American Express Company (AXP) — Q4 2015 Earnings Call Transcript

Thanks so much. 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 fourth 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 Ken Chenault, Chairman and Chief Executive Officer and will be joined by Jeff Campbell, Executive Vice President and Chief Financial Officer. Once they complete their remarks, we will move to a Q&A session. With that, let me turn the discussion over to Ken.

Thanks, Toby and thanks everyone for joining us this afternoon. We have a lot to cover with you today, including a review of our fourth quarter and an update on the Costco portfolio sale, and our outlook for 2016 and 2017. I'm joining the call today as I thought it was important to share my thoughts on the financial outlook and the evolving operating environment. Before Jeff begins, let me acknowledge that the performance we're discussing today is not what we or you are accustomed to see from American Express, and that we are taking significant actions to change the trajectory of our business going forward. During our remarks, we'll address three main questions. Why has our view of 2016 and 2017 changed? What are we doing about it? Why are we confident in our ability to grow over the moderate to long-term? So with that, let me turn it over to Jeff.

Well, thanks and good afternoon everyone. To answer the question Ken just posed, I'm going to start by explaining our 2015 results, how they've impacted our view of the future, and how they reflect the actions we are taking. I'll also acknowledge upfront that across all the periods we're discussing, there are a large number of items adding complexity to our results. We've provided some normalizations to help you better understand the underlying performance trends. I'll start on Page 2. Our fourth quarter and full year performance reflected the strength and the headwinds that we've been managing throughout 2015 versus the prior year on a reported basis the billings were up 2% for both the quarter and the prior year. Adjusted for FX, billings growth was 5% during Q4, which was consistent with the prior quarter and slightly below the full year growth rate as billings did decelerate modestly during the second half of the year. During the quarter, revenues were down 8% year-over-year and were impacted by the stronger U.S. dollar and the gain from the sale of our investment in Concur during the prior year. Excluding FX and the Concur gain, adjusted revenue growth was relatively consistent sequentially at 4% during the quarter. This was also in line with our adjusted full year performance of 4%. Earnings per share are $0.89 in the quarter and $5.05 for the year, and included a charge in our Enterprise Growth business, which was driven primarily by the impairment of goodwill and technology together with some restructuring charges. Excluding this charge, adjusted EPS would have been $1.23 in the fourth quarter and $5.38 for the full year, down 3% from last year’s EPS of $5.56, which did include a net gain of about $0.10 on the global business travel and Concur transactions. This performance is slightly above the high-end of the earnings range we provided on the Q3 earnings call, with the favorability primarily driven by our continued focus on operating expenses. In terms of key drivers for the year, our performance continued to reflect healthy loan growth, strong card acquisitions, excellent credit performance, disciplined operating expense controls, and the benefits of our strong capital position. In particular, the accelerated new card acquisitions, loan growth, and expense control all stemmed from actions we took in late-2014 and throughout 2015, as it became clear that the environment was evolving and all these actions should further help us in 2016 and beyond. But these positives were challenged by several factors. First, the cumulative impact from the early renewals of our co-brand relationships with Delta, Starwood, British Airways, Cathay Pacific, and Iberia, along with the end of our relationship with Costco in Canada, reduced EPS in the quarter and the year by approximately 5%. So we are done lapping these changes as we enter 2016. Second, the U.S. dollar continued to strengthen as the year progressed, reducing EPS by another approximately 3% to 4% for both the quarter and the year. At current rates, the dollar will now represent a headwind for us as we enter 2016. Third, our decision to increase spending on growth initiatives for the year, remaining at the elevated levels we were at in 2014 further pressured our earnings in 2015 and we now intend to stay at these levels throughout 2016, before returning to lower levels in 2017. And last, the economic, regulatory, and competitive environments all became even more challenging as the year progressed. The combination of these factors resulted in our billings and revenue growth rates being fairly steady throughout the year, whereas we had expected to see a sequential strengthening. Despite these challenges, we leveraged our strong capital position to provide significant returns to shareholders and again returned over $5 billion of capital through buybacks and dividends during 2015, which reduced our average share count by 5%. These results also brought our reported return on equity for the period ending December 31st to 24%, excluding the enterprise growth charge, our adjusted ROE was 26% to slightly above our target and illustrates the continued strength of our business operations. Let’s now go through the components of results beginning with Billed business performance by region and segment which is on Slides 3 and 4. Billed business growth was 5% on an FX adjusted basis during the fourth quarter, consistent with Q3 and below the full year number of 6%. Overall, our billings growth rate decelerated modestly during 2015 while we had anticipated a sequential strengthening. Although, this is disappointing, we did see positive momentum in certain segments. International performance excluding Canada continued to be strong with volumes up 11% on an FX adjusted basis versus the prior year during Q4. I’d note that Costco began accepting other network products in its Canadian warehouses during Q4 2014 in advance of the termination of our relationship with them as of the end of 2014. Therefore, the drag on our ICS growth rate from Canada was smaller this quarter and we will fully lap this impact during the first quarter of 2016. GNS remained our fastest-growing segment with volumes increasing 14% versus the prior year on an FX adjusted basis powered by continued strong performance in China, Korea, and Japan. In the USCS segment, billings growth remained consistent sequentially 5% despite further softening in billings on the Costco co-brand product, where volumes this quarter dropped more significantly versus the prior year. I’d also note that lower gas prices continue to be a drag on USCS growth as average prices were down 24% versus the prior year. GCS billed business growth continued to slow and volumes were flat versus the prior year on an FX adjusted basis during the fourth quarter. Performance continues to be impacted by lower airline volumes in a generally cautious corporate spending environment. Looking forward into 2016, we expect to see a modest uptick in billings growth rates beginning in the first quarter as we lap some of the headwinds we faced in early 2015 and as our initiatives to drive growth have more impact. Obviously, our billings growth rates during the second half of the year will be impacted by the end of our relationship with Costco in the U.S. around mid-year. Turning to loan performance on Slide 5, loans were down 17% on a reported basis, but this is entirely related to the reclassification of a portion of our loans to held-for-sale effective December 1st. We now expect the sale of the JetBlue loan portfolio to occur during Q1 and I'll provide more details on the status of our Costco portfolio sale discussions later in my remarks. Excluding the held-for-sale portfolios from the prior year, worldwide loans were up 7% and U.S. loans were up 10% versus the prior year. Excluding the negative impact of FX and Canadian loan balances, international loan growth also remained strong at 10% during Q4. So we are pleased with the underlying trends in loan growth and that our increased investments and efforts to grow loans since earlier 2015 are already having an impact. Looking forward, we expect to see strong growth in loans held for investment and continue to believe that there are opportunities to increase our share of lending without significantly changing the overall risk profile of the Company. I'll also remind you that net interest income this quarter made up only 18% of our total revenues. Even if we continue to grow our loan portfolio at the higher rate you have seen, our overall business model will remain very spend focused given the expected reduction in loans associated with the co-brand relationships which are ending this year. Moving to our revenue performance on Slide 6, reported revenues were down for the full year and quarter driven by the prior year Concur gain and changes in FX. Excluding these items, adjusted revenue growth was 4% during the quarter which was consistent with our full year performance. Looking at our major revenue drivers, discount revenue was down 1% during the quarter, which was relatively consistent with our full year performance. During the quarter, our discount rate declined by 2 basis points versus the prior year driven in part by the continued roll-out of OptBlue. Going forward, we anticipate that our discount rate will decline by a greater amount during 2016 due to the continued expansion of OptBlue, a greater impact from international regulatory changes and continued competitive pressures. Moving to our other primary revenue driver, growth in net interest income remained strong at 9%, which is modestly higher than our full year performance. Performance continues to be driven by strong loan growth. Stepping back while revenue growth did not accelerate sequentially as we anticipated through the year, we were still able to consistently generate adjusted revenue growth of 4% even in a challenging environment. Going forward, subject to FX and economic trends, we believe that our efforts are focused in the right areas to drive acceleration in our revenue growth rate. Turning to credit performance on Slide 7, our provision was down 2% versus the prior year as lending write-off rates remained at lower levels. Our write-off rates remained the lowest among large peer issues. I'd note that the reclassification of a portion of our loans this quarter to held-for-sale had a small impact on provision, but did not significantly change our performance trends or reported credit metrics. Going forward, the continued growth in loans will contribute to an increase in provision as we expected since we first provided our multiyear outlook last year. We also expect to see some upward pressure on our write-off rates due primarily to the seasoning of loans related to new card members. That said, we remain very pleased with our loan growth and believe it is driving healthy economic performance. Moving to expense performance on Slide 8, total expenses were up 1% in the quarter and down 1% for the year, but were influenced by a number of items in both the current and prior year. Overall, we continue to be very disciplined about controlling expenses, but recognize that we will need to be even more aggressive going forward as evidenced by the $1 billion target to reduce our overall cost base announced in today's press release. Looking at the quarter's results, marketing and promotion expenses ramped up to $892 million, which was similar to the prior year as we also had an elevated level of spending during Q4 '14 due to the Concur gain. As we discussed, another one of the key areas of focus for our incremental spending on growth initiatives is driving new card acquisitions. In this context, we are pleased to see that these efforts drove 2.1 million new cards acquired across our U.S. consumer small business and corporate issuing businesses during the current quarter, which remained well above the average level of card acquisitions in prior periods. Now, obviously, this is a very early cycle for our investors and it will take time for the benefits from these new acquisitions to impact our performance. Turning to rewards, expenses were down 5% in the current quarter driven by a $109 million impact in the prior year related to the renewal of our relationship with Delta. Our renewed co-brand relationships continued to have a significant impact on the cost of card member services, which was up approximately 20% versus the prior year during both Q4 and the full year. We will have lapped this as we head into 2016. One last item I’d highlight is the tax rate, which was 38.2% in the quarter and significantly above the full year rate due to the enterprise growth charge, majority of which was not tax deductible. Looking forward into 2016 excluding the impact of discrete items, we believe that our underlying tax rate will be closer to the 34% to 35% range if it's trending to prior to this quarter. While there were a number of items that impacted year-over-year growth in operating expenses, adjusted operating expenses were down 2% for the full year and were up 2% after adjusting for FX. Both of these results are below our 3% operating expense target and in part reflect actions we took at the end of 2014 and throughout 2015 as we observed that the environment was evolving. We have a long track record of taking cost actions when needed and looking forward we plan to take a series of additional aggressive actions which we expect will result in restructuring charges during 2016 and drive benefits in 2017 and beyond. Now shifting to our capital performance on Slide 10. During the current quarter, we returned over 150% of the capital regenerated to shareholders while maintaining our strong capital ratios. During the full year 2015, we returned over $5 billion of capital to shareholders for the second consecutive year and continued to increase our dividend, which is now approximately 60% higher than it was in 2011. Our full year payout ratio of 105% reflects our confidence in the Company’s ability to generate capital while maintaining its financial strength, as well as our ongoing commitment to using that capital strength to create value for our shareholders. So let me now shift to a discussion of our negotiation efforts on the Costco portfolio sale and our 2016 to 2017 financial outlook. As we mentioned in our press release and 8-K last Friday, given the progress on our portfolio sale discussions, we are now reporting the Costco portfolio as held-for-sale in a separate line on our balance sheet. Given this progress and given the importance of the transaction to our 2016 outlook, we have decided to provide a substantive update on the status of the anticipated transaction today. Clearly, since the agreement is not final, the update is subject to change. But we believe an agreement consistent with what I will outline will be signed in the near future. We now expect there to be a sale and for that sale to close around midyear 2016. And we expect that our merchant acceptance agreement will extend through the transaction close. In addition, as you would expect, we will continue to hold the co-brand loans and co-brand card members will also be able to use their cards at any AmEx accepting merchants through the transaction close date. We will be paid a premium on the assets when the transaction closes. The ultimate gain will be determined based on the assets actually sold. But we currently estimate a gain of approximately $1 billion. We have not yet signed a definitive agreement, and given that we are still several months away from the close and the card member borrowing and pay down trends are difficult to predict in this type of transition, the final gain could differ from our estimates. So now that we’ve concluded 2015 and progressed in our portfolio sale discussions, we can provide additional clarity on our 2016 and 2017 EPS outlook. Because year-over-year growth rates during this period will be complicated by the number and timing of the moving pieces in our results, we have focused on the absolute dollar amount of earnings we are targeting in H2. That said, we have not seen volume and revenue growth accelerate as we expected over the past year. And the competitive, economic, and regulatory environment has become more challenging. As a result, we have become more cautious in our outlook and now expect our earnings per share during 2016 to be between $5.40 and $5.70. This now includes a substantial benefit from the portfolio sale gain and the incremental economics associated with the Costco contract extension and also includes the incremental spending on growth initiatives that they are helping fund. This range excludes the impact of any restructuring charges or other contingencies. This is clearly a change in our expectations. I can assure you though that we are acting with a strong sense of urgency and confidence and executing on our plans to accelerate revenue growth and even more aggressively reduce our cost base. To help drive revenue growth, we plan to maintain our spending across a range of business opportunities during 2016 at similarly elevated levels to 2015. I emphasize that while the gain from the portfolio sale will impact us only in the quarter we close the transaction, the increased spending on growth initiatives will occur in all four quarters, resulting in some unevenness in our quarterly performance. On cost, as we moved through 2015 and gained more clarity on the portfolio sale, as well as our revenue growth outlook, it became clear that we needed to accelerate and expand our cost reduction efforts to right-size our cost base with the evolving business environment. As a result, we've launched cost initiatives that are designed to remove $1 billion from our overall cost base, which includes total operating expenses plus marketing and promotion cost by the end of 2017. To put this into perspective, since 2007 our billed business volumes have grown by over 60%, but our adjusted operating expenses are almost flat over that period. We achieved this disciplined cost control by continuously taking actions to increase the overall efficiency of our organization. Looking forward, we determined that those actions were no longer enough and that we needed to be even more aggressive on eliminating cost which is why we are targeting a $1 billion cost reduction. We plan to take actions throughout 2016 to drive these benefits in 2017 and beyond, which we expect to result in restructuring charges this year. So if you step back and think about our 2016 EPS guidance versus 2015, there are several key items impacting the year-over-year results. First, we expect the underlying business will grow based on our financial model of revenue growth which we believe should accelerate to 2015 levels, while with operating expense leverage and capital returns. Second, the portfolio sale gain will be partially used to fund a continued elevated level of spending on growth initiatives. Last, when the Costco volumes go away at midyear, the marginal contribution will fall away immediately, but we will need to maintain certain costs all the way into the first quarter of 2017 to ensure strong customer service. In addition, given the slower than anticipated overall revenue growth we saw in 2015, we will also need to remove more cost to offset the lower revenue which will take some time. Turning to capital, the portfolio sale will increase our capital ratios to a significant reduction in risk-related assets. We plan to leverage this additional capital flexibility to support business building opportunities including growth in the loan portfolio and potential strategic acquisitions. As you're aware, we have been aggressive historically in our capital request through the CCAR process. Consistent with this approach, we plan to consider the opportunity for incremental capital returns related to the portfolio sale as part of our 2016 CCAR submission. Turning to 2017, we’re now targeting to earn at least $5.60 per share. If you step back and think about this versus our 2016 EPS guidance there are again several key items impacting the year-over-year results. First, we expect the underlying business will again grow based on our simple financial model of revenue growth, operating expense leverage and capital returns. Second, we will have to lap the portfolio sale gain along with half year of getting the marginal contribution from the Costco business. Third, our more aggressive cost reduction efforts will be gaining traction, reducing our operating expense versus the 2015 adjusted base of $11.3 billion by at least 3%. And last, our spending on growth initiatives will be lower based on the changes we are making to drive further revenue growth more efficiently. Looking beyond 2017, because there are so many moving pieces in the near-term, it's difficult to project when we might return to our consistent 12% to 15% earnings per share growth range. And we point out however that to achieve our 2017 target of $5.60 per share, the core will have to be growing at a healthy rate and overall, we believe the 12% to 15% EPS growth is still an appropriate long-term target for the organization. We recognize that we're operating in a new reality and we're focused on our plan to increase revenues and substantially reduce our costs. We continue to believe that the strength of our business model will allow us to drive profitable growth. Now let me turn it back over to Ken so he can provide some additional context.

Thank you, Jeff. And now that Jeff has taken you through our financial outlook, let me come back to the questions I set out at the start of the call. Why has our view of 2016 and 2017 changed? What are we doing about it? And why are we confident in our ability to grow over the moderate to long-term? To give context, our performance comes against the backdrop of changes that are reshaping the payments industry. These include a reset in co-brand economics, regulatory and competitive pressure on merchant fees and intense competition for customers. A number of cyclical factors in the broader economy also weighed on our 2015 performance and influenced our outlook for 2016 and 2017. As Jeff said, the economic headwinds we sighted last year including the stronger U.S. dollar and lower gas prices have lasted longer than we previously expected. This is a long list of challenges, longer than we've seen in a number of years, we recognize them, we've been addressing them with a strong sense of urgency and we're making progress on many fronts. Over the past 12 to 18 months, we took decisive actions in the co-brand space, accelerating contract talks with partners. We focused on those where we can earn attractive returns and provide strong customer value, which led us to deals with Delta, Starwood, Cathay Pacific, British Air and Charles Schwab. We contained operating expenses and restructured many areas of our business. Now we’re set to take cost reduction to the next level through our Billion Dollar Improvement program. We ramped up spending on card member acquisition and brought in 7.7 million new cards in the U.S. last year. Our investments here are paying off, and we’re now focused on turning those new accounts into additional volumes. We stepped up investments in our international business with strong results; adjusted billed business rose by 12% last year. We expanded our merchant network, adding more than 1.2 million new merchants globally in the past year, with our OptBlue program we’re continuing our efforts to move toward parity coverage with the other card networks in the U.S. We grew our lending business faster than the market while maintaining our industry-best credit performance. We’ll continue to target new lending prospects and deepen relationships with current customers. We expanded our digital capabilities with new apps and partnerships to better serve our customers. We streamlined our management structure, creating integrated consumer, commercial and merchant teams to accelerate growth. And taking advantage of our financial strength, we’ve returned more than $5 billion to our shareholders last year. Although, 2015 was challenging, we did accomplish a lot. However, let me be clear, we need to accelerate our efforts and we have a plan to do just that. It includes three priorities; accelerate revenue growth; reduce our expense base and optimize our investments; and continue to use our capital strength to create value for shareholders.

Let me start with expenses and give you a little more context. In 2013, we set a goal to limit OpEx growth to 3% or less. We beat that goal every year since then. To do this, we took a number of restructuring actions that provided benefits in 2015 and will continue to aid us in 2016. The plan we announced today is a major step up from there. It targets reducing our overall cost base by $1 billion by the end of 2017. Along the way, we intend to see operating expenses decline by at least 3% from our 2015 base in 2017. And we expect to see the full benefit in our run rate by the beginning of 2018. This will involve restructuring actions to streamline the Company starting in the first quarter of this year. I’ve assigned our Vice Chairman, Steve Squeri to lead the effort. He’ll work with me and our senior leaders in every area of our business to ensure we move quickly and meet our goals. Steve is one of our most accomplished leaders. He’s been at the forefront of campaigning our operating expenses over the past several years and has an outstanding track record of making the organizations he’s led more efficient and more effective. As this new effort advances, we’ll be taking actions to reduce costs in a thoughtful way, without compromising our ability to serve our customers, meet our compliance obligations, and grow the business. We have a strong history of meeting our reengineering commitments and I am confident we’ll do it again. At the same time, we’re also focused on optimizing our investments. We’ll continue to use Big Data analytics to improve the way we evaluate, prioritize and execute our investment opportunities. We’ll gain efficiencies from our new management structure and we’ll stop certain initiatives where we’re not seeing results or a clear path to results just as we did by refocusing on our price growth, using our investment dollars more efficiently should help us as we move toward a lower level of investment spending in 2017. As we work to accelerate revenues, we’ll be focused on the opportunity I cited earlier. We’ll invest to grow our card member base and merchant network, deepen customer relationships through lending and rewards, increase our international presence, grow our commercial payments business, and develop newer adjacent opportunities like our Loyalty Coalition business. In addition to organic growth, we’ll continue to explore opportunities to grow through acquisitions. Even with the challenges we faced in 2015, we continue to see underlying growth in the business. Adjusted revenues rose 4% for the year and we’re confident that we can improve upon this performance. We have a tremendous set of assets to draw upon; our trusted brand, financial strength, the advantages of our closed loop, world-class customer service, and our proven ability to innovate. Our integrated payments model runs about $1 trillion in spending through our closed loop each year. That rich data enables us to create value for card members and build the business for our merchant partners. This is a major advantage and that’s one reason why other card issuers are trying to cobble together a closed loop on their own despite only having a portion of the essential data. We're not simply looking to do a better job of processing payments, we're focused on using our relationships, technology, and data to better serve our customers and open up commerce opportunities for our partners.

As the boundaries between online and offline blur, I believe our business model puts us in a great position to benefit from the convergence of payments and commerce. We have a deep and experienced management team to guide us forward. They've been tested by major challenges many times over the years and our Company has always emerged stronger. You'll hear more about our plans to drive growth from Steve Squeri, Anré Williams and Doug Buckminster as well as Jeff and me during Investor Day on March 10th. Let me conclude by saying, we recognize that we're operating in a new reality. That's why we're focused on the plan I outlined to increase revenues, reduce costs and optimize our investments. We're confident that we can deal with our near-term challenges, return to growth and position the Company for long-term success.

Thanks Ken. 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 will ask those in the queue to please limit yourselves to just one question. Thank you for your cooperation in this process. With that, the operator will now open up the line for questions, operator.

Yes Jeff, can you confirm in terms of the '16 guidance, do you have an incremental payout ratio assumed in there from the gain or do you not have that built in yet?

Well, I think Don it's fair to say we take our best shot at estimating what we think a reasonable capital return is based on our view of our capital strength and our opportunities. Of course as you well know we'll have to see if the Fed agrees with this, but certainly what we have built in is what we think is a very healthy return on capital.

Right, and then of $1 billion of expense cuts, clearly the Costco is a big piece of the portfolio 20%, you'd expect some cost reduction from that. Can you sort of help us think about how much of the billion is sort of Costco related versus sort of core business?

Well, the way I guess I would answer that Don and I'd remind you Costco is 20% of our loans and look our net interest income is only about 18% of our income statement so they are about 8% of our billings for the co-brand, another 1% for other merchant acceptance. I think the broader way to really think about it is that as Ken said in his remarks, we recognize that there are many things that have changed in the environment we are in and as we have gone through 2015, we have not seen the revenue acceleration that we had expected to see. If you go back to our Investor Day in March, if you go back to the original conference call we did last February when Ken and I talked about our decision to walk away from the Costco agreement, we said we're going to have to see how much other volumes ramp-up and what the pace is of that ramp and exactly what the final outcome is of when the Costco portfolio goes away and in what way, well we have those answers now and when you put all of that together with the evolving environment that we are in we concluded we need to be much more aggressive about all aspects of our cost base. So I don’t think Don you can really attribute it to any one factor, it's the confluence of all the things that Ken and I talked about this afternoon.

Yes, I would just add to what Jeff said is that, one we recognized early that the economics of the co-brand marketplace were changing and certainly that competitor pressures throughout the industry were likely to increase and that's one of the reasons Don that we initiated two separate restructuring initiatives in 2014 which was well before we knew how our Costco negotiations would come out and I think those initiatives certainly helped us to hold OpEx growth below our target again flat in 2015. Then in February as we talked about, we recognized that the termination of the Costco relationship was going to create a short-term volume and revenue gap and that's why we said it's possible that we take an additional restructuring charge. We know what the situation is now, but that also would be based in part on the revenue and volume growth that we saw in other parts of our business. And as Jeff said in his opening remarks, the revenue and billings growth is not accelerated as we would have expected and so we're working to right-size the course of the cost base, there are variable costs that we can take out relatively quickly, but there are fixed costs as well and that's going to take time to transition, but I think that the reengineering plan that we have put in place gives us a lot of confidence that we can realize the cost objectives that we have put in place and we can do it in a way that is not going to impair our ability very importantly to build on the range of growth opportunities that we’ve identified.

Encouraging on the card acquisitions in the quarter and the year, I guess as you’ve been looking at what is kind of the centerpiece of that growth is that coming from premium cards, credit cards, star cards. Could you give us any sense as to what is underlying that growth please?

I think Ken what is very pleasing to us and this goes back to the broad range of opportunities set we have, we clearly are pleased with the growth we’re seeing in premium cards. We also have a very good small business franchise. International, as we’ve said, is performing well for us. Certainly, what we are benefiting from is to have a variety of card growth initiatives. So very frankly it is really across the board that we’re seeing this card acquisition growth. And certainly the point that we have emphasized, it’s one thing to get the cards and we’re excited and we think we’re getting the right types of cards. But we also have a demonstrated track record of in fact generating spending on those cards. And that’s very important. But what I would say the headline would be that we feel very good about the growth that we’re seeing across the franchise.

I guess I want to reconcile the commentary on the weaker revenue growth trajectory into 2016 and 2017. I guess we knew kind of the co-brand reset and the regulatory backdrop and I understand the economic environment a bit weaker. But is it really mainly coming from the competitive environment affecting the business? And maybe you could just specifically talk about what’s changed over the last three to six months that’s affecting your outlook. And then when we think about strategic acquisitions, maybe you can just talk about what you guys are anticipating in terms of size and where exactly an acquisition might fit into the business? Thank you.

Sanjay let me just go back and explain how things have evolved over the last year and then Ken you might want to provide a little broader context. As you think about the course of 2015, we clearly did have an expectation that you would see a significant sequential strengthening in both volumes and revenues. And as we went through the year that clearly did not happen. As we thought about that Sanjay in the context of our forward outlook, at some point when revenues weaken a little bit, as you know we have a financial model that has lots of levers and we can pull those levers at different times. With regards to the end of the year though and looked at a full year revenue growth not being where we thought it would be, we concluded it didn’t make sense to pull the levers as hard as we would have had to pull them to get to where we had hoped to get to in 2016 and ’17. And so we’ve adjusted course. So I think there are many drivers of that slower revenue growth which Ken and I tried to get in our remarks, but Ken you probably want to provide a little broader context.

Yes I would, I think what’s important is while certainly Sanjay the revenues and the volumes are not where we want them to be. I would just go back if we look at the competitive environment and look at the large issuers. We are at least generating an adjusted 4% growth rate against the backdrop of a more challenging economic environment. And as we have continued to maintain over the last several years a intensifying competitive environment, what we’ve seen from our large issuing peers is despite the investments they’re making and the billings growth, they’re not achieving much revenue growth. So our revenue growth is certainly better I’d like it in fact to be accelerated and we believe it will in 2015. I think again the investments that we’ve made in card acquisitions have frankly been performing in general in line with our expectations. Now, we are constantly reviewing our investment alternatives and while allocating those dollars, we believe we can generate the best returns. And I think as we’ve said when some of those initiatives are not working enterprise growth was an example of that. What I’ve also been pleased with is the increasing way that we are using our technology and our data analytics to improve our marketing programs and to make them more effective. So I think there is always some lead time as we have talked about between when we are making investments and when we see the returns, but I think it's not just the signpost that we've seen in card in bringing in new cards, but it's also some of the signposts that we're seeing in some of the services and capabilities that we're providing something like pay with points which we're seeing from a standpoint of young people there is an attraction and engagement to those programs. I think what we've done with some of our digital partnerships I think the progress that we've made with OptBlue and then I go back to what I think has been very strong performance in a range of international markets. So I think that that's the balance.

Can I just kind of summarize, if you think about 2015 Sanjay you had oil that kept going lower, you had FX that kept going against us, the economy was weaker than people thought and you have the cumulative impact of regulation and competition. All that said, as we get into 2016 for all the reasons Ken talked about, our expectation and you should expect to see some acceleration in our volume and revenue growth trends beginning in the first quarter.

Ken we don’t often get you on a call, so I think a long-term question seems appropriate, historically AmEx has been a trade of premium to peers due to its spend centric discount revenue having modeled. Now we're hearing about ramped up pressure on the discount rate and aggressive lending growth against a backdrop. As an industry quickly moving toward giving up interchange economics to drive loan growth and share gains, so my real question is concerning the competitive backdrop and the change in how your competitors are looking at their economics, how can you maintain the model long-term that has traditionally allowed AmEx to be valued at a premium to competitors?

Well I think that's Craig a multi-layered question, so let me hit it on some different pathways as we go forward. I think one is if you look at the issuing side of the business and you focus on the spend-centric versus the lend-centric, I go back to a point that Jeff made in talking about the fourth quarter results and certainly we have said this in the past, if you look at net interest income as a percentage of revenues that range is around 15% to 20%, in the fourth quarter it was 18%. So at the end of the day, the progress that we're making on lending and I should add to that growing better than the industry with industry leading credit performance and I think we're getting good spending on those cards, I think that is working well for us as I look at it on the issuing path. So I feel pretty good about the viability of our spend-centric model. The second thing that I would say is that the nature of just focusing on specific customer segments and just focusing on one geography in the U.S. so what's interesting is when you look at small business and I think you know this in 2014 $4.8 trillion were spent by small businesses, but only 10% of that was on plastic and where we are the market leader in small business. So I think that it's not just the payment industry dynamics that we're competing with in this case, we're competing against cash checks and the fact that only 10% of 4.8 trillion is on plastic suggests there's a strong opportunity, I can do the same thing in middle market. Then I go to international and I look at a range of markets where the penetration against plastic is relatively low and we've actually achieved pretty good growth rates, so 12% in billings growth in a number of markets we're growing faster than the market. So I think when you look at the breadth of our portfolio in consumer, small business, and corporate and the geographic and the fact that we are competing also against cash and checks, that gives me some confidence relative to both the growth and the economics. Now I will absolutely admit that's why I started off, there's a reset on co-brand economics. That certainly is a challenge, but we are not overly dependent on co-brands and we have a range of opportunities that we are pursuing. On the merchant side, let's be very clear Visa and MasterCard have different models at this point in time those models are working pretty well for them, but as I look at our opportunities going forward, I think there is a sea change going on in payments and commerce. So certainly they provide an important part of the payments process, but I think increasingly it's going to be very important to have direct relationships with consumers and merchants and we think direct relationships in the inside, the information that we have from card members and merchants is going to be even more valuable as the convergence of online and offline commerce continues. And so building on the relationships inherent in our integrated model provides the foundation we think to deliver strong value to our shareholders. So I think that that is going to be an important development as we go forward. What I would also say is that when you look at the value that we provide and certainly regulation is playing a role in the merchant business. But I do want to avoid sort of an apples-to-oranges comparison between the Visa and MasterCard rate structure, which is enormously complicated and that varies significantly by product. And I would say that our merchant rates really do reflect the value that we provide. And so the fact that as you know card member spending is 3 to 4 times the amount on Visa and MasterCard, I think Visa has consistently increased their prices in the nation groups and that obviously is a dynamic there. But when I relate that to the importance of how we drive value going forward and direct relationships that we have with the end-user customer and the merchant and the changes in commerce, I think that we have the ability to compete. So you’ve got to look at the breadth of the portfolio and the number of levers that we have to pull.

I guess I was struck by the comment that you expect that in 2017 the level of marketing and rewards could be reduced as you kind of lap some of those investments. You talked about how much that could be. And maybe relate the level of rewards that are on the cards that you’re offering to these new consumers to what your current cost of rewards is?

All right Moshe to be clear rewards were not what I was referencing. What we’re talking about is when you look across the range of things we spend in the market and promotional area and the operating expense area. When we look at our evolving digital acquisition, our evolving use of Big Data, when we look at certain markets, Ken just talked about the breadth of our business model where in fact we’re increasingly finding the use of direct salesforces to be a more effective way to grow than certain of our more traditional marketing and promotional efforts, we absolutely look at that from our marketing and promotional line and see a pathway to moderate down the level of spend without losing any ability to grow revenues. And so as we think about taking the billion dollars out of the cost base, we very consciously have said while the majority of that will certainly come out of operating expenses, there are instances where in fact it makes more economic sense for us to pull down marketing and promotional expenses and actually grow operating expenses. And we want the flexibility to do the right thing to drive revenue growth going forward.

I’d just say two or three things, Jeff, is one what we’ve seen on the operating expense side if I just take small business and middle market what we’ve seen is the expansion of our salesforce the return on that has been substantial even though that adds to OpEx that is a very-very good trade-off that we want to make. But I just come back on the rewards point because there’re different categories of rewards. There is cash back, there is co-brands and the reality is if you look at how we’ve managed the cost for example of membership rewards I think we’ve been able to manage those costs very well. When we look at the engagement of our customers on membership rewards, it’s been very strong. So I mentioned that that segment of 30 and under is very attracted to pay with points. And so the deals we’ve done with Airbnb and Uber are very attractive to that segment. And one of the reasons why is because we have a program that’s over 20 years old and in fact we have a very large number of points in our bank. So I think as with other categories, when you look at rewards, you’ve got a segment and you’ve got to look at the economics of cash back, you’ve got to look at co-brands as we’ve talked about and certainly the margins have been squeezed more in co-brands. But the fact that we have a very broad-based rewards program that we continue to evolve we’ve made more digital, we’ve made more mobile, I think gives us a flexibility in how we manage the overall reward gains of our customers.

Could you clarify for us the core EPS number, what that is for 2016 excluding any gain net of reinvestment? And the reason for the question is that some investors that we've spoken with are stripping out the $1 billion Costco gain or about $0.66 a share to get to kind of what they're calling a core EPS number for 2016. The math I've seen is people are using the midpoint of your 2016 guidance to get to above $4.89 that would imply negative 9% year-over-year growth for '16 and then they're comparing that to kind of what you had previously been guiding to the modestly positive EPS growth, I think consensus of about plus 2%. Maybe could you give a little bit of clarity around that, just so there's not I guess speculation around how much of '16 is being influenced by or I guess inflated by the gain?

I think the way to approach this is that we will use part of the gain to maintain a higher level of growth-oriented spending similar to what we had in 2015. Moshe mentioned how we will methodically reduce that spending through 2017. Initially, we had planned to decrease our growth-oriented spending in 2016, as discussed during our Investor Day last year. However, as we've considered the recent gains and the current state of the company, we've decided that it's better for the long-term to continue investing at that heightened level. Regarding the specific amount, there's some judgment involved. A significant portion of the gain is being allocated to sustain our investments at this higher level, though it might not account for the entirety of the gain. It's likely the majority, but I hesitate to provide a precise figure, as our approach considers a variety of opportunities that we believe align with long-term value for shareholders. We're fully funding those opportunities in 2016, which absorbs a substantial part of the gain.

Yes the point I would make Jeff is that American Express has had a velocity of how we've used gains overtime and where we see growth opportunities and those of you who followed the Company for a while might recall that we had a fairly substantial gain over a multiyear period in the Visa MasterCard private action and so the damages claim was in I think the first amount charged was probably $1 billion I think it was $3 billion in total, I can't remember it exactly, but the reality is that we believe we had a range of opportunities to invest in growing our business middle market was an example and small business and I think what we demonstrated is we used those gains in a very-very productive way. So when I look at what we can do relative to adding new card members, deepening customer relationships from a lending, reward standpoint, we believe even though commercial payments had a slower year in 2015 we see that as an area for investment going forward. So this has been pretty consistent that where we have seen opportunities either to make investments in technology platforms or from a growth standpoint, we've done that and I think we've had a pretty good track record of basically achieving the outcomes that we set out to.

I guess two unrelated questions. Given everything that we're hearing in the economy around corporate, particularly the industrial economy, any material weakness that you're seeing across any sectors and I guess specific for you Ken given the planning you laid out today, can you just talk about how management incentives are aligned with delivering on the plan?

What I would say Ryan is our managements and it start with pay with performance and so what we have is very clear objectives around each of our businesses whether that's consumer, commercial, merchant, international. We obviously factor in what are some of the external factors that we need to weigh, but we have very clear objectives that we have set for the Company overall and for particular businesses. And I think we have a demonstrated track record that we hold our people accountable. So what we have not had is a situation that someone simply says that it will be certainly will be reflected in our compensation is because it's a challenging economic environment that people get a pass that’s not the way we operate as a Company. On the other side, there are different strategic initiatives and particular areas that we’re going to make multiyear investments in and we established certain signposts to judge the effectiveness and the performance of those activities. And it is a very rigorous process that we very consistently review not only as a management team but with our Board and the comp committee in particular on a regular basis throughout the year.

And then just on the other part of the question, around what you’re seeing from corporates any particular sectors of weakness?

I think as we’ve said, hopefully we believe that we’ll see some improvement but I think we’ve been very clear throughout the year that I would say the segments that I’ve been most disappointed in has been the corporate segment. And I think you have heard me say this before through the years that the easiest expense category to cut is T&E that’s the first thing you see. Then you start to see people cutting on technology investments. And we hope that we’ll see some improvements in that in 2016. But as I evaluate 2014, that was an area that in the beginning of the year we started off in a better place, and we saw a pretty consistent decline. And certainly what we’ve seen in my 30 plus years experience with the Company is cut backs in T&E tends to be an early indicator for a slowdown. And I am not sure what will happen going forward. But what we do believe is we’ll see some improvement in the growth in commercial in 2016.

A question I guess Jeff you sounded pretty confident and Ken about accelerating growth in 2016 starting in the first quarter, that’s kind of an unusual statement in an environment where the markets are very jittery about decelerating economic growth. What gives you confidence in seeing accelerating growth in 2016 to build it into your plan and even say that you would see it in the first quarter?

I think I can answer that in two parts. First, regarding the first quarter, while foreign exchange remains a challenge for us, it has eased slightly as we enter this period. We'll have to monitor oil prices, which I thought might stabilize, though they have become a bit more challenging recently. Additionally, looking at our business developments, particularly with Costco Canada and the areas we focused on during 2015, we anticipate seeing some acceleration in year-over-year volume trends as early as the first quarter. As we consider the broader picture for the year, we're certainly aware of the various macroeconomic risks you're concerned about. However, we are working on initiatives aimed at driving revenue growth. Despite 2015 being a year of modest growth, we achieved a 4% revenue growth on an FX-adjusted basis, and we believe we can surpass that in 2016.

And are you counting on an acceleration in GDP growth to get to those numbers?

Yes, of course…

Not no, no.

And then you’re clearly not seeing a deceleration then in the pieces of your business in line with some of the concerns you’re not seeing strong trends necessarily but you’re not seeing, you’re not concerned about the U.S. economy going into recession for example?

Yes, here is what I would say, Bob, is we are not seeing decelerating trends. We’re certainly not seeing in the overall economic catalyst that would say that we think there are going to be improvements in GDP growth. But I think the indicators that and the reasons that Jeff cited, we are really focused on our business model and the reasons why we think we’ll see improved revenue growth. And I would keep it at that. I think as with most people, I don’t think we are of the view that we're going to see a dramatic change in the improvement in the U.S. economy. We hope things hold and I would say we hope certainly I'm not predicting that things will get a little bit better, but I certainly would not bank our plan on seeing a dramatic improvement in GDP growth, that's certainly not an assumption at all that we are making for our plan.

Ken you mentioned the acquisitions of the potential growth strategy earlier in the call and I just wanted to see if you could give us any color on the potential areas of focus. You also mentioned the importance of being closer to the merchant and I was wondering if you've ever looked at the private label space as the potential area of expansion anything closer to merchants through proprietary closed loop card within a merchant at this point? And sort of second question just clarify for '17 is there any anticipated impact in your guidance from Starwood and also from the European interchange reductions? Is that a net positive or a negative in your view? Thanks.

So we’ll split this up, I’ll do Starwood and I’ll have Jeff talk about FX, obviously it would be totally inappropriate for me to go into the terms of the contract. But what I would say that’s very clear is that if you have a group of customers that in fact have relied on getting very strong value for a product, the last thing you want to do is diminish the value of the product. And as I said earlier, and not just from us but if you look at independent card surveys, the SPG product is one of the highest-rated products from a value standpoint. So I think that the Marriott people are very customer centric, very smart, and I don’t think they would have done this deal if the objective was to dilute the value of products to some of their most important customers. So that would just be my perspective, I don’t have any information from them there. But I do know in some of what I have read publicly they have talked about their excitement about having this size of customer and the value that they put on it. And on FX, our comments today are based on the world as it exists today. And so we basically presume all of the increase or strength of the U.S. dollar that you’re seeing today but not that it continues to get worse. On provision, we’ve been very consistent in saying. We see a continued pathway to have loan growth grow at a good clip. Obviously, provision will grow with it. And as we continue to get the cumulative impact of a lot of really good growth in loans then you have a different mix more early tenure folks. And so there is a little bit of seasoning that will also drive these provision rates up a bit. So that’s all built into the commentary we made today.

Great. Well, thanks everybody for joining the call and thank you for your continued interest in American Express.