美國運通 (AXP) 2006 Q3 法說會逐字稿

Good afternoon.

My name is Sarah and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Express third-quarter 2006 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.

You may begin your conference.

Thank you, Sarah, and welcome to everyone.

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

Before we get started with the review of our results, let me just 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 the forward-looking statements included in 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 2005 10-K report already on file with the Securities and Exchange Commission.

In the third quarter 2006 earnings release and supplement, which are now posted on our website at ir.americanexpress.com, and on file with the SEC in a 8-K report, we have provided information that compares and reconciles the Company's U.S.

Card Services segment, the 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 is actually registered to ask questions.

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

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

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

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

As you have seen in the earnings documents distributed earlier today, our third-quarter results reflect a continuation of the strong business momentum we reported throughout 2005 and the first half of 2006 and the ongoing benefits of our investments in a broad range of business-building initiatives.

When you compare our financial results from continuing operations for the third quarter to last year's results, net revenues were 12%, net income increased 11%, and our diluted EPS of $0.78 rose by 13%.

In addition, return on equity for this quarter was 34%.

As you know, the end of this quarter marks the one-year anniversary of the Ameriprise spin-off.

Therefore, we are no longer reporting a pro forma ROE, since the reported metric, which is computed a trailing 12-month basis, is now impacted to a much smaller degree by the results from discontinued operations.

This quarter's results included $33 million, or $24 million after tax, of gains related to the sales of our card and merchant operations in Malaysia and Indonesia.

These gains are fully allocated to the International Consumer and Global Commercial Services segment.

In conjunction with these sales, independent operator agreements were signed with Maybank in Malaysia and Bank Danamon in Indonesia.

As a result, this quarter's results reflected the transfer of approximately 200,000 cards in force and the associated billed business from the ICGCS segment to the Global Network and Merchant Services segment.

While these sales and the sale of our Brazilian operations last quarter negatively impact the card results within ICGCS, the key underlying card metrics continue to be strong.

This strength is not fully evident as the segment's revenue and income growth is negatively impacted by the international bank's results, which continue to be pressured by interest rates and the corporate travel environment, which remain challenging.

Last year's quarter also included a $105 million tax benefit from the resolution of a prior-year tax item and a $49 million provision to reflect the estimated cost related to Hurricane Katrina.

Both quarters also included re-engineering costs, which totaled $12 million or $8 million after tax this year and $86 million or $56 million after tax in last year's number.

During the quarter, we returned 81% and year to date we have returned 97% of total capital generated to our shareholders through share repurchases and dividends.

We repurchased at a higher level of shares this quarter versus last year as our activity was reduced last year in light of the capital implications of the Ameriprise spinoff.

Since 1994, we have returned 68% of capital generated to shareholders, which is above our 65% long-term target.

Before I delve further into our results, I want to address this quarter's reporting revisions within our U.S.

Card Services segment.

In order to best highlight the GAAP results and the managed information for this business, we have presented and discussed the GAAP P&L and then provided a separate reconciliation of the GAAP to managed results for the line items significantly impacted by our securitization activities.

While this varies from our prior presentation, I think you will find that all of the important information that we have provided historically is still available within this revised format.

With regard to our results, the strong revenue growth in the quarter reflects increases in discount revenue, Cardmember lending net finance charge revenue, and securitization income, all of which reflect the excellent spending, lending and cards in force growth achieved during the quarter.

Billed business remained strong, despite the particularly high growover hurdle that our 18% growth performance in last year's third quarter represented.

Each of our customer segments and major geographic regions contributed to our card-related metric growth during the quarter.

Worldwide, card billed business increased 15% versus last year on a reported basis and 14% on a foreign exchange-adjusted basis.

In our U.S. proprietary business, consumer spending grew by 11%, small business spending rose 15% and corporate services volumes improved by 14%.

In total, U.S. non-T&E-related volumes, which represent approximately 68% of U.S. billings, grew 15%, while T&E-related spending rose 11%.

Outside the U.S., proprietary billed business growth was 10% on an FX-adjusted basis as we saw 9% growth within our consumer and small business activities and 14% growth within our corporate services volumes.

In addition, excluding the impact of the sales of our Brazilian operations last quarter and our Malaysian and Indonesian operations this quarter, we achieved a 14% FX-adjusted proprietary growth rate outside the U.S. and double-digit growth within each major region around the globe.

And finally, within Global Network Services, billed business rose 62%, driven by strong growth outside the U.S. and robust growth within the U.S.

Excluding the impact of the transfer of the cards and spending associated with the independent operator agreements established in Brazil, Malaysia and Indonesia, billed business growth was up 41% as the underlying growth outside the U.S. again exceeded 20% and U.S.-related volumes more than doubled.

Worldwide cards in force continued to grow at their highest level since the second quarter of 2001, increasing by 11%.

We added 2.1 million net new cards during the quarter and 7.5 million net new cards since last year, reflecting 5% growth versus last year in proprietary cards and 46% growth in network partner cards.

If you adjust for the 1.5 million cards transferred from the proprietary international card business, the GNS, proprietary growth was 7% and network card growth was 30%.

You will note that despite the strong growth in cards in force and the relatively flat average fee per card, our net card fee revenue decreased 10% this quarter.

This reflects the reclassification, effective July 1, 2006, of certain card acquisition-related costs which are now reported as contra-revenue within the net card fee line rather than as operating expense.

This reclassification suppressed the total revenue growth by approximately 1%, but had no effect on net income and is not included in the average fee per card calculation.

Spending per proprietary basic card in force grew 6% worldwide, despite the suppressing effect of the substantial card additions over the past few quarters.

Our average discount rate remained flat to last quarter at 2.57% and declined 1 basis point versus last year.

The decrease continues to reflect selective pricing -- re-pricing initiatives and ongoing changes in the mix of spending between various merchant segments.

Worldwide lending balances on an owned basis rose 28%.

On a managed basis, balances grew 16% on 15% in the U.S. portfolio, and a 20% increase outside the U.S.

The net finance charge revenue as a percentage of average loans increased versus last year and held steady versus last quarter.

Securitization income rose 9% as a higher portfolio yield and lower write-offs were partially offset by greater interest expense and a lower level of securitized assets.

Travel commission and fees increased 1%, reflecting a 6% increase in travel sales, a moderately lower transaction level and lower average transaction fees due in part to the ongoing transition to online booking.

U.S. consumer travel sales continue to grow rapidly, increasing 24%, and global, corporate and international consumer sales rose 2%.

Human resource expenses increased just 1% versus last year as merit increases and greater benefit and management incentive costs were partially offset by lower severance-related expenses and a lower level of employees.

Marketing, promotion, rewards and Cardmember services costs increased 7%, reflecting greater rewards costs, partially offset by moderately lower levels of marketing and promotion spending.

Marketing expenses continued to reflect relatively high levels of spending related to various business-building initiatives, but lower costs related to the Company's ongoing global "My Life, My Card" advertising campaign, which was in a particularly active phase last year.

Increases in rewards costs continued to reflect strong spending growth, higher redemption rates and increasing Cardmember participation.

The total provision for losses and benefits increased 8% as the lending provision and the investment certificate and other provision rose by 13% and 70%, respectively, while the charge card provision declined by 14%.

The increase in the lending provision was driven by higher loan volumes globally, partially offset by the favorable impacts of lower bankruptcy-related charge-offs and strong credit quality in the U.S.

The charge card provision decline reflects a lower loss rate, Katrina-related reserves last year and improved results within our collections activities in the U.S., partially offset by higher volumes worldwide.

The growth in the other provision was due to higher interest rates on larger investment certificates balances.

Interest expense increased 36% versus last year, driven by higher funding costs and a greater average receivable balance.

Growth in the remaining operating expenses reflected the impact of increased volumes from outsourcing costs within our technology, Cardmember servicing, and credit and collections activities.

The consolidated tax rate of 29% for this quarter increased from 20% last year.

Last year's lower effective tax rate reflected the $105 million benefit related to an IRS audit of previous year's tax returns.

This year's tax rates reflect various items which lowered the effective tax rate modestly.

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.

This quarter's results continued to illustrate healthy momentum throughout our proprietary payments businesses, where comparisons to notably high growth rates last year were particularly difficult.

Growth within our network business accelerated, even if you exclude the benefits of the Brazilian, Malaysian and Indonesian independent operator agreements.

Our competitive position continues to be strong as growth in Cardmember spending and borrowing was again at the top of the industry.

Furthermore, our position among affluent Cardmembers and high spenders remain strong and is continually supported by our focus on leveraging our direct merchant relationships, the unique information benefits of our closed-loop network, and our attractive loyalty programs to deliver premium, differentiated offerings to our customers while driving incremental spend to our merchants.

We believe that these advantages and our position within the marketplace are not easily replicated by our competitors.

As I mentioned, this quarter represents the one-year anniversary of the spin-off of Ameriprise.

Over the last year, the Company has become even more focused around driving our spend-centric strategy and has delivered strong organic growth while we continue to leverage some of our unique assets, including our brand, our closed-loop network and our information management capabilities to continue to identify and pursue high-growth, high-return opportunities within the payments industry.

We are optimistic about the growth opportunities that we see.

We have spoken to you in the past about the plastic penetration upside we see, given the relatively low levels of spending currently on plastic throughout the geographies and customer segments in which we operate.

Our continued focus on growing merchant coverage and targeting customers with compelling products and offers that drive their spending will enable us to capture more of this spending on our networks, supporting our organic growth initiatives.

We also feel uniquely positioned, given our vertically integrated payments infrastructure, which encompasses the issuer, acquirer and network activities, to continue to innovate and drive our business towards new or expanded growth opportunities that meet or exceed the high-growth, high-return criteria established by the organic business.

Some of the immediate growth opportunities that we see that both embody the spend-centric model and position us to drive growth and market share are, first of all, our GNS business, in which we have established a strong foundation through the network of bank partnerships that we forged outside the U.S. over the past 10 years, and the initial progress that we've seen in signing and ramping up bank partnerships within the U.S.

This foundation, combined with the strong ROE profile of these activities, make us very optimistic about the business' future growth potential.

Our small business segment, particularly in the U.S., which is a $2.2 trillion segment in which we have cultivated a market leadership position and in which plastic spend penetration is still less than 50%, the average spend within our small business segment is particularly high, driving considerable spend velocity and returns within this business, all of which make it an attractive segment on which to continue to focus.

Finally, our global middle market corporate business, which represents a significant opportunity, given the high average spend and strong ROE profile of this charge-only business -- this $950 billion segment is less than 10% penetrated by plastic.

We have made considerable progress in this area over the past several years, in particular by leveraging our dedicated sales force, a competitive advantage in this market, to acquire customers and drive their spending to our network.

We will continue to invest in our middle market sales force, both in the U.S. and abroad, in order to pursue the considerable growth opportunity the middle market represents.

We are confident in our growth opportunities and we believe we're positioned well to execute against our business objectives and financial targets.

However, we're also cognizant of the ongoing competitive pressures within the marketplace and the growth challenges within the economic environment.

In particular, interest rate comparisons will become more difficult early next year as current hedges roll off and the beneficial provision-related factors from the U.S. bankruptcy law change that we are enjoying this year will likely not be present.

As a result, to ensure that we're positioned to continue to invest in growth opportunities, we remain intensely focused on re-engineering activities.

While this will likely generate re-engineering-related expenses from period to period, it will position us to continue to effectively control underlying operating expense growth.

In addition, we continue to leverage our investment and balance sheet optimization disciplines to allocate capital and to ensure that we're positioned to be able to continue to drive our organic growth, as well as to capture the important growth opportunities that we see on the horizon.

In summary, our recent business success and our strong track record of innovation, product development and customer-focused marketing makes us confident that we are positioned to continue to drive attractive growth and returns into the future.

Thank you very much.

And Sarah, I think we are now ready to take questions.

(OPERATOR INSTRUCTIONS).

Bob Napoli, Piper Jaffray.

Two questions, if I could, one numbers and just one theoretical.

If you look at the international business, the earnings there don't have the same kind of growth trajectory or returns of the other businesses.

I was wondering on the earnings side if you could tell us what earnings you lost from the sale of the Indonesian, Malaysian and Brazilian businesses?

And is that the primary reason for those trends?

Well, the overall level of earnings out of those three operations were not significant in the overall scheme of things in that segment.

In this particular quarter, there was actually a gain, as I mentioned, of $33 million that was allocated into that segment from the sale of Malaysia and Indonesia.

The fundamental trends that are taking place in international are actually very strong.

I mean, if you look at the billed business growth and the metric growth, as I said, billed business was up 14% if you adjust for the sales that I talked about overall, and receivables were up 20%.

And those are both positive things.

Those were offset in the quarter somewhat by the fact that the travel business revenue growth rate continues to be under pressure as there's an ongoing transition to online spending.

And our American Express Bank is in that segment, and American Express Bank is under pretty significant pressure as interest rates go up and their spread business is pressured.

So what you are really seeing, Bob, in that segment is the impact of these various trends.

And I underline that our general view of things is that we don't manage this business segment by segment.

We manage it in totality.

And there are a lot of relationships between the establishment services business that we operate internationally, which is reported in our third segment, and of course, our international card businesses, which are in the second segment.

And then just with the U.S. consumer, it does seem like -- well, business spending seems to be pretty good, especially on the small business side.

It looks like the U.S. consumer spending has lost some momentum.

Do you attribute -- is that the case, in your opinion?

Do you see a slowing of momentum in the U.S. consumer?

And do you blame that -- what would you attribute it to?

Well, it is a little hard to diagnose completely accurately.

If I read the reports of our competitors, I think we still have a distance between ourselves and almost everyone in the industry in terms of billed business.

Additionally, the comparisons that we have from prior year are really quite substantial.

So this was kind of the peak period of billed business growth for us in the prior period.

So you have to adjust for that in some way.

So there's no doubt about the fact that the absolute numbers are a little lower than they have been in the last few quarters, but the comparisons are also a little bit steeper than they were in prior quarters.

Chris Brendler, Stifel Nicolaus.

I guess a quick follow-up, if I could, on Bob's question -- if I delve into these metrics as much as I possibly can in terms of the spending side, I can certainly see how there was a great period last year, and it is a very tough comparison.

But on the T&E side, it looks like that 8% growth is one of the slowest numbers we have seen in some time, and we're also seeing I think an airline-related charge, and volume was down a little bit.

Any sort of parsing besides just the consumer in the U.S. -- is there anything on the T&E side you are seeing?

Well, from a T&E perspective, so total airline volumes, transactions were up modestly, and then average ticket price was up.

I think that is quite consistent with what we saw last quarter.

And the overall levels, although I don't remember exactly the numbers with last quarter, we're fairly consistent.

There's certainly no significant drop-off in growth rate in T&E versus prior quarters.

This pattern has been established now for probably the last three quarters, I would guess, where average transaction size has grown very modestly and the ticket has been up quite a bit.

Last year, we kind of had the opposite effect -- we still had ticket prices down and we had transactions volumes that were up very nicely.

But generally, I think to the broader question, really, which is maybe the intent of both your and Bob's question on revenue growth, I think there are a couple of factors that are worthwhile underlining from what I had talked about in my introductory comments.

First of all, I think there are a number of people who look at our results on a managed basis and typically build models on a managed basis.

And the revenue discussion that I just had was on a GAAP basis.

There is a difference, obviously, if you go back to page 12 of the supplement and look at the impact of the additional revenues that would have been added.

Had we looked at this on a managed basis, you would have picked up some income, obviously.

And then secondly, we had this reclassification out of operating expense, some of the deferred acquisition costs that were a contra-revenue or going forward will be a contra-revenue item against our discount revenue, or it's actually our net card fees.

And as a result of that, we took about a 1% impact on our revenue growth rate.

And so, frankly, if you add both of those two things back in, you factor in a 15% billed business growth rate, you look at last year's comparison, it all seems to kind of make sense to me.

Just a quick follow-up.

I'm sort of backing into this 8% number of T&E spending year over year, so I'm not sure it is actually correct.

And then also, on that latter point on the revenue growth being impacted by the change in accounting -- is that across all segments?

Yes, that is across all segments.

That is a consistent accounting change across all segments.

If you look on page -- I'm just looking here real quick, Chris, on page 6 in the supplement, we actually split out the T&E-related volumes.

So they are kind of in the middle of page 6.

Non-US T&E categories were about 68% of the total.

They grew 15%, while T&E volumes rose 11%.

And as I said, that was split -- modest growth in transaction, stronger growth in average ticket.

David Hochstim, Bear, Stearns.

I wonder if you could just talk some more about the increase in professional services expenses and the items that were highlighted in the supplement and sort of the relative importance, and how much of that might continue?

It's up just about $300 million for the first nine months relative to last year at $120 or so?

The primary things that are there are -- we're doing some additional outside use of collection agencies, and that is one factor that is driving the expense.

We also continue to kind of shift spending from internal technology vendors to outsourced technology vendors.

And I don't think either of those patterns, David, are likely to change much.

I think those are both kind of business policy or business practice things that we do.

It is a decision whether we do them outside or inside.

At this point in time, most of that is being done on the outside.

And I think that is what you are seeing reflected in that number.

Are there IBM-related expenses in there?

Or is that some other technology?

Yes, there's IBM-related expenses that are in there.

So that rate of increase should continue, or next year (multiple speakers)?

Again, we don't forecast numbers like that.

I guess the point I would make is there's nothing unusual about what is in that line item this year.

They are decisions that we make about whether we do something on the inside or outside.

Our HR expenses were well controlled in the quarter, as you saw.

Our total headcount was essentially flat versus last quarter, down a little bit from last year.

These are decisions that we make all the time that impact individual line items on the income statement.

And then could you just clarify one thing?

There was an increase in basic cards outside the U.S. that was greater than the increase in total cards outside the U.S.

And that seems kind of unusual.

I just wondered, does that have to do with the sale of those proprietary businesses or something?

You know, I am -- that is probably the reason, but I honestly -- honestly, I need to think it through a little bit.

Whenever you think of it, you can just shout it out.

Joel Houck, Wachovia Securities.

Gary, it sounds like your revenue growth was about 13% if you add back in the accounting change or reclassification.

Right.

Yet the marketing -- year-over-year growth in marketing dropped below 10% for the first time in a while.

Is there something unusual in the quarter?

Or was this more of a -- are you playing more defense, maybe -- perhaps there were some pockets of slowness in the economy, maybe -- consumer grew 11%, still a good number on a relative basis to competitors.

But can you just talk a little bit about what is going on in the marketing and promotion and maybe the outlook going forward?

Yes.

We have talked in the past about our ability to dial this up and dial it down as circumstances dictate.

And certainly what you have seen is on-purpose decisions that we make with regards to the overall level of marketing expenditures.

I can tell you than most of the change in marketing was our brand advertising campaign related to "My Life, My Card."

And you can really see that because it shows up in Segment 3 of our financial statement.

Most of our brand advertising is found there, so you can see what the year-over-year change was in that brand campaign.

And, you know, last year at this time we were spending at a particularly high level on that campaign, and so have dialed it back a little bit this year.

But I think what you are seeing reflected here is exactly what you would expect to see from us, given the way we have talked about the business.

If you look at our margins, our pretax margins, our pretax margins actually increased in the quarter by about 190 basis points.

If you take out the additional re-engineering that we had in the quarter last year, you still see a very nice improvement in leverage.

So we've got nice growth in revenue, particularly if you adjust it in the way that you just suggested.

You have nice growth in revenue.

You have very well-managed expenses on the primary line items that are important to the business -- on provision, on human resource expense, on all of the kind of larger line items, you have very well-managed expense control, leading to good expense leverage in the quarter in spite of the very difficult comparisons that we had from last year.

Craig Maurer, Soleil Securities.

Question regarding paydown rate -- what's the trend look like there over the last six months to a year?

And to dovetail off the previous question, on the competitive environment, we have heard some issuers discuss a slowdown in mailing in the market domestically and a possible softening in that market over the next six months.

If you can comment on both of those, I would appreciate it.

Sure.

Our paydown rate we don't disclose specifically.

But I can tell you that if you go back over the last six months, there really isn't a firm trend in either direction.

In fact, a couple of our businesses went in opposite directions this quarter.

There wasn't a consistent pattern among the businesses.

And it has been up and down, but within a very narrow band going over back over the last six quarters or so.

So there's really not a definitive trend, I wouldn't say, in that metric.

We have mailed at a relatively strong rate in this last quarter.

And obviously, our -- we move that metric up and down a little bit based on whatever programs we happen to have in the pipeline.

Difficult for me to comment on what others plan to do.

I think the one thing I would underline is this success that we've had with building our Internet channel.

We talked about this in prior analyst meetings.

But although direct mail continues to remain a very important channel for us, today the use of inbound contacts that come to us because of the quality of what has happened from a brand advertising standpoint over the last couple of years has built some momentum into that channel that is really quite outstanding and continues to be a strong part of what we plan to do over the next few quarters.

Ed Groshans, Fox-Pitt, Kelton.

I just wanted to talk to you -- it seemed like the provisioning in worldwide cards came down a little bit.

And the thing that I was noticing is that reserves to delinquencies are at, like, a 1 to 1 level.

And it had been higher than that in prior periods.

Could you just give me some of your thoughts around what you are seeing there and what your expectations are?

Well, they are very modest changes.

So if you go back to page 8 in the supplement, for example, you can see how this has moved.

There are obviously a couple of different factors that drive this.

One is what the bankruptcy level is.

I'm going to talk primarily now about the U.S. because that kind of drives the lion's share of what we're talking about.

From a bankruptcy perspective, we've continued to benefit from the fact that bankruptcies really are at lower levels than they were prior to the bankruptcy legislation.

And that has given us some advantage.

Offsetting that is, as you can see, a modest deterioration in past dues as a percentage of total loans.

Those factors go into the models as we calculate what the provision is going to be.

And as you can see here, we have had a modest decrease as a percentage of the total, if you look at the percentage coverage on 30-day past due accounts.

But it is a fairly mechanical calculation, depending on really the two factors that I talked about just a minute ago.

I think the important factor is that, as I mentioned in my opening remarks, we do think that the current level of bankruptcies is not sustainable, that it's more than likely that we will see either an increase of bankruptcies, but more likely an ongoing increase in past dues as we go into future quarters, if you kind of model out what you think is going to happen as a result of these bankruptcies.

And that is going to give us a little bit of a headwind as we go into the first part of next year.

But I do believe that is well controlled.

I think it is well calibrated in the way we look at the future.

And it is nothing, from our perspective, that is unexpected.

But the numbers that you see today I think are quite consistent with the patterns that have been reported by other issuers and reflect the underlying trends that I just talked about.

And then one more, if I could.

You talked about the return of capital of 81%, really running above I guess the long-term average and also the guidance, 65%, for three or so quarters now.

Going forward, should we continue to look at maybe running above average as long as the returns are running above the high end of the 30% guidance?

Well, the one thing that I can assure you is that we have no desire to sit on cash.

So to the extent that we continue to, just as you said it, to the extent that we continue to have high returns, we will return the excess cash that we have back in the form of share repurchases or dividends.

That is our stated intent.

Now, the long-term target that we have for that is 65%.

Fortunately, we have been able to perform well above that for the last few quarters.

Certainly, on a year-to-date basis, we are into the 90% total capital returned to shareholders.

But it allows us the flexibility, when we have an event like we did with Ameriprise, not that we expect another major event like that, but it allows us the flexibility when we have an event like that to take a pause in the program and ensure that the amount of excess capital that we have is appropriate and aligned with what we have agreed with the rating agencies that we would maintain.

Meredith Whitney, CIBC World Markets.

I have two quick questions.

One is, can you quantify the impact of lower gas prices in the quarter and if that had any impact on billed business?

And then the second question is -- forgive me if it's late and I'm particularly blonde right now -- but you had talked about your interest rate guidance in terms of the hedges that are rolling off.

That's a question that has come up quite a bit, and as far as we have modeled it, it is a pretty -- a small impact on EPS.

Are you saying something more there in terms of the re-engineering expenses, or am I not getting something?

I just need that dumbed down to me.

No, there's no -- with respect to your second question, Meredith, I think you've got it positioned appropriately in terms of what we had talked about.

So this year, we have said that we are roughly 50% hedged.

We said as we go into next year that we are substantially lower than that amount.

And so there's two factors that really impact us as we go into the first part of next year.

We have both a lower amount of hedges, and then if you look at the absolute level of interest rates for the unhedged position that we did have, they are higher today than they were a year ago.

And if today's interest rates prevail, you're going to get the impact of those higher rates.

So there's really two impacts in the first half of next year that are different from the first half of this year -- both the absolute higher level of interest rates and then the fact that there is a lower level of hedges.

And you are just going to have to model through what the impact of that is.

The movement in gas prices is really relatively inconsequential.

As a total percentage of our billed business, it is a relatively small number.

And then this is a small number on top of a relatively small number.

So it is not a particularly large vertical market for us.

The impact up or down wouldn't be a significant factor in driving the numbers that we've talked about.

Because I just wonder in terms of now that you have rolled off the rewards for gas and groceries, etc., whether that had any impact, and then you pick up the points for the online mall shopping -- whether that is going to have a corresponding impact?

Am I reading too much into it?

I think we're doing -- yes, I think you might be.

I think we're doing very well in both gas and in grocery.

The everyday spend channels continue to perform very well for us.

Eric Wasserstrom, UBS.

Gary, you spoke a little bit about this, but I'd like to get a little more granularity on the drivers of the billed business spend on the consumer and small business side.

It seems that the growth rates there are disinflating, disinflating from a very high level, and maybe you argue just going back to where they normalize.

But what is it that explains that?

Is there some change in the behavior, or you had a particularly robust period and now it is cooling, and is that a function of some of the wealth effects?

What are the underlying drivers of that disinflation trend?

Well, I wish I could be completely exact in that answer.

If you look across the billed business results of each of the companies that are kind of in our competitive set, you have seen kind of a similar dropback kind of year over year in overall level of billed business.

Now, fortunately, we have continued to outperform them, particularly if you adjust for the fact that there were acquisitions in some of the numbers of the competitors that reported earlier this year.

So we are not immune, obviously, from the effects of the economic cycle.

Now, that doesn't say that we are predicting some kind of a downturn in the economy.

We are not doing that.

But certainly there are macro effects that have an impact on everyone who competes in this business.

What our objective, obviously, is is to consistently outperform our competitors regardless of the environment and to make sure that we operate a flexible enough business model that we have the ability to compete and deliver on average and over time on the financial commitments that we have made to you all within a range of different economic environments.

And so honestly, to say that we know what moves our billed business up or down by 2 or 3% quarter to quarter would be an overstatement of our macroeconomic forecasting capability.

We simply don't know that.

What we do know is that it does, if you look back over a very long period of time, and I'm talking about now going back to, say, early 2002, we have performed roughly within the range that we are performing in now.

And we have been able to operate our expenses, just as we did in this quarter, in a way that we maintain margins at a pretty attractive level.

In fact, in this particular case, we're able to actually expand margins.

And so more than trying to explain the exact detail of what's happening with our billed business, what I hope you would take away is how we think about the business and the way we manage it, given a range of possible environments.

We don't have a particularly strong crystal ball about how things will evolve over the next few quarters.

What I do know is that we have got an excellent capability to manage our expenses in a range of environments.

And you see some of that evidenced in this quarter, and you will see that continue to be evidenced, depending on what the environment happens to evolve to be.

I appreciate that.

I guess I'm just wondering -- would you characterize the current period in the U.S. small business and U.S. consumer as being in line with, above or below your long-term expectations?

Well, you know, our long-term expectations for revenue growth are 8%.

And so obviously we reported above that.

We reported above that in this quarter.

And that was without adjusting for the things that some have talked about potentially adjusting for.

And so as we think about it, this was a very strong and very solid revenue growth quarter for us.

And 15% billed business is actually pretty darn good.

And so we feel good about the quarter, we feel good about the expense management associated with the quarter, and feel very good about the results.

Brad Ball, Citigroup.

Could you give some clarification on the tax rate?

You said it was down modestly to 29%.

It was 33% in the second quarter.

You mentioned in the release three things that drove that.

I wonder if you could just give some color around it, and what should we expect as an effective tax rate going forward?

Sure.

There are, as you correctly stated, three things here.

The first is a tax settlement that we got with the IRS.

So we had paid taxes historically at a time when we also had some bills from the IRS that were due to us.

We had been credited by the IRS at one rate and paid at a different rate, and the net of those two was advantageous to us.

And we found out literally at the close of the quarter that we were going to get a favorable settlement there.

And so that positively impacted our situation in the quarter a little bit more than what we had expected, obviously, as we came through the quarter.

We also finalized the 2005 tax return during the quarter.

That is typical that this would be the quarter that we would finalize the tax return.

And when you do that, you obviously true-up your estimate that you made at the end of the prior year.

And we did that.

And then finally, although we try hard to ensure that we have our mix of income correctly forecasted for the year by geography and by state -- so I mean geography outside the U.S. and inside the U.S. -- we true that up as we go through the year as the actual income comes in from the various geographies around the world.

And as a result of that, we had a little bit lower rate this quarter that benefited us.

Obviously, compared to last year, it's a substantially higher rate, but a little bit of a benefit from that as well.

I think the ongoing tax rate -- I will refer back to my comments that I've made in prior quarters -- probably if I just pick a normalized rate, certainly starts with a 3, and then I'll have to kind of let you pick from there.

I mean, it does vary and bounce around from quarter to quarter.

But on a normalized basis, it is in the 30s, certainly.

So would you -- just to summarize those three points that you laid out there, would you say that you had a tax benefit in the quarter of -- could you give a dollar amount?

Was it over $30 million?

We didn't estimate it, Brad.

But obviously, it wasn't anything like the order of magnitude that we had in the prior-year quarter, or we would have broken it out and put a dollar amount against it.

And then just a follow-up real quick.

On one of the prior questions about the international business revenues, one of the items that you indicated was dragging revenue growth a bit was increased incentives for corporate clients associated with increased corporate volumes.

Wonder if you could just give a little more color around those incentives?

What exactly is that?

Is that something that is ongoing?

Yes, generally it is.

So on the corporate card side of the business, we provide incentives to our major -- large corporate card customers to take the American Express card.

And there is a mix of things that you do when you sell a corporate card program.

Some of those things involve savings programs that you do that can advantage those customers.

It involves providing reporting to them so that they can manage their own expenses better as they put things on the corporate card around the world.

And it involves providing incentive payments to them as well.

And those are typically all part of an overall agreement that we have with someone when they start with us in a corporate card program.

But it isn't necessarily giving them a break on the rate or--?

It doesn't give them a break on the discount rate.

It is just an incentive payment.

Scott Valentin, Friedman, Billings, Ramsey.

More of a conceptual question -- you've had great success in growing the finance part of the business, what I call the credit card part.

But some investors view that as being a lower valuation business compared to the charge card or the discount side.

I'm just curious -- is there a conscientious effort to kind of manage those two?

Or is just you try and grow both as prudently as possible?

Well, I think the honest answer is is what we try and grow is return on equity.

So what you see is an ever-increasing return on equity over the course of the last few quarters.

The fact that we had a 34% return on equity in this quarter and paid out more than 90% of the capital that we generated I think underlines the focus and intensity with which we manage our capital.

And so from time to time, we will grow various elements of our business, depending on where we think the opportunity to hunt lies.

And obviously, we have been very successful growing the receivables portion of our business over the last little while.

The interesting thing about that is if you look at the total mix of our business, including GNS, the success we have with our small business portfolio, the growth that we have in our middle market business -- if you take all of those things added together, what you see is an increasing return on equity that is very attractive and puts us in a position to have these high payout levels that I've talked about just a minute ago.

So that is how we manage the capital.

That is how we manage to the return.

And that is the way I would think about it.

And I think you will see the various elements of our business move up and down based on where we opportunistically think we have the best opportunities to grow.

And just a follow-up question, if I may -- in the GNS business, it looked like the promotional spend was down.

I guess that is the My Life program?

Correct.

So is that a permanent reduction or is it more of, as you mentioned earlier, you pick your spots and you thought now was an opportune time to dial back that marketing a little bit, given you had good revenue growth in that business?

We pick our spots.

I'm the worst person in the world to give you any detail about our exact marketing programs.

But best as I know, we run marketing campaigns for a while, then you go off on that campaign, it allows it to kind of refresh, and then pulls back at some time in the future.

So I wouldn't take that necessarily as a permanent reduction.

But on the other hand, there are other elements of the marketing mix that are going up.

So we will change those elements of marketing mix, both membership rewards as well as the use of brand advertising and product brand advertising, and then direct marketing expenses as we think we can best drive the business.

Joseph Dickerson, Atlantic Equities.

Can I just clarify the comment that you made sort of towards the end of your prepared remarks about the re-engineering initiatives?

I'm just wondering if the slope of the re-engineering initiatives is going to increase next year?

Is that a fair interpretation?

Well, you know, as I have always said, that number really varies based on how we think about the world and kind of what initiatives we have underway.

So far this year, we have recognized about $600 million -- I think we said in the quarter, right? -- we had $600 million worth of re-engineering benefit, roughly 30% of which came from revenue initiatives.

And over the last few years, we have had well over $1 billion worth of re-engineering benefits in each year.

I would say nothing has changed about that fundamental assessment.

However, the focus that we have, cost re-engineering, revenue re-engineering, obviously changes over time based on the opportunities that we have, and changes based on the environment.

So paradoxically, the times when we have had the widest margins, if you look back over the last few years, have been at the times when we have had the weakest business levels, when we have really had to have real strong cost re-engineering to offset what was weaker business levels.

And then at times when we have had stronger business, we have actually had somewhat narrower margins as we took advantage opportunistically of the business situation to try and drive the business.

And so I don't think there's anything that is going to be unusual about next year or that you should read into what I was saying that would cause you to think that it is going to be differently managed than it has been historically.

So we are very focused on maintaining this flexible business model that allows us to respond to various kinds of economic environments.

And to do that, you have to have a pretty robust pipeline of things that you're always working on to enhance your productivity.

And that is where we are now, and that is likely what we will do next year.

And can I just ask you a very quick follow-up?

In terms of -- a lot of people are focused on what appears to be a small deceleration on the billed business growth.

Is there any impact towards growing the receivables side of the business a little bit more than the spending business that could be driving that slight deceleration?

There really is not.

No.

Part of this is -- internationally, you know, we have had real success.

You have seen the numbers -- 14% billed business, 20% growth in AR.

We have had real success under Ed's leadership in driving our what we call premium value lending strategy as we focus the growth of our business on lending products among customers that have very high spending associated with them.

That is obviously a program that is getting a lot of traction and being very successful.

But there is no kind of on-purpose effort within the Company to re-orient the way we are growing the business and have it be lending oriented versus spending oriented.

The focus of the Company continues to be very much on driving consumer spending and then opportunistically taking advantage of insights that we get from our risk management capabilities, to expand our receivables portfolio, or where we have products that have particular momentum behind them to get behind those products and drive those products, and to do that in the context of driving a return on capital that is very attractive.

Matthew Park, Prudential.

I guess I missed a lot of the introduction, so I apologize if you covered this, but could you give us the amount of the net card fee change in terms of accounting change you have seen -- you have implemented?

And then obviously, that implies also the operating expenses were running ahead of what is reported.

Can you give us kind of a clarity on what the normalized operating expense is--?

Yes, we said it was 1% of revenues, is what we have disclosed.

We said it would add about 1% to our revenue growth rate.

But you haven't specified exactly how much?

We did not specify exactly how much.

And then the second category of questions is your card growth was fairly strong, especially on the basic card side.

Could you give us commentary on what is driving that and what kind of a revenue ramp-up or spending ramp-up you expect out of those cards?

Yes, in fact, this gives me a chance to come back and also answered David's questions that he had asked earlier.

So the reason, David, that the basic number growth rate was a little higher than the total growth rate is that CIFs as a percentage of the total were lower this quarter than they had been in prior quarters.

But in terms of the overall growth rate in cards in force, obviously we're having success in attracting new customers in the franchise.

That's true both from a GNS perspective as well as from a proprietary perspective.

I think that is coming as a result of the success we have had with various channels of distribution.

So we are certainly not wedded only to direct mail, to channel distribution -- we have had great success with what we have done with our online activities.

Supplemental cards continue to perform very well.

And so really, we have had higher growth rate in CIF now than we have had at any time in our history going back to 2001.

So I think about these essentially as new stores that come on with relatively low revenue.

And there's the opportunity, then, over time to have these cards comp, in a sense, pick up revenue, and it bodes very well for us I think both to have on an absolute basis 6% average spend growth at the same time that we're having very strong overall proprietary cards in force growth.

I think it bodes very well for the future in terms of having those things and obviously underlines our confidence in what we think is our ability to continue to perform at the kind of financial level that we've committed to.

Bob Napoli, Piper Jaffray.

Most of my questions were answered.

And I'm not sure if you'll answer this one, but I will ask it.

As you look at charge-off and kind of what the current charge-off rates are and you look at bankruptcies picking up or delinquencies, what your business model today -- is a normalized charge-off rate in the 5% range?

Is that what you would expect to get to as the bankruptcies either pick up or consumer -- the people that would have gone bankrupt go delinquent or otherwise charge off?

Obviously, we don't forecast that kind of thing.

Obviously, the annualized number for last year is too high and the number that we think we have for this year is too low.

So I wouldn't use either of those as the basis for looking at what normal might be.

There are two factors that drive what is happening from a credit perspective beyond the economy that are very important to us.

One is what is happening with Membership Rewards.

So as Membership Rewards grows, that tends to improve our credit performance over time.

The second is our underwriting skills.

We continue to demonstrate better and better underwriting skills, and clearly, a significant differentiation in our performance relative to the rest of the industry.

So while I won't forecast a specific number, I will tell you that neither of the last two years' numbers annualized represent probably what the number would be.

But if you go back historically, you probably have to improve on that a bit, given the fact that Membership Rewards is a larger proportion of our total, and [Ash] and the risk team just continue to do an outstanding job for us.

Sarah, we probably have time for one more question.

Laura Kaster, Sandler O'Neill.

Most of my questions have obviously been answered.

But last quarter in GNS, you had a big uptick in provisioning.

And that was due primarily to Taiwan and the UK.

Can you give us an update on the trends that you're seeing there, and also some type of an update on merchant acceptance on an international basis?

Yes, I think you might be mixing apples and oranges.

But correct me if I'm wrong.

So within GNS, we don't take any credit risk.

And so there was really no provision --

I'm sorry, in your international card business.

International.

Yes, so in the international segment, we did have an increase in provision last quarter.

That was driven primarily by Taiwan.

But as we said, the level of delinquencies and write-offs in the UK have been high as well.

And you continue to see a relatively high level of increase in provision quarter over quarter in the third segment again this quarter as well.

It's not nearly as high as it was in the last quarter, but there is a relatively high level of overall provision.

Those things obviously are factored into how we think about the future, factored into our best projections going forward.

And we think we have adequately captured the full implications of the credit environments in those international markets in our financial results today.

You asked me a second question.

I'm afraid I didn't write it down.

Merchant acceptance, yes -- on the merchant acceptance internationally, we continue to make actually pretty good progress.

Our focus continues to be on city-by-city penetration.

We focus obviously on those parts of the world where we have most of our Cardmember spending.

And measured on that basis, we have seen very good progress internationally.

So thank you very much for joining.

Appreciate you all being part of the call.

Thank you for participating in today's American Express third-quarter 2006 earnings conference call.

You may now disconnect.