American Express' Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.16.14 | About: American Express (AXP)

American Express Company (NYSE:AXP)

Q4 2013 Results Earnings Call

January 16, 2014 5:00 PM ET


Rick Petrino - SVP, Investor Relations

Jeff Campbell - Executive Vice President and CFO


Mark DeVries - Barclays

Sanjay Sakhrani - KBW

Ken Bruce - Bank of America Merrill Lynch

Craig Maurer - CLSA

James Friedman - SIG

Bill Carcache - Nomura Securities

Chris Donat - Sandler O’Neill

Don Fandetti - Citi

Bob Napoli - William Blair


Ladies and gentlemen, thank you for standing by and welcome to the American Express Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode and later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions)

As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to our host Mr. Rick Petrino. Please go ahead.

Rick Petrino

Thanks and welcome. We appreciate everyone 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 8-K 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 fourth quarter 2013 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed. All of which are posted on our website at 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 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.

Jeff Campbell

Well, thanks Rick and good afternoon everyone. I am pleased to be here this afternoon to discuss the solid results across our businesses that we reported today for both the fourth quarter and full year 2013.

Our performance in the quarter reflected healthy billed business intense revenue growth, a continuation of credit metrics being at historic lows, disciplined controlled operating expenses and as a result, solid earnings performance.

Since this quarter does mark the end of the full year, I will be discussing our full year results, which we are also pleased with, as they help illustrate some important trends.

During the quarter, we made several significant announcements in particular around signing new GNS partnerships and reaching separate settlement agreements with our merchants and regulators. In addition, we helped support small business entity for the fourth consecutive year. I will discuss some of these initiatives in more detail later on the call.

I would say that there was some complexity to understanding our financial results this quarter. While the merchant settlement is the most significant new item, we also have a number of previously disclosed items that make the year-over-year comparisons more complex, including last year’s fourth quarter items, the sale of our publishing business at the beginning of October and the few other specific items which I will walk you through as I discuss our results.

To begin with the summary of our Q4 results, you can see on Slide 2 that FX adjusted billed business growth was 9%. Given our spend centric business model, this was in the primary driver of our FX adjusted revenue growth of 6%. Both of these rates of growth are modestly above our full year growth levels, reflecting the uptick in the economy and our business that we saw as 2013 progressed.

This level of revenue growth combined with our continued strong operating expense control this year drove net income to $1.3 billion in the quarter. This was up sharply from the prior year of course due to the items we incurred in the fourth quarter of 2012.

Our strong capital position allowed us to continue our share repurchase efforts, over the last four quarters we have spend $4 billion buying back shares, which cumulatively resulted in our average shares outstanding declining by 4% versus the prior year.

To more meaningfully review the impact of these solid operating results and our share repurchase efforts on EPS, it’s important to realize that year-over-year comparisons are impacted by the three items recorded during the fourth quarter of last year, as well as this year’s merchant settlement.

Regarding the settlement which we announced in late December, it resulted in expenses that lowered fourth quarter EPS this year by approximately $0.04, adjusted for this merchant settlement this year and the three items from the prior year, adjusted EPS for the fourth quarter increased from a $1.09 to $1.25.

These solid results helped bring ROE for the period ending -- for the period ending December 31st to 28%. Overall, we feel good about our performance in the quarter, especially considering the continued moderate pace of the economic recovery.

Turning now to the full year results for 2013 on slide three. For context, as we enter 2013, there are number questions about our ability to grow revenues and earnings per share in a slow growth environment.

As you recall, billings and revenue growth have slowed over the second half of 2012 and there were concerns about the impact of tax increases and the microeconomic environment on our card that were base.

In fact, 2013 did turn out to be a year of only modest economic growth. While we are encouraged by the recent strong sequential increase seen in the U.S. GDP growth rates, it is important to remember that the year-over-year increase in U.S. GDPs are in the first three quarters of 2013 was just 1.3%, 1.6% and 2.0%. It is this year-over-year increase that relates historically to our billed business growths.

Given this challenging economic environment, we were please to be able to generate FX adjusted billings growth of 8% over the full year and FX adjusted revenue growth of 5%. Importantly, both of these metrics exhibited improving trends over the second half of 2013.

Another key focus of our organization during 2013 was on disciplined control of our operating expenses. On our fourth quarter earnings call last year, we disclosed our goal of growing operating expenses excluding the Q4 ‘12 restructuring charge at less than 3% annually during 2013 and 2014. We more than met this goal during 2013.

The strong control over operating expenses has enabled us to fund greater investments to grow our business and resources to meet our growing compliance demands, and to have increased financial flexibility in the face of a slow growth environment.

You will recall that at our financial community meeting in February of last year, we laid out several scenarios illustrating our ability to achieve our on average and overtime earnings targets in a variety of economic environment.

Given the slow growth GDP environment we experienced this year, our strong capital position and disciplined control of operating expenses were particularly important contributors to our financial performance.

We were able to drive full year EPS of $4.88, which was 25% higher than last year. Our EPS has now grown at a 13% to compound annual growth rate since 2010 in line with our on average and overtime target to grow earnings per share by 12% to 15%.

Over the same multi-year time period, our revenue CAGR has been 6%, well below our on average and overtime target of 8%, we generally feel positive about this performance given the slow growth economic environment.

I would also remind you that back in 2010 there were concerns about the growth potential of our existing card businesses, particularly in an environment with lower levels of consumer spending and borrowing. Since that time, however, our performance has given us greater confidence in the continued growth prospects of our card businesses.

Let’s turn now to the more detailed trends starting with billed business on Slide 4. Our billings growth rate remained healthy given the economy and improved slightly on a reported basis from 7% in Q3 to 8% in the current quarter. Billed business overall grew by 9% on an FX adjusted basis, so it’s consistent with the prior quarter.

The USCS segment, which constituted about half of worldwide billed business, saw growth increased from 8% during Q3 to 9% in Q4. Open small business volumes have been a particularly fast growing part of our U.S. business and ended the year having achieved four consecutive quarters of double digit growth.

As many of you know, we will be featuring a discussion on our open business as one of the topics at our upcoming financial community meeting.

We were also pleased to see a modest uptick in growth rate in our GCS segment from 7% to 8% on an FX adjusted basis. We continue to see particularly strong volumes in GNS, which grew by 16% year over year on an FX adjusted basis. GNS volume growth continues to be highest in the JAPA region, powered by strong growth in China and Japan.

Looking at billed business by geographic region on Slide 5. Consistent with our focus on expanding our business globally, total international volumes continued to grow at a faster pace than the total company and were up 11% year over year on an FX adjusted basis.

Billed business growth within the U.S. region also improved from 8% to 9% during the current quarter. EMEA continues to be our slowest growth region given the lower rates of economic growth within Europe.

Moving on to loans, the other key revenue driver. We continue to see steady growth in loan balances as shown on Slide 6. Worldwide loans grew by 3% versus the prior year, up from 2% last quarter. Our growth rate in the U.S. was 4% which is up slightly from Q3 and continues to outpace the industry average.

Putting it all together down in the revenue slide, you see on Slide 7 that overall revenue growth was 5% on a reported basis and on an FX adjusted basis was 6%. Consistent with our spend-metric model, this revenue growth was primarily driven by higher discount revenue from increased spending volumes.

Secondarily, revenue growth was aided by net interest income increasing 11% versus the prior year as we experienced lower funding cost year over year along with the increase in average loan balances. The sale of our publishing business depressed the growth rate of other revenue and impacted total revenue growth by approximately 1% during the fourth quarter.

For this quarter, this impact on total revenue was largely offset by the greater amount of card member reimbursements recorded in the prior year. Going forward, the loss of publishing revenue in and of itself will depress total revenue growth by a similar percentage point or a little less over each of the next three quarters.

You see on Slide 7 that the two biggest components of our revenues -- discount revenue and net interest income as well as total revenues were all stronger in the fourth quarter than in the full year, reflecting the modest sequential strengthening we saw in the economy and our business.

Turning now to provision where overall our credit metrics remained at all time low levels. Looking at the metrics highlighted on Slide 8, you can see that worldwide lending write-off rates, which were already at historically low levels, declined further during the fourth quarter and remained best in class. The delinquency rates remained consistent with the prior quarter.

Now as a reminder, our objective is not necessarily to have the lowest possible write-off rate but is instead to achieve the best economics when we make investments. Therefore at some point we would expect that lending write-off rates will increase from today’s historically low levels.

Slide 9 shows that our lending reserve coverage levels also remained relatively consistent with the prior quarter after considering the normal seasonal increase in loan balances. We believe that our coverage levels remain appropriate given the risk level inherent in the portfolio.

Finally, as you can see on slide 10, for the full year, provision increased by 6% as the benefits from reserve releases were smaller during 2013 than they were in 2012. While write-off rates have continued to improve and are at historic lows, the rate of improvement in 2013 was slower than what we experienced during the prior year.

In the fourth quarter, provision was lower by 17% this year, which is somewhat out of pattern with the full year results as we benefited from a modest reserve release in this year’s Q4 which is a modest reserve build than in a prior year Q4.

Turning now from the revenue side to the expense side on slide 11, story gets a bit more complex because of the three items we recorded in Q4 2012 and the merchant settlement this quarter. As of this, I will walk you through each individual line item in subsequent slides.

I would make the overall comment that a key to our 2013 results was maintaining disciplined control of our expenses, particularly within operating expenses. This allowed us to achieve solid financial results, while continuing to invest for both our current and future customers.

One item I would like to talk about while still on slide 11 is the tax rate. You see that our tax rate during the quarter was 34%, a bit higher than we’ve been trending and expecting. As we closed the year, the final geographic mix of where we generate income came in a little less favorable than we’ve been expecting and drove the higher rate for the quarter. This brought the full year effective tax rate to 32.1%.

Let me now start the more detailed expense discussion with operating expense since controlling operating expenses to make our business more efficient has been key to providing additional resources for growth initiatives, and by any measure our teams did a great job this year of more than meeting our ambitious operating expense goals.

Slide 12 shows you some of the details of our operating expenses during both the quarter and the full year. And clearly a number of individual lines here were impacted by specific items both this year and last. So, I won’t take the time to go in all of those details but I do want to call out two items.

First, other net expense in the quarter includes approximately $66 million of expenses related to the merchant settlement I discussed earlier in which we announced on December 19th. As part of the settlement, we agreed to pay a reasonable attorney fees up to a maximum total of $75 million plus up to $4 million to notify merchants of the settlement terms.

A small portion of these costs were accrued for in prior periods, resulting in a net impact of $66 million in the fourth quarter. Second, I would note that sale of our publishing business depressed operating expense growth by little more than 1% in the quarter.

So putting it all together on slide 13, you see that excluding the Q4 ‘12 restructuring charge, full year 2013 adjusted operating expenses were flat versus the prior year and remained well below our commitment to grow operating costs at less than 3% annually during 2013. Looking ahead, we remain committed to achieving our goal of having operating expenses grow by less than 3% again during 2014.

So moving to rewards expense, a key source of value for our card members. After excluding the cost of the enhancements to the URR or ultimate redemption rate estimation process for U.S. card members in the fourth quarter of 2012, adjusted rewards expense were like 13% during the quarter as illustrated on slide 14.

This 13% growth rate in adjusted rewards expense is somewhat higher than the volume growth in our MR and co-brand products due predominantly to two items, a benefit in the prior year due to a decline in the weighted average cost per point and an increase in current year quarter due to an enhancement in the URR estimate process in our largest countries outside the U.S.

With this enhancement, the global URR will remain at 94%. As a reminder, loyalty and reward programs are one of our major competitive advantages. Based on their success, we have expanded them during the last few years to offer broader opportunities for cardmembers to earn and redeem points.

Turning then to Slide 14 in our marketing and promotion line where significant amount of our investments in growth are. You see expenses up 12% in Q4 as we took advantage of opportunities to invest in the business while still delivering solid EPS growth.

We were pleased to be able to invest more in this area as the economy and the business strengthened as the year progressed. We continue to see many attractive opportunities in the marketplace, including those for new customer acquisitions.

During the fourth quarter we were particularly pleased to support the Fourth Annual Small Business Saturday. Momentum for this event continues to grow led by local businesses around the world. During the current year we supported Small Business Saturday in six countries, including the launch of the event in Australia, Israel and South Africa.

Importantly this event helps us build relationships with all businesses across both our merchant network and our cardmember base. This is critical to both the continued strength we see with small business cardmembers and our continual efforts to expand small business merchant coverage.

So more broadly, we believe that we continue to have a number of attractive investment opportunities across both our card businesses and from newer initiative. These opportunities exist across our existing card business -- these opportunities, excuse me, across our existing card businesses include increasing our penetration of B2B, middle market and small business spending continuing to deepen our relationships amongst affluent customers, continuing to expand our reach to a broader segment of consumers and expanding our merchant network particularly among smaller merchants.

While all of these areas represent sizable opportunities within the U.S. market, we believe that the long-term potential of these opportunities is even greater internationally where our relative share position today is still significantly lower than it is in the U.S.

As I mentioned on last quarter’s earnings call, we also target a portion of our investments for longer-term opportunities, including many initiatives in the digital space. Over the past several years we have increasingly focused our efforts on two large initiatives: reloadable prepaid, our products that help you move and manage your money as well as our Loyalty Partner rewards coalition program.

Both of these efforts continue to ramp up, and we believe that they provide significant opportunities for growth. This growth, however, will occur over a longer period.

Last, a common theme across all of these new initiatives is that they improve our ability to reach new customer segments and help make our brand more inclusive.

So given the breadth and depth of opportunities that we have which are financially sound, one of the challenges we have is how to balance our investments with our performance against our on average and over time financial targets.

As I mentioned earlier, you did see us increase our investment spending in the latter half of 2013 as the economy and our business improved. Historically this approach has led to fluctuations in our investment levels over time. For example, during 2010 and 2011 our operating and marketing expenses increased as a result of our strategy to re-invest a portion of the Visa MasterCard settlement gains and the benefits from improving credit performance back into growing the business.

We are completing our planning process for 2014 currently and well as always, be thoughtful and prioritized which investments we will fund. Of relevance here are our plans to create a joint-venture to accelerate the transformation of our global business travel division.

As an update, the negotiations for the joint venture continue to advance as we had planned. Our best estimate for closing date remains the second quarter 2014. Upon closing, it is expected that our partners will infuse a $700 million to $1 billion capital contribution into the new joint venture. American Express would contribute the assets of our business - travel business. As a result, we would expect to realize a meaningful P&L gain upon the close of the transaction. This could offer us some additional financial flexibility during 2014.

So turning now to capital, our strong capital position and the sizeable amount of new capital we generate through net income each quarter provide significant flexibility. This allows us to balance the capital needs in our businesses, our desire to remain strong capital ratios and the potential for significant capital returns to our shareholders.

The benefits of our strong capital position were on display all year as we returned 81% capital generated in the year to shareholders. We did this while modestly strengthening our already strong capital ratio year-over-year as you can see on slide 16.

As usual, you do our capital ratios decline slightly sequentially during the fourth quarter due to the seasonal increase in our loan and receivable balances. We did, of course, complete our submission for the 2014 CCAR process earlier this month and we will expect to hear back from the Fed about our submission in March.

Like the rest of the industry, we have worked hard to continue to strengthen aspects of our capital planning processes which supports this critical effort. While it is too early to know how this process will play out for 2014, I will say personally that going through this planning process for the first time has furthered my own confidence and the strength of our business model and capital structure.

Part of the strength has been our continuing efforts to evolve the mix of our funding sources which you can see on slide 17. We have worked hard to improve the diversity of our funding sources by driving a significant increase in the contribution from deposits over the last several years.

At this point, we believe our funding mix should be relatively stable going forward. Overall, our liquidity position remained strong and we continue to hold enough cash to cover our next 12 months of funding maturities.

Turning to other events of the last quarter, let me first make just a few more general comments on the two settlement announcements we made the financial aspects of which I have already touched on.

During the quarter, we announced that we agreed to settle two antitrust class actions filed by U.S. merchants that challenged specific provisions in the company’s card acceptance agreements. The settlement agreement if approved will address certain merchant concerns while helping to ensure that American Express card members are treated fairly at point of sale.

We also expected to limit the company’s exposure to future legal claims and ensure that any credit and charge, surcharge on American Express card transactions would be no more than the surcharge charge on competing credit for charge card products.

The settlement is presently under-review by the court. Some of the merchants that have cases pending against the company have objected to the settlement. Any objections or concerns will be considered by the court as it determines whether to approve the settlement.

During the quarter, we’ve also announced that we had reached settlements to resolve previously disclosed reviews of marketing and billing practices related to several discontinued products that were previously offered to card members. Marketing of the products included in these settlement was discontinued more than a year ago.

Most of the card member reimbursements have already taken place and most of the cost associated with those reimbursements, as well as the fines were provided for in prior periods.

The regulatory environment has evolved significantly and has heightened the focus that all the financial companies must have on their controls and processes. We take our regulatory obligations very seriously.

As we have discussed, we continue to scrutinize and improve our card practices, regulators wants companies to be clear, transparent and fair to their customers, a goal that is very consistent with our own objective.

As previously reported, American Express continues to conduct internal reviews designed to identify issues correct them and ensure that our products and practices need a high standard of quality.

Before I conclude, I wanted to touch on one other item that has been getting a lot of attention. The recent data breach at Target. We continue to work closely with Target and law reinforcement on the investigations and we are closely monitoring the situation as it evolves.

We have sophisticated monitoring systems and internal safeguards in place to protect cardmember accounts and to detect fraudulent activities. We have the appropriate broad controls in place on affected accounts and are continuing to take targeted actions as needed. We have seen minimal exposure thus far.

The closed loop is a big advantage for us, especially in situations like this. Our relationships with cardmembers and merchants represent one of the reasons why our fraud rates are the lowest in the industry.

So in summary, coming back to our financial results, we feel very good about our overall performance in the current economic environment. During the quarter we saw healthy billings growth and modest growth in loan balances which drove FX adjusted revenue growth of 6%. This revenue growth combined with historically low credit metrics, disciplined control of operating expenses, and a strong capital position allowed us to generate a healthy growth in EPS while still investing in the growth opportunities we see in the marketplace.

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 one follow-up so that we can ensure we give as many people as possible the chance to participate. Operator?

Question-and-Answer Session


(Operator Instructions) First, we’ll go to the line of Mark DeVries with Barclays.

Mark DeVries - Barclays

So with the stock having traded up a fair amount recently and also revenue growth still kind of below target, does this increase your interest in all and using excess capital to do acquisitions versus buying back stock here?

Jeff Campbell

Well, I think when you look at the company’s history, we have selectively used acquisitions over the years when we see an opportunity to either enhance our capabilities or build upon an existing strength of the company in an area. And certainly as we think about our long-term strategies, we are always looking for opportunities to do that.

All that said, when you think about our policies on using our capital while on average and over time we’ve said we will return about 50% of our capital to shareholders in the form of share repurchase and use the other 50% for other growth initiatives or acquisitions. Acquisitions are the kinds of things that you can’t really predict and you really need to be very thoughtful about when you find the right opportunity. And when we don’t have those opportunities, we’re very committed to returning capital to shareholder and that’s what you saw us do in 2013.

And so when you think about the future it’s very hard to predict and I think our commitment is to be thoughtful about anything we do on the acquisition side and be very consistent in returning capital to shareholders when they’re are not opportunities that we think are great opportunities on the acquisition side.

Mark DeVries - Barclays

And then just to follow up, I was hoping I can get you to quantify what you meant by meaningful P&L gain from the closing of the JV and comment on whether you included that in your capital plan submission?

Jeff Campbell

So two separate questions. So the size of the gain -- I will tell you, beyond saying it will be a material gain, there are still so many moving pieces as we work through the last part of this, that I am probably not comfortable giving you a number. I would point out that if you think about the math it’s pretty simple. If the partner puts in $700 million to $1 billion, we’ve got 50% ownership and re-contribute our assets, that will define the value, if you will, of what the joint venture will be worth and then what gain will drop out will be a function of what is on our books as we contribute the business travel enterprise to the joint venture.

So it will be a material gain. I can’t really give you a range today. As we thought about our CCAR submission what I would say to you is that what we convinced ourselves though and made the point of to the Fed in the submission is that in any circumstance, even though there is still a range of outcomes here, we would see that the transaction will be accretive or positive to our capital ratios. And so while we can’t quantify, it’s all upside and then we built our CCAR submission on an assumption that it would be neutral to positive. But we didn’t -- the way these things work, we want to build a share repurchase plan based on the certainty that it would happen.

Mark DeVries - Barclays

Yeah. Thank you.


And next, we will go to the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - KBW

Yeah. Following-up on that last comment, I guess when we think about your CCAR submission, are you anticipating, just keep a -- targeting a flat capital ratio and basically paying out consistent with what you did in 2013? And then could you have built in a contingency that upon the sale if that were to happen, you would use that excess capital towards capital management activities? And then I guess, secondly, just on the tax rate, could you just tell us how we should think about the level going forward? Thank you.

Jeff Campbell

So on CCAR, I would say, we certainly did not build in a contingency. I don’t think that really fits with the way the CCAR process have evolved to thus far as run by the fed. More broadly, when we think about our CCAR submission, we clearly do a tremendous amount of work internally and have a tremendous amount of discussion and debate amongst the management team and with our Board of Directors. And it is really all aims are trying to balance the views of our regulators, the views of our shareholders and our own views about the strength of our capital structure and our future performance.

I think that leads you to what we submitted and I don’t want to get into the details of what we submitted. But I think our history would show that we are pretty committed to consistently being shareholder friendly. We believe that our capital structure is strong and within that set of thoughts, we submitted what we thought was a very balanced submission and we’ll see how it goes.

On the tax rate, geographic mix does vary a little bit. If you look over the last few years, our tax rate has consistently been in the low 30s, but it’s varied a little bit between about 30% to 32% on a full annual basis. And we don’t necessarily see anything that we learned this year that suggest we will be outside that historical range. Beyond that, probably is a little hard to predict exactly what will happen in terms of the mix and other items next year.

Sanjay Sakhrani - KBW

All right. Great. Thank you.


Next, we’ll go to the line of Ken Bruce with Bank of America Merrill Lynch.

Ken Bruce - Bank of America Merrill Lynch

All right. Good evening. Thank you. Could you spend a little time and may be discuss some of the seasonal factors that impact the discount rate. You’ve had several fourth quarters where you have a significant reduction in discount rate. It tends to snap back in the first quarter. Can you just remind us what those seasonal factors are if you can quantify them that would be helpful as well?

Jeff Campbell

Yeah. It is probably tough to specifically quantify, but the basic trend is pretty simple. If you think about the fourth quarter, you have a little spurred upwards in retail spend and a little decline in some of the more business-oriented spend. And that mix shift is quite consistent each year and drives the discount rate down very, very modestly and that’s why you see it pop back up in Q1.

Ken Bruce - Bank of America Merrill Lynch

And are there are any other just either pricing or deal related factors that are more first quarter seasonal or fourth quarter seasonal that impact then?

Jeff Campbell

No. No, it’s really just that simple mix shift..

Ken Bruce - Bank of America Merrill Lynch

Okay. And maybe just lastly, you had mentioned that you’re going to balance out essentially the gain that may be taken from the sale of the Business Travel. I just want to make sure I understand this right. So basically, you’re going to look to keep your investments at an elevated level in terms of just driving future growth. But you’re possibly going to have some of that fall of the bottom line, is that the way to think about the balancing act that you have got to look out there?

Jeff Campbell

Well, I want to be a little careful because this is a potential joint venture. I think the point I was trying to make in my prepared remarks is we have a long track record of being very thoughtful about how we balance our on average and over time financial targets, with steadily investing in the many growth opportunities that we see. And it is certainly possible that as we get into 2014 and as we execute on the business travel joint venture, you may see an elevated level of investments depending on how all the final economics work out. And we will be as we always are thoughtful about making those investments in things that are going to produce very good returns for our shareholders, and we will be very transparent about what we are doing and why.


And next we’ll go to the line of Craig Maurer with CLSA.

Craig Maurer - CLSA

A couple of questions. First, the Target breach. Do you think this is a potential accelerator to EMV adoption, and could you see regulatory involvement pushing that along?

Jeff Campbell

Well, I think it’s early for anyone to know exactly what all of the impacts of the Target breach will be. Although there is obviously already a line of regulators and other oversight authorities who have expressed interest and understanding what’s going on. I think from our perspective, we have a tremendous dedication to the security of everything that goes on between our merchants and our cardmembers. We have the lowest fraud rates in the industry. Our closed loop gives us some real advantages here in helping to manage things.

And there are many things we can do with our merchant partners frankly that help lower fraud rates. Moving towards new technologies like EMV is one of those things. But frankly, there are many others and they all have different costs and difference trade-offs. Certainly, it has long been our goal to work ever more closely with our merchant partners to lower rates of fraud. We think that this may spur greater interest in doing that. The exact form it takes, I think, is probably anyone’s guess at this point.

Craig Maurer - CLSA

Secondly, thinking about the cardmember services expense line, it’s been in the press that the American Airlines lounge relationship has left American Express. I was wondering if we’re going to see any type of either adjustment lower for that, the end of that relationship or a ratchet-up in spending to account for replacing that service whether that’s through Centurion Lounge construction or other things?

Jeff Campbell

Well, I think we probably start by thinking about this from the customer or cardmembers’ perspective. And we have a long track record of doing lots of things that make all of our products valuable propositions for the customer. In the specific case of the Platinum Card, that is a card really targeted to people who travel a lot. There is a wide range of benefits that people get from the Platinum Card, including I would point out, even post once the American Airlines announcement goes into effect, which I believe is March, we will have access to three different sets of lounges - Delta as well as two others, Priority Pass and Airspace.

We have a variety of credits that we offer to customers on cost of global entry and other airline fees. You are correct that we are experimenting with building our own lounges and they’ve met quite a rousing reception thus far, in the two that we’ve opened in Las Vegas and Dallas. And we’ve announced plans already to open a couple others at LaGuardia in New York and in San Francisco. So, we see and we also feel that we remain very competitive, because if you think about it with the consolidation in the airline industry, and I would remind you as someone who was the CFO of American Airlines 12 years ago, there were a lot more airlines when I was the CFO there.

As the airlines have consolidated, you’re really left today with sort of no card is going to give you access to any broader set of lounges than what our Platinum Card does, and that’s sort of what airline consolidation has done. So we feel very good about the customer proposition and we think we have a long track record of being innovative about how we continually evolve that proposition. So it is a great value to customers and that is, that will drive all of, I think ultimately, yes, that will fall into our P&L and have an impact on the cardmember services line. But I think, frankly, the best way to think about that is, I would not expect this to have any material impact one way or the other as we continually find ways to provide value to our customers.

Craig Maurer - CLSA

Thank you.


Next we’ll go through line of James Friedman with SIG.

James Friedman - SIG

Hi. Thanks. I want to ask about an update on the Wells and U.S. Bank partnership. Jeff, how should we think about sizing that say in the year ahead in terms of cards-in-force?

Jeff Campbell

Well, so we are very excited about both the Wells Fargo and U.S. Bank relationships, and we see it as a really great commentary and the many things we can bring to our partners in this kinds of relationships.

Now it is a long and complex thing for large institutions to launch new products. The first thing, I do want to point out as well. Wells has begun to launch a few small test markets. These deals will actually take several years to fully rollout and reach some level of maturity.

We’re clearly very excited about the longer term potential of both of these partnerships and we think for both of those institutions we can really help them achieve any of the business goals they have and further their penetration particularly amongst their own customer basis and help them grow their card businesses to be more commensurate, frankly, with the broader size of those two institutions. But this will play out over a longer time period and so, I probably don’t want to size it beyond those general comments.

James Friedman - SIG

Okay. And then, if I could a follow-up on, with regard to Serve and Bluebird, if you could talk in general terms about what we should expect with the revenue mix between fee and transaction revenue overtime, how does the company think about the revenue generation from those products?

Jeff Campbell

Well, clearly, on the prepaid products you have both a range of fee revenue. Although, I would point out to you that we have worked very hard going back to some ways my comments about the Platinum Card. We have worked very hard to start with the customer proposition and I think you would find that we have two of the lowest fee products in the market with the widest range of functionality and features for the consumer and that’s exactly where we want to be on the continuum here.

When you think about the economics, you have a range of both revenues from fees, as well as, of course the point-of-sale or discount revenue. And you also have to think about it in the broader context of the family of products in the many different customer segments that American Express targets reaches.

So we look at all those things as we look at the economic model for Serve and for Bluebird and we are still in early stages, I would point out to you, we just re-launched the Serve product for example a few months ago. But we’re encouraged by the early signs and we think this is a market that over the years will grow to be a very significant market.

James Friedman - SIG

Thank you so much.


Next we will go to the line of Bill Carcache with Nomura Securities.

Bill Carcache - Nomura Securities

Thank you. For my first question I was hoping to revisit the points that were raised regarding the closing of the JV. So just to put balance around the potential magnitude of gain, if hypothetically there was a zero book value to the assets on AmEx’s book spend, since this is a 50-50 JV and the partners contribution is valued at somewhere between $700 million to $1 billion, and presumably AmEx’s contribution would be valued at the same level. So at zero book value then the maximum theoretical gain would be between $700 million to $1 billion?

And then, I guess, if we looked at that in terms of let’s say the book value was not zero, but if the book value was $500 million, then would that suggest the maximum gain is $200 million to $500 million, am I thinking about that the right way?

Jeff Campbell

Yeah. You’re thinking about it exactly the right way. The two things I’d remind you about are, these kinds of quite complex transactions do not come without a tremendous amount of effort and cost by both internal and external resources.

And then, I’d also remind you that our Business Travel business is a highly global business, which produces a very complex structure and will produce a very complex tax outcome, which is part of what we are still working through. But with those two editions, yes, it really is as simple as what you just took us through.

Bill Carcache - Nomura Securities

Great. Thank you. And then for my follow-up question, if I may, it has two parts, the first part on revenues, the second part on expenses. So on the revenue part, I was hoping that you could touch on the 4.5 times multiplier effect that AmEx has historically enjoyed relative to GDP and billings growth, relative to that relationship, is that something you still believe in? In other words, I guess I’m just wondering if there’s any reason to believe that that’s 4.5 times multiplier effect will continue to hold?

And then finally on the expense portion of that, it was good to hear you guys reaffirmed your commitment to keeping operating expense growth below 3%, I guess, separate from that, I was wondering your expense ratio I believe was at 70% this quarter, should we still expect that ratio to continue to work its way down towards the more normal 2007 levels that you guys have talked about of 67%?

Jeff Campbell

Yeah. So, on the 4.5, the interesting thing is if you look actually at the data we have this year, we don’t have GDP data, of course, for Q4. The 4.5 historical relationships still seems like a pretty good metric when you look at the most recent quarters and just to make sure everyone on the call is clear that’s applying that 4.5 ratio to year-over-year real GDP. I had to train myself a little bit since I joined American Express six months ago, much of the media talks about sequential rates of GDP growth, but what we’re talking is the year-over-year number.

And I would say, we’re not saying -- we are not necessarily actually trying to make any commentary on correlation but we are saying when you just look at the math that historical relationship has existed.

To go to the operating expense ratio, you’re right, I think it’s for the full year of 2013, we ended at 70%, I believe we were at 71% last year, if you exclude the restructuring and other charges.

The point I would make is we are very committed to the operating expense goals that we have laid out very publicly for over a year now and that is keeping our operating expense growth in 2014 to less than 3% as we did in 2013. Beyond that, I would say we want to be a little cautious about driving to other expense ratios because what we are always trying to do is meet our bottom line on average over time targets, particularly around EPS, while still being really thoughtful about how we can most productively and with the highest returns invest in growth opportunities for our shareholders.

And those growth opportunities come in different forms. Sometimes it takes just traditional advertising and promotional spend, other times it means hiring sales people who runs our operation expense. And you get different impacts depending on which ratio you want to manage. And so, and I would say our real commitment is to working towards continuing to meet our on-average and over time bottom line targets and for 2014 meeting that operating expense target.


Next we’ll go to the line of Chris Donat with Sandler O’Neill.

Chris Donat - Sandler O’Neill

Thanks for taking my call or my question. I wanted to just explore one other point on the JV, and I respect the complexity here. But trying to understand the cost basis, is it safe to think about this as parts of the cost basis have really been in place for decades, and so it would come in a pretty low book value, but other parts like newer technology are much more modern? Is that sort of wide parameters for thinking about it?

Jeff Campbell

I’ll tell you the complexity of this is great, because you are correct. There are some parts of this business that are quite old. I would also tell you they’re very, very intertwined. We have, for most of our long history in the travel business, run it in a pretty integrated fashion with other parts of our company that we’ll retain. I’d remind you that over the years we have done a number of acquisitions, which adds complexity. It is a highly global business. So, maybe this goes a little bit to the point I made in response to the earlier question about, there are deal costs, there are transaction costs. And part of them go to just sorting through how do we really cleanly create a separate entity and how do we make sure that we understand all of the financial and legal and tax implications.

And I’ll stop there because I don’t want to sound overly apologetic. But for all of those reasons it’s just difficult to give you a better estimate at this point.

Chris Donat - Sandler O’Neill

Understood. Just to kind of appreciate what all is involved here. And then to shift gears on to the settlement announced on December 19, I was a little surprised that the word “surcharge” appeared as frequently as it did in the summary of the terms and is the right way to look at this as sort of an abundance of legal caution for an outcome in the United States that has more [surcharging or is this] saying that we are going to be in a world where surcharging is more common? I am just trying to put this in the right context.

Jeff Campbell

Well, I certainly would quickly say we do not expect the outcome you had at the end of your statement there. So, let me step back for a minute. So I’ll make a few points. And I might almost start with, look we are out there every single day working to build relationships with our merchant partners. And we are really all about helping them grow their businesses, we’re not about being in litigation with them.

And so part of what we are trying to do here is find a way to put this litigation behind us and begin to work more productively with all of our merchant partners. What we get out of the agreement is a clear commitment that our card members will be treated fairly relative to other credit and charge card customers of any other institution. That is very important to us. We think there is tremendous value there.

We also believe and we are long on public record about this that surcharging is a very consumer and customer unfriendly practice. I’d remind you that surcharging is outlawed in a number of states in the U.S. And I’d also remind you that there are many countries all around the globe of course where we do business, which have all many different regulatory regimes. And In those where surcharging has been allowed, it has not become a rampant practice, we think because merchants recognize that it is just not a customer-friendly practice.

So when all is said and done, we thought this settlement was a good think for our shareholders, was a good thing for our merchant partners and allow us to get back to running the business and building relationships.

Chris Donat - Sandler O’Neill

Got it. Thank you.


Next we will go to the line of Don Fandetti with Citi.

Don Fandetti - Citi

Jeff, you would mentioned in your commentary about China benefiting your G&S business? I was just curious if that’s just normal growth or if you are gaining market share that would seem like that could be a good opportunity to sign up other banks? I was wondering if you could talk a little bit about that and just confirm that the economics are generally the same from region to region at G&S.

Jeff Campbell

Yeah. Well, I do think it is important to be very clear about what I said about China. So, our China growth in billings has been tremendous and has been a significant, though not the only part of why you see particularly high growth rates when we breakout billed business for you either by segment, it’s in the GNS segment or by region where you see it in the JAPA region, and we’re very pleased by that billings growth.

But I would remind you that in China as you would really see for all foreign payments players, today we earn very little revenue on the domestic spend within China and then we do much better on what we would call the outbound spend and that’s just due to the regulatory environment in China.

So longer term, we think it’s really important that we establish as larger presence as we can in China and we have a number of different business things that we’re doing in China. One of which is reflected in the great growth in billed business that you see, I just want to be a little cautious in saying that that billed business does not today generate particularly material amounts of revenue or earnings.

Don Fandetti - Citi

I understand that, I was just curious, if on your cross-border out of China, if you feel like there’s room to sign up for other banks to grow that business and are the economics similar to what you’d see in another region even though knowing it’s a small contribution to revenue?

Jeff Campbell

Well, we are continually exploring different opportunities in China. I certainly don’t want to get into exactly who we are talking to and what our strategies are in China. Let me just say that we see it as a very exciting long-term market. We think our brand carries into China very well. I think the billing growth that you are seeing demonstrates that and we think that it is creating a number of interesting opportunities for us, but I really don’t want to comment beyond that.

Don Fandetti - Citi

Okay. Thanks.

Jeff Campbell

We probably have time for about one more question, operator.


Okay. And that will come from the line of Bob Napoli with William Blair.

Bob Napoli - William Blair

Thank you and good afternoon. The spending growth accelerated nicely in the U.S. in the fourth quarter. It had a small acceleration, but important and I was wondering if you could give a little more color on that if the online spending growth, which I think is about 20% of your spend if that there was an outsized acceleration in online spend. And then just related to that, I mean, you seem to think that the economy was helpful, how does -- what is American Express’s view on how the economy going into 2014?

Jeff Campbell

Well, so let me -- maybe answer those in reverse. Certainly in terms of the economy, we don’t profess to have any greater insights, our business is not necessary a leading indicator. So, I would tell you, we build our internal plans around a consensus economists forecast of what GDP in the U.S. and many other markets around the globe is going to be. And I think we are pretty transparent about our sensitivity to what economic growth actually ends up to be, and so we hope that it turns out to be frankly as strong as sum of the consensus economists are saying.

When you look at Q4, certainly like all payment forms, we see tremendously high growth rates in online spend. We’re not going to provide today any specific numbers about Q4, I would just make the obvious point that like other players, the growth rates in online spend are quite high. It still remains a more modest piece of the total.

I think the most important thing though for us as we think about trends and what we saw over the course of 2013 does come back to the point I made earlier that we are pleased by the fact that when you look at the back half of the year, you saw an acceleration across billings and across revenues versus what you saw in the first half. So, we think that’s a good trend as we head into 2014, whatever the economic environment may be.

Bob Napoli - William Blair

Great. Thank you.

Jeff Campbell

Great. So I’d like to thank you all for your time and Operator, I think we’re done. Thanks for your interest in American Express.


Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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