American Express Company
Q4 2014 Earnings Call Transcript

Published: 23 Jul 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2015 Earnings Call. At this time, all lines are in a listen-only mode. Later, there will an opportunity for your questions, and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I’ll now turn the conference over to Toby Willard, Head of Investor Relation. Please go ahead, sir.

[Toby Willard:]

Thanks, Kathy. Welcome. We appreciate all of you joining us for today’s call. The discussion contains certain forward-looking statements about the Company’s future financial performance and business prospects, which are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today’s earnings press release and earnings supplement which were filed in an 8-K report and in the Company’s other reports already on file with the Securities and Exchange Commission. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2015 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today’s discussion. Today’s discussion will begin with Jeff Campbell, Executive Vice President and 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, Toby, and good afternoon everyone. Welcome as well to VDU, as this is your first quarterly earnings call, since he took over the leadership of our Investor Relations function from the capable hands of Rick Petrino few months ago. Overall, our results this quarter reflected what we consider solid core underlying earnings performance. Reported Q2 EPS of $1.42 was relatively consistent with the prior year, while understanding our performance is more complex than usual this quarter for several reasons. As expected, the results reflected discrete impacts including a significantly stronger U.S. dollar versus last year, the impact of various changes to our cobrand partnerships and the initial stages of our ramp-up in spending on growth initiatives. On a year-over-year basis this quarter, EPS growth was also impacted by the prior year net benefit related to the Business Travel joint venture transaction and of course Business Travel’s Q2, 2014 operating results. Looking through the complexity of these items, our core underlying earnings performance was generally consistent with the financial outlook framework that we first shared with you at our Investor Day in March. We continue to view this framework as the usual way to understand the drivers of our performance through the period of the multiyear financial outlook we first provided in February of this year. Accordingly, we have included this financial outlook framework that’s the first slide in our earnings presentation today. Looking at our results through this lens, we saw revenue growth of 5% after adjusting for FX in the prior year impact of Business Travel revenues. We built upon this revenue performance with disciplined expense control and the return of significant amounts of capital to shareholders. This solid core performance included making strong progress of some key initiatives highlight included the launch of the Plenti loyalty coalition program in the U.S., the expansion of our OptBlue small merchant program in Canada, the roll out of two new Centurion Airport Lounges, refreshes of our Gold and Starwood’s products as well as the launch earlier this month of Amex Express Checkout, our online merchant Checkout solution. As we expected, our solid core underlying performance was impacted by the discrete impacts from the strong dollar and FX along with the changes in our cobrand partnerships. In terms of our spending on incremental growth initiatives, we are really just starting to ramp these up and you will see that much more concentrated in the second half of the year. As a result is while our year-to-date, our earnings are up approximately 5% versus last year, we would expect earnings per share for the second half of the year to be down versus the prior year consistent with our discussions on Investor Day. For these reasons, our full-year 2015 EPS outlook remains unchanged as we continue to expect earnings per share for the full-year to be flat to modestly down. Just where in this range we end up will be a function of a level of incremental spending we do towards the second half of the year along with our billings and revenue trends. We also believe our outlook to return to positive earnings per share growth in 2016 and to be within our target range of 12% to 15% earnings per share growth in 2017 remains appropriate. As you recall this outlook does not contemplate the impact of any restructuring charges or other contingencies. Now to turn to a high level review of our financial results for Q2, as you can see on Slide 3, reported billings growth was 2% on an FX adjusted basis, billings grew 6% significantly higher than our reported rate but modestly slower than the first quarter. I’ll provide more details on our billings performance shortly but we did see some deceleration in volume growth in the U.S. that was partially offset by improving growth across most international markets. Reported revenue growth was down 4% due to the inclusion of Business Travel revenues in the prior year and the stronger U.S. dollar. Excluding these items, adjusted revenue growth was 5%; net income was down 4% versus the prior year. The decline was primarily driven by the net benefit related to the Business Travel joint venture transaction and Business Travel operating income in Q2, 2014 which together contributed approximately $0.08 to EPS in the prior year. Below the net income line, we made our first preferred dividend payment during the second quarter which reduced EPS by approximately $0.02. We also continued to leverage our strong capital positions to provide significant returns to our shareholders. Over the past year, we have repurchased 51 million common shares which translated to a 4% decline in average shares outstanding. This decline in shares outstanding benefited EPS which was down only 1% versus the prior year despite the 4% drop at net income. This performance resulted in an ROE of 28% for the period ended June 30, well above our on average and over time target of 25% and demonstrate the continued strength of our business model. Let’s now move to a more detailed review of our key performance progress during the second quarter starting with build business on the Slide 4. On an FX adjusted basis billings grow the slowed modestly 7% in Q1 to 6% in Q2 as you can see the primary driver of that decline is the U.S. where we saw growth of 5% down from 6% in Q1. I’ll provide more details on the drivers of the U.S. performance by segment in a few minutes. Across our international regions we saw strong growth in JAPA which was again the fastest growing region in the quarter up 16% on an FX adjusted basis. This solid performance continued to be powered by strong growth in China, Japan. We also saw improved performance in EMEA where the growth in the U.K. remains in the double digits. The decline in volumes in the LACC region was driven by Canada which is being impacted by the end of our relationship with Costco in Canada. Outside of Canada we are seeing improved performance in LACC particularly in Mexico the growth has accelerated during 2015. To turn to Costco and Canada for just a moment while it is still early we continued to be pleased by our efforts to catch the spent of the Costco cobrand card methods as you recall the September 2014 we’ve launched a new cash back card in Canada, that was offered a former Costco Canada card members and it appears to be resonated well. Through the second quarter we’ve been able to retain over half of the other stores spend related to the former Canadian Costco cobrand product. Now I would pause here and highlight that this result is very specific to the Costco relationship in Canada and has the little relevance for the U.S. As we said the two situations are very different, was the most important distinction being that there was no portfolio sale in Canada. If you assume there is a portfolio sale in the U.S, it will have a profound impact on our ability to capture the spend and lend of the Costco card members in the U.S. obviously the sales itself automatically moves to card member relationship. In addition as you might expect when a portfolio was sold there are likely to be contractual restrictions on what types of marketing activities to the seller is permitted to engage in. We realized that all remain extremely interested in the status of our Costco cobrand portfolio sale discussions with Citi. The reality this is a very complex transaction and I can’t comment on the specifics during the negotiation. I will remind you now that our contract with Costco imposes its own constrain on the sale process with of course by the contract and will continue to update you as appropriate. To return to billings now and to provide you with some additional perspective on our international performance. We included Slide 5 quarter which shows total international volume growth with and without Canadian volumes on an FX adjusted basis as depicted it by the green line on the slide international volume growth excluding Canada increased 13% during Q2 and this trend has being driven by improved performance across all of our international regions excluding Canada. Looking into results by segment on Slide 6, we saw a sequential decline in growth in GCS where billings were up 2% on an FX adjusted basis, similar to last quarter we continued to see slower spending across the number of corporate customers primarily in the U.S. In our U.S. consumer and small business segment we also saw some deceleration in growth to 6% in Q2. This performance continues to be impacted by gas prices, which we down 27% year-over-year. I would remind you that gas billings comprise about 2% to 3% our volumes. The U.S. billings performance also reflects the current external economic environment, which remains uneven. Another driver of the sequential change in billings growth the U.S. CS segment was our Costco US portfolio. Historically, Costco billings have tended to generally grow in line with the U.S. CS average growth rate, but in the quarter, while still positive, Costco co brand car growth rates slowed to well below the segment average. The slower growth is in part due to a decrease in new card acquisitions. As you would expect during a wind down period, we have agreed with Costco to reduce our joint marketing efforts. Turing to GNS, this continues to be our strongest billings growth segment with FX suggested growth of 16% during the current quarter. This consistently strong growth demonstrates the diversity of our business model, given the much higher than average returns on equity of the GNS business and the fact that more than 85% of GNS volumes are from international markets. And again, I would remind you that the slower growth in ICS being driven by the end of our relationship with Costco and Canada, which I just discussed. In all international regions, you see that like other U.S. companies with a significant global footprint, our reported results are being significantly impacted by changes in foreign exchange rates. Over the past year, the dollar has strengthened by 10% to 30% year-over-year against the currencies that we are most exposed to outside the U.S. as you can see at the bottom of Slide 7. Looking at the comparison of our reported and FX suggested revenue growth rates for the last eight quarters as you can see in the trajectory of the blue dotted line on the slide, our adjusted revenue growth remains consistent with recent trends in the 5% range. However, during the second quarter, foreign exchange had a slightly larger impact on our results than in Q1 driving adjusted revenue growth down by four percentage points. As you know, this revenue impacted partially offset by the benefit we received from having certain expenses to nominated in international currencies, but there is a bottom-line impact especially when rates move this dramatically. Over the longer term, we continue to believe that being a global company that generates revenue in a diverse set of markets around the world is a strength our business model. At current FX rates, we would expect to see similar drag in the third quarter, but a smaller impacted Q4 as we begin to lap a significant strengthening of the dollar that occurred at the end of last year. Turing now to loan, you see on Slide 8, that worldwide loans were up 4% versus the prior year. In the U.S., which constitutes the majority of our loan portfolio growth continues outpace the industry and move relatively consistent with the prior quarter at 7%. Looking continue to believe that there are attractive opportunities to gain a greater share of loans from both our existing and new customers without significantly changing the overall risk profile of the company. Regarding the Costco loan portfolio in the U.S., which we consider of course to be a very high quality portfolio. We had previously disclosed that it made up about 20% of worldwide loans as at the end of 2014. It remains that approximately 20% of worldwide loans today have a growth rate in the portfolio is starting to slow in line with spending. On the international side, reported loan balances were down year-over-year due to the negative impact of FX rates and an expected decline in loans related to the Costco Canada cobrand portfolio. So putting it all together on the revenue side on Slide 9, you can see that revenues declined by 4% on a reported basis, but increased by 5% on adjusting for FX and Business Travel of news in the prior year. While this suggested growth was consistent with last quarter, we did this quarter have a benefit related to certain merchant rebate accruals, we also had some unfavorable timing impacts in the prior year. These items collectively benefited the year-over-year discount revenue growth rate and also resulted in one basis point increase in the reported discount rate versus the prior year. These specific impacts as well as the decline in Costco Canada merchant volume where we are in a much lower discount rate, lower than offset the expected downward impact on the reported discount rate from growth in the OptBlue program and industry mix changes. I would remind you that from quarter-to-quarter, individual merchant related items can cause fluctuations in the reported discount rate. While broadly we said for a number of years that you should expect to see the reported discount rate declined two to three basis points a year on average due to changes in the mix of spending by locations and industry, volume related pricing discounts competition and more recently growth of OptBlue amongst other factors. Regarding OptBlue we have been pleased with the progress we have made signing up merchant acquirers for the program and the pace at which those acquirers have added new merchants to our network. Year-to-date, we have signed up over 700,000 new merchants in the U.S. through OptBlue and we are focused on driving card member spending those incremental merchants. We are also undertaking similar ones to improve our small merchant coverage in many other markets around the world as evidenced by the launch of the OptBlue program in Canada this quarter. Coming back to our revenue performance more broadly, as we’ve seen in prior quarters the gap between total discount revenue and total billed business growth was again impacted by GNS and cash rebate products growing faster than the company average. Before moving on let me first touch on a couple other items on the slide starting with the other key component of revenue, net interest income. Here we saw a healthy 8% growth rate driven by our continued efforts to grow our loan portfolio as well as lower funding cost. As the majority of our loan portfolio is in the U.S. the impact of FX is smaller on net interest income than on other revenue lines. Turning to net card fees, other commissions and fees and other revenue, these lines were all impacted for greater extent by foreign exchange and also reflected growth in loyalty coalition revenue and some timing items in the prior year. As we discussed in Investor Day, the loyalty coalition business is one of our most important initiatives to find profitable growth in adjacencies and we have been expanding the business since our acquisition of Loyalty Partner in 2011. Reported revenues - tangible example of how we can leverage our digital capabilities to provide value for merchants while creating a new revenue stream for the company. During the quarter together with our merchant partners, we were pleased to launch Plenti, our loyalty coalition program in the U.S. while it is still very early days, we have been encouraged by the initial response and it already has more than 20 million total collectors. Moving now to credit performance on Slide 10, you can see that our lending credit metrics remain at or near historically low levels with our write-off offering declining slightly versus last quarter and our delinquency rate remaining flat. As you can see on Slide 11, the steady lending credit performance as well as lower write-off and our charge card portfolio and benefits from FX helps drive a 4% decline in provision versus the prior year. Though we experienced a year-over-year decline in provision this quarter, looking ahead we would expect reserves to build modestly in line with loan growth and any changes in credit performance therefore we would expect provision to increase year-over-year and represent headwind to growth in the second half of 2015. Moreover, as we discussed at Investor Day we did build into our multiyear financial outlook and assumption that we would see some steady upward tick in write-off and a modest build in reserves over the outlook period. Shifting now to expenses on Slide 12, on a reported basis expenses declined 4% versus the prior year. Clearly there are a number of items impacting expense growth year-over-year including the Business Travel joint venture related items and Business Travel operating expenses in the prior year. Expenses also benefited year-over-year from the change in foreign exchange rates, I’ll walk you through this impacts in more detail as you review marketing and promotion and operating expenses, performance in a few moments. First however, let me touch on a few other items on this slide. Rewards expense grew by 1% which was a bit slower than reported build business growth. Growth this quarter does include a portion of the discreet impact form our renewed cobrand partnerships. However that impact was more than offset by a decline in membership rewards related expenses in part due to an enhancement to the ultimate redemption rate estimation process in certain international markets it occurred last year. Turing to cost of card member services, you see a significant year-over-year increase of 26% consistent with the commentary provided last quarter as you recall a portion of the expense in this line has increased as a result of our renewed cobrand partnerships and we would expect these elevated levels of growth continued for the remainder of 2015. Let’s focus now on marketing and promotion expenses on Slide 13 and make a few points. First, recall that last year in Q2 we leverage the gain from the business travel joint venture transaction to support an elevated level to spend lapping this elevated level along with this year’s beneficial impact from FX led to the decline of 21% you see year-over-year. Second, we have been clear since the Costco decision was made in February that we intend for spend on incremental growth in this during full year 2015. To be relatively simpler with the elevated level we were added full year 2014. This remains our intention; I would also point out that while the largest piece of this increment spending will flow through the marketing and promotion line a portion well also had operating expenses come to revenue. Last looking at Slide 13, you see that we were still on the process of wrapping up our initiatives in Q2; you should expect to see marketing and promotion expense increased substantially in the second half of the year. As we have said the elevated level of spending in 2015 will focus on the many growth opportunities that we have across our company, it was our key initiatives including acquire a new card members, gaining additional spend and lend from existing consumer small business and middle market customers, expanding our presence internationally, growing our merchant network to program such as OptBlue, building our loyalty correlation business with things like the launch of Plenti in the U.S. and introducing new digital capabilities. Turning now to operating expense performance on Slide 14. Our reported results continue to reflect the impact of business travel on the prior year across a number of expense categories. Complicating line-by-line comparisons. Additionally, this quarter’s results were significantly impacted by last year’s items related to the creation of the Business Travel joint venture, excluding expense related to the business travel joint venture transaction as well as expenses from Business Travel operations in 2014. Adjusted operating expenses in total decreased by5% in the quarter aided in part by a benefit from FX. Moving to Slide 15 adjusted operating expense growth year-to-date remains well below our 3% growth target. As [indiscernible] noted in our Investor Day in March however we are not achieving this disciplined expense control for a cut back in investment levels but were added to ongoing efforts to increase the efficiency of the organization. We continued to make strategic investments within operating expenses to support our growth initiatives. This is just one example. Earlier this month we leveraged our unique technology in assets to launch Amex express check out which allows Amex card members to check out quickly, using their Amex login credentials. Looking ahead to the second half of the year I point out again that portion of the incremental spending on growth initiatives well had operating expenses including technology initiatives to enhance our small business in corporate capabilities. Now shifting to capital performance on Slide 16. During the current quarter we return 97% of the capital we generated to shareholders while maintaining our already strong capital ratios. Our Q2 performance demonstrates our confidence in the company’s ability to generate capital while maintaining at financial strength and we remain committed to using that capital strength to create value for our shareholders. Looking at the capital ratios on the bottom of the slide, I remind you that the greater year-over-year increase in the tier-1 capital ratio was driven by our recent preferred issuances do remain our first dividend payment this quarter. This payment has recognized there is a reduction of earnings available to common shareholders and therefore reduced our EPS by 1% during Q2. Let me now provide an update of DOJ lawsuit before I could conclude and take your questions. We are disappointed, that our request for a stay of the decision in the adjunction was denied this quarter. We have of course, moved forward to comply with the trail courts remedy. As a result of the stay being denied, we can no longer enforce certain contractual provisions that prevent US merchants from steering customers to use other credit and charge cards. We are appealing the trail court’s ruling. It is we believe that we will not provide any benefit to consumers and will in fact our competition. Steering is not a good thing for sub-sellers, we believe many merchants to group. At this point, even that the remedy just took effect earlier this week, it’s too early to tell what the impact in the market place will be. We are staying focused on delivering value to merchants and deeply believe in the strength our value proposition. I’d also remind you that there are a number of other private merchant litigation cases, the Eastern district had New York and other proceeding seeking monitory damages that will begin to progress as our appeal is being heard. So let me now conclude by stepping away from some of the complexity I just took you to confirm. And going back to the key things in our results. Our results show solid core earnings performance built to turn off financial model of having diversified growth businesses, disciplined expense controls and capital strength. While billed business growth overall slowed modestly for the first quarter, we saw positive momentum across many areas of our business including international merchant acquisition and loyalty collision. Going forward, given our 5% EPS growth year-to-date simple math would indicate that EPS growth will have to be negative for the balance of the year to meet our continued outlook for full year EPS growth to be flat to modestly down. As I mentioned, the biggest driver of where will end up within this EPS range will be the level of incremental spending on growth initiatives over the balance of the year, as well as our billings in revenue trends. Going back to our investor day in March, we discussed our plan to leverage incremental spending in 2015 to help drive sustainable growth going forward. We continue to believe this is the appropriate long term strategy and also that we have a range of attractive growth opportunities. All this is also consistent with our previous comments that quarterly earnings performance will be more and even than it has been historically while we go through this transitional period. Given this dynamic, our focus has been on our full year earnings outlook rather than our performance in any individual quarter. Stepping back, as we’ve discussed in multiple forms over the past couple of years, we of course have three on averaging overtime financial targets. Generating EPS growth from 12% to 15%, our return on equity of 25% or better and revenue growth of above 8%. Clearly our top focus when we think about these targets, is generating consistent EPS growth from 12% to 15%, which in most environments we have a fairly good track record of achieving over the 20 plus years that the target have been in place. Our recent revenue performance has been below our aspirationally present target and we expect to remain below that level during the near term given some of the discrete impacts on our performance I noted earlier, as well as the current low inflation and low growth in economic environment. However, when you think about our financial targets, the revenue target is just one of the facilitating leverage that we use to help drive 12% to 15% EPS growth. We have consistently demonstrated that we can achieve our EPS target across a variety of different economic buyer environments without having 8% revenue growth. In a context of our year-to-date results, we believe that our core earnings performance continues to demonstrate the strength of our business model that we are doing the right things to position the company for the long-term. With that I’ll turn the call back over to Toby with some details on our Q&A session.

[Toby Willard:]

Thank you, Jeff. As a reminder, our ongoing goal is to provide a greater opportunity for more analysts to ask a question during the session, therefore before we open up the lines for Q&A I’ll ask those in the queue to please limit yourself to just one question. Thank you for your cooperation in this process. With that, the operator will now open up the lines for questions. Operator.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Sanjay Sakhrani with KBW. Please go ahead.

[Sanjay Sakhrani:]

Thank you. I guess I was trying to get a little bit more color on some of the commentary you had around retention, the Costco portfolio given the sale process and how we should think about a gain that might occur in fact you saw the portfolio and you can’t go after those customers, could you just talk about how that affects the 2016 guidance. Thanks.

[Jeff Campbell:]

Good questions, Sanjay. Thank you. So the point I was trying to make in my remarks were we can now give you a little bit of information that are trying to help you understand what is going on in Canada where there was no portfolio sale but we were able to reissue cards with in fact the same card number in where we are pleased that we are tracking to retain over half of the store spend. As I give people that detail, I think it’s really important to realize that that is a completely different situation to what may happen in the U.S. and if you assume there is a portfolio sales in the U.S. where all the card members are automatically moved to new card and new issuer. If you assume that in general these contracts to your point Sanjay have restrictions around marketing, I want to caution people that you expect to get a very, very different outcome from what is happening in Canada and that’s the way the U.S. were to play out. When you think about portfolio sale and assuming there is a gain we’ve been I think consistent for quite some time in saying that we would use that gain or at least portions of that gain to help on continued spending on a variety of growth initiatives and when you think about our company and our growth opportunities, we have many, many opportunities to grow in every part of our business and every part of the globe and so the efforts we may or may not make at times around Costco card members are just one small piece what is a much broader pie of opportunities we see to really effectively continue to spend in elevated levels marketing promotion and certain other things. So I wouldn’t overly try to tie it on JV elevated levels of spending with any particular segment including the Costco segment, it’s really an elevated level of funding that we’re applying to the best opportunities we have which occur all across our business.

[Operator:]

Thank you. Our next question is from Ken Booth with Bank of America Merrill Lynch. Please go ahead.

[Kenneth Booth:]

Thank you. Good afternoon. My question relates to marketing and promotion expense, you obviously are looking to increase that in the back half of the year, looking back at some of the recent experience going back to 2010, 2011 where you really did increase spending pretty dramatically then to drive growth, the level of that you accelerated spending at that time were considerably higher than what I think you’re basically guiding to for the back half of the year, so I guess the question is do you think that taking up marketing and promotional expense to say somewhere in the say 34, 35, 36 basis points per unit billing is going to be sufficient to get to the growth you need to achieve your targets and if I’m thinking about it wrong, is there a way to dimensionalize that?

[Jeff Campbell:]

Well I think the way I would think about it Ken it’s very good question is we have a range of opportunities, on the other hand we want to be really prudent about only focusing on those opportunities that offer really good returns for our shareholders. When you look at in fact one of the slides in the presentation today which lays out the last eight or nine quarters of spending around marketing and promotion, I would say if you stare at that slide a little bit, it will give you a more realistic sense of the range of spending that we would consider elevated and that we would consider a range where we can vary efficiently and vary effectively in today’s environment to deploy all the dollars. I wouldn’t, I’ll be cautious about going back and looking at analogies from 2010 and 2011. It’s a very, very different situation. So I think if you look at that more recent set of histories and think about the highest levels that’s probably more we can target and be really effective.

[Kenneth Booth:]

Good, thank you.

[Operator:]

Thank you. We’ll go next to James Friedman with FIG. Please go ahead.

[James Friedman:]

Hi, my question is about Europe and the changes in the interchange environment there, just looking for some high level thoughts on how you might characterize your strategy now that competitor cards out there interchange rates capped is do you see that as an opportunity going forward?

[Jeff Campbell:]

Well, it’ very good question Jim, let me step back and say clearly as a general matter we don’t think regulation is a good thing for consumers and merchants and for this category, when you look at the European Union regulation and the final layout of it, it certainly confirms our view that most of the reforms are really targeted at addressing concerns around Visa and MasterCard’s interchange practices but as we along said, the reality is there are always impacts in these situations on our business some of which can create challenges for us we’ve talked this particular case, in particular about the fact that there is some new cross border dynamics that are putting some pressure on our discount rates in Europe. All that said, one of the strengths of our business model is we’re out there every day having to prove our value to card members and merchants and everyday evolving the way we work with both to demonstrate that value that does give us an ability to flex and demonstrate our value in ways that others can’t necessarily in this regulatory environment. So we are working hard to manage some of the negative impacts of the regulation and use other parts of it to find ways to be even more creative about adding value to merchants and our card members and I would say well obviously the legislation hasn’t had any or much material impact yet. We’re pleased with the results we see right now in Europe and we’re going to work really hard to try to continue those.

[Operator:]

Thank you. Our next question is from David Ho with Deutsche Bank. Go ahead please.

[David Ho:]

Good afternoon. Could you talk about some of the interest rate headwinds that you might face and then what are not that baked into the 2016 guidance and what you may do as a company to offset some of those on paper headwinds from the liability side typically that you have currently.

[Jeff Campbell:]

So good question, David. We of course are unusual in that raising rate environment in isolation if you hold everything out steady, is a negative for us and we put a number in our 10-K just use round numbers that says all else being equal, 100 basis point rise and all interest rates will cost us around $200 million a year, when you look at the outlook we provided, we built it, we’re trying to be realistic in that outlook and so we built a steadily rising rate environment into that outlook for that matter I remind you we also built a little bit of steady uptick in some of the provision costs as well. So relative to our outlook, you would have to have a spike in interest rates that was much quicker and larger than what the general economic consensus has been to cause us to see any impact relative to that outlook. In terms of how we think about offsetting the impact of those rising interest costs, if you look historically there is hugely some natural hedge here because as a general matter Central banks and the Fed tend to raise rates more when there is a little bit stronger economic environment and raise little less when the economic environment is not so strong and obviously the rest of our business benefits tremendously when there is a little bit stronger economic environment. Beyond that the reality is we’ve - the largest source of our position on our sensitivity - interest rate is the strength of our charge card franchise, we love that business, we think it’s a great business and so it just comes with this one aspect that we have to manage as interest rates at some point inevitably raised. Thank you.

[Operator:]

Thank you. And next we have Craig Maurer with Autonomous. Go ahead, please.

[Craig Maurer:]

Yes, hi. Thanks. I wanted to ask if you could frame the upload discussion little bit differently versus your historical penetration versus Visa and MasterCard in the U.S. in terms of merchant coverage, how has the additional 700,000 merchants helped you close that gap?

[Jeff Campbell:]

Well, good question, Craig. I think there is a couple aspects to this. So because you first have to close the actual coverage gap and then you have to make progress on closing the perception gap and there is a time lag as you do both those things. So the program that we first begin to talk about little over a year ago was one where we said boy, if you play out the incremental merchants that we think we can get if you look at just the cycle of those merchants and how often they wrap as all merchants would acquirers, then you have a multi-year process here before we believe we can get to the point where in fact you signed on most merchants in the U.S. relative to MasterCard, Visa, you could have a process that then extends beyond that to match that with perceptions and to drive card members to those merchants. If you think about the things they said a few minutes ago as I pointed out they were really pleased with our progress this year on OptBlue and we’ve signed 700,000 new merchants under it. We also have to wait, say get them signed up and then you have to go through a process to drive business to those merchants. And we’re engaged in that and we’re certainly not at the point today where we would say that we have materially closed the coverage gap, so we’re not going to go out and start talking about that until we’ve gotten further end of this. So this is clearly a multi-year effort because you’re talking about a couple of million merchants, you ultimately have to add on to the role and it’s a multi-year effort to change perceptions but we’re really pleased with the way it’s going. We feel strongly that when you take a multiyear view of this company, this is the really important part of our growth story and we will continue to give you a sense each quarter of how it’s going.

[Craig Maurer:]

Thank you.

[Operator:]

Thank you. We have a question now from Moshe Orenbuch with Credit Suisse. Go ahead, please.

[Moshe Orenbuch:]

Great. Thanks. I was just wondering given the commentary you made about the opportunities for marketing, why did you wait till the second half and could you talk a little bit about how some of the new products that you’ve been marketing and will be marketing especially like the 631 cards will impact the profitability?

[Jeff Campbell:]

Well, all fair questions, Moshe. We went into 2015 as we began the year in January with an assumption that we would be continuing our very long-term partnership with Costco and we set marketing plans, then we set budgets, then we set the management teams off to execute on that plan. When we change that plan in February, and decided to go down a different path and concluded that we think in the long run we can generate more value for our shareholders with the past we’ve now gone down. We really have to do a little bit of a reset and we’ve managed the company for the long-term, we want to be thoughtful and we chose to do something as dramatic as we’ve done. Go to our shareholders and say we’ve going to ramp up spending this year and it’s going to result in not a lot of earnings growth and in fact EPS could even be down a little bit this year. We want to be really thoughtful about the way we deploy those resources and so while we began to deploy them in the second quarter to be as thoughtful as we wanted to be, reality is it’s taking us until the third quarter to get fully ramped up. So we think that’s the right way around the company, the right results and as we said beginning back in February we’re stepping away a little bit from overly focusing on each individual quarter.

[Moshe Orenbuch:]

And the rewards, the profit of the impact on rewards costs of the new products.

[Jeff Campbell:]

Well, look, the rewards environment in general has always been competitive and is pretty competitive right now, what we really try to focus on sure are a couple of things. Number one, ultimately this is about broad customer value proposition rewards is one component of that. We have a brand, we have a reputation for security and trust and service and try to leverage those things. Second, we have a very broad portfolio of products in the U.S. and we do that because we think there is tremendous value in making sure you are delivering to different customer segments that things they value the most, whether it be cash back rewards products, things that use our membership rewards program which is of course still by far the largest and most diversified rewards program or our many co brand products. And by focusing on the broader customer value proposition by making sure we’re being really thoughtful about how we segment the different customer groups and produce something that they are going to mostly highly value. We think we can get to the best possible result for both our card members and our share holders without having to compete dollar for dollar on every single aspect that every single product. So we feel good about some of the latest things we’ve launched, certainly the big launch in the last 12 months was around the everyday card last year that card has performed better than we had anticipated. It has reached a little bit different demographic which is exactly what we are trying to do and so we are pretty pleased with that.

[Moshe Orenbuch:]

Thanks.

[Operator:]

Thank you. We’ll go next to David Hochstim with Buckingham Research. Please, go ahead.

[David Hochstim:]

Yes, hi. Thanks. I wonder what’s the benefit of another three months of analysis if you could provide more color around the decline that we've seen in GCS build business and is weather a factor, comparisons and what is the outlook for some improvement in the third quarter and I guess, really just wondering why that has declined so much par rapidly than U.S. CS build business for example.

[Jeff Campbell:]

So very good question, Dave there is two things, there was a sequential decline here Q1 to Q2 from 42% that decline actually relates to one product with actually anyone large customer and it’s an airline fuel buying product very, very low margin product. As an old airline CFO, I will point out the airlines are little flush with cash right now and so they’re sort of minimizing their use of these products which help them out with cash flow, that is what caused the drop from four to two as you go from Q2 from Q1. Now four is still a low number and as I said last quarter boy, as we had really scrubbed our customer base, all I can tell you it is U.S. not international markets, it is very broadly spread in terms of a slowdown in just the organic growth spending trends amongst our mid-sized and larger clients. T and E oriented and very broad spread. So you can draw different conclusion from that is this company is tightening T and E budgets as they think about the economic environment as if little bit of fare pressure on the airline, lots of different areas and you can add your own but those are the facts as we see them.

[David Hochstim:]

Was there any change late in the quarter that would lead to a different trend in Q3?

[Jeff Campbell:]

You know we’re always cautious David about reading too much into trends that occur over a couple of weeks. So as I would say, no we will just have to see how Q3 plays out.

[Operator:]

Thank you. Our next question is from Don Vendetti with Citigroup. Go ahead please.

[Don Vendetti:]

Yes Jeff in terms of your American Express Checkout product, that was pretty interesting that you can use your existing ID and password, I was just curious what you found as you’ve rolled that out to merchants, are you having to offer any type of economic incentive, I know some of the networks have suggested it, it can be a more tricky to get their merchants to prioritize that and how quickly do you think you can grow that penetration to your top merchants?

[Jeff Campbell:]

Well of course very, very early days here. We have just announced the product; it’s available with a small number of initial websites with longer public list of people who will soon be adding it. Certainly we have done some pilot types before we launched it and of course the key here that everyone is trying to get to with these products is you’re trying to get to a much higher percentage of people who go all the way through to the Ad and buy what they’ve been looking at in any particular online or mobile experience and I would say we and the couple of merchants we had doing pilots with us were very encouraged by the results that we achieved in terms of improving those rates of getting people through to the final step. So when you think about the economic arrangements, I obviously can’t comment on specific economic arrangements, so what this is really about and real part of goal that everybody chasing here is can you get those rates up significantly and to the extent you can prove that you can then the economics take care of themselves for everyone and that is what we are seeking here, now I will go back to where I started it is very early days and we are going to have to see how things progress here but we are encouraged by the early results we think we have products with some very interesting features relative to some of the other alternatives it is very simple, it is very quick but we will like to give you an update as time goes on.

[Don Vendetti:]

Okay, thanks.

[Operator:]

Thank you. Our next question is from Sameer Gokhale with Janney Montgomery Scott. Please go ahead.

[Sameer Gokhale:]

Hi thank you. So just quick first question about the steering injunction which became effective on 20th of July, at this point have you notified all merchants that they can in fact steer just wanted to get a sense for that and then in terms of earlier this year there was a restructuring initiative enrolling 4000 jobs and just wanted to get an update on that, have you completed that restructuring with the 4000 jobs just an update on that would be helpful, thank you.

[Jeff Campbell:]

So let me take those one at a time, so start with the DoJ, so you are correct the judge’s order became effective at the beginning of this week and we are in the process of following that order, one part of that process is notifying all of our merchants of their right to steer and that will be happening for the order in the next several weeks. There is other aspects to it but that is certainly one of the most important parts. As we think about the order I think the first thing I would say is when we sit here and think about it today, we believe that in near term, the financial impact of these orders within the financial outlook that we provided at Investor Day reiterated it again today no clearly in the longer term we are going to have to see how the marketplace reacts to the order and think about what impact that is going to have on our business normally. So that is where we are with the DoJ, much more straightforward question yes we took restructuring charge last year to involve about 4000 employees there we are well into that. However there is still a significant portion still to come some of this involves fairly complex moves as we right interestingly enough a lot of this is moving from one non-U.S. location to another non-U.S. location at some of our operations that has to be done very thoughtfully and so there is a very experienced team is doing this who is involved in that process but they won’t be done until much closer to the end of this year.

[Sameer Gokhale:]

Okay. That’s helpful, thanks guys.

[Operator:]

Thank you. We have a question now from Mark DeVries with Barclays. Please go ahead.

[Mark DeVries:]

Thanks. Follow-up questions on what is embedded in your EPS growth guidance, what do you contemplate in terms of FX, is it I’m assuming is it consistent with what you laid out Jeff or fading headwind from FX in the fourth quarter and if that is the case does that assume no further appreciation in the dollar in there, what might happen if you see continued dollar strength and also what happens if credit is more benign then you are thinking and you don’t see the provision ramp in the back half of the year, could we expect that to part of the bottom-line or would you expected kind of reinvest the benefit to that.

[Jeff Campbell:]

Yes, two good questions, so on FX essentially what is built into our multiyear financial outlook to use broad strokes is roughly the rates you see today and so to the extent because it is hard to imagine these may be same as last words if you could have another move as dramatic as you have had in the last 12 months beyond where we are today. If you do that will be a tough headwind for us that will do our best to manage. I just remind you that the movement of the U.S. dollar so far so fast against so many currencies all it once as it’s done in the last nine months you have to go back quite a number of decades to point another group like that so it could happen but will have to see on credit you’re correct we built in both in the back half of this year as well as into our 2016 and 2017 outlook some modest up stand steady uptick in the provision and growth of the loan provisions, clearly we have a very steady track record now in growing our loans above the industry average. What happens if that is more benign well that will be a very good thing, what I would say in terms of the bottom-line is what we are trying to be true to at this point is the financial outlook that we provide to people and making sure we are really well position to demonstrate and to execute upon, once we’ve left all the FX, once we left all the cobrand changes, once we left Costco in U.S demonstrating the people that the business model, financial model that produced to 12 to 15 EPS growth rates throughout 15% is in place and is working well. And so credit is a little bit more benign we will frankly look to see whether we are operating within the financial outlook that we haven’t whether we have other growth initiative funding that we fact think you could be for shareholders are properly redeployed or whether we want to take into the bottom-line to make sure we feel comfortable that we coming with kind of outlook we provided so well there is all, we have lot of when we repeat as We'll have to see where they come out, but hopefully, mark, that will give you a sense at how we’ll think about things.

[Mark DeVries:]

That’s helpful. Thanks.

[Operator:]

Thank you. Our next question is from Eric Wasserstrom with Guggenheim Securities. Please go ahead.

[Eric Wasserstrom:]

Hi Jeff, this is Eric Wasserstrom, how are you? I just want a follow up on David Ho’s question, one of the teams that’s come out from the recent slide of bank reporting has been some enthusiasm after many quarters of may be not so much enthusiasm about the growth in C&I credit demand and the growing growth in middle market demand and to the extent that corporate now are demanding more credits presumably to fund operations, do you think that potentially, pick up in spending in the middle market and corporate universe.

[Jeff Campbell:]

Well, Eric I got to say that’s the one where I hope you right and I hope that’s the signal but all I can do is tell you what we are seeing in our corporate business I remind you it is a - where we do lots of things in the GCT segment the biggest component is still tied to more or less T and E oriented spend by mid to large size companies and so I have read some of those same comments that you just referenced will have to see whether they show up in our results over time certainly through June 30, it would be hard to see that.

[Toby Willard:]

Hey Cathy we probably have time for one more question.

[Operator:]

Alright. Thank you that will come from Cheryl Pate with Morgan Stanley. Go ahead please.

[Cheryl Pate:]

Hi, good afternoon. I just wanted to circle back to some of the earlier comments on OptBlue and sort of closing the perception gap, can you just may be help us bank through is that increased finance with the merchants or is it more proactive with the card members and then how would tie that into I know we've talked about in the past the economics sort of move into the positive on OptBlue at some point this year. Thanks.

[Jeff Campbell:]

It’s a good question. And the answer of course is, yes. It’s sort of all those things so there is - not to get overly tactical here. You have to get the merchants signed up, the reality is we have trained over many decades, our card members to look for little stickers in the window and so you literally send teams of people out to make sure the stickers are going up in the windows and that helps. There is an element of educating our card members. Now here there’s sort of we have to think about the pacing and the timing, that wouldn’t necessarily be if you were Cheryl an AmEx card member, which I’m sure you are of course, want to get an e-mail from us every single time we signed up any merchant within 10 miles of you because you get tired of seeing all the e-mails and you would ignore. So you kind of have to be thoughtful about when is the right time to communicate in the most impactful way to our card members and when do you make sure you are doing that soon enough so the merchants who sign up, start to see AmEx card members and feel good about what they have done. So there is no magic here, it’s a matter of balancing some of those basic blocking and tackling things we need to do. But we are very focused on it. I’ll go back to that’s why I said so far this year, we’re pleased with all the sign ups and we are very focused now on continuing the signs but also beginning to drive more business to those merchants I would say we remain on track for this year for the program overall to be a positive to our bottom-line when you look at the net of all the positives and negatives. And we are tracking to our plan over a couple of years to much more significantly close the coverage gap. So, Cheryl, thank you for that last question and thanks to everybody for joining us on tonight’s call. I guess I would go back probably to where I started and where I ended earlier, which is, there is a lot of complexity in our results but we think that this quarter does again reflects solid core underlying performance. With that I will wish you all a good evening and thank you for your continued interest in American Express.

[Operator:]

Thank you. And ladies and gentlemen, this conference will be available for replay after 7 p.m. tonight through midnight July 27. You may access the AT&T executive playback service at any time by dialing 1800-475-6701 and entering the access code 363379, international callers dial 320-365-3844, using the same access code 363379. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.