American Express Company (AXP) — Q3 2015 Earnings Call Transcript

Welcome. We appreciate all of you joining us for today’s call. The discussions today contain 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 third 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.

Well, thanks, Toby, and good afternoon everyone. Overall, our third quarter performance was in line with our 2015 financial outlook and reflected the headwinds that we’ve been managing throughout 2015 during a challenging economic, competitive, and regulatory environment. Consistent with the expectations that we discussed publicly in mid-September, reported Q3 EPS of $1.24 was down 11% versus the prior year. And on an FX-adjusted basis, we did see a modest slowing sequentially in the billings growth rate from 6% to 5% and saw adjusted revenue growth slow from 5% in Q2 to 3% in Q3. As in the first two quarters of 2015, our third quarter results continued to reflect the discrete impacts from various changes to certain of our co-brand partnerships and a significantly stronger U.S. dollar versus last year both of which I’ll quantify later in my remarks. The decline in earnings versus the prior year was also in part driven by increased spending on growth initiatives. I’d remind you that as we considered earlier this year the implications of the pending termination in 2016 of our relationship with Costco in the U.S., we made the decision to increase spending in 2015 across a range of business opportunities to best position the company for long-term growth. While our reported results reflect the discrete impacts, our performance continued to reflect healthy loan growth, strong card member and merchant acquisitions, write-off rates at historically low levels, disciplined operating expense control, and the benefits of our strong capital position. Through all of this, we continued to drive an ROE above our average and overtime target of 25% demonstrating the continued strength of our business model. As we turn to the slides, we are once again beginning our presentation with the financial outlook framework that we first shared at Investor Day in March, as we believe it remains a useful framework for discussing the drivers of our current performance. I’ll provide more details on the specific drivers as we review our reported results, but overall we believe we are doing the right things to achieve our multiyear outlook and position the company for the long term. Thinking ahead to Q4, we expect results to reflect some of the same headwinds as the current quarter including incremental spending on growth initiatives as well as the discrete impacts from changes in our co-brand relationships and a stronger U.S. dollar. I’d also remind you that in Q4 2014 we had a net benefit related to the sale of our investment in Concur. Throughout this year we have said that our full year 2015 outlook was for EPS to be flat to modestly down versus the prior year. To be more specific, as we sit here today with one quarter left in the year, we estimate that full year 2015 EPS will be between $5.20 and $5.35. We believe our outlook to return to positive earnings per share growth in 2016 and within our target range of 12% to 15% in 2017 remains appropriate. As you recall, our outlook for 2015 to 2017 does not contemplate the impact of any restructuring charges or other contingencies. Now to turn to a review of our financial results on Slide 3. Billings were flat versus the prior year on a reported basis. Adjusted for FX, billings growth was 5% during Q3 reflecting slower volume growth across our U.S. consumer and corporate portfolios. I’ll provide more details on our billings performance shortly. Reported revenues were down 1% but were up 3% after adjusting for FX. This is slower than the adjusted Q2 revenue growth rate in part due to the modestly slower billings growth and the merchant rebate accrual benefit that impacted discount revenue last quarter. Net income was down 14% year-over-year primarily reflecting an increase in spending on growth initiatives and the discrete impacts from changes to our co-brand relationships and the stronger U.S. dollar. We estimate that the changes in our co-brand relationships reduced EPS by approximately 5% during the quarter and that the negative impact from FX further reduced EPS by another approximately 4% to 5%. Below the net income line we continued to leverage our strong capital position to provide significant returns to shareholders and have repurchased 56 million shares over the past 12 months, which has reduced our average share count by 5%. As a result, EPS was down 11% versus the prior year despite the 14% drop in net income and a $0.02 EPS impact related to our preferred dividend payment. As we have said previously, we expected our quarterly earnings performance to be more uneven during this transitional period and certainly you saw that in our results this quarter. Our focus continues to be on the earnings outlook for each year and the long-term as opposed to the performance of any given quarter. Turning to our billings performance by region on slide four, on an FX-adjusted basis billings growth was 5% during the quarter versus 6% in Q2 driven by a sequential decline in U.S. volume growth. I’ll provide some context on the U.S. results in a few minutes, so let me begin with a review of the international billings trends. While we continue to face an evolving regulatory landscape going forward, we have seen very solid performance trends across our international regions over the last several quarters. JAPA remained our fastest growth region with volumes up 14% on an FX-adjusted basis. The strong performance was again powered by Japan and China. While performance in China remained robust year-over-year, growth was lower than in Q2 which drove a deceleration in regional volume growth and also in the GNS segment as you will see on the next slide. As a reminder, while China does impact our billings growth rates, it is a very small impact on our revenue and earnings due to the low margin that all networks earn on spending within China today. Moving to the EMEA region, volume growth remained consistent at 9% on an FX-adjusted basis including double-digit growth in the U.K. The year-over-year decline in LACC volumes is being driven by Canada, which is being impacted by the end of our relationship with Costco in Canada. This will continue to impact our volume growth until Q1 2016, although it will begin to lessen next quarter as Costco began accepting other network products in its Canadian warehouses during Q4, 2014. Outside of Canada, LACC regional growth remains in the double digits including strong performance in Mexico and Argentina during Q3. Overall, international performance excluding Canada continued to be strong with volumes up 11% on an FX-adjusted basis versus the prior year during Q3. We are pleased with our progress outside the U.S., which reflects strong performance in the consumer and network businesses where we have seen encouraging returns on our recent growth initiatives. As our largest global issuer, we constantly balance global strategies and local execution seeking to leverage our best practices, capabilities, and learnings in all the markets in which we compete. Looking at the results by segment now on slide five, we saw slower growth in GCS where billings were up 1% on an FX-adjusted basis and in the USCS segment where volume growth slowed to 5% versus 6% last quarter. As I mentioned in my initial comments, billings growth particularly in the U.S. continues to be impacted by a number of headwinds during 2015. I’ll provide a bit of color on this. On average, we are seeing lower average transaction sizes in the U.S. as opposed to card members using their American Express cards less frequently. In total, U.S. transactions increased 7% versus the prior year with the average transaction size down 3%. We are clearly seeing this impact on gas spending, where industry average gas prices are down 25% versus the prior year. Lower average transaction sizes are also a driver within airline spending which constitutes 7% of our total volumes in the U.S. and is down 3% year-over-year. This decrease is consistent with the recent trends in average ticket prices and revenue performance across the U.S. airline industry. The slower airline spend had a larger relative impact within GCS, where airlines make up approximately 25% of total spend. Also in GCS, we saw a slowdown in growth across middle-market customers in the U.S. Despite this near-term performance, we do see opportunities to accelerate growth in this segment as we continue to focus and leverage our efforts to bring together some of the unique products and services we can offer to middle-market customers. And lastly, moving back to the USCS segment, consistent with the prior quarter we saw volumes on the Costco co-brand product soften. Although the loan portfolio and Costco remained approximately 20% of worldwide loans as of the end of Q3. More broadly on Costco, we have not seen a significant earnings impact from Costco in the U.S. as lower volume growth to date has been offset by reduced marketing expenses associated with the co-brand portfolio. One other Costco point: we do realize that all of you remain extremely interested in the status of our Costco co-brand portfolio sale discussions with Citi. The reality is this is a very complex transaction and I don’t think it would be appropriate to comment on the specifics during the discussions. We will provide more detail on the outcome and its implications for our 2016 EPS outlook as soon as the discussions are complete. Moving on now to loan growth on slide six, you can see that worldwide loans increased by 4% versus last year. In the U.S., which constitutes the majority of our loans, growth was steady at 7% during Q3 and continues to outpace the industry. International loan balances remain down year-over-year due to FX and the end of our Costco relationship in Canada. Excluding the negative impact of FX and Canadian loan balances, however, international loan growth improved to 9% during Q3. So we are pleased with the underlying trends of loan growth. We continue to believe that there are opportunities to increase our share of lending from both existing and new customers globally without significantly changing the overall risk profile. Now 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 significantly year-over-year against the currencies that we are most exposed to outside the U.S. as you can see at the bottom slide seven. The dollar’s strength will have an impact on our performance for the balance of the year and could impact 2016 as well. Looking at the comparison of our reported and FX-adjusted revenue growth rates, you can see the difference between our reported revenue growth and our FX-adjusted revenue growth remained relatively consistent as FX dragged our reported revenue growth by approximately 400 basis points in both Q2 and Q3. When currency moves this dramatically, there is also a bottom-line impact. As I mentioned earlier, we estimate that the strengthening of the dollar reduced our EPS by approximately 4% to 5% during the quarter. Over the longer term, we continue to believe that being a global company generating revenue in a diverse set of markets around the world is the strength of our business model. So, let's move now to our revenue performance on slide eight. Where you see that our reported revenues were down 1% versus the prior year, but increased 3% on an FX-adjusted basis. As I just discussed, the strengthening of the U.S. dollar had a significant impact on a number of revenue lines including discount revenue, net card fees, and other commissions, which all increased year-over-year after adjusting for FX. Other revenue also grew versus Q3, 2014 after adjusting for FX and the gain from the sales of ICBC and Concur shares in the prior year. FX adjusted revenue growth of 3% did slow sequentially versus the prior quarter; this was in part due to the modest slowing in bill business growth that I discussed. I'd also remind you, that our second quarter results included a benefit in discount revenue related to certain merchant rebate accruals, which resulted in a year-over-year increase at a discount rate during Q2. The two basis points year-over-year decline in the discount rate this quarter was in part driven by the growth of the OptBlue program, as well as the continued downward pressure that we traditionally have from changes in mix competition. These impacts were partially offset by the decline in Costco Canada merchant volume, where we're under much lower than average discount rate. We continue to make steady progress with the OptBlue program. With the recent addition of Chase Paymentech, all of the top ten U.S. merchant acquirers have now signed up to join the OptBlue program. We are signing a significant number of new merchants to the program and are focused on driving greater awareness and card member spending at these new AmEx-accepting locations over time. Continuing with the merchant related items in the U.S. it's now been approximately three months since the DoJ's remedy took effect. While the remedy has not yet had an impact on our business, it is still too early to tell what the longer term impact in the marketplace will be? Before moving on to slide eight, I would say, we are pleased with the strong growth of 8% in net interest income driven by our continued progress in growing the loan portfolio and lower funding costs. Turning to credit, on slide nine, we are pleased that our lending credit metrics remained at low levels with our write-off rate declining slightly versus last quarter and our delinquency rates remaining flat. Moving to slide 10, our credit performance during the quarter combined with higher loan balances to drive an 8% year-over-year increase in provision, which included a $53 million reserve build. Our credit metrics have been steadily improving since the downturn. They have generally stabilized at the current levels over the course of the past year. Therefore, reserve releases from improved credit performance are no longer offsetting the additional reserves needed to higher loan balances. This performance is in line with our expectations that provision would increase year-over-year and in part reflect the steady growth we are seeing in the loan portfolio. Going forward, we do continue to anticipate that write-off rates will gradually increase from today's low levels in part due to the seasoning of our newer loan vintages. This is consistent with our comments from investor day about expecting to see some steady upward tick in write-off rates and the modest build in reserves over the outlook period. Moving to expense performance on slide 11, our total expenses increased by 3% during the current quarter; performance deferred significantly across P&L lines, and all expenses benefited from the year-over-year change in FX rates. On an FX-adjusted basis, total expenses increased by 7% during the quarter. I'll walk you through the details of marketing and promotion and operating expenses in a few minutes. Let me first touch on a few other items on this slide. Reward expense increased 4% versus the prior year, a bit above the growth proprietary billings, which excludes GNS. Performance this quarter includes the portion of the discrete impact from renewed co-brand relationships. Our renewed co-brand relationships continue to have a more significant impact on cost with expenses up 31% versus the prior year. As I mentioned earlier, we estimate that all of the changes in our co-brand relationships reduced EPS by approximately 5% this quarter. This estimate includes the impact of our renewed co-brand relationships with Delta, Starwood, Cathay Pacific, British Airways, and Iberia, as well as the net impact on our Canadian business from the end of our Costco relationship. The co-brand impact is primarily concentrated in cost of card member services and reward expenses, although there is an impact on revenue growth as well. Let's now turn to the marketing and promotion, slide 12. Marketing and promotion expenses were $847 million in the quarter and were up significantly from Q2 due to the higher spending on growth initiatives we did this quarter. On a year-over-year basis, marketing and promotion was 8% higher than the prior year; it was up 14% after adjusting for FX. The increase in M&P this quarter is consistent with our expectations as we have been clear since the Costco decision earlier this year that we intend for the spending on growth initiatives during full year 2015 to be at or slightly higher than the elevated levels of full year 2014. We have also highlighted that the increase will be more concentrated in the third and fourth quarters. To provide some additional perspective about our growth initiative spending, we included the breakdown on slide 13 that we have previously shared in mid-September. We continue to feel that this slide is helpful way to think about what we broadly consider to be our spending on growth initiatives within the company. As you can see, while a large portion of this spending occurs within marketing and promotion, a significant amount also occurs within operating expenses. Some of the impact also shows up as contra revenue. I can make a few comments related specifically to the spending during the third quarter. A large portion of the increase in marketing and promotion during Q3 was focused on our efforts to attract new card members across our consumer small business, corporate franchises around the globe. For example, in our U.S. consumer business we ramped up acquisition efforts with our cash rebate products as well as our gold charge card, Starwood preferred guest credit card both of which were recently refreshed with several new card member benefits. We also increased our spending on longer-term technology initiatives including efforts to enhance the digital capabilities that we provide to middle market corporations and small businesses. A higher spending during Q3 also helped drive progress across the number of business initiatives including adding Sam's Club to our merchant-acceptance network, rolling out Apple Pay to our corporate card and U.K. card members as well as the continued expansion of the Plenti loyalty coalition program. So as I just mentioned, the efforts to attract new card members are one of the key focus areas for our incremental growth initiative spending. In this context, we are pleased to see that these efforts drove a significant increase in new cards acquired across our U.S. consumer, small business, and corporate issuing businesses during the current quarter as you can see on slide 14. Now obviously it will take time for the benefits from these new acquisitions to impact our results, which is why our focus has consistently been on our performance over the multiyear outlook period. Moving to operating expenses on slide 15, operating expenses were down 1% year-over-year and increased 3% on an FX-adjusted basis. As I mentioned, operating expense performance this quarter reflected an increase in level of spending on growth initiatives including a number of technology initiatives. As a portion of the spending on these technology initiatives hits the professional services and occupancy and equipment line, we'll provide a bit more detail on what's included. Starting with professional services, I would point out that the majority of expenses in this line are related to the technology costs that we pay third parties. This P&L line also includes the fees we pay third parties for credit and collection activities, as well as some of the incentives we pay merchant acquirers. Similarly, moving to occupancy and equipment, over 75% of the cost in this line on a year-to-date basis are related to data processing including the license fees we pay technology providers and depreciation costs associated with our technology hardware and software. The remainder consists primarily of depreciation expense on office equipment and buildings and the rents we pay for office space around the world. Similar to our performance across other operating expense lines, we have gained efficiency in our professional services and occupancy and equipment expenses over time. As we have rationalized our technology infrastructure and location footprint around the world, we believe there is a sustained opportunity to deliver operating leverage going forward as technology continues to become cheaper and more powerful each year and our customers and merchants increasingly demonstrate a preference to engage with us through more digital channels. Moving on, let me touch specifically on the 21% increase in occupancy and equipment expense this quarter. The increase was driven by a $91 million impairment charge related to previously capitalized software development costs primarily within enterprise growth including the decision not to continue with certain investments within the group. We continuously evaluate our investments across the company to ensure that we are deploying the right level of resources against our most attractive opportunities. In this context, we decided to pull back on certain initiatives in enterprise growth during the current quarter including the decision to not proceed with the launch of a service product in Mexico. These decisions are aligned with some recent organizational changes within enterprise growth including consolidating the service platform and related capabilities under Steve Squeri. More broadly, we continually look at ways to make our overall organization more effective, streamlining the processes that cut across multiple parts of the company, and focusing the organization on the most attractive growth opportunities in both the consumer and business-to-business space. As we set priorities for 2016 and beyond, we will focus on those opportunities that can produce the best returns. And we will be ensuring that we have the proper operating structure to deliver results in the most efficient and effective way. To conclude now on operating expenses and moving to slide 16, despite the greater spending on technology initiatives in the quarter, adjusted operating expenses are down 3% on a year-to-date basis and up 1% on an FX-adjusted basis, both well below our 3% target for 2015. Now shifting to our capital performance on slide 17, during the quarter we've returned well over 100% of the capital generated to shareholders while maintaining our strong capital ratios. Our Q3 performance again demonstrates our confidence in the company's ability to generate capital while maintaining its financial strength and also demonstrates our ongoing commitment to using that capital strength to create value for our shareholders. So let me now conclude, by stepping back from some of the complex that I just went through and going back to the key themes in our results. Overall, our Q3 performance reflected the headwinds and challenges that we have been managing throughout 2015. As expected, our results were down year-over-year due to the ramp-up in spending on growth initiatives and the discrete impacts of some changes in our co-brand relationships and the stronger U.S. dollar. In addition, billings and revenue growth continue to be impacted by the challenging economic, competitive, and regulatory environment. Against this backdrop, we continue to move ahead with initiatives to build our business in the years ahead. We're investing substantially more in marketing incentives and technology to attract new card members and add additional spending to our network. We're expanding card acceptance at an accelerated pace amongst merchants and added Sam's Club, the eighth largest retailer in the U.S. to our network earlier this month. We're broadening our relationship with card members to accommodate more of their borrowing needs and our loan portfolio continues steady growth this quarter. The flexibility to invest in these and other growth initiatives comes in part from our ongoing progress in containing operating expenses throughout the company. We also continue to benefit from a strong balance sheet that allows us to return a substantial portion of our earnings to shareholders through share repurchases and dividends. We remain committed to these actions and believe that these are the right things to do to achieve our multiyear outlook and position the company for the long term. With that, I'll turn the call back over to Toby for some details on our Q&A session.

Thanks, 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.

Yes. Hi, thanks. Two questions. First could you talk about the magnitude to which cash back rewards acting as a contra revenue item are impacting the merchant discount rate? And secondly, you're calling out loyalty partner in your press release as adding to revenue growth in a meaningful way. Can you contrast that to Plenti and how we should think about growth in Plenti long-term? Thanks.

Let me start, Craig, with the cash back question. Certainly in the U.S. consumer business in particular we have been seeing very nice growth in our cash back products and as you know, the accounting for our cash back products does push – does make the cash back a contra revenue. So when you look at the discount rate that we report what we try to do is reflect the actual economics that we're getting at the point of sale with the merchants, and so we take that out of that calculation. What you do in the straight calculation of the income statement of discount revenue over your business; you are capturing the higher growth rates of the cash back products. All that said, I would say that in the grand scheme of the company overall, the cash back product is still a relatively modest part of the overall portfolio which is why we don't specifically call out the impact it has on the earnings. In terms of loyalty partners, what I would say is to remind everyone we have a business that is more mature in a variety of other countries around the globe like Germany, Poland, and India; it’s a little bit newer in Mexico and in Italy and we're really pleased with the way the business has developed in all of those countries as it has gotten to profitability. When you go to the U.S., we are really pleased and excited about the launch of Plenti earlier this year. It’s very, very early days in the U.S. and so we're very encouraged by the growth that we've seen and the number of members that Plenti has been able to attract. Several of the other partners in Plenti have talked about their view of the progress and it’s all very positive. What I would say on the U.S. is it’s still early days, and we will need to see how it progresses over the next year or two before it begins to have a more material impact on the company's financial results.

Hi, Jeff. Just wanted to ask on your GNS business and I guess also on U.S. in general. Do you think you're holding your market share in GNS? You clearly laid out some issues around the pressure from airline pricing and maybe China was off a little bit? But if you strip that out, that's always been a very strong area for you. Can you talk a little bit about that? And then on the U.S. side, I should say more on the corporate side, do you think you have a structural issue there or are you just kind of weak because of general economics and some of the issues you highlighted last quarter around airlines?

So a couple of questions there, Don. I maybe parse it into pieces talking a little bit about GNS, a little bit about the U.S on share and then maybe a little bit about corporate solely each of those. If you look at GNS, just to remind everyone, our GNS business generates about 85% or so of its billings outside the U.S and then about 15% comp in the U.S. so you really have a broad range of market conditions. You have markets like the U.S., Australia, and U.K., where we run a network business side by side with our proprietary business. And then you have a lot of markets around the globe, China being a good example where through our partner, in fact the GNS business, that's how we operate American Express through a franchise model. So across that many different markets, I think it’s a little challenging to generalize by share, but I would make the general points that we're really pleased with the growth rate we're seeing in GNS everywhere in the world. And share is something that we probably think about differentially in each market depending on whether it’s a pure GNS market or a combined proprietary and GNS market. But I would say, we feel very good about our share trends on a combined basis outside the U.S. and when you take out the one challenge we have in Canada, I think we – when you look at our overall international growth rates, we'll match up very well in most few quarters with the broader sense. And turning to the U.S., you talked about U.S share, we probably have lost a little bit of share to U.S. in recent quarters, but I'll make a broader point that over the last five years we've actually gained quite a bit of share in the U.S and we think about our prospects over the longer term. We also focus at the end of the day on our share of industry profits and industry revenues. We actually think we've done pretty well including in recent quarters on that front. We're very thoughtful about what opportunities are going to produce the best return to our shareholders and sometimes that does not always lead you to the same answer as what might produce the largest billings share. Going to the last part of your question, go to corporate in particular in the U.S. As I said in my remarks, the slowdown in airlines spend and all the airlines see what is remarkable when you look at both the large profits they are also generating right now even with the drop in fuel prices, but also the pretty tough revenue environment therein with industry revenues and industry unit revenues in the U.S, down. That has reflected in our numbers where we don't think we're losing share. When we look at numbers of transactions, but the average transaction size is just trending right along with the airline industry spends. That does particularly impact our corporate business since airlines were about 25% of that business. And we have seen a little bit of slowdown in the middle-market part of our corporate business. As I mentioned in my remarks, but I would tell you over the medium to long term we continue to see this area of the middle-market sector of business in the U.S. is a real growth opportunity for us. That's why we made some of the organizational changes we made earlier this year putting together our corporate card business and our open franchise under the leadership of Steve Squeri because that's why I talked a little bit about some of the technology initiatives. Spending, we are doing to strengthen and refine some of our products targeted at that segment. So, we haven't lost any of our enthusiasm for growth opportunities in that segment in the medium to long term, even if we have seen a number of factors that slowed us down this quarter.

Thank you. Good afternoon. You added a lot of new cards this quarter, a substantial increase more than what we expected. Now, what is the cost regarding those cards? Does cost per account gone up? And if not, why not accelerate marketing? Obviously, that would be the best way to grow through Costco in 2017 is to continue to add a substantial number of accounts, so maybe just talk about the quality of the accounts, the cost per account, and whether or not the amount of cards we saw this quarter is sustainable? Thank you.

Good question, Bob. We feel really good and really pleased to see the growth in new accounts. What I would point out is we see growth opportunities across lots of the pieces of our portfolio and the reason you've heard us talk about since earlier this year staying at an elevated level of growth-oriented spending in 2015 is because we wanted to do exactly what you just suggested, which is as we think about the termination of the Costco U.S. contracts sometime in 2016, we think we have a lot of growth opportunities. We think in a significant fixed cost business, it makes a lot of sense to seize as many of the growth opportunities as we can to position ourselves for that Costco change in 2016. When you think about what we're acquiring, we feel really good about the average quality of the accounts we're acquiring. And in terms of the cost of acquiring those accounts and we look at historical trends, we also feel really good that we are spending more absolute dollars. That's what the elevated level of growth spending is all about, and it's being reflected in a much higher level of new account cards acquired, and the average cost is pretty similar to what we've historically experienced. So I suppose the other part of your question was why don't you do even more? Well, we're always balancing our financial metrics and marketing resources and trying to make trade-offs that we think are optimal for our shareholders. So we believe we're going as aggressively as we can and should be given the range of opportunities. And I would just say we're encouraged by the progress we saw this last quarter.

Thank you. Hi, Jeff. I wanted to ask a question I've gotten from several investors who are wondering whether the quarter's results suggest that you guys are facing a little bit more pressure than you expected earlier in the year. I know you said that the results were in line with your expectations. But I think the reason people are asking is because the 2015 target EPS growth range of $5.20 to $5.35 that you provided implies in the area of I think like 3.5 to kind of -6.5% growth and I think people are viewing that as worse than the flat to slightly negative growth range that you've given previously. I was hoping that maybe you could speak to that?

Well, that’s a good question, Bill. I think as we look at 2015 on the earnings side, the reality is it will come in very much in the range that we originally envisioned. If you go back to February when we first provided an outlook, and I suppose it goes a little bit to how you want to define modestly down. The reason we gave a range, if you go back to the beginning of 2015, is we wanted to make sure in the current environment we're giving ourselves the flexibility to do the right things for the company for the long-term. If you think about the question that Bob just asked, we are pleased by what we saw in the outcome or some of the fruits of the higher levels of spending we did in Q3, and that does suggest to us that we should continue to pursue many of those growth opportunities and stay at a pretty elevated level of spending to do it, and that does drive us probably more towards the modestly down part of our original guidance than the flat part of our guidance. I do want to downplay the fact that as you've seen in the last couple of years, it’s also a tough economic environment. If you go back to January and February as we were putting our plans in place and you look at all the economic forecasts, and we just raise our own plans on the consensus economic forecast, we don't try to say we could forecast better than anybody else. The actual have all come in below what the consensus was earlier this year, and we are used to that. Part of the flexibility in our business model is we've got a lot of leverage to pull, to make sure we can react to that. But that has been a challenging thing for us. Gas prices staying down, it’s been challenging. Foreign exchange getting a little worse. When we first provided an outlook for 2015, the U.S. dollar on a weighted average basis versus the range of currencies that matter to us was probably down around 10%. It’s gone down close to another 10% since then. So all those things are factors, but we're trying to focus on the core underlying things that will really determine the run rate of the company as we get past a range of the challenges facing us in the near term here and we feel pretty good about those trends.

Thank you. Maybe to follow-up on that last question. I guess then as we look forward and you guys talk about returning to growth, how do you define returning to growth and what gives you the confidence that you can achieve this? And I guess how does the Costco portfolio sale affect? I know you cannot really speak to Costco's portfolio sale, but how does that sale factor into the return to growth? And just one final one, how much of the run rate of cost savings from the workforce reduction is actually in this year's number? Thank you.

Finishing right note, Sanjay, that’s a lot of questions. I want to make sure I get them all. So how do we define growth? I guess what I will tell you is that our view of sort of absolute levels of what we believe we can achieve in 2016 has not changed at all since February. So nothing that we have seen that I just talked about in response to Bill's question are things that we don't think are manageable within all of the leverage we have to pull thinking about 2016. Second, when you think about Costco, I'll remind you that when we first back on February 12 provided our two-year financial outlook, we said we were confident that we can achieve the 2016 outlook we've then provided which was a return to positive growth, sort of regardless of what happened with the Costco portfolio. So we still don't know what the outcome is going to be around the portfolio. When we do, we will talk about it publicly quickly. And when we do that will allow us, Sanjay, to be more precise because there's a lot of – there is quite a range of outcomes around the portfolio, and until we know those it’s tough to give you a number. But what I want to come back to is the point I'm trying to make is that the underlying performance - to a positive earnings performance in 2015, so we lost our lights here in. If you think about what the drivers are for next year, well just think about our financial framework. So the co-brand headwinds that we've had all of 2015, 5% was the headwind this quarter and should drop away as you get into 2016. FX for particularly this quarter is a big headwind. Now, I suppose the dollar could move another 10% or 20% over the course of the next four quarters, and if it does that will be headwind for us. But if it doesn’t, you should have an easier compare next year from an FX perspective. You brought up costs; you are correct that in fact when you look at some of the actions that are behind the restructuring charge we took at the end of 2014, many of those savings won't really get to full-year run rate until you get to 2016. I'd also remind you that we said all along that we will be mindful as we think about volume trends and Costco going away about what further steps we can take to make other improvements in our cost structure. So all of those things, Sanjay, to conclude, combined to say my view of what this company can generate in 2016 is really the same today as it was in February when we first provided the guidance. In my view of 2015 is we really have come in within the envelope that we set for ourselves, leaving ourselves enough flexibility to make the right decisions to run the company for the long-term.

Guys, thanks for taking my question. Just a quick clarification. It looks like you restated book value historically; can you just tell us what happened there?

Restated? You might need to help me out, Rick. I am not sure…

When we look back, the book value didn’t tie out to what we had previously, and when we went back and looked at the old numbers there was a difference, is there anything there or are we just screwing something up?

This might be one we need to take off-line. I'm looking around at my colleagues here and we're not quite sure, but let's get to the…

Thanks. Hi, Jeff. I'm wondering could you expand on your comments about enterprise growth and the changes you made. And I guess I really want to understand also with the $91 million impairment charge, is that sort of a one-time item or is that kind of recurring? Because it’s really equal to the FX headwind and the co-brand headwind if it’s not recurring?

Well, so a couple of comments. We are continually looking at all of the choices we have about where we invest our management and financial resources in order to produce the best outcome for our shareholders. And we continually learn from things we try, we continually need to react to the evolving competitive and regulatory environment in which we operate. And so one of the things that we've done over the last quarter is made some different decisions about product strategies and resource allocation around a number of the businesses. As you do that, from a pure accounting perspective, the reality in a company like ours where you are developing a lot of software, and where you capitalize a fair amount of the software, you sometimes end up with things on the balance sheet that relate to products that you are deemphasizing or not going to continue with. One of the examples I did call out in my remarks is we had planned to launch a Siro product in Mexico. That may still be a good idea at some point, but we decided looking around at all of our other opportunities that it’s not something we want to further invest in right now, and that does drive pulling some assets off the balance sheet. So all of that leads you to, this is certainly not a recurring event; this is a one-time charge that is reflective of the decisions that were made this quarter. I would just make the observation that I tried to be pretty clear in my remarks that in the current challenging competitive regulatory and economic environment you will see us continually making changes to the organization. And to where we choose to put resources and that may from time to time drive other kinds of one-time charges or contingencies that won't stop us from doing things we think are in the best interest of long-term value creation for shareholders.

Hi, good afternoon. I just want to touch back on the comments earlier about the average transaction size coming down a little bit. I appreciate the color around gas and airlines. I was just wondering if there is anything else we should be thinking about there as well. For example, in some of the new card acquisitions is that a meaningfully different customer than your current average customer or does something like OptBlue where we are adding a lot of small merchants factor in as well?

Those are all actually really good questions, Cheryl, and would probably answer them with as precise as any of us would like. Now I’d make a couple of points. Our transaction growth has been really consistent over the last couple of years at around that 7% level. What is quite striking in recent quarters is the way the average transaction size is really the trend line has changed. Certainly some of the things we do about our steady efforts to drive more everyday spend you would expect over a long period of time and a gradual rate to have an impact here. But what you really see is quite different, and it’s a little bit more tied in timing to cash prices going down to some of the challenges the airlines have had on the revenue side. In fact, we see the average transaction size coming down across other categories like retail as well. So I have to tell you at this point we’re still spending a lot of time thinking ourselves about just what it all means. I think there is probably a little bit of influence from some of the things we're doing internally, but I think there is a lot of influence from a variety of external factors and what’s going on in the overall very low inflation to so many categories frankly maybe there is inflation in the economy that we are now doing business in.

Yes, hi, I have an actually related question that if we look back over the past three quarters, U.S. card member loan growth has actually outpaced U.S. card service build business growth by 1% to 2%. Historically, we’ve seen kind of the correlation between bill service build business growth really kind of wed your loan growth going forward. Is that a sign, Jeff, that you are kind of shifting on incremental growth towards more of a lend-centric customer base than a spend-centric customer base? And if so, kind of what are the implications for the migration of returns?

That's a good question, Mark. It's important to maintain perspective. Overall, net interest income for American Express constitutes approximately 15% to 20% of our profit and loss, in contrast to our competitors, where this figure ranges from 50% to 90%. Our business model is heavily focused on spending. With the impending loss of the Costco loan portfolio in 2016, we will be losing 20% of the loan portfolio that contributes to net interest income. We believe we have ample time over the next few years to maintain our current contribution from lending to the overall economics of the company. In our U.S. consumer business, and some other sectors, we see opportunities to enhance our performance, as we have historically captured a smaller share of our customers' borrowing behaviors compared to their spending behaviors. We view this as a clear opportunity for growth. This focus has enabled us to consistently increase our loan balances beyond the industry's growth in the U.S. We maintain confidence that we can grow without significantly altering the company's risk profile. Overall, we expect to take some time to recover from the loss of the Costco loan portfolio, but we are excited about the long-term prospects for growing loans in the U.S. at a rate that outpaces the industry while maintaining our risk profile.

Thank you. With interchange caps going into effect this December in Europe, what actions will American Express take to sustain your growth, even though your proprietary business will not be regulated? Your merchant discount rate to be twice as high as MasterCards, which potentially could negatively pressure merchant acceptance?

Good question, David. We said for a while that when you look at the EU regulation, which to remind everyone is that it targeted the semester card and will cap interchange rates. That will put some downward pressure on our discount rates. And frankly, you see that downward pressure even this year. Despite that, I’ll be pretty pleased with our performance in Europe this year and I would point out to you that we have long had in Europe in most countries, varies by country, but in most countries a very significant premium to MasterCard and Visa. So that’s not a new phenomenon. What the Interchange regulation will do is put downward pressure on us, not to go to the points where the Interchange is capped, but put pressure on us to move it down probably to keep the differential more similar. So I think we’ll have to see how this goes. I would tell you that sitting here today, we are pretty pleased by this year’s result and you already see changes in the competitive environment as the number of issuers have announced pullbacks on the products or rewards they are able to offer. And like all of these things, our challenge and opportunity is to try to find ways to mitigate the obvious downside, which will put some downward pressure on our discoveries in Europe, but trying to offset that with saying the word opportunities because they create to perhaps do somethings that others can’t, and at the end of the day I think what the European regulations are really seeking is a competitive and more competitive European environment. Our market shares in most of those countries are quite small, so we would love being more competitive to find ways to grow over time, but both we’ll have to see.

So let me thank you all for joining tonight’s call and Toby do you want to make a few last comments? Sure, thanks Jeff. As part of our commitment to provide investors with the exposure of company leadership, our executives plan to speak at several events in the fourth quarter. Looking ahead to the next few months, American Express Vice Chairman, Steve Squeri plans to present in the Citi Financial Technology conference in New York City on November 10th. Additionally, Jeff Campbell plans to participate in the JPMorgan Financial Technologies and Specialty finance forum in New York on December 2nd. And finally, our Chief Executive Officer Ken Chenault plans to participate in the Goldman Sachs U.S. financial services conference in New York on December 9th. Live audio webcasts of each of these events will be made available to the general public through the American Express investor relations website at ir.americanexpress.com. Thank you again for joining tonight’s call and thank you for your continued interest in American Express. Rochelle, I’ll turn it back over to you.