美國運通 (AXP) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Express fourth-quarter 2016 earnings call.

(Operator Instructions)

And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to Toby Willard.

Please go ahead.

Thanks, Ryan.

Thanks, everybody for 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 presentation slides, and in the Company's reports on file with the Securities and Exchange Commission.

The discussion today also contains certain non-GAAP financial measures.

Information relating to comparable GAAP financial measures may be found in the fourth-quarter 2016 earnings release 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 Chief Financial Officer, who will review some key points related to both the quarter and full year results, through the series of presentation slides.

Once Jeff completes his remarks, we will move to a Q&A session.

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

Well, thanks, Toby, and good afternoon, everyone.

I'm happy to be here to discuss our results for both the fourth quarter and full year 2016, as well as our outlook for 2017.

As you can see in this afternoon's earnings release, our earnings per share was $0.88 for the fourth quarter, $5.65 for the full year 2016.

When excluding restructuring charges consistent with how we provided our 2016 outlook, our adjusted earnings per share was $0.91 for the quarter, and $5.93 for the full year.

This performance is significantly above the $5.40 to $5.70 earnings per share range we provided at the beginning of 2016, and is consistent with the provised full year 2016 outlook we discussed last quarter.

We are pleased that our business and financial performance enabled us to lift our earnings expectations over the course of 2016, while at the same time, allowing us to substantially increase our spending on growth initiatives, particularly during the fourth quarter to take advantage of the opportunities that we saw in the marketplace.

Stepping back to provide some context for today's call, a year ago in January 2016 on our fourth quarter 2015 earnings call, Ken and I discussed a number of challenges that our business was facing, and provided detailed financial expectations for 2016 and 2017.

We also outlined our plans to take significant actions to change the trajectory of the business going forward.

All of these actions fell under the three overarching priorities that we outlined at Investor Day of accelerating revenue growth, optimizing investments, and resetting our cost base.

12 months later, we are pleased with the progress we made in 2016, and we ended the year in a stronger position than we started it.

Adjusted revenue growth in Q4 was encouraging.

We completed in 2016 a record level of business-building investments that will better position us for many years, and we are running ahead of schedule on our plans to remove $1 billion from our overall cost base.

We're now halfway through the two year period of financial expectations that we laid out at the beginning of last year.

Our better than expected 2016 performance trends have built momentum, that we are seeing across our business entering 2017.

As a result, we feel good about our outlook for 2017, for earnings per share to be between $5.60 and $5.80.

That said, there is still a lot of work to do.

It remains a challenging economic, competitive, and regulatory environment, and so we are intensely focused on executing the plans we have in place.

Now let's turn to the results.

Let's start with the review of our full year financial performance metrics on slide 2. The full year metrics, of course, were impacted by the end of the Costco relationship in June, as well as the large portfolio sale gain during the second quarter.

These and other impacts produced the unevenness in our quarterly results during 2016 that we have been discussing all year.

As a result, I will provide some adjusted performance metrics for both the full year and fourth quarter to help you better understand the underlying business trends.

For your reference, we've included a summary of the adjusted metrics on slide 20 in the appendix, which you may want to pull out and look at, as I go through my remarks.

During 2016, we generated $32.1 billion of revenue which was down 2% year-over-year, but increased by 5% when adjusting for FX and Costco-related revenues in the prior year.

Our full year performance drove net income of $5.4 billion, and earnings per share of $5.65.

Since we have provided our 2016 EPS outlook excluding restructuring charges, I would point out that our adjusted EPS after excluding the $0.28 of full-year restructuring charges was $5.93, which was within the higher revised outlook range we provided last quarter.

We continued to leverage our strong capital position to return in 2016 a total of over $5.6 billion of capital to shareholders through buybacks and our dividend, which we again increased this year in the third quarter.

The share repurchase drove a 7% reduction in average shares outstanding versus the prior year.

These results brought our year-end 2016 reported return on equity to 26%.

Turning specifically to our Q4 results on slide 3, revenues decreased by 4%, reflecting the decline in volumes and card member loans following the portfolio sale of Q2.

When excluding FX and the Costco-related revenues in the prior year, adjusted revenue growth was 6% during the fourth quarter.

Net income was down 8% versus the prior year and earnings per share was $0.88, or $0.91 when excluding the $50 million of restructuring charges related to our ongoing cost initiatives during the quarter.

As we discussed on last quarter's earnings call, our Q4 earnings with were down as expected versus the prior quarter, primarily due to a higher level of spending on growth initiatives, and we also incurred some smaller discrete items within operating expenses, which I'll discuss in further detail later in my remarks.

Moving now to our billed business performance trends, which you see several views of on slides 4 through 7. Worldwide FX-adjusted billings were down 3% during the quarter, as you can see on slide 4. As we have done the last three quarters, we also provided a trend of adjusted worldwide billed business growth rates, excluding both Costco cobrand volumes and all merchants, and non-cobrand volumes at Costco on slide 5. By this measure, the FX adjusted billings growth was 7%, which was consistent with last quarter.

Our billings performance this quarter reflects a number of trends.

In the GCS segment, in the US, we continued to see healthy performance across our middle market and small business portfolios, and adjusted growth rates improved sequentially in both segments.

In contrast, spending by large corporations remained weak, with billings declining year-over-year, as we have seen in recent quarters.

I would say that it is too early to know if any of the changes in corporate and consumer sentiment that have occurred since the US election will impact corporate volume trends going forward.

Our US consumer billings performance this quarter was fairly consistent with Q3, and reflected our focus on building long-term relationships with customers, which generates sustainable revenue and profitability.

Turning to GNS, we did see a deceleration of billings growth during the quarter as FX-adjusted growth declined from 10% in Q3 to 4% in Q4.

The change was due in part to a decline in FX-adjusted volume growth in China, though volumes were still up in China nearly 20% versus the prior year.

As you know, while China does impact our billings growth rate, it has a very small impact on our revenue and earnings due to the low margin that all networks earn on spending within China today.

We also continued to see lower GNS volumes in the US, due to the end of the Fidelity relationship earlier this year.

Finally, turning to international.

You see on slide 7 that our billings growth rates remained strong, in both GCS and in our consumer business, as we saw our third consecutive quarter of double-digit growth in FX-adjusted terms.

This performance reflected accelerating FX-adjusted growth in the UK, which was up 17% versus the prior year.

And in Mexico which was up 14%, despite the uptick in the volatility of the currency exchange markets since the election, with the US dollar strengthening significantly against the Mexican peso.

Turning now to our worldwide lending performance on slide 8, our total loans were up 13% versus the prior year on an FX-adjusted basis as you can see on the left side of the slide, which is relatively consistent with the prior quarter.

We continue to grow US loans faster than the industry, while maintaining industry-leading credit quality, and continue to see opportunities to steadily increase our share of our customers' borrowing.

Turning to the right side of the slide, our net interest yield was 40 basis points higher than the prior quarter, or excuse me than the prior year, and a bit higher than Q3.

As I mentioned on last quarter's earnings call, over the last two years as our cobrand loans have declined, we have shifted our loan mix towards non-cobrand card members.

These card members are more likely to revolve their balances.

This change, along with other mix considerations and some pricing actions are driving the higher yield versus last year.

Our credit performance and volume growth during the quarter resulted in total provision of $625 million, which was 9% higher than the prior year, as you can see on the left side of slide 9. As in recent quarters, this growth rate was impacted by the provision in Q4 2015, including costs relating to the two cobrand portfolios that were sold in the first half of 2016.

When you exclude those credit costs from the prior year, as we do on the right side of this slide, adjusted provision increased 20% versus the prior year.

Similar to last quarter, provision growth differed significantly between lending and charge.

On an adjusted basis, lending provision increased 29% versus the prior year, driven by growth in loan balances, and as expected, a slight increase in the lending delinquency and net write-off rated versus the prior year due to the seasoning of new loan vintages.

I'd note that lending net write-off rate was down slightly versus the prior quarter, and remains best-in-class amongst large peer issuers.

Moving to charge card, charge provision was up only 3% versus the prior year, as growth in receivables was partially offset by improved credit performance in the current year.

Stepping back from the quarterly credit results, I'd emphasize that there has been no change in our credit outlook, and that credit continues to perform better than the Investor Day expectations we laid out last March.

Consistent with our previous comments, we expect some modest, gradual upward pressure on our write-off rates, due primarily to the seasoning of loans relating to new card members, which will cause provision to grow faster than loans going forward.

Turning to our revenue performance on slide 10, FX-adjusted revenues were down 3%, while excluding Costco-related revenues they were up 6%, a modest sequential acceleration from 5% in Q3.

Moving to the detailed components of revenue on slide 11, discount revenue was down 4% due to lower volumes, but increased by 6% on an adjusted basis due primarily to the 7% growth in adjusted volumes I discussed previously, along with the discount rate performance I'll discuss in a minute on the next slide.

Net card fees grew by 6% versus the prior year, due primarily to continued strong growth in our US Platinum, Gold and Delta portfolios.

I'd note that the slower growth in card fees sequentially was due primarily to the strengthening of the US dollar during the current quarter.

Growth in net card fees on a FX-adjusted bases was relatively consistent with Q3.

The steady growth in card fees is a reminder of the strength of the value propositions we have in the marketplace, and our ability to attract and retain fee-paying customers even in the face of an intense competitive environment.

Net interest income was down 9% due to lower average loans, but increased 12% on an adjusted basis, driven by the 13% growth in adjusted loans, and the higher net interest yield that I mentioned previously.

These impacts were partially offset by higher funding costs for charge card, due to an increase in interest rates versus the prior year.

Now given the recent changes in forward interest rate expectations, I realize there's a lot of focus on the potential impact of rising interest rates.

As you are all aware, due primarily to our charge card portfolio, we are liability sensitive.

In our most recent annual report, we disclosed that an immediate 100 basis point increase in interest rates would reduce our net interest income by approximately $200 million annually.

I'd point out though, that the math behind this sensitivity assumes a beta of one, relative to changes in the Fed funds rate for all of our deposits, including our $30 billion in high yield savings accounts.

While future changes in these deposit rates will be dependent upon many factors, the interest rate on high yield savings accounts in fact, has remained fairly consistent during the past year, despite the increases in the Fed funds rate.

Coming back to discount revenue performance on slide 12.

Our reported discount rate increased by 2 basis points versus the prior year, as lower discount rate volume coming off the network more than offset the rate pressure from merchant negotiations, including those tied to new regulations in Europe, changes in industry and regional mix, and the continued growth of OptBlue.

The ratio of discount revenue to billed business declined by 2 basis points year-over-year this quarter, as the increase in the reported discount rate was offset in part by growth in contra revenue items, including cash rebate rewards and corporate card incentives.

We are now lapping some of the upfront incentives we were offering on new acquisitions in 2015, which are also treated as contra revenues.

This lapping helped drive a smaller year-over-year decline in the ratio of discount revenue to billed business than in prior quarters.

Overall, on revenue growth, we are encouraged by the progress we have made against the four key pillars we laid out at Investor Day last year, though there is more work to do and we expect to see some continued unevenness in our revenue growth during 2017.

First, our growth trends are strengthening in small business and middle market, as we bring together and focus on our sales and marketing efforts targeted at this segment.

Second, we are making steady progress on accelerating merchant coverage, particularly in the US, and our fourth quarter Shop Small promotion was an early step in raising card member awareness.

Third, we have for several years now been steadily growing our share of US lending, and we continue to grow well above the industry every quarter in 2016.

And last, we are seeing organizational synergies from creating our global consumer, commercial, and merchant groups as they better leverage best practices from around the globe.

Turning now to total expenses on slide 13, our expenses were lower than last year both for the full year and the quarter.

For today's call, I'm going to focus on the individual expense line items, which I believe will be more helpful in understanding our underlying performance.

Clearly, marketing and promotion was up significantly year-over-year, and I'll cover that on the next slide.

Rewards expense was lower, in both the full year and for the quarter versus last year, primarily due to cobrand volumes that came off the network earlier this year.

Focusing on the fourth quarter trend, and adjusting for Costco cobrand volumes in the prior year, rewards expense would have increased in the quarter by 13%, while adjusted proprietary billings in the quarter grew by 5%.

We highlighted this shift in trend on the third quarter earnings call, given the introduction of higher rewards on our consumer and small business Platinum cards in October, and we expect this relationship to continue into 2017.

I would also note that we view the enhanced benefits as an important component of our initiatives to drive revenue growth.

Moving to cost of card member services, we saw full year growth in this expense line of 11%.

We are seeing higher levels of engagement in many of our premium services, such as airport lounge access and cobrand benefits such as first bag free on Delta.

As we look ahead to 2017, we will continue to invest through this line, as we expand the differentiated features and benefits we offer to our card members.

We view this as another important component of our initiatives to drive revenue growth.

Operating expenses for the full year and quarter include a number of unusual items, a few of which I'll touch on in a minute.

But overall, we are making progress faster than we had anticipated a year ago, in our effort to reduce our cost base by $1 billion.

This is part of what allowed us in 2016 to invest at higher levels than we had originally planned, and it will continue to provide momentum for us in 2017.

Looking specifically to fourth quarter though, operating expenses were down 13% versus the prior year.

I'd remind you that in the fourth quarter of 2015, we took a $419 million pre-tax impairment and restructuring charge, and that this year we incurred $50 million of restructuring charges in the quarter.

Excluding these items, adjusted operating expenses were down 3% for the quarter, continuing the momentum we saw in Q3.

I'd also point out that there were some discrete impacts in Q4 2016 operating expenses, including a negative impact due to the unexpected change in certain benchmark interest rates, driven by the volatility of the financial markets since the election.

But the key theme on operating expenses is that we continue to expect ongoing operating expense benefits in 2017.

Finally, as we expected, our tax rate for the quarter was lower than the full year average of 33%.

We recognized some discrete tax benefits in the quarter related to the resolution of certain outstanding tax items in the US.

As we look forward, we would expect the tax rate for 2017 be more in line with our Q3 year-to-date average of 33% to 34%.

Moving to marketing and promotion expenses on slide 14, as expected, marketing costs in Q4 were up significantly versus both the prior year and the third quarter.

For the full year, marketing and promotion costs were $3.7 billion, which was 17% higher than the prior year as we invested across a range of growth initiatives that we have been working on for some time.

First, we provided increased marketing support for the tremendous Platinum card franchise that we have in the US.

As we discussed last quarter, we rolled out expanded benefits for our US consumer and small business Platinum products during October.

While it is still very early days, the initial performance trends on both products have been encouraging.

Second, we leveraged our many years of sponsoring Small Business Saturday in the US to build upon the success that we've had increasing our small merchant coverage in the US through OptBlue.

Our fourth quarter promotional campaign helped make card members aware of the many new locations where American Express is now welcomed.

Third, we leveraged our digital marketing capabilities to build upon the success of our US and international card acquisition efforts.

During the quarter, we acquired 1.6 million cards across our US issuing businesses, and 2.4 million on a worldwide basis, which remains above our historical average levels, and demonstrates that we have now effectively replaced Costco as a distribution channel with our own proprietary activities.

Fourth, our investment mix this quarter reflects a shift towards initiatives focused on driving loyalty, and building our relationships with existing card members, which is part of the strategy we outlined at our Investor Day earlier this year.

And last, we supported all of these efforts through an increased brand advertising presence around the globe.

Stepping back, we have been focused now since 2014 on navigating the evolving competitive, regulatory and economic landscape.

When we made the decision to step away from Costco in early 2015, we told you that we were embarking on a series of steps to reposition the Company to be stronger without that relationship.

Since then, we have made many changes, including investing in a range of growth initiatives across all of our businesses.

In many ways, our marketing efforts in 2016, and particularly in the fourth quarter of 2016, represented the culmination of those efforts.

We'd also remind you that these efforts including our fourth quarter initiatives have been targeted to provide a mix of returns over the short, medium, and longer term.

In addition, I'd remind you that many of the investments that we make to drive growth, including things like the recent enhancements to our US Platinum products, and other differentiated services we provide to card members like lounge access, are reflected in our P&L and expense lines outside of marketing and promotion.

I'd also note that as part of our efficiency efforts, certain marketing activities that were previously provided by external partners will be performed in-house going forward, which will move these costs from the marketing and promotion line to the operating expense line going forward.

So as we enter 2017, we are capitalizing on the momentum, capabilities, customer base, and efficiencies that our efforts have produced.

The combination of all of these things is what we believe will allow us to moderate somewhat our marketing and promotional spend in 2017, while still continuing to generate solid revenue growth.

Turning now to slide 15, and touching briefly on capital, we again, used our strong balance sheet position to return significant capital to shareholders.

We bought back $1 billion worth of shares in the quarter, and again saw our share count drop by 7% versus the prior year.

For the full year, we returned 99% of the capital we generated to shareholders in the form of dividends and buybacks.

Our capital ratios continue to be strong, though they did decline sequentially, which is in line with the seasonal pattern we typically see at the end of the year.

We remain confident that the strength of our business model provides us with the ability to return significant amounts of capital, while maintaining strong ratios.

Before I conclude, let me go back now to where I started my remarks.

On our earnings call last January, we provided our financial expectations for 2016 and 2017, and as you recall, we said that we expected to earn at least $5.60 in 2017.

Based on our business performance over the past year, our outlook for 2017 is for EPS to be in the range of $5.60 to $5.80.

This outlook is based on what we know today about the economic, regulatory and tax environment, and incorporates the current forward interest rate curve, and recent changes in foreign exchange rates.

We have not factored into our outlook any additional significant changes in these areas.

To state the obvious, there is uncertainty about potential changes in the external environment.

We will, of course, discuss any specific changes should they arise, and help you understand any potential impact on our 2017 outlook.

We do believe that our 2017 plans appropriately balance shorter term profitability, with the steps we need to take to position the Company for the longer term, and in particular, for steady growth in 2018 and beyond.

To provide a bit more detail around our 2017 outlook, I would remind you that at our Investor Day last year in March, we laid out one potential scenario for how we could achieve our 2017 EPS outlook, which included a 5% adjusted revenue CAGR across the 2016 to 2017 period, as well as significant reductions in operating expense and marketing versus our 2015 base year.

As I reflect on that scenario today with the benefit of the full year 2016 results, I'd make a few comments.

We continue to believe today that a 5% compound annual growth rate and adjusted revenue growth across the entirety of 2016 to 2017 is consistent with the EPS outlook we have provided.

We do expect some unevenness in our 2017 quarterly revenue growth rates, with lower growth in Q1 in particular, driven by the impact of leap year and some timing factors.

To be clear though, we remain strongly focused on driving revenue growth to a rate above 5%, and are focused on executing the strategies we have in place to do so.

On the expense side, we continue to make faster progress than we initially expected on reducing operating expenses.

And as I said last quarter, we now anticipate that operating expenses in 2017 will be lower than the $10.9 billion shown in our Investor Day scenario.

This favorability in operating expenses provides us flexibility to spend more on marketing and promotion, and we now expect to have modestly higher levels of marketing spend than in our Investor Day scenario, though the ultimate level which be dependent upon our financial performance, and the opportunities present in the marketplace.

Last, in part due to the acceleration of benefits from cost savings during 2017, we again expect quarterly earnings performance to be uneven, with earnings notably lowest during the first quarter, in part due to the revenue impact I just mentioned.

We anticipate that earnings levels will increase across the year.

In summary, we are encouraged by our performance during 2016, which was a year of transition for the Company.

We executed well on the strategies we communicated early last year, and our results validate that we are on the right path.

There is, of course, more work to do, and we are intensely focused on executing in 2017, and achieving the targets we have discussed today.

We'll provide further details on 2017, and our long-term strategies at our Investor Day scheduled for March 8, and we hope to see many of you there.

With that, let me turn it back over to Toby.

Thanks, Jeff.

Before we open up the lines for Q&A, I'll ask those in the queue to please limit yourself to just one question.

Thank you for your cooperation.

And with that, the operator will now open up the line for questions.

Ryan, back to you.

(Operator Instructions)

Our first question comes from the line of Don Fandetti with Citigroup.

Please go ahead.

Yes, Jeff.

It sounds like you're maintaining that adjusted 5% top line growth in your guidance.

Can you talk a little bit about the components, I mean, specifically on the reported discount rate, what is your outlook there?

And why not build in, off of Q4, a slightly better top line outlook?

Yes, good question, Don and thank you.

To be clear, we are giving very specific EPS guidance of $5.60 to $5.80.

And, of course, one of the things that I think we've demonstrated over the years is the flexibility of our business model, and the many levers we have to pull to achieve a particular financial performance.

What I said in my remarks, was that if you go back to the Investor Day scenario which has a 5% compound annual growth rate for 2016 and 2017, we're certainly comfortable that you can get to the EPS range we provided with that kind of revenue performance.

I'd point out that the adjusted number for us in 2016 was about 5.3%.

To be clear, that's not our goal.

It's not guidance.

But even if you assume no acceleration in the revenue growth rate on an annual basis in 2017, with the cost reduction efforts that we already have in place, with the several years we've spent working on different ways to be more targeted, more focused, and more efficient and some of our marketing efforts, we're very comfortable that even if that revenue performance were to come to fruition, we're very comfortable with the earning guidance.

So we'll have to see how things play out over the course of 2014 (sic -- 2017).

Our loan growth has been very steady, very consistent, and very strong relative to the industry for several years now, and we would expect that to continue, and be a real source of growth.

Our volume growth has been steady, and we see some signs of pick-up in certain segments, like the small business and middle market area, and that will help us.

And when it comes to discount rate, at this point, we don't really have an update to what Anre Williams back at our Investor Day provided for 2017.

Thank, very helpful.

Thank you, Don.

Our next question comes from the line of Chris Donat with Sandler O'Neill.

Please go ahead.

Thanks for taking my questions, Jeff.

I wanted to ask, sort of following up on the last question, or your answer to it, on the small business side, because when we look at the monthly data you have, it looks like your small business loans are growing at a 20% annual rate.

I guess, I'm curious if that's sustainable, or do you see anything on the horizon that might slow that growth rate for small business loans?

So I think it's a good question, Chris.

And I think it's probably fair to say that in a lot of our discussions going back to Investor Day and many other forums, we particularly probably talked more about the fact that we are underpenetrated with our consumer card members, in terms of capturing what we would regard as our fair share of their borrowing behaviors.

That exact same phenomenon exists though, with our small business customers.

And, of course, we have a tremendously strong franchise with small businesses across the globe and in the US.

We have some unique features to our business model and our capabilities, because of our charge card capabilities that allow us to be particularly effective in helping our customers meet some of their spending needs.

But just like in consumer, we have not necessarily traditionally been as focused on capturing our fair share of their borrowing behaviors.

And so, we have been making the same pivot in small business that you have seen us making in consumer, and we have steadily been increasing growth rates.

A lot of that, just like in consumer, is driven by our existing customers, and we feel really good about our ability to continue to grow well above the market there, and to maintain really strong credit quality.

The one other mechanical point I would make that applies to both consumer and small business is in Q4, a modest piece of the growth is still helped from the fact that we have done better than we had anticipated at retaining some of the former Costco cobrand card member spend and lend behaviors.

And if you think about the way we do the adjusted revenues, the adjusted billings and the adjusted loans, that effect helps us a little bit in Q4.

Now it's actually moderating.

We've lapped with billings and loans, the peak of that effect.

But that will cause some modest slowing as we get into 2017, but it should remain, we believe, for a very long time, well above the industry.

Got it.

Thank you.

And our next question comes from the line of Mark DeVries with Barclays.

Please go ahead.

Yes, thanks.

Jeff, I understand that when you make some of the investments you made, you do it with an eye towards both near-term, and intermediate term and long-term benefits.

But you had kind of a record quarter in terms of M&P, and we only saw kind of -- we didn't really see billings growth accelerate sequentially, and I think adjusted revenue was only up modestly.

So can you kind of help us think about how you anticipate those benefits coming through over time, through things like Shop Small to get you to kind of a reasonable payoff, where we see some acceleration in revenue growth?

Yes, that's a good question, Mark.

I think of Q4 -- and you are correct, it wasn't kind of a record, it was a record high level of M&P spend, as reflective of the culmination of things we've actually been working on for a number of years, and they happen to come together in Q4.

So we run Shop Small in the US every fourth quarter, it's been a tremendously effective event for us, for our small merchants.

And when you think about leveraging that to begin, what we've said for a long time will be the long process of getting customer perceptions about our growing merchant coverage in the US to match the actual coverage.

We saw a tremendous opportunity to build upon Small Business Saturday, and try to drive our card members to new small merchants.

That just happened to come in Q4.

We have for quite some time been thinking about the next steps to evolve our Platinum products in the US.

I'd remind you, we tend to make some changes to them every year or two.

Those plans have long been in the works.

They happened to come to fruition in the fourth quarter, as well.

The fourth quarter in many ways was the last quarter, as I think about it in the US consumer market, of some of the battle going on for the spending and lending behaviors of the former Costco cobrand card members.

So all of those things came together in a way that just happened to coincide with the fact that we also were performing financially well ahead of where we thought we would perform, and well ahead of where we had committed to our shareholders that we would perform in 2016.

So those are the things that allowed us to spend at the record levels.

Now when you think about all of those efforts, they're all about driving long-term relationships with our customers, and generating sustainable revenue and profitability.

Most of them have very little in-quarter impact.

And in fact, particularly on the revenue side, when you think about new card member acquisition efforts, those are things that we've long said often take in two years, two and three to begin to pay off on the revenue and profit side.

So we feel comfortable with the decisions we've made.

We wouldn't have expected them to have much impact on Q4 metrics or results, but we think they're the right mix of things to drive the Company's results over the next several years.

As you know, when we make investment decisions, we make them considering very long-term economics, because this is a business where customer relationships are sticky.

Our best customers are people who stay with us and have been with us for many years, and that's really what all of our efforts are targeted at.

Got it.

Thank you.

Thank you, Mark.

And our next question comes from the line of Ken Bruce with Bank of America.

Please go ahead.

Thanks.

Good evening.

We've noticed a pick-up in travel-related activity and spending.

And I'm wondering -- I know you mentioned in your comments around the large corporate, that you thought it was too early to talk about confidence levels, and it impacting business volumes.

But I'm wondering if, in particular in that segment, if you have seen any increase in activity levels, maybe more broadly?

And if you could help us understand what the impact of that would be, not only on the billings number, but also on the discount rate?

That would be very helpful.

Thank you.

So the tough thing, Ken, is if you think about a lot of the changes in sentiment, and a lot of the comments that people across the travel business have made in the last couple weeks, most of them are forward-looking about the sentiments that they are hearing from their customers, about the bookings they are seeing for future travel.

They're not necessarily things that we would have expected to see in the brief six or seven weeks post-election in the US, a period where you've got both the Thanksgiving holiday, and the Christmas and New Year's holidays.

So in our results, through December 31, it is hard to see a noticeable uptick in large corporate travel spend.

There is some modest uptick.

And if you think through the tables in our press release, you'll see a modest sequential uptick in airline spend.

I just think we don't have enough data, and it's too early to call it a trend.

So we're certainly hopeful that a lot of the other commentary from other players in the travel industry about forward bookings is correct.

I just can't really point to anything in our Q4 results that would suggest in that time period through December 31, there's any meaningful uptick for us.

And any commentary around the discount rates that that segment has relative to your broader business?

Yes, sorry, Ken, I should have gotten to that part of your question.

So as you know, our business over the years has become less and less T&E focused.

If you look, again back at the tables, you will see this quarter's number for the percent based in the US of T&E, which someone is looking up here for me -- it was 24%.

That number has steadily gone down, and our T&E merchants tends -- there's lots of exceptions -- but tend to have higher discount rates than our non-T&E merchants.

So one of the reasons we have said for years, that there's a little downward pressure each year on our average discount rate is that because the non-T&E sector is growing faster.

That mix shift, which is ongoing, puts a little downward pressure on the discount rate.

So certainly, should the commentators who say there's going to be a significant uptick in travel, and particularly corporate travel to be correct, that would be helpful to our discount rate.

I just can't say that I see any of it yet.

Great.

Thank you.

And our next question comes from the line of Arren Cyganovich with D.A. Davidson.

Please go ahead.

Thanks.

You mentioned about, taking a runway to growth, sometimes two to three years for new card member acquisitions.

I was wondering if you could talk about the engagement of the new card members, how that's tracking relative to your expectations?

And whether or not there could be a boost in revenue accelerations related to that growth that you've had over the past year.

So we really rigorously track each vintage, to use the term we would use internally of new card members we acquire, and we study their behaviors and how it tracks over time, and think about how that relates to past vintages.

And I would say, that while there are really modest changes in the average pattern of how quickly we can engage customers, and how their spending plays out over time, changes are kind of slow, when they evolve.

You tend not to see across large numbers of customers, dramatic shifts in behavior.

And of course, as a Company, we are really focused on trying to acquire new card members with whom we can build a long-term relationship, where we can really generate sustainable revenue and profitability.

So when I look at the card members who we have brought into the franchise over the past 18 months, all of our experience and data thus far tells us they look not terribly dissimilar to people we have brought in in the past.

The one clear difference, which I did talk about a little bit in my earlier remarks, is that while in the US consumer and small business area, the Costco used to be a significant acquisition channel.

We have now replaced all the volume we used to acquire through that channel with other proprietary channels, putting people on other products, that particular shift tends to result in customers who have a little higher propensity to carry a revolving balance.

That does drive revenue a little bit more quickly, it tends to drive a little higher yield, comes with slightly higher credit costs as well, but very, very good economics.

Other than that general shift, I wouldn't really call out any change in the makeup of the new card members we're acquiring as of today, we think would drive a different profile going forward, of how they come to be both revenue positive and profitable.

Thank you.

Thanks, Arren.

And our next question comes from the line of Sanjay Sakhrani with KBW.

Please go ahead.

Hi, Sanjay.

Hey, how are you?

So I was hoping to get a little more clarity on the baseline number for 2016, if we were to adjust for some of the one-time items?

I appreciate some of the commentary you've given around the revised outlook, but I'm just trying to think through the different ways we can get to the 2017, on a baseline 2016 number, would be helpful?

Sanjay, I'm happy to go into as much detail as you like.

But really, as we think about running the business, if you take 2016, and you say you've got a big portfolio sale gain in there that doesn't repeat, and you've got six months of a big cobrand relationship that went away, those two things you pull out.

And, look, there's lots of other one-time things, and some things that surprised us in Q4, like odd movements in interest rates, but those kinds of things to some extent, are going to happen every year.

So if you make those two adjustments to 2016, you will get, when you plug in our guidance range, a pretty darn healthy EPS growth rate between 2016 and 2017.

But achieving that growth rate is strictly a matter of sustaining the kind of revenue growth that we've already achieved in 2016 on an adjusted basis.

We're trying to raise it, but our guidance doesn't necessarily count on that.

Executing on the $1 [billion] take-out of infrastructure costs, and we thus far are ahead of our plans, both in time and dollars to do that.

And then, moderating our marketing and promotional spend.

And we've been pretty specific on the marketing and promotional spend in the past.

At Investor Day, in one scenario I talked about how in 2015, we spent $3.1 billion on marketing and promotion.

And at the time, I said we'd probably pull that down by $200 million or $400 million.

Last quarter I said, with the better progress we're making on OpEx, we probably don't need to pull marketing and promotion down quite that much.

And I'd also remind you, and I was trying to make this point in my earlier remarks, that there's many things we do to drive revenue growth.

And we have made very conscious decisions, for example, that putting financial resources towards improving the value proposition in the Platinum product for both consumers and small businesses in the US is an even more effective use of our financial resources in 2017, than putting that same amount of money towards marketing and promotion.

We have clearly done more to provide very differentiated services to our card members, and our lounge network is an example of something that we can uniquely do because of our scale.

That runs through the cost of card member services line, not through marketing and promotion.

But we're doing more of that now than we were a year ago, and I think you can expect to see us do more a year from now than we are today.

And that's another example of why we are comfortable that we can moderate down the marketing and promotion line, because part of what we're doing is just shifting to other kinds of spending that we think will be even more effective in driving the end goal, which is more revenue growth.

So that's how we think about it.

If you just take again, the revenue growth rates we're already at, the cost reduction plan that's well under way, a little bit of moderation in M&P, and then of course, the continued steady returns of capital, that we have a long track record of doing.

And we just completed a year where we returned about 99% of our net income to shareholders through our dividend and share repurchase, that's the simple model that makes us comfortable with the outlook that we provided.

Thank you.

Thanks, Sanjay.

And our next question comes from the line of Craig Maurer with Autonomous.

Please go ahead.

Yes, hi.

I apologize if this has already been asked, but I was hoping you could comment on -- provide some more detail on what you're seeing in the competitive environment?

We've seen some interesting moves from Chase recently, as they have seemingly have pulled back on the promotional offering on the Sapphire Reserve card to fund an increase in rewards on the Amazon card.

So one might deduce, they've reached the point of maximum pain.

You also could see high -- rising interest rates along with worsening credit, which might lessen the appetite for second-rate players to drive easy cash-back programs.

So do you see the window improving over the next year or two, in relation to competitors?

Well, good questions, and comments, Craig.

Look, we try to be extremely mindful of all the things going on in the marketplace.

However, we are even more mindful of what we're doing to provide the best possible value propositions for our card members, our merchants, while still generating real sustainable growth for our shareholders.

I think the events of the last couple years, say to us that in the US -- I would remind everyone on this call, that your question is probably mainly targeted at the US consumer market, which is really the market where we have seen a real evolution in the competitive environment over the last year, less so in our other markets, less so in B2B, less so outside the US, et cetera.

I think our experience over the last few years makes us cautious about making any business decision that relies on our competitors deciding to pull back on any benefits, or relies on an assumption that the marketplace is going to be any less competitive than it is today.

And in fact, it may become even more so.

But even in the face of all that competition, we feel really good about our value propositions, right?

We have been growing card fee revenue in the high single-digits all year.

That's driven by fees out of our Platinum, Gold, and Delta portfolios, the exact premium card holders that our competition has been targeting at.

So we are mindful of all the changes in the marketplace that you went through.

Certainly, from a credit and interest rate perspective, we always make long-term decisions based on a through the cycle perspective.

And certainly, our history of managing through difficult credit situations is a pretty good one, where we tend to come out more quickly, and more strongly than others, stay more profitable than others.

And in fact, sometimes that's been a good opportunity for us to pick up a little bit of share.

But we'll have to see.

So we have a very clear set of financial expectations we've laid out for you, all of our shareholders, and for ourselves.

We feel good about our progress midway in, and we're very focused no matter what happens in the competitive environment, on achieving the results we've laid out.

Thank you.

Thanks, Craig.

And our next question comes from the line of Ryan Nash with Goldman Sachs.

Please go ahead.

Hey, good afternoon, Jeff.

Maybe I can ask a question around rewards?

I fully understand that this is baked into your full year guidance of $5.60 to $5.80.

But can you maybe just help us understand, particularly as you're enhancing some products, how we -- and the competitive arm that you just talked about in Craig's question, how can we think about the relationship between billings growth and reward growth?

I mean, I think you said earlier something like 5% billings and 13% reward costs.

Do you think we're going to see that type of magnitude for the better part of 2017, or could we start to see some of that growth alleviating?

Yes, it's a good question, Ryan.

To remind everyone, if you even go back to the beginning of 2016, when at Investor Day I laid out a couple different scenarios for growth.

At that point, we built into those scenarios an assumption that our rewards costs would grow a little bit faster than billings, and that was just an acknowledgement of the competitive environment, that in many ways Craig Mauer just did a nice job of laying out.

Now in fact, when you look at most of 2016, we have not seen rewards costs growing any faster than billings until Q4.

And so, that should tell you pretty clearly that what drove that change in trend was the introduction of the different benefits to both the consumer and small business Platinum cards in the US.

With that being what drove it, I think you should expect to see numbers somewhat in the ballpark with what you saw in Q4.

And you're correct, on an adjusted basis I talked about 13% -- I'm looking for the number here -- but we talked about billings growth of 5% and rewards growth of 13%.

So you should expect to see something in that ballpark through the first three quarters of 2017, just from actions we've already taken.

Beyond that action, we'll have to see in the competitive environment.

We're always looking to periodically refresh products.

When we do that though, our goal is to try to refresh them in a way that provides enhanced and differentiated benefits to our card members, and frankly often, as a result allows us to capture a little bit more economics from the product.

So our goal going forward would be to continue that trend.

We also feel good about a lot of our value propositions, our cash back products in the US have been tremendous acquisition vehicles for us, with the value propositions they have.

Our cobrand products, we think are extremely competitive in the marketplace.

And around the globe you operate outside the US in an environment, where we think we have market-leading value propositions in most of the places in which we do business.

So I wouldn't necessarily look to see the trend increase from what you saw in Q4.

I do think you should expect to get three quarters of it in 2017.

And I think you should see -- look to see us build upon the differentiated service and value propositions we can put into the marketplace.

Great.

Thank you for the detailed answer.

And our next question comes from the line of Jason Harbes with Wells Fargo.

Please go ahead.

Hi, Jeff.

Good evening.

Thank you for taking my question.

So just looking at the charge card receivables, that accelerated quite nicely this quarter.

I believe it was a five year high.

To what extent, do you view that as a function of some of the Platinum enhancements you put in place this quarter?

And more generally, how sustainable do you view that sustainment, along with the double-digit loan growth that you've demonstrated over the past year?

Thank you.

So thanks for the question, Jason.

I think, there's really two questions probably there.

From a charge card perspective, look, the charge card franchise is a tremendously strong and unique asset that we have, and it cuts across both our commercial and consumer segments, of course.

I think it's probably a little early to say, that a couple months into our introduction on just one product, the Platinum product, of new benefits that it had a material role in what you would have seen the quarter end.

I think what you saw at the quarter end is really a function of trends across the entire charge card franchise, which is both consumer, commercial, and is impacted by lots of things.

And certainly, the fact that we were able to achieve that growth, while also in fact seeing improved credit quality in the charge card franchise.

Because as you recall, when I talked about provision, I pointed out that charge provision was actually up less than charge growth, because of improving credit quality.

So gosh, we feel really good about the franchise.

We see continued growth.

The Platinum product in the US is an important component of that franchise, and while it's too early to declare victory, we do feel good about the early returns.

On lending, we are now several years into growing our lending, which is predominantly in the US, well above industry rates.

And yet several years of doing that really doesn't even put a dent in the under representation that we have in our customers' borrowing behaviors.

And that's why we feel very comfortable that we have a long runway of continuing to grow above the market, both consumer and small business lending, as we just continually capture a little higher share of our own customers' borrowing behaviors.

So I really would say we feel good about both of those trends, the charge business, as well as the loans.

Thank you for the question, Jason.

Our next question comes from the line of Rick Shane with JPMorgan.

Please go ahead.

Hi, Rick.

Thanks for taking my questions today.

When I think about or develop sort of a simple engagement tourista, I think about twin components, the sign-up bonus, which basically encourages people to take the card.

The ongoing rewards, which is has an in-place decline in terms of engagement, and then brand, which has the long-term decay in terms of engagement.

And I think even your competition would agree that the brand is really your advantage.

When you do the analysis of when your customers are taken away or engaged by competitors through either sign-up bonus or rewards, and then those rewards abate, do you have any analysis that shows how they return because of that strength of the brand?

That's a really good question, Rick.

I -- and maybe let me maybe make a few comments.

Certainly, we think the brand is a tremendous asset for us.

But I think you have to think a little bit more broadly about what it is that causes our card members to -- and this is my word -- really attach to American Express in a way, that I think is unusual in my experience with other brands, and certainly other card brands.

And part of it's brand, a large portion of it is service, and there is a160-year plus legacy of our Company being all about service, all about going the extra mile for customers when something goes wrong.

It's about the scale we have, which allows us to offer some differentiated benefits and services that others find very difficult to match, right?

And I'm going to come back to something I talked about earlier, which is the lounge -- the breadth of the lounge access that we offer to people who hold our premium products, that gives them lounge access.

It's very difficult for anyone who doesn't have our scale to ever match.

And yet the combination of our own Centurian lounges, which have been tremendously powerful in terms of strengthening the brand with the lounge access that we get through our great partnership with Delta, and then the other lounge networks that we give our members access to, which are probably easier for others to replicate, but not those first two.

That breadth that our scale allows us to do things with, the levels of service, the long, long reputation for service, the global scale, the brand, those are the things that as we sit around, and think about products, and product features that we start with.

And those are the things we think hardest about how we strengthen the unique aspects of them, so that we can do things that our competitors won't be able to match.

Now, you're right, customers, particularly a subset of customers are going to think a lot about sign-on bonuses, and they're going to think a lot about mathematical calculations, about rewards.

And we need to be responsive to that.

But our view, and I think our history and our performance would say, we don't need to match necessarily, because we have a brand, a reputation, and an ability to deliver service and benefit -- and differentiated benefits that others can't match.

So the trick is, what's, our goal is producing long-term customer relationships that are going to give sustainable revenues and profits for our shareholders as well.

And all of our thinking is always targeted at trying to achieve the balance that gets at all of those things.

So thank you for the question, Rick.

Thanks, Jeff.

Next question comes from the line of David Ho with Deutsche Bank.

Please go ahead.

Hey, good evening, Jeff.

Just wanted to circle back on your views on potentially how much leverage your guidance could have, in an environment where you do have an inflection, and kind of the organic component of spend, i.e.

spend for account, or a little bit of acceleration inflation.

Obviously, those historically have been very beneficial to your model.

But obviously, you shifted away a little bit more from the higher -- highest end spend, to like the more mass affluent, maybe middle market.

But just wanted to get your thoughts there, on any kind of coil spring effect from the better macro environment?

Well, certainly for some number of years now, we have been operating in a slow growth, and really no inflation environment.

And I occasionally, David, do remind people as you were you just reminding us all that, that low or no inflation environment when you have a spend-centric model is more challenging in some ways, in terms of achieving some of the historical levels of revenue growth that we're achieving.

So more than anything else, what is good for us, are the same things that are good for everyone in the economy, which is more robust growth than we've seen.

A little bit of inflation, I think I would probably say, we're pretty neutral on.

We do have to be sensitive to our liability-sensitive balance sheet.

Although as I tried to talk about in my remarks, while we are more liability sensitive than others, we do have a portion of our funding structure that probably has some lower beta than one, revenue rising interest rate environment.

So we'll have to see.

There's so much uncertainty, I think economically right now, what are tax policies going to be?

What's going to happen to growth in some of the foreign markets we serve, what's going to happen to foreign exchange rates?

I guess, I'd just summarize by saying, what we're after is steadily healthily growing economies, and stable exchange rates, but we will adapt to whatever environment we face.

Hey, Ryan, we've got time for one more question.

Okay.

And that question will come from the line of Betsy Graseck with Morgan Stanley.

Please go ahead.

Hi, Betsy.

Hi.

Good morning, or afternoon, sorry.

It's evening over here.

A question on how we think about the dynamics in the charge card, as you are migrating some of those people to be more on a revolving basis?

And it's an opportunity that you're offering to them, and a certain part of it, I'm just thinking how you think through that dynamic on the balance sheet?

Well, I guess, I'd make a couple comments.

I think Betsy, you're getting at -- it sounds like you understand something that maybe not everyone outside the Company always does, which is sometimes I think there's a perception that, oh, you've got charge card customers, they have zero interest in borrowing money from anyone.

And what in fact is the case, both on the consumer and small business side is, we've learned over the years that some of our best charge card customers are off carrying balances on our competitors' products.

And that's why we've become a little bit more focused on -- from a product perspective, and marketing perspective, and targeting perspective trying to in fact, capture our share of our customers, including our charge card customers borrowing behaviors.

And we have a number of ways to do that, including other lend-oriented products in the hands of charge card customers.

Or we also have, and not everyone realizes this, an ability for our customers to borrow on their charge cards with a product we call lending on charge.

So we actually see that expansion, both on the small business side and the consumer side as a way to strengthen both our charge card, and the borrowing relationship we have with the existing customers.

It's a way to grow our lending with customers who we know incredibly well, from a credit quality perspective.

And it has a side benefit in a rising interest rate environment, I suppose, of slightly lessening our liability sensitivity as an overall Company, although that is certainly not a driver of the strategy.

It's a bit of an offshoot from the real strategy, which is how do we strengthen, and build even broader, better relationships with some of our best customers who tend to be the charge card customers.

So thank you for the question, Betsy.

Toby, maybe I'll turn it back to you.

Thanks everybody for joining tonight's call, and thank you for your continued interest.

As Jeff mentioned earlier, that our Investor Day is coming up on March 8, and we hope to see many of you there.

Thanks very much.

Ladies and gentlemen, that does conclude today's conference.

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