美國運通 (AXP) 2004 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the American Express second-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

With that, I would now like to turn the conference over to Mr. Ron Stovall, Senior Vice President of Investor Relations.

Please go ahead, sir.

Welcome.

I appreciate all of you joining us for today's discussion, and as usual, it is my honor 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 earnings press release, which was filed in an 8-K report and in the Company's 2003 10-K report already on file with the Securities and Exchange Commission.

In the second-quarter 2004 earnings release and supplement, which are now posted on our website at IR.AmericanExpress.com, and on file with the American SEC in an 8-K report, we have provided 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 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&A period.

Up until then, no one is actually registered to ask questions.

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.

Based on this, we ask that you limit yourselves to one question at a time during the Q&A.

With that, let me turn the discussion over to Gary.

Thanks, Ron, and welcome to everyone.

Thank you very much for joining us today.

As you have already seen, our second-quarter diluted EPS of 68 cents per share increased 15 cents (ph) versus 59 cents last year.

The quarter reflected strong results within each of our card businesses, and continued to validate the benefits of higher business-building expenditures over the last few years, in addition to demonstrating the success of our efforts to create a more flexible business model and a better-balanced risk profile.

Importantly, revenue growth remained well in excess of our 8 percent long-term target, rising 14 percent versus last year.

We generated particularly strong second-quarter results that met or exceeded all of our long-term financial targets, while continuing to invest in our future competitive strengths at a very high level.

The benefit of our investment spending is evident within the strong momentum in all of our card-related metrics, which performed well on an absolute basis and versus the competition.

Billed business growth of 19 percent was robust, on continued strength within the US consumer, small-business and corporate services spending growth.

In addition, foreign exchange-adjusted spending growth outside the US strengthened during the quarter, and we exceeded quarterly worldwide billed business volume of $100 billion for the first time in our history.

Cards-in-force growth of 7 percent reflected the addition of 900,000 cards during the quarter and 4.2 million cards since last year.

Worldwide average spending per basic card in force increased 14 percent, as we successfully leveraged the advantages of our spend-centric payments model.

Worldwide lending balance growth versus last year was solid, rising 7 percent to $45 billion, despite an industry environment that has proved to be a challenge to organic receivables growth.

At AEFA, we continued to generate traction against aspects of our strategy, as our actions to better position AEFA for growth helped us generate solid metrics on a number of fronts, despite a relatively lackluster market environment during the quarter.

For instance, assets owned, managed and administered rose 55 percent, or 21 percent excluding the Threadneedle assets acquired as of September 30 of last year.

Total cash sales increased 16 percent, and branded adviser generator sales, as measured on the internally-used gross dealer concession basis, grew 10 percent, reflecting improved adviser productivity.

While companywide expense growth reflects the relatively high-level of investment spending, and the impact of higher compensation-related costs resulting from our decision to expense stock options beginning in the first quarter of last year, underlying human resource expenses continued to be well-controlled.

We were also on track to deliver the $1 billion of additional reengineering benefits targeted for this year.

Our consolidated balance sheet remains strong.

Credit card quality improved further during the quarter, and reserve coverages of cash to accounts remained at the high end of historical ranges.

The repositioning of AEFA's investment portfolio and AEB's loan portfolio yielded a more balanced and diversified risk profile.

Once again, these results underscored our balanced approach to managing the business, as well as our substantial organic growth opportunities.

Additionally, as evidenced by the Threadneedle and Rosenbluth combined 2 percent contribution to consolidated revenue growth, targeted acquisitions can further supplement and strengthen these organic growth opportunities.

The integration of both of these acquisitions continues to go very well.

With that, now let me review the details in each business line, and I'll start first with TRS.

At TRS, managed net revenues increased 13 percent, and net income rose 16 percent.

On the revenue side, our ongoing expansion in the everyday spend categories and our investment in growth initiatives over the past two years continued to drive strong card member spending, cards in force and lending balanced growth.

Worldwide billed business volumes rose 19 percent versus last year, or 17 percent on a foreign-exchange-adjusted basis.

Strong double-digit growth continued in the US consumer, small-business and corporate services sectors.

Outside the US, each major region around the world also generated double-digit growth.

In the US, consumer spending grew 17 percent, small-business spending rose 22 percent and corporate services volumes improved 15 percent.

In total, US non-T&E-related volumes grew 20 percent, while T&E-related spending rose 13 percent.

Outside the US, reported billed business was up 24 percent, which equated to 18 percent growth on a foreign-exchange-adjusted basis.

Within our proprietary business, FX-adjusted consumer and small-business volumes grew 15 percent, and corporate services spending increased 20 percent.

Network partner volumes also remained strong, rising almost 30 percent in the quarter.

The discount rate decreased 3 basis points from the first quarter of 2004 and the second quarter of last year.

The decline reflects seasonal influences and the ongoing shift in the mix of spending between various merchant segments, due to the cumulative impact of a stronger-than-average growth in the everyday spend categories.

We have effectively managed the gradual decline of our average discount rate over recent years, as a greater proportion of our billings evolved into everyday spend in retail sectors.

We have a number of levers, including reengineering, that we can utilize to mitigate discount-rate pressure that may result going forward.

Our pricing, obviously, is based on the value that we deliver to the merchant through higher-spending card members and value-added marketing programs, relative to the price that we charge for card acceptance.

We believe we are well-positioned to continue to deliver this value.

Worldwide cards in force rose 7 percent versus last year, as a result of our continued focus on acquisition within the consumer and small business segments, continued strong network partner card-related growth and an improved average card member retention level.

Managed net finance charge revenue increased 4 percent, as 9 percent growth in average worldwide lending balances was partially offset by a lower portfolio yield.

Quarter-end balances were up 7 percent worldwide, reflecting 7 percent growth in the US and 6 percent growth outside the US.

Spreads declined versus last year and last quarter, as paydown rates increased and credit improvement resulted in fewer customers at higher interest rates.

Additionally, the proportion of the portfolio on promotional rates was higher, and the rates on those balances were lower.

Funding costs decreased, partially offsetting these trends.

Consistent with prior quarters, both the net interest yields and the intro rate percent for the portfolio remained within the historical range over the past five years.

Travel revenues rose 26 percent, on the benefits of the Rosenbluth acquisition and an improved sales environment.

Marketing, promotion, rewards and card member services expenses increased 40 percent as rewards cost rose, reflecting strong volume growth, a higher redemption rate and the increasing card member loyalty program participation.

This increase also reflects our activities to leverage current business strength through our continued focus on business-building investment.

As we have previously discussed, our rewards programs provide us a competitive advantage through the higher spend, better loyalty and credit and the faster speed of pay that accompany program participation.

In particular, within the US consumer and small business, spending is 33 percent higher than in Q2 of 2002, while provisions are 23 percent better versus the same period.

Spending for basic card in force has increased 18 percent versus last year's second quarter, and transaction growth has been in double digits for 19 consecutive months now.

Total managed provisions for losses declined 9 percent, as credit quality improved still further during the quarter.

Within both our charge card and lending businesses, the worldwide loss rate and past-due rates improved versus last quarter and last year.

In light of the strong credit indicators, the combined reserves declined somewhat.

However, coverage of past-due receivables was maintained at the higher end of historical levels.

Interest expense declined on a lower cost of funds that was partially offset by the additional borrowing needed to fund high receivables.

Human resources expense rose 12 percent, due to merit increases, greater management incentive and employee benefit costs, and the impact of the employees added through the Rosenbluth acquisition.

Other operating expenses rose 10 percent versus last year, reflecting higher business and service-volume-related costs and the Rosenbluth acquisition.

The effective tax rate of 32 percent was flat versus last year.

Let me now turn to American Express financial advisers, where net income increased 11 percent on 27 percent growth in net revenues and 27 percent higher pretax income.

The Threadneedle acquisition contributed approximately 8 percent to the revenue growth, and modestly to net income growth during the quarter.

In addition, net investment gains of $30 million were realized this year, versus losses of $16 million last year.

We absorbed higher expenses related to the various regulatory and legal matters that we in the industry are facing, and we recorded a $16 million tax expense, primarily as a result of required adjustments to prior year-end tax returns, which elevated AEFA's effective tax rate for the quarter.

Management and distribution fees rose 32 percent on a 42 percent increase in management fees and a 20 percent growth in distribution fees.

The management fee increase resulted from the higher average assets under management, reflecting the impact of Threadneedle, improvement in equity market valuations versus last year and net asset inflows.

During the quarter, we saw inflows at Threadneedle and within our retail and institutional activity.

Assets managed, including separate accounts, increased 72 percent, including the Threadneedle assets that we acquired on September 30th of last year.

Assets managed grew 18 percent, if you exclude those assets.

Distribution fees increased on greater mutual fund fees and increased brokerage-related activities.

Total cash sales were up 16 percent on strong growth in retail-related mutual fund, institutional and insurance product sales.

Branded adviser sales increased 6 percent on a cash basis, and 10 percent as measured on the internal use gross dealer concession basis.

During the quarter, sales growth continued strong in April, however weakened in May, but improved somewhat in June.

Total mutual fund cash sales increased 19 percent, as proprietary fund sales were flat and nonproprietary sales increased substantially.

Institutional sales were particularly strong in the quarter, due to the benefit of the Threadneedle contribution and the private placement offering of the structured investment managed by AEFA.

Net investment income rose 6 percent on the net investment gains this year versus the losses in the second quarter of last year.

Average invested assets rose 1 percent, while the portfolio yield was flat.

The overall credit quality of the portfolio continued to improve, as corporate default rates have declined through the past year.

Other revenues rose on strong property, casualty and higher life insurance revenue.

Planning and advice services rose 17 percent.

The provision for losses and benefits increased 1 percent, reflecting higher in-force levels of insurance, annuities and certificates.

This was partially offset by lower crediting rates, and the impact of lower appreciation in the S&P 500 versus last year on the equity index annuities and stock market certificate product.

Human resource expenses increased 27 percent, on the effect of the Threadneedle acquisition and higher field force compensation-related cost.

The adviser base rose 2 percent versus last year, but declined by 127 advisers from last quarter.

This decline resulted from a shift in focus towards tighter controls over new hires and appointments, as well as a positive change that resulted in a longer time to appointment.

A positive result of these changes was stronger first-year adviser retention in the quarter.

The home office employee count continued to be well-controlled, as the average number of employees was down 2 percent, excluding Threadneedle.

Other operating expenses rose 27 percent versus last year, in part to the Threadneedle acquisition and costs related to the various industry regulatory and legal matters.

The effective tax rate was 34 percent versus 25 percent last year.

And finally, at American Express Bank, earnings grew 4 percent on 2 percent growth in revenues and a lower provision.

The bank's results reflect the positive impact of growth within private banking and the financial institutions group, which was almost fully offset by reductions in loan and other activities within corporate banking and the personal financial services lending business, particularly in Hong Kong.

Private banking client holdings and loans increased 10 percent and 23 percent, respectively, while loans within the financial institutions group grew 20 percent.

Personal financial services loans declined 9 percent, and corporate banking loans continued to decrease, and now represent just 2 percent of the total loan portfolio, or approximately $120 million.

Results also benefited from a provision decline of 50 percent versus last year, due to an improvement in the bankruptcy-related write-offs in Hong Kong and the reduced activity within the PFS lending portfolio.

In conclusion, we view this as another outstanding quarter, as our results illustrate the benefits of the business momentum resulting from our investments over the last few years, as well as the improved economic and market environment versus last year.

We delivered record results during the quarter, and met or exceeded all three of our long-term financial targets, while significantly increasing business-building expenditures and maintaining substantial balance sheet strength.

Over the last few years, when the environment required, we demonstrated the ability to cut costs.

Recent quarters show that we can use the flexibility built into our business model to invest in strong revenue growth when we see the opportunity to do so.

While investors are focused on the potential for interest rate increases, as we discussed last quarter, our current funding strategy has largely mitigated the near-term risk.

Although year-over-year business comparisons will become more difficult as the year progresses, and varying opinions exist about the future strength of certain elements of the macroeconomic environment, such as retail spending and the equity markets, we entered the second half of the year in an excellent competitive position, with strong momentum.

In addition, while aspects of the economic environment may have recently moderated to some degree, on a relative basis, the environment continues to be a positive one.

Corporations are spending on T&E again, after three years of containing these expenditures, and even the more pessimistic forecasts are still anticipating healthy growth around the globe.

We are confident that we're in a strong position to leverage these opportunities for growth.

I think our recent successes support this confidence.

Thank you very much for listening.

I think we are now ready to take questions from those who are calling in.

(OPERATOR INSTRUCTIONS).

Ed Groshans, Fox-Pitt, Kelton.

I just wanted to follow up on the issue with the Department of Justice, and following up on the recent transactions, if you can give us some color around that.

Sure.

The government's case continues to be in front of the Supreme Court.

We don't know exactly the time that that will be heard.

I think there are a lot of observers who believe that it will be heard and be completed before the end of this year, though we don't have a specific data on which that will happen.

MBNA, as far as we can tell from all of the material that they have disseminated, continues to make superb progress towards preparing to launch a card as soon as they are in a position to do so, and we have ongoing negotiations with a number of other partners, both in the United States and outside the United States, and have recently announced a few partnerships that we have concluded outside the United States.

Okay, but right now, it's still looking relatively positive?

Have you been working with MBNA on any reward programs, or anything along those lines?

Well, the reward programs that they will conceive will be ones that they will design as an issuer from their business.

We've obviously been talking to them about the kinds of things we're going to be doing for the entire network that will support both the American Express proprietary business as well as their business.

David Hochstim, Bear Stearns & Co.

Gary, can you talk about the sequential trends at AEFA, in terms of management distribution fees and expenses, I guess, mainly HR expenses.

I think you were talking about year-over-year comparisons, which were pretty good, but the sequential changes?

Yes.

Well, even the year-over-year changes were large.

We've had a big increase in the total amount of assets that are under management, and so as a result of that, we've seen some pretty good increases in the distribution fees that we have been paying to the adviser network, and that trend has been fairly similar.

This higher level of fees has been fairly similar over the course of the last few quarters.

Now, embedded in that number, obviously, is also some expenses associated with the addition of Threadneedle.

So in total, that adds to the number, as well.

But Threadneedle is in the first quarter, isn't it?

Yes, yes.

You're talking about the year-over-year and quarter-over-quarter --

No;

I'm talking about if you could talk about the change from March to June, in terms of management distribution fees were down a little bit; it looked like the average rate was lower, and human resources expenses were up again, pretty significantly, sequentially.

Well, I think basically this just reflects the underlying growth we had, I think, in aggregate -- you know, a $2 billion inflow in the quarter in terms of assets.

And we've had a pretty good addition to the assets under management in total, and this is just the normal adviser compensation that goes along with that.

If you kind of decomposed it into its parts, the actual human resources headquarters expense has been very tightly controlled and contained.

We're actually down, I think, about 2 percent in terms of total headcount at AEFA.

And so literally, what you're seeing here is just the increase that we are paying as a result of the successful sales efforts of the adviser network.

And then I had a clarification question.

Just in trying to work out the math -- and I always have a problem with math -- the change in dollars of T&E spending from the first quarter to the second, and the change in non-T&E spending, it seems that there's about a $5 billion sequential increase in non-T&E spending, and then something between $0.5 billion and $0.75 billion in T&E spending, but it depends on whether one uses the split in billed business this quarter, or the percent has changed (ph).

I just wondered if you had any idea.

I'm afraid I didn't follow exactly what you said.

I think probably the best way to do it would be you can give us a call after we finish here, and go through some of the detail that I just didn't follow.

Okay, thank you.

Michael Cohen, Susquehanna Financial Group.

Maybe I was just going to follow up a little bit on David's question about AEFA.

We also saw a decline in the spread revenue from investment income versus the provision expense, and I noted that there was actually some one-time benefits to the net investment income.

Could you provide some commentary on that?

Yes; there obviously was the benefit that you talked about that came from the sale of some assets, which was beneficial in the quarter.

We also had some spread compression associated with the certificate business, and those are really the only two significant impacts on the year-over-year increase or change in the quarter.

When you say -- I'm sorry, because it was more really the quarter to quarter where things got compressed a bit, about 20 bits (ph) by my calculation.

The other factor was we have these stock market certificates that we sell at AEFA that provide a guaranteed return to our customers, and the market appreciation that we had in the second quarter of this year, relative to the market appreciation that we saw in the second quarter of last year, was lower and that also mitigated some of the increase that we typically see there.

And that would be the same factor sequentially, as well, where the first quarter saw the market stronger; obviously the second quarter did not see the market as strong.

Robert Napoli, US Bancorp Piper Jaffray.

There was a statement in your presentation that the global network services volume was up 30 percent?

That's right.

I was trying to understand that, and the difference there between that and other spending growth items.

Well, that's our GNS business, so that's the volume that our partners do, is up 30 percent in the quarter.

So if you think about the partners that we have outside the United States that have already issued on our network, that number specifically refers to the increase in volume, which is based on the quarter versus the same quarter last year.

For the non-American Express?

Yes.

So this would be the partners that we have all over the world.

We have a total of 74, I think, different partners in a number of different countries around the world, and we track, obviously, their billed business growth just like we do our own, and their increases during the quarter were 30 percent.

So we've indicated for a long time now that both the cards in force and the total billed business that we print for the network, for American Express, includes both our proprietary issuing business as well as our network partner issuing activity.

So within that non-US number is where this strong growth of almost 30 percent occurred within the global network services partners.

Can you quantify that at all, as far as in dollars of spending or anything like that?

No.

What you can do, really, is go back to Dave House's presentation in the first quarter, in February, and he talked about the growth over time.

He also gave some information as to the relative size of that business from a billed business and a card point of view.

I think that will give you a sense.

I believe it was about $6 billion of billed business, approximately -- or 6 million cards; it was about 12 or 13 billion, something like that, of billed business.

Bradley Ball, Prudential Equity Group.

On the AEFA expenses, which were up sharply in the quarter, you mentioned that at least a portion of that increase was attributable to the higher costs associated with regulatory compliance, I guess.

Could you clarify that?

Was it specifically related to the Wells notice related to your revenue sharing agreements, or is there something else?

And should we view this higher level of expenses as an ongoing thing, or can you bring that compliance expense back in line?

There's actually a number of different factors that are there.

We have had a couple of different class-action lawsuits that we have had recently, and we -- where we think we have a reasonable estimate for what we think the cost of those might be, we accrue for that on that line.

We mentioned in the first-quarter 10-Q that we have a number of different regulatory conversations going on with regulators in this industry, not just associated with the revenue share, but on a broader set of topics.

And obviously, we have the legal costs associated with supporting those conversations.

And we do our best to try and estimate whenever impact there might be associated with those conversations when they eventually come to a conclusion.

So this is a very difficult thing for us, at this point, to really say exactly how it's going to come out.

As you know, these are very broad-ranging conversations on a whole series of issues, and it's just very tough for us to know exactly what the direction is going to be.

But it obviously is a higher cost, and it's something that we experienced in the quarter, and we may see a fairly substantial number here as we go through the year.

So some of it may be ongoing, Gary.

Some of it might be the cost of running a more complete back office to comply with whatever the requirements are of the regulators.

Well, that's not the line item where we would reflect that, but there may be some ongoing costs associated with the things we just talked about;

I think that's correct.

Bruce Harting, Lehman Brothers.

One is just on expenses, and how we should be thinking about the quarterly progression from here Gary and Ron, and the $1 billion impacting exactly what line items.

And then, just digging into the back of your releases, I'm noticing this significant drop in NPAs (ph) at the bank.

I know it's a small part of your overall business, but can you just update us own plans with the bank?

And as you have this pretty significant drop in nonperforming assets and provisioning, any highlights you can give us on plans for maybe redeploying capital, or how the consumer bank buildout is going.

Sure, Bruce.

First of all, on the general expense trends, if you kind of break it into its component pieces, the underlying human resource expense is contained from a total headcount perspective.

That number really hasn't changed much over the last year, with the exception of the acquisitions that we've done.

The increase that you see embedded in that number, other than the acquisition-related headcount cost, is really the costs associated with the implementation of the expensing of stock options last year.

As you know, we cut the size of the program, but when we cut the size of the program, we implemented other factors like an increase in incentive compensation or higher merit increases for our middle management ranks, and that has had an impact on driving those expense numbers up at a higher rate than the headcount would reflect.

We've obviously had a pretty significant increase in our marketing and rewards-related expense, and that's been an on-purpose decision about investments.

And if you look at the results that that's generated in terms of metrics, I recited a few of those in my prepared comments, today.

The ongoing result of that in our metrics really has been absolutely outstanding, and we continue to be convinced that there is a terrific payback on having people become part of the membership rewards program.

And you see that evidenced across a broad range of elements on the P&L.

But most particularly, you see that evidenced in what is happening with our provision, as our provision just continues to improve quarter after quarter, as we have more and more people decide to participate in this program.

The program is also more relevant for people today than it's ever been in its history.

People worry about rewards not being effective.

Well, more and more people are using rewards.

And so their program is becoming more relevant to people, and therefore it is really helping us drive both our top-line growth, a reduction in our attrition and an improvement in our credit losses.

And so the factors that are controlled by reengineering, I believe, are very tightly controlled.

What is moving up are areas where we are making very specific investments.

Our legal costs, obviously, at AEFA are going up, and our human resource costs are going up, as a reflection of the expensing of stock options.

Now, we have this year, once again, a $1 billion reengineering target that we are quite comfortable, at this point, we are going to reach.

About one-third of that target is revenue reengineering -- so activity that we engage in that allow us to reap greater revenue for the activities that we participate in, things like the transition of our customers over to the web-based reservation making from a travel standpoint.

That kind of thing represents about one-third of that $1 billion.

The remainder comes from many of the initiatives that you've become quite familiar with.

They include things like the reengineering activities we have in our procurement area, the outsourcing arrangement that we have with IBM that continues to deliver year-over-year benefits to us.

It really includes the Six Sigma activities for process improvement that we have under way around the globe, and continued activities we have to try to locate our working -- where we locate our work in our personnel in environments that are as low-cost as they can be, to support the level of customer service that we need.

So, there's many activities that we have going on there that we are quite confident at the end of the day will add up to this $1 billion in expense savings.

So in aggregate, the picture that you see is an improving pretax margin as a result of improving interest costs, improving provisions, and a deteriorating operating expense margin being driven primarily by human resource expense going up, and then the expense associated with membership rewards.

But those metrics overall are really helping us.

In terms of the NPAs at the bank, the bank obviously has made a lot of progress, particularly in the corporate book over the last few years.

You all have kind of watched this evolution take place.

I mentioned today in my prepared announcement that the corporate book is now down to $120 million.

We also took some very specific charges last year that enabled us to reduce our exposure in a couple of third world countries that, again, have positioned us even better in that business.

And so today, we are in a position of having very contained corporate exposures; almost all of our exposures today are on the consumer side, and those that we have are well covered.

As you see, our coverage ratios are very high.

And so the combination of all of those things has put the bank, I think, in a very strong position from a risk profile perspective.

Matthew Vetto, Smith Barney.

One quick follow-up, and then another topic.

Is there a theoretical rate of participation in the membership rewards program that starts to take away from some of those benefits you mentioned, where the incremental cost doesn't get you better attrition or credit performance?

And if so, where do you think you might be on that spectrum?

Or is it -- you know, you'd have 100 percent participation if you could get it?

And then secondly, just trying to remember, at AEFA, it seems to me that towards the end of the year, we were going to get some three-year track records on some of the newer funds that you were going to be able to go out and market.

And I thought that might be helpful from a funds flow perspective.

Could you comment on those two things?

Sure.

I think it's logical to conclude just what you concluded, that there are certain participants in membership rewards that are more profitable than others.

That obviously has to be true.

And so over the course of the last year or so, we have gradually been increasing our analytic capabilities to really study our membership rewards program to ensure that the kinds of offerings that we have are targeted to provide the best benefit possible for our customers at the lowest cost for us, so that we have kind of optimized the trade-off between those two things.

And we are kind of early on in that program, and that program is being led by Ash Gupta (ph) and many of the people who work in the risk group, who are bringing to bear a lot of the same analytic capabilities that we have in our credit business today.

And so, we do think there is opportunity for us there to make sure that the programs that we offer, the offerings that we have both are extremely attractive to our customers, but at the same time minimize the cost that we have overall.

There's two different levers that we manage here all the time.

One is the usage of the program, the ultimate redemption rate, and the other is the cost of the program.

Frankly, we would like the usage of the program to be very high, and that's what continues to increase.

And we would like the cost to be as contained as we possibly can, but offer terrific value for our customers, and we are working on both sides of that equation all the time.

But I think there's ample opportunity for us still ahead to focus more on that, and to have a bigger impact on the trajectory of that line.

With regards to the track records at AEFA, one of the things that we have some difficulty with, because of some of the kind of regulatory constraints that we face, is talking specifically about track records, in the absence of providing an enormous amount of disclosure.

I think our viewpoint would be more or less the following.

On the fixed-income side, we really have made very substantial progress, and feel very good today about where we stand with the fixed-income portfolio.

On the equity portfolios, we had a very strong year last year, overall.

This year, we have struggled, and we've struggled primarily because of the performance of New D (ph), which is the largest component of our portfolio.

There are other parts of our portfolio that have actually done quite well.

And so the year isn't over yet, and we'll see how this year plays out.

But we certainly have had a very good year last year.

We hope that some of the early weakness that we have seen in the first six months of this year, particularly in New D, is something that we'll see some improvement and trend in as we go through the year, and that those parts of the equity portfolio that have done very well will continue.

Phil Marriott (ph), Arnhold & Bleichroeder.

Just to follow up on the marketing and membership rewards questions, clearly, the growth that you're getting from the investment that you're making is very strong, and you pointed out that interest expense and provisions, and NTRs have been going down.

I'm just wondering what happens when they stop going down, and how will you manage the business in that environment?

Will you keep investing heavily in the marketing and membership rewards, or is that something that you would dial back, in the event that sort of the benefit from what at least partially could be viewed as an exogenous factor goes away?

Yes; it's a very good question.

This is now a pattern that we've had the opportunity to go through over the last four years.

So we have worked very hard to put flexibility into our business model, so that if we had an adverse impact on the business -- let's say you had a dramatic increase in interest cost, or unemployment were to shoot up, and therefore provision cost were to start heading in the other direction.

We've worked very hard to have detailed flexibility plans that allow us to cut costs in our businesses to respond to a different market environment.

So we literally have cost reduction plans, by business line, by quarter, that we go through and review each quarter, that represent the cost reductions that we could take if we needed to take them, in order to help us move directionally towards the long-term financial targets that we have.

We've demonstrated an ability to do that when we had to, in the more negative environment of a couple of years ago.

But it's precisely that capability that has enabled us to more quickly ramp up investment spending in the environment that we are in today.

So I think what you would see is you would see us respond across a number of fronts, if the business got tougher.

Obviously, the last thing that we would try and cut would be those things that we perceive as being business-building expenses, but we clearly have plans that would enable us to respond much more quickly than we used to be able to do.

Today, we can get into the market with a marketing program within a very short window of time.

When we decide that we have the wherewithal to engage in a new marketing program, literally within a matter of a couple of weeks, we can be in the market with that particular program, and it works in reverse the same white.

We can relatively quickly cut back on programs if the environment or the credit environment doesn't support the growth of the business at any particular time.

So we are pretty comfortable with our capabilities here.

As I say, it's been tested on both sides of the equation now, and we are not in any way immune to the same kind of thought process.

The environment is more difficult in the back half of this year.

Although the economy today continues to feel like it's pretty solid, we are aware, as anybody is, of the things that you read in the newspaper.

And we stand prepared, if need be, to take the actions that we think will both kind of protect our long-term ability to meet our financial targets, but also not hurt the business.

And are you able to provide a participation on MR?

Unit, we just have never disclosed it in terms of billings.

When Al Kelly gave a presentation, it's probably about a year ago now, in that presentation he showed that roughly 60 percent or so of our accounts were participants in MR.

As you might guess, the participants in terms of billings are higher than that, but about 60 percent of the -- and I guess that was the US -- about 60 percent of the US customers were part of the MR, were a part of the rewards program.

Ed Groshans, Fox-Pitt Kelton.

Just going through, I was kind of surprised to see that cost of funds was mentioned as a benefit here.

I was expecting maybe to see the cost just flatten out and maybe pick up a little bit.

Can you just discuss your outlook with funding, and touch on how much is short-term, how much is long-term?

It differs a little bit, business by business.

On the TRS side, it actually went down a little bit, because of the way our hedges are currently laid out.

This year, we have very strong hedging; we talked about this a little bit at the end of last quarter, but we are hedged somewhere in the 60 to 65 percent range.

Next year, as we said, our hedges are a little less than that, and then the year after that, 2006, somewhat less than that.

But we have laid out -- during this time period, when the yield curve has been flat and interest rates have been relatively benign, we have really succeeded in locking in a fair amount of our funding costs on the TRS side that provides us some protection from an upturn in rates.

The other thing you always have to think about when you think about rates going up is that hopefully rates go up because the environment generally is very positive, and business is strengthening and there are other aspects like provision improvement, billed business improvement, that at the same time help offset some of these expenses.

So historically, the combination of the hedging strategy that we have followed and the overall strength that we've had in the market has enabled us to manage through increases in interest rates relatively well, and we don't have any reason to think it will be different this time through.

We think about this, obviously, all the time.

We think about the leverage that we have at our disposal to try and manage through it if times get tough.

And I think we've had a pretty prudent strategy with our hedging over the last little while.

At AEFA itself, there was some deterioration in spreads, as I mentioned, as our certificate business -- we lend longer in that business, obviously.

The mismatch there is a little bit stronger than it is in other parts of our business.

And so, as a result, when interest rates go up there, we see some modest impact.

That modest impact also impacts the American Express Bank.

And so I think if interest rates continue to go up over the next little while, you're going to see some pressure at the bank and some pressure at AEFA on that same line item.

Neil Abromovage, Deutsche Bank.

Shifting to corporate spending, any commentary there?

Any notable strength or weakness in any particular sectors of the economy?

On corporate spending broadly, we had a good quarter.

We had a good quarter in the United States.

Corporate services volumes were up 15 percent, small business spending was up 22 percent.

Outside the US, corporate spending was up 20 percent overall.

In part, I have to give a lot of credit to Ed and his team.

I think you all know that we invested in a sales force last year, and we put a team in place in the United States, I guess, about a year and a half ago.

We put the team in place in Europe a year or so ago, and now we are adding to the US team as we speak.

That team has just done an outstanding job.

If you look at almost any parameter that we judge our corporate services kind of health on, it's looking good right now.

If you look at our pipeline strength, the signings that we have, our win/loss ratio, virtually all the kind of metrics that we track that give us a sense of the health of that business indicate that we are doing well, and that our competitive position is strengthening there.

That team is doing a very fine job.

Honestly, off the top of my head, we do track T&E spending by sector of the economy; we look at things like pharmaceuticals and consulting and that kind of thing.

I haven't looked at it recently, because it's been strong.

When it turns down, we ten to focus an awful lot on it, but I can't, off the top of my head, really cite which industry sectors seem to be doing particularly well right now.

But it is something that we do track from time to time.

Christopher Brendler, Legg Mason.

First, on the margin, the increase in teaser usage -- if you could also just give us a little bit of color on the competitive environment.

Does that teaser usage number include your usage of sort of long-term, like 5.9 lifetime balances, or is that teaser usage only 0 percent?

And my second question is on the discount rate.

Are we purely seeing a mix issue?

I was expecting a little more firmness in the discount rate, given the growth in T&E, but I guess as a mix, it certainly did seem to decline.

If you could give us any other color on what's happening with air or hotel revenues in the quarter?

Well, let me just give you a little of bit background here.

The percentage of our portfolio right now that is on promotional rates is near its historic high.

This has varied for us from anywhere from 15 percent up to about 25 percent.

It's a little bit below 25 percent today, and so we do stand right now at a relatively high level, which I guess is not surprising, given that our business has grown very strongly over the last year or so.

That tends to run conversely, or to run in the opposite direction, with our net interest yield.

So obviously, when we have a large percentage portfolio in promotional rates, then our net interest yield goes down.

There are other factors that go into net interest yield, but that is one of the factors that drives that.

In terms of the offers that we have outstanding, there's an entire range of offers.

And so it's a little bit hard -- the sticker price interest rate and whether it's fixed or variable is one of many, many different factors that go into the offer.

So there are so many factors, and we test different offerings all the time.

So it is almost impossible to really answer that question in a way that makes a lot of sense.

I can tell you that it represents a blend of interest rates, and it's clearly not just 0 percent interest.

That's not a primary leading offer that we make as a company, kind of full stop.

But it does represent various interest rates with various terms and conditions that we are testing in the marketplace all the time, and hopefully that consumers find attractive.

My question was that if, on your commentary in the supplement that says that (inaudible) first increase in the promotional rates -- my question was, is that just 0 percent, or does that include some of these longer-term fixed rates you're offering?

And I think you've answered my question (multiple speakers).

Yes, it includes.

It does include.

Yes.

And so I'm just sort of wondering, if you look at the margin pressure maybe a little larger than I was thinking, given the fact that you really are kind of stepping away a little bit from 0 percent -- or like you say, you don't really use 0 percent like a lot of the other issuers are.

So I'm a little bit just -- just hoping for a little bit of color on what kind of trends you're seeing on the portfolio yield.

And also, if you could comment on growth in the second quarter in the US card market?

A lot of issuers have seen a lot of pressure and a lot of difficulty growing receivables.

Yes.

I'm glad you provided a little bit more background, because I think we can give you a little more color.

The other factors that go into this are things like the pay-down rate.

So, as our credit quality has improved, the paydown rates have increased, and that results in fewer customers being on higher interest rates.

And so that has an impact on this.

This also reflects trends that we have within our balance transfer portfolio, and the rates at which those balance transfer offers are available to customers that we happen to have in the market at any point in time.

And so each of these factors, and then there's the underlying interest cost that is a factor in this, as well.

And in an increasing rate environment, even for our floating-rate products, there is at least a temporary impact associated with increasing interest rates that impact that net yield at the same time.

So there's a number of different factors that go into this.

I wouldn't conclude, necessarily, that it is the sticker price pricing part that is causing the depression.

It really is a whole series of factors, and these are a broad set of levers that we look at all the time, and we try and understand what opportunities we have to induce people to revolve longer, to have balances outstanding for longer periods of time.

There's lots of different things that we look at to try and manage this number that would be different than just the sticker rate.

So I think you've captured the question here pretty well.

On the discount rate question, and then I'm going to ask you to come back on your third question -- on the discount rate question, as you recall, we had a very benign discount rate in the first quarter.

There is a little bit of seasonality to this thing, and you're seeing some seasonal impact associated with this.

T&E really did outgrow airlines in this quarter, so again you see the impact of that.

And the vast majority of this reduction really is related to the mix of businesses that we serve.

We are being really successful at the retail level today.

If you look at retail growth rates, and you look at our billed business growth rates on the consumer side, the only conclusion you can draw is that we are gaining market share fairly rapidly within the retail segment.

And that mix shift is resulting in a downward trend in our discount rate, but it's also resulting in a big expansion in our business.

So we are carrying forward a very nice growth in our discount business.

If you look at that discount business line on the income statement, we feel pretty good about that.

So generally, this is something that we manage very carefully, and this kind of downward trend of 3 to 4 basis points a year is something that we've lived with now for a very long period of time.

And we manage through it very carefully.

We think about all of the leverage that we have to manage it well, and we are quite comfortable with this kind of a shift.

Then you had one last question that I missed;

I'm sorry.

Kind of (ph) the competitive environment.

I don't think we can break out US card lending receivables anymore.

If you could just comment on what you are seeing in terms of domestic growth and the effects of mortgage lending on credit card receivable growth?

And then, to clarify my question on T&E versus corporate, I thought that the airlines were actually lower -- of the T&E categories, it was the lower discount rate versus hotels and restaurants.

So the slower growth there actually would have been beneficial for the discount rate.

Your final point is correct.

Yes, your final point is correct there.

The airlines did grow slower than the T&E grew overall, and airlines are lower than the other categories that you mentioned.

But in the overall scheme of things, it just didn't work out to be that influential a change.

But basically, your conclusion was correct.

The growth rate in the domestic side of the portfolio was about 7 percent, and the international side was about 6 percent in the quarter.

As you know, we don't have a strategy that focuses on the growth of balances as a targeted strategy.

Our strategy is to grow spending, and spending is growing terrifically well, and that's really what we're focuses on focused on.

The balances growth for us as kind of a side benefit of that.

We believe over time that gives us less exposure to things like trends in refinancing, the state of the balance sheet of the people that use our products.

Our focus really is driving our spending, and then to leverage that (ph) as a byproduct, we pick up additional receivables, we're delighted to do that, obviously, because it has a beneficial impact to us.

But it's not the primary focus of our business.

But overall, that environment is a little tougher, as I said in my prepared comments.

The environment there feels to be a little more challenging than it was a little bit earlier in the year.

One other thing that I should just point out here -- as I've been sitting here, that was back on the first question that David had raised, or the second question that David had raised about the serial increase in the AEFA distribution cost during the quarter.

We had in the first quarter of this year a $44 million DAC benefit, as a result of the adoption of SOP03-1 that we just didn't think about when we were discussing the answer to that question, that would have accounted for the major portion of that increase that David identified.

I just wanted to make sure that I mentioned that.

Michael Hodes, Goldman Sachs.

At this point, most of my questions have been addressed, but perhaps you could give us a little color on the trend in billed business line throughout the quarter.

Was there much of a deceleration in June?

We just don't generally, as you know -- unless there's something very pronounced, we just don't make much comment on it during the course of the quarter.

The one thing to kind of think about is that last year, we were right in the heart of the Iraqi war early in the quarter, and we also had the SARS thing that kind of rolled out during the course of the quarter.

The impact of SARS was largely over by the time we got to the July time period.

So just keep that in mind.

And obviously, that will have some impact on our comparisons, as we go into the back half of the year.

Our momentum is good, but the underlying factors, some of the comparison factors from the prior year, were obviously very favorable in the first couple of quarters this year.

Gentleman, there are no further questions at this time.

Do you have any further comments or any closing remarks?

No.

We certainly appreciate you joining with us.

And as always, Ron and team will be here this evening to answer any specific questions you might have.

Thanks very much.

Thank you, ladies and gentlemen, for participating in today's American Express second-quarter 2004 earnings conference call.

You may now disconnect.