美國運通 (AXP) 2002 Q2 法說會逐字稿

Good evening, ladies and gentlemen

and welcome to the American Express second-quarter

earnings release conference call. At this time,

all participants are in a listen-only mode.

Later, we will conduct a question and answer

session. I would now like to turn the call over

to Mr. Ron Stovall, senior vice president of

investor relations. Mr. Stovall, you may begin.

Thank you, Laura, and welcome to

everyone. Appreciate all of you joining us for

today's discussion.

I just, as usual, want 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 the company's financial and other goals,

are set forth within today's release, which was

filed today in a 8-K report, and in the company's

2001 10-K report already on file with the

Securities and Exchange Commission.

As with recent conference calls, this call is

being broadcast live on our website. Gary

Crittenden, executive vice president and chief

financial officer of American Express, will

provide some introductory remarks, highlighting

the key points relating to today's announcement.

Once he completes his remarks, we will turn to the

moderator, who will announce your opportunity to

get into the queue for the Q and A period. Up until

then, no one is actually registered to ask

questions, so once we open it up, then you can

register. And while we will attempt to answer and

respond to as many of your questions as possible

before we end the call, we do have a limited

amount of time, and so based on this, we would

just ask that you limit yourself to one question

at a time and then get back in the queue, and if

we can get back to you, we certainly will strive

to do so.

With that, let me turn the discussion over to

Gary.

Welcome, and thanks for

joining us today.

As you have already seen, our second-quarter

diluted earnings per share was 51 cents versus 13

cents last year. The 51 cents is a penny in

excess of the 50 cents implied within the

pre-announcement that we made a few weeks ago.

The additional penny reflects the benefits from

adjustments to last year's 9/11 disaster recovery

reserve and the restructuring reserve that we also

took last year.

Overall, the second-quarter results demonstrated

the increased flexibility within the company's

business model, resulting from our focus on

re-engineering and improving our risk profile.

These benefits, coupled with lower funding costs,

allowed us to absorb the impact of weak economic

and market environment, higher costs related to

marketing and other business-building initiatives,

the investment loss on WorldCom debt securities,

and the losses on strategic investments held at

TRS, while also delivering solid financial

results.

Company-wide, our restructuring activities are on

plan and we continue to feel good about the

progress we're making here. The consolidated head

count reductions of 2,700 in the quarter and

14,200, or 16%, since year end 2000 provided

substantial cost benefits throughout our

businesses.

At TRS, business volume comparisons did improve

versus the first quarter, turning slightly

positive on a smaller decline within corporate

spending and improved performance outside the U.S.

These volume levels were in line with the

environment, but better than our expectations

earlier in the year. On an absolute basis, we

still have some distance to go to get back towards

our historical growth levels.

Lending spreads and funding costs continue to be a

strong positive factor for us. However, the

substantial interest rate benefit earned in the

first half of the year will be less beneficial

throughout the next two quarters. Slower cards in

force and lending balance growth reflect the

impact of our reduced acquisition spending in the

second half of last year and in the early months

of this year. The more recent increase in

acquisition spending, which we expect to further

increase throughout the remainder of the year,

should position these metrics and TRS's revenues

for stronger growth coming out of 2002 and into

2003. And credit quality continued to improve and

is tracking better than we expected coming into

the year.

At American Express Financial Advisors, while

equity markets negatively impacted results, the

execution of our business plan is on track, as

re-engineering benefits are funding the cost of

upgrading our asset-gathering and investment

management capabilities.

We are encouraged by the early progress being made

on improving our investment performance. Advisor

productivity was relatively strong in the quarter,

but equity market weakness does pose a challenge

to asset and sales trends, if it persists, as the

weakness seen in equity markets over recent weeks

was not a significant factor in the second

quarter.

Generally, American Express Bank continues to

perform well in light of the difficult global

economic environment. For the company overall, we

believe the underlying business results continue

to compare well with relevant industry peers. We

feel very good about the drivers of earnings in

the quarter. While revenue growth fell short of

our target, we have initiatives underway to

improve growth going forward.

Also, in light of the recent investor interest

surrounding the tightening of certain reserve and

other standards within the sub-prime sector by

regulators, let me quickly address this issue.

As you know, American Express is not a sub-prime

lender, and with regards to the regulators, we

have not been alerted to any such issues within

our portfolio.

With that, now, let me go into the details in each

of our three segments.

At TRS, revenue increased slightly and net income

rose 9% on a reported basis. Excluding the

benefit of the elimination of goodwill

amortization and the restructuring writeback net

income rose 4%. On the revenue side,

consumer-built business continued to perform in a

relatively strong manner, as U.S. consumer

spending grew at 4% on 8% higher transaction

volume, offset by declines in corporate and, to a

lesser extent, small business spending.

The discount rate declined 1 basis point from the

first quarter of '02, and 2 basis points from the

second quarter of '01 on the continued impact of

the mix of spending from relatively stronger

growth in everyday types of spending.

Worldwide cards in force growth slowed to 3%, due

to the impact of lower acquisition spending last

year and the early part of this year, although

outside the U.S., growth was still relatively

strong at 7%.

Lending spread revenue grew 22% on 4% growth in

average lending balances, and a substantially

higher yield versus last year. Travel and

traveler's check sales remained depress on

continued weakness in travel activity.

Marketing expenses rose 17% versus last year on

higher brand-related advertising activities, more

loyalty marketing, and the renewed focus on card

acquisition activities. Provisions for losses

declined 2% as credit quality within both the

charge and lending portfolios improved versus the

first quarter of '02, and volumes remained

relatively weak.

Reserve coverage of the total receivables and

loans was reduced modestly. However, the coverage

of past-due balances improved.

Charge card losses remained at relatively low

levels, while the lending write-off rate improved.

The other provision increase reflected higher

insurance-related costs and some additional

reserves related to credit exposures to the travel

industry service establishments.

As forecasted, interest expense was sharply lower

on a significantly lower average funding rate, and

to a much lesser extent, weaker charge card

volumes. Human resource expense declined for the

fourth quarter in a row on continued head count

reductions. The TRS employee base was down

12,600, or 17%, versus last year's level.

Other operating expenses rose 16% versus last year

on on variance between the recognition of

strategic investment losses, primarily internet

related, this year versus gains last year. The

difference between the gains that we had last year

and the losses incurred this year was $94 million.

This leads to a year-to-year negative comparison

in operating expenses.

In addition, higher participation in our rewards

program and the impact of our technology

outsourcing agreement with IBM negatively impacted

our other operating expense comparison. The IBM

agreement has the effect of moving certain

technology-related costs from human resources to

operating expense, although at a lower cost.

At American Express Financial Advisors, we

continue to make progress executing on the three

priorities we had previously discussed:

Re-engineering, capability enhancement, and new

growth programs.

Revenues on a reported basis were up strongly, but

adjusted for the impact of the high-yield losses

last year, they would have been down somewhat as

you would expect in this environment. High-yield

investments stood at 6% of the investment

portfolio at quarter end, up from 5% last quarter

and from 8% last year, after recording the second

quarter of '01's investment losses.

This reduction versus last year, coupled with the

lower interest rate environment, continue to

negatively impact investment income through a

lower portfolio yield than we have seen

historically.

Going forward, we continue to target a high-yield

percent of the investment portfolio of

approximately 7%, which is more in line with

industry averages.

Management and distribution fees declined 2% on a

lower level of assets under management. The lower

asset base reflected the negative impact of market

depreciation and net asset outflows within both

our retail and institutional management

activities. The fees earned on the lower asset

levels more than offset the fact that distribution

fees rose versus last year on higher sales levels.

Here, improved sales within the retail channel

more than offset weaker institutional sales. In

fact, advisor productivity was relatively strong

as branded advisor generated sales increased 10%

on a cash basis and 14% as measured on the

internally used growth dealer concession basis,

which weighs the sales of various products to

reflect their individual profitability dynamics.

Other revenues were up on higher life and property

casualty insurance related revenues.

Human resource expenses declined 1%, as higher

field force costs due to the increased sales

levels were more than offset by the expense

benefit of a 15% reduction in the average home

office employee base.

The advisor base declined 1% versus the first

quarter of '02 and 2% versus last year as we

continued to see the effects of the difficult

market environment, as well as our more

conservative stance towards advisor additions and

attrition in light of the weak environment.

Other operating expenses increased 18% versus last

year as we invested in a number of initiatives, so

the impact of the IBM outsourcing agreement and

realized a higher minority interest expense

related to premium deposits, which is AEFA's joint

venture with the bank. Sequentially, however,

operating expenses were down 4% versus the first

quarter of this year.

At American Express Bank, the bank continued to

make progress on its strategy shift as corporate

banking loans decreased by $200 million in the

quarter. Consumer activities continued to grow.

Re-engineering continues to play a key role in the

bank's financial results, with human resources and

other expenses down in the quarter. Provision was

up again in the quarter on continued consumer

losses in Hong Kong, where the environment has

been particularly difficult, but seems to be

stabilizing versus the first quarter level.

So that's a quick review of our results for the

quarter. I'd like to conclude with just a few

comments on our outlook.

Clearly, we are still dealing with a difficult

economy, and volatile equity markets. Questions,

obviously, still exist about the likely direction

of each of these over the near term. The

flexibility we now have built into our business

model allows us to - allowed us to produce solid

earnings in the first half of the year, despite

the weak environment and the cost of additional

spending on revenue-generating activities.

These results show that we are now better

positioned to operate in an uncertain environment

as a result of the more flexible and adaptable

model we have created. Despite the strength of

the first two quarters, we think that it is

unlikely that our full-year 2002 earnings will

exceed the current Wall Street consensus. There

are a few reasons for this.

First, the continued uncertainty in equity

markets. Second, the diminishing benefit of lower

interest rates throughout the year. But third,

and most importantly, our belief that our moderate

to long-term economic value is best served by

having less of our credit and re-engineering

benefits flow through to the bottom line and to

invest more into growth initiatives in the last

half of this year.

These expanded business-building efforts should

lead to improved business metrics late this year

and into 2003, but as always, we will carefully

monitor the performance of the economy to endeavor

to make the appropriate trade-offs.

Thanks for listening to my summary, and Laura, I

think we are now ready to take questions.

Thank you. We will now begin the

question and answer session. If you have a

question, you will now need to press the 1 on your

touch-tone phone. Remember, if anyone pressed the

1 at the beginning of the call, the request has

not been recognized by the system. You will hear

an acknowledgment that you've been placed in

queue. If your question has been answered and you

wish to be removed from the queue, please press

the pound sign. Your questions will be queued in

the order that they are received. If you're using

a speakerphone, please pick up the handset before

pressing the numbers. Once again, if there are

any questions, please press the 1 on your

touch-tone phone. One moment.

I have Ken Palsmer from Morgan Stanley. Please

state your question.

Hi, Gary. The sales at AEFA were

certainly encouraging, given the difficult

environment. I'm wondering if you can comment a

little bit on some stuff we saw in some of the

trade journals about shifting the advisors'

compensation to overweight the proprietary

products at the expense of the non-proprietary

products. Is that a little bit of a shift from

the previous policy, and is it really customer

friendly to do that?

I think you're probably

talking about the ticket charges, Ken. Is that

what you're referring to?

I think that's what they are.

Actually, Ken, what we were

trying to do was reflect the actual costs that we

incur when we, you know, process transactions that

are non-proprietary products, not proprietary

products. It is a relatively small charge, and

certainly not in any way reflective of the overall

economics of the relationship between us and an

advisor.

But it is something that, you know, we're looking

at and, you know, and reviewing, and, you know, we

certainly don't want to in any way encourage our

advisors to, you know, take actions that would not

be in their customers' interest.

And so as with other issues like this we're taking

a look at it and if we feel like, on balance, it's

something that we ought to revise, we'll do that.

Thank you.

I have Michael [inaudible] from J.

P. Morgan. Please state your question.

Yeah. Hi, Gary.

Hi, Michael.

I wanted to talk a little bit about

expense saves and I guess it's two parts.

First of all, you know, give us some comfort that

there's still, you know, more flexibility to come.

You're talking about still having the power there,

but if I look at human resources expenses, for

example, in AEFA, you mentioned some reasons why

that might have been higher than we were

expecting. It's down very modestly sequentially.

So I guess I'm not clear on where there's still

some additional fire power on some expense saves

to come.

And then if we're to see, on that same vein, if

we're to see increased investment in marketing, I

guess, as a result of not wanting to let it fall

to the bottom line, should we be anticipating

higher marketing and promotion expenses

specifically across both businesses?

In terms of the HR savings,

the exact dynamics of what took place at AEFA in

this quarter is that obviously our sales were

good. Our retail sales. So both cash sales and

gross dealer concession sales were good. And

obviously, our advisors earn, you know, fees when

they - when they sell products for us, and that

additional sales commission offset, to some

measure, the 15% head count reduction which we now

have at this point at AEFA. And so you didn't see

as much benefit from that in the second quarter as

you might have seen in other quarters.

It's frankly, however, good news, obviously,

because we want to sell product at AEFA, and we

only pay that commission to the extent that the

revenues are there, and those products end up

being, you know, added onto our books over time.

I think if you recall last year, the head count

reduction process that we went through, there was

a fairly gradual reduction in head count that took

place in the third and fourth quarters, reflective

of the restructuring charges that we took in each

of those quarters, and we now have the bulk of

those people off of the books. So we still have a

fairly favorable comparison in both the third and

fourth quarters from the - you know, from a human

resource point of view.

With regard to the additional investment that

we're making in marketing, obviously this is

something that we think about very carefully, and

as I said right at the end of my comments, we'll

monitor this, you know, with regards to the

overall economy.

But it's important to realize that we are managing

carefully to all three of our financial metrics,

so we're managing to, on average and over time, 12

to 15% net income growth, return on equity of 18

to 20%, and revenue growth of 8%. And obviously

we've fallen well short of the revenue growth

target of 8%, and we're now confident, with our

performance on a year-to-date basis from a

provision point of view, from making sure that our

re-engineering has taken hold in the way that we

wanted it to, and so we have really turned our

attention, you know, over the course of the last

few months to ensuring we have the growth programs

to take us strongly out of 2002 and into 2003.

Now, the additional - the initial spending that

we have done in the early part of this year was

primarily brand oriented, so you saw a lot of

American Express brand advertising on television,

you saw the opening program in the first few

months of this year, because we were quite

cautious about the acquisition environment because

of the credit losses that we've experienced. I

think you'll see us now turn more strongly, now

that we're confident where credit stands, to do

more aggressive acquisition practices in the next

few months, and hopefully, as I said, that leads

to good CIP growth and better metrics as we come

out of this year and go into the early part of

next year.

Can you quantify for us at all what

the benefit of the higher sales was, you know, on

the expense? You know, it's a funny way of saying

it, but what sort of impact the higher sales had

on human resources expenses in AEFA this quarter?

Well, the - the difficulty

with doing that, and I don't mean to be evasive

here at all, but the expense - the benefit of

these assets coming on the books comes more

strongly next year because we largely pay out the

commissions associated with that in this year and

then you get the benefit of having that on the

books next year. And so it's hard for me to split

that out, obviously, for you specifically.

Okay. Well, maybe just as a - to

close the loop on that, if we could, in terms of,

you know, the fees that you earned in the - in

AEFA in terms of investment management fees, any

of that benefitting from 12b-1 fees, you know, as

obviously you've had in outflows this quarter? Is

any of that from that, because obviously assets

declined quarter to quarter, so it's hard to sort

of put that in perspective.

We're just discussing it here

real quick, Michael.

Yeah, we've just taken a look at it, and there is

some benefit of that, but the - it's really more

just the - the sales runoff more than anything

else.

Thank you.

I have Karen Mayor from Banc of

America Securities. Please state your question.

Hi. Couple of questions. One is,

Gary, could you comment on just sequential

spending patterns in the quarter? If you won't

give us the exact numbers, maybe qualitatively or

directionally, both for consumer and T and E? And

then could you also just remind us of how the

Lehman dividend works?

Sure. The spending overall

that we saw was - there wasn't a significant

difference from month to month, or as we went

through the quarter. Because of the timing of

Easter this year, and frankly the number of

business days, the actual results were, you know,

distorted somewhat. But in aggregate, the

spending from month to month as we went through

the quarter did not vary by more than about 1%

from the total that we reported for the quarter.

Obviously, from last quarter to this quarter, we

saw a very substantial improvement in our

corporate spending, so corporate spending was down

about 16% last quarter. It's now about 8% in this

quarter. And so the major factor that we saw over

the two quarters was the - was the fact that

corporate spending was down less, and that's the

thing that put us overall into positive territory,

as well as relatively good performance in the

international markets.

And so in combination, that's basically how it

performed.

From a consumer point of view, the spending was

the same, up 4% essentially in the first quarter

and the second quarter of this year.

In terms of the Lehman dividend, this is the last

year that we'll receive the Lehman dividend. We

still have a - kind of a stub payout of that,

which is roughly half of the year's balance,

somewhere around $28 million, I believe,

$23 million, that will be paid out this year, and

that's the end of that payment and we won't

receive any future payments in future years.

So that 23 million is divided over

the next two quarters or that was - you saw part

of that this quarter as well?

It's in the third quarter.

In the third quarter. Okay. Right,

right, right.

And so - and it had been 46 million in the prior

year

Right.

Okay. Great. Thank you.

You bet.

Fred Ball from Prudential Securities

is on-line. Please state your question.

Hi, Gary. I wonder if you might just

spend a minute talking about your relationship

with your credit card bank regulators. I know you

mentioned you don't do credit card loans and you

don't have - or have not been alerted to

anything. But could you talk about whether or not

you have on-site examiners and when they last

conducted a review. And also whether or not

you've had a look at the SFIEC draft guidelines on

account management and loss allowance guidance and

where you stand vis-a-vis those guidelines which

are just put on the website today.

We have obviously had a

chance to just do a very cursory review of the

guidelines that we have in place and I think -

you know, my best recollection is that it's been a

few months since we have had regulators on-site.

I would say that as I do a very cursory review of

these guidelines, and compare them against our

policies, that we actually stack up very well. As

you know, we don't re-age accounts, just as a

matter of policy; that we have reserved in the

past for accrued fees and accrued interest, and so

I think many of the proposals that are likely to

be surfaced through this process are things that

we do as a matter of course today.

Also, obviously, the sub-prime portion of our

portfolio is very small. I would imagine in

relationship to what some other credit card

companies have. And it's certainly not a focus in

any way of the acquisition activities that we have

going on.

Can you tell us what your exposure is

to cycles of 660 and below?

You know, it's not something

that we have ever disclosed externally but I can

tell you that it's a small portion of our

portfolio.

And do you have examiners on-site? I

know you said it's been a couple months, but are

they actually on-site?

You know, not that I know of.

Not that I know of.

Thanks.

Barry Cohen from Maverick capital is

on-line. Please state your question.

Yes. Hi. I was wondering, you kind

of mentioned that going forward, that the cost

savings are going to be reinvested into the

business for a variety of usages, and without

putting too fine a point on it, I know a number of

times over the last several months, a lot of

investors have asked how can we tell this, since

we've never known what the gross and net numbers

were going to be.

So how can an investor tell just exactly how much

is being invested back into the business versus

what's flowing down to the bottom line, and,

therefore, what one can assume is the marginal

rate of return on that investment?

Well, there's a number of

places that you could look. You know, if you look

at some of the items on the income statement,

obviously we're making a larger investment in

marketing than we had made at the end of last

year, and as I said, our intention is, obviously,

to increase that as we go through the third and

fourth quarter of this year.

And so that gives you a sense of the amount of

investment dollars.

We also, on the other expense line, both in TRS

but in a more pronounced way at American Express

Financial Advisors, have had an increase and so

you can get a sense for what the increase is in

the investment spending that we have made. So

that kind of gives you one side of the equation.

On the other side of the equation, there are

benefits that really fall in a number of different

line items on the income statement. One,

obviously, is the human resource line. That's the

obvious and most apparent. But also, part of our

provision benefit that we've gotten this year has

come not only just from general improvement in the

economy, but also from the fact that we have

re-engineered some of our collection practices and

have focused in particular on the reduction of

fraud. And so, again, some of the savings that

you read about in the provision line is really

re-engineering benefits that have come through.

So on the one side, you have - you have savings

that, you know, clearly fall through in human

resources, you have savings that are on the

provision line, and then we've - because of the

environment, obviously, gotten substantial benefit

from interest savings. And we've had some of that

come through, obviously, in the form of higher

income than we anticipated that we would see at

the beginning of this year. I think just

generally, if you kind of follow the consensus on

a full-year basis, we started out at the beginning

of the year at a lower number. The current

consensus, obviously, is a higher number than

where we started out the beginning of the year by

I think about 8 cents or so higher than where we

were, and so some portion of that, if you assume

those calculations were correct, has come through

to the bottom line. And then on balance, we're -

we believe that the appropriate thing for us to

do, the way we add the most economic value, is to

ensure that we have a balance between income

growth, revenue growth, and return on equity, and

we think these are the right steps to take right

now to ensure that we go into next year with the

right kind of revenue momentum.

And so we have actually been working on these

growth plans for some time. You know, as we came

out of last year, we spent a fair amount of time,

you know, determining what the programs were that

we thought could have the best impact in this

environment, and I think you'll be seeing some of

those programs over the next few months.

Okay. I'm sorry to be, you know, a

pain on this, but it's very - I guess it's tough

to tell the difference between, you know, what are

the yield curve benefit and therefore a cost

savings. I guess I'm not familiar with that

concept, but, I mean, maybe it's something to

think about. I know you guys have been reticent

about sharing certain information in the past with

investors but as you kind of move into a different

cycle of what you're doing with your P and L and your

business, perhaps it might be helpful for people

to be able to analytically truly understand what's

happening by sharing some of that information.

Just a thought.

I appreciate the - I

appreciate the feedback. Let me just make sure I

was clear about something. The interest savings I

was talking about obviously is not re-engineering

savings. You know, that is, as I said - and I

referenced in my comment - an environmental

factor. The other obvious specific item that we

identified was the over $600 million in savings

that we would achieve through the restructuring

reserve that we took last year, and as we have

reinforced, we believe we're right on track with

the numbers that we had identified last year that

we would save this year and next year from that.

And so I think, you know, there's enough pieces

there that one can triangulate reasonably well

what our position is. And as always, we continue

to come back consistently to what we're trying to

accomplish financially, what our long-term

financial targets are, and we will continue to try

and operate the business to achieve those

financial targets on time and on average.

Thank you.

Matthew Vettle from Salomon Smith

Barney is on-line. Please state your question.

Hi. Good afternoon. A couple of

questions. The first, following up on the idea of

increased marketing investment and account

acquisition marketing spend in the card business,

it seems like there's a lot of banks that have

reported in this quarter and the card business has

really been the source of strength, and then given

what's happening with the regulatory have

environment at the sub-prime end of the market,

there's a lot of marketing dollars going off the

prime and super-prime part of the card market.

I'm just wondering what you're seeing out there

that gives you some optimism that you will be able

to grow accounts and balances at a price that is

attractive.

And then secondly, if you could just comment, you

mentioned that the discount - the blended

discount rate dipped a little bit because of mix.

If you could just comment on the progress in sort

of maintaining the pricing in the different

verticals on your discount rate.

Sure, Matt, I'd be happy to.

The - in terms of the marketing programs, as I

mentioned, we have been planning, you know,

various programs in the last part of last year and

the early part of this year and have done a fair

amount of market testing and we continue to go

back to those programs that drive our core

strengths. That is, the programs that drive

spending, like rewards programs, and programs that

take advantage of unique capabilities. And we

certainly think of rewards as being one of those

things. And so I think we have, you know, done a

fair amount of work to determine those programs

which we think in this environment will have the

best opportunity for driving our overall

economics, and rewards obviously figures centrally

to that discussion.

As we have talked about in the past, not only do

they drive good acquisition efforts, but they have

favorable impacts on various parts of the P and L, and

so, you know, we have good confidence that the -

the things that we are - you know, that we have

teed up in the pipeline are good programs that are

going to result in improvements in our revenue

lines overall.

In terms of the discount rate, obviously it was

down 1 point. That did come as a result of the -

primarily came as a result of the mix change that

we've experienced as a result of T and E being down

and the other industries growing, which is very

much our strategy, and we have said that we

anticipate that that is going to continue going

forward.

It is very rare for us to make a repricing of an

industry happen. It just is something we don't

do, by and large, and our brand proposition as a

company remains very, very strong, and, you know,

we just feel very good on a market-by-market basis

about where we are from a discount rate point of

view. And so while there's always pressure on

that, like there is in any industry on pricing, it

is something that we feel good about our position

on, and we think that the trend that you'll see

over time in the discount rate is reflective of

the things that we talked about in the supplement,

the mix change, electronic data capture, and that

kind of thing.

Okay. Thanks.

Moshe Orenbuck from Credit Suisse

First Boston is on-line. Please state your

question.

Thanks. Gary, I was kind of

wondering if you could give us a little more

detail on the non-personnel expense. It was up

roughly $200 million. It seems like about half of

that was kind of the shift in kind of the gains

versus the losses, and then in the text, in the

supplement, you attributed the rest of it to

increased cost of loyalty programs.

Could you kind of reconcile that with the fact

that your spending volume was basically flat and

airline pricing is down kind of double digits?

Sure. Let me just try and

take you through each of the segments a little bit

in more detail.

As you, I think, rightly mentioned, there's about

$94 million that comes from the year-over-year

change from the internet gain we had last year,

internet business gain and the impairments that we

took this year.

Secondly, we had the outsourcing arrangement with

IBM. Essentially, a lump of expenses that we have

had in human resource cost has been reclassified,

and now goes through other operating expenses as

part of our contractual arrangement with IBM, and

so it moves it essentially out of the HR line and

into the other operating expense line item.

And then the - many of the business-building

types of activities, as you stated, the membership

rewards program is one, you know, fall onto that

line also, and as I just mentioned a minute ago,

that's a key part of our thinking going forward

for our acquisition strategies.

If I go to AEFA, AEFA also has the same impact of

the reclassification of the IBM outsourcing cost

from human resource cost into other operating

expense. It also, you know, is the place where we

have concentrated our spending for the primary

programs that we've talked about that we're

developing in AEFA. So you've heard about the

American Express or American Express Financial

Advisors one account, the spending that we're

doing on the platinum advisor program. The

development/training expense associated with those

programs are all concentrated in that line item,

and that's obviously key to our strategy at

financial advisors going forward.

And so that gives you at least a qualitative split

of what we see in those line items.

Thank you.

Michael Holt from Goldman Sachs is

on-line. Please state your question.

Yes. Hi. Good afternoon.

Hi, Michael.

Two kind of related questions. Given

the comments, you know, at the outset of the call

about perhaps rebalancing the - your focus on

reinvestment versus letting some of the expense

savings drop to the bottom line, I was wondering

if you could maybe just delineate somewhat more

specifically some of the developments that you -

or opportunities that you see in the current

environment and then if you could perhaps just be

a little bit crisper about your expectations as

far as meeting consensus. You know, maybe just

tighten that up a little bit.

All right. The - in terms

of the opportunities, I wish I could obviously go

into the detail on these, but our preference is

not to do that, with marketing programs that we're

just about to launch.

Yes, I'm sorry, go ahead.

Can you hear me all right?

Yes.

So from an opportunity

standpoint, we - you know, as I said, we have

some programs that we're going to be launching

around the [inaudible] work space within TRS that

we anticipate based on the testing that we've done

that those are going to be very positive for us.

And similarly, we are in the early stages of

roll-out of both of the programs that I just

referenced at financial advisors as well, and so I

think the marketing spending that we've talked

about are going to go against those programs and

obviously some of our other acquisition-related

activities and we're going to continue the branded

advertising, which we have been doing this year,

both for the small business program as well as

the - for the brand more broadly. And the brand

advertising that we've done has touched both

financial advisors as well as TRS. And so those

are - you know, that's probably about as much

granularity as we would want to provide right now

on what our plans are for those marketing dollars.

In terms of our expectations, frankly we tried to

be as clear as we could about that. The current

consensus out there, I think, is $2.01. As we

look at all of the factors summed up in the

environment right now, it looks like that there

are a couple of negative factors. One is that the

equity markets are a little weaker and we won't

get quite the same benefit from interest savings

that we got in the first half of the year in the

last half of the year. That being said, we've had

very solid business performance. You've seen

that. You've seen the benefit of the

re-engineering. You've seen that we've been able

to have solid performance in light of being able

to absorb some fairly significant charges from

WorldCom, from our internet activities, and in

spite of that, have had good financial

performance, and it's our belief, as I said just a

minute ago, that we really need to deliver a

balanced result, good revenue, good income growth,

and good level of return on equity.

And so taking all of those things into account,

our best expectation is that we won't exceed the

$2.01, you know, on a full-year basis this year.

And that's our - that's our best view of things

today.

Okay. And by that, you know, I take

it you mean that you don't expect you'll fall much

shy either, though.

You know, again, we really

don't like to make point estimates about how we

think the year is going to come out. We like to,

as you know, provide as clear of guidance as we

can about what we're going to do over the long

haul, and this - this, you know, guidance that

we're providing today is very consistent with our

long-term view of what we're trying to accomplish.

You know, for example, if we wanted to have lower

revenue growth, then clearly we could have - at

least it appears now - stronger momentum on the

net income line on a full-year basis, if the third

and fourth quarters were like the first half.

Our belief is, though, that our economic value is

best enhanced over time by a balance that allows

us to have better top- line growth and net income

growth consistent with what we've said. And so I

think you'll always see us, on average and over

time, making decisions that guide our business

towards the direction that we have tried to

articulate.

Gotcha. Thanks. Thanks so much.

Jennifer Scottie from CIBC World

Markets is on-line. Please state your question.

Hi. Good afternoon. You know,

probably most of my questions have been answered

but I was hoping that you could go into a little

bit of detail about your non-AMEX brand, both on

the cards in force and the billed business volume.

You know, I've noticed that you have been pretty

steadily adding, you know, new relationships, but

yet we have not really seen much of a change on

the - on the billed business volume side or on

the cards in force, at least to one decimal point

that you provide. If you could just give us a

little insight as to what you see going on in that

particular piece of the business.

Yeah. I think, Jennifer,

unless I'm mistaken, you might be confusing a

couple of different things.

We have a - we have a joint venture in

Switzerland with Credit Suisse, which is the

non-AMEX branded business that you see disclosed

at the top of Page 6 in our settlement, and that's

a joint venture that we've had now for some time,

and the cards and billed volume around that is

relatively stable.

On the other hand, we also have a very active

branded card program that we do through GNS, in

cooperation with banks, where banks issue American

Express branded credit cards and that's a

high-growth portion of our global establishment

services business. It falls into that same

organizational unit. And that business is doing

very well for us. We're adding a lot of cards.

We're adding good billed business. And that's not

split out as part of the top of Page 6.

All right, then. Thank you.

We have Matthew park from Thomas

Weisel Partners. Please state your question.

Good afternoon. Just one quick

question on the provision line, and I was

wondering, going forward, as you intend to grow

your balances a little quicker, whether you need

to provide further, in terms of reserves.

The - you know, our - the

amount we keep in provision is obviously driven by

the underlying volumes that we have, and also, you

know, what our pattern is in delinquencies and

write-offs, bankruptcies, and, you know, for the

most part, the underlying economic factors that

would tend to drive our results have been

improving. So unemployment, for example, has

been - or at least new unemployment claims have

been decreasing. And to the extent that trend

continues, then that offsets the natural increase

in provision that would be caused by the growth in

the business overall.

I think at this point, we've referenced a couple

of times earlier in the year that we are reserving

above our midpoint estimate for future credit

losses, and we're doing that, obviously, in

accordance with all of the accounting policies

that we have, but our belief has been that there

was enough mix data in the economy that it made

sense for us to reserve at above kind of midpoint

estimates for what our losses would be in the

future and we continue, as you saw in the second

quarter, to be in that position, where our reserve

coverage as a percentage of our past dues has

increased very nicely.

Now, there will certainly come a time, over the

course of this cycle, where the economic situation

will be clear enough that that situation will

probably reverse itself, where we don't need to

have reserves at the level that - or this may

happen, where we don't need reserves at this

level, and we'll be in a position to have some of

those provision numbers come down as a percentage

of those outstanding.

But as we look at things really right up through

this quarter, we didn't - that wasn't our call.

We didn't think that was the case. But it may

very well be the case, going forward.

We're certainly in a strong position today, I

believe, in terms of our total reserve coverage.

Regardless of where we're talking, whether we're

talking about our coverage at TRS, at AEFA, or at

the bank, in all three areas we feel comfortable

with our reserve levels.

I'm sorry. To follow up quickly, do

you believe that you - your loss rate is peaking

at this point and continues to improve down the

road, or do you think this is sort of a temporary

reprise?

Well, the best correlation,

you know, between our loss rates is - and the

actual result, as I mentioned, is what the

unemployment levels do. And as you know, it

appears as though there's been an increase in

unemployment that is now being led, hopefully,

down the other direction by a reduction in new

unemployment claims.

If that actually happens, then we would expect,

you know, our numbers also to peak and begin to

improve, although, you know, we don't know,

obviously, where new unemployment claims are going

to go and where unemployment overall is going to

go, so it's a little bit hard for us to forecast

that.

I think the data has been mixed enough for us so

far that we're comfortable that the reserve levels

that we have are appropriate at these higher

reserve levels. But if the economy continues to

improve and unemployment declines, then, you know,

we'll certainly have some opportunities here.

The other thing I would just point out is that

much of the increase that we have had in the

provision related to growth in our lending

portfolio that really started now a little bit

more than 24 months ago, and so, you know, we have

essentially now been through the maturation cycle

for the very strong growth that we had in Blue and

the growth that we had in Costco in 2000 and 2001,

and we have, I think, come through that in a very

difficult economic environment, and done well from

a credit management standpoint, and so that's

another positive factor for us as we go through

the next couple of quarters.

Thank you.

Mike Hughes from Merrill Lynch is

on-line. Please state your question.

Hi. Your interest expense, the ratio

of interest expense on charge cards, was up a

little bit this quarter, and the dollars were up a

little bit as well, and the overall balance didn't

move all that much. I had two thoughts as to why

that might be, and maybe it's both but I'd hope

you could fill it in. Those were, I know you guys

are doing a little less commercial paper, I think,

than you were, so maybe you termed out some of

that funding, or it's the hedging that you guys do

because you're using - your forward rates, the

forward rates haven't really come down much, as of

a few quarters ago.

Well, certainly the former is

true. You know, we - we do have less commercial

paper than we had, you know, last year at this

time or even six months ago. I think we talked in

last quarter's call that we were making a

concerted effort to bring our commercial paper

down below our credit lines, and that's the

position we're in today, where our credit lines

exceed the total amount of commercial paper that

we have outstanding. And that has come at some

cost penalty, although the total amount of that is

really quite small.

Our hedging strategies really vary from time to

time, and it would be - I don't think it's the

right take-away, Mike, to say that we have a

knee-jerk reaction to always be hedged forward at

every point in time. You know, we look at the

various unhedged positions that we have open in

the business and then we make decisions about what

we should do based on, you know, our aggregate

unhedged position, and so I think that is probably

less of a factor in our - in our interest cost

overall.

So what are you doing right now,

given that forward rates look like - well, rates

don't look like they want to move and forward

rates have come down. Are you kind of borrowing

current or are you pushing it out still?

Well, at this very moment, as

we're renewing funding, we're tending to borrower

shorter at this particular moment in time, but our

portfolio is a very large portfolio with positions

that expire over a long period of time. So you

can't really characterize the whole nature of our

portfolio by what we're doing right at this

moment, but given the steepness of the yield curve

right now, we're tending to be shorter than we are

longer.

Thank you.

Bruce Hardy from Lehman Brothers is

on-line. Please state your question.

Yeah. Gary, what - you know,

net-net, what do you see as the operating per

share number in the quarter? I mean, would it be

closer to 56, 57? And if so, you know, if the

consensus is 201, that's kind of a 52-cent number

in the third, you know, 52, 53 in the fourth. You

know, where is the, you know - to the degree that

the nonrecurring losses in the quarter do not, you

know, go away, what happens to the - you know,

are you saying that that income is going to go

into the marketing spend or, you know, just help

out with that a little bit.

And -

You know, there are more -

there are more pieces, obviously, in the overall

equation than what you just referenced. You know,

certainly part of what you just mentioned will go

into marketing for the quarter.

Additionally, you know, we anticipate that the

impact of equity markets, should they stay at

their current level, will be stronger in the third

and fourth quarters. And then the year-over-year

benefit from interest is not as high in the third

and fourth quarters as it has been in the first

two quarters of this year. So you factor all of

those things in and you come up with a - with a

slightly different picture.

Also, on an ongoing basis, obviously when you run

a high-yield portfolio, there are some ongoing

losses that are associated with high yield. We

essentially - you know, when we took the charge

in the second quarter of last year, largely

cleaned the decks of that kind of an impact, but

we've now - we're now substantially further along

in our development than that time period, and so I

think it would be normal to expect that there's

going to be some amount of ongoing loss associated

with the high-yield portfolio. I guess that's a

complicated way of saying that, you know, we are

quite comfortable that, you know, we will continue

to deliver very solid performance for the

remainder of this year, even recognizing the -

you know, all of the uncertainties that are - or

at least a portion of the uncertainties that are

out there, but we do believe that it's right now

to begin, you know, focusing more of our attention

on the growth initiatives that we have in front of

us.

I have Mark Alpert from Deutsche

Banc on-line. Please state your question.

Hey, Gary.

Hi, Mark.

I'm going to beat the horse one more

time. The market, as you pointed out, is

obviously much worse since the end of the quarter.

Yeah.

And just thinking about this

trade-off in terms of the flexibility, you know,

in terms of the reinvesting cost saves or letting

them fall to the bottom line. So does your

statement and your comfort with consensus, did

that - did that factor in the - you know, the -

just where things were, as of July 30th, or did it

incorporate the - you know, the first few weeks

of July as well, particularly given the state of

the equity markets?

Yeah. Let me just underline

that what we said was that we didn't expect that

we would exceed the consensus level. And I do -

I want to underline that that's explicitly the

language that we used. We didn't confirm that we

were going to hit consensus for the year. Because

I think as you rightly point out, there are a lot

of uncertainties that, you know, we don't control

and we have difficulty calibrating.

What we have is we believe we have very good

momentum on the expense side of our business,

which provides an opportunity for us, we believe,

to - we have more confidence today because of

where our provision level is, where our expense

levels are, to be able to spend more of our

dollars correspondingly in marketing than we did

in the first part of this year and to target that

more directly at acquisition activities because

the credit statistics have improved. And that's

basically our belief.

And with that, we don't think, given the market

environment that prevails today, that it's likely

that we're going to exceed the consensus that

right now happens to be about $2.01 on a full-year

basis. That means that it is possible that we

could go above $2.01. It also says that it's

possible we could go below $2.01, depending on

exactly how things play out over the next few

months, and, again, you know, we do whatever we

can to be as clear as possible about what we're

trying to accomplish on a long-term basis, while,

you know, retaining the flexibility to recognize

that there are a lot of uncertainties out there

that are very difficult for us to control on a

quarter-to-quarter basis.

I guess what I'm asking is: Did the

statement incorporate the tremendous drop in the

stock market we've seen in July?

Sure, sure, sure.

Okay. And of course the other - I

mean, this is not a very brilliant observation,

but you'll definitely have people above $2.01

coming down and so if the people below $2.01 don't

come up, consensus automatically falls, but - you

know, so are you - you're taking a look at

consensus before earnings numbers change?

Yeah. We were looking at the

numbers as they were kind of out last week, and

looking at those numbers and calibrating around

that.

Okay. Thank you.

Vincent Daniel from KBW is on-line.

Please state your question.

Yeah. Just quickly. I mean clearly

the increase in investment at TRS is because

you're seeing credit metrics as you've said. How

much is a result that some of your competitors, at

least from a regulatory standpoint, seem to be,

quote, on the ropes and this might be a chance to

steal some market share maybe back from some of

the competition.

Well, I tell you, we did

reduce our marketing expenditures in the third and

fourth quarters of last year, and it's had an

impact on our metrics and we're not happy with

that. And we want to obviously begin to reverse

that and see our revenue grow more in line with

what our long-term targets are. And we are

convinced, based on the work we've done, that

we've got products that are going to be attractive

to our customers and we're going to push those

products. And so it is, you know, a difficult

time for some competitors in this industry. For

us at this moment in time, we feel good about our

expense management, we feel good about our credit

performance, we feel good about the resources that

we have at our disposal, and we think there's an

opportunity for us to improve our revenue

performance, given, you know, a couple of months

of good spending behind our acquisition

initiatives.

Thank you.

Okay. Laura, I guess we're

coming up on 6 o'clock, so maybe we've got time

for one more question, please.

Our final question today comes from

Phil Marriott from around Holt and Blischroder.

Please state your question.

Thanks. Actually, I have a few I

hope you can help me with.

That's why we left a couple

minutes here, Phil.

Thanks a lot.

You know, first, I'd just like to say I think this

is a very solid - solid quarter that you guys put

out in what is a challenging environment but I

guess my first question is just related to detail

on the investment and venture gains and losses

that you've provided this quarter on TRS.

Could you give us a sense of what that was last

year, what gain - for the total?

Yes. You know, I don't

actually know the specific company name, and let

me -

No, no, no. I wasn't looking for a

company name. I was just looking for sort of a

total dollar figure of gains.

Oh. Yeah. It was

$46 million last year and it was related to public

companies where we actually harvested our position

in those public companies and therefore could

recognize the gain.

I was actually trying to get for

the - for all of 2001, rather than the quarter,

because that's not - I'm not sure that that kind

of detail has been provided in the past for -

You know, I don't think we

have it at our fingertips here.

Okay. And just sort of related to

that, do you - where do we stand in terms of

scrubbing, you know, private equity investments

and the like at TRS? Are there - are there

losses to expect going forward, or is the - how

has that process gone?

The total amount of our

outstand - the book value or the carrying value

that we currently have on the remaining assets in

the portfolio is about $70 million.

Okay.

There is one of those

investments that has a - that is a

publicly-traded company that has a value of

about - our holding is about $16 million.

Uh-huh.

The remaining $54 million or

so is split among 15 different companies, all of

which are obviously a small piece of the

$54 million.

So there's no one single lump that is large.

And obviously we felt like this was the

appropriate thing for us to do as we looked

through the business prospects and cash flows

associated with each of these businesses and

that's why we took the impairment now.

Okay. And I - I'm encouraged by the

comments you've made about returning, you know, to

invest in your business for growth, and I think

that there is clearly some concern that the market

environment is such that, you know, you may want

to reconsider that further down - out in this

year.

Could you just give us a sense of how quickly, you

know, you'd be able to put on the brakes, if

necessary, and how frequently you're reviewing

those, you know, invest for growth strategies?

We review them every month,

so we look at, you know, what we have committed

and the way the business is performing, the way we

look at the - you know, what the economic

backdrop is, and we review each month the

decisions that we make about releasing further

investment dollars, and we calibrate those

accordingly.

They probably have somewhere around a 8 to 12-week

lead time associated with the actual launch of a

marketing program. There's some dollars,

obviously, that are required to be committed even

a little bit further in advance of that, but the

majority are committed with that kind of a lead

time. And so as I said in my very last comment,

we'll continue to monitor what the economic

circumstances going forward are, but we think at

this point in time that we've got an opportunity,

particularly because our credit results have been

performing so well and we're encouraged by what we

see from the tests we've done.

Uh-huh. And just so I'm clear on

this, did you open the spigot at any time in the

second quarter?

Yes. Yes, we have, and a lot

of that, you know, has been related to brand

advertising spending.

So we increased the amount that we had planned to

spend against our brand advertising campaigns in

the second quarter and began, you know, what I

might call a small down payment on the acquisition

activities. But you're really not going to see

much of an impact of these activities until we get

into the fourth quarter, so -

-

Right.

-

We expect the third quarter

to be another kind of lower metric quarter for us,

and then hopefully we'll see some upturn at the

end of the year and going into 2003.

Okay. Two more here. I was also

encouraged by your return to re-purchasing some

stock here recently. As I look back, you've

done - in prior years - well over a billion

dollars a year. Are you in a position at this

point to be at that kind of a rate, or should we

expect sort of lower rates of share repurchase

activity versus investing in growth opportunities?

No, we're not at all capital

constrained, so we're in a position to return to

that kind of rate.

Okay. Great. Last one, you talked

about the reserve. Could you give us a sense of

the utilization to date and what the remaining

balance is on the restructuring reserve?

You know, I don't know that

off the top of my head. I can tell you that we

have now written back, I think, in total about

$19 million pretax. I'm sorry, $24 million

pretax. Between the first two quarters.

Uh-huh.

So - and by the end of this

quarter, we will have, I believe, spent the

overwhelming majority of those dollars.

So on a full-year basis, it looks like we'll come

out very close to what our estimates were last

year.

Okay. Very good. Thank you very

much.

Okay. Thank you, Phil. And

thanks everyone else for participating with us

this afternoon.

Thank you all for participating in

today's teleconference. You may all disconnect.