美國運通 (AXP) 2005 Q4 法說會逐字稿

Good afternoon.

My name is Brian and I will be your conference operator today.

At this time, I would like to welcome everyone to the American Express fourth-quarter and full-year 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. (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, Brian, and welcome to everyone.

Appreciate all of you joining us for today's discussion.

As usual, I want to remind everyone that the discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today.

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

Factors that could cause actual results to differ materially from these forward-looking statements, including the Company's financial and other goals, are set forth within today's earnings press release, which was filed in an 8-K report, and in the Company's 2004 10-K report, already on file with the Securities and Exchange Commission.

In the fourth-quarter 2005 earnings release supplement, which is now posted on our website at ir.americanexpress.com and on file with the SEC in and 8-K report, we have provided information that compares and reconciles the Company's pro forma return on equity to be discussed today with our consolidated return on equity, as well as the U.S. card services segment's managed basis financial measures with the GAAP financial information.

And we explain why these presentations are useful to management and to investors.

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

Gary Crittenden, Executive Vice President and Chief Financial Officer of American Express, will provide some introductory remarks highlighting the key points related to today's announcement.

Once he completes his remarks, we will turn to the moderator, who will announce your opportunity to get into the queue for the Q&A period.

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

While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time.

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

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

Thank you, Ron, and thank you all for joining with us on the conference call today.

As usual, my remarks today will focus on our results for the fourth quarter, as you are already quite familiar with the results from the first three quarters of the year.

But during the Q&A period, I'd be happy to respond to any of the questions that you might have on our full-year results as well, in addition to the questions that you will have on our fourth quarter.

My discussion today will center on the results from our continuing operations, and in particular, I will focus on results at the consolidated level.

As you know, we have managed the Company to achieve our long-term financial targets on an overall basis, utilizing investment spending and cost containment levers within the business to maximize our flexibility and optimize our overall performance.

Accordingly, results at the segment level may vary significantly from period to period, and a clear period of the Company performance can be obtained through the consolidated results.

With that, let me now review our results.

As you have seen in the earnings documents distributed today, our fourth-quarter results reflect the continuation of the strong business momentum that we've reported throughout 2005 and the ongoing benefits of the investments in a broad range of business-building initiatives which have allowed us to capitalize on competitive opportunities.

During the quarter, we executed well against our business objectives to achieve outstanding results within our payments businesses.

New product launches, brand advertising and expanded acquisition programs contributed to a record level of marketing-related spending, which while below our earlier estimates for the quarter contributed to strong card and billings growth, allowing us to enter 2006 in an excellent competitive position.

We expanded our U.S. global network services businesses by signing new network partnerships during the quarter with the Bank of America and HSBC while launching five new card products as part of our network agreement with Citigroup.

In addition, last week we announced another partnership with GE Consumer Finance, whose first product under the agreement will be a Dillard's American Express Card.

We also increased technology development expenditures to enhance our new product and servicing capabilities and to ensure that we continue to deliver innovative, high-value products to our customers in a cost-effective manner.

Overall, our pipeline of new products and services continues to be excellent, and we feel well-positioned to execute our strategy to focus on the high-return, high-growth opportunities that exist within the payments industry.

Now let's turn to our specific financial results from continuing operations for the fourth quarter.

When compared to last year's fourth quarter, total revenues grew 9%, income increased 12% and diluted EPS of $0.60 rose 13%.

Our reported return on equity for the quarter was 25%.

As you know, this calculation reflects the net income and the average equity over the prior 12-month period, which includes the earnings and capital from our discontinued operations.

The suppressing effect of this incremental capital will progressively lessen over the ensuing nine months, and you should see the Company's reported return on equity migrate upward.

Pro forma return on equity, which is determined using the trailing four quarters' income from continuing operations over average shareholder equity during the fourth quarter, was 31%.

The fourth-quarter results included two significant items that impacted the P&L -- a $60 million tax benefit primarily related to the finalization of state tax returns and re-engineering costs of $65 million or $42 million after tax, principally reflecting initiatives within our business, travel and technology functions.

We also experienced a $192 million increase in the managed provision for credit losses within the U.S. card services segment, which reflected substantially higher write-offs related to the increased bankruptcy filings resulting from the October 17, 2005, change in the bankruptcy legislation.

Actual managed write-offs within our U.S. consumer and small-business portfolio during the quarter came in somewhat below our previous estimate, but still increased by approximately $170 million versus the fourth quarter of 2004.

Bankruptcy filings under the new law have now declined substantially from their elevated level, and despite the higher write-offs during the fourth quarter, our underlying core credit quality remains excellent.

The Company's re-engineering initiatives delivered in excess of $1 billion of additional benefits this year, including significant carryover benefits from certain initiatives begun in prior periods.

Revenue-related re-engineering initiatives again drove a significant portion of the total benefits and represented more than 25% of the benefits delivered in the fourth quarter of 2005 and also during the full year.

During the quarter, we returned 35% of total capital generated to our shareholders through dividends and share repurchases.

As previously discussed with you, the lower repurchase activity during 2005 reflected a more measured approach to repurchases in light of the capital implications of the Ameriprise spin-off.

However, since 1994, we have utilized our share repurchase program to return 65% of capital generated to shareholders.

This level is consistent with our long-term target and we expect to be back to more normalized levels now that the spin-off is complete.

The strong revenue growth in the quarter reflects increases in discount revenue, cardmember lending net finance charge revenue, and various card-related fees, all of which reflected the excellent spending, lending and cards in force growth.

Worldwide card billed business increased 15% versus last year on a reported basis and 16% excluding the impact of foreign exchange translation.

We have gotten a few calls this afternoon from some who have had the opportunity to dig into the details of the press release and the supplement.

And it appears as though, if you look at the subcomponents, the U.S. billed business growth in the fourth quarter and the international billed business growth in the fourth quarter, that they don't accurately reflect the percentage increases that we show in the documents.

I can assure you that the percentage increases are correct and that this is a rounding issue, and tomorrow during the day, we will publish an 8-K that will extend the digits out for each of the four quarters of this year and last year so you can see that these calculations are accurate.

But the percentage growth that we disclose in the documents are correct.

In our U.S. proprietary business, consumer spending grew 15%, small-business spending, importantly, rose 18% and corporate services volume improved by 13%.

The growth in consumer and small-business volumes was achieved despite the substantial grow-over challenge created by the strong growth that we had in last year's fourth quarter.

In total, U.S. non-T&E-related volumes, which represented approximately 71% of U.S. billings, grew 17%, while T&E-related spending rose 12%.

U.S. airline related volume also increased 12%.

Outside the U.S., proprietary billed business was up 14% on a foreign exchange-adjusted basis, reflecting 14% growth within our consumer and small-business activities, as well as within corporate services volumes, and double-digit growth within each major region around the global.

And lastly, within our global network services business, billed business rose 34%, driven by strong growth outside the U.S. that exceeded 20% and MBNA-related growth within the U.S.

Worldwide cards in force grew 9% as we added 2 million net new cards during the quarter and 5.6 million net new cards since last year, reflecting a 6% growth in proprietary cards and a 23% growth in network cards.

Spending for proprietary basic card in force grew 7% worldwide, despite the suppressing effect of the substantial card additions over the past year and the negative translation effect of a stronger dollar.

During the quarter, our average discount rate was 2.54% versus 2.58% last year.

The decrease versus last year continues to reflect in part the changing mix of spending between various merchant segments, including higher fourth-quarter retail spend levels.

The decline also reflects various costs associated with the high level of investments in strategic merchant partnerships that should contribute to the success of our business in the future.

Worldwide managed lending balances grew 15% year over year.

Net finance charge revenue as a percentage of average loans rose versus last year, reflecting a lower proportion of the portfolio on introductory rates and increased finance charge rates, partially offset by rising funding costs.

Travel commissions and fees decreased 10% on a 3% decline in travel sales and lower fees per sale, due in part to the ongoing transition to online booking.

Securitization income declined 9%, primarily due to the higher bankruptcy legislation-related write-offs.

Human resource expenses decreased by 4% since last year, despite the continued negative impact from our decision to expense stock options beginning in the first quarter of '03.

Lower severance costs for this year and re-engineering savings were partially offset by higher management incentives costs, merit increases and greater benefits costs.

Underlying human resource costs continue to be very well-controlled, as the total employee count was down 1% versus last year.

Marketing, promotion, rewards and cardmember services costs increased 11% versus the fourth quarter of last year, reflecting higher marketing and promotion expenses and greater rewards costs.

While the total expense was at historically high levels, the growth rate was lower than the 16% growth we had previously forecasted.

We continued, however, to fund all of the core growth opportunities targeted for the month of December.

However, a number of items created the $70 million shortfall versus our forecast in November.

These items included certain expenses that were originally forecasted to be in our marketing and promotion line item, and they were subsequently recorded in other lines within the P&L.

They also included certain partnership-related initiatives that were originally anticipated for the fourth quarter that will now take place during the first quarter of 2006 and the impact of a comparatively strong dollar on the translation of spending in other currencies.

Other business building expenses for the quarter also included an increase in technology development expenditures, which rose $30 million or 24% from the fourth quarter of '04.

These investments were directed towards activities that should enhance our product and servicing capabilities.

The total provisions for losses and benefits increased 34% as the charge card and lending provisions rose by 21% and 40%, respectively.

These increases were due to the impact of strong volume in lending growth, but also more so to the higher provision rates, reflecting the substantially higher write-offs reflected to the change in the bankruptcy legislation.

Other provisions rose 52% as a result of higher interest rates on larger investment certificate balances.

Interest expense increased 12% versus last year, driven by a greater average receivable balance and higher funding costs.

Growth in the remaining operating expenses reflected the impact of rising volumes and the inclusion last year of a $117 million pre-tax gain on the sale of our small-business equipment leasing product line.

The consolidated tax rate of 22% for the quarter decreased from 27% last year, due to the $60 million tax benefit that I discussed earlier.

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

We again delivered strong revenue and earnings growth during the quarter while continuing to invest in the business and maintaining substantial balance sheet strength.

Our results continue to illustrate healthy momentum towards our payments business, where our competitive position has strengthened, as evidenced by the relatively wide gap over recent quarters between industry growth rates and our spending and lending growth rates.

We continue to deliver against our business objectives.

This quarter, we rolled out a number of new proprietary products and continue to maintain an active pipeline of new products and services that reflect our increasingly more sophisticated customer segmentation and information management capabilities.

We are also very excited about the momentum in our global network services business, evidenced by the strong international billings growth I referenced earlier and the recent agreements that we've signed in the U.S.

If you think about it, our U.S. partners now account for over 50% of the total U.S. credit card billings for Visa and MasterCard, and each of them have attractive, high-spending customer segments within their portfolio and are looking for ways to differentiate their product offerings to those customers.

That positions us to successfully pursue our strategy and deliver excellent value for them.

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

We are fortunate to have such a diverse set of businesses that span across the industry.

In addition, we are confident that the financial dynamics of our business model position us to grow the business and deliver particularly attractive returns without requiring a burdensome level of investment.

We believe we have the potential for operating leverage within several aspects of our cost structure, including, for example, within the marketing and promotion expenses, where there are sizable pockets of discretionary expenses that can be leveraged if necessary; within rewards-related expenses, where rewards spend penetration has climbed to a point within the U.S. at which we believe going forward, excluding any change in the cost per reward point or ultimate redemption rate assumptions, reward cost growth should be tied more directly to spend levels; and lastly, within operating expenses, where scale benefits are available to us as the business expands.

Finally, to ensure that we're positioned to continue to invest aggressively for the future and to capitalize fully on the growth opportunities we see, we continue to work to reengineer the business and to control underlying operating expense growth, which has not grown as rapidly as our business volumes.

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.

Let me remind you that our long-term financial targets are 12 to 15% EPS growth, 8% revenue growth and 28 to 30% return on equity on average and over time.

As you know, our 2005 income from continuing operations includes some significant items, like tax and insurance benefits in the second and third quarters and the tax benefits and the provision increase in the fourth quarter.

Therefore, as we have indicated previously, we will focus on delivering appropriate full-year results, recognizing that there will be fluctuations in the quarterly growth rates created by these items.

Thank you very much for listening, and Ron and I are now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Ken Posner, Morgan Stanley.

I'm wondering if you can go into a little bit more detail about the strategic partnerships that you said were in part responsible for the slight decline in the discount revenue?

Yes, in the course of any quarter, we sign up either the renewal of some partners that have been merchants for us or new partners.

And from time to time, we have a spike in the number of signings that we do.

And we had somewhat of a spike associated with those signings in the fourth quarter, which is a good thing.

And as a result of that, it had some impact on our discount rate for the quarter.

Should we interpret that to mean that signings are coming on at lower rates than was that case in the past, or is this continued just mix shift?

Actually, no, they were higher in the quarter.

There's usually some type of promotional activity that takes place around the time that we do these signings that we treat as contra revenue.

And when you have a spike of those signings that takes place at any one point in time, you get a little bit of an abnormal impact from those signings on the fourth quarter.

And that's what happened in the quarter.

Because the promotional rates are finite in time, so that effect should disappear once the new contracts are on the books for a period?

Yes, that is correct.

Chris Brendler, Stifel Nicolaus.

I had a question, and now I think I want to just follow up on Ken's question a little bit.

My question was related to GNS, and just looking at the revenue growth and the earnings growth there, not really tracking the spending and card growth.

I think I may have gotten the answer.

Are you saying that the discount revenue -- there's a contra expense booked in the discount revenue for the new contracts that you signed in the fourth quarter?

Yes.

If you kind of look at that segment, you'll see that the revenue growth rate was relatively weak in that quarter, weaker than what you would have expected to see if you just looked at the billed business overall.

I think, if I recall correctly, it was up 6%.

And so we had some signings in the quarter.

Those signings in the quarter have a contra revenue impact that eventually makes its way it into our transfer pricing that we do between the segments.

But it is fully reflected in the discount rate, as we reported it in the quarter.

But all of the impact of that gets absorbed into that particular segment when we do those signings.

Okay, and then just a clarifying question on your disclosure.

Your discount rate now did not used to include the G&S business that it now does.

Is that correct?

Yes, that is correct.

Bruce Harting, Lehman Brothers.

Gary, did you defer any marketing spend from what was planned in '04 into -- from '05 into '06?

And then can you just explain what is helping drive the continued strength of the receivables growth while the rest of the industry is growing at a much, much slower pace?

And any comment on what could continue that into '06?

Thanks.

On the first question, the answer is yes, and it was $4 million.

We really did spend what we had intended to spend in the quarter.

And the factors that influenced the amount that we actually spent in the quarter were the ones that I went through.

So there were some things that just either happened on a different line item than we anticipated or that was some kind of a deal that was in conversation that did not happen in the fourth quarter but we expect to happen in the first quarter.

But there was almost nothing that was deferred from one quarter into the next.

And then the second question, Bruce, again?

Yes, just talk about the --

The AR growth rate?

Yes.

You know, honestly, if you look at the details here, it really is good news.

As a result of very strong billed business that we have had over the course of the year, you know, there is kind of a tag-along effect that happens from the strength of the billed business.

If you look at the success that we've had with cards in force, with cards in force being up 9% in the fourth quarter, there's really just nothing underlying or unusual about what's happening other than very strong billed business and very strong cards in force having pretty good stickiness as far as accounts receivables go.

We have not seen any deterioration in our paydown rates.

You know, we are really not impacted by the minimum payment regulations.

It's never been much of an issue for us.

So that has not impacted us.

The percentage of our portfolio that is on intro rates and on balance transfer is going down.

And so we've been able to hold our net spread pretty well.

And so I think what you see is just very good competitive performance that we have been fortunate to see over the last few quarters.

If you think about it now, the numbers are more obvious now than they were before this quarter, because we had the business leasing business that we were -- that we had sold and we were up again.

So it wasn't quite as obvious that our strength was as good as it is.

But our strength is good.

And obviously, we are delighted about it and feel very good about it.

We feel particularly good, when you reflect on what we showed at the last analyst meeting, about the underlying FICO scores, for example, in the Blue portfolio and how those FICO scores have improved.

And so we just think this happens to be one of those cases where a lot of good work is resulting in a very good result.

And this is being done without really any zero teaser or any products or (multiple speakers)

As I said, both our intro rates and our BTs are lower than they were this time last year.

And this growth is virtually all U.S.-based, or the large part of it?

No, there's good growth both in the U.S. and internationally.

On AR.

Yes.

David Hochstim, Bear Stearns.

I wonder if you could just repeat and clarify what you said about the growth in GNS cards.

And if you look at -- maybe also explain again the difference between total U.S. cards and then the U.S. segment cards?

It looks like there was about 5.5 -- 5.7 million difference in the fourth quarter versus 5.1 in the third and 4.9 a year ago.

So the difference has actually declined between the third and the fourth quarter.

And I wonder if that would be some MBNA-issued cards were canceled or a decline in corporate cards?

The overall GNS number -- the growth rate in GNS obviously was influenced by the fact that we are lapping the first cards that were issued by MBNA last year.

If you look at the total U.S. number, the total U.S. number includes the proprietary consumer cards, plus it would include the corporate cards and the GNS cards.

And so no, there's nothing unusual taking place within the GNS portfolio like high attrition or something like that.

The GNS portfolio is very healthy.

In fact, if you look at the kind of raw numbers around GNS this quarter, it is performing just as we would hope it would.

You know, what you see is very strong growth, kind of in the mid-20s in card growth.

And then you see very nice growth rate in billed business in the 30s.

And I made mention in my opening remarks that I'm particularly pleased that if you look at the billings growth rate outside the U.S., which really reflects much more kind of the year-over-year growth rate from our partners than it does signing of new partners, we had very attractive growth rate outside the U.S. as well.

So it looks, at least at this point, that pieces are coming together pretty much as we had hoped.

Laura Kaster, Sandler O'Neill.

I was wondering if you could -- first of all, before I forget to ask, tell me what the tax rate we should model going forward is?

And also, if I could please, Gary, get a little bit more color on the marketing spend reclassification, of the dollar amount that -- I think it was about 70 million different from my estimate -- what percentage of that dollar amount was going to different line items and what those line items were?

Yes.

The tax rate is -- obviously, we don't want to forecast it, but let me give you a way to think about it.

I think this year was about 21 or 22%.

That's obviously much lower than we have had historically because we had a couple of positive things.

In '04, on a restated basis, with AEFA out of the mix, it was about 30.

And it was I think slightly above that in '03.

And so, if I had to make a guess, I would probably think along those lines in terms of a number.

One thing to keep in mind is that our tax rate is benefited by Travelers Cheques, and that part of our business is not growing as rapidly as the rest of the business is.

And so that will have, longer term, some negative impact on the tax rate overall.

So without giving a specific forecast, I hope that brackets it for you a little bit.

From a marketing spend perspective, the examples that I gave were examples of the total.

And we don't want to get into splitting it out too specifically.

But there were a couple of things, for example, that we had intended to have included in marketing that ended up actually being technology spend, so they ended up in either other expense or on the technology line item when they were appropriately bracketed.

In our original forecast, we had those in marketing expense.

And then we had a couple of items that were -- that we had in marketing expense and we ended up putting them up as contra revenue items in the quarter as well.

And between those two things, you capture the vast bulk of what was there.

Okay, and that was the contra revenue items you were speaking of earlier?

No, these were other marketing promotions that -- other promotional activities that are best expressed as contra revenue as opposed to marketing expense.

Ed Groshans, Fox-Pitt, Kelton.

I just wanted to talk to you about average spend.

It looks like the average spend grew a little bit slower.

Is that because of the cards in force coming online?

And then can you just give us of the 2 million cards that have come online, how long does it take for those to really ramp up?

The average spend is -- you're correct.

It is lower than it has been for the last little while.

As we look at it, there's really two major things happening there.

One is we've had better cards in force growth than we've had for awhile.

And the good news about that, frankly, also is that GNS growth rate was a little lower this quarter because we lapped the MBNA contract.

So a lot of that was proprietary card growth, which shows the uptick in proprietary spend.

And so that obviously had an impact on what our average spent was.

For the 2 million cards that we have brought on, it really depends a lot on the type of card.

So if you have a credit card, a credit card has a much longer build in terms of spend and balance over time, whereas charge cards tend to come on very rapidly and we see that spend literally within the first six months or so that the chargecard is on the books.

The GNS cards should have a positive impact on our average spend as a company overall, even though they are not included in that basic average spend number.

They should have a positive impact on our economics because the mix should be gradually shifting during the course of this year to more U.S.-based card partners as Citibank comes online with the products that we have just -- that they have just announced there, as well as our other partners launched during the course of year.

Although that won't be reflected in our average spend numbers, it will be reflected in the underlying economics of the Company.

And just give me some color as to the focus of American Express' marketing.

Is it more centered on the proprietary chargecards?

Or is revolving becoming a bigger part?

As you no doubt have seen, we have an umbrella marketing campaign -- My Life, My Card, which we think tries to express kind the full Blue Box view of how we think about the Company and try and position ourselves, that this is a card that has to do with the things that represent what you personally want to do in your lifestyle.

And then we have a very wide breadth of product advertising and product marketing that targets individual niches.

I think one of the truly great capabilities of this Company is the ability to slice and dice and segment the market in new and innovative ways.

If you taken American Express One Card, the one card were we have really put a substantial push behind that product this year, it seems to have really resonated right at the right time.

As people have been kind of concerned about savings levels and maybe a little bit more concerned about the future, that's a product that seems to have resonated very well.

And at that the same time that we're doing that, as you know, you have probably seen the [NMYC and the NLA] cards that we have launched, which target a slightly different demographic.

And then we have co-branded products.

So we really do have I believe a very unique capability as a company to identify relatively small market segments, to exploit those market segments with products that take advantage of our existing infrastructure and allow our continued penetration and growth in the payments business.

Meredith Whitney, CIBC World Markets.

The only part of the quarter that concerned me was the excess capital.

You guys have spoken about whether to increase the dividend or buy back shares.

And nothing happened this quarter.

And my concern is that you're sitting on a lot of extra dough and that might pressure returns.

What are your plans?

And how immediate are they to get some of that excess capital off the balance sheet?

Well, a little bit of the pressure on the -- the sequential pressure on the ROE is a little bit circumstantial related to the spin-off of AEFA.

So we had an artificially low position as we finished the third quarter.

And we've needed to obviously bring that to what the appropriate level is to sustain our credit rating going forward.

One thing I can assure you, Meredith, is that there's no desire on the part of anybody here to maintain any excess capital beyond what we need to sustain and support our credit rating.

And we are very committed to the 65% payout that we have announced publicly.

So I would not read anything into the fact that we had a 35% payout in the fourth quarter other than we were doing exactly what we said -- that we needed to get past the spin-off of AEFA and give that company every opportunity to succeed as a new independent entity.

But our track is to continue to meet the 65% target on average and over time.

So the fourth-quarter capital levels should be sort of at the steady-state run rate levels that we should be working with?

Well, we are always working to try and find ways to re-engineer our capital.

So I hope that we have some smart ideas over the course of the next couple of years that can always work on the steady-state number.

But clearly, the fourth quarter represents a truer view of the equity requirement than the third quarter did.

Okay, good.

That is helpful.

Eric Wasserstrom, UBS.

Actually, my questions have been addressed.

Bob Napoli, Piper Jaffray.

A question on the spending growth.

I think it was a little bit lighter than what we had modeled.

And it has kind of slowed from very high levels.

So I was just wondering if you had seen a -- if you felt that the consumer spending generally and the economy has slowed in the fourth quarter and your outlook for the health of the consumer into 2006?

You know, if you really dissect this and you look at all the various impacts on it, the foreign exchange impact was not inconsequential on the number to begin with.

And then we had a higher-than-trend number of cards in force, particular proprietary cards in force, which is the number that goes into this average spend calculation.

And if you look at billed business, billed business on an FX-adjusted basis was up 16%, which is what it was in the second and first quarter, essentially, down a little bit from the third quarter, but essentially the same.

And if you look at the growth rate in small-business spending in the U.S., the growth rate in small-business spending was up 18%, which was I believe the same number that we reported last quarter, down from its peak of 22% in the second quarter, but still at very healthy levels.

So if I kind of roll all that together, it feels to me like still a very healthy environment.

And certainly within the context of that environment, we're doing fine, and certainly compared to the folks that we compete with, we're doing much better.

And I guess on some of the comments you made on the earnings for next year and looking at the quarterlies, were you essentially trying to say that consensus might not reflect those items?

Well, what I wanted to say is that there were -- if you're going to step through quarter by quarter, in the second quarter we had a tax benefit and we had an insurance recovery.

Those were partially offset by some re-engineering costs.

In the third quarter, we had some tax benefit.

And then in the fourth quarter, we had this unusual bankruptcy effect.

And then we had a tax benefit.

So there were a number of these items that impacted the quarter.

And they impacted the quarter in different directions as we have gone through the year.

And we have been obviously explicitly clear about exactly what those amounts were in each of the quarters in the supplements.

But they just have to be factored in as you think about the quarter-to-quarter performance.

And so what we are trying to do always is we think hopefully about our business longer term than a single quarter.

We are managing towards kind of on-average and over-time results.

And the volatility that would be kind of implied in our business, if we, for whatever reason -- we wouldn't do this -- but if we for whatever reason tried to match that pattern in the underlying operating results, just wouldn't make sense for us.

And I just wanted to make sure that people had had a chance to think about that.

What would you say was the core earnings adjusted for the full year, adjusted for one-time items for '05?

You know, we've just never given out a number.

If I did that, I'd have to have a lot of legalese that would back up exactly what I said.

Brad Ball, Citigroup.

Gary, just to clarify your comments about the discount rate decline in the quarter, did you say that a portion of that decline was driven by promotional rates that are offered in new partnerships and that they would not be permanent?

No, the discount rate is the discount rate.

And that's a permanent thing.

And everything that we have done is reflected appropriately in the discount rate.

But occasionally, we give some type of marketing or promotional allowance that would be reflected in contra revenue in the segment where we have our establishment services business.

And so everything that goes into the calculation of discount rates fully comprehends those promotional expenditures.

And I guess a way to think about it is that those promotional expenditures are one-time events that happen now.

They are relatively small in magnitude.

And over time, those will work their way through the discount rate and won't have the impact that they had in this quarter -- the quarter that we just went through.

So I know you won't talk about guidance, but when we think about modeling the discount rate, we generally think about a couple of basis point decline per year, judging by the mix shift --

I think the long-term guidance that we've given here, the 2 to 3 basis points a year, still continues to be about the right level.

Kenneth Bruce, Merrill Lynch.

Many of my questions have been answered.

Maybe you could spend a little time addressing ultimately how the credit performance of your book of business is -- is kind of matching up with your expectations.

Obviously, post the bankruptcy spike, it looks like credit trends are generally positive.

The provision is increased, it looks like possibly lockstep with managed receivable growth.

Is there any indication that you're seeing any deterioration in credit or any disparity in any particular aspect of your book of business?

No.

First of all, as you know, we have generally the lowest write-off levels and the lowest credit expense in the industry.

And I think the risk team has just done an absolutely terrific job to put us in that position.

And I think that we very much kind of are at the levels that we anticipated being at.

One of the things I mentioned last quarter is that we don't pay that team to have the lowest write-offs in the industry.

We really pay them to maximize the net present value of our customers.

And so we're not always going to strive to have absolutely the lowest write-offs rates in every quarter.

But we will manage that over time to ensure that we have maximized the net present value, subject to focusing on the customer segment that we are very, very targeted on.

So I think what you see reflected in our results this quarter over the last couple of quarters is a real effort to focus on making sure that we optimize the net present value of what we do rather than go for the absolute lowest credit cost.

And I think you'll continue to see that impact as we go through 2006.

So that's -- generally speaking, you are expanding the credit parameters in a way that might actually increase the overall nominal losses within your overall return expectations?

That could certainly be an outcome.

I guess what I'm saying is that the objective function is really not to minimize credit losses.

It is to maximize overall returns, subject to making sure that we are focused on the customer segment that we really want to focus on and grow over the long term.

Now, if you look at the actual performance over the last little while, what you've seen is that we've had both good growth in AR and terrific credit performance, and we've actually improved the underlying FICO scores of our portfolio.

So we've been in a really unique and attractive situation.

Hopefully, that situation continues.

But there's never any guarantee that it will.

But what we're clearly trying to do is maximize the net present value and not necessarily just minimize the credit losses.

Joseph Dickerson, Atlantic Equities.

My primary question has been answered.

But I was just wondering, and I don't mean to revisit this issue again, but on this sort of lower-than-expected or at least somewhat depressed discount rate, are we talking about signups of banks or merchants to get the benefit?

Merchants.

Merchants.

That's what I -- because it seems in the release like banks, but I just wanted to clarify it was merchants.

Yes, we refer to merchants as partners because in many cases, we do do partnership activities with them.

And many of these kinds of activities reflect the promotions that we agree to do with them when they re-sign.

And so we have good ongoing relationships with these merchants.

It's actually good news that we had a somewhat larger than normal number of signings in this quarter, which resulted in a somewhat higher amount of promotional activity, which is fully reflected in the discount rate.

It's a little bit of a spike that happens in the discount rate as a result of this.

In the overall scheme of things, it's not enough money to really make a substantial long-term impact.

And it will roll through the discount rate as we go through the course in the year such that I believe the long-term average reductions that you have seen over time are likely to be continued.

So net-net, there were more merchants in the fourth quarter?

Net-net, we had more of these promotional signings and merchants in the fourth quarter than we had seen over the few quarters before that.

Ken Posner, Morgan Stanley.

Actually, my question was answered, thank you.

David Hochstim, Bear Stearns.

I wonder if you can just talk a little more qualitatively about what you saw in the way of bankruptcies, bankruptcy filings in your customer base in the fourth quarter, including I guess chargecard customers and what you've learned from that in terms of underwriting?

As we went through the quarter -- when we came into the quarter, honestly, we didn't expect the number to be as high as it was.

It was higher than what we had anticipated and coincided with the time that Ken gave the speech in I guess late October, it was -- late October, early November, where we talked about what our expectations were for bankruptcies for the quarter.

That ended up playing out about like we thought it would.

Then post that, we did not see the rapid decline in bankruptcies that we hoped we would because it took a long time to get those bankruptcies filed.

So even though they actually happened before October 17, we did not see that real decline happen until somewhat later in the quarter.

We now have seen, as I mentioned in my comments in the beginning, a pretty substantial decline in the bankruptcy rate that kind of brings it down to the level we anticipated we would see that will obviously have some beneficial effect for us as we move into 2004, and that I referenced as one of the unusuals that would have impacted our year-over-year comparison.

I meant as we roll into 2006, not 2004.

As we roll in 2006.

You know, if you look at the provision increase, we had provision increase both in the chargecard business and in the lending card business.

It represents good underlying business results in both of those businesses.

And in the chargecard business, when you sign up new customers, you find out faster if they are going to pay you eventually.

And I don't think there's any new news in that.

It just is a reconfirmation that you get faster feedback from new chargecard customers than you do from lending customers who can take a longer period of time before you actually understand that they're not going to perform as you thought they would when you put them on the books initially.

If we look at the change in delinquencies at the same time of the increase in charge-offs, were a lot of these customers current and they just went bankrupt?

You know, again, it's a little hard for me to split the detail out.

The honest answer to that is yes.

But there are also customers that are current in normal times that end up declaring bankruptcy and that are a real surprise to you.

But clearly, there were some people in this category that pulled forward into the quarter.

We tried hard to kind of bracket that amount by the numbers that we've disclosed.

But it's very difficult for us to say how many of those people would have gone bankrupt anyway in the quarter and how many people would have not.

Some of the other disclosures that I've heard from some of our competitors have tended to lump those together into one category.

It's a little hard for us to separate out who would have gone bankrupt anyway and who went bankrupt just because of the bankruptcy legislation.

But we have talked about the absolute totals that we have seen to try and give you a feel for what the total amounts are.

So clearly, there will be a benefit that we expect to see during the course of next year that will come from the pull-forward that we saw.

We have our own estimates internally about the amounts we think that will be.

Time will tell whether or not the estimates that we have are current.

But it is a subset of what the total bankruptcies were, because some of those people obviously would have declared bankruptcy even if the law had not changed.

But to the extent that you had a sort of surprise in the number of bankruptcies you saw, isn't that saying that a lot of these customers look like good customers still?

You know, I think the big surprise was we'd never encountered a law like this before.

You know?

And we just didn't know how to interpret what the impact of this law was going to be.

And so we had, clearly, as we went into the quarter, we did not anticipate this spike quite as high as it ended up being.

Now that that spike has passed, actually the level of current performances is pretty much in line with where we thought it would be post a spike of that magnitude.

So we have learned something about how credit performs when you have a major change in the law like this.

We had based our modeling off of earlier runs at this law, you know, where it had not actually taken effect, but where, as you know, three or four times over the last few years, there had been instances where it almost became law and we went through one of these run-ups.

And we had done our modeling off of that.

But obviously when it actually really did become law and people were faced with that decision, there were more people that made the decision than we had anticipated going into the quarter.

Laura Kaster, Sandler O'Neill.

Gary, have you ever quantified the effect of the change in the minimum payments laws that it had on your books in '05?

I'm going to assume you guys are all set for '06 in that regard?

Yes, it really has never been an issue for us.

We have always had a policy to have a minimum payment sufficiently high that we did not have negative amortization.

So it really is just not a problem for us.

Great.

And then I was just kind of curious, with your signing with Dillard's, it seems like private label cards normally have about half the discount or interchange revenue of your normal relationship.

Can you just explain how you guys make money on that?

Well, our relationship is with GE.

And then GE has a relationship with Dillard's.

And I can assure you that the economic relationship that we have with GE is a good one for them and for us.

Craig Maurer, Soleil.

Two questions for you.

The first is, you talked about the increased pace of merchant signings in the fourth quarter.

Have you seen a noticeable increase since your number of partners in the U.S. have increase as in these merchants are starting to see the writing on the wall, one?

And two, in terms of the billed business growth beyond the impact of foreign exchange, was the troubles -- did the troubles the UK consumer is currently having show up at all in your numbers in the quarter?

Two good question.

The number of new merchant signings that we were talking about that impacted the discount rate are so few that it wouldn't be impacted by what you said.

What you did say, however, is in fact the theory of the case for GNS.

So the idea is that by having more people with American Express Cards that are high-spending card members, that it will enable us over time to continue to strengthen the merchant network that we have.

And that is really one of the key kind of theories of this business that we hope to prove out over the next four or five years.

But the discrete number of new signings that we did really is not related to that hypothesis that we have about how things are going to play out.

I do think the ES team has done an extraordinary job at signing new merchants.

And as we said in a couple of the last two conference calls, and as Bill Glenn said, we really do believe that our relationships with merchants are probably healthier now than they have been at any time in our history.

And we certainly have good positive feedback from them.

Because we have a sales force that is out there working with merchants all the time, we have I think a very good feel for what merchants are thinking and what the issues are that they confront.

In terms of billed business growth, the UK in and of itself is not large enough to really have a significant impact on us.

As I mentioned, we had double-digit growth internationally in every region of the world.

We were particularly strong in Canada and Latin America in the quarter.

The UK has, however, had issues with credit losses.

And we haven't been immune with that.

We along with others have been impacted by credit losses in the UK.

And that has impacted the financial performance of that market this year.

But if you take Europe as a region, we were in double-digit growth in Europe, and obviously that stands in stark contrast with the underlying economic performance over the last year or so there.

Ed Groshans, Fox-Pitt, Kelton.

I was looking at the airlines, and you're talking about that there was a lift in the actual billings that came through, not just the number of transactions.

I guess that is a little bit of a change from what we were seeing?

Yes, first time that we've seen that in quite a while.

Do we think that maybe this is sustainable, that maybe we can get 1 to 2% per quarter or year over year in airline tickets compared to I guess the declines we have been experiencing for several --

I hope so.

I hope so.

We are not in control of that, obviously.

It is driven entirely by airline pricing.

But it is a hopeful sign after a long period of time where we have seen average ticket prices decline.

It's a very positive thing to see the strengthening.

You know, you have seen the strengthening take place in hotels.

It would be nice to see that strengthening happen on the airline side.

So they are certainly flying fuller than they were a year ago.

And hopefully now, they're flying with a little bit more revenue than they did a year before.

There's nothing that we would be happier about than to have them have success in driving up average ticket size.

We probably have time for one more question.

Matthew Park, Prudential.

Just touching on the managed loans, would it be fair, Gary, to expect the growth rate of managed loans to decelerate over the next few quarters, perhaps as far as the industry average?

Or do you think you can continue to post very high rate we have seen?

You know, we think, without going into too much competitive detail here, we think that the strategy that we are executing on internationally is really gaining strong traction.

So if you look at how we have performed internationally over the last six or so quarters, we have really started to gain momentum.

And that momentum appears to be building on itself.

In the U.S., we also continue to have real insights based on the use of good customer information about our ability to provide the right kind of products that seem to be both attracting customers with strong credit scores, but also customers that will build AR to a certain extent.

And we are getting more capable in that regard rather than less capable as time goes on.

So there is no way I can forecast, obviously, where that train heads.

But we are delighted with the performance.

And this is not a one-quarter performance.

If you go back now for a very long period of time, over the last three or four quarters, we really have had this outperformance relative to the industry.

And I think it is based on fundamental capabilities that we have developed and that we are executing on.

By growing faster than the industry, do you worry about any adverse selection?

You know, I would if I didn't know what I know about the underlying credit quality.

And we've shared as much of that with you as we think we can prudently do.

And the underlying credit quality, as you have seen from the information we have disclosed, is excellent.

So both the performance on an aggregate basis, if you look at our write-off levels and the performance of that part of measuring our performance, as well as the FICO scores as we have shown them, really are quite attractive.

Thank you.

And thank you all for joining us tonight.

Ladies and gentlemen, thank you for participating in today's American Express fourth-quarter and full-year 2005 earnings conference call.

You may now disconnect.