美國運通 (AXP) 2005 Q2 法說會逐字稿

Good afternoon.

My name is Michael and I will pay your conference facilitator today.

At this time I would like to welcome everyone to the American Express second-quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to our host, Ron Stovall.

Thank you.

Mr. Stovall, you may begin your conference.

Thank you Michael and welcome everyone.

I appreciate all of you joining us for today's discussion.

Before we get started, as you know, it's my duty to remind you that the discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects which are subject to risks and uncertainties and speak only as of today.

The words "believe", "expect", "anticipate", "optimistic", "intend", "plan", "aim", "will", "should", "could", "likely" and similar expressions are intended to identify forward-looking statements.

Factors that could cause the actual results to differ materially from the forward-looking statements, including the Company's financial and other goals, are set forth within today's earnings press release which is 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 second-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 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.

Welcome to you all and thanks for joining with us today.

As you have seen in the earnings documents which were distributed earlier today, our second-quarter results reflected a continuation of the strong business momentum that we have reported over the last two years, the ongoing benefits of our continued high levels of investment spending and the addition of costs related to this planned spin off of AEFA.

During the first half of the year we executed well against our business objectives.

Notably we delivered several new products and product enhancements from our pipeline of opportunities in addition to signing multiple new network partnerships.

We remain very optimistic about the prospects within the payments industry, our ability to cultivate a robust pipeline of growth vehicles for the Company and our ability to leverage our reengineering discipline to enable us to invest aggressively to pursue these opportunities.

Turning to our specific financial results, when compared to last year's results during the second quarter total revenues grew 11%, net income increased 16%, diluted EPS of $0.81 per-share rose 19%, and return on equity was 23%.

The second-quarter results also included a mix of positive and negative items that impacted the P&L.

Fortunately, certain tax and insurance benefits provided the flexibility this quarter to accelerate various reengineering initiatives and investments in the business.

On an after-tax basis the following items impacted results -- a benefit of $90 million resulting from an IRS audit of previous years' tax returns; a $75 million benefit related to the settlement of 9/11 related insurance claims; a $37 million net investment gain at AEFA, primarily resulting from the sale of all of AEFA's investments in a CDO securitization trust; reengineering costs of $66 million, principally related to restructuring activities within the international payments business, corporate travel business, and the financial and technology functions; $38 million of expenses related to the spin off of AEFA; and $23 million of costs associated with securities industry, legal and regulatory matters at AEFA.

During the quarter we returned 53% of total capital generated to our shareholders through dividends and share repurchases.

The somewhat lower repurchase activity during the first two quarters of 2005 versus prior quarters reflects a more measured approach to repurchases in light of the capital implications of the AEFA spin off.

Strong revenue growth in the quarter was driven by an 18% increase in billed business, 13% higher proprietary spending for basic card, an 8% increase in total cards-in-force, 8% growth in managed lending balances or 12% when adjusted for the equipment leasing portfolio that we sold in the fourth quarter of 2004, and a 9% increase in assets owned, managed and administered at AEFA.

Consolidated expenses rose 12%, primarily reflecting higher human resources costs and increased marketing and rewards-related expenses.

Our decision to expense stock options beginning in the first quarter of 2003 continued to negatively affect the human resources expense comparison.

The impact of incremental annual stock option grant expense increased levels of restricted stock awards.

And other compensation changes are reflected in the 15% increase versus last year.

This increase also reflects retention-based spin off costs and severance costs associated with restructuring and reengineering activities.

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

In fact, the total employee count was actually down 3% versus last year.

On the reengineering front, we're well underway to achieve $1 billion of benefits targeted for 2005.

Lastly, the consolidated tax rate for the quarter decreased compared to last year, primarily reflecting the $90 million tax benefit mentioned earlier.

With that, let me now turn to the business unit results.

At TRS the overall quarter reflected a strong financial performance with excellent metrics driven by strength throughout our proprietary card and network businesses.

Managed net revenues increased 11% and net income rose 10%.

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

Spending for proprietary basic cards-in-force grew 13% worldwide, reflecting the success of our loyalty-related initiatives and merchant coverage expansion activities.

Worldwide billed business was very strong during the quarter, increasing 18%.

In our US proprietary business consumer spending grew 16%, small-business spending rose 19%, and corporate services volume improved by 11% despite continued pressure created by airline pricing declines.

In total, US non T&E volumes were grew 19% while T&E related spending rose 11%.

US airline related volume increased 8% as 15% transaction volume growth was suppressed by a 6% lower average airline charge.

Outside the US reported billed business was up 21%, which equated to a 15% growth on an FX adjusted basis, reflecting 13% growth within our consumer and small business activities, as well as 17% growth within corporate services.

Global network services volume rose by more than 35%.

Worldwide cards-in-force grew 8% as we added approximately 1.2 million net new cards during the quarter and 4.8 million cards since last year.

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

During the second quarter of 2005 our average discount rate was 2.54%.

The decrease versus last year and last quarter continues to reflect in part the changing mix of spending between various merchant segments.

Worldwide managed lending balances grew 8% year-over-year or 12% excluding the impact of our leasing business sale.

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

The net portfolio yield held fairly steady versus last year and last quarter.

Coupled with our strong credit performance this has resulted in a risk-adjusted margin that compares favorably to the industry.

Travel revenues increased 7%, driven by higher transaction volumes.

On the expense side, marketing, promotion, rewards and card member services expenses increased 18% due to both higher marketing and promotion expenses and an increase in rewards-related costs.

Human resources expense rose 13% due to severance costs, larger management incentive expenses, including an additional year of incremental stock-based compensation expenses, merit increases and higher employee benefit costs.

Charge card interest expense increased 20% versus last year, driven by a greater average receivable balance and higher funding costs.

We continue to feel comfortable with our ability to manage through the current rising rate environment based on our success with migrating a larger portion of receivables to variable pricing and our effective overall hedging strategies which should continue to provide a reasonable amount of protection from rising rates over the next few years.

The total managed provision for losses increased 7% as increases in the charge card and other provisions were offset by a lower lending provision.

Credit quality, as well as reserve coverage ratios within both the lending and charge portfolios, remained strong.

Total other operating expenses increased 6%, reflecting higher professional services and occupancy and equipment costs.

Lastly, the effective tax rate of 31% declined slightly versus last year and last quarter.

At American Express Financial Advisers net income decreased 19%.

Net income for the second quarter included the following after-tax items -- $35 million of spin-related expenses; $37 million of net investment gains; $23 million of expenses related to securities, industry, legal and regulatory matters.

Total assets owned, managed and administered rose 9%, reflecting market appreciation, a favorable foreign currency translation impact, and net asset inflows.

Despite a relatively lackluster market environment, total cash sales increased 12% on strength in sales of nonproprietary mutual funds and proprietary annuities and investment certificates.

Revenues increased 10% on increased distribution fees, greater investment management and service fees, higher net investment income, larger insurance-related revenue, and higher other revenues, primarily driven by growth in financial planning and advice service fees.

The provision for losses and benefits increased 12%, driven primarily by higher interest crediting rates on greater average certificate reserves.

Field human resource expense increased 18% on the inclusion of approximately $23 million of spin-off related costs, improved adviser productivity and growth in the adviser force versus last year.

The total adviser base increased 2% versus last year but decreased by 2% versus March 2005, primarily due to lower employee adviser appointments in the quarter.

Importantly, veteran adviser retention rates remain strong and the adviser productivity improved.

Non-field human resource costs increased 33% reflecting higher management incentives, primarily at Threadneedle; $11 million of spin off related expenses, merit increases, severance costs and greater benefit costs.

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

Other operating expense growth of 24% reflects $20 million of spin costs and higher expenses related to securities, industry, legal and regulatory matters.

The effective tax rate declined to 21% from 34% last year, mostly due to the lower levels of pre-tax income compared to taxed advantage items during this quarter, and a $16 million additional tax expense in last year's quarter.

With regard to the status of our spin off activities, earlier today we filed our first amended Form 10, which reflects responses to the initial SEC comment letter.

The form 10 provides substantial detail on the business and pro forma segments of the new company post spin off, which will be known as Ameriprise Financial as of August 1st.

Based on the timing of this amended filing, we believe we're on track to complete the spin off late in the third quarter.

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

At American Express Bank pre-tax income increased 7% as higher net revenues and a lower provision expense were partially offset by higher human resources costs.

Net income more than doubled due to the inclusion of a $34 million after-tax benefit related to the previously mentioned tax audit and recovery of 9/11 insurance claims.

So with that, let me conclude with a few final comments.

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

Our results again illustrate healthy momentum in our card business where our competitive position continues to strengthen as evidenced by the relatively wide gap between industry growth rates and our spending and lending growth rates.

We continue to deliver against our business objectives and the pipeline of growth opportunities that we have identified.

Importantly, we also continue to focus on leveraging our market segmentation abilities to provide highly relevant and targeted offerings coupled with incentives that drive in our customers to expand their breadth of spending on the American Express network supporting the premium value that we deliver to both our merchant and card customers.

Overall we're very optimistic about the growth prospects that exist within the payments industry and our ability to leverage our closed loop network and our superior marketing capabilities to continue to capture cash and check spending on our card products.

To ensure that we're positioned to invest aggressively for the future and to capitalize on the growth opportunities we see, we continue to reengineer the business and to control underlying operating expense growth.

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

Thank you very much for listening.

We are now ready to take your questions.

(OPERATOR INSTRUCTIONS) Michael Hodes, Goldman Sachs.

Good afternoon.

My question is really on the growth in the worldwide lending balances.

It strikes me that American Express is enjoying I think the fastest growth rate in the industry in terms of receivables.

I was hoping you could drill down a little bit more in terms of what is underneath the acceleration.

It seems like you're also flagging a decline in intro rates as something that's been helping the yield so maybe you could help flesh it out a little bit more for us.

There are two or three things going on.

One is obviously their billed business has been very strong, and that's the primary driver that we see happening.

We also have had a tempering in the reduction in pay down rates.

Pay down rates have kind of been decreasing as we've gone through the last year or so.

And we've seen some of that pay down rate reduction level off as we came into this quarter.

Third, outside the US, we continue to focus on growing our lending business.

If you look at the penetration of lending relative to charge, outside the US the opportunities there are really quite significant.

And Ed and his team have a lot of focus on that business right now.

And generally, when you put those pieces together, you come up with a very strong performance from a receivables perspective.

As you know, we don't necessarily focus on growing that business, per se, but we focus on growing our spending and this happens somewhat as a byproduct.

It's been very successful for us.

Just quickly on AEFA, our life insurance analyst, Joan Zief, wanted to ask a question.

The one question I wanted to ask is if you look at the results of this division, stripping out the investment gains and the separation costs of these spin off expenses, it still looks like margins are under a little bit of pressure.

So I was just wondering what is the key reason for that and if these issues are short-lived.

There's probably two things that do that.

One is there is some natural -- as AEFA builds its headquarters team, and as we reduce the headquarters team here in New York, there is some natural trade-off.

And we can't deconstruct the corporate team that has been basically supporting AEFA as quickly as it's important for us to build the team at AEFA in Minneapolis to support that business on an ongoing basis.

So what you see here is a bit of a trade between expense in New York and expense in Minneapolis and the early build of that expense in anticipation of AEFA being an independent company.

The whole transition will take place over the next couple of years, but I think you'll see it in their business most pronounced over the next few quarters most likely.

Secondly, there are, as you know, in a rising interest rate environment certain aspects of their portfolio, the certificate business for example, that does experience some interest rate pressure.

And I think you see some of that interest rate pressure evident in this quarter.

But there's nothing fundamental about the trends in the business that are different from what the trends have been over the last few quarters.

I think it's all quite consistent.

Thank you.

Bob Napoli, Piper Jaffray.

Just wondering if you might elaborate a little bit on the MBNA-Bank of America deal and your thoughts on that relationship and other relationships like that; if you have had any discussions with MBNA subsequent to the announcement of that deal.

We have, Bob.

We continue to work very closely with MBNA.

We had a very successful quarter this last quarter in conjunction with their efforts.

And we feel as though that relationship should continue very much in line with the agreements that we have.

We have no reason to think otherwise.

My assumption is that they're at a very early stage in thinking through what the combined MBNA-Bank of America credit card business is going to be about.

And over time I'm sure we will learn more about that.

Frankly, the way we're proceeding right now is according to the plan that we had initially set up with MBNA.

And we're quite pleased, frankly, with the progress that that business has made together with them.

So over time, I'm sure we will know more about how their relationship together with B of A will evolve, but I think it's just a little too early probably both for them and us to know exactly how that's going to shake out.

Thank you.

Matthew Park, A.G. Edwards.

Two questions on expenses and TRS.

One, what should we think of as the primary driver of marketing promotional expenses now going forward?

I have traditionally modeled one way, and that seems to be undershooting quite a bit each quarter.

And then second, on the charge receivable costs, I think that jumped up a little bit this quarter.

Can you provide some commentary there about how you think about it going forward?

In terms of expenses, obviously we continue to be somewhat opportunistic here.

We saw we have an opportunity with this insurance recovery that we had.

We had this tax benefit that came in the quarter.

And so we have tried to be nimble.

And when we have opportunities to kind of push ahead rapidly, we do that.

We did that in this quarter.

And that historically has paid dividends for us.

It's been the right thing for us to do in terms of the momentum of our business, the profitability and the market share gains that we've been able to have.

If you look at the underlying marketing and rewards growth, we said, I think, in the supplement that marketing was growing faster than rewards in this quarter.

And one of the things we're doing now that is incremental to what we did last year is the spending that we're doing on network brand advertising, the my life, my card campaign.

That essentially is incremental spending that we're doing this year.

We have a great deal of flexibility in terms of how much we spend there and how we spend it over the course of the year.

But that is pretty incremental to what we had done last year.

And I think that's probably why your models may not fully accommodate what we're doing.

But I emphasize that we have a great degree of flexibility in how we spend this marketing expense and will continue to be opportunistic about it as we go down the road.

With regards charge receivables, again the good news is our charge business has been terrific.

Our charge business is very strong.

So if you kind of dissects that in terms of volume growth versus rate growth, there's a big piece of it that is related to volume growth.

And then there has been some rate increase.

In broad terms -- let me just kind of talk a little bit about where we stand with the whole kind of hedging and opportunities that we have -- I think as we said a while back, about 65% of our position in 2005 is hedged.

I'm talking about our fixed rate funding.

About 50% or so is hedged for 2006.

We have pretty good opportunity as funding comes up to reduce the maturities that we have so we can slide back down the yield curve some of so that the implications of higher rates actually don't hit us at the same impact as they would obviously if we took four-year money and renewed it as four-year money.

If we take four-year money and renew it as two-year money generally you can do that less expensively, obviously depending on the shape of the yield curve.

There are some natural hedges that exist within our income statement.

When the business is healthy typically we see interest rates increasing and we see billed business growing, and you see some of that affect taking place now as well.

And so all of those really are levers that we have at our disposal that we work at to try and mitigate rising interest costs.

And I think that is what you'll see us do in the future.

The final aspect -- and this doesn't have anything to do with our charge business, but our lending business -- is Al and his team have really done a terrific job in migrating a larger percentage of our portfolio from fixed rates to variable rates.

If you take the last four quarters, four quarters ago we were running right at about 60% fixed, 40% variable, and that 40% variable is now 55% variable.

We've been able to do that just over the last four quarters.

So we have a very active program underway to try and manage the implications of the rising rates, and feel -- we feel okay about how we're going to be able to work through that over the next few quarters.

Michael Cohen, Susquehanna Financial Group.

I wondered -- and I don't necessarily want to be a pessimist asking this -- at what point do we get some sort of disclosure around which of the cards are proprietary and which are network?

Not to sort of pin down any one partnership, which is obviously what it is right now, but I noticed in some of your other disclosures specific to fee income per card you disclose it as fee income per proprietary card. (multiple speakers) color on that, Gary?

What we have disclosed so far is we have disclosed at the end of last year in the 10-K we gave a pretty good sense of what our balances were that we had outstanding, I think it was $18 billion as we closed the year last year.

We've given good numbers on the growth in balances since then; about 35%, I think, was in this quarter.

And the best way to kind of measure the cards-in-force growth that we've seen from our partners is to go back and trend things over time.

You can go back into last year before we launched the MBNA partnership and get a sense for how those growth rates have turned up, and that's not a bad proxy for what the growth rate has been.

Obviously the growth rate in cards-in-force on the network side has been very high compared to the growth rate that we have had overall, but because it's a much smaller business it doesn't contribute significantly.

I think when it gets to the point that it is significant on its own, it's something that we really will revisit and can talk about disclosing separately.

But this is still an early-stage business that has all the wonderful characteristics of that.

We have very attractive growth rates, but you have a lot of volatilities from quarter-to-quarter.

And we're going to -- until we build up a little bit larger base we think it makes sense to put them together with the numbers that we disclose.

Michael Cohen Great.

Thank you.

Chris Brendler, Legg Mason.

I just want to (indiscernible) a little bit of a question sort of follows up on Tony's (ph) topics, but also steps back a little bit.

If you could, Gary, talk at all about what you have said recently between the mix of charge card and credit card, both in terms of spending and also in terms of account growth, because it seems like we're seeing some nice growth in the charge card business (indiscernible) kind of hard to call it out, but looking at the metrics it looks like the charge card business is seeing somewhat of a bump up in growth, if that's correct.

And then also, if you could sort of address what you're seeing in terms of response rates.

We've seen other issuers report pressure on response rate, yet your account rate growth metrics look fantastic and it doesn't suggest that you're seeing any pressure on those kind of metrics.

If you could just comment on that for me.

One of the things that we think about Chris, as you know is the lines for us blur a bit between charge and lending products because so many of our products that are really lending products still perform as though they were charge products because they have large pay down rates associated with them.

So it is in our mind a little bit of an artificial distinction as we think about charge products and credit products because they average spend on a Delta Sky Miles card, the average spend on many of our co-brand products really do look a lot like the spend that we have on our charge cards.

I think as you all know, our spend on Delta Sky Miles is actually higher than our regular green charge card product.

So we don't think about it in discrete buckets quite the way you might have mentioned, but we do think about it more on a product by product line basis.

That said, if you look at the charge card product line, it has done well.

If you take all of the various levels it has done well.

In particular, the premium end of the charge card product line continues to be the fastest grower.

So the platinum products continue to grow very rapidly and Centurion grows at the fastest rate of all of the various categories of charge that we have.

So we feel good about where charge is.

It certainly has made a significant improvement over the last few years, and this was a good quarter for charge card overall.

Our response rates, like everyone else's in the industry on a direct-mail basis, have gone down.

What we have seen is that a lot of things that we're doing that are not related to direct-mail are paying off for us.

So we've got a fair amount of broadcast advertising going on now.

And if you look the number of new account applications that are coming to us through online, it is very high.

I don't have a good sense for that for competitors in the industry, but pretty clearly we're seeing a real shift in channel that suggests that this online channel for us is very significant.

And we try to do a lot of things that tie in together to make that happen; a lot of the marketing programs that we do try and drive that kind of behavior.

We work in various channels at different times.

We pursue partnerships.

Obviously we announced this new partnership with Jet Blue the other day, which we have high hopes for.

We have new partnerships with NGNS (ph) that have been a factor for us in terms of driving new account growth over the course of the last couple of quarters.

We just signed this deal with Lloyd's in the UK.

And so there's just an awful lot of pieces to this puzzle that enable us to put together this growth.

It's very different from a company that is in a single business with really only one product line.

We've got a lot of different levers that cover different segments -- the consumer segment, small business, large corporate.

We have different geographies.

We have lending products, charge products and different incarnations within each of those categories with lots of different partners that support that.

And that amalgam just gives us a lot of flexibility in growing the business.

Fortunately it is really responding right now.

I have one quick follow-up.

I think you may have already answered it, but one thing that really is surprising is your ability to still garner an annual fee, and actually the average annual fee seems to actually be rising.

At least it has been steady to rising over the last four years despite the mix of cards coming in from MBNA.

And I think if I look at it, industry data suggests that you pretty much dominate the annual fee in terms of what -- cards that are offering annual fee, but a lot of cards don't offer annual fees.

Is that driven by the premium segment for the most part?

Is that offsetting pressure that would come from Blue, for example?

That number is calculated on proprietary cards only, but what you said is generally true.

We have had faster growth in platinum than any of the other categories, and also growth in things like Delta Sky Miles.

And if you look at the growth rates that we have had there a big portion of that comes on cards where people pay a fee.

Customers obviously are doing that because they perceive that there's a value there.

And there's a lot of orchestration behind that value that customers perceive -- the offers that they can receive, the rewards programs that we have, the various incentives that we have for consumers drive that perception of value obviously, and that's what is allowing us to charge that fee.

That same thinking applies to our merchant network.

We have going to have a chance to have Bill Glenn talk at our analyst meeting here in a few days and really go into real detail about our merchant relationships, how strong they are, the way we're thinking about working with our merchants today.

And that is generally a very positive story that goes hand-in-hand with the positive story that we have on the consumer side.

Thanks so much.

David Hochstim, Bear Stearns.

Could you just remind us where you stand in terms of your exposures to Delta aside from just card transactions, but the loan and the accelerated mile purchases, and if there is a bankruptcy what happens?

And then could you just tell us also what's left in CDO equity exposure at AEFA, and then what the industry regulatory and legal matters this quarter were compared to, say, a year ago and last quarter?

Yes, as much as I can.

On the Delta front, our agreement with Delta in aggregate was about $600 million, and the balance that we have with Delta is approximately that amount.

We have the appropriate amount of capital decked against that on the balance sheet.

The collateral that we have against that loan is very attractive.

It's a multiple of that number.

Our expectation is that we would never have to call on that collateral, that hopefully Delta continues to operate successfully and continues to be the outstanding partner they have been.

Should that not be the case and they go through a Chapter 11 process, which of course we have no insight into, but if they go through a Chapter 11 process we anticipate that that will operate very much like all of the other partners that we have had that have gone through a process similar to that.

And our expectation is there's very little exposure to us during that process.

So the roughly $500 million in prepaid points and a $100 million line of credit are basically with Delta today.

We have every expectation we're going to continue on a good partnership with them, whether they go into Chapter 11 or not.

In the very remote event of an eventual chapter 7 scenario we believe that we've got a position there that is well protected, and we monitor that very closely.

In terms of the equity position in the CDOs, honestly off the top of my head I don't know the number.

It's got to be very small.

This was one very small piece that we liquidated out of this quarter.

And so my guess is we did a relatively small new one a few -- maybe two quarters ago where we were picked up some equity.

But the numbers here could be measured in the tens probably.

I don't know them exactly off the top of my head, but measured in the tens.

So we have very little exposure there.

From an industry regulatory standpoint, you know there are always kind of new kind of litigations for us that we have, new regulatory issues that come up.

Basically what we do is at the end of each quarter we sit back and assess what do we expect our future exposure to be to these things, and we make our very best estimate of what we think that is.

And the mix of those things can change from quarter-to-quarter.

So in one quarter you might have more of a regulatory threat where there might be more of a fine issue.

For example, we settled this issue with the state of New Hampshire just a couple of weeks ago.

On the other hand, you might have another quarter where you might have a legal threat of some sort that might be a little higher.

We try to calibrate it as best we can on the best legal advice that we can possibly get to figure out what the appropriate amount is to accrue for any potential future liability that we might have.

And that was true with this quarter as well.

Without going into any details of our legal strategy, that's true for this quarter as well.

So is the full 35 million in reserve or --?

Yes, the full 35 million that we added was essentially a reserve in this quarter.

That doesn't mean that we didn't pay out some things in this quarter as well.

We didn't pay out the New Hampshire dollars this quarter and there may have been some other minor pay outs that I just can't remember off the top of my head that happened during the course of the quarter.

But yes, you should think about that as an addition (multiple speakers) then we had some draw down for the state New Hampshire.

I guess you won't tell us what the reserve level is at the end of June.

No.

Okay.

And then finally, did anything happened yet with the late trading or the market timing on the mutual funds (multiple speakers) still an ongoing investigation?

(multiple speakers) still an ongoing issue.

We continue to cooperate with all of the various groups that are interested in that topic, but it's an ongoing issue.

Okay, thanks.

Ed Groshans, Fox-Pitt.

There's been a lot of talk out there -- interchange fee, pressure there; competition from Visa Signature -- and I guess I want to see -- get your sense of what you're seeing from both the Visa and MasterCard higher end products, what kind of competition and pressure you're getting from that.

Also, I'd like to get your take on the retail lawsuits as to why American Express is excluded from that and I guess your view of why they're also excluded from the UK investigation into interchange fee.

Let me start with the second one first.

We really don't have a monopoly.

We really do have to sell our values story every day, and we do.

And our relative value I think increases all the time.

Our spending has grown very nicely.

Our spending has certainly grown more rapidly than our competition's spending growth rate has been over the last few years.

And so literally every quarter that goes by the values story that we have we think improves with merchants.

And so our belief is the reason why we haven't been named is that we haven't done anything wrong.

We basically have had to sell our values story and merchants accept us because they think it is in their best interest to accept us.

And they accept us at the value we offer to them.

And we have really a very good dialogue that takes place between us and merchants as we arrive at those discount rates on an industry by industry basis.

And as I mentioned, we're going to hear a lot about that from Bill Glenn coming up in this analyst meeting.

I'll also say that Louise Paren (ph) is also going to be part of this analyst meeting.

And she is going to go into real detail around this whole area and provide a lot more clarity than we've been able to do in these brief analyst calls that we have.

In terms of competition on the high end, I think the numbers speak for themselves.

Our numbers are terrific.

There's nobody that's even close to us this quarter.

If you look at the spread in billed business, I think we had a 6 or a 7 point spread between us and the closest competitor around billed business.

If you look at receivables growth, we had one another competitor who was in the same neighborhood that we ran.

But other than, all the competitors were substantially below where we are.

And so we continue to do what we do best -- we focused on the spend-centric model; we drive our business with rewards; we hopefully continue to invest in our future here as we reengineer; and we just continue to work away at basically the same strategy that we've worked on now for a number of years.

So based on that are you're not feeling the pressure?

I mean the retails are out there making some noise about interchange fees and increases that they're seeing from Visa and MasterCard.

Is that part of the story here or not?

I know there's been a lot of comments from The Street regarding pressure on American Express's discount rate.

We always have felt that pressure, and it comes because we're in a position of selling our values story in everyday.

So it is something that we've lived with for many years, and that has not changed.

I think what you're going to hear from Bill Glenn is that our merchant relationships have never been healthier.

We've never had more merchants.

We've never had a position where our largest merchants have had longer arrangements with us than we have today.

If you just look at all of the objective measures of the health of our merchant business, I think you're going to conclude that it's pretty attractive.

Thank you very much Gary.

Joel Houck, Wachovia Securities.

I'm wondering if maybe you could provide an update on where the Citi relationship stands in terms of potential rollouts and where you are with that.

We still expect in the last quarter of this year.

We haven't been any more definitive than that.

We're getting to close to knowing exactly what the launch date is, but we're actually very excited about it and have been working with them on the portfolio of products which they're going to launch.

We think it's a terrific pallet of products and really do look forward to it.

So it still looks like it's a fourth quarter thing.

On a different track, delinquent fees went down and loss rates ticked up a bit.

That might I guess indicate maybe driven by early bankruptcy filings.

Was that the case?

And if so, does the drop in delinquencies portend better charge-off numbers later in the year.

What you said is exactly correct.

We did have higher bankruptcies and it manifested itself in the way that you just saw.

We expect on the full-year basis that we're going to have higher charge-offs in total than we would have this year had the law not happened.

We expect it to cycle through, so we have this blip that we have experienced right now.

The industry at large is going through a period where it is turning down as we speak.

And then prior to the effectiveness of the law, our expectation is we're probably going to see another little uptick and then we will be done for this year.

And then hopefully it nets out over time being beneficial for us.

This is not a huge issue for us as a Company just given the nature of the customer base that we have, but the pattern that I just described I think is the pattern that we expect to see.

Thanks Gary.

Bruce Harting, Lehman Brothers.

Assuming you stay on track of the third quarter, just what would be the logistics in terms of future immediate conference calls and how you'll roll out the information in the next quarter?

And then with regard to reconcile reconciling expense, when you talk about Company's reengineering initiatives continuing to be on track to deliver $1 billion of additional benefits, and the fact that you're funding, as you said, an estimated 875 million in pretax separation costs to be borne on the Ameriprise side, will we see as early as the fourth quarter and certainly into next year a very clean expense line and the separation complete?

Or what can we expect in terms of noise and charges in 3Q, 4Q, and into next year with regard to any residual expenses other than what you point out where you said that the parent expects to incur 70 million of the separation costs; 50 million will be this year and 20 next year?

Thanks.

We expect it to be quite clean.

If we're successful in completing the spin off by the end of the third quarter, then we will have a discontinued operations line that will consolidate all of these expenses into discontinued operations, so you will be able to actually see very cleanly how it splits out.

And going forward that's exactly the way we would monitor it.

The split that you just mentioned is exactly the split that we intended or that we expect to see on the parent company side, still the 50 and 70 -- 50 and 70 in total, but 50 of that happening during the course of this year.

So I think the split will be actually quite clean.

The Form 10 itself, as I mentioned, we filed the first kind of amendment to the Form 10 earlier today.

We will see what the response is from the SEC to that.

And hopefully we can stay on the timeline that we have been on.

If that timeline plays out in the way we would hope, then some time in the later part of August we would probably be in a position to begin talking to our Board about actually declaring the dividend.

They will declare the dividend at some point.

When the dividend gets declared then at some point after that we're in a position where the as-traded trading of Ameriprise would actually begin.

I assume during that same time period we will also be engaged in a road show.

I should say Jim and Walter and their team will be engaged in a road show to go out and educate people more broadly about Ameriprise as an organization.

And then it would begin trading obviously around that September 30th date.

So that's how we would hope that that whole thing would play out.

But I expect that you will get a very clean view of American Express beginning with the third quarter, assuming that AEFA is spun off on September 30th.

The discontinued operations will drop out, and what you'll see is just American Express as it stands today without AEFA.

Thank you.

Eric Wasserstrom, UBS.

Two quick questions please Gary.

The first is just to get back to some of the non-US receivable growth, is any of that being driven by 0% teaser pricing?

Honestly, I don't know the answer to that.

As you know, one of the things that we generally have tried to do is to stay away from 0% offers because that's not what we lead with.

That's not our strength.

There is some of that that we do, and we do it and test it from time to time in conjunction with other things that we do.

But I'm afraid I just don't know.

The strategy that we follow outside the US is exactly the same one that we follow in the US, which is we seek after customers that are going to be high spending and make very attractive rates available to them because we anticipate that the velocity on their cards are going to be very high.

So if you actually look at the spend to lend ratio in the international business over the course of the last three quarters, it has appreciated very nicely as Ed has continued to focus on attracting high spending card members whose receivable growth does not keep pace with spending growth.

And that has this really positive dynamic in terms of driving our return on equity, which then has a real positive cash flow dynamic associated with it.

And that's fueling a lot of our ability to do the share repurchases and to have good dividend growth.

And so that whole strategy of faster billings growth and receivables growth is in place outside the US, but it's really a strategy that says I'm going to focus on the very best customers in the marketplace, try and provide them attractive lines of credit with attractive interest rates, but where I believe we're going to have really attractive spending levels.

And that in combination really fuels the business model.

Thanks.

Just very quickly, can you just remind me what your policy is about recognizing bankruptcy?

We do them immediately.

Okay, so they flow immediately to charge-off?

Right.

Okay great.

Thanks very much.

Meredith Whitney, CIBC World Markets.

Gary, I'm asking this question to you because you're in charge of this unit.

I think most of the people on the call understand how you generate a new card account member, but what we are unclear about, or at least I am, is how you generate a new G&S (ph) partner.

I want to focus specifically on US bank partners.

And when you go to make a new partnership and you face the resistance in terms of a bank thinking that you are a competitor, how do you get over that barrier?

We have relationships with banks in various fields where we both compete and cooperate.

I think that's generally true.

Even, for example, in our travelers checks business many people sell travelers checks that are part of our overall portfolio, and obviously aid in our profitability.

But I think the argument that you can make to a bank partner is actually very strong.

It really wrests on three core elements.

One is the interchange difference that exists between us and the Visa and MasterCard associations; second, what we believe is a substantial opportunity to have higher spending.

And remember every dollar of incremental spend that that bank is able to generate on that card comes through at the full amount of the interchange, for lack of a better word, interchange to the bank.

Because that's a dollar of spend that they did not have before.

When you look at the level of spending that we're producing on this network, the level spending is just higher than it is for Visa and MasterCard.

And then third, we're getting increasingly sophisticated in our ability to use the close looped network to drive customer spending to both -- to offer offerings that are attractive to our customers and also to our merchants.

And those things in combination really make, I think, a very strong and compelling business argument for our bank partners.

And that's basically the story that we tell.

And we do the best thing -- the best job we can highlighting the value at the American Express umbrella brand brings to an association with us.

And we find that most people understand how those works.

They understand that in some fields of endeavor you're going to compete; in other fields of endeavor you're going to cooperate.

But on balance this is an area where it can be a win-win for all the parties that are involved.

Then just follow up on that, are you suggesting that you're finding great receptivity and that we should expect some new partnerships within the next 6, 12, 18 months?

And where are you and how much time do you spend on cultivating those partnership?

I think we've found terrific receptivity so far.

If you look at the fact that we've signed up MBNA, we've signed up Citi, we signed up as FSAA; if you look at those as major partners, the deal that we have with UBS, that's within -- I think in total here -- let me just get the months right -- it's about 18 months.

So within 18 months, if you take the proportion of the credit card industry that those companies represent in the United States, it's not a trivial percentage of the entire industry in the US.

Now there are lots of other potential partners that we have out there, and lots of discussions that we have underway with those partners.

But this is kind of an early adopter kind of market like anything else, and our expectation is that over time we will continue to be able to grow that base of people that want to issue the American Express card.

So there's lots of very positive things happening right now, but it's also -- it's a combination of executing on the deals that we've already signed, as well as working with potential new partners as they contemplate issuing on the American Express network.

So on the one hand, one can say you've only signed four major partners.

On the other hand, you could say you have signed four major partners.

And we tend to think about it in the second category rather than the first.

Good for you.

Thanks so much.

Laura Kaster, Sandler O'Neill.

I was just wondering if you could give us an update on how you see debit cards taking market share from credit cards versus cash and checks.

We've been fortunate over the last couple of quarters, at least within the time period here that we can get the information -- it doesn't come -- it's not contemporaneous.

There's always lags by a couple of quarters -- of actually gaining share even when debit is included in the mix.

But overall debit is gaining market share relative to credit cards.

It just doesn't happen to be gaining share relative to us right now.

We're gaining share relative to debit.

But our expectation is that cash and check is still going to decline over time and that credit cards and debit cards will take share from cash and check.

The good thing is that most of the consumer spending in the US is still on cash and check.

You still have trillions of dollars of consumer spending that's on cash and check that is available out there for us to penetrate.

And that's the entire focus of our strategy, is to focus on those relatively unpenetrated segments.

If you kind of tick those through, you've got a lot of reoccurrence billing that is today still done, paid for by check.

I'm talking about cellphones, telephone, plug utility type payments; you have got healthcare spending; you've got things like easy pass, a lot of categories where the spending today is still primarily either cash or check.

And it makes a lot of sense for people to put that on plastic.

Debit and credit are likely to gain share against that.

Over the last little while we've been gaining share at both debit's expense and at cash and check's expense.

Great, thank you.

Howard Mason, Sanford Bernstein.

Two quick points.

The first is I wonder if you could just talk about how the cross currency (indiscernible) bankruptcy and delinquency trends affect your reserve policy.

I noticed the reserve ratio, reserves to worldwide managed card loans, dipped a little bit in the quarter.

And then secondly, just whether you could confirm where you booked the insurance recovery.

I'm assuming it was (indiscernible) revenue, but just wanted to confirm that.

It was against other operating expenses as a contra expense item on the AEFA income statement I believe.

We'll just confirm that, but I am pretty sure that's where we put it.

In terms of the bankruptcy, we take the bankruptcy charge immediately when it happens.

That has a benefit for us if someone is delinquent obviously and going bankruptcy that reduces your delinquency and has the immediate impact of doing that.

Not everyone who goes into bankruptcy is delinquent though so you have to kind of look at the mix, how that mix actually works out to see if it's a positive or a negative benefit.

How do you think these trends are likely to affect that reserve ratio going forward in say the next couple of quarters?

Because the bankruptcy thing has not been that big of a deal for us, what I would expect to see happen is a modest benefit potentially in the third quarter, although I'm not exactly sure of that.

The bankruptcy law takes effect in October and we expect to see a little bit of a blip.

But we might see a modest benefit on the bankruptcy side in the third quarter with some deterioration in the fourth quarter.

It depends a little bit on how that plays out.

That would then have the attendant impact on delinquencies.

So these are very hard things to forecast, each of the individual elements, because it's dependent upon the shades of gray that I talked about.

But my best expectation would be that you see bankruptcies go up a little bit this year; as a result of that delinquencies improve a little bit; we then have a lower bankruptcy rate next year and possibly a little higher delinquency rate next year because of that.

Thank you.

There was also very little of the AEFA recovery that was in their income statement overall.

I think they only had $4 million of that business resumption insurance claim as part of their income statement.

Most of it was in TRS or in corporate, and that was in the other operating expense line.

Great.

Thank you.

Moshe Orenbuch, Credit Suisse First Boston.

Gary, you had mentioned that the kind of brand marketing grew faster than rewards in the quarter.

Since marketing and charge volume grew at kind of about the same rate year-on-year, does that mean that you had a decline in penetration of membership awards as a percentage of spending, or the expensing reserving rate for membership awards?

What we had is we had -- MR grew obviously less rapidly than the category overall.

And so the -- let me just think here a little bit.

The ultimate redemption rates stayed roughly the same in the quarter, and then we got some modest benefit in terms of cost per points.

So if you think about what we do with that reserve, there's an ultimate redemption rate calculation and then there's a cost per point piece of the calculation.

And we review that in each quarter.

And in this quarter, if my memory serves me correctly, those were the trends.

So all of that added up to a slower growth rate in rewards than the overall growth rate in marketing which was slower than the growth rate in billings.

Thanks.

Bob Napoli.

Just wondered if you could -- just a couple quick things on the international side, lending receivables, I wonder if you could give a balance there.

Secondly, on minimum payments, if you can talk about any adjustments that you may need to make on minimum payments.

And the last thing is on AEFA, if you could walk through the process in determining the valuation on the spin off of AEFA.

Sure.

We don't split out -- we give worldwide lending balances.

We don't really give much detail in terms of international --

Right, you used to break that out.

I don't see it.

It would kind of be helpful if you could.

It's roughly $7 billion today.

If you just picked a number it would be close to $7 billion.

Okay.

On minimum payment side, frankly again that hasn't been as much of an issue for us because we have such a large transactor base.

It really hasn't been a significant topic of conversation, so I don't even know the detail there.

But for us it is not a significant factor because of the large transactor base that we have.

Finally, on the valuation of AEFA, it will be set in the market the way I described.

There will be a win traded price that will be available for AEFA actually is spun off, and then the day that the dividend is actually done it will begin trading.

And that will be the price that it will be valued at, is the day that it begins trading.

On minimum payments, are you saying you have to make -- you don't anticipate having to make any adjustments?

I would be surprised if that were the answer.

There must be some modest adjustment, but it is such an insignificant issue for us given our transactor base that it just hasn't been much of a topic of conversation for us.

Thank you.

We probably have time for one last question.

Brad Ball, Prudential Equity Group.

You have been returning a little less than your target 65% through buybacks and dividends lately leading up to the spin off.

Just curious, is there anything explicitly linked to the spin off that prohibits buybacks; any time period around the end of September?

And then when would you expect to get back to the sort of normal 65% combined buyback and dividend payout?

The reduction really is related to building up the $1 billion in total capital that we're going to contribute at AEFA, and it really is no more complicated than that.

At the time we spin off AEFA we will do that, and then hopefully we will rapidly be back into position that we were in before we did this.

If you look over the last couple of years, we've been generating free capital the order of magnitude of $3 billion.

And that's in a relatively short period of time we were able to build that back and be back in the position that we were in before.

I would expect that that would just be kind of a business as usual thing as we complete the spin off.

So there's no prohibitions for you to be in the market the day before, the day after around the spin, nothing like that?

We have normal blackout periods that we follow her.

And we follow those same things.

I would have to consult our legal counsel to find out exactly what we're going to do, and I'm not sure that we've even made a decision around that at this point.

But what we typically do is if there's any information that's not fully absorbed in the market price, then we're also not buyers in the market during that time period.

If the information is fully disclosed then we are generally in buying the stock, just like we would be at any other time.

And we anticipate that the AEFA spin off will be a very well-known event with lots of information about the AEFA spin around that time.

So I can't think of a reason for why we would have a blackout period then, but it's not impossible.

Before I let you go, the amended Form 10 you filed today, it's a massive document.

I'm just curious, are there any major changes to the original Form 10 you filed over a month and a half ago, anything you would highlight?

I don't think so.

We went through a discussion about whether or not it made sense to do it today, and there's nothing in there from our perspective that requires immediate reading.

It's obviously interesting reading, but nothing that requires immediate reading.

And so there's no significant change from our perspective from what we originally filed.

Thanks a lot.

Thank you all.

Thank you, Michael.

We appreciate your help.

Thank you sir.

And thank you for participating in today's American Express second-quarter 2005 earnings conference call.

You may now disconnect.