美國運通 (AXP) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Express second-quarter 2013 earnings call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Senior Vice President Investor Relations, Mr. Rick Petrino. Please go ahead.

Thank you. Welcome, and thank you for joining us for today's call. 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, estimate, 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 and earnings supplement, which were filed in an 8-K report, and in the Company's 2012 10-K and Q1 2013 10-Q already on file with the SEC.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second-quarter 2013 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will begin with Dan Henry, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's earnings, through the series of slides included with the earnings documents distributed, and provide some brief summary comments. Before I turn the discussion over to Dan, I did want to acknowledge that this will be Dan's last earnings call as our CFO. He will be leaving AMEX after a distinguished 23-year career, including the past 6 years as CFO, where he's played an important role in building relationships with the investment community. On behalf of all of my colleagues throughout the financial organization, I want to sincerely thank Dan for his many contributions, and to wish him the best of luck on his retirement.

I also wanted to recognize that Jeff Campbell is joining us on the call today. Jeff joined AMEX from McKesson Corporation, where he was Executive Vice President and CFO of the largest healthcare services company in the US. Jeff will be assuming CFO duties in early August after we file our second-quarter financial results, and we are excited to have him as part of American Express.

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

Okay, thanks, Rick. So to start on Slide 2, the second-quarter 2013 summary financial performance slide. Total revenues came in at $8.2 billion, that's 4% higher than a year ago. On an FX-adjusted basis, it's also 4%. In the first quarter, the growth rates were 4% on a reported basis, and 5% on an FX-adjusted basis. I will speak about the impact of card member reimbursements on revenue growth a little later.

Net income came in at $1.4 billion, 5% higher. EPS is $1.27, 10% higher, as you can see the benefit of our share buyback program. And on the last slide, you can see that shares outstanding are declining. Return on average equity was 24% in the second quarter. Without the three adjustments in the fourth quarter of 2012, as this is a 12-month rolling calculation, ROE in the second quarter of 2013 would be 27%.

Moving to Slide 3, our metric performance billed business came in at $237 billion. That's 7% higher, or 8% higher on an FX-adjusted basis. That compares to the first quarter when we grew at 6% reported, and 7% FX adjusted, so this quarter is about 100 basis points better growth rate than the first quarter.

Total cards in force are 104 million. That's a growth of 4%. Proprietary cards grew 2%, which is comparable to what we've seen in recent quarters. Average basic card member spending is $4,097 in the quarter, that's up about 4%, and reflects the continued strong card member engagement that we are seeing. Card member loans are $63 billion, that's an increase of 3%, 4% on an FX-adjusted basis, and reflects continued modest growth in loans.

Moving to Slide 4 -- so, this is billed business growth by segment on an FX-adjusted basis. So total billed business, the red line, you can see the growth rate increase from 7% in the first quarter to 8% in the second quarter. Both ICS, which is international consumer, the light blue line, and GCS, global corporate services, the green line, increased by about 100 basis points. G&S, the yellow line, increased from 12% in the first quarter growth rate to 17% growth in the second quarter, driven by continued strong growth in Japan, and accelerated growth in China and career due to new partners and product launches. Markets like China have high growth, and are strategically important.

Moving to Slide 5 -- so this is billed business growth by region -- so the US, the dark blue line, growth of 7%, consistent with the first quarter. EMEA, the light blue line, and LACC, the yellow line, both have increased their growth rate compared to the first quarter. EMEA is growing at 6%, and LACC at 10%. JAPA, the green line, increased from 9% growth to 13% growth, driven by Japan, China and Korea.

So before I leave this regional section, let me just comment on the EC draft proposal that has been in the news today. We put out a press release earlier today based on how the preliminary report has been characterized to us, and we made a number of points. First, the publication of the formal proposal by the Commission will start a lengthy legislative process and review period. We expect these proposals to prompt extensive debate among many market participants. The proposals focus primarily on, and cap, the interchange fees charged by four-party payment systems such as Visa and MasterCard. The discount rate that American Express charges to merchants would not be regulated. Our proprietary consumer and corporate card businesses are not covered by the pricing caps. Three-party systems such as American Express would only be covered when they license other institutions to issue cards, as in our global network services business.

GNS represents a relatively small percentage of our European business. The provisions that focus on separating the payment network and processing functions do not appear to impact proprietary networks like ours. Given the potential impact on consumers and competition within the European payment sector, American Express has been in touch with senior policy makers at the Commission, and will continue to represent its positions vigorously throughout the process.

Now let me be more specific what we mean by GNS represents a relatively small percentage of our European business. EMEA represents about $100 billion of billed business in 2012. GNS billed business in European Union Markets are less than 15% of total EMEA billed business. On Page 110 in our annual report, in footnote Number 25, EMEA pre-tax income for 2012 was $505 million. GNS European Union pre-tax income was approximately 12% of EMEA pre-tax income in 2012, so I just wanted to dimensionalize that further for you.

There are many aspects to the EC draft proposal. They will play out over time. Some will impact us directly. Some will impact us indirectly. We are accustomed to changing business environments, and reacting to them in an appropriate manner, and we will do the same in this situation.

So let me go to Slide 6 -- so this is US consumer card loans. So the bar represents US card member loans, and they totaled $54.6 billion in the second quarter of this year. We have a growth rate of 4%, and that's the same as the past two quarters. As I mentioned before, worldwide loans grew 3%, and 4% on an FX-adjusted basis. The 4% loan growth is driven by growth in billed business. Loan growth is about 50% of the rate of growth in billings on our lending products.

Net interest yield, which is at the bottom of this chart, is up 10 basis points compared to the second quarter of 2012. It is down sequentially from the first quarter of 2013, which included a reserve reversal for card member reimbursements that had been set up in prior periods. As you'll see in a minute, our credit performance continues to be excellent.

Let me comment on interest rates, which have been the focus area in the industry, before I move to the next slide. As disclosed in our 10-K, a 100-basis-point immediate increase in all interest rates would reduce the Company's net interest income by approximately $220 million over a one-year period. Historically, an increase in long-term rates generally has a minimal impact on our Business; however, movements in short-term rates impact earnings. The impact is primarily driven by the fact that we fund a portion of charge card receivables and transacting loan balances, which do not have interest rate revenue streams, with variable rate debt. However, historically in rising interest rate environments has also coincided with strong billings and revenue growth.

So let me move to Slide 7, revenue performance. But before I go do a review of the individual P&L line items, I wanted to touch on card member reimbursements, which is driven by our continuing commitment to proactively review card practices, identify any issue, and remediate them quickly. In both the second quarter of 2013 and second quarter of 2012, these efforts resulted in costs that impacted year-over-year variances on some of our P&L lines. The overall cost related to this work was similar in both this quarter and the second quarter of 2012; however, in the current quarter, most of the reimbursements were recorded in revenue, reducing revenue. Therefore, the revenue growth rate in the second quarter of this year, which was 4% on both a reported and FX-adjusted basis, would have been 5% on an FX-adjusted basis excluding the impacts of the card member reimbursements, same as the first quarter of 2013.

A year ago, most of the costs were recorded in operating expense. The operating expense growth rate in the second quarter this year is lower due to the reimbursement costs incurred in the prior year, and I'll provide more detail on adjusted operating expense on Slide 13. We've also included a reconciliation of the adjustments in Annex 9. We continue to place a premium on self-identifying resolving any customer-related issue, and we clearly believe that this is the right thing to do for our customers.

Now let me go through the specific line items on Slide 7. Discount revenue increased 6%, reflecting 7% growth in billed business, partially offset by a decrease in discount rate, and faster growth in GNS billings than the overall Company billings growth rate. The discount rate is 2.52 in the second quarter of this year, down 2 basis points from the second quarter of 2012, and flat with the first quarter of 2013. Net card fees increased 5%, as we had higher average fees per card due to fee increases, also due to the increases in the number of proprietary cards in force, and a greater mix of premium products. Travel commission and fees decreased 5%, driven by a 1% decrease in worldwide travel sales, and slower lower supplier revenues due to the timing of certain contracts. Other commissions and fees are up 5% due to slightly higher late fees and foreign currency conversion revenue.

Other revenue is lower by 13% due to card member reimbursements in the second quarter of this year, which I discussed a minute ago, as well as a benefit in the second quarter of 2012 related to a revised estimate of the liability for uncashed travelers checks. The second quarter of 2013 includes a gain of $36 million related to the sale of ICBC shares. The second quarter of 2012 had a gain of $30 million related to the sale of ICBC shares.

Net interest income increased 7% compared to the second quarter of 2012, reflecting a 3% increase in average card member loans, lower funding costs on the charge card portfolio, and an increase in the worldwide net interest yield to 9.1% from 9% a year ago. In the second quarter of 2013, our international consumer segment included the impact of some card member reimbursements.

Moving to Slide 8, provision for losses, the charge card provision is $38 million or 23% higher than the second quarter of 2012, and this reflects the fact that we have higher receivables, up about 6% year over year, slightly higher write-offs, and a slightly lower reserve release, which was $24 million this year compared to $32 million last year. Card member loan provision increased $78 million or 31%, reflecting lower reserve releases; this year it was $25 million and last year it was $133 million. So this is the primary driver of the higher provision expense. That was somewhat offset by lower write-offs in the second quarter of this year, which were $348 million, and that compares to the second quarter of 2012 when write-offs were $370 million. So provision is increasing while credit metrics remain stable or improve slightly, as we'll see on the next slide.

So Slide 9 are our lending credit metrics. On the left side of the chart, you can see that we continue to have excellent write-off rate at historically low levels of 2%. On the right side is the 30-day past due, which is also stable or slightly improving, and again, these are historically low numbers. As I say each quarter, our objective is not to have the lowest possible write-off rate, but to achieve the best economic gain when we invest.

Moving to Slide 10, these are our lending reserve coverage metrics, and you can see that reserves as a percentage of loans and principal months coverage are lower in the second quarter of this year compared to the first quarter of 2013 and the second quarter of 2012, as our credit metrics continued to either be stable or improving. Reserves as a percentage of past due are slightly higher than the first quarter, as delinquency rate has improved this quarter compared to the first quarter. Our reserves in these metrics are appropriate for the risk in our portfolio.

So I'll move to Slide 11, which is expense performance. So total expenses improved, or grew rather, 1% year over year. Marketing and promotion increased 2% compared to last year, and represents 9.5% of revenues, and I'll cover this in more detail on the following slide. Card member rewards reflect higher spending volumes on co-brand and membership reward products. The membership reward ultimate redemption rate is 94%, and that's comparable to the ultimate redemption rate that we had in the first quarter. Card member services reflect enhanced benefits on our premium card products. Total operating expense decreased 4%, reflecting strong expense control, as well as card member reimbursement costs in Q2 2012, and I'll cover this on another slide as well.

Our effective tax rate for the second quarter of '13 was 29.6%, reflecting the resolution of certain prior year tax items. While discrete tax items lowered the tax rate in both the second quarter of 2013 and 2012 to be below 30%, over the past three quarters, our tax rate has been 32% or 33% in each of those quarters.

I'll move to Slide 12. This is marketing and promotion expense as a percentage of managed revenues. So marketing expense in the second quarter of this year was $786 million, compared to $773 million in the second quarter of 2012. As you can see on the right side of the chart, the second quarter was 9.5% of revenues, and on track to achieve 9% growth for the year, or potentially slightly higher. We continue to invest in our Business despite the slow growth economy.

Moving to Slide 13 -- so this is operating expense performance. Total operating expense is 4% lower year over year. Salary and benefit is flat year over year, and this reflects some of the benefits from the restructuring that we announced in January. Employee count is 1,300 lower than in the second quarter of 2012. Employee count in the first quarter decreased 1,100 compared to year-end 2012, but ticked up slightly by 200 in the second quarter. We estimate employee count at year-end 2013 will be 4% to 6% lower than at year-end 2012.

Professional services increased, reflecting higher technology development. And other net decreased 48%, reflecting $89 million more in card member reimbursements in the second quarter of 2012 compared to the second quarter of 2013, and you can see this on Annex 9. The second quarter of 2012 also included an asset impairment. The second quarter of this year includes a Canadian value-added tax benefit that lowered other net expenses.

So moving to Slide 14, this chart shows the adjusted operating expense growth over the past three years. In 2013 and 2014, our target is to grow operating expense at less than 3% each year. You can see the first quarter grew at 1%, and while the second quarter decreased 4%, after adjusting for the card member reimbursements I just discussed, the second quarter of 2013 would have been a reduction in year-over-year expense of 1%. So we were on track to achieve our target of less than 3% annual growth in operating expense for this year.

Moving to Slide 15. So this is adjusted expense as a percentage of managed revenue, and this excludes credit provision. In 2012, we committed to migrate this ratio over time back towards historical levels in two ways. First through revenue growth, and second controlling operating expense while continuing to invest in the Business. In 2012, and the fourth quarter of 2012, in those bars, the dotted line is excluding the restructuring charge and card member reimbursements that we had in the fourth quarter of 2012. As you can see on the chart, we are making substantial progress in reducing adjusted expense as a percentage of managed revenue. While both the first quarter and the second quarter of 2013 round to 69%, the second quarter's ratio is actually slightly lower than the first quarter, if you carried it out one more decimal point.

Slide 16 -- so these are our capital ratios. In the second quarter of 2013, our Tier 1 common ratio is 12.5%. In the quarter, we generated $1.7 billion of capital, $1.4 billion from net income and $300 million from employee plans. We also distributed $1.7 billion in capital, $1.4 billion through share buybacks and $300 million in dividends. Risk weighted assets increased slightly due to higher receivables.

The Basel III implementation from Basel I would have reduced Tier 1 common by 30 basis points, but I would remind you that we have not yet implemented Basel III advanced approach. So there has been much conversation about the new supplemental leverage calculation, so the leverage calculation -- Tier 1 leverage calculation for us, as you can see on the chart, is 10.5. If we did the calculation in the second quarter on a leverage supplementary level basis, it would be 8.8%, well above the required level of 3%. So our Tier 1 common ratio and leverage ratio provides the Company with a strong capital position.

Moving to Slide 17, this is our pay-out ratio. So our share repurchases are governed by our performance and our CCAR submission in January 2013. Our plan for 2013 is to repurchase $4 billion. The $1.4 billion in repurchases in the second quarter is consistent with our CCAR submission in January.

Moving to Slide 18 -- so this is our US retail deposit balances. So the US retail deposit activity in the quarter you can see decreased slightly. Our overall funding strategy is to utilize unsecured securitizations and deposits. In the second quarter, we issued $2 billion of unsecured debt, therefore, we did not need to increase deposits. Therefore, we decreased deposits slightly; however, within deposits, we continued to grow direct deposits by $1.2 billion to $23.1 billion, while third-party CDs and sweeps decreased slightly.

On the liquidity front, we continue to hold excess cash and marketable securities to meet our next 12 months of funding maturities. As of June 30, we had $15.4 billion in excess cash compared to funding maturities of $14.4 billion over the next 12 months, thereby meeting our objective.

So with that, let me conclude with a few final comments. We continue to feel positive about our performance, especially given the relatively slow growth in the economic environment. In the quarter, our spending growth continued to be healthy, and was relatively consistent with the past several quarters. In addition, we did see some improvement in our growth rate internationally. We also saw our average loans continue to grow modestly year over year, and outpace the industry. Loan growth and slightly lower funding costs led to a 7% increase in net interest income, and at the same time, lending loss rates remain near all-time lows.

Revenue growth was 4%. We continue to consistently grow revenues despite the slow growth environment, and in this quarter, the negative impact of card member reimbursements. In the quarter, operating expense decreased by 4% versus prior year, reflecting strong expense control, as well as higher card member reimbursements costs in the prior year. We are clearly off to an excellent start with our aim of having operating expense growth at an annual rate of less than 3% over the next two years. We are also continuing to invest in the Business, as marketing and promotion, and technology development spending, both increased versus prior years. These investments are driving higher average spend and growth in our card member base, while continuing to build capabilities for the future.

Second-quarter EPS of $1.27 represents an all-time high, but did benefit from a lower tax rate than recent quarters. EPS growth rate of 10% outpaced revenue growth, reflecting the progress we have made on improving operating leverage and our strong capital position. We continued to return significant capital to shareholders in the quarter through dividends and buybacks, while maintaining strong capital ratios. We recognize that our Business is not immune to the economic environment, but we continue to believe that the flexibility of our business model enables us to deliver significant value to our shareholders, even in a slow growth environment.

So with that, let me turn it over to Jeff Campbell for a few remarks.

Well, thank you, Dan, and good afternoon, everyone. I am excited to have joined American Express this week, and I'll look forward in the coming months to spending time with many of you on the call, and to continuing the strong legacy of performance that Dan's leadership has helped create here at American Express.

So with that, Rick?

Thanks, Jeff. Okay, so we're going to start the Q&A. Just before we kick it off, I do want to ask everybody, as a courtesy to all those who do want to ask a question, that we strongly encourage you to limit yourself to one question and one follow up, so we can get as many folks on the call as possible. And with that, let's open up the lines for questions.

(Operator Instructions)

Craig Maurer, CLSA.

Good afternoon. Dan, first let me congratulate you on your ride off into the sun. It's been a pleasure.

Okay, thank you.

A question regarding the GNS business in Europe and the 12% of the $505 million you discussed. I'm not sure -- I don't think of us know in terms of the break down of GNS revenue. Is there any component of that, that would be susceptible to the cap that they're placing on interchange or is that strictly network and acquiring fees or is there some level of interchange split with the issuer? And as a follow-up, is there any guidance going forward on card member reimbursements that we can think about in terms of suppression of revenue or help on expenses? Thanks.

So the draft is not even out yet, so getting very specific in terms of answering all of the elements of your question is really not possible. I think the main point that we wanted to make is that the cap relates to four party systems and from our understanding does not relate to three party systems, which is our system and therefore our proprietary business, the proprietary consumer business and corporate card business is not impacted. However, in our GNS business we think the cap will apply. As a result of that, we'll have an impact directly on that business. Exactly how it's going to play out will depend on exactly what the address says and the debate that will take place between now and the time that the final rules are issued, which will be several quarters in the future. So it's hard to be more specific at this point and it is our intent in which we have a chance to read the draft to touch on this topic at the financial community meeting which will take place on August 8.

In terms of card member reimbursements, as we identify items, we look for root causes and if there's a need for us to modify our procedures going forward we do that and if it's appropriate to have reimbursements to customers, we do that as well. As I said in the same quarter of last year than this year, the number is at a similar level. It has varied from quarter to quarter in terms of how much it is. Forecasting what might happen in the future is difficult because certainly anything we know about we have addressed at this juncture, but certainly in the course of our work of reviewing our policies and our practices, it's potential we could identify other items and if they do, we will remediate those and if appropriate have reimbursements but there's really no way to forecast what that might be.

Sanjay Sakhrani, KBW.

Thank you, good evening, and congrats, Dan. Two questions. One on Europe. I was just hoping if you could just talk about how you would deal with the competitive pressure of lower rates from Visa and MasterCard when domestic interchange rates go down and kind of how you would offset any potential impacts to the extent you had to take your pricing down. And also, I just wanted to get a sense of how much of your volume is commercial as well. And then just second, that Canadian benefit you mentioned, I just want to know how much that was. Thank you.

Okay, so certainly as I said, there's going to be a direct impact as it relates to GNS and the business we do with GNS partners and then there will be an indirect impact, but that's something, again, that would be very dependent on what the final rules actually say and how we need to react in the marketplace. Certainly, we have faced these type of challenges in other markets and I think we have reacted in the way that has been beneficial in terms of our overall business. But it's hard to really specifically say what's going to happen because we don't even know what the draft rules are exactly nor what the final rules will be or what will take place in the marketplace. This is something that I think will play out, honestly not only in a couple quarters but likely off a couple years, but we will be very thoughtful about how we approach that.

In terms of the commercial piece of the European business, that's not a disclosure that we've historically made at this juncture. I thought the most useful information was to actually share what percentage of the GNS billings were of the total billings in Europe, so hopefully that was helpful. Canadian benefit kind of falls in this category of an amount we felt was large enough that we should mention but not large enough to give a dollar amount, which has kind of been our practice on a fair number of items like this but to let you know that there is something in there that is affecting the line item and therefore the growth rate.

Great, thank you.

Bill Carcache, Nomura Securities.

Thanks, good evening and Dan, I'll also add my congratulations and its been a pleasure working with you. I had a follow-up question on the comments that you made. You made it clear that the proprietary business is not covered by the proposed caps. Does that suggest that you'll be able to generate premium economics and be able to offer greater rewards and, therefore, greater value for your customers and the logical thought process then does that put you in a position where you can experience similar results to what you saw in Australia? And I have a follow-up.

So currently, we have a premium position, right? And that's what enables us to provide the value in our products that we provide to our customers and certainly, initially, the gap between what our discount rates are and the cap we'll probably widen that gap somewhat. But realistically, we know we'll have to react to what is taking place in the market place. I don't want to analogize this exactly to Australia because every market is different but what we did in Australia, I think demonstrates the fact that we have a flexible business model and are thoughtful in terms of how we do react when the environment changes.

And can we address some of the concerns that are out there around regulators focusing on the three party system? Can you just talk -- your comments today were very helpful in the release and what you've said so far in the call but can you just give us more broadly perspective on whether you've ever heard of any regulator, you've had any experience with any regulator anywhere around the world really talk about bifurcating the negotiated merchant discount rate in your proprietary business with the goal of regulating it? I think that's kind of where some people were going and I remember from past meetings that we've had with your head of global merchant services it seemed pretty clear that regulators around the world get that your model is different because your rates are negotiated. I wonder if that's still a fair or reasonable way of thinking about it, if you could just comment on that. Thank you.

As you said, we negotiate our rates with the merchants around the world. Certainly in Australia that regulation didn't address our rates specifically, it dealt with four party systems. And our understanding of this draft as it was characterized to us, we don't believe it addresses three party systems such as ours. So that seems to be the course of action that happens historically and our understanding of what is taking place here. What may happen elsewhere, only time will tell but that has been the focus historically when it comes to a change in regulation.

Brian Foran, Autonomous.

Maybe switching gears to capital. As Basal III rules firm up, two things. One, is there any reason to think the advanced approach would be a meaningful change from the 12.2% Basal III you implied by the 30 basis point hit and is there any reason to think the liquidity coverage ratio is a hurdle that would be an issue in terms of the way you manage the excess liquidity?

So capital -- the 30 basis points is when we go from Basal I over to Basal III, skipping the Basal II piece. It's hard for me to say what the impact will be until we actually complete the work on the advanced Basal III methodology. It requires the gathering of an enormous amount of information that we have to process from systems. That work is actually under way currently. We actually are scheduled to enter parallel one in the beginning of 2014. At that juncture we'll have a better sense of what the impact would be on capital ratio, so I don't have an estimate for you at this juncture.

In terms of the liquidity rules, we don't have final liquidity rules at this point, although from what we understand so far, we think we have a strong liquidity position and don't, at this moment based on our understanding, think that the new ratios that will phase in over time would have a substantial impact on us. So therefore, I would say wouldn't necessarily have an impact on kind of how we think about liquidity at the moment.

One follow-up on the other expense, all the dimensions you gave were very helpful but if I just think of that simplistically, is the 219 kind of a good run rate for that number or is it better to think about since the Visa and MasterCard benefit rolled off and excluding the quarters where you had to take reimbursements it's tended to be more in the 260 to 270 range?

Well the 219 as I said includes the Canadian item, so I don't know that I'd use that number. In the third quarter, in the first quarter, so in the first quarter of this year we didn't have any items that we spiked out and it was 246.

Perfect. Thank you very much.

Rick Shane, JPMorgan.

Hi, thank you guys for taking my questions and, Dan, I will miss these conversations and wish you all the best.

Thank you.

I'd love to talk a little bit about the nuance of your conversations with the regulators. We're in a situation now where it appears that the press has seen the documents and what you guys have indicated is you've had conversations, it doesn't sound per se like you've actually seen the draft at this point. You guys are very deliberate in your communications, you're very cautious and you come out with a strong interpretation of how this is going to play out for you guys. I'd love to understand what the dialogue was like when it started and make sure that we understand the subtlety of this because it is pretty significant as you can see from how the stock traded around all this today.

I didn't say that. We're not necessarily intimating that the conversations or the people who have characterized this to us are the regulators, right? So it is based on our understanding previously to this leak of this draft where we would come out and based on the characterizations of those people that have seen the draft and discussed it with us, our sense is that it's not notably different than what we had been thinking about before. However, when we actually see the draft and get a chance to read it and digest it, then we'll be in a better position but as you indicated, there was certainly notable discussion in the press and activity in our stock and so we wanted to have a press release that shared our understanding of where we are, even though we haven't read the complete document. And so that's the state of play at the moment. After it's issued on the 24th, we'll read it and if there's anything, any refinements we can make we'll do that at the financial community meeting on August 8.

Great. We look forward to reading it at the same time you guys do. Thanks guys.

Okay.

Ken Bruce, Banc of America.

Thank you. Good evening, gentlemen and Dan, wish you good fortune in your retirement, so thank you very much for the help over the years. My question I'll steer around Europe for the moment. Looking at the average card member spend that has been decelerating really for the last several quarters and that has always been one of the metrics that you all have really focused on in terms of the health of the business and obviously there's been a change in strategy, or at least there's been some additional products that may be impacting the numbers but what I'd like to understand or get some response from you is how you are seeing the deceleration in the average card member spend growth? What ultimately will turn that as if it's just purely the weak economy strengthening or if there's something specifically within your strategy set that will drive that or if you expect that to be less going forward just given the nature of where you're adding new cards and the like?

Yes, so I think historically, our growth in billed business has come from both a combination of growth in cards in force as well as the growth in average spend. The growth in average spend comes from two things in recent history. That is just greater engagement on the part of our current customers who are spending at higher levels but it's also coming from our premium strategy. So we're bringing on higher spending customers compared to what we were doing several years ago and I think that shift to a more premium mix is influencing as well.

However, let's face it, the broad economy has an impact here as well and certainly just consumer confidence is a factor in terms of how much people spend. That's been shifting a little bit recently, certainly things like housing prices firming, the Stock Market doing better are things that can influence that. But as we've talked about a fair number of times, there's a pretty good correlation between billed business for us and GDP and I think the average card member spend numbers we see now are being impacted by the fact that GDP is below the average rate that we've seen over the last 10 years. And if history is any barometer, if GDP picks up you would think it would have a positive impact on average spend but it's obviously also totally contingent on us having the best value propositions in the marketplace and providing the best service and that's what we're focused on. So it's hard to spike out exactly how each of those things impact average spend but certainly the general slow growth in the economy I think is a factor here.

Okay, thank you and just on a clarification or maybe just if you could provide some sense as to what the differences are in the card member reimbursements that will either determine whether it's a revenue item or an expense, can you give us some examples as to what caused that change, please?

Yes, so I think each item, it's not one item in each quarter, it's a number of items in each quarter and each item is unique. So each quarter we evaluate the items that are in front of us and make a judgment based on our view at that quarter of how it should be categorized, so you can have different types of items in different quarters. So that's really the thing that is the primary driver.

Okay, thank you and best of luck.

Ryan Nash, Goldman Sachs.

Hi, thanks. Just as a follow-up on Ken's question related to spend growth, outside of the acceleration we saw in GNS from new business wins, do you think particularly here in the US, do you think the current run rates are a good proxy for what we should see for spend over the next few quarters? Should we expect it to remain stable or just given the fact that we are seeing improvement from the wealth effect, whether it's higher home prices or higher markets, should we start seeing that manifesting into higher spend?

So as you know me I don't want to forecast here, one of the factors is the grow overs later in the year are not as steep as they were earlier in the year but clearly, I think where the economy goes and consumer confidence will also be significant factors about whether it accelerates from here or not.

Okay, and then just a question on expenses, so you're at 69% as a percentage of managed revenues and I know you talked about migrating towards 67% over time, so should we expect to stay at these levels in near term and if revenue growth does start to accelerate then we could see a pick up in expenses from here?

So we say we want to migrate back towards historical levels. We happen to have 2007 on there which is 67 but we want to migrate back to historical levels. If we are successful, and it's our plan to be successful, of growing operating expense at less than 3%, that's growing to create leverage and should enable us to continue to improve that number over the next 18 months.

Great, thanks for taking my questions and congrats.

Thanks.

Don Fandetti, Citigroup.

Hi, Dan. Just a conceptual question, I was looking back at your merchant discount rate and it was down a couple basis points over the last two and a half years and you have very strong GNS growth, which I would think would naturally bring that down more. So my question is do you really have any sort of core change in your merchant discount rate and should we think about that as more flattish going forward ex the mix?

Okay, so first GNS is not in the discount rate calculation. It's really a calculation based on our proprietary business, so that's not in there. So we have said in the absence of increasing price anywhere because of our strategy to drive further into every day spend categories, in the normal course we would expect the discount rate to drop by two or three basis points a year. We, in fact, have not seen that over the last several years as there have been opportunities where we are bringing greater value to merchants and have actually been able to increase price in certain situations, so that the drop in discount rate is probably more in the 1% or 2% level over the past several years. So if we can drive sufficient volume by moving into new categories and driving volumes up, then you would, I would expect to see some drop in discount rate as you go forward but that's very much on strategy for what we want to accomplish over the long term.

And then quickly, any updates on Bluebird in terms of transactions or fees?

So I think we're going to do some updates of the data that we shared at the FCM in February at the August FCM, so we'll update that information on August 8.

Thanks.

James Friedman, Susquehanna.

Hi, thanks and let me echo the congratulations. Wanted to ask about cards in force. It was one of the faster growing numbers in the past year, up 1.2 million. A question in two parts, one is should that continue to be the emphasis going forward in terms of driving billed business? And two, it looked like about 700,000 of that 1.2 million came from GNS. Should we anticipate going forward that GNS would be the driver of cards in force? Sounded like in your introductory comments it suggests that some of that growth may have come from China. Is that a correct interpretation?

So cards in force number which was 4%, was 2% our proprietary cards, so that's pretty consistent. We have been at the 2%, 3% growth rate over the last five or six quarters so the growth rate there is very consistent with the last few quarters. The growth rate in GNS cards at 7% is somewhat lower than what we've seen over the last several quarters. It had been kind of in the low single digits, so the lower growth rate is driven by fewer GNS cards being out there. So the growth in our business is going to come, as I said before, from both higher average spend as well as higher number of cards, and the fact that cards are growing at 2% or 3% compared to maybe proprietary cards compared to higher levels historically is due to the change in strategy where we're focused on premium cards as opposed to just bringing cards in. In terms of is new cards in China part of what drove the strong performance in GNS and in JAPA the answer to that is yes. So both in China and Korea, we've had some new partners sign and some new product launches in those countries, both by new partners and existing partners, so that is part of what's driving the GNS and JAPA growth rates that we see.

And just as a follow-up, housekeeping so Bluebird is not included in that cards in force number, I presume. I imagine that's a pretty big number.

It's not included in cards in force, no.

Okay, and at some point, will you start to decompose the cards in force at that level?

So currently we share information. In terms of what the GNS piece is I think we can do some geographic splits for you. Sorry, we don't. If any of that I don't know that we're going to give more detail on that. It wasn't in our thinking but certainly as we move forward we'll provide information as it relates to new products like Bluebird where we think it's appropriate.

Mark DeVries, Barclays.

Yes, thanks. Dan, I was hoping you could provide a little more color on what we can expect on the GNS growth in Asia you referenced. Is it realistic to think that at least for the next three quarters you've got some fairly positive year-over-year comp on that? Should we continue to expect to see that robust mid high teens billed build business growth from Asia?

So I don't want to forecast but in China it's an important market for us and we're focused on the partners that we have and the product launches that will take place. So my sense is that will be a good growth market but I don't want to forecast exactly where GNS growth is going to be over the next couple of quarters. And also potentially it will be impacted by the economy in China but right now our growth rates are being driven there by new partner signings and new product launches.

Okay, got it and then just a follow-up. With marketing and promotional expense leveling off here on a year-over-year basis is it reasonable to expect to continue to see the 4% to 5% cards in force growth that you've had over the last year or so?

We have put this 9% number out there and I don't want it to be a target or a guideline but it's recognition of the fact that on an annual basis -- we have fluctuations from quarter to quarter -- on an annual basis we need to increase investments at the rate that we're going the business if we're going to continue to have the type of business I imagine that we want. So my view is we are very committed to investing in the growth of the business, you have seen us do that historically, and we will continue to do that. So our view is we wanted to make sure that there are sufficient investment dollars to sustain the business momentum as we go forward. Certainly there is a whole focus on reengineering that we announced in January is designed to grow operating expense at a slower rate so that it provides additional resources for investment in the growth of the business.

Got it, thanks. Best of luck to you, Dan.

Thanks.

Chris Brendler, Stifel Nicolaus.

Hi. Thanks, good afternoon. A quick follow-up on the cards in force. It's my understanding that you had some minor annual fee increases in some of your proprietary products this year and you see that in the net cards in force. Is there any price sensitivity across your portfolio, any is not the word, but is it significant, is that a contributing factor and is that something that you continue to squeeze higher over the years given the strength of your products and the consumers attraction and loyalty to your products?

So as you said, it was selected price increases on certain products. We never try to squeeze out higher fees. We don't want to increase fees without improving the value proposition for customers. So our practice has been where we increase fees to also have elements that increase the value proposition to our customers and we've been very successful at that and when we have had fee increases we have not seen notable attrition as a result of that. But it's all tied into we're delivering value, we increase the value, part of the increase in the fee and variability a portion goes to the bottom line, a portion goes back into increasing the value to card members. That has been our strategy and I think it will be our strategy going forward.

Okay, great and then my follow-up question, enterprise growth and the initiatives there, the $3 billion target, is it possible with your Bluebird update for the community meeting in early August? Are we also going to get an update there? I'm just curious as to the investments you've made over the last several years to serve in particular, are we starting to see any meaningful contributions from those new initiatives yet? Any color there would be helpful.

So we set a $3 billion target a couple years ago to exit 2014 at that rate. Certainly when we set that target we didn't necessarily contemplate the economy being as slow as it has been over that period. That number, as we disclosed last year, was $1.5 billion so we have a lot of work to do between now and then, but we continue to think that it's an appropriate target for us to aim for. I don't anticipate us updating that more than the update I just give now.

What about Serve?

So I think one of the topics, one of the topics at the meeting will be Dan Schulman and he'll talk about what's taking place both in Serve as well as Bluebird in particular.

Excellent. Congratulations, Dan. Thanks a lot.

We'll take one more question.

Brad Ball of Evercore.

Thanks and congratulations, Dan, and good luck in your future endeavors.

Thank you.

I wonder if you can give us a sense for the progression of billings over the course of the quarter, month to months, was it stronger late in the quarter and would you give us an update for July to date?

So the earnings growth over the month by month was relatively consistent. There was no sharp upward trend or downward trend. I would say it's relatively consistent and we don't really plan to give an update about what has taken place in July. Even the quarter is a short period of time. We try to do it for a couple weeks and we found it's not necessarily indicative of what's going to happen for the quarter. But within the quarter, month by month, it was relatively consistent.

Fair enough and one follow-up on the EC proposal. You said in your press release earlier today that separating the payment network and processing functions did not appear to impact proprietary networks like AMEX's. Could you explain what you mean by that and what's the basis for making that statement?

I'm not going to say I'm an expert here but I think there is some language in there about whether you need to split the merchant processor and the merchant acquirer in the network. In that case, in our case we do all those functions, so it doesn't appear to us that, that would be applicable in our situation but again, once we get a chance to read the draft, we can address that more specifically.

So it would apply to a four party system but not to the three party system?

That's our understanding.

Okay that's helpful, thanks very much.

Thanks everybody for joining the call and thank you very much for your congratulations. From my perspective it has been a pleasure dealing with each of you as well, and I'm highly confident that Jeff will do a terrific job as we go forward so thanks very much.

Okay, thank you. And, ladies and gentlemen, this conference will be made available for replay after 7.00 PM this evening through July 24 at midnight. You may access AT&T executive replay system at any time by dialing 1-800-475-6701, entering the access code 295471. International participants dial 320-365-3844 and, again, that access is 295471. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.