plus side I also put our ROE performance. While our performance was below our long-termtarget, and down from our recent trends, our absolute return of 31% continues to be best in the industry – by a sizable margin.Balance Sheet Strength Another plus is the strength of our balance sheet. I believe we’re in an excellent position to meet ourongoing business requirements. We have access to diversified sources of funding, our current cashposition, cash flow and liquidity profile provide us with added protection in volatile times, and we’vestrengthened our charge card and lending credit reserves to provide for appropriate coverage given theenvironment.Competitive Position The final positive I’d note is our overall competitive position, which I believe remains strong. The creditlosses we booked in the 2
nd
quarter were sizable. But our relative position remains strong:
 
Our billings growth of 12% was the best among our five major issuing peers, a trend that hascontinued for 6 quarters. Our growth rate has moderated, but we remain the largest global player interms of spend. To put it in perspective, despite the weakness in the U.S., our second quarter worldwide volume of $181 billion was still the highest quarterly billings number in our history.
 
Our year to date growth in marketing and promotion also exceeds those in this group reporting thisexpense. While a number of competitors have reduced their marketing, or held flat, we continued toinvest.
 
 And finally, as you’ll hear from Al, while our U.S. lending loss rates rose at a faster pace than in priorquarters, we continue to outperform the industry in terms of both delinquencies and writeoffs. Using reported numbers through June only one of these peers had lower absolute rates for these metrics.In looking at this list it’s clear that not every item has equal weight. As I noted earlier, the slower U.S.consumer spend and higher credit losses on the left side of the slide have had an outsized impact on ourresults. But at a time when many financial companies have few, if any, positives to point to in theirperformance, we continue to have a number of major growth elements working to our benefit.
 
BLUE BOX
Generating long-term shareholder value is a goal we strive to achieve regardless of the economicenvironment. This goal requires that we navigate through near-term issues, while also keeping a firm focuson longer-term growth.
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