美國運通 (AXP) 2005 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the American Express first-quarter 2005 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.

At that time, you will be alerted us to how, using your telephone keypad, you will be able to ask a question.

I would now like to turn call over to our host, Ron Stovall.

Thank you.

Mr. Stovall, you may begin your conference.

Welcome to everyone -- appreciate all of you joining us for today's discussion.

Before we get started, as usual, I want to just remind you that the discussions today contain 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 2004 10-K report, already on file with the Securities and Exchange Commission.

In the first-quarter 2005 earnings release supplement, which is now posted on our website at IR.AmericanExpress.com, and on file with the SEC in an 8-K report, we have provided information that compares and reconciles TRS's managed-basis financial measures to be discussed today with the TRS GAAP financial information, and explains why this presentation is useful to management and to investors.

We urge you to review that information in conjunction with today's call.

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 you all, and thanks for joining with us today.

As you have seen in the earnings documents that we distributed earlier today, our first-quarter results continue to reflect the strong business momentum we have reported over the last two years, particularly in TRS, in addition to a continuation of high levels of investment spending and initial costs related to the planned spinoff of American Express Financial Advisors.

Specifically, when compared to last year's results, total revenues grew 10%; net income increased 19%, or 9% before last year's accounting change; diluted EPS of $0.75 a share rose 23%, or 14% before last year's accounting change; and our return on equity was 23%.

It's important to note that last year's results included two items related to an accounting change at AEFA -- specifically, an above-the-line benefit of $43 million after tax and a below-the-line charge of $71 million after tax.

During the quarter, we returned 63% of total capital generated to our shareholders through dividends and share repurchase activity.

The somewhat lower repurchase activity during the first quarter of '05 represents somewhat lower activity versus recent quarters, reflects a more measured approach to repurchase as we work through the final capital implications associated with the spinoff of the AEFA.

Strong revenue growth in the first quarter was driven by a 15% increase in worldwide billed business; a 10% increase in proprietary spending basic card; a 7% increase in cards in force; 3% growth in worldwide managed lending balances, or 7% when you adjust for last quarter's equipment leasing portfolio sale; and a 7% increase in in assets owned, managed and administered at AEFA.

Consolidated expenses were up 9%, primarily reflecting higher business-building expenditures, human resource costs and interest expense.

Provision expense increased on growth in our charged and owned lending portfolios and higher provisions at AEFA.

Our decision to expense stock options beginning in the first quarter of 2003 continued to negatively affect the human resource expense comparison, as the impact of the annual option grant expense increased levels of restrictive stock awards, and other compensation changes are reflected in the 12% increased versus last year.

This increase also reflects advisor-related spinoff costs, Threadneedle incentive-based costs and costs related to the continued re-engineering of your travel business and last year's DAC benefit at AEFA.

Importantly, the underlying human resource costs and related employee count continue to be very well-controlled.

On the re-engineering front, we are well underway to achieve the $1 billion in benefits that we target for 2005.

And lastly, the consolidated tax rate for the quarter was flat compared to last year.

With that, let me now turn to the business unit results, and I'll start first of all with TRS.

Overall, the quarter reflected strong financial performance with excellent metrics, driven by strength through throughout our proprietary card and network businesses.

Managed revenues increased 9% and net income rose by 20%.

The benefits of our investment spending over the past two years continue to be evident in our card-related metrics, which are strong both on an absolute basis and versus the competition.

Spending for proprietary basic cards in force grew 10% on a worldwide basis, showing the success of our loyalty-related initiatives and merchant coverage expansion activities.

Worldwide business was very strong during the quarter, increasing 15%.

In our US proprietary business, consumer spending grew 13%, small-business spending rose 17% and corporate services volume improved by 7%, despite continued pressure created by airline pricing declines.

In the US, non T&E-related spending rose 8%.

US airline-related volume increased 3%, as 15% transaction volume growth was suppressed by a 10% lower average airline charge.

Outside the US, reported billed business was up 18%, which equated to 14% growth on a foreign-exchange-adjusted basis, reflecting 11% growth within the consumer and small-business segments as well as the corporate segment.

Global network services volumes rose in excess of 35% on continued strong growth in non-US partner volume, as well as the addition of MBNA-related volumes in the US.

Last week's announcement that we will team with UBS and Juniper Bank to offer an American Express network card to UBS's wealth management clients provides additional volume potential later this year.

Worldwide cards in force grew 7%, as we added approximately 700,000 net new cards during the quarter and 4.5 million cards over last year.

Continued successful card acquisition activities and improved card member retention levels within our proprietary issuing business, as well as strong growth in the network cards worldwide, combined to drive this growth.

Our discount rate of 2.56% rose by 2 basis points versus the fourth quarter of 2004 on seasonal shifts in the spending mix, but consistent with strong retail and everyday spend growth, it declined 3 basis points versus last year.

Over the last decade, our average discount rate has declined modestly, largely due to the success of our strategy to evolve our spend mix towards non-T&E categories.

However, during this period, our industry-related merchant pricing has held relatively steady, reflecting our strong merchant relationships.

Additionally, over the last year or so, we have signed long-term contracts with a number of our largest merchants, many of which extend beyond this decade, demonstrating the benefits they received from our card members and partnership.

Worldwide managed lending balances grew 3% year over year, or 7% excluding the impact of the sale of our leasing business in the fourth quarter of last year.

This improvement came despite an industry environment that continues to generate low-single-digit organic receivables growth.

In addition, the net yield on the portfolio increased versus last year and versus last quarter.

Coupled with our strong credit performance, this has resulted in an improvement in our risk-adjusted margin that compares very favorably to industry trends.

Travel revenues increased slightly as transaction levels grew modestly, and we continued to see online bookings growth outpace counselor-assisted activities.

While these online bookings generate a lower level of revenue per transaction, the ultimate cost of these transactions is also lower.

On the expense side, marketing, promotion, rewards and card member services expenses increased 29%, due to particularly high marketing and promotion expense increases and a lesser increase in rewards-related costs.

Total managed provision for losses declined 6%, as charge card and lending credit quality as well as reserve coverage ratios remained strong.

Human resource expense rose 7%, due to the greater management incentive expenses, larger employee benefit costs and merit increases.

Total other operating expenses decreased 6%, primarily reflecting benefits from the sale in the third quarter of 2004 of the ATM business, as well as a positive change in reserves resulting from various control improvements and reduce printing and supplies expenses.

And lastly, the effective tax rate of 32% was flat versus last year.

I will now turn to American Express Financial Advisors, where net income increased 5% but decreased 27% before last year's accounting change.

The decrease before last year's accounting change reflects the $43 million after-tax above-the-line DAC valuation benefit that was associated with the accounting change.

Assets owned, managed and administered rose 7%, reflecting market appreciation, favorable foreign currency translation impacts and asset inflows versus last year.

Despite a relatively lackluster market environment, total cash sales increased 5% on strength in the sales of nonproprietary mutual funds, investment certificates, insurance products and institutional activities.

Revenues increased 8% on increased net investment income, greater investment management and service fees, larger insurance-related revenues, higher fees earned on nonproprietary funds and growth in financial planning and advice service fees.

The provision for losses and benefits increased 10% on higher in-force levels, particularly within certificate products and generally higher interest crediting rates.

Human resource expense increased 8% on the inclusion of the spinoff-related costs mentioned earlier, as well as higher asset levels and the growth in the advisor force.

The advisor base rose 2% versus last year and held steady versus the December 2004 level, despite typical seasonal pressures in the first quarter, as well as the expected initial spinoff-related distractions that typically accompany an announcement of this kind.

Veteran advisor retention rates remained very strong.

Non-field human resource costs increased 22%, reflecting performance-related incentives at Threadneedle, higher benefits and management incentive costs, as well as merit increases.

The average number of non-field employees was relatively unchanged versus last year.

Other operating expense growth reflects increased marketing costs, higher expenses related to securities, industry regulatory matters and spinoff-related costs.

The effective tax rate was 29% versus 28% last year.

Before discussing the bank's results, I would like to spend a few minutes on the AEFA spinoff.

I know that you have many questions about the ultimate costs and capital implications of this transaction.

While we are not yet in a position to provide you with this information, we should soon be able to fill in many of the details.

The planned filing of our Form 10 in June will provide you with a better understanding of the transition costs, ongoing expense implications of separating the two companies and the capital strategy for AEFA.

It will also give you a pro forma segment breakout of AEFA's results that should further enhance your understanding of the business.

In conjunction with the filing, we will also hold a conference call to provide you with the opportunity to ask questions and to facilitate your analysis of the transaction.

There are significant efforts underway throughout the Company to coordinate and execute all of the initiatives that will be required to complete this transaction -- including, among other things, de-linking integrated technology and corporate staff-related activities -- in establishing a new brand for AEFA.

In the quarter, as a result of these initiatives, we incurred an initial $22 million of pre-tax spinoff-related expenses, the majority of which reflect expenses designed to recognize and reward advisors for their ongoing contributions to AEFA's success.

Cumulatively and over time, these expenses will be significant, and we plan to disclose them as part of our quarterly results as we go throughout the year.

Lastly, we continued to strive to complete the spinoff towards the end of the third quarter.

However, as you know, the timing of certain key tasks, such as the SEC approval of Form 10, are not fully within our control.

At American Express Bank, net income of $30 million decreased 1% versus the first quarter of 2004, as pressures from rising interest rates were offset by continued growth in private banking and in the Financial Institutions Group-related activities, last year's re-engineering costs and a lower tax rate.

The bank's results reflect a 9% increase in total loans outstanding to 7 billion, driven by growth in private banking, the Financial Institutions Group and consumer loan portfolios.

Finally, results also benefited from a provision decline of 19% versus last year.

With that, now let me summarize with a few comments before we take questions.

We delivered record earnings for the quarter, while continuing to invest in the business and maintaining substantial balance sheet strength.

Our results again illustrate the healthy momentum in our card business, where our competitive position has strengthened, as shown by our gains in the share of industry spending and lending activities over the last two years.

Based on the reported data from our major competitors to date, it appears that these gains continued through the first quarter.

To ensure that we are positioned to invest aggressively for the future, and to leverage fully the many growth opportunities we see in the payments arena, we continue to work to re-engineer the business and to control underlying operating expense growth.

Our pipeline of marketing, product and the service-related initiatives is particularly strong today, with investment opportunities that we expect will generate a number of new and enhanced capabilities for our card customers, merchant partners and network issuers.

In fact, over the next year, you'll see a portion of this pipeline as we introduce a number of new products, reward program enhancements and service enhancements that will further position American Express as an industry innovator and leader.

We believe that the breadth of these activities is excellent, and that they will enable us to leverage our considerable ability to understand our card and merchant customer behavior and needs, segment these customer bases appropriately and provide them with value-added offers, benefits and services.

Our recent business success, coupled with our strong track record of innovation, product development and superior marketing, make us confident that these investments will continue to drive growth into the future.

Thank you very much for listening.

We are now in a position, I think, to take your questions.

(OPERATOR INSTRUCTIONS).

Michael Cohen, Susquehanna.

I was wondering if you could talk about GNS partnerships in the US, and sort of where you think you are today, relative to where you thought you would be.

Obviously, you signed two very large and very significant issuers.

At what point do you think that number is going to grow significantly from the two that you have signed up to date?

Well, we actually have signed three.

There was this deal that we just recently signed with UBS for their wealth management portfolio.

Honestly, if I were to think back maybe 14 months ago, we are considerably further along than I would have imagined that we would have been at this point, given that we have had these two very significant signings which we have great expectations for, for the future.

I think what you will probably see is over time, like almost anything else, there is kind of an early adopter curve.

There are some people that come in early.

Those people tend to take a few more risks.

Others, who then take a wait-and-see attitude, see how things perform and then join in a little bit later.

So we have every expectation that we are going to continue to see additional signings as we go through this year and into next year.

But my guess is we don't want too many elephants as part of this party, either, and we have got a lot to do with the two very large ones that we have onboard now.

And just sort of an update as to where Citi and MBNA are in sort of their development, and maybe when you're going to start to disclose stand-alone numbers, whether it's volume or units of cards?

Well, we did disclose that our build volume was up 35%.

Now, that's for the total GNS business.

I doubt we will ever go to the point where we actually describe discrete customers and what discrete customers are doing.

But I think they are both basically where we expected them to be.

Although it's difficult for me to speak for MBNA, as I understand it, they have a very attractive staggered program of offers that they are going to be presenting to the market, starting with last year and will be rolling out through this year, that includes both product variations as well as different affinity groups that will be kind of part of their overall marketing program.

And I think, as we said with Citi, we anticipate that they will be issuing before the end of this year.

And I don't think anything has changed basically with that timeline.

And we think that UBS will issue sometime during this year, as well.

Bruce Harting, Lehman Brothers.

Just reading through some of the recent press on Delta, Gary, that things to seem to have gotten worse again due to fuel costs, et cetera -- can you just do a summary review of some of the issues outstanding with them, and protections you have in place?

I know that there's a graded scale I think you use, in terms of protections, as companies' credit ratings decline and things like that.

Maybe you can just summarize those?

Let me talk about airlines in general, and then I will specifically come to Delta.

What you said at the end is exactly correct.

I think we have probably as good an insight into the risks associated with individual airlines as any company in the world, because of the volume that passes through on the American Express card.

And we monitor that activity very carefully, and as we see -- if an airline starts to have an issue of some sort, then our contract generally -- not in every case, but generally allows us to lengthen the number of days before we pay them, so that we work ourselves into a position when an airline really does have difficulty that we don't have a particularly large exposure.

So historically, we have never experienced a loss from an airline, because we have that kind of insight into their performance.

As you might guess, when we entered into this arrangement with Delta, we ran a wide range of scenarios for what the outcome could be.

And I think we are pretty confident that, given the way the relationship is established, that we are comfortable.

First of all, we have every hope and expectation they are going to continue to fly successfully, and I don't think there's any reason to conclude anything different than that, as we sit here today.

Should that not be the case, in almost every case historically when an airline -- well, in every case, when an airline has gone through bankruptcy in the past, if the airline did not liquidate, then we were reinstated as a creditor right after the bankruptcy actually took place, and so it didn't become an issue for us.

In addition to that, because of our particular relationship with Delta and the prefunding -- so to speak -- of points that we have done, we have other collateral that basically support the position that we have.

And we are very comfortable with both the magnitude and liquidity characteristics of the collateral that we have in this particular situation.

So I think, obviously, they are a very important strategic partner of ours.

We hope that they are going to be very successful, and that fuel prices are going to be at a level that make it comfortable for them to go through this period.

But, should that not be the case, I think the way our relationship is set up with them, that we should be fine.

Matthew Vetto, Smith Barney.

A couple of questions about AEFA.

One, you alluded to some advisor-related spinoff costs.

Are those essentially retention bonuses to keep top producers?

Or any prospective you can add on that?

And then, secondly, one of the nonrecurring items, I guess, you alluded to some securities industry regulatory matters.

Any other light you can shed on the nature of that?

What is going on there, and will there be further such charges?

I'd be happy to talk about both.

As you might guess, any time you go through something like this spinoff, it does create uncertainty.

And we wanted to make sure that the advisors were focused on doing what they do best, which is advising clients, and not worrying about how the spinoff potentially could have an impact on their income levels.

And so what you're seeing in this payout is essentially an incentive for the advisors to stay focused on doing the business that they are doing today.

And that's something that is going to be paid as we go through this year and actually goes into next year, as well -- in the early part of next year, until the spinoff is complete and AEFA is operating as an independent company.

Is that fairly broad-based in nature, or does it target sort of top producers?

Well, it covers the vast bulk of what our production is.

So it doesn't cover the bulk of the headcount, but it does cover the bulk of the production.

And then, on the regulatory front, there is nothing -- there is no new item here, in terms of things that you are not already aware of.

So it's the issues that we have had, along with others in the industry now for some time period, that you are very familiar with.

As we get closer to understanding exactly what our true liability here might be, then we obviously have to book to that true liability, and that is what you're seeing in the quarter.

We did this $35 million charge in this quarter, and I think we also disclosed that we took a charge -- I believe it was $17 million -- in the first quarter of last year.

And as these discussions evolve, we book to what we think our eventual liabilities will be.

At this point, it is virtually impossible to say exactly how that all works out and plays out.

But for this moment in time, at least, we book to what we expect the future liability of the currently understood issues is.

Meredith Whitney, CIBC World Markets.

I have a couple of questions.

My first question is related to the account growth, which actually declined on a year-over-year basis or, rather, decelerated on a year-over-year basis.

You guys are putting a lot of money into marketing, and I wanted to -- if you could explain, sort of, is it a question of the marketing dollars are harder to attract accounts, or are the rewards payments going up?

Or could you provide some clarity on that, please?

Yes, be happy to.

I guess there are a couple of ways to think about it.

First of all, the first quarter last year was an unusually large quarter for us, if you just kind of take the series increase.

And then, obviously, the fourth quarter benefited from the initial push that MBNA did with their potential customers.

And we internally have a pattern of doing different kinds of marketing things at different times, not surprisingly.

So, undoubtedly, during the course of the first quarter, you saw a lot of My Life, My Card advertising.

If you didn't, then you were not around a television set, because there was an awful lot of it that happened.

And we do different things at different times, so sometimes we might have our foot very heavy on the acquisition pedal, and other times we might have it heavier on the brand advertising pedal.

And we do those at different times, in ways to try and maximize the total benefit that we are going to get from the acquisition that we do during the course of the year.

And so the spending in the first quarter was particularly oriented towards the brand advertising, as you no doubt saw, and there will be other times where our focus will be heavier on acquisition in a particular quarter than it might have been during the first quarter of this year.

The one thing that I think is interesting about this quarter is that it was a good example of the fungibility between rewards expense and marketing expense.

Here in this particular quarter, the rewards expense was not up as much as the marketing expense, which is kind of a reversal of the pattern that we have had over the last three or four quarters, where we have really increased a lot on the rewards side.

And again, as we test various approaches, various marketing ideas, we push on different levers at different times.

And in aggregate, we think about that as a common pool -- what we do with rewards, what we do with marketing.

And the marketing is subdivided into various categories; it's the brand marketing, there's product marketing, there's acquisition spending and so on, all of those subcategories.

And at any one point in time, we might be emphasizing one piece of that more than another.

Well, just to follow up on that, and let me ask one last question -- I defininitely caught Laird Hamilton, by the way.

No missing that.

But if I wanted to look at the account growth, to track the success of the new distribution channel and partnership, and then I see that the account growth decelerated, but you have more momentum behind an MBNA, a Lloyd's, a UBS, et cetera -- am I mistaken, then, to look at that number?

I think probably the best thing for me to say is that we are pretty confident about what the account growth is going to be this year.

We think it's going to be very solid.

So the first quarter was 7%, and I think we are pretty confident that we are going to see good growth during the course of 2005.

Okay, and then, just a last question is originally, when you discussed the spinoff you had talked about 30% ROE for TRS.

Yes, well, 28 to 30, right.

Okay.

It continues to just skyrocket higher now, at almost 34%.

Are you still talking about the 30% TRS?

What would happen to make that ROE, then, decline to a 30% level?

Well, there's a couple of issues.

One is that doesn't include the corporate segment expense.

So if you take the corporate segment expense and add it in, as well as the bank, then it comes down lower than the 34, obviously -- but I think probably still, at this moment in time, close to the 30%, close to the high end of that range.

What we've tried to do is give a number that we are very confident that on average and over time can truly be our target.

And as with the previous target that we had, the 18% to 20%, a good portion of the time we were above that; however, in 2001 we were below it.

And we just want to make sure that the guidance that we are giving is very authentic, then it really is on average and over time.

And that's our expectation.

So it also triangulates nicely.

If you think about a revenue growth rate of 8%, kind of a 65% payout of our free cash flow, and think about what the sustainable growth rate is, a 28% to 30% return on capital is pretty consistent with that whole view of the world.

So I think we're comfortable where the range is now, but I hope that someday you might be right.

But for now, we are pretty comfortable with where the range is.

David Hochstim, Bear Stearns.

Recognizing that you don't want to provide anything specific about spinoff-related expenses, could you maybe give us some sense of what the cumulative significance costs would be, and if the 22 million is a reasonable run rate for the next quarter or two?

No, I wouldn't think of that as a reasonable run rate.

I'll tell you what the big pieces are.

The big pieces are the incentive associated with the spinoff, and there's a management component to that, as well as an advisor component to that, and that's one piece.

Secondly, there's a marketing component.

And there's both the marketing materials that are required to rebrand AEFA.

It literally is the brochures, the signs, things like that, along with kind of a new brand positioning for American Express Financial Advisors.

And then the other large piece is technology costs; there's a cost associated with separating the technology of the two companies.

We do run a common data center.

We obviously run, in many ways, common financial systems, that kind of thing, and those have to be split off.

Those are the big three components, and then there's a series of smaller things.

So they have to re-establish a finance team; there's some cost associated with that.

We have to right-size our headcount for the new company size.

That's a component of what will go into this charge eventually.

So there are a series of costs like that, which, if you take them all together, I think you would have to count them as significant.

But we'll be extremely clear about it when we actually file the Form 10; we'll talk about exactly what we anticipate these to be, how we are capitalizing AEFA, how we expect these expenses to kind of roll out over the remainder of the year for us.

And obviously we'll have to talk about how they will then impacted AEFA after the separation of the two businesses.

And then, could you just clarify again for us where you stand, in terms of interest hedging or hedging the float on the charge business, and the sequential increase in the net interest yield in the quarter and what was driving that?

I think we said -- I'm going back here a little bit and my memory.

I think we said a couple of quarters ago, maybe three quarters ago, that we were somewhere this year in the 50's range, so 55% hedged on the non-floating piece of what had to be financed and that next year, '06, we were more in the 40% to 45% range.

And that's the last time we've given a disclosure on that.

We always work also to balance the mix of floating versus variable, and at any point in time that changes, as well.

And in rising rates environments, it's obviously positive to have a bigger variable portion than fixed portion, and we've made progress in that regard over the course of the last year.

So we continue to feel pretty good about our ability to manage through a rising rate environment, if you take the forward yield curve as a proxy for what a rising rate environment is going to look like.

The increase in the net yield, actually, we feel terrific about.

There's just been some really good work done by Al and his team.

Balance transfers are down; that's a helpful thing.

The fact that we've sold the leasing business, which was a drag on our return and a drag on our net yield, has been helpful for us.

And then, we generally have been able to move some accounts to a variable pricing basis that were fixed-priced.

And you couple that together with excellent credit performance in the quarter, and you get, really, a very nice improvement in the risk-adjusted return.

So we feel very good about that.

So there has been some good progress made there.

So in terms of hedging the float on the charge business, that hasn't really changed?

Well, no, I wouldn't say that.

Virtually every day, we make different hedging decisions.

What I was saying was kind of where we were three quarters ago.

But the general philosophy that I've talked about before -- and that I know that you are aware of, as well -- is that in periods of rising rate environments we tend to shorten our hedging, shorten the maturities so that the impact on our overall interest expense is less than if you held your maturities constant.

So every day, our treasury team is out making decisions about what they will hedge and what they won't hedge.

But generally, when you're in a rising rate environment and when that curve is steepening, we are shortening the maturities so that you don't have such a large lift as you would if you kept your maturities the same.

And then the opposite thing happens when you are in a reduced rate environment and the yield curve is flatter.

And so we just work through that and make the decisions that we think are appropriate; and that, combined with the strength in the business, allows us to work through situations like the one that we happen to be in right now.

Eric Wasserstrom, UBS Securities.

Would you mind maybe putting a little color around what you're seeing from your corporate clients by segment, in terms of large, middle and small, in terms of charge and borrowing opportunity?

Yes, sure.

The numbers that we disclosed, and then I'll give you a little bit more color beyond that, is that the small-business business was up 17% in the US.

That continues the very robust performance that we have seen there; they really have just done a very nice job.

And we don't see any reason, at least at this moment in time, to think that number is changing.

It has been a very strong performance.

The corporate business overall -- which includes our middle market as well as large corporate -- is up, I believe, 7% in the quarter.

That's in spite of the fact that, frankly, ticket prices were very weak.

And so, even though we had a good increase in transaction volumes, we did not see much help from pricing.

So we kind of had that headwind that hurt us a little bit.

But really, offsetting the 7% growth overall in corporate was the fact that middle market continues to do really well.

As you know, we put a sales force in place in the US.

We added a sales force in Europe.

We are now supplementing that sales force in Europe with some additional people, and we are just very pleased with the way middle market is performing overall.

And that, in some ways, is acting as a bit of a balance for us.

If you look at the corporate business outside the US, it's growing, for example, at 11%.

And part of that is a manifestation of the success of the sales force that we have put on this targeting middle market account.

So with the corporate ex the middle market, would it still have been positive year on year?

The honest answer is I don't know that.

But I would imagine it has to be, because if you take middle market compared to corporate, it's still so small that it would be almost impossible to get to 7 if it weren't positive.

And on the small -- and this is the last item -- what is driving that?

Is it simply off of a small base, or is it sales effort or marketing, or what is the driver there?

No, it's a large base.

As you know, we have the lion's share of that business.

And this really is a manifestation of the success of the open to small-business network activities that were launched three years or so ago now.

And that value proposition really does resonate with small-business owners, and we've continued to improve it.

We've got better rewards programs now.

We have a lot of partners that are participating as part of that program -- small-business participants or small-business owners find to be attractive.

And so, honestly, we think we just have a very strong value proposition there that is doing a good job of driving the business.

Matthew Park, A.G. Edwards.

I just wanted to talk a little bit more conceptually about the merchants, and your reading into what the merchants are feeling about AMEX value proposition, as well as the sort of Visa/MasterCard, and perhaps talk a little bit about what Discover may be doing, in terms of trying to be more merchant-friendly.

In terms of discount rate, obviously you can see the pattern in discount rate.

We really have not had any significant deterioration, from a pricing perspective.

That continues to be true.

And what I said as I went through my comments is also true, that we have been successful now in signing up a large number of our largest merchants with relationships that are multiple years.

And some of those go out into the next decade.

We talked about Costco, we talked about Delta Airlines, for example, as examples of merchant relationships that go out beyond just the decade that we are in.

I think, at the end of the day, that our value proposition is really driven by the averages spend that we have.

And our average spend in this quarter was up now, again, 10%, which obviously is driving our business overall, but continues to reinforce our attractive our customers are to our merchant base.

And it's that value that, more than anything else, allows us to have the premium that we have today overall, versus Visa and MasterCard.

And we feel very confident in our ability to continue with the spend-based model that is going to drive spending like that.

And as we bring partners onto the network, the partners that we bring onto the network bring a targeting that is consistent with what I just talked about for us overall.

So I think it's fair to say that our relationships today with our merchants are really as strong as they have ever been.

We work hard to do marketing efforts with our merchants, to take advantage of the closed-loop network, to provide specific marketing support and capability to them, to allow them to target their customers in unique ways that other credit card companies simply don't have the facility to do, or not to do as well as we do.

And so we feel good about the position that we have generally, overall, with our merchant customers.

Frankly, that is basically our strategy versus Visa and MasterCard, is for us to do what we do best -- drive our value proposition -- and to consistently raise the question, where is the value that Visa and MasterCard provide as they raise price?

And we think that's the right question for a merchant to ask.

And that's a question that we feel very comfortable answering, given that we have not had large increases in our discount rate, and we have had very nice increases in spending from our customers over the last few years.

Honestly, as far as Discover goes, basically their strategy has always been to have the lowest discount rate.

One thing I always think is that if having the lowest discount rate were the key factor in driving success in our industry, then Discover would be by far and away the most successful player.

But I think, by most measures, they are not the leader.

And so we just think it's a continuation of the strategy that they have been on, basically.

I think that your relative value proposition versus Visa and MasterCard has been very strong.

But are you seeing any signs that the merchants are getting, perhaps, a little more negative about the credit cards in general or charge cards?

All I can tell you is what we just said.

We, today, probably are in a position where we have as strong or the strongest relationship with our merchants that we have had.

Particularly with our largest merchants, we have long-term relationships that reinforce the value that they see in the relationship that they have with American Express.

Ed Groshans, Fox-Pitt Kelton.

Someone was talking to me today about American Express Bank, and I don't know -- are you marketing new products out of there on the debit side or credit side?

Well, not on the debit side, but on the credit side we are.

American Express Bank really does operate outside the US, for the most part.

We don't offer a debit product, and really don't have a lot of deposits outside of our private banking business.

We do have deposits in private banking but not a lot outside of private banking.

What we do have is something that we call consumer financial services, CFS.

And they market non-card, unsecured lending products to people around the world.

And that's a business that we have been in and continue to expand.

Now, a big piece of that business was in Hong Kong, and about three years ago, there was a major credit issue broadly in Hong Kong.

And that affected our overall numbers for about two years, but we are over that hump now, have been through that credit cycle in Hong Kong.

And with the kind of passing of that credit cycle, there has been renewed growth within that portfolio.

But in the overall scheme of things it is relatively small compared to the rest of the Company.

Just because someone just told me about opening an account with American Express Bank here in the US.

I didn't know if there were some efforts in that area or not.

We do have a membership banking activity that's part of Centurion Bank -- or I guess it's part of the Federal Savings Bank, American Express Federal Savings Bank -- that is part of American Express Financial Advisors.

So if you went on our website, for example, you could open an account.

I have an account there.

You can open an account with American Express and make deposits there.

Again, it doesn't represent a huge part of our funding strategy.

It's a relatively limited amount of deposits, but they measure in the billions of dollars, and it is a product line that AEFA offers.

And you mentioned the filing with AEFA and the marketing and rebranding.

Has a name been picked yet?

There hasn't been a name picked.

If there had, I think I'd be in trouble if I announced it on this call.

Joseph Dickerson, Atlantic Equities.

Sort of back to airlines again, just on the 10% average lower airline charge -- is that something you see as ongoing, or is that just a reflection of ticket prices at the airlines?

Every time I think it has kind of bottomed out, it has continued to come down.

It really is a reflection in the short-term of this no Saturday night stay effect.

We saw an immediate effect, literally within a week or so, of that announcement.

The airlines kind of coalesced around that strategy, and you could see average ticket price come down.

And so I think that's something we're going to be living with, at least until we annualize that effect, which is probably now only about a quarter old.

So we probably have another three quarters ahead of us before we will see the year-over-year impact not being as significant.

I don't know, as it goes beyond that, but clearly over time there has been a reduction in airline ticket prices.

And right now, it happens to be particularly severe.

Brad Ball, Prudential.

Real quick, on the spin from a timing standpoint, I think you said that the Form 10 you expected to file in June.

How much time does the SEC need with it, and is there any concern about meeting the September 30th deadline?

Are there other regulatory hurdles to be met?

There are other regulatory hurdles, but none appear to be a binding constraint.

The SEC really has whenever amount of time they deem necessary to review the Form 10.

We've got a couple of months in our mind as being the time period that it would take in order to get that review completed.

And if it is a couple of months, in fact, then we will make the September 30th timeframe.

But we can't control that time period, but that's what's built into our timeline.

If, for whatever reason, it took longer than that, then we wouldn't make the September 30 date and it would spill over into the fourth quarter.

But we have no reason to expect that right now.

Our expectation is what you described.

And what are the other regulatory hurdles?

Are they (multiple speakers)?

There's some insurance -- I'm not the best person in the world, frankly, to answer the question.

But I know there are particularly some insurance regulatory groups that have to approve insurance licenses and things like that, as you make a move like this.

But frankly, I'm just not the right person to ask the question.

And I wanted to follow up on the GNS volume question.

I note the 35% increase, but I'm wondering if you can give us some context.

I think you are 90 partners or something like that in 80 plus countries outside the US, three partners now in the US.

Where are we in terms of the evolution of this business model?

Can you give us a sense as to how much of the 109 billion of billed business is coming from GNS?

Any context you can give us would be helpful.

I think my view is we are at a very early stage of this.

Obviously, the largest component of this is what eventually will happen in the US; there's no doubt about it, that if Citi and MBNA are successful in hitting the objectives that we understand that they have with this business, that that will drive a pretty significant lift in this over time.

Now, when we released the 10-K, we said that the total billings in 2004 were $18 billion.

So that kind of just gives you kind of a starting point.

Obviously, you'd have to split that by quarter and, on that base, figure out kind of what a 35% lift would be, to give you some general parameters for what 35% might actually mean.

But I think you should think about this as we think about it internally, as an early-stage business that has really attractive potential associated with it.

And the potential is particularly attractive from a return-on-capital perspective.

We take a small slice, obviously, of every transaction.

But we hold very little capital against those transactions, and there's a very nice service fee element associated with this, kind of a reoccurring service fee element associated with it.

And so the net of all that, if things play out the way we anticipated in our business plan, will be a positive impact on our return on capital.

And so different parts of our business obviously do different things for us, as we look forward into the future and anticipate how our financial performance will evolve.

And we are particularly looking for this business to help us when we think about leveraging our return on capital.

And just finally, you announced today, I think, a partnership with Lloyd's in the UK.

Can you just tell us what the plan is there?

I think you had indicated that would be your only UK-based issuing partnership?

On the final thing, I'm not sure that that's correct, but this is a normal relationship that we have with Lloyd's, like the other relationships that we have outside the United States.

We anticipate that this will actually launch this quarter.

We have been in discussions with Lloyd's, actually, for quite a while.

And so we are far along the process with them, and I think we're going to be in a position quickly to be able to launch these new cards.

Michael Hodes, Goldman Sachs.

Really, two questions -- first, just on the tax rate in TRS, I thought last quarter you indicated that you had made some adjustments in terms of funding internationally, and that should have a beneficial effect on an ongoing basis.

Maybe you could update us on how you think that might look?

Then, just secondly, regarding the revolving card portion of the business, in the supplement there is a comment about reducing the proportion of teaser rates in the mix.

And maybe I was hoping you could give us a little more specifics around that.

Sure.

You are absolutely right on the TRS tax rate.

This reflects the fact that there are a lot of things that go into the tax rate in any individual quarter, and we are basically flat vis-a-vis last year in the same quarter, and we are actually up versus what we were in the fourth quarter last year, because there are many things that go on just besides, for example, the underlying impact on taxes of a foreign funding strategy.

But, that being said, that foreign funding strategy is having a positive impact on our tax rate.

And if you just kept everything else completely equal, that benefit over time would be seen in the tax rate.

But you're going to see some quarter-to-quarter variability, just related to what happens to be going on at any point in time.

So in this quarter, we had some additional state tax assessments, we had a foreign tax issue that is part of the TRS tax rate.

And those things taken together were enough to offset what would have been the visual impact of the financing strategy.

But that strategy is intact, it is delivering the benefit that we expected, and we hope it will be that way, obviously, going forward.

On the teaser rate question, I think specifically what we are referring to there is the reduction in the whole balance transfer offer area.

If you look year over year in our balance transfers, they are down from prior year.

And that is a business that was particularly unattractive financially for us, so as we have reduced those kinds of offers overall, it has helped our net yield.

Joel Houck, Wachovia.

I kind of wanted to go back to the discount rate, given that Visa and MasterCard are kind of raising rates on their premium products.

That would seem to play into your hands, and I'm wondering if you can elaborate.

Does it help with negotiation with merchants?

Does it help kind of firm up pricing that may have otherwise been under pressure?

And just kind of how you see that playing out.

Well, I think one of the key things here is that, obviously from a merchant perspective, spending is what counts.

And that also, by the way, is a very important factor for our network partners, that although one element of the economics that we have has to do with the discount rate, the other element has to do with the average spend that that same customer will actually spend on that card.

And just to give you a little context for that, think about it in this way -- that there is some differential, obviously, in discount rate between Visa and MasterCard and us.

But there's also average spend differences that are driven by our marketing efforts on our closed-loop networks, the power of the American Express brand, the enhanced reward programs that our network partners offer because of the improved overall economics that they anticipate seeing on the card.

All of those things taken together deliver a higher-spending customer.

And for that additional spending or incremental spending, that's 100%.

So they get 100% of the interchange associated with that additional incremental spending.

And so, it really does make a pretty attractive economic proposition, from a network partner prospective.

As we work with merchants, frankly, the positioning that we always take is that the reason why it is important for them to accept the American Express card is because we bring attractive, high-spending customers to them.

We can prove that objectively, we can prove it against Visa and MasterCard.

We can prove it, if they want to test it, in some locations before they adopt the American Express card.

We have had years and years of experience of demonstrating that on the margin, it makes a lot of sense for a merchant to take American Express where they have not taken it in the past.

And really, nothing has changed about our sales pitch in that regard.

And as I said, we feel very good today about the strength of our relationships with our merchant partners.

Chris Brendler, Legg Mason.

A credit question for you.

I'm so used to fantastic credit performance, I just want to make sure there's nothing unusual -- there probably is something unusual -- in the numbers.

On the worldwide lending, I'm calculating an increase in delinquencies in dollar terms, not just in the percentage rate.

And I was wondering if there was something unusual about either the international mix or the way that you look at these numbers that causes that to increases seasonally in the first quarter, because most other issuers in the credit card business, as of this quarter, are showing pretty significant declines in delinquencies on a dollar basis in the first quarter.

And then, the second part of the question is if you could just address, sort of help to frame your exposure to bankruptcies.

Probably the best way is your percentage of your losses that typically come from bankruptcies, as we head into what is likely to become a bankruptcy bubble over the next couple of quarters.

At least from our perspective, there's nothing unusual about the delinquency number that you talked about.

Typically, because of the spending growth that takes place in the fourth quarter associated with the holiday season, we see an expansion in receivables.

And we typically see, as a result of that, an increase in delinquencies or an increase in credit costs associated with that, as we come into the first and second quarters of the year.

So that pattern for us is actually pretty typical of what we have seen in the past.

On the exposure to bankruptcies, for us this is less of an issue than it might be for some issuers.

Our expectation is that it will have a modest negative impact on us in this year, as people kind of rush a little bit to get in before the law actually takes effect.

And we expect that effect, actually, to be a little larger than the positive impact that we are going to see in future years as a result of the provisions in the law.

So, although there will be an ongoing positive stream associated with it, there's a negative in this year that's probably a little bit bigger than the ongoing annual positive.

But overall, for us, this is a relatively small issue.

As you know, we work hard to target customers that have attractive credit profiles, and so it hasn't been a big issue for us.

Any sense of how to quantify that, in terms of basis points?

We have just never disclosed that information, Chris.

Do your reserve levels at the end of the first quarter anticipate a rise in bankruptcy filings?

Obviously, they do.

When we put together our reserves, we have a quantitative way for thinking about those reserves.

And then we adjust them; we have the ability to do modest adjustments up or down, based on management adjustment.

And when you have an event like that, you can adjust for it.

But it is such a small number in the overall scheme of things, compared to our overall provision, that it really is a rounding error.

One more question, if I could.

The credit card lending environment in the US -- seeing some trouble from some of your competitors.

And I just wanted to see if you could give us a little color on your ability to pull back on teasers without any adverse impact, really, on your balances, your ability to move from fixed to variable rates.

Any insights you might have, as to your experience on how that went relative to your expectations?

And also some of the things that's driving your success on that front?

I think it all, at the end of the day, gets back to the basic spend-driven model, that we have developed a set of incentives to, obviously, influence people to spend more on the American Express card.

And one of the nice things that happens when they do that is that, if they have borrowed what they are comfortable borrowing, they tend to spend more and earn rewards points without increasing their receivables balance.

So the velocity of spending that we have, relative to the receivables space, actually improves over time.

And that has very nice economic outcomes associated with it.

So it improves our return on capital, it binds us to that customer more tightly.

And I think with you're seeing really is a manifestation of the strength of the spend-based model.

So we are really not constrained.

Even though our receivables grew on a comparable basis year over year by 7%, which I think compares very favorably in the industry, we are really not constrained by consumer balance sheets, or by what is happening in the refinancing market, because our focus is on spending.

And, although we are very happy to have that lending business, obviously, it is more of an outgrowth of what our spend-centric model causes our business to do than it is something that we have gone after and targeted and tried to develop in any extensive way.

Thank you, and thank you all for joining us on the call.

This concludes today's American Express first-quarter 2005 earnings conference call.

You may now disconnect.