美國運通 (AXP) 2002 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the American Express fourth 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.

Okay. Thank you, Jody. Welcome to everyone. Appreciate all of you joining us for today's discussion.

Before we get started, let me tell just 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 earnings press release which was filed in an 8K report and in the company's 2001 10K report, already on file with the Securities and Exchange Commission.

I'm sure you noticed some changes in our reporting of GAAP versus managed information within today's earnings documents. As you know, new reporting guidelines have stressed the importance of highlighting GAAP results and reconciling them to certain information reported on a non-GAAP basis.

In the fourth quarter and for the year 2002 earnings release and supplement, which are now posted on our website at ir.americanexpress.com and on file with the SEC in an 8K report, we have provided initial information that compares and reconciles the managed basis financial measures to be discussed today with the TRS GAAP financial information, as well as AEFA's GAAP and net revenues and explains why these presentations are useful to management and to investors. We do urge you to review that information in conjunction with today's discussion.

Gary Crittenden, Executive Vice President and Chief Financial Officer of American Express will provide some introductory remarks, highlighting the key points related 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. And while we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time and based on this, we ask that you limit yourself to one question at a time during the Q-and-A.

With that let me turn the discussion over to Gary.

Welcome, everyone, and thanks for joining with us today. As usual, my opening remarks will focus on our results for the fourth quarter, as you are already familiar with the prior quarters during the year. During the Q-and-A period, I'll be happy to respond to any questions you might have on our full year results, in addition to the fourth quarter earnings questions that you might have.

As you've already seen our fourth quarter diluted EPS was 52 cents a share versus 22 cents a share last year. Even if you consider the impact of last year's restructuring charge, our fourth quarter growth was strong. Consolidated revenues rose 6% while consolidated expenses decreased 5%. Overall the fourth quarter results reflected a return to solid growth levels at TRS while continuing to demonstrate the flexibility in the company's expense base and improvements in the company's risk profile. These benefits, coupled with lower funding costs and improved credit quality, allowed us to deliver solid financial results while absorbing both the impact of the weak economic and market environment and significantly higher costs related to marketing and other business-building initiatives.

Companywide our restructuring activities delivered benefits consistent with the plan we discussed with you last year. The consolidated head count reductions of 13,400, or 15% since year-end 2000 provided substantial cost benefits throughout our business.

During the quarter, the consolidated head count increased by approximately 400 employees as we geared up for the movement of additional jobs to a service site in India. This process entails hiring service employees in India before we actually allow natural attrition to eliminate the duplicate jobs in their current locations so we can train the new service representatives prior to the actual transfer of the work. In addition, our consolidated balance sheet is strong.

Overall, TRS was characterized by improved spending volumes, comparatively stronger lending balance growth, good expense controls, excellent credit quality and a strong earnings performance with metrics and marketing spending in a better position to support revenue growth during 2003.

Overall, AEFA's results reflected persistent market pressure on asset and sales levels and a negative earnings comparison, but we also continued progress on some key initiatives as planners grew and equity portfolio performance on an asset-weighted basis was again above the industry mean.

Lastly, AEB continued to perform well in light of the difficult global economic environment.

With that now let me review the details of each business line. At TRS, managed revenues increased 8% and net income more than tripled. While the revenue and net income growth reflect a strong business performance, the earnings comparison also benefited from last year's restructuring charge. On the revenue side, our decision earlier in the year to invest in growth initiatives rather than to deliver additional short-terms earnings is already producing benefits within volume cards in force and lending balance growth.

Business volumes improved versus last year on relatively stronger growth in consumer, small business, and corporate customer spending. Worldwide billed business increased a relatively strong 13%. In the U.S., consumer spending grew at 13% on 11% higher transaction volume. Small business spending rose 12%, and corporate volumes increased 13%. These better volume comparisons reflect the initial benefits from our stepped-up investment in marketing initiatives, as well as the easier comparisons to last year's post-9/11 levels.

The discount rate declined one basis point from the third quarter of 2002 and four basis points from the fourth quarter of last year on a continued mix of spending shift towards everyday spend category. Worldwide cards in force rose 4% versus last year at the impact of increased acquisition spending was evident within the fourth quarter card editions. In fact, during the quarter we brought in the highest level of new cards since the first quarter of 2001, when we had strong contributions from our Blue and Costco products.

Managed net finance charge revenue grew 8% on 8% growth in average worldwide lending balances. Period-end balances were up 10% worldwide. Spreads only rose slightly as some of the previous quarterly interest rate benefits diminished and the mix of products further revolved toward lower rate offerings. Traveler and traveler's checks sales turned positive despite continued weakness in travel activity due to comparisons to particularly depressed levels from last year.

As expected, marketing expenses rose substantially, increasing 31% on the marketing of our new charge cards with membership rewards built in and the cash rebate card, more loyalty marketing and our renewed focus on card acquisition activities.

Manage provisions for losses declined 12% as overall credit quality improved. Within our lending business, loss trends reflect the quality of our target customer segments and stand in direct contrast to those issuers with a historical sub prime focus. Despite the improved credit indicators, reserve coverage of lending receivables was increased in light of the continued uncertainty within the economic and regulatory environment.

With regards to banking regulators, as I indicated last quarter, we are in regular dialogue with them on an ongoing basis and not been alerted about any particular issue with regards to our portfolio or practices. Despite the fact that the final FFIEC guidelines contain no negative surprises, we do think in the current environment it is prudent to maintain a relatively conservative reserve posture.

Coverage of charge cards receivables was reduced somewhat based on the portfolio's excellent credit trends. Despite this coverage of past-due balances remained at a very high level when compared to historical levels.

Other provisions declined substantially due to last year's reserve editions related to credit exposures to travel, industry service establishments, and flight 587 insurance claims. As forecasted, interest expense was sharply lower on a significantly lower average funding rate. In fact, for the year, lower funding costs provided well over $500 million in benefits to TRS.

Human Resource expense declined for the sixth consecutive quarter as we continue to carefully control the employee count. The TRS employee base was down 8,400, or 12%, versus last year's level. Other operating expenses rose 10% versus last year from higher participation in our rewards program and the impact of our technology outsourcing agreement with IBM. As you know, the IBM agreement had the effect of moving certain technology-related costs from Human Resource to operating expense, although at a lower overall cost.

Let me now move to American Express Financial Advisors. Net income declined 6% versus last year as generally weak business conditions continued to negatively impact results. The decline would have been greater without the inclusion of last year's restructuring charge. Net revenues declined 5%, reflecting the difficult market environment and higher provisions. Management and distribution fees declined 11% on a lower level of average assets under management. The lower asset base reflected the negative impact of market depreciation and to a lesser extent, net asset outflows, or retail and institutional management activities. The lower fees earned on the reduced offset levels more than earned a slight rise in distribution fees versus last year.

We saw lackluster sales comparisons within both the retail and institutional channels. Branded advisor-generated sales decreased 9% on a cash basis but rose slightly as measured on the internally used gross dealer concession basis, which weighs the sales of various products to reflect their individual profitability dynamics. Institutional sales increased 1%.

Despite our improved overall equity fund performance, the fact that our new funds where the style orientations are more consistent with current consumer interest, don't yet have proven multiyear performance records has negatively impacted our fund sales levels.

Other revenues rose on greater life and property casualty insurance revenues. The provision increased 8%, reflecting higher levels of insurance, annuities, and certificates in force. Increased expenses of $9 million related to guaranteed minimum death benefits and higher claim costs. These increases were partially offset by lower accrual rates.

Human Resource expenses declined 1% as modestly higher fuel force compensation-related costs were more than offset by the benefit of a 14% reduction in the average home office employee base. The advisor base rose versus the third quarter of '02 in last year. This growth reflects improved appointments during the quarter, but going forward we expect to continually carefully manage new advisor editions until the environment turns more positive. Veteran advisor rates however remain very strong.

Other operating expenses rose 9% versus last year due to the impact of AEFA's third quarter of '02 revision of the types and amounts of DAC cost defers, the impact of the technology outsourcing agreement, and a higher minority interest expense related to premium deposits, which is AEFA's joint venture with American Express Bank.

Let me now turn to American Express Bank. The bank continued to make progress with its strategy shift. Consumer activities expanded as private banking holdings increased 12% and PFS , Personal Financial Services, client volumes rose 10% versus last year. Corporate banking loans continued to decrease and now stand below $500 million.

Overall results continued to benefit from lower funding costs and good expense control. These benefits were partially offset by higher provisions on continued consumer losses in Hong Kong, where the environment has been particularly difficult but seems to have stabilized.

That's a quick review of our results for the quarter. Let me now conclude with a few comments on our outlook.

Clearly we are still dealing with a weak economy and volatile equity markets. The question still exists about the likely direction of each of these over the near term and the added uncertainty regarding the prospect of war in Iraq and other geopolitical events further clouds the view. The flexibility we have now built into our expense base, coupled with the benefits of good credit controls and lower funding costs, allowed us to produce solid earnings for the year despite the weak environment and the cost of additional spending on revenue-generating initiatives. 2002's results show that we are now better able to operate in an uncertain environment, and the benefits of our business-building initiatives have positioned us to achieve solid growth in 2003, although the environment continues to be characterized by uncertainty. When we entered 2002, we indicated that we were planning for a lackluster environment. We are also taking a cautious approach to 2003.

Our plan for the year seeks to continue our growth-oriented investments, funded in part through some additional interest rate-related benefits and through additional reengineering activities. We continue to believe our financial targets of 12% to 15% EPS growth, 8% revenue growth, and 18% to 20% return on equity on average and over time are appropriate.

In the fourth quarter, TRS' volume growth of 13% exceeded the 6% to 10% growth we've indicated that underlies our ability to meet our long-term financial targets. So TRS seems reasonably well positioned for good growth as we enter 2003, although environmental risk clearly does exist.

At AEFA we've indicated an 8% equity market appreciation level is needed for them to achieve our targeted growth. Unfortunately, we start 2003 in a tougher spot as the market today is already below the 2002 average.

On balance, however, we enter the year in a reasonably solid position but as always we will carefully monitor the performance of the economy and markets to endeavor to make the appropriate trade-offs as we move through the year.

One additional point related to 2003 before we move into the question-and-answer session. As previously announced, the company will be expensing stock options granted in 2003 and in future years. Today the compensation and benefits committee of the board made its regular annual award of restricted stock and options. These awards reflect the comprehensive review of our compensation strategy which Ken discussed last July, including his intention to reduce the level of options granted relative to historical levels. The company has reduced the number of options granted to senior level management and eliminated grants to mid and lower level managers.

In lieu of options, mid and lower level managers are receiving restricted stock with shares adjusted for the reduced risk and higher inherent value associated with such awards. Our overall compensation program continues to be competitive based on performance.

Based on today's action, the potential delusion related to these annual grants has been reduced significantly from approximately 2.9% of shares outstanding in 2002 to 1.1% of shares outstanding in 2003. Obviously some additional grants may be made this year as the year progresses, but today's awards are expected to comprise the vast majority for 2003 and show the substantial share usage reductions resulting from the compensation review.

Thank you very much for listening. I think we're now ready to take your 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 press the 1 at the beginning of the call, the request has not been recognized by the system. You will hear an acknowledgement that you have 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 are using a speaker phone, 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.

Our first question comes from Eric Hunery of Boston Partners. Please state your question.

Just a quick question on disclosure and travel-related services. You list a 3.2% ROA in the fourth quarter and it was 2.6 on a similar net income number in the third quarter. Did assets shrink substantially there?

It's a -- I think you are probably looking at a twelve month-to-date number.

That was actually the quarterly number.

It is for the quarter, but it's done on a 12 month-to-date basis. So each quarter we are doing it --

Oh, all right. So it was for last year.

Right.

Okay. Thank you.

Our next question is from Adam Herwick of Ulysses Management. Please state your question.

Good evening. Could you just give us some indication in terms of what you are seeing on marketing costs for additional, for net ads in your card business?

You know, we don't obviously break out the cost per card acquired. You could -- you know, you can put some math around it. We did say that we acquired 900,000 new cards in the quarter, which was for us, I think the highest number since we had seen back in 2001, the first quarter of 2001. And obviously we increased our marketing expenditures in the quarter.

So you could, you know, get some sense of that but obviously our marketing dollars go for lots of additional things besides just the acquisition of new cards, but we don't specifically split it out. Obviously the cost of the card depends somewhat on the channel through which it's acquired.

So in cases where we have a co--branded partner, the expenses of acquiring those cards, like a Costco card acquired in a Costco warehouse would be less expensive than a card that we might just, you know, acquire through the mail in some way. The cost also varies a lot depending on whether you are talking about a lending card versus a charge card, with charge cards typically being a little more expensive to acquire than lending products. So I wish I could be a little more specific than that but those are kind of the facts.

Thank you.

Our next question is from David Hochstim of Bear Stearns. Please state your question.

Hi, couple of quick questions. One, could you give us an idea of the increase in U.S. cards, particularly if it was due to lower attrition or more new ads?

It was a little bit of both. We had a modest reduction in attrition in the quarter relative to our levels that we had had earlier in the year, David, and obviously we, you know, really put the pedal to the metal on marketing and saw the benefits associated with that.

As you know, we have been working on both our cashback product and our, you know, our charge product that has the new membership rewards embedded in it and I think we're pleased with the initial results on both of those. So it's a little bit of both frankly in this particular case.

Okay. Any chance you would give us a sense of how much more was expensed on membership rewards this quarter versus the third quarter, let's say?

Well, as you know, we don't split that out. You can see in the other expense category a little bit what we're up year-over-year.

I can tell you that our -- in terms of the factors that drive our membership rewards expense, our ultimate redemption rate remains pretty much consistent with what it has been historically. There's been very little change there. And also our cost per point redeemed is about the same. There's been no major change.

And is there an increase in the penetration of the card member base?

There is. As you might guess with this new program that we have launched, you know, we've seen some increase through that path, but also we continually market against our existing base to try and increase the number of membership rewards of participants.

Okay. And then I missed the very beginning of your remarks but could you just remind us what you said, if anything, about the extent of the interest rate benefit we could expect in 2003?

We haven't been specific about it. We have said it's going to be substantially less than what we saw this year. So we talked a little bit about the fact that it was well over $500 million this year. It won't be anything like that number next year.

Okay. Thanks.

You bet.

Our next question is from Matt Vetto of Salomon Smith Barney. Please state your question.

Excuse me. As a follow-up to the question about the marketing costs, it's encouraging to see the number of cards start to reaccelerate. I also have heard you talk in the past that you thought pricing got a lot more competitive than in months and maybe years past. Can you comment at all on how you think the profitability of new business you are adding today compares with the existing book or business you may have added, you know, a year ago?

Yeah. We go through an analysis all the time, Matt, that looks at the profitability of various ten years that we have both on the lending book and on the charge book, and the models that we have, that we use frankly, are pretty consistent over time. There hasn't been a huge difference by card type.

Now, within the various card types, there's quite significant differences in profitability. So, you know, our Delta co- branded cards, for example, have very high average spin. Those are difficult to acquire but they have very positive economics associated with them. Blue cards are less expensive for us to acquire. The economics aren't as compelling as the Delta co- branded cards might be but they are still well above what our targets are. So there's bigger differences by program frankly than there is by ten years over the last little while and as you know, we have had, you know, our pedal off -- our foot off the marketing pedal at the end of last year and the beginning of this year and we've seen pretty good response to the mailings that we've done at the end of this year and feel -- you know, our hope was that spending would result in some real positive momentum coming out of 2002 and going into the first part of 2003, and I think we're certainly seeing that at the end of 2002.

Great. Thanks. And then maybe just a quick comment on open, if you are willing to talk a little bit about how that's going?

Yeah. We -- as you know, open is a number of things. Open is obviously a program that includes things like the merchant editions, those kinds of programs that we have now, everyday savings programs, and I think we are more and more convinced as time goes on that this is going to be a very powerful benefit for our customers. As people increasingly see that the benefit they get by having this card is that they actually do get real discounts beyond what they would get by paying either in cash or by paying with another card, we think that's a very powerful proposition. And it's interesting if you look at the impact this program has had, our total incremental spending that we have done on this program relative to what we spent in prior years is real -- has really not been very large but because of the focus and the fact that we've been really clear about it in our external marketing, we think it's had a real positive impact on the marketplace and so we're enthused about it and frankly look forward to another good leg of benefit as we move into next year.

Great. Thanks a lot.

Our next question is from Michael Freudenstein of JP Morgan. Please state your question.

Thanks. Hey, Gary.

Hi, Michael.

I just wanted to ask about the operating margin, I guess, you know, ex-provision and marketing, I guess the way you guys have talked about.

Yes.

Thinking about 1996 levels is maybe a goal for you and just looking at the sequential change this quarter, looked like it actually had gone the wrong way and obviously you had a strong quarter in terms of revenues. I'm wondering if you can explain why that might have happened.

Yeah, it's really a couple of things. There is some seasonality associated with it so the fourth quarter typically gets a bit of a dip just because of the way the mix of expenses hit us during the course of the year.

Secondly, we did have the weak revenue at AEFA and there is just no doubt about the fact that that hurt our operating expense on a consolidated basis more than what we would have thought of. So if you look in the supplement you know if both the case of TRS and the case of AEFA, there's been a serious reduction in that margin, you know, in the margin overall. But we think from a TRS perspective, it's overwhelmingly a seasonal factor if you take out the marketing expenses as you did.

But in the case of AEFA, it really is that revenue has been soft there, and has been as a difficult comparison. That being said, we are as committed as we ever have been, to that 1996 level as our target and that's what we try to make happen.

And maybe just one quick follow-up would just be in terms of marketing spend, obviously you ramped it up dramatically here in the second half of '02 and are seeing some of the benefits of that in the accounts. What should we be expecting in terms of marketing investment, you know, for '03? What sort of rate of change?

Well, I think, you know, if we are able to, you know, play according to the plan that we currently have, there will be, I think, an increase overall in marketing next year. The question obviously comes with the uncertainty in the environment, how that will actually play out, and as you know, that's one of the many levers that we have that we push and pull to make sure that we, you know, manage through difficult environments. So our plan right now would call for that number to be up on a full-year basis from where we are today. We're putting those marketing dollars behind a number of different activities, you know, enhanced sales force activities, enhanced acquisition activities, both from an AEFA point of view as well as from a TRS point of view but the actual amount that we end up spending, you know, could very well be different depending on what the environment looks like.

I think it's important to remember we showed it in the February analyst meeting some bar charts that were kind of indexed out about, you know, how much additional we were planning to spend this year than we ended up spending on a full-year basis, and we ended up spending this year quite a bit more than our initial plan called for because the environment supported us as we would go through the year. And this is a very dynamic thing, you know. It's a very dynamic process for us, and we will increase the amount of spending or decrease it, you know, based a little bit on how the environment evolves. But our base plan calls for an increase over these levels.

Thank you very much.

Our next question comes from Jennifer Scutty of CIBC World Markets. Please state your question.

Hi. Good afternoon. I wanted to ask you a little bit about credit quality trends that we saw in the quarter. I don't think we've touched on it too much yet.

Sure.

You know, we saw just substantial improvement and particularly within the charge card and also the lending certainly not only on a rate basis but also on a dollar volume if you kind of back into the numbers. And I was just wondering if you could elaborate a little on what's going on there. Is this really a trend you are seeing, was it a one-time event for such a substantial improvement? And maybe a little more color. Thanks.

I think the charge card, Jennifer, there's a couple of different factors at play there. One is that we've had low growth in charge card in the early part of this year, and obviously we're spending now to try and reverse that trend, but what we're benefiting from is the fact that, you know, we've got very tenured cards for the most part in the charge portfolio that have excellent credit performance, and so you see that benefit. I think -- I would be surprised if we didn't see some modest, you know, turn in that number as we go into next year and continue to push these new charge products because you recognize losses on charge cards obviously more quickly than you do on lending cards because they are a pay-in-full sort of a product. So I think the trends you'll probably see there is potentially some improvement over the next short while but then probably some modest deterioration.

On the lending side, you know, I honestly believe that our underwriting standards continue to get better and better, our risk management capabilities. I've mentioned a few times on these calls this year that we have had a real focus on fraud reduction, and fraud reduction has really helped us this year and has been a material, you know, impact, has had a material impact on our overall write-off results and so net, we think that these are kind of sustainable levels of performance.

Now, they always move in line with what our overall growth rate is. So, you know, you kind of see, once you've had a real rapid growth in cards, you know, 18 months later or so, you see the negative implications of that from a lending standpoint. We're now kind of coming through a period where we've had relatively low growth in our lending business and so we are benefiting from that relatively low growth. Hopefully, you know, this quarter is the sign of things to come in the future, and then as we, you know, continue to have, you know, stronger growth in our lending portfolio, that will lead probably to some increases in what these, you know, past due rates have been, the write-off rates have been. But generally we think we've got some real good management, you know, capabilities being demonstrated right now within both of these portfolios that will, you know, help us over the long haul.

Great. Thank you.

Our next question is from Bruce Harting of Lehman Brothers. Please state your question.

Gary, can you talk about cost saved outlook in '03 and head count and maybe after the training rollout is complete? Thanks.

We anticipate another major set of activities around reengineering this next year, and so, you know, our expectation is that we're going to continue to see the benefit of that. We're obviously I don't think, Bruce, going to see the same kind of massive reductions in head count that we saw from the two major restructuring reserves that we took last year, primarily because the mix of activities that we're engaged in on the reengineering side this next year are not very people-intensive. That is, the head count reductions are not as heavy.

So let me give you an example. We talked a lot about this project that we have that, to optimize the cost of our infrastructure around the world by moving jobs to low-cost wage environments. Those actually don't actually eliminate people. So the head count stays the same even though the cost to produce actually goes down.

Another major program we have this year obviously is the procurement activities we have. That will save us, you know, significant amount of money this year. A lot of people intend to do business.

So I don't think you are going to see next year the same kind of head count reductions that we saw this year, but I don't think you should take from that that costs aren't going to be managed well or that we're not going to if focus on what I was saying to Michael a few minutes ago, that we really are trying to work on improving this operating expense-to-revenue ratio.

Our next question comes from Mosi Orenbach of Credit Suisse First Boston. Please state your question.

Thanks, just two quick things. First, just a follow-up to an earlier question about [INAUDIBLE]. When you said smaller benefit than the 500 million, does that mean an incremental benefit above the level this year, just smaller, or does that mean less?

It will be an incremental benefit above the level this year.

Could you also talk about any kind of merchant kind of activities that you have been doing to work with merchants, cooperative advertising and the like and, you know, how that's kind of contributed to the cost structure?

Well, we have, you know, a significant activity that David House managers in established services that goes out and signs up new merchants and works on loyalty programs with existing merchants and there's nothing really that's changed about the kinds of programs that we offering to merchants or the incentives that we provide to them. You know in some cases we do cooperative advertising with merchants, as you've seen, you know, undoubtedly. In some cases we offer some cash incentives to merchants. It just depends exactly on the particular merchant situation. But generally it's consistent with the activities that we've had all along.

Now, for 2003 we are going to increase our commitment in terms of those sales activities. We have some specific goals about increasing coverage around the world, and David and his team are very focused on achieving certain coverage objectives in particular markets that they coordinated with the issuing side of the house, with the card issuing side of the house and so, you know, our hope is this next year what we'll see is some improvement in our overall coverage levels in key markets where we have wanted to improve it.

And those cash incentives are an expense, not a reduction of the revenue, right?

No, they are an offset to our discount rate.

Thank you.

Our next question is from Joel Houck of Wachovia Asset Management. Please state your question.

Thanks. Wachovia Securities, I haven't moved to the buyer side yet.

The question is regarding what you are seeing in terms of, you know, kind of putting the pedal to the metal in the marketing expend. Your results clearly stand out, you know, on consumer side this quarter relative to some disappointments from your peers. The credit costs are good, yet you still have a cautious outlook regarding '03. It seems somewhat counterintuitive that you would be marketing this aggressively into the face of an uncertain environment yet your results would seem to support that. So could you comment on those two, I guess counterintuitive aspects of your business?

Yes. What we have worked hard to do over the last couple of years is to increase the amount of flexibility we have in our cost structure. So if we have a change in, you know, the amount of demand-to-revenue that we are seeing that we can react quicker than we might have been able to historically on a revenue base and there's lots of things we've done to try and do that, but that's been our primary focus.

So we have, as you might guess, actually most companies do, we have pretty clear kind of scenarios painted for how the year might evolve, from some very negative ones to some that are more positive, and we have trigger events that, you know, if we hit, you know, more negative experience going forward, it would actually take spending out of our overall cost base. So as we look at this year, we frankly think about this year a lot like we did about last year. There's a lot of uncertainty, it feels uncomfortable to us as we look forward over the next 12 months, but we have some confidence in our ability, particularly after we've just come through the last 18 months, that we can react more quickly to short-term dislocations in volume, both on the upside and on the downside, than we might have before. And it's something that we manage each and every month. We obviously look at each month at what our forecast is for the full year, how it compares to the targets that we're trying to hit, what we think that the opportunities are and the risks that we have, all the open and unhedged exposures that we might have during the course of that time period and then we make decisions about what our spending is going to be going forward based on our assessment at any point in time.

So we really have tried to put in place a series of processes that allow us to respond to a changing environment and so we feel like we have reacted appropriately for the way the market is responding right now in terms of the additional spending that we have done, but we feel that there is a, you know, a major external event that hopefully we can react to that as well. That doesn't guarantee, by the way, that we will meet any particular level of performance. I think we've tried to be pretty clear that our financial performance really is linked to some underlying industry performance measures, but we feel that we've got better flexibility than we've had historically.

Once again, if there are any questions, please press the 1 on your touch-tone phone.

We have Robert Hottensen from Goldman Sachs online with a question. Please state your phone.

Hi. It's actually Michael Hoods.

Hi, Michael.

Good afternoon. The billed business growth was a little bit stronger than we had expected. Could you quantify the differential on comparison versus last year following 9/11, kind of the 9/11 effect, and the benefits that are being generated from a more robust and successful rewards program?

And also, if you could just give us some sense on how you are looking at billed business growth for this year.

In terms of, you know, the comparison versus last year, obviously the comparison got a little harder as we went through the year last year. So our billed business growth rate in the fourth quarter was better than in the third quarter. So to the extent we are doing better now in absolute terms than we did last quarter, then obviously, you know, that's real improvement because the base that we're comparing ourselves to is, you know, is tougher.

We think that's obviously in part driven by membership rewards. It's also driven by some terrific new products and real efforts outside the United States as well to continue to penetrate markets where, you know, we see opportunities and where, you know, the market is less penetrated and less competitive overall. And so all of those things I think have contributed to the number, but there's been very little -- in fact, there's no part of this quarter's improvement that is due to having an easier comparison in the fourth quarter this year than last.

With regard to billed business next year, you know, I would really be hesitant obviously to characterize it. We -- you know, our intention was to come into this year with good momentum as a result of the spending that we had, and we feel like as we came out of last year, we had that good momentum, and hopefully the environment will be such that it's going to enable us to sustain it, but we'll have to see.

Thanks.

Our next question comes from Bob Napoli of U.S. Piper Jaffray. Please state your question.

A little bit of follow-up on the spending question. I was really surprised by the level of corporate growth on the big corporate side and I was wondering what the driver was and then kind of related to that, the cards that you added in the quarter, can you give any feel for the break-out of where these coming from, how much is from consumer, small business, and big corporate?

Well, let me deal with the first one first. On the corporate side, obviously we are rebounding off of what were low levels last year, although in the fourth quarter they were better levels. I think if you were to ask Ed Gilligan why it was better, he would say it was based on his brilliant management of that segment but, you know, we, last year, invested in a sales force in Europe for our middle market accounts. We had the maturation of our sales force happen for middle market accounts during the course of 2002 in the United States, and I think, you know, all of these pieces, the continued growth of the procurement card, the success of our middle market activities in Europe and in the United States and then some, you know, modest rebound in corporate spending have been really, you know, the primary factors that have driven what we saw with the corporate growth rate in the fourth quarter. You know, although the percentage growth rates are attractive, we still obviously wish we could be at a level that was more reflective of what we saw back in 2000 because we're coming off of what was very depressed levels in the prior year.

In terms of [INAUDIBLE] breakout, we really don't break that out in any, you know, specific number below the 900,000 that we've talked about.

Okay. Do you have -- this a -- this is a numbers question -- the worldwide lending balances and credit quality for worldwide lending balances and is that something you can give quarterly in the same format so it's easy to track, since it's getting bigger?

Yeah, the worldwide lending balance is $39.8 billion. So there's about $5.5 billion approximately of lending outside the U.S., and while we haven't to date provided specific credit, certainly I would tell you that credit there is consistent train-wise with what we see overall on the U.S. front. There's no dramatic differential period-to-period. And it is something we've looked to, to potentially add to our disclosures at some point down the line.

Thank you.

We have no further questions at this time. Are there any concluding remarks?

I don't think so. I think the information in the earnings release, as well as the supplement hopefully provides the details that are important to your ability to kind of analyze the results and take a view towards '03. Clearly we'll be here over the next couple of days to respond to any follow-up questions and appreciate all of you joining the call. Thanks very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for participating. You may now disconnect.