美國運通 (AXP) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Express first quarter 2014 earnings conference call.

(Operator Instructions)

Also as a reminder, today's teleconference is being recorded. At this time, I will turn the conference call over to your host, Mr. Rick Petrino. Please go ahead, sir.

Thank you, Tony. Welcome. We appreciate you all of you joining us for today's call.

The discussion contains certain forward-looking statements about the Company's future financial performance and business prospects which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and earnings supplement which were filed in an 8K report and in the Company's other reports 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 first quarter 2014 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 Jeff Campbell, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed. Once Jeff completes his remarks, we will move to a Q&A session. With that, let me turn the discussion over to Jeff.

Thanks, Rick. Good afternoon, everyone. Our performance this quarter showed strong earnings per share growth, driven by disciplined control of operating expenses, another quarter of write-off rates near historical lows, and a strong balance sheet that has allowed us to return a substantial amount of capital to shareholders in the form of share repurchases over the past year. We delivered 16% EPS growth despite having modestly lower revenue growth sequentially, and these results highlighted once again the flexibility of our business model.

During the quarter, we took several important strategic steps including rolling out our OptBlue program to expand coverage amongst smaller merchants, launching a new credit card, AMEX EveryDay, designed to capture a greater share of everyday consumer spending, and expanding Loyalty Partner by introducing the program in Italy. All of these steps are part of our broader strategy to reach new segments of the market and make the American Express brand more welcoming and more inclusive.

Additionally, in the quarter we were pleased that the Fed did not object to the capital plan included in our 2014 CCAR submission, and we were also pleased to sign the formal agreement for the business travel joint venture that we announced last year. I'll discuss each of these items in more detail later on in the call.

To begin now with our financial results for Q1, as you can see on slide 2, FX adjusted billed business growth was 7%. This increase was the primary driver of our FX adjusted revenue growth of 5%. Both of these growth rates represent a modest deceleration versus Q4 levels which occurred predominantly in the US market and was more pronounced among our US small business and corporate card members.

Net income of $1.4 billion was up 12%. The increase was driven by a combination of greater revenues and continued tight control of operating expenses. Over the last four quarters, we repurchased more than $4 billion of our common shares. That translated into a 4% decline in average shares outstanding versus the prior year. This then allowed us to grow our diluted EPS by 16%.

These results call to mind the presentation we made at our Investor Day in February of last year, when we laid out several scenarios illustrating our ability to achieve our on-average and overtime earnings targets in a variety of economic environments. Given the slower revenue growth we experienced during the first quarter, our strong capital position and disciplined control of operating expenses were particularly important contributors to our financial performance and helped drive the 16% increase in earnings per share to $1.33. These results also brought our ROE for the period ending March 31, to 28%, above our on-average and overtime target of 25%.

Let's turn now to a more detail look at several trends that will give you a better sense of the quarter starting with billed business on slide 3. Overall billings remain solid with an FX adjusted increase of 7% versus 9% last quarter. The sequentially slower growth was primarily in the US where billings rose 6% in Q1 compared with 9% during Q4.

As I said a minute ago, this decline was more evident among our small business and corporate card members. Additionally, volume growth rates appeared to be influenced in part by the severe winter weather. I would add that while we are always cautious about drawing conclusions from intra-period trends, we were encouraged to see that US billings growth increased over the second half of the quarter as the weather improved.

Outside the US, where volumes continued to grow at a faster pace than the total Company, billed business was up 10% year-over-year on an FX adjusted basis. Overall, growth rates across international regions were generally consistent with the prior quarter, and we did see a small uptick in EMEA from 6% in Q4 to 7% in the current quarter.

Turning to billed business by segment on slide 4, volumes continued to be particularly strong in GNS, up 15% year-over-year on an FX adjusted basis. GNS growth continues to be highest in the JAPA region powered largely by China and Japan. You do see across both the regional and segment view of our billings that the stronger US dollar continued to put downward pressure on our billings and hence revenue growth, as has been the case for the last five quarters. To give you a better sense of the drivers here, we have provided on slide 5 some background on the major concentrations of our billed business by international currency.

The first row shows the approximate range of billed business in each market as a percentage of total billed business, while the bottom row shows the year-over-year change in that foreign currency compared to the US dollar. Overall, in Q1, this mix translated into approximately a one percentage point reduction in both billings and revenue growth.

Moving on now to loans, the other key revenue driver. We see on slide 6 that loan balances grew 3% globally. US loans were up 4% from a year ago. Both of these growth rates are consistent with what we saw in Q4. I'll also note that the total level of loans declined $3.2 billion versus Q4, which is in line with normal seasonal trends. We are pleased that our loan growth in the US continues to outpace the industry average.

Putting all of the pieces of revenue together you see on slide 7 that total revenue grew 4% on a reported basis and 5% on an FX adjusted basis. Consistent with our spend-centric model, this growth was primarily driven by the discount revenue growth that was generated by increased spending volumes. The other primary driver of revenue growth was an 8% increase in net interest income as we continued benefit year-over-year from both lower funding costs and an increase in average loan balances.

One other point I would make about our revenues was that the sale of our publishing business last year continues to depress the growth rate of other revenue, and impacted total revenue growth this quarter by a little less than 1%.

Turning now to provision, you can see on slide 8 that our credit metrics remained near all-time lows. Worldwide lending write-off and delinquency rates increased slightly in the quarter consistent with seasonal trends. As a reminder, our objective is not necessarily to have the lowest possible write-off rate, but is instead to achieve the best economics on our portfolio. Therefore, at some point we would expect that lending write-off rates will increase somewhat from today's low levels.

Slide 9 shows the trend in our lending reserve coverage levels. We believe that our coverage levels will remain appropriate giving the risk level inherent in the portfolio. The fact that our delinquency rates have become more stable and our loan portfolio is growing, resulted in a smaller reserve release in the first quarter and a year ago. The smaller reserve release more than offset the benefit from lower write-offs this year, and drove total provision up 17% compared to a year ago, as you can see on slide 10.

The increase in the charge card provision in particular is primarily due to a reserve build in the current year, versus a reserve release in the prior year, along with higher card member receivables. I'll also note that beginning this quarter we have reclassified fraud losses from provision for losses to operating expenses, in order to be more consistent with industry practices. This had the effect of lowering provision and increasing operating expense, though we have reclassified prior periods for this change to keep everything comparable.

Turning now to expenses, on slide 11 you can see the total expenses were down 1% versus the prior year. Clearly, maintaining disciplined control of expenses, particularly our operating expenses, was a key driver behind our strong earnings performance during the quarter. To comment on a few specifics, you see that while marketing and promotion was relatively flat in this quarter, going forward we do anticipate that investment levels will increase as we move into Q2. For rewards expense, you see growth that was relatively consistent with our billed business growth during the quarter.

The key story around expenses is obviously operating expenses, and we provide more detail on these on slide 12, which shows a 4% decline in total operating expenses versus the prior year, with lower expenses seen across every line. We did benefit from the timing of certain items this quarter.

I would also remind you that the sale of our publishing business continues to suppress operating expense growth by a little more than one percentage point. That said, our operating expense decline this quarter went well beyond our goal for the full year of keeping growth to less than 3%, as you can see on slide 13. Of course, we remain committed to our annual target, but we would not expect to see similar declines in the remaining quarters of the year.

To turn more broadly now to our marketing and promotion efforts to grow our business, slide 14 shows that these expenses were relatively flat versus a year ago in Q1. As you can see on the chart, marketing and promotion is typically lower during Q1 and ramps up beginning in Q2. We continue to see many attractive opportunities in the marketplace including those for new customer and merchant acquisitions.

To be specific, during the quarter, we launched AMEX EveryDay, a new credit card that rewards card members for how often they use the card, not just how much they spend. The rewards structure incents card members to use the cards for everyday purchases at the places they frequent most. We are excited about the potential of the product to attract new customer segments to our franchise.

At our Investor Day in February, we introduced OptBlue, the next step in the evolution of our merchant acquiring programs in the US. OptBlue gives small merchants the convenience of working with our network of third-party merchant acquirers who have the flexibility to give them one pricing construct, one monthly statement, one settlement process, and one contract that covers all of the major card brands the merchant chooses to accept.

In February, we reported that we had signed six merchant acquirers to the program. Since then, we have continued to add partners and believe OptBlue will provide a significant lift to our small merchant acquisition efforts as it is rolled out.

We continue to target a portion of our investments for longer term opportunities, in particular, focussing on two large initiatives, reloadable prepaid, our products that help you move and manage your money; and Loyalty Partner, our rewards coalition program. These initiatives continue to ramp up as evidenced by this quarter's launch of our Loyalty Partner program in Italy where we now have over 3.5 million collectors as of the end of March. A common theme across all of these new initiatives is to have the American Express brand be more welcoming and inclusive, to be meaningful to more people and more merchants.

To return now to the financials, turning to slide 15, you see that during the first quarter our effective tax rate was 35.1%. This is the second quarter in a row that our tax rate has been somewhat higher than the recent past. Tax rates as you know often fluctuate from quarter to quarter, due to a variety of discrete items.

More importantly, over the longer term we have seen modest increase in our average effective tax rate primarily because of the changes in the geographic mix of where we generate income. Additionally, in 2014, we are being impacted by certain changes in tax laws, including the delay in the renewal of the active financing exemptions and the loss of the R&D tax credit.

In the past, we've mentioned that we expected our average effective tax rate to be in the low 30% range. When you look at the trend, we now believe that our rate for the full year could be closer to the mid-30%. On a last note on tax, I would point out that our tax rate in Q2 2013 was just 29.6%, which was unusually low and was driven by certain discrete tax items. A challenge we will face in this year's second quarter will be growing over the impact of this lower rate.

Now, let's turn to capital. The substantial amount of new capital we generate provides us with significant degrees of flexibility as shown on slide 16. This quarter, we were able to return 73% of capital to shareholders while also strengthening our already strong capital ratios.

We have worked hard to continue to strengthen all aspects of our capital planning processes, and last month we were pleased that the Fed did not object to the capital plan included in our 2014 CCAR submission. The good news from the Fed underscored both our balance sheet strength and our ability to remain profitable under hypothetical severe stress scenarios, while also reflecting the strength of our overall planning processes. In fact, in the Fed severe scenario we had the highest pretax income as a percentage of assets among all bank holding companies, and our Tier 1 common ratio, both before and after capital actions, was in the top quartile, as you can see on slide 17.

These results gave us the leeway to increase our dividend by 13% beginning in the second quarter, and to repurchase up to $3.4 billion of shares during the last three quarters of 2014, with up to an additional $1 billion during Q1 2015. That represents a payout ratio that would be among the highest of all of the CCAR participants. Our capital plans focus on three important priorities, supporting our growth strategies; maintaining a strong balance sheet; and returning a significant amount of the capital we generate to our shareholders.

One aspect of a strong balance sheet is maintaining a good mix of funding sources, and as you can see on slide 18, we have improved the diversity of our funding sources by building a significantly larger deposit base over the last several years. At this point, we believe our funding mix should be relatively stable going forward.

Before concluding, I want to provide an update on the plans for our business travel joint venture. Just as a reminder, our global business travel organization provides corporate customers with 24/7 support for travel in more than 135 countries. The agreement we signed this quarter entails our partners investing $900 million and the Company contributing the assets of our business travel business to the joint venture. The new structure should provide greater resources to grow the business as a separate entity while maintaining important linkages with American Express.

We still plan for the transaction to close by the end of the second quarter. However, as is the case with most sizeable transactions, there are regulatory aspects that could delay the transaction closing date. In fact, we could receive regulatory approval very late in the second quarter which due to the complexity of the closing process could push back our second quarter earnings release date. We will keep you posted on the timing as we progress through the second quarter.

More importantly, we expect to realize a sizeable pretax gain, which we currently estimate to be between $600 million to $700 million, prior to considering any costs related to the transaction. As we have said before, we plan to use a substantial portion of any gain, net of transaction costs, to position the Company for the future. This will include supporting some of our newer growth initiatives, including AMEX EveryDay and Serve, as well as initiatives to increase the efficiency of the organization among other efforts.

When we release Q2 results, we plan to provide additional detail to give you a clearer understanding of our underlying performance, the resulting gain on the transaction and associated costs, incremental spending in growth and other initiatives, as well as the expected impact the JV will have as we present our results to the future.

In summary, coming back to our first quarter results, our strong earnings performance makes us feel good about the flexibility of our business model. We generated EPS growth above our on-average and overtime target, driven by disciplined control of operating expenses, our strong capital position, and continued low write-off rates. While billings and revenue growth slowed modestly from the fourth quarter, our financial performance was solid. Looking forward, we continue to believe that the flexibility of our business model enables us to deliver significant value to our shareholders.

With that, I'll turn the call back to the operator for your questions. I would ask that you limit yourself to one question with only one follow-up so that we can ensure we give as many people as possible a chance to participate. Operator?

(Operator Instructions)

Craig Maurer, CLSA.

Good evening, guys. Thanks. I wanted to understand your thought process on the spending trend in the quarter, and how the shift of Easter into April affected the year-over-year comparison?

I guess I'd say a couple things about the spending trend. As I said, the sequential decline was clearly stronger amongst the small business and corporate card members segment. I think it's also important to point out that the sequential trend across the quarter, and while that's something we're always cautious, as you know, Craig, to draw too much attention to because there's inherent volatility when you look at any short-term period, but we did see the second half being stronger than the first. I would say in the first few days of April we haven't seen anything that contradicts that general trend.

We do lots of internal analysis where we make a number of adjustments to how we look at our spending, considering exactly what the days or the week are in each period, trying to use historical patterns around holidays to make adjustments. When I make comments about trends, they are considering all of those adjustments. All that said, there is clearly some art to doing something like an adjustment for a holiday like Easter that moves around quite a bit from year to year. We take what we think is a fairly sophisticated approach to those adjustments, but there is some subjectivity to it.

Thank you.

Don Fandetti, Citigroup.

Yes, good evening. Jeff, it looks like the March data suggests some slight uptick in year-over-year loan growth in the US. Are you seeing any signs of increased consumer appetite for debt, or are we just still in a holding pattern?

When you look at our loan growth, Don, it's actually been pretty consistent for the last few quarters at around 3% to 4%. Globally, it was 3% this quarter, a little higher in the US, 4%. When you look, as you know, at the industry data, the industry's been bouncing around flat, sometimes down a little bit. I think the February year-to-date numbers were up about a half a point in the US.

We've certainly been pleased by the fact that our loan growth was holding steady at a little bit above that industry average. Frankly, you don't see anything in our first quarter results that suggests any particular acceleration of that trend, nor do we see it yet in the industry data we've looked at.

Mark DeVries, Barclays.

Thanks. Jeff, I know you indicated that we shouldn't expect to see OpEx remain at this down 4% year-over-year level going forward. If you don't see a meaningful acceleration of billed business growth, particularly with the modest headwind we have now from higher tax rates, is it reasonable to think you'll have to remain well below the cap of 3% growth, if you want to hit the on-average over time targets for EPS growth this year?

I think, Mark, that's a very good question. It really goes to the flexibility of our business model. As I said in my earlier comments, I would actually take you and other folks back to the February FCM when we showed that we have quite a number of levers that we can pull and have a history of pulling. Certainly I would stick to the remarks I made a few minutes ago that the 4% decline year-over-year you see in the first quarter is not indicative of what you should expect the next couple of quarters. There were some timing items.

We are very committed to using the flexibility of our business model to achieve our earnings targets. I think we have a pretty strong track record pulling various levers. How much we let operating expenses and other expenses grow over the remainder of this year will certainly be heavily influenced by the economic environment we see. We don't try to outguess the economic forecasters, and we build plans based on consensus GDP forecasts. The consensus has actually come down slightly in the last 90 days, but we certainly hope that that's wrong, and we hope the economy shows strong acceleration from here. But we think we have the flexibility in our business to react to whatever environment we face.

Okay. That's helpful. In the earnings supplement, there was a comment that indicated US consumer travel sales declined 7% year-over-year. The question I have is, is that a trend you expect to continue? Were there any signs that weather affected that? Do you generate higher fees on the consumer side than you do on business travel?

You have very sharp eyes for someone who's only had an hour to stare at the voluminous amount of material we put out. Yes, you're correct. The consumer travel business shows a decline of about 7%. That's actually driven by the fact that we sold a smart part of that business that provided the packaged vacations. It was such a small transaction. It's not particularly material, so we didn't bother to call it out last year. But that actually is what the loss of revenues associated with that business are what drove the 7% decline.

Okay. Got it. Thank you.

Sanjay Sakhrani, KBW.

Thank you. I guess just focussing on the volume trends going forward and maybe even revenue growth, when we think about the trends going forward, are there any investments that you're making that might start paying their dividends sometime from second quarter onwards? I guess broadly speaking, when I look back in time it seems like that 8% target hasn't been hit for a while. I guess over the past several years, if not more, it's probably only been hit once. Can you just talk about conceptually how you guys think about that revenue growth target going forward? Thanks.

We continue, Sanjay, to think the 8% revenue target is an appropriate target on average, over time, in a non-average and overtime economic environment. You are quite factually correct, but if you look at the last few years, our revenue has tended to be a little bit below that level. I would point out that despite that, we've shown much better performance on the EPS side due to the flexibility of the business model I just talked about. We certainly have an economic environment over the last few years that has not gotten to the global economies or in particular the US economies long-term average trends.

Certainly when you looked at the original GDP consensus forecast for this year, they started to approach those long-term averages. It appears based on what economic data is out there so far. That's probably not going to be the case for the first quarter, and that is probably reflected somewhat in our results. But we would not in any way want to back off from the appropriateness of that 8% target, and we continue to believe that as the economy returns to more normal growth rates, you will see us head towards that.

The other part of your question, we certainly are always balancing across our investment portfolio things that are going to help us in the near term, the medium term, and the long term. We have made a number of incremental investments and did some stepped up investing towards the latter part of last year, and those are things, if we follow normal patterns, will help us as we get further into 2014 and beyond. You also, as I mentioned in my remarks, saw us launch a new product in the US market, EveryDay, just at the end of the last quarter. We just re-launched Serve at the end of last year. Those are things that, again, as you get later in 2014 and beyond, you will begin to see meaningful contributions from.

Okay. Great. Thank you.

Bill Carcache, Nomura.

Thank you. I had a question, a follow-up on the JV gain. I believe that your reported expenses would decrease significantly once you deconsolidate that business travel segment and start accounting for it under the equity method. I guess my first question is, is that right? Then more broadly, how would that JV gain impact how we should think about your commitment to the operating expense growth below 3% through the end of this year?

Those are both very good questions, Bill. First, maybe I should be clear for everyone. As we execute on the joint venture transaction, that will shift our accounting to the equity method which means that all of you will see in our P&L will be our proportionate 50% share of the joint venture's earnings each quarter. We won't report any revenues. We won't report any expenses, so that means you will see the travel and other commissions revenue line come down significantly, because that line, the predominant thing that's in that line today, are revenues from the business travel joint venture. Then most of the expenses of business travel appear in the operating expense category.

Both of those, assuming we hit our current time line beginning in the third quarter, you will no longer see the business travel amounts in those rows. We will, as we get to an actual close, give you the real specifics on that, but that's the structure or the methodology, if you will, that everyone should keep in mind as they think about what our financial statements will look like going forward.

Okay. Thank you. If I may, with one follow-up, can you talk about whether it's reasonable to expect that you'll fully complete the buy-backs up to the full amount that was in your capital submission? Then along those lines, can you talk about how you're thinking about the stock at these levels? I think in the past, you guys have thought about capital return as capital return and haven't, I believe, been so much focussed on the price, but I wanted to see if maybe you could update us on the thought process.

Yes. Let me take those two questions. Certainly we are committed to the amounts that the Fed did not object to in our CCAR submission. There is a very small portion of the total each year that is a little tricky at the end because what the Fed actually approves, not to get too into the details here, is a net repurchase amount, net of the proceeds we get from option exercises. As we go through the year and we get to the fourth quarter of the CCAR year which is really the first quarter of the calendar year, we make an estimate of what we think the option exercises are going to be that year. Then we conservatively size our share repurchase in that last quarter to match that. If you did all of the math, you'd see we were about $60 million or so below for the fourth quarter period which was approved in our 2014 CCAR. Not to get into the details too much, as I said, but that's the mechanics of the process. We do our best to estimate what's going to happen but options exercises are not always the easiest thing to exercise.

More importantly and more broadly, you are correct. We do very much remain committed to the philosophy that we believe we should have a well capitalized and strong balance sheet. We believe we should pursue all of the internal capital spending and external opportunities that we think are prudent and offer good returns for our shareholders. Once we are done with those two things, we don't believe we should sit on excess capital, and so we will return capital once we have hit those first two objectives to our shareholders through a mixture of dividends. Our dividend for the sector and for our profile we think is a competitive dividend, and then we use share repurchase to return the remaining capital.

We think we have a tremendous track record of growth over many, many years as a Company. We continue to believe we have many growth opportunities going forward. We believe that it is a good financial proposition for shareholders to continue to return capital to our shareholders, and we are not therefore very indifferent to modest swings in the price. I would also just make the observation that our stock in a normal economic environment is not a particularly volatile stock, and so does not figure greatly in our repurchase efforts. I guess as the last comment I'd just remind you that mechanically as a public Company, there's all kinds of constraints under which we buy back shares. Practically, you end up with more of an averaging it approach when you're returning the large amounts of capital that we return to our shareholders.

That's really helpful, Jeff. Thank you.

Ken Bruce, Bank of America. Mr. Bruce, your line is open. Check your mute key. No response from that line.

Bob Napoli, William Blair.

Good afternoon. Question, the GNS business continues to show very strong spend growth, 15% been trending at that level. But the revenue growth is only showing this quarter at 5% in that segment. Do you think that GNS can continue to grow with those types of rates? Why isn't revenue growth matching the spend growth?

A couple of comments. First, just a mechanical comment. Remember, what you actually see in our statements is what we refer to as GNMS, which is a mixture of our GNS business, and the proportionate share of the little over 20 countries where we do the proprietary acquiring of the merchant portion of the economics. It's really the GNS growth rates are not the same as the GNMS growth rates. All that said, we don't break the GNS growth rates out publicly separately.

All of that said, when you look at that GNS billings number, I try to always remind people that while we're really pleased with that 15% number, a portion of that high growth is driven by China. China, as you know, is a market where because of the regulatory environment it is very difficult for any player to get a lot of economics out of the billings. We are pleased with what we've been doing in China because we think without any capital expenditure, we are building awareness and presence and brand in China that we believe we will find ways to monetize over the longer term. But in the near term, China is a market that produces a significant number of billings in our GNS business and very, very little revenue. The GNS revenue is below that billings number, but you can't see it when you look at that GNMS number.

Okay. Then my second question is just on the OptBlue. We've heard from some contacts that that product is very well received by the market. I know that it's only a handful of merchant acquirers offering it today. Can you comment on what your expectations are for OptBlue? Do you expect to have that in the hands of most merchant acquirers at some point? Then it does offer a lower discount rate. Are you comfortable with the economics and the strategic value of OptBlue as you've seen it operate now for a few months?

Yes, good question. First, let me start on the facts. When we first talked about this in February, we talked about the fact we had six merchant acquirers on board, and we've been very pleased since then to add several more. We think we are on a track to really get most of the industry on board, and we're very excited about that. It is very, very early in the process, so we all need to watch and see how this plays out in the coming quarters and couple of years, but I would say all of our early experiences are positive and very reinforcing of the plans we set out at that February financial community meeting.

Now, you are correct there are some trade-offs here, but we also pointed out that while we are in effect offering, this is my term, a wholesale discount rate to the acquirers, there are also certain incentives that we have traditionally paid to acquirers that go away. That helps fund a portion of that wholesale rate. It will just show up in a different place from a financial perspective, but helps offset it.

The other much more important thing is that we believe this program has the potential in the US over the next several years to make a very, very material dent in the coverage gap that we have in the US. We think that is very powerful for our issuing businesses and drive the incremental volumes that will make this a very positive trade-off for the Company and for our shareholders.

Thank you.

Betsy Graseck, Morgan Stanley.

Hi. Just a follow-up on a topic we were just talking about. You indicated the discount rate is a little bit lower, but I'm just wondering, lower than what? When we look at your all-in discount rate obviously you're skewed, I would expect, to some larger merchants. Are you suggesting that the overall Company discount rate is negatively impacted by this, or just the like-for-like small merchant?

Yes, that's a good question, Betsy. To be very precise, my comments were really directed at the economics with the very small merchants who are part of the OptBlue program. Now, obviously any change with any merchant does affect the Company's overall rate. But it is important to realize that while the merchants that we believe we will gain through this program are very important from a coverage and a perception of coverage perspective, in terms of the percentage of our total billings of these very small merchants generate, that is a very, very modest portion of our overall billings. Therefore, the impact on the Company's overall discount rate, these changes, is very much moderated by that mathematical reality, if you will.

Separately, you indicated earlier in the call that the US billings growth rate was negatively impacted by weather, and that you ended the quarter better than the first couple of weeks of the quarter. Can you tell us what January, February, and March were in terms of year-on-year growth and billings?

Betsy, we don't like to break it out that specifically by month. I would just stick to the comments that the second half of the quarter was certainly stronger than the first half, and we haven't seen anything in the early part of April that contradicts that trend.

I would also just make the observation that partly because of the closed loop, we have a tremendous amount of information by merchant, by type of merchant, by industry, by city, by day, that allows us to do quite a detailed analysis of the impact of some of the most severe weather by city, and by day that you saw in the country. That's what makes us feel quite comfortable in my commentary that there certainly was some weather impact in January and February here.

Lastly, on the expenses you indicated that there was some timing issue there, and we shouldn't expect, obviously, to have a sub zero, 4% shrinkage in OpEx on a go-forward basis. Is there anything that you have, planning now to do that would be incenting incremental billings growth for Q2 and 3Q? Or really to get into that activity we have to wait for, the closing of the global travel business?

I guess I would say we generally are not targeting our spend decisions in terms of the benefits of spending. We do quite precisely, as you just suggested by, so that we know the benefits and how they're going to [appear] by quarter. We generally are making investment choices that we think will help us over longer time periods. Certainly as we point out in my remarks, as you get into Q2, you would expect to see some incremental spending in a number of areas supported by the business travel. We did just launch the EveryDay card at the end of March, so we're really just in the introduction phase of that. The Serve product is in its very early days since we just re-launched it with vastly improved functionality toward the latter part of last year.

There are probably a few steps you will see us taking that are just another step on our journey of becoming a ever more efficient Company with a really good solid cost structure and some of those things will drive some one-time charges. All of those things are targeted at helping us as we move into the latter parts of 2014 and beyond, but I wouldn't want to suggest that we're as precise as saying they're going to help us in any specific quarter.

Thanks.

David Hochstim, Buckingham Research.

I had a follow-up to Betsy and Craig's question, again, about the trends in the first quarter spending. Can you tell us the recovery in the second half of the quarter bringing you back to fourth quarter growth rates in the USCS? Is there any other color you have in terms of where the spending was weak in the first half aside from geography?

A couple of comments. Guys, I don't want to get so specific that I'm calling out specific numbers based on a few weeks. To step back for a second and provide a little bit of context, if we look over the past several years at our billing rates and our revenue rates, you will find some modest volatility quarter to quarter where we go up or down a point or two, and it's not necessarily indicative of a long-term trend. That's why we're cautious about even now talking about within a quarter or within a couple weeks, trends that are overly specific.

In terms of the specific geographies of industries, I think it's all of the things that you would expect. If you pull out a weather database, you'll see specific days in New York, in Boston, in Chicago, in St. Louis, of extreme weather. When we look at what happened in those places, you see some pretty extreme results in those cities on those days. When you look at things like airline billings and lots and lots of public commentary about massive, in fact I believe, record number of flights that my old industry managed to cancel in January and February, that's lost revenue to the airlines, which is why they're talking a lot about how much revenue they've lost. Frankly, it's also lost business to us. Those are the couple of things I'd probably call out that are in the specifics of things we looked at.

The travel aspect of that would be the reason you call out small business and corporate spend, as opposed to consumer in the quarter?

Well, that's certainly a logical connection. We can't understand the psychology of every one of our card members. At one point, I want to be careful here because it gets to us making some educated judgments, and I can't prove that to you, but that fact pattern would appear to fit together to us.

My basic question was I wonder if you could share any incremental thoughts about the European regulation, and given now that we've been through now the Parliament process, what's your thinking in terms of vulnerability of GNS business in Euro Zone or the UK?

Certainly, those discussions are something that we are following closely, we are very engaged in. We spend a lot of time trying to help all of the players involved there understand the real economics and the real competitive dynamics of that marketplace.

Just to level set for everyone, I would remind people that, maybe I shouldn't use a cricket term, we're somewhere in the middle innings. First, the commission published their draft proposal. Parliament came out just a few weeks ago with their version of the recommendations. The next thing is that the European Council will come out with recommendations. Then there's the equivalent of a conference committee in the US where they all come together. We are very engaged, and certainly there are some things we think in the regulation that have the potential to have some unintended consequences, and achieve results that are probably not what the regulators intended. Those are the kinds of things we have a lot of dialog with them about.

All that said, we do business in many, many countries around the globe, with many different types of regulatory regimes, and quite frankly our business model varies from country to country. We are used to and little experienced in dealing with evolving environments and evolving our business models. This is a situation that is very important to us. We're watching it very closely, but we're just going to have to see how this all plays out which we think will continue to take some time.

You don't expect a final resolution by summer?

No, not to go out on a limb and guess politics, we don't. We would say at this point, and you are correct that originally they were trying to get this done by April or May. That is clearly not going to happen. Our view would be the earliest you could get to a resolution is probably much later this year, and certainly it could extend beyond that.

Thanks.

Sameer Gokhale, Janney Capital.

Thank you. Jeff, I do understand the cricket terminology, so (inaudible).

You'll have to educate me on what I just said.

I do have a couple of questions. The first one was just to clarify the reclass of fraud losses, out of provisions into operating expenses. I don't know if you disclosed a specific number for this quarter but it looked like the run rate was about $70 million or so a quarter. Is that correct, or maybe you disclosed the actual number for this quarter, and I just missed it.

You're correct that the run rate tends to be $70 million or $80 million a quarter. We often talk about fraud on a basis-point level. When you look at industry data, or as you know, about half the industry, but yes, the $70 million to $80 million is a good run rate. I don't know. Did we disclose a number more specific? It doesn't vary that much from quarter to quarter usually.

Okay. That's helpful. Then just the other question was in terms of the AMEXoffers.com, the program where you can basically go online, check the offers, save them to your card, and be able to redeem them, it looks like AMEX offers are basically ranked on individual relevance. I'm curious if there was anything from a timing perspective or technology perspective that resulted in this coming together relatively recently? Is this tied into your big data projects and trying to mine some of your consumer data to make more relevant offers?

That was one question. The second part of it is how big do you see this program becoming potentially?

Certainly, we think that our ability to put together an offer ecosystem is particularly strong because of our closed loop and can be a particular source of value, both for our merchants and for our card members. Of course, our card members value it the more we can customize for them what we offer them. Of course we're getting better at that every month, including using your location to be very specific to what we offer you.

We have seen growing interest on the part of merchants in using that ecosystem to help them drive business. We are, I think, quite excited about our ability to continue to expand our efforts in this area and our ability to use it as one of the many key tenets we have to create value across our entire network of both card members and merchants.

Okay. I'm getting a little bit specific here, but just on a different note with your EveryDay preferred credit card. You referred to this program. I was looking at some of the rewards associated with the preferred card, and they do seem somewhat rich depending on how you use them. But is this a sign? I think some other card issuers also have been amping up the rewards, if you will, and some of the card offers. Wells Fargo has clearly indicated they want to grow their card business.

Is this a sign that we are seeing competition at this point now that's going to eventually just reduce the profitability of the products across the board? Or do you feel that these are just very specific to a certain target demographic, and as a result of that, we shouldn't read into this more broadly that there's going to be a ration of competition?

I'd make a couple of points. One, remember that our goal is to engage our card members in the reward program because that is really how we generate the most loyalty, the most spend, and the best bottom line result for us. An irony here is, as a general statement, it can be a very positive thing for us when our rewards expense goes up.

We've also done a lot of work over the last few years, and you continue to see us every quarter really expand the range of redemption offers because people have lots of different preferences and lots of different likes and dislikes. We found great receptivity amongst our card members to that growing range of offers, which sometimes makes trying to do the kind of comparison you just described a little trickier. You don't necessarily know the redemption patterns. In some ways, you can look at our rewards costs each quarter, and that does give you a macro view of how it's trending relative to billings.

On EveryDay preferred, clearly we think we have a proposition here that is going to be very attractive to a segment of the market that fits our longstanding risk profile that we're after, but frankly a segment of the market that we probably didn't have the right product for. Certainly offering the right product to that demographic has to include having a competitive set of rewards. I'd be a little cautious about extrapolating from that one data point anything over the broad about rewards in general.

Okay. That's helpful. Thank you.

I think, operator, we probably have time for one last question.

Daniel Furtado, Jefferies.

Great. Thank you for the opportunity here. Earlier in the prepared remarks, you said you're working on products that are, quote, unquote, more welcoming, more inclusive, and focussing on some new customer segments. Is the way a layman should read this is simply that you're looking to move slightly down the credit spectrum as the economy has improved, or how should we read those comments?

I don't know if I'd focus on the word credit. I'd like to think of this as, if you look at this Company over the last 30, 40 years, we started out with a charge card that was targeted at a very small group of customers who traveled a lot and stayed at certain types of hotels. There's been a steady evolution over decades of us moving beyond that initial, very narrow customer demographic, moving beyond the very narrow merchant demographic, and moving towards everyday spend, moving towards a broader customer base. We added lend products, et cetera.

When we look at things like the EveryDay card, the prepaid products, the OptBlue program to expand merchant coverage, all of those things to us are part of a long running trend in this Company to extend the franchise and the brand which we think is so powerful, but that doesn't mean that we're changing the risk profile or the credit profile of the Company. We think it means having the right product for different parts of the market and matching that with ways that we can provide value to merchants. Yes, we see a real opportunity here to continue to expand with the footprint of our brand, but this is not about changing our risk profile. For the EveryDay card, this is for people who already would have qualified for other products. Frankly, we didn't really have a product that they thought was relevant for them. That's what we're trying to do.

Okay. Great. Thank you for the opportunity. That was my only question.

Thank you, all, for your time and your interest in American Express. Have a good evening.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.