Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Daniel Henry - Chief Financial Officer, Executive Vice President and Member of Operating Committee

Kenneth Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc and Chief Executive Officer of American Express Travel Related Services Company Inc

Ron Stovall - Senior Vice President of Investor Relations

Analysts

Robert Napoli - Piper Jaffray Companies

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Michael Taiano - Sandler O’Neill & Partners

Craig Maurer - Credit Agricole Securities (USA) Inc.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Jason Arnold - RBC Capital Markets Corporation

Drew Dampier

Betsy Graseck - Morgan Stanley

Bradley Ball - Evercore Partners Inc.

Kenneth Bruce - BofA Merrill Lynch

David Hochstim - Bear Stearns

Bill Carcache - Macquarie Research

American Express (AXP) Q3 2010 Earnings Call October 21, 2010 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Third Quarter 2010 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.

Ron Stovall

Okay, thank you very much, Kathy and welcome. We appreciate all of you for joining us today on the call.

As usual it's my job to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, optimistic, intent, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements including the company's financial and other goals are set forth within today's earnings press release, which was filed in an 8-K report and in the company's 2009 10-K report, and 2010 first and second quarter 10-Q reports, all already on file with the Securities and Exchange Commission, in the third quarter 2010 earnings release and earnings supplement as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com.

We have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will be structured differently than recent calls. We will begin with our Chairman and Chief Executive Officer, Ken Chenault, who will provide some perspective on the evolving regulatory environment surrounding the payments industry and the DOJ's anti-trust lawsuit against the company. Then Dan Henry, Executive Vice President and Chief Financial Officer will review some key points related to the quarter's earnings through the series of slides included with the earnings document and provide some summary or a brief summary remarks. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get in to the queue for the Q&A period where both Ken and Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions.

While we will attempt to respond to as many of your questions as possible, before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

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

Daniel Henry

Good afternoon, and thank you all for joining our call today. As Ron said, given the news that hit this month about the DOJ lawsuit, we're going to break from our norm on today's conference call. So before turning things over to Dan to cover the third quarter, I'm going to spend a few minutes sharing my views on the various regulatory and legislative changes that have occurred over the last two years, including the DOJ lawsuit.

I'm going to discuss the issues raised by all of these changes, not just for our company but for the payments industry overall. First, I want to assure you that we're taking the DOJ lawsuit very seriously. However, a number of the changes we're currently seeing are likely to have far greater impact on industry growth, pricing, consumer behavior and merchant relationships than the DOJ suit alone. The lawsuit after all is about steering between credit products. Merchants are already allowed to offer a discount or incentive for customers who pay by cash, check, or debit card, but few do. For bank issued credit products, there is some rate differential between products. For example, for Visa credit products, the difference between their high and low interchange rates is approximately 90 basis points. That's $0.90 on a $100 purchase. All things being equal, it seems questionable whether merchants would disrupt the transaction at the point-of-sale and risk a potential loss of customer goodwill for the sake of a relatively small differential.

For me, the core issue of the lawsuit is a simple one. It's about consumer choice and the right of a customer to select the card they want to use at the point-of-sale. Now I don't believe the government or the merchant should be making this choice. This choice should belong to the customer. And I also believe that we, as a company, like American Express, should have the right to negotiate freely with our merchants on the terms of our contract. Our contract requires the welcome acceptance of our card products and our customers at the point-of-sale. And I don't believe that government intervention in this manner, or in any legal commercial negotiation, will lead to a positive outcome.

Finally, I disagree strongly with the DOJ's assertion that we have market power, that merchants are forced to accept our products. This is not the case, and I believe it's one of the many reasons why we'll win this suit. In terms of merchant acceptance, we’re the smallest network, smaller even than Discover who is not a party to this suit. In the DOJ's own anti-trust case against Visa and MasterCard several years ago, they explicitly stated, and the courts agreed, that we did not have market power. Merchants chose to accept Amex because they understand the value we bring them. Higher spending customers, our superior service and our marketing expertise to help them expand their business. Our actions in the marketplace are all about competition, not coercion.

Now, as I said earlier, while we certainly take this lawsuit seriously, it's also essential to put into perspective, and in fact, connect the dots against all the changes across the payments and card industry in recent years. Just over the last two years, we've seen the CARD Act, the Dodd-Frank bill, we've seen Durbin on interchange regarding debit and new regulatory limits on over limit fees. Now this regulation and the legislation has clearly been the most significant in the history of the card industry. Each clearly reflects the political environment and have turned back towards regulation rather than competition in the banking, financial services and card industry. And while they share a common starting point, each one is likely to have a different impact on the market, on the consumer and on different players in the industry.

For example, among other impacts, the CARD Act has changed how some consumer products are priced. On one side, it has simplified terms, conditions and made disclosure more transparent. It has insulated some consumers from higher interest rates and fees if they fall behind on payments. And it forced some issuers to stop practices that were misleading or at best, very hard for customers to understand.

Now on the other side, it may cause some lenders to limit access to credit to all but the most financially secured borrowers. It may increase the overall cost of borrowing from some banks as they offset their inability to charge higher rates for riskier customers.

It's made the traditional, mass market credit card business less attractive. It's caused some issuers to reorient their sites on the premium sector. And it may cause others to scale back investments in the card business perhaps significantly.

Now we've noted before that because of our spend base model, we are less impacted by the CARD Act than our bank issuing peers. For example, while we did have a significant impact within our yield because of the Act, we've worked to mitigate it through our repricing activities over recent quarters. The financial impact on many issuing banks from the CARD Act is substantially greater and therefore harder to mitigate. And during the second quarter earnings cycle, a number of our issuing peers disclosed that after mitigation, they would have net income losses of several hundred million dollars as a result of the CARD Act.

The Dodd-Frank Act, which included Durbin and the creation of the Consumer Financial Protection Bureau, coupled with the Reg E changes to overdraft practices, are likely to have an equally broad impact on issuing banks. The Consumer Financial Protection Bureau will represent continued uncertainty until its approach and regulatory program are clarified. And the combined effects of Durbin and Reg E are easier to see.

So on the one side, it's eliminated high, frequent, overdraft charges to consumers, Reg E. It's eliminated the practice of processing high ticket debit transactions, out of sequence, in order to generate multiple overdraft fees. It may provide merchants a lower interchange and/or transaction fee for debit in certain prepaid cards. And it has given consumers the choice of whether to accept and pay for overdraft protection.

On the other side, it's made the debit card business much less attractive to banks. If banks do end up imposing monthly debit or transaction fees, consumers may shift back to creditor charge products. And it may lead some banks to impose higher fees or rates elsewhere in retail banking to compensate for lost debit revenue. But there are certainly competitive consequences to an action like that. And it has the potential to cause a scale back or elimination of rewards programs that are tied to debit products.

So what we have here is bank issuers are seeing their debit economics squeezed from two sides. Low interchange rates and lower revenues from overdraft fees. Their previous public disclosures on these changes, again, projected loss revenue in the billions of dollars. Our charge and credit products do compete with debit, so the Durbin pricing adjustments will impact competition among payment products. However, whether and to what extent that competition will affect our pricing and revenues will depend on these specific government guidelines and the reaction of consumers to steering. Depending on the Fed's reasonable and proportional debit study comes out, there is the potential for a 50 to 100 basis points reduction in debit interchange fees from current levels. And this could increase the gap between debit and credit rates to approximately 150 to 200 basis points.

With this potential benefit, some merchants may try to steer their customers towards debit, but given this rate differential, it's possible they could fund some discount or incentive to encourage customers to switch to debit. But there is still a question of whether the amount will be significant enough for merchants to disrupt the sales process and risk a potential loss of customer goodwill.

Now the DOJ case on the surface addresses some of the same issues as Durbin. The terms of its settlement deal with Visa and MasterCard would allow merchants to steer consumers to a lower-price credit or debit product. For example, if a consumer pulls out a Visa rewards product, the merchant has the right to ask a customer to switch to a Visa MasterCard credit product with a lower rate. The merchant could offer the consumer an incentive for them to switch or they could just ask.

Now as I mentioned earlier, the gap between a higher cost of Visa and a lower cost Visa is about 90 basis points. And for context, the Amex average rate is about 25 basis points higher than Visa and MasterCard's average for credit products or about $0.25 on a $100 transaction. Assuming these differentials remain constant, steering between credit products does not offer a lot of marginal economics for merchants. Particularly when weighed against the potential alienation of good customers and the operational difficulties in implementing these actions at the point of sale.

The irony here is that if the DOJ's case against us were successful, and merchants did engage in steering, it is far more likely for merchants to steer customers to Visa and MasterCard and away from us, thereby making the two dominant players in the industry even more dominant and harming competition. This is why we must defend and win this case, and we will.

So in my view, as far as the DOJ settlement is concerned, it offers a remedy that could push more business to the two largest networks. And if it is put into effect, could push consumers to lower value cards that offer minimal protections, fewer benefits, limited customer service, scaled-back rewards and potentially higher interest rates. So for the card industry, over the last two years, the impact of the legislative, regulatory and DOJ actions can be summarized like this. The CARD Act will have the biggest impact on issuers who have relied heavily on interest income from basic revolving credit products, issuers who relied heavily on back end and penalty fees and issuers that targeted less creditworthy borrowers. Durbin will have the biggest impact on debit card issuers and potentially on merchants steering to debit from other payment products. Now the DOJ impact is yet to be determined, but it is more likely to have a smaller dollar impact on the industry than the CARD Act or Durbin.

Now going forward, I believe the traditional, lend centric models most bank issuers rely on will need to be refashioned. Some issuers will focus on low-cost, no-frills products, others will focus on full-service, high-value alternatives and this segmentation among issuers is already underway. Going forward, I believe debit based models will look much different and debit products will likely cost more for consumers to use while offering fewer rewards. But I also believe that despite all the changes, there are some constants. First, that many consumers and merchants will continue to place a premium on superior value and service and second, that regardless of the industry, merchants, while they will always want to lower price, want high spending customers and value from the payment networks they choose to accept. Merchants know how important it is to treat customers well at the checkout counter, particularly in a slow growth economy. And successful merchants will be reluctant to risk losing the goodwill of their customers, absent a real economic upside for them. So while everyone will need to adapt to a new regulatory environment, long-term success within payments will continue to depend on several factors: treating customers well; providing superior service; providing value in return for a fair price. Innovation is going to be critical, and obviously, keeping expenses in line. Superior service and value will continue to earn a premium price from card members and merchants and I believe that we can compete very successfully as a network of choice for high spending Cardmembers. Our strong recent performance has shown that we have been successful in each of these areas. And I remain highly confident in our ability to compete and win in the future.

So with that, let me now turn things over to Dan to go into detail on our third quarter results.

Daniel Henry

Okay, thanks, Ken. So I will use our slide package and start with Slide 2, summary of financial performance. So total revenues were up 17%, but the more appropriate line to look at is the managed total revenue line, which was up 5%. That compares with being down 1% in the second quarter. Income is $1,093,000,000, that is the second quarter in a row that we've had income over $1 billion. EPS is at $0.90, a significant improvement from last year. And ROE is now 26%.

Moving to Slide 3, metric performance, Billed business had 14% growth and this is a continuation of the strong growth that we saw in both the first and second quarter. Cards-in-force, proprietary cards were flat with last year. GNS cards increased 3% so total cards are up 1%. Average spending also has continued to be strong with growth of 15%. Loans on a managed basis decreased 6% based on our actions and customer deleveraging. Now this is down less than what we saw in the first and second quarter. Travel sales increased 21%, driven by Airline spending, which is up 20% as we saw both higher average price and higher number of transactions, both in consumer and corporate.

Looking at Slide 4, Worldwide Billed business, so the bars on this chart reflect the amount of Billed business each month. The lines represent the growth rate both on a reported and an FX basis. So monthly Billed business has been at $58 billion or more since March. The third quarter, we had growth of 14% despite more difficult grow overs as billings were improving last year. Now Billings month to date in October are growing at about the same rate as we saw in the third quarter.

Moving to Slide 5, which is Billed business by segment, you can see that we had strong Billed business growth across all businesses. Each segment had double-digit growth both on a reported and an FX adjusted basis. GNS continues to have the strongest growth, but Global Commercial Services or GCS, continues to grow at above average rates. Again this quarter, it appears that we will gain share in the U.S. as growth in our spending by our customers is notably above the growth we see in our competitors' spending.

Slide 6, Billed business growth by region. So here again, we see strong performance in all regions, particularly, JPAA, which is Asia and Australia. All regions had double-digit growth on an FX adjusted basis so we can see that the growth in business is really very broad-based both by business and by geography.

Moving to Slide 7, so this is spending by product for U.S. consumer and small business. And you can see here, spending by product over the past five quarters. Billed business growth continues to be strongest in charge and co-brand products, consistent with our strategy in investments in premium lending and charge.

Moving to Slide 8, so this is Lending, Billed business and managed loan growth. The solid line is Billed business and the dotted line is loans on a managed basis. So loan balances are no longer tracking closely with the increase in spending on lending products as you can see on the chart. Due in part to our actions and part to consumer deleveraging, our actions have included line management reductions, fewer prop lending acquisitions and significant reductions in balance transfer. And Cardmembers have changed their behavior as they are transacting more and revolving less. If you look at our lending trust pay-down rates, in September of '09, pay-down was 25.2% and in September of 2010, it was 29.28%, an increase of over 400 basis points.

So next is Slide 9, this is our net interest yields for USCS, we can get managed loans. As we've discussed in prior quarters, the impact of the CARD Act within yield is significant. However, we have worked to mitigate it through repricing. And you can see on the chart, the increase in yields from the fourth quarter of '08 to the first quarter of '09. We expect yield to migrate back to the historical range of yields in the high 8% or 9% and you can see that this is taking place in the second and third quarter of this year.

Moving to Slide 10, which is revenue performance, discount revenue is up 13% driven by 14% growth in Billed business, partially offset by faster growth in GNS Billed business and higher contra-revenues, including higher cash back rewards and corporate incentive payments. The average discount rate was 2.56%, up two basis points from last year and flat with the second quarter. The increase compared to last year reflects certain pricing initiatives. Going forward, we will likely see an erosion in the average discount rate over time.

Card fees continued to hold and were basically flat with last year. Net interest income should be looked at on a managed basis, so we're down 16%, this is a combination of loans being down 6% and a decrease in yield from 10.2% last year to 9.5% in the third quarter of this year. So those are worldwide numbers, the numbers on the prior slide for USCS.

Travel commissions and fees reflect the higher travel sales that we saw earlier. Other revenues, up 13% on a reported basis and that reflects the fact that we have fees on loans that were previously securitized. If you look at it on a managed basis, we're up 4% and that's being driven by higher foreign currency conversion revenue and higher GNS partner-related revenues. Overall, we're up 5%. And while that's not robust, it compares very favorably to the revenue growth that we saw earlier in the year.

Now moving to Slide 11, Charge Card provision improved over $50 million based on improved metrics and lower reserve requirements. If we look at Cardmember loans or lending provision, it has improved dramatically by over $700 million on a GAAP basis, as you can see on the slide. On a managed basis, it's actually $1.2 billion better. And this is due to significantly improved write-off rates, which will result in lower write-off dollars in the quarter and improved 30-day past due levels that translate into lower reserve requirements. Reserves decreased by $548 million in the third quarter compared to the second quarter.

Slide 12, expense performance, marketing promotion is up significantly in the third quarter compared to last year and up from $208 million in the second quarter of this year. This is consistent with what we have said, as credit improved we indicated we would drop some to the bottom line and invest to drive business momentum.

Next is rewards. Now here, if we exclude the benefit in the third quarter of '09 related to a policy change, related to accounts that were 30-day past due, rewards expense increased in line with spending.

Salaries and benefit increased 7%. This reflects merit increases, higher benefit costs and higher incentive compensation. On an employee base, it's basically flat with last year.

Other operating expense includes, in last year, a benefit related to an adjustment to how we accounted for our net investment in foreign subsidiaries. Absent that, it increased 17%, reflecting higher technology related expense, higher T&E and investments in new business initiatives.

Now income taxes are higher and that is due in part to higher income and part to the fact that we have a higher tax rate. In this quarter it's 33%, in the third quarter of last year, it was 30%. And that really reflects the level of pretax income relative to the recurring permanent differences that we have. So when income is lower, those permanent differences have a larger impact and as income increases, has less of an impact. So a 33% rate is a reasonably normalized rate for our business.

Moving to Slide 13, marketing and promotion expense. As I've mentioned, marketing and promotion is above historic levels as you can see on this chart. We have elevated spending levels across U.S. Consumers and Small Business, International Consumer and the Merchant and Network businesses. Within USCS, it's primarily charged and premium co-brand acquisition. In International Consumer it's primarily acquisition and spend stimulation. In the merchant business, it's spending on perceptions of coverage and brand communication. And in GNS, it's contractual payments driven by higher Billings.

Moving to Slide 14, operating expense. So operating expense growth was 12%. Now some portion of that is investments to drive growth of our business, and that is above 12%. And a portion is not driving revenues, and that's below the 12%. Here we can see that we have significantly higher levels of spending on technology development that supports business growth. New business initiatives including LoyaltyEdge, Revolution Money and Business Insights, as well as GNS partner investments and higher levels of sales force. While below the dotted line, we are controlling non-revenue-generating OpEx.

Moving to Slide 14, now this is Charge Card reserve coverage. Now while Charge Card credit metrics are improving, we haven't maintained appropriate levels of reserves across the U.S. card, international card and Global Commercial Services as you can see from the reserve coverage ratios on this page.

Now on Slide 16, here you're looking at managed lending net write-off rates. And here you can see that managed lending write-off rates have improved dramatically over the last four quarters in both the U.S. and international. In the U.S., in the third quarter, the write-off rate was 5.2%, a 100 basis point improvement from the second quarter and 370 basis points improvement compared to last year. Our metric performance is substantially better than the industry.

Next, Slide 17. So this is the managed lending 30-day past due chart. So again, lending 30-day past due also continues to improve both in the U.S. and internationally. These improvements will prove to be beneficial to us as we move forward.

Next is Slide 18. Now here we're providing information for USCS lending related to roll rates and bankruptcy filings. So the current month write-off is a function of the current to 30-day past due roll rate five months ago. So the green triangles in the upper left chart lead to the write-off rate in the third quarter of this year. And you can see that they are lower in the three triangles just before that. So all else being equal, you would expect write-offs in the third quarter to be lower than the second quarter, which is what we've seen.

You'll also see that the three triangles following the three dots are lower. So all else being equal, we could see fourth quarter write-offs being lower than the third quarter. You'll also note the 30-day past due to write-off, the bottom left chart, is improving slightly. Now bankruptcies on the right, if you took on average of the three quarters in 2010, you can see that they're slightly lower than what we saw in 2009, and this is the number of filings. Two other things to consider is the dollar amount of each filing. And they have been lower this year than in 2009. And the other is the percentage of filings that we've already written off, and that percentage is higher than we saw last year. So all in all, bankruptcy losses are lower than last year.

Now I’d remind you that these are uncertain economic times and what the write off rate in the fourth quarter will be will depend on the 30-day past due to write-off percentage, bankruptcies and recoveries, what they actually are.

Moving to Slide 19, so this is our lending reserve levels, and it reflects the activity in the third quarter of last year and this year, and you can see that the dollar write-offs has improved significantly. So if you look at the chart and look at '09, write-offs were $850 million. This year, they were $810 million, but that includes both the previously securitized and those that were on balance sheet. If we look at this on an apples-to-apples basis, you'd have to add the write-offs related to the securitized receivables last year. They were about $500 million. So the actual comparison is about $1,350,000,000 compared to the $810 million that we had this year.

So the reserve level we have reflect our credit performance and the inherent risk in the portfolio and you can see that we have reduced lending reserves by $560 million.

Next, on Slide 20, we look at lending reserve coverage. And as you saw on the prior slides, credit metrics have been improving and we have reduced reserves based on our methodology. However, we continue to be cautious in setting reserves as the economic environment remains uneven and unemployment remains stubbornly high. Here, you can see the reserve coverage ratios in the U.S. and on a worldwide basis. Our reserve coverage reflects the uncertainty that we see in the environment.

So next is our capital ratios. And so while the capital requirements, what they'll actually be is still evolving, our capital position and ratios remain strong, particularly Tier 1 common. And you can see that it has increased from 10.7% in the second quarter to 11.7% in the third quarter. One other thing that I would note is that it's our plan in the fourth quarter to repurchase shares approximately equal to the 15 million shares that we issued under employee programs over the past four quarters in the fourth quarter of this year.

So moving to Slide 22, this is our liquidity snapshot. We continue to hold excess cash and marketable securities to meet the next month of funding requirements. Now the higher than normal level of excess cash is due to the funding maturities in the fourth quarter and the anticipated seasonal increase in the balance sheet associated with higher holiday spending in the fourth quarter.

Now looking at Slide 23, this is our retail deposits. Now as accounts receivable and loan balances remains relatively consistent with the second quarter levels, we did not have demands for higher funding levels. So this quarter, we focused on reducing brokerage CDs and continuing to grow direct Personal Savings CDs and high yield savings deposits.

So with that, let me conclude with a few final comments. Results for the quarter reflect the continuation of the positive business trends evident during the first half of this year. Spending growth remains strong across all our business segments. In fact, on an FX adjusted basis, this was the strongest quarter ever in terms of dollars spent.

We also continue to see further improvement in credit trends. Some of this is due to our strategic and risk-related actions. Some reflecting the post-recession behavior of consumers. Even through these trends have contributed to a divergence between consumer spending and borrowing levels, the net effect is a lower risk profile for the company, as charge and co-brand spending are the main driver of our volumes and receivable trends. Managed revenue growth of 5% improved versus prior quarters and outpaced our large industry competitors as strong Cardmember volumes more than offset the impact of lower loan balances and yields.

Importantly, our strong billings growth, improving credit trends and well-controlled operating expense provided an ability to invest in the business at significant levels while also generating strong earnings. Some of these investments are driving metrics and improving revenue comparisons near-term but others are focusing on the medium to long-term success of the company.

Challenges clearly remain in the U.S. in many other key markets, job creation remains weak, consumer confidence is volatile, consumer behavior is uncertain and regulatory and legislative initiatives are changing aspects of the business going forward. While we are currently investing at historically high levels, these factors have us approaching the future investments and spending commitments with caution. But the bottom line is that our strong competitive position is yielding high-quality results that spending on our network continues to increase well above industry average and our credit performance remains best among major card issuers.

This gives us confidence that our investments and differentiated business model are appropriately positioned to manage through our challenges, capitalize on the opportunities in front of us and continue to win in the marketplace.

Thanks for listening. Ken and I are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Craig Maurer with CLSA.

Craig Maurer - Credit Agricole Securities (USA) Inc.

I was wondering what changed in the quarter for you from the prior conference calls. In the last call, if I remember correctly, you'd indicated that marketing spend had peaked in the second quarter. So what were you seeing in the environment? Secondly, regarding the other expenses, the $251 million. I was hoping you can go on a little more detail there because it's up dramatically off the prior quarter and the quarter before that and I'm wondering if there is any type of one-time spending in that number.

Daniel Henry

I think last quarter we had $802 million, which is probably the peak that we had seen at that juncture. But as we've said, as credit improved, we were going to continue to invest. And so credit continued to improve, Billed business continued to be very strong and so we actually elevated marketing spend to a somewhat higher that you saw in this quarter. And what you see in operating expense as what we said and the reason -- I think we provide the new bubble chart that we've had for a couple of quarters, is that investments are not solely marketing and promotion. Certainly, marketing and promotion is one aspect of our investments, in terms of acquiring customers and stimulating spending with existing customers. But investments also include being on the right capabilities, having the right talent to move forward with our new business initiatives and it also includes investing in higher sales force for both our Merchant business and our Commercial business. So I think the increase that you're seeing in operating expense is a reflection of that. So as long as we have strength in the business, we'll continue to invest at higher levels.

Kenneth Chenault

I would say given the momentum that we're seeing in a range of businesses, and the opportunity that we have to invest, we obviously want to continue that moving aggressively.

Daniel Henry

I think this is part of what we've talked about I think for some time, which is really the flexibility that we have in our business model. But we have this strong performance in spending by our customers and the improvement that we're seeing in credit. We're going to flex up and invest at a higher level. As those diminish, we'll flex back down our investment to more traditional levels. But I think we've demonstrated that in '09, we can flex down, but when we have the opportunity, we can also flex up. So we want to take some of that and improve the bottom line. I think you saw a significant improvement in the bottom line but we also want to invest to drive business momentum going forward.

Craig Maurer - Credit Agricole Securities (USA) Inc.

But when I think about the run rate, my question is more along the lines of – is a lot of that going into the $251 million one-time to build capabilities and you'll see that investment slowdown again, that's what I'm getting at.

Daniel Henry

So I think that when we get back to a more normal state as it relates to provision. I think you'll see marketing spend back more to where we were, say, in the '05 to '07 timeframe and I think you'll see operating expense not grow at the levels that it's growing today. It may be not the level that we had back in '07 because I think the nature of our business is changing somewhat and you can see that we're investing in businesses that are more fee related and that generally will be driven by operating expense. But we will continue to be focused on having the right margins in PTI. So that's something we'll focus on going forward.

Craig Maurer - Credit Agricole Securities (USA) Inc.

Ken, I was wondering if you could give us your thoughts on PCF suit to try to block the Durbin amendment.

Kenneth Chenault

Frankly, I have not studied that closely so I really can't shed a lot of light on that at all. Obviously, debit is an important piece of business to them. They're very focused on it but that's not something I frankly spend a lot of time on.

Operator

We'll go to Ken Bruce with Bank of America Merrill Lynch.

Kenneth Bruce - BofA Merrill Lynch

Understanding the answer that you just gave to Craig, I'd like to ask maybe a bigger picture question as it relates to how you see the credit card market and the charge card market evolving with obviously a lot of competition focused on the high-end. If you think that some of these costs in particular rewards are you want to be in essence at a higher run rate going forward so despite your interest and maybe pulling back at some point in the future that you don't have quite as much flexibility, if you could give me any kind of sense as to how you're thinking about that any early thoughts about competitor moves as they begin to target the employment market again?

Kenneth Chenault

First, if we just step back a little bit is one, it is not new news that we've had a number of competitors literally over the past 20 years on the premium segment. And the reality is that I think that certainly rewards are important, it's important to have a diversified rewards program. And it's clear that our competitors and ourselves are investing more in those capabilities, but at the end of the day, what we've been able to demonstrate is that we're getting very good returns from those investments. It's less clear, given the difference between a lend centric and spend centric model, if our competitors, in fact, will enjoy the same types of economics. But we've proven that we can impact those levers. The third piece that I think is very important is if we just look at the backdrop of the last 18 months and look at the disproportionate growth that we've been able to generate against our competitors, when in fact, some of our competitors have dramatically increased their marketing and advertising spending, it does not seem to have had a damaging impact, in fact quite the contrary, we have accelerated our growth and our market share improvement. The last piece that I think I would emphasize very strongly is that we have, in fact, made investments, we have concentrated on improving our service quality and our capability of service, both online and offline.

It is easy to replicate a feature on a card product. It is much harder to deliver consistently high quality service. And if I go back to the J.D. Power award, frankly, and I won't name names, but if you take a look at the list of issuers, and those who are saying that they're focused on the premium market, some of them in fact are in fifth and sixth and seventh place. And we in fact have won for four years in a row. So one of the things is we clearly understand the causality of segmenting our customer service and providing it. So I think it's a focus, certainly, rewards are important, features are important, services important but the momentum that we generated over the last year and the fact that, that moment is increasing. So that gives me a lot of confidence going into the Premium segment. But as I said earlier, when I was going through some of the trade-offs, I really do believe that someone who has a lend-centric model, which is most of the traditional bank card issuers, are going to have to substantially reconfigure their business models to compete effectively going forward because they have the impact, some of them of debit, they have the impact of the changes in pricing. And they've got to find some of the formulas that will allow them to really come up with a premium value proposition that resonates with the consumer.

Daniel Henry

So the only thing I'd add to that is that part of putting a value proposition in the marketplace that consumers want to use and we're seeing them use our product, part of that is having a valuable rewards proposition. And so going forward, it's likely that you'll see that rewards, as a percentage of revenues, will be slightly higher than we may have seen in the past. And we recognize that and that means that we need to be very focused on operating expense efficiency, which we are, and a combination of all those things, again, I think will provide economics that are very attractive.

Kenneth Chenault

The only other point I would make because you really do have to connect the dots on all that is going on that as you improve the value proposition of your premium products, in fact, the value proposition to the merchant improves because the merchant wants to generate more spend, they're going to get that from those customers that carry premium products and that will spend more. And that's why our average spend is four times that of Visa and MasterCard. So I think what's very critical is you got to look at what we call this virtuous circle, that you've got to have a improved value proposition that customers really want, and obviously, then get those customers who will spend more so their value proposition at merchants is enhanced. And in these economic times, we're finding that to be incredibly valuable.

Kenneth Bruce - BofA Merrill Lynch

And could you reiterate, you had mentioned, Dan, the momentum coming into the fourth quarter was equally strong from a growth perspective, and also do you have any thoughts as to maybe whether credit has the capacity to trend well below the historical norm, which seems like you're getting they're very quickly if you think that we're actually kind of looking at a sustained period of very low credit losses given the nature of the underwriting over the last few years, please?

Daniel Henry

What we indicated is Billed business month-to-date and October growth rate was similar to the growth rate that we saw in the third quarter. Now in terms of credit, I think we're all keenly aware that our credit has improved at a far more rapid pace than the industry. And I think where it will settle out will obviously in each period dependent in part on the economy, but I think it will be impacted by the strategies that we've put in place where we're focusing on charge and premium lending. So to the extent that's our focus going forward. I think it's reasonable to have an expectation that it could be somewhat lower on average and overtime than what we may have seen before when we participated more broadly in the lending space.

Operator

We have a question from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley

Question on International, I wonder if you could give us some color as to what kind of investments you're making in the non-U.S. space, it seems like one of the opportunities. And I guess I'm wondering if you have anything in the works to expand your presence overseas.

Daniel Henry

Right. So we believe that there is opportunity for strong growth outside the U.S. We are actually increasing slightly the allocation of investments to more globally outside the U.S.

Kenneth Chenault

And that has been the case over the last several years.

Daniel Henry

And so we're focused really on two things. What are the right acquisitions that we should make in our proprietary markets, how can we further stimulate our current customers? And then quite frankly, how can be kind of optimize internationally between what we do on a proprietary basis and what we do with GNS partners? And that has been our focus and is going to continue to be our focus as we go forward.

Kenneth Chenault

The other point I would make is that we're making substantial investments across our Payments business, our Global Merchant Services business to bring on more merchants, that's something that we have invested in outside the U.S. as well as the U.S. And the other point that I would make is that our GNS business not only helps us acquire card and acquire spending, but also allows us to expand our merchant coverage. So we have been very pleased, I think as you saw from the numbers, in International, the growth that we're generating and in fact, the innovation that's taking place in those markets. So that the priorities that we have listed for growth international remains one of our top priorities.

Betsy Graseck - Morgan Stanley

Because when people just look at the simple charts of merchant acceptance, it looks like there's a gap and that you need to spend some investment dollars on filling that and...

Kenneth Chenault

And that is exactly what we're doing. As you went through some of those bubble charts from Dan, the reality is that in the operating expense line, we are expanding our sales force, and we have expanded that, our sales force, in the international markets for coverage. And so you’ve got to look at two ways that we're doing that, one is we are increasing our proprietary sales force and then in the bank partnership deals that we're doing, in a number of those deals, we're also able to get our partner to expand merchant acceptance. So that's something that we're very focused on. And obviously, you will see the impact of that over the next several quarters. So it's not something you’re going to see in 30 days but you'll see it over the next several quarters.

Betsy Graseck - Morgan Stanley

And so a dollar invested in the U.S. versus a dollar invested in the non-U.S. market, which one has the faster growth rate or profitability associated with it?

Daniel Henry

So I think it depends on the investment. So I don't think there's a blanket statement that international is better than U.S. I think it's really depending on what the product is and what the nature of the investment is. And as we've said, we try to concentrate some of our investments about things that give us a near-term return and others are more focused on the medium to long term. But even the near-term investments, when you take a sales person on, you need to train them, they need to get seasoned. And so all of these things that we do when we evaluate investments, we're not evaluating what's the benefit three quarters from them, we're really evaluating what's the value that's created over the life of either the sales person, the merchant, the cardmember that we're acquiring here. And that's how we evaluate investors.

Kenneth Chenault

I just like to emphasize, I mean, you really got to separate out what I’d call the card acquisition investments from the sales force investments because they have a longer tail. But the impact of those investments, as we have seen over the years in middle market and large corporate, have been substantial even though it is a longer tail. And the other point that I would make is as a result of consolidating the card businesses under Ed Gilligan, we're able to more quickly make portfolio acquisition changes of how we're going to allocate those dollars across markets and across products that has really helped us in a major way.

Operator

We'll go to Mike Taiano with Sandler O'Neill.

Michael Taiano - Sandler O’Neill & Partners

Just wanted to make sure I understood on the regulatory challenges and I know obviously they're all challenges, but you're making the case that the Durbin amendment because of the differential between credit products and debit products and as well as cash and checks is a bigger threat than the DOJ case because of the smaller differential between you and Visa, MasterCard?

Kenneth Chenault

Yes, look, the point I'm making is that if you go through debit, and just don't listen to me, in fact, as you go through the pronouncements from a range of banks, what they're saying is that their revenues are being impacted by billions of dollars. Because you have this double whammy squeeze going on is you have the squeeze going on the issuing side and what the features are going to be and then you have the issue of the potential of a lower interchange rate. So one, at the end of the day, we're not in the debit card business. But the point is that if you review the earnings releases and the statements that I've read from major banks, they're the ones saying that debit will not be as profitable, that they in fact, some have said on an individual basis that they're going to lose billions of dollars in revenues. Now the point for us that I think is critical while it's hard to speculate on what the individual impact will be on us, the reality is what's not new news is that we know that merchants don't have to accept our products. And we have to earn a premium rate every day by providing them with premium value. And as I said earlier, what we have seen, particularly in this environment, is that merchant’s value spending and that our average spending is three to four times the size of Visa and MasterCard. And they also value, which we are increasingly doing, we are providing them with information, insights, marketing help and all of which we think help tremendously because we're seeing it that it helps with the acceptance of the card but also is providing us revenues in some of the particular services that we provide. So I think at the end of the day, premium value is at the core of what we do with merchants, and at the end of the day, we face a very competitive marketplace in terms of merchant pricing, I might add not just in the U.S., but all over the world. But I think what we've demonstrated very strongly in a very tough economy is that we’ve continued to succeed and grow because of our ability to compete on value. And I have no doubt that, that will continue to be the case in the U.S.

Michael Taiano - Sandler O’Neill & Partners

I saw you guys took off the fee on your Starwood co-brand card this quarter, was that fairly broad-based with other co-brand products as well and would that have been reflected in this quarter?

Kenneth Chenault

I think what's important, and this is where innovation comes in, if you're a premium value provider, you've got to innovate. And so what you saw on the Starwood product is we refreshed that product and added some attractive features that increased the value. And at the end of the day, you can't call yourself a premium provider if you're not consistently adding premium value. And so that's what we did on Starwood. And we believe that we're going to get fair value for that product and we think that the increase is very, very fair, related to the value. But that is a fundamental principle when you're in the premium value business is that you have to innovate and we will continue to innovate. And when we innovate and when we increase our value, if you really are a premium provider then you should be able to charge a premium price.

Operator

We have a question from Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

I just had a couple of questions for Ken based on his commentary. First was just in your conversations with the top merchants, do you believe those merchants would steer customers from credit to debit? And then secondly, was wondering if you guys have had continued dialogue with the DOJ and if it were possible to come up with some kind of agreement before going to trial? And one other question for Dan, just if you could elaborate on the net interest yield trends going forward? I'd appreciate that.

Kenneth Chenault

I think I'd say, Sanjay, the same point that I made before. The reality is that we have continued to provide substantial value to our merchants. And the spread certainly between credit and debit is larger. However, there is not much evidence that merchants are taking the risk of steering customers. And I think that's a very important point. And what is critical to emphasize is that merchants have had the right to steer from credit to debit. They can do that now. And I think that what is very important is that merchants recognize that what you don't want to do is alienate your good and best customers. And fortunately, we have good high-spending premium customers, that's the last group that frankly you want to alienate. So we have not seen much evidence of that happening.

Daniel Henry

So to go to your second question, Sanjay, if you look at Slide 9, you can see that back in the third and fourth quarter of '08, we were at 8.9% yield. We put in pricing changes which were intended to mitigate the impact of the CARD Act. So you can see in the first quarter of '09 that, that popped up and through '09, kind of stayed in the high-nines, maybe 10%. Now that the CARD Act is taking effect, you can see that it’s migrating back down, and we would expect that it's going to migrate back down over time to something in the high 8% or 9% range and that would be very much in line with what our expectations were.

Kenneth Chenault

Sanjay, I just want to come back to one point on steering that's worthwhile emphasizing and is critical is unlike Visa and MasterCard, merchants are not compelled to accept us. We have to prove that every day. And I think that is a very, very important point that we've got to sell value to merchants. Merchants are under no obligation to accept us. And what's important for us is we've got to demonstrate that value, and that's why we have to individually negotiate with each merchant to demonstrate that value. The point is that I think we have demonstrated over the years and certainly over the recent years, particularly how we've come out of the downturn on the billings that we are generating that merchants are strongly seeing that value.

Daniel Henry

So one of the things I just mentioned, as an add on to what I said about yield, and that's our expectations will go back to historical levels. But the one caveat to that is to the extent customer behavior changes, then that could potentially impact that.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

On then just on the DOJ question I had?

Kenneth Chenault

Look, the reality is I'm not going to go through legal strategy. What I've said is we think we have a very strong case. We are going to defend ourselves. We think that the DOJ case is a weak case for all the reasons that we have outlined. And that's the position we're taking.

Operator

We'll go to Drew Dampier with Meredith Whitney.

Drew Dampier

On a percentage basis, your travel commissions and fees jumped fairly dramatically. Can you just clarify if that line includes your Travelers Cheques and Prepaid business, and what the main driver of that year-over-year growth was?

Daniel Henry

So Travel Sales does not include Prepaid or the Travelers Cheques business. I mean the growth that we saw in Travel sales, which was both in consumer and corporate I think is a function of really the resilience that we're seeing in our total customer base. And I think it's also being heavily driven by Airline, where we're seeing both an increase in price and the number of transactions. So I think probably that's the largest driver of increase in Travel Sales.

Operator

We have a question from Bob Napoli with Piper Jaffray.

Robert Napoli - Piper Jaffray Companies

Just on your repurchase, I was wondering if you had to get any certain approvals for that and if you intend to continue the repurchase? And then a question on the lawsuit as well, has any other government around the globe attempted to litigate against private contracts, individual contracts? Anything similar to this lawsuit? And when I think in other markets that have regulated interchange, they haven't attempted to regulate your discount fee? Just maybe a little color on that would be helpful.

Daniel Henry

So I'll take the first question. So the question is do we need to have conversations with the regulators before we do repurchases, and the answer to that question is yes. At the moment, what they've given us the go-ahead on is to the extent we've issued shares related to our employee programs. And it really covers what those issuances were over the last four quarters. I think what we've seen in repurchases in financial services to date for ourselves and others is really related to employee planned issuances. Certainly, as we go forward, we intend to have conversations with regulators on what our plans would be in terms of repurchases going forward. And we'll probably start those discussions within the next month or so.

Daniel Henry

Bob, in answer to your question, what I would say is in at least everything I know and in all the markets where actions have been taken in place relative to the interchange rate, they have all been directed to Visa and MasterCard because they're the dominant payment networks. So that's been the focus. So it's a question that I would really put to them because they really have been the subject, the focus, not us.

Robert Napoli - Piper Jaffray Companies

Just one quick question on the international. The revenue growth in international was lower than the spend growth, revenue growth. I think the discount fee growth in the mid single digits and spend in the mid double digits. Or is the discount fee coming down international or what's -- why the gap between revenue growth and spend growth?

Daniel Henry

Yes, I think one aspect of that might be FX is affecting the growth rate as it relates to revenues. I don't think there's any markedly different trend in discount rate internationally compared to what we're seeing in the U.S.

Operator

We have a question from David Hochstim with Buckingham Research.

David Hochstim - Bear Stearns

I wonder, Ken, could you talk about whether you think there's any significance to the fact that the Justice Department didn't pursue a change in surcharging rules at this point?

Kenneth Chenault

I can't really comment what their intent is or what their strategies are. So I couldn't really make any informed response to that.

David Hochstim - Bear Stearns

Any other color you could share with us about the conversations you've had with merchants since the lawsuit was announced aside from...

Kenneth Chenault

Yes, I mean at the end of the day, what I would say is the conversations have been very constructive and very supportive. And the only thing I will say is at least we've also heard from different people in the media who have talked to merchants and have not been able to identify a merchant who is saying that they are going to steer as a result of what the DOJ is doing. And very frankly, exactly the points that I've made, the reality is people are saying there's no surprise that you charge a higher price. This is not new news. You give us a lot of value and we like the business that you generate. So very frankly, the conversations have been pleasant, constructive, supportive.

David Hochstim - Bear Stearns

And then I wonder if you could explain what happened with total and basic cards in U.S. this quarter? They're down about 900,000, they were up last quarter, is there some anniversary of free promotion or something?

Daniel Henry

It really has to do with a change that we made as it relates to certain GNS cards. We had an issuance with a large partner and included all the cards that had been issued. Now some of those cards to the extent they're only used in store don't really generate revenues for us so we made the decision that we should not be including those cards. So that is actually the fact that is driving the reductions in card numbers.

David Hochstim - Bear Stearns

Was it Macy's cards?

Kenneth Chenault

No, not Macy's.

Daniel Henry

But we think it's a better reflection of the cards that are actually generating revenues for us. It was really a one-time change in policy that drove that. It was 1.6 million cards that we actually backed out related to that.

David Hochstim - Bear Stearns

And so if we want to have an apples-to-apples comparison with Q2 we take the same 1.6 million out of Q2?

Daniel Henry

That would be correct.

David Hochstim - Bear Stearns

And then just last thing, on Slide 18, we have 30 days past due to write-off there was a nice decline in July and then a little bit of an uptick in August and September, can you explain what happened?

Daniel Henry

That's just a processing blip that we shouldn't focus on. In fact, that goes back -- the dip if you took it back to the beginning, relates to last February. And we were actually in the process of just adopting new GAAP [ph] (1:18:04) and had to change some of the cycle cuts. In addition to that, February is just a shorter month. So what happened is more items fell into the first roll rate that made therefore the denominator in this calculation higher. But in the end, it rolled down to the same manner of write-offs. So that's why you have that little bit of a dip. So it's not an indication of a change from a credit perspective, it's just the mechanics that took place in the system in February.

Operator

We have a question from Bill Karachi with Macquarie.

Bill Carcache - Macquarie Research

Ken, just for the sake of argument, let's assume for a second that you're not bound to have market power. So as you think about managing the business going forward, is market power something that you need to be conscious of so that you don't ultimately achieve it for obvious negative regulatory consequences? Or is market power just something that you don't think will ever really be a concern given you’re focused on the premium customer segment, and therefore, that would be something that would make market power not something that would ever be a concern. Could you just share some of your thoughts around that?

Kenneth Chenault

Here's my view. I'm a growth-oriented guy. I want to grow, and at the end of the day, if I grow to a substantial level under the legal definition of market power and I have market power, I don't have a problem with that. So our focus is on growing the business, we think we have a range of opportunities across payments and services to grow. And what I've said to our management team and our employees is I want us to be a growth company, even in a slow growth environment. And so, the reality is we are now the smallest. And so what I'd separate out is where we are today and there are obviously the legal issues with that. But I think we are very comfortable in a world where I have to prove that we provide value to our customers every day. And at the end of the day, my objective is growth, profitable growth.

Bill Carcache - Macquarie Research

One other question on your fee-based initiatives, can you give us a sense of whether -- it seems like all of these things that you mentioned earlier, the CARD Act, Durbin, the DOJ suite regi (sic) [regulation], all of these things, the impact on the pull of profits around cards is clear. But to what extent are the fee revenues that you would generate from your network in these fee-based initiatives not impacted by that? Is that fair to think about it that way or would those potentially be exposed?

Kenneth Chenault

No. I think it's fair to think about it that way. I mean the reality is obviously, we cross-sell services to customers. So if we couldn't acquire cards or we couldn't retain cards, that would have an impact. But at the end of the day, if you look at our fee services strategy, we are offering fee services to our card customers, we're offering fee services to merchants, we're offering fee services to non-cardmembers. And so I think we have a lot of options and the other point that I would make is with our enterprise growth group, under Dan Shulman, we'll be talking with you in the weeks and months to come about the growth opportunities there. And I would say that the vast majority of those growth opportunities are not related to impacts from the CARD Act. All that said, I want to reinforce, even in the CARD Act, we have a fundamental difference because of our spend-centric model against a lend-centric model that were less reliant on spread revenue and back end fees. That is a major difference in our model and why I think we've been able to navigate through those changes in a way that has put us in a better competitive position than the traditional bank card issuers.

Operator

We'll go to Jason Arnold with RBC Capital Markets.

Jason Arnold - RBC Capital Markets Corporation

One market where you've seen regulatory impact in your business from a steering or surcharge perspective already is Australia. And while I know your business is growing and you've been taking share in that market, I'm curious if there's any way to quantify the impact you've seen here in this market as measured on a discount fee or perhaps ROE perspective?

Kenneth Chenault

I think the only points that we would make there and obviously we've been very clear that the two markets are different. And we certainly did see a lowering of our discount rate. That was clear. But because of the fact, and this is the point that we have emphasized, because we have the most diversified business model, payments business model in the world, we had other business and revenue and economic levers that we could pull. And so that's why we're in a situation where Australia is generating good growth and good financials. Now I would add that didn't happen overnight. We had to adjust to those changes. But I think what we were able to demonstrate is that we were able to adjust and actually create not only a viable business, but in fact, a very well-performing business that has gained profitable market share over the last several years.

Jason Arnold - RBC Capital Markets Corporation

And then just one quick one for Dan. I was just wondering if you could talk about where the Care and re-aging program stand in the size of the loans outstanding here?

Daniel Henry

So the Care Program continues in place, still a very difficult environment. It hasn't grown in size substantially nor has it really declined in size. As we've said, with respect to those customers, we're very conscious of how they're performing so we understand the economics related to them. And in total, it's not a very large program. So I would say it's on an equal footing to where it's been over the last couple of quarters.

Operator

We have a question from John Stilmar with SunTrust.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Ken, to dove tail on the last quarter with regards to Australia, I believe that in Australia with the right to surcharge, one of the dynamics that's been happening is Visa and MasterCard merchants are allowed to apply a surcharge differently to American Express versus Visa and MasterCard. But over the time since the implementation of Australia's rules, the surcharge differential has been narrowing. And other than the qualitative that it's been narrowing that we've heard from you in the past, is there any sort of numerical evidence that you can share with us that shows that American Express has taken on Visa and MasterCard with regards to parity and at the point of sale with merchants?

Kenneth Chenault

I think here's the point. The reality is that even with surcharging, our fundamental positioning is the same that we provide substantial incremental value and plus business to merchants. So we have been successful and in fact, pushing back surcharging. That was one of the points that I was implying is when it first happened, it certainly took some time for us to adjust, but what we were very encouraged and we saw very tangible results is that we, in fact, were able to successfully reduce substantially the level of surcharging that was taking place because we were able to not only convince, but demonstrate the plus value that we were bringing to the merchant so the merchant no longer saw the value of surcharging. And so the reality is it exists still in some places but it has been substantially reduced. And again, as we look at our share of billings, our market share has increased which is concrete proof that, obviously, we’ve been able to successfully deal with surcharging. So it goes back to this fundamental point that the premium value positioning and premium value in your cards and premium value for your merchant really does work in the marketplace.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

Is there any numerical evidence that you can -- or some more disclosure that you can say in terms of the pace of that improvement and how it occurred other than sort of what we can glean from the governmental releases?

Kenneth Chenault

What I would say, frankly, the government releases the data. The data shows conclusively that we have gained substantial share in Australia over the last several years. So it's not our data. It is the government's data that demonstrates that we've grown share. And our earnings have improved and so it's profitable market share growth. But what it also points out is the diversity of our business model and that we have a Consumer Card business, we have a Corporate Card business, both large corporate and middle market, we have a GNS business and we have been able to pull the levers of those different businesses to create a business model that in fact, has worked very well.

John Stilmar - SunTrust Robinson Humphrey Capital Markets

And, Dan, just a quick point on revisiting, I'm not sure I got the question of the jump in other expense this quarter. Is that temporary? Should we think about that? What was the driver there and how should we think about that going forward?

Daniel Henry

So the jump in operating expense in part is being driven by investments. So when we're increasing investments, we're not only increasing them in the marketing and promotion line, we're also making investments that get reflected in operating expense. So technology spending to support growth in our products, initiatives such as investing in Revolution Money or Business Insights or LoyaltyEdge or growing our sales force, those are all things that we're running through operating expense. And just like marketing and promotion, those are at elevated levels. When we get to the point where credit isn't showing off as much in terms of reserve releases, we'll bring those more back to normal levels, but investment levels that are sufficiently healthy to enable us to sustain business growth going forward.

Kenneth Chenault

The other point I would make is, again, because we talked about the sales force expansion. But as we said in the earnings release, the investments that we've concentrated on for example, Charge Card and co-brand, are paying off. We are generating those results and you see them in the quality of cards that we've been able to perform. If you go back to the analyst meeting in August, we actually took you through the increase that we were seeing in spending from the new cards that we were bringing on, not just compared to 2009, but compared to previous years. And so what you're really seeing is a partial redirection of our payment strategy where we're focused on more select segments for lending, we're concentrating on premium lending. And Charge Card, frankly, has become more of a product for the times. Consumers are becoming more disciplined. They're becoming more careful. And at the end of the day, the services, the rewards that we have on those Charge Card products is very appealing to a number of segments. So there, you are seeing relatively quick payback from the investments that we've made over the last year.

Operator

And that will be from Brad Ball with Evercore.

Bradley Ball - Evercore Partners Inc.

I wonder if you could comment on the proportion of your spending that is currently in T&E and what the trends have been of late. Is that still coming down as it has over several years? And the reason I ask is, Ken, is it possible that you would have different merchants, sort of a tiering of merchants react to their new powers differently, maybe higher-end merchants, luxury sales merchants more likely to not steer a discount and lower-end merchants sort of more motivated to do the steering. How do you see that?

Kenneth Chenault

Yes, I think the reality is we’ve continued to see the T&E related volume categories expand. And so non-T&E in the U.S. is approximately 72% of our U.S. Billed business.

Daniel Henry

So you're right, over time, we’ve really transitioned from kind of 2/3 T&E to really more than 2/3 non-T&E. In the near term, just in a very short term now, the bounce back that we've seen is really across all category, it's all segments, it's all geographies. So T&E is bouncing back along with other spending in this very short term.

Kenneth Chenault

And I think, Brad, it really represents a strategy. Frankly, if you go back to 2000, we, in fact, talked about the fact that we were going to focus on non-T&E. And very frankly, even in our Commercial Card business, that is one of the priority areas and we've had -- that we've also invested in this year where we had been very pleased with the progress that our non-T&E spending has increased. And frankly, what that makes for is a more balanced model. So as we go through different economic times, we don't have the reliance on some of the T&E categories that we had historically. So that frankly gives us more balance and puts us I think in a more stable situation, where we are less reliant on T&E categories. So I think what's important to understand is that non-T&E is very key to the success we've had in both our billings growth but also our business mix. So I think that is a very good thing.

Bradley Ball - Evercore Partners Inc.

And in terms of the merchants potentially tiering? The question of whether different merchants would be more likely to steer than others, so higher end less likely...

Kenneth Chenault

Again I go back to that reality is that all merchants, as we go through the categories, are not just high-end merchants. And what they're really doing is they're focused on taking care of customers at the point of sale. I would go back to what Dan said, which is that we're seeing growth across all merchant categories, all merchants categories, small, medium and large. And I would go back to the other point that our conversations that we've had recently with a range of merchant categories have been very positive and constructive and supportive conversations. So the point to focus on is that what we want to deliver to our merchants, irrespective of size and category, is high-spending customers. That's really our focus. And we're providing that value, and the proof of it is in our disproportionate growth rates relative to the rest of the credit card industry.

Kathy, I think that's going to be the end of the call. If you could just alert people to the availability of the tape, the replay.

Operator

Certainly. Ladies and gentlemen, this conference will be made available for replay after 7:00 p.m., Eastern, today through October 28 at midnight. You may access the AT&T executive replay system at any by dialing 1-800-475-6701 and entering the access code 169781. International participants dial (320) 365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Express CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts