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.