美國運通 (AXP) 2004 Q4 法說會逐字稿

Good afternoon. My name is Miles and I will be your conference facilitator today. At this time I would like to welcome everyone to the American Express fourth quarter and year-end 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. At that time, [audio difficulties] using your telephone keypad, you will be able to ask a question. I would now like to turn the call over to our host, Mr. Ron Stovall. Thank you. Mr. Stovall, you may begin your conference, sir.

Okay. Thank you, Miles and welcome to everyone. Appreciate all of you joining us for today's discussion.

Before we get started, it's my job 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, intends, 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 fourth quarter 2004 earnings release supplement, which is now posted on our Web site at IR.AmericanExpress.com, and on file with the 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 has 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 yourself to one question at a time during the Q&A.

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

Thank you, Ron, and welcome to all of you, and thank you for joining with us today.

Before I discuss our quarterly results, I want to highlight the changes that we made to this quarter's disclosures. As we discussed on our third quarter call, we conducted benchmarking exercises and survey interviews in August and September to help identify disclosure, presentation, and process changes to enhance the transparency and the value of the Company's financial reporting activities.

While the survey responses and our other benchmarking efforts indicated an overall better than industry average reporting activity at American Express, there were some good revisions identified to improve further the transparency of our disclosures. We have implemented some additional changes and improvements this quarter. Specifically, and as disclosed in an 8-K filing on January 14th. For TRS we expanded the presentation of operating expenses to provide further detail.

For AEFA, we expanded the income statement to highlight revenue and provision expense information for certain products and lines of business. We are also providing additional information regarding human resources expenses by separating the field and non-field expenses and segregating the amortization of deferred acquisition costs, which historically was included in the human resources and other operating expense line items.

Finally for AEB, we have expanded the reporting of selected statistical information to provide additional information on the characteristics of the AEB loan portfolio and related loan loss reserves, in particular to provide more information on the consumer financial services business versus other AEB loans.

In addition, the new presentation provides information relating to AEB's owned, managed, and administered assets. These changes have no impact on our segment total revenues, total expenses, or net income, or on their respective total assets or liabilities.

With that, let me now review our results. As usual, my remarks will focus on our results for the fourth quarter as you are already familiar with our results for the first three quarters of the year. However, during the question-and-answer period, I will be happy to respond to any questions you may have on our full-year results in addition to your fourth quarter questions.

Our fourth quarter results exceeded all of our long-term financial targets and continued to reflect the strong business momentum reported during the first nine months of the year. Specifically, revenues grew 10 percent versus last year, net income increased 17 percent, or 16 percent before last year's accounting change, our diluted EPS of $0.71 rose 20 percent, or 18 percent before last year's accounting change, and our return on equity was 22 percent.

In addition during the quarter, 80 percent of the total capital generated was returned to shareholders through dividends and our share repurchase activity. For the year, we returned 87 percent of total capital generated. This exceeds our long-term target of 65 percent and reflects the success that we've had with our balance sheet optimization efforts.

Strong revenue growth in the fourth quarter was driven by a 17 percent increase in card member spending, a 14 percent increase in travel sales, a 13 percent increase in assets owned, managed, and administered at AEFA, and a 4 percent growth in worldwide lending balances on a managed basis, or actually 8 percent when you adjust for the equipment leasing portfolio which was sold during the course of the quarter.

On the expense side, consolidated expenses were up 11 percent continuing to reflect higher business building expenditures and human resource costs in addition to higher interest expense this for the first time in many quarters. Provisions were flat versus last year due to the exceptionally well controlled credit within our card and banking operations.

Our decision to expense stock options beginning in the first quarter of 2003 has contributed to higher compensation related costs, but the underlying human resource expenses and related employee count continue to be well controlled. We also exceeded the $1 billion of re-engineering benefits which we targeted for 2004.

And finally, the consolidated tax rate for the quarter was lower, primarily as a result of the impact of continuing benefits from the changes in the international funding strategy at TRS in 2004. Favorable tax audit experience at both TRS and AEB and a favorable adjustment to the current taxes payable account at AEFA.

At TRS, the changes in international funding strategy will continue to positively impact our effective tax rate going forward, and will be offset in part by higher related funding costs.

Before I get into our segments specific results, I'd like to quickly discuss two additional items.

During last quarter's earnings call, we announced the intended sale of American Express Business Finance Corporation, the equipment leasing product line managed within TRS' small business operations, which constituted a loan portfolio of approximately $1.5 billion. On December 1st, the sale of this business to Key Corp. closed and we recorded $117 million, or a $76 million after tax net gain on the sale.

Separately, late in the fourth quarter, we announced $102 million pretax, or $66 million after tax, of aggregate restructuring charges that were recorded in connection with various restructuring activities. Principally, restructuring of the Company's business travel operations and the decision to sell certain operations within American Express Bank.

These restructuring activities are expected to result in the elimination of approximately 2,000 positions companywide, and to provide annual pretax benefits to the Company in excess of $75 million.

So while we've had some positive and negative items in the corner, when coupled with the substantially higher levels of investment spending, the aggregate effect was well-balanced. Overall, we generated very strong financial results and excellent metrics within the business which I will highlight within my review of the segment-specific results for the quarter.

Let me begin by starting at TRS. Managed net revenues increased 11 percent and net income rose 20 percent. The benefits of higher levels of investment spending over the last two years continued to be evident in our card-related metrics, which are strong both on an absolute basis and versus the competition.

Spending for proprietary basic card in force grew 12 percent globally, showing the success of our loyalty-related initiatives and merchant coverage expansion activities. Worldwide billed business was exceptionally strong during the quarter, up 17 percent, and continued to grow at a robust pace despite the particularly tough comparisons in last year's fourth quarter.

In our U.S. proprietary business, consumer spending grew 15 percent, small business spending rose 20 percent, and corporate services volumes improved by 10 percent. We experienced strong growth through the retail and everyday spend categories.

Our U.S. holiday-related spending appeared to outpace the bank card volumes disclosed by the associations, even when you include their debit spending. And when you look at just their charge and credit spending, we outpaced them by one of the largest gaps we can remember. In addition, spending at high-end retailers and online was particular robust for us.

Corporate spending grew double digits despite the more difficult comparison to a particularly strong growth rate in the quarter last year, and pressure created by airline pricing declines.

Outside the U.S., reported billed business was up 23 percent, which equated to 15 percent growth on a foreign exchange adjusted basis, reflecting 12 percent growth in proprietary, consumer, and small business volume, and a 15 percent increase in corporate services spending.

Network partner-related billed business volumes rose in excess of 40 percent on continued growth in the non-U.S. partner volume and the addition of MBNA-related volumes in the U.S.

Worldwide cards in force grew 8 percent as we added nearly five million cards during the year. Here we saw continued strong card acquisitions and an improved average customer retention level within our proprietary issuing business.

In addition, we had exceptional growth in network cards, particularly in the U.S. with the addition of MBNA issued cards.

The launch of American Express branded cards through MBNA is off to a terrific start. Overall spending volumes on these cards have been very strong, the average transaction size has been higher than we expected, and the quality of these customers is very high.

The discount rate of 2.54 percent decreased 3 basis points versus the third quarter of 2004 and decreased 2 basis points from the fourth quarter of last year as the mix of spending continued to evolve toward everyday spend categories.

Worldwide lending balance growth versus last year was solid rising 8 percent excluding the impact of the leasing sale, despite an industry environment that continues to challenge organic receivable growth.

While airline ticket prices have declined, travel revenues rose 9 percent on an improved sales environment. On the expense side, marketing , promotion, rewards, and card member services expenses increased 24 percent, as rewards costs rose and we continued to focus on other business building investments.

The launch during the quarter of our new global card advertising campaign was an important contributor to this growth. The total managed provisions for losses declined 1 percent as charge card and lending credit quality, as well as reserve coverage ratios remain strong.

Human resources expenses rose 17 percent due to severance-related costs within the restructuring charge, merit increases, and greater management incentive and employee benefit costs. Total other operating expenses rose 1 percent, as the leasing gain and expense control initiatives offset volume-related expense increases.

The effective tax rate of 28 percent decreased from 31 percent in the third quarter of 2004, and the fourth quarter of 2003, due to the items that I referenced earlier.

At AEFA, net income increased 20 percent on growth in managed revenues of 10 percent, and a substantially lower tax rate. Assets owned, managed, and administered rose 13 percent on market appreciation and asset inflows.

Total cash sales increased 12 percent on strength in non-proprietary mutual fund sales, variable annuity sales, investment certificates, and institutional activities. Revenues increased on higher investment management and service fees, greater net investment income, larger distribution fees, greater property casualty insurance premiums, and increased fees from planning and advice services.

The provisions for losses and benefits increased 6 percent on higher in force levels within most product areas, particularly certificate products.

Field human resource expense increased 15 percent on the effective of higher field force production-related costs. The advisor base rose 2 percent versus last year to over 12,300 advisors nationwide.

Non-field human resource costs increased 22 percent, reflecting higher management incentives and merit increases. The average number of non-field employees was relatively unchanged versus last year.

The effective tax rate was 12 percent versus 21 percent last year.

AEFAs ROE before the accounting change improved from 10.4 percent last year to 11.8 percent in 2004, as earnings improved and we more effectively deployed capital within its business. In fact, in addition to the $430 million special dividend paid to the parent company earlier this year, a $500 million special dividend was again paid in December which positions AEFA for further improvements in its returns in 2005.

As you know, as we report these numbers, we report them on a lagged 12-month basis so the improvements that we've made here in December should have some carry over benefit for next year which should be attractive.

The positive impact of growth within private banking and the financial institutions group offset by reductions in loan and other activity within corporate banking, and the relative stability within the consumer financial services lending business. Specifically, non-CFS loans increased 8 percent, due to increases in the private banking and financial institution group loan portfolios, partially offset by a decrease in the corporate banking loan portfolio, which now represents only 1 percent of total loans, or approximately $76 million.

Private banking client holdings increased 15 percent, and CFS loans were flat versus last year, reflecting stabilization within our activities in Hong Kong. Results also benefited from a provision decline of 60 percent versus last year, due to a substantial improvement in credit quality within the CFS lending portfolio, primarily related to activities in Hong Kong.

With that, let me now conclude with a few final comments. Our results for the quarter and full-year illustrate the benefits of the strong business momentum achieved through our investments over the last few years. We delivered record results during the quarter and full-year that exceeded all three of our long-term financial targets, while also increasing our business building expenditures and maintaining substantial balance sheet strength.

We strengthened our competitive position within payment services as we gained market share of industry spending and lending activities, and signed two significant partners within our U.S. network business. In retail financial services the foundations are now in place to better position us as a strong competitor in the future.

We have a number of excellent growth opportunities on the horizon. To help ensure that we have the resources to take full advantage of these opportunities, we have intensified our focus on our re-engineering activities as evidenced by the restructuring initiative announced last month.

We will continue to focus intently on gaining additional efficiencies over the coming year. Most importantly, our recent business success makes us confident that we're positioned to leverage these growth opportunities.

Thanks very much for listening, and 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 need to push star, then the number one on your touchtone phone. You will hear an acknowledgement that you have been placed in the queue. If your question has been answered and you wish to be removed from the queue, please press star two. Your questions will be queued in the order that it is received. If you are using a speaker-phone, please pick up the handset before pressing the numbers. Once again, if there are any questions at this time, please press star then the number one on your touchtone telephone. Please hold for your first question The first question comes from the line of Michael Cohen with Susquehanna Financial Group.

Hi, guys. I was wondering if you could provide a little more commentary in and around the number of accounts that were put on through partnerships whether it's obviously MBNA and otherwise, just because as we model your company and model certain revenue line items other off of cards in force, partnerships cards in force are certainly a little bit different from proprietary cards in force, if you will.

It's a good point, Michael. I think probably the best way to think about it is it's hard within a three month time period to have a dramatic impact on what the trend in the business, what the trend in that particular line item is. And so it's safe to say that if you kind of trend what had been happening for the last few quarters it wouldn't be a bad extrapolation to think about that in the fourth quarter, and obviously the final result came in very attractive and so I think it's fair to say that if you kind of looked at it on that historical basis, you could get a pretty good idea of [overlapping speaker].

And the overage would essentially be partners be they MBNA or Citi once they get live.

Let me not quality it quite as exactly as you did but directly I think that's appropriate.

Okay. Great. Thank you.

Your next question comes from the line of Chris Brendler with Legg Mason.

Thank you. Good evening.

Hey Chris.

Hey, Gary. How are you doing? Just want a clarification and then a comment. First a clarification. Did the leasing portfolio, was that captured in worldwide lending balances?

In the past it has been, yeah, so when you see the, what looks to be a pretty good drop for us, it's related to the fact that business is no longer there. So we took about a billion and a half of receivables out. If you adjust for that, then receivables would have actually been up 8 percent in the quarter which compared to most people in the industry was pretty good performance in the fourth quarter.

Okay. And that's the source of my question. Can you give me a little color on how you're viewing the lending environment? Obviously we haven't seen much industry growth. You're out there with two different products, the charge card and on the lending credit card products. Obviously the charge card seems to be doing very well, the volumes are huge, but can you just comment on what you see in terms of competition and maybe kind of on your user teaser rates as you go after lending balances? Thanks.

As you know, our strategy really is to go after spending and we do that both with charge and lending products and some of our lending products have charge-like characteristics. You know, if you take the Delta Sky Miles card for example, we have very high billings on the Delta Sky Miles card.

So in our minds it's somewhat of an artificial distinction between charge and lending just because of the way our customers use the products and the paydown rates we have.

That said, one of the nice side benefits of having this very strong spending model has been that we have garnered receivables at a faster rate than the rest of the industry. So you know, we don't see anything in the business right now that would cause us to feel particularly cautious about how the underlying performance of the lending part of our business is performing.

The credit performance is good. We're getting, you know, an appropriate amount of receivables associated with the spending that we get, the paydown rate has increased a little bit, and you see a little bit that in the net yield number that we reported during the quarter, but it hasn't increased substantially in the last quarter or so. It did increase substantially earlier in the year. But overall, we feel pretty good about it.

As for teaser rates, we're generally, we have worked hard for the most part to try to get out of that business. You know, particularly the parts of the business that are just not attractive and very profitable and focus much more on rewards-based spending-oriented cards be they lending products or charge products.

Okay thanks.

Your next question is from David Hochstim. Sir, is your phone on mute?

I'm right here.

You may go ahead, sir.

I wonder if you could just clarify what you said to Michael's question and then I had a question about Walgreens and I guess the perception that you may have been too flexible with them and luring them back or what you could say about that.

But the, as we look at the sequential change in cards and forth over the last few quarters it's been running five or 600,000 and then this quarter it was a million nine. Were you saying that the difference is attributable to partners or--

Well obviously we spend a fair amount year-over-year increased advertising also within the proprietary portfolio but I think the emphasis for me, David, is that within a three-month time period you really can't, on the proprietary side, change that trajectory dramatically and so, you know, even if we had good success at doing that, I think it still demonstrates that the success of the network card looks to be pretty substantial in the quarter. Yeah.

Without quantifying it exactly. That's helpful. Thank you.

On the Walgreen's front, we have seen some reports to the effect that you mentioned, primarily from people who are not close to the detail obviously of what has happened there but, you know, in terms of the outcome there, our relationship with Walgreens, the pricing with Walgreens is in the context of the standard rate cards that we use with that industry. It's completely in alignment with the standard rate card that we have there which is a function of the class of trade and the volume that the merchant does, but we've not deviated at all from that particular rate card in that relationship.

So what would have caused them to drop acceptance and then come right back if you didn't change price?

Well, my guess is they were, they would have liked to have had us make a change, but they, I think one of the things they said is they wanted to make sure that they provided the opportunity for all their customers to use American Express cards and I think that became clear to them after they made that announcement.

Okay. Thanks.

Your next question comes from the line of with Ed Groshans with Fox-Pitt Kelton. Sir, your line is open.

Good afternoon.

Good afternoon.

I guess, you addressed it a little bit. My first question just stems around the tax rate and, you know, is 24 percent the new run rate? Is that a little bit low, is it going to be a little bit higher? I know we've seen closer to 30 in the past.

Right, 24 is too low. There's nothing about the AEFA rate that should change from what it's been historically. This was an unusual quarter for AEFA in terms of the tax levels because we were truing up both the conclusion of a couple of tax audits as well as the current-year rate, and so the AEFA number, I think you should think about it as being more in line with what historical levels would be at.

From a TRS perspective, we will get some, I think, long-term improvement in our tax rate, but it's primarily being driven by funding strategy. We worked hard to increase the number or the breadth of the sources from which we can raise funds, now do a lot of active funding outside the United States which results in a somewhat higher funding cost but also has some side benefits on the tax side.

So the primary reason for doing that is a funding strategy, but there are some long-term tax benefits that will translate into a somewhat ongoing lower tax rate at TRS.

Great. And just one other question if I can.

Sure.

Just guaranteed income funds, do you have an idea of what percentage of those have hit their minimum crediting rates?

You know, I haven't. I don't know off the top of my head. It hasn't been a substantial issue for us. So this was an issue about a year or so ago, but I think with the increasing rates we've seen over the last little while that that hasn't been much of a topic.

Excellent. Thank you very much. [audio difficulties] Eric Wasserstrom Can you hear me?

Yeah, we can hear you.

Okay. Thank you. On the, I just wanted to firm up kind of on that tax issue, not to beat it to death, but I'm not sure totally understand.

On which issue? I'm sorry, Eric.

The tax issue.

Yes, okay.

Is the lower tax rate going to be a recurring or permanent phenomenon or --

Yeah, it should be.

Okay. It should be.

This is an ongoing funding strategy. Essentially what we want to do is diversify our funding sources and in the major markets outside the U.S. where we have large presence like the U.K. or Australia or Mexico, for example, do local funding. If we do local funding in those markets has a hire cost associated with it than for example, if we did commercial paper funding here in the U.S.

But there are some tax benefits associated with that that are actually a little larger than the additional funding cost and so the net of this should be a somewhat higher funding cost, but an improvement in our tax rate. So I wouldn't think about, I mean, there's other factors that are going into that 28 percent rate at TRS as well that are positive, so please don't assume a permanent reduction of that order of magnitude, but there is some ongoing permanent reduction here that we should see from this funding strategy.

Okay. Great. And perhaps one more substantive question. Now that you've lined up MBNA and Citi as you know, two of the effectively have a dozen maybe national level issuers in the country, what are your, does it make sense to target smaller and more regional players or does this provide you the scale that you need in terms of expanding the [G&S] opportunity?

I think we would like to target some smaller and regional players and I think obviously what appears to be very successful start of the MBNA program may, in fact, encourage even more of those people to have interest in talking to us, so that's always been part of the strategy and it continues to be a part.

Thanks very much.

Your next question comes from the line of Bruce Harting with Lehman Brothers.

Thank you. Gary, the, you know, how do you feel about, you know, I don't know if you can talk at all about projections but relative to making, you beat your sort of long-term objectives by a pretty good margin on the EPS side and comfortable on the revenue part of your longer term goal. Compared to where we sat a year ago, are you able to make any forward-looking comments about sort of comparing how you see the business going into '05, particularly on the spend side and maybe a little commentary on AEFA?

Absolutely. Honestly I think the metrics speak for themselves. If you look at them, we had a 17 percent increase in card member spending, cards in force were up 8 percent, we've taken a bit of a gamble over the last couple of years here by really pushing hard on the marketing and reward side, but pretty systematically that's translated into improvements on the business and we feel, I think, pretty bullish about the momentum of the business as we finish 2004.

And on the AEFA side, I mean clearly we have challenges there. But you know a 13 percent increase in assets in this quarter is pretty good if you compared across the board.

Now obviously we'd love to have a larger piece of that be proprietary assets, but we've done well with wrap products and overall that business appears to be, it has pretty good momentum so sales are strong there, both GDC and cash sales were up, I think, 13 percent or so in the quarter. So we have, we feel pretty good about the way the year ended and see no reason right now to be particularly cautious about the year we're in.

You've clarified the tax issue, I'm just, you said in your prepared remarks that there were offsets and I assume those are recurring also in the way you've changed your funding?

Yes, correct.

I just wasn't clear on exactly what those are and where they appear.

The offsets would be in the interest expense line so our actual funding cost will be higher as a result of the strategies that we've implemented here to increase our liquidity but it will have a benefit on the tax line that more than offsets that.

So the net of that is a pretty, is a somewhat modest number. I'm concerned that somebody may say a 3 percent is a permanent change in tax and there's no offset to it. There will be an offset to it on an ongoing basis, but there is a modest benefit associated with this that overall gives us a positive result.

Thank you.

Your next question comes from the line of Brad Ball with Prudential Equity Group. Brad has pressed star two and dropped from the queue. We will now go to the line of Matthew Vetto with Smith Barney.

Hi. Good evening.

Hi, Matt.

I just wonder if you could talk a little bit about rewards efficiency if there is such a thing? I mean obviously that marketing and rewards line has gone up pretty healthfully over the last few quarters and you've talked about how in your mind you don't really separate the two, but just trying to get a little bit of a feel for how much of that is kind of opportunistic acceleration versus kind of baseline sort of rewards utilization expense. Any kind of color you can offer?

Sure. There's actually, there's a couple of things going on there. One is, more and more customers join the program so the penetration of rewards as a percentage of the total goes up, and then more people who are on the program utilize it than ever before. And when you have both of those things taking place at once, you see a very rapid acceleration in that expense and that's exactly what we have seen.

That's been an on purpose strategy which Ken announced that we were going to do three, maybe four years ago now, when about 30 percent of our customers were on rewards he said we were going to drive it up substantially higher, and about a year ago we said we'd crossed the 60 percent threshold in terms of number of customers.

Obviously it's even a higher proportion of our total billings. So that increase has taken place, and we're still going to see some of that obviously until we get more or less to full penetration of rewards programs.

That being said, it has a lot of positive knock on benefits that I don't need to go into the details here, because you all understand them, but in terms of provision, we see these big provision increases, this is not unrelated to the fact that the penetration of rewards has happened the way that it's happened, and speed of pay, better provision, lower attrition, all these other factors go into the profitability that we calculate when we look at the increase in that expense line item.

That said, we also focus and now have built a reasonable utility within the Company to focus on how we can be more effective in using rewards as a program. So that we're not, so that it's not serendipity that a program works out well for us that we really do target rewards in ways that incent customers to spend more on the card and then of course that's beneficial for them as customers.

And under Ash Gupta's leadership under the risk management team with the customer information management group, they're really making what I think are some very good strides and applying much of the sophistication that we have around risk management to the use of rewards. And hopefully we'll see benefits from that effort going forward.

Okay. That's helpful, thanks. And maybe one other quick thing. Can you contrast at all what you're seeing in spending patterns from your small business base versus the large corporate? I know you mentioned that corporate had kind of a tougher comp this quarter, but is it mostly just airline fares that are holding it back on a relative growth rate basis?

No, there's really a couple of things. There's that and then also the switch to online, you know, continues to take place and the revenue associated with that from our perspective is obviously lower because of the average charge that we get from those tickets is somewhat less. But, you know, that's taking place. I mean if you look at the differential, it has remained pretty consistent.

We've had the small business business was very strong in the quarter. I think it was 20 percent growth rate domestically, and you know we've had 12, 13, 14 percent growth rate in corporate, that's been pretty consistent now for the last three or four quarters and nothing really has changed about that.

One of the positive things, frankly, I think about the quarter is that we got that growth rate in spite of what has been this price reduction announced by the airlines that is clearly starting to bleed through in terms of average ticket price.

So underlying activity levels are good. You know you see that obviously in passenger counts, so the passenger counts are very strong. But it looks like it's pretty solid right now.

Okay. Thanks a lot.

Your next question comes from the line of Laura Kaster with Sandler O'Neill and Partners.

Good evening, Gary. I have a question for you. Relative to my expectations, provisioning at AEFA was higher than I had modeled. I appreciate the increased break out that you give us, but if you could just give me a little bit more color on why that went up specifically and how to think about that going forward as a percentage of average investments.

It's a little bit too broad of a question. Can you narrow it down exactly what you're focused on?

Well, I'm looking at, let's see. Just as a percentage of average investments [inaudible] about 5.5 percent and that's an increase from prior quarters. Do you think that that's a level that's sustainable or --

You know, I mean the honest answer is off the top of my head, I don't know of any reason to think that there's something unusual happening there. I wish I could provide more detail to you. Ron, I don't know if you have anything to add to that.

I think the one area that increased more substantially than others was the interested credited on investment certificates. There was a special promotion for certificates in the period and then you've got the effect of stock market variations, on the S&P 500 related certificates. So typically what happens is, when you see that in the certificate line on the provision, you also have a kind of corresponding impact within that investment income that kind of offset each other in pretax income. But I think that's probably the variance that is substantial within the provision line overall.

Okay. Great. And then one more question. Gary, we've spoken in the past about your concerns with the regulatory environment and the effect that it has on the discount rate and interchange revenue.

Right.

And BNA spoke last week at their conference that their interchange rate is about 110 basis points in the U.K. and they think that over the next couple of years that could go down to about to 30 basis points. Can you give us any update on your thoughts on that concept?

Well, the way we approach this, I mean obviously we're not part of, so far we're not part of really any of these actions directly and so we have the flexibility to continue to price based on the value that we deliver to the merchant and that's really how we think about it. So our view of these things are that we try to very carefully manage our revenue by each country, by each industry based on the strength that we have in that particular industry.

And we really try to do a very careful job of managing that discount rate realization, if you will. And because we have so many different kind of tools at our disposal to do that pricing, different industries in which we can be different countries, our belief is that we have a reasonable ability to manage through changes like that over time, just because of the breadth of the product line that we have.

That said, another important part of all this is our ability to re-engineer and, you know, some combination of the growth of the network business in most countries and our ability to re-engineer is an important offset to declining interest rates in those places where we're going to see, or declining discount rates in those places where we're going to see it.

I think the best story really to look at is Australia. I mean clearly Visa MasterCard rates there have come down. We've had some reduction in our rates in Australia as well.

We've also been fortunate enough to add a couple of [G&S] partners who have done very, very well for us in that market, So if you look at how our proprietary business has done in conjunction with how the network partners have done, and you add in the re-engineering activities that Jim Bush and his team are conducting in Asia, the overall answer is something that we like and that's the way we approach it. It's kind of a holistic strategy that takes into account all those factors.

Great. Thank you.

Again, ladies and gentlemen, if you would like to ask a question at this time, please press star and the number one on your telephone keypad. Star one to join the queue to ask a question. We will now go to the line of Craig Maurer of Fulcrum Global Partners. Mr. Mauer?

Good evening. How are you?

Hi, Craig.

A quick question regarding funding cost. I was wondering if you can discuss the trends you're seeing there in the card business and what you're doing to, I suppose, mitigate the ramp-up in short-term lending cost that might be applied to the charge card?

Yeah. For first time as I mentioned in my comments, we've seen an increase in interest expense as something that was pretty well telegraphed and expected by what the forward yield curve said quite a few months ago and so we've seen that increase in the funding cost. Most of what we have embedded in the portfolio for this year is hedged.

We talked about this, I think, in a conference call that we had two quarters ago and said that roughly 55 percent or so of our funding for this year, 55 to 60 percent of our funding for this year was locked in and the rest that floats. We float a portion of our funding cost because of the short end of the curve, when weighted in with the longer maturities that we have locked in give us a weighted average funding cost that doesn't move as dramatically as the market itself improves.

So I think we're in reasonable shape for this year. We also said on that call that we had something like 45 to 50 percent of our funding in place for 2006 and so, you know, when the interest rates were low, we took that opportunity to extend our maturities.

Because of the nature of the yield curve when interest rates go, up we tend to do shorter funding, because you're now funding at the shorter end of the curve you're actually getting a lower rate than, or maybe an equal rate that you got when you were funding at the longer end of the curve when rates were lower overall and so we try and manage through in that way.

So the net result of that is, that we're pretty comfortable with our ability to manage through it this year, and also hopefully if interest rates continue to increase we'll see a robust economic environment that has other positive benefits from a billing standpoint.

Thank you.

Your next question comes from the line of Brad Ball with Prudential. Brad, your line is open.

Thanks, try again.

Hi, Brad.

I wanted to ask about the discount rate. We're continuing to see the discount rate come down, and you indicate in your footnotes to expect to continue to see pressure there. I wonder there's any link, at least in this quarter, between the decline in the discount rate and the increase in billed business related to MBNA as you've alluded to the growth being partly driven by the MBNA deal?

No. There really is no linkage there. That's not, that doesn't have any impact on our number at all. That pricing is done on a merchant by merchant basis and so there really isn't anything that their billings would have contributed that would have had that impact.

Okay. And just a follow-up. The questions about the Citi partnership, some have asked why it's taking till the end of '05 before they'll begin to launch their card. Any reasons why you could explain that?

I think just wanting to do a good job. I mean frankly, with the MBNA contract I know we announced that, I think it was in January or February of last year and we launched in November obviously in part driven by what the Supreme Court decision was, but also driven in part by the fact that it takes a while to put together a program that is absolutely outstanding and I think we are working very hard with Citi.

We've got good joint efforts going on between the two companies that I think are likely to deliver excellent results once we get them off the ground. But it just, you can't turn a high quality product on overnight and I'm sure they're in the process of developing products that they want to be very competitive in the marketplace.

Okay. Thank you.

Your next question comes from the line of Bob Napoli with Piper Jaffray. Bob, your line is open.

Thank you very much.

Hi, Bob.

Good afternoon. My question on, hopefully two quick questions. On the marketing side, your marketing expend was up about 30 percent this year, 31 percent, I think concluding obviously the rewards programs and the biggest increase, you know, I think I've seen out of you guys. But looking forward I would expect a lot less growth in marketing. Would you expect that line item to grow in line with spending or less on the go forward basis and --

You know Bob, we'll be opportunistic about that. One of the things that we have done is as we've had these unexpected improvements in provision and we've had some interest opportunities. We've tried to be opportunistic about that and drive marketing where we've had the opportunity to do so and that's the way I would think about it.

We obviously have a plan for next tear and I can't really discuss the specifics of what's embedded in the plan, but I think we'll continue to utilize the same strategy that we've had. If business turns out to be a little bit better than we thought, we're going to take advantage of that and plow some of that back into try and drive market share results as we have over the last couple of years.

If business is a little weaker, then we've got to be a little circumspect. So I think it will depend a little bit on what the business environment is like.

The one element that was new to this quarter obviously is the new brand campaign. That was a big factor in the advertising expense for this quarter. And obviously that's a campaign that we intend to carry forward into next year, but we have a lot of flexibility in terms of how we manage this.

You know we've got a much better capability today than we've ever had in our history to quickly move in and do marketing and advertising programs and also quickly shut them off in we need to in order to kind of balance things. And so it's a little hard for me to say exactly what that number will be, but other than to say we'll be opportunistic about it.

Then on the regulatory side, it's falling up, it just seems like there's more concern about the discount rate and there have been perpetual concerns forever on American Express, but there's even today just on American Express but on MasterCard, Visa on merchant retail, if you rebellion, if you would, on the pricing side.

Do you feel that the risk today is higher than it has been given some of the international occurrences, U.K., Australia, in the U.S. and did that debit card victory I guess that the merchants had, do you feel from your side that there's more risk today and how are you handling that?

I talked a little bit about the international side and rightly there is a discount risk internationally. I think we've been pretty clear about that and, but we have worked hard to have in place what we think is a strategy that works for us outside the U.S. that has lots of different elements to it. It's not just a single answer but it has lots of different elements to it that if you kind of factor it in to our long range plan, we feel pretty comfortable about it.

As regards the U.S., we really have always faced, you know, the challenge of selling our value to merchants every day, and we really do that. We do it, you know, it's a big part of our job.

And the kind of quality of customer, for example, that MBNA has brought into the portfolio over the last few months only serves to reinforce this value message that we have to our primary merchant customers. And so we think our story today is stronger than it's ever been in our history.

If you look at these increases in average spend, and at 70 percent of what we're doing in this quarter with everyday spending, our value proposition to a merchant is pretty darned strong. And, you know, if you just play through the experience that we've had over the last month or so with Walgreens, pretty clearly, you know, it's important for all retailers to have the kind of products available to their customers that their customers want to use. And that's kind of the clearly the impression that we've taken away from this experience.

So we feel good about the value of the card. We don't think it's been stronger ever in our history and certainly the early success of MBNA would reinforce their contribution that they're making to this partnership.

Thank you.

Your next question comes from the line of Bruce Harting with Lehman Brothers.

Just a branding question. As a couple of the monoline competitors are increasing their branding advertising, you know, what's the view at your Company as to the propensity of another dollar spent on media advertising versus direct mail, et cetera, and how do you see that, are we entering kind of a very high spend warfare period here where the industry is just going to, you know, get diminishing returns on dollar spend. Thanks. What's your view on it?

Well, I wish I had the perfect answer on how brand advertising affected our results versus the direct promotion. Obviously I don't. What I can tell you is that we do a pretty good job of evaluating the campaigns that we have and looking at the success of our marketing and promotion activities when they're taking place in the context of an umbrella brand campaign and when they're not and we try to make some of those judgments as we go through this over time.

Brand advertising is not anything new to us at all. It's been a key component of what we have tried to do over the years.

We think this new campaign that we've just recently launched is particularly effective. We like it and we think our customers like it, certainly based on the feedback that we have gotten.

But it's hard for us to comment on MBNA's economics or Capital One's economics. Some of the people who have had or said that they're going to have substantial increases in their brand advertising programs.

We do have a good sense of what it costs us to do this or constantly making shifts in that tradeoff to see where we can find the optimum balance. But I don't think you should think of about us building some kind of a permanent disadvantage in our cost structure as a result of a need to build in a higher level of brand spending.

And your next question comes from the line of Ed Groshans with Fox-Pitt Kelton.

Hi, Gary. Just on the spend, I mean the billed business was up good, you talk about the breakdown between consumer, small business and it seems like for the past few quarters small business has been growing a bit faster that everyone else, and I just wanted to, is it because the small business is a lot smaller relative to the other groups or are we really seeing a push in the small business area that's growing pretty rapidly and helping out the results?

I think there's a couple of things. One is, I think we're seeing the fruits of the network strategy that we put in place a couple years ago so we launched this OSBN effort, you know, open the small business network activity that has network partners, like Staples, that offer discounts to our small business customers that have been incredibly well-received.

You know, we just feel terrific about that and we've now been consistently at that program at that program for a couple of years, and it does take a couple of years to see the fruits of that and we're really seeing some real benefits.

Secondly, I think our value proposition continues to get better and better there as we have good network partners that participate in this, it's more attractive for our customers to be part of that program.

And then third, this is a category where plastic has a very low level of penetration and the opportunities for additional penetration are very high. So we feel actually very good about the strength of our business there and, you know, continue to expect it to perform very well.

As I've said many times and I caution everybody with this, this is a good leading indicator of, you know, the health of the economy overall. And this particular type of spending tends to be more sensitive than virtually anything else.

Obviously the indications from this business would indicate that the economic environment is very strong, but this tends to be the business that turns down first in periods when the economic environment starts to weaken.

And has American Express ever given sort of a breakdown like a [lines] of small business relative to consumer relative to corporate?

Well, we've given total business volumes in the past, but it's been quite a while. I guess is it's been maybe four years since we disclosed this and at the time it was about 40 percent corporate.

Yeah.

For corporate and small business so the two categories added together, three or four years ago when we disclosed this were about 40 percent, and we haven't ever, since that time, updated that. That may be something at a future analyst meeting we may want to update.

Thank you.

And your next question comes from the line of Neil Abromavage with Deutsche Bank.

Good afternoon, Gary.

Good afternoon.

Just a quick question going back to you [inaudible] your long-term targets and the comments you made about the '05 business environment. Would you say that you would give up say 100 or 150 basis points in an increase in funding costs for 8 percent, that's your target in market appreciation? That's the first question.

And then, you've got your alliance with MBNA and Citi, and then on Friday, we had an announcement where Discover and Wal-Mart and GE Capital got together. Could you give us your views on that transaction?

Sure. On the trade-off of the funding cost, I mean honestly I'd have to think about it. Typically we have said in the annual report, correct me Ron, if I'm wrong on this, bit I think recently it said it's about a 100 basis point change and the S&P is worth roughly, I don't know, 75, $80 million pretax, and so you'd have to do the math for me on that one, without me doing it here in my head, but that's roughly what a 100 basis point change in the S&P is worth for us as a Company on an annual basis.

With regards to the Wal-Mart Discover partnership, co-branded cards are part and parcel of the business. We obviously have some very strong co-branded relationships. We hope to have more of those as they tend to be very attractive ways of getting cards at relatively low cost, and we anticipate that's likely to be a good thing for Discover and a good thing for Wal-Mart.

But it's obviously a business that we pursue and we hope to have continued success in ourselves going forward. And did I miss another question?

Thank you very much, Gary.

Gentlemen, at this time there are no further questions.

It looks like we've come to the end of our time here as well. So thanks very much for joining us.

Ladies and gentlemen, we do appreciate you're participating in today's American Express fourth quarter and year-end 2004 earnings conference call. You may now disconnect.