American Express Company (AXP) — Q2 2016 Earnings Call Transcript

Thanks, Cathy. 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 presentation slides and in the company's reports on file with the Securities and Exchange Commission. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2016 earnings release 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 results through the series of presentation slides. Once Jeff completes his remarks, we will move to a Q&A session. With that, let me turn the discussion over to Jeff.

Thanks, Toby, and good afternoon, everyone. Earnings per share for our second quarter was $2.10 and, as expected, included a number of discrete items, creating some complexity in our results. This complexity included a $1.1 billion pre-tax gain for the sale of the Costco cobrand portfolio, a continued slowdown in Costco-related volumes leading up to the date of the sale, a $232 million restructuring charge related to our ongoing cost reduction efforts, and an elevated level of investment spending. Looking beyond these discrete items, our underlying results for the second quarter were solid and consistent with the outlook we provided at our Investor Day in March for both 2016 and 2017. Excluding the impact from Costco-related volumes and FX, billings and adjusted revenue growth were generally consistent with recent quarters and our Investor Day expectations. On the expense side, provision and rewards were both modestly better than our expectations as write-off rates have remained steady and growth in rewards has been slightly slower than growth in billed business. As expected, marketing and promotion expenses continued to reflect an elevated level of investment spending, while operating expenses were also impacted this quarter by the Costco gain and the restructuring charge, underlying expenses remain well controlled. And during the quarter, we continued to use our capital strength to create value for shareholders including repurchasing $1.7 billion of outstanding shares. We also made progress on our key initiatives to accelerate growth including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage and driving strong momentum across our lending growth initiatives. In addition, we continue to make good progress on the steps needed to reduce our cost base by $1 billion, which drove the $232 million restructuring charge. Beginning now with the summary of our financial results on slide 2. Billed business increased by 3% year-over-year during Q2 and was up 4% versus the prior year on an FX adjusted basis. Revenues decreased by 1% versus the prior year and increased 1% on an FX adjusted basis. As you know, our agreements with Costco ended on June 19 and we completed the portfolio sale and related transition. Primarily due to the Costco related impacts, we did see a sequential decline in billed business and revenue growth rates versus the first quarter in line with our expectations. Net income was up 37% versus the prior year due primarily to the gain from the Costco portfolio sale, the majority of which held to the bottom line during the second quarter. The gain was offset in part by the restructuring charge and the continuation of the elevated level of spending on growth initiatives that we expect to maintain for all four quarters of 2016. As I mentioned, we repurchased over $1.7 billion of shares during the quarter, which when combined with the $1.1 billion we repurchased in Q1 represents our highest ever level of share buybacks over a two quarter period. This higher level of share repurchases helped drive a 7% reduction in average share count versus the prior year. Our net income for the quarter combined with the decline in average shares outstanding, drove EPS of $2.10, which was 48% higher than the prior year. Since we have provided our 2016 EPS outlook excluding restructuring charges, I would point out that our EPS adjusted for the $0.16 restructuring charge was $2.26. These results brought our reported ROE for the 12 months ended June 30 to 26%. Moving now to our performance metrics during Q2, starting with billed business on slide 3. Worldwide FX adjusted billings growth slowed sequentially to 4% during the quarter driven by the decline in Costco-related volumes. Similar to last quarter, we've provided a trend of adjusted worldwide billed business growth rate excluding both Costco cobrand volumes at all merchants and non-cobrand volumes at Costco on slide 4. Billings growth adjusted for Costco and FX was consistent with the prior quarter at 8%, though I would remind you that Q1 included an extra day for leap year. To put this metric into context, I would also remind you that a portion of the new cards acquired in recent quarters relates to Costco cobrand card members who have signed up for a new Amex product. Our efforts around this began early last year and continued until the portfolio sale date. Although the ultimate outcome will play out over time, we are pleased with the demand for our products and the success we've had in putting cards into the hands of former Costco cobrand card members while, of course, closely following the terms of our agreements with Citi and Costco. We expect to capture at least 20% of the out-of-store spending of the former Costco cobrand card members as a result of our acquisition efforts prior to the sale. This spending is helping to provide a lift in the adjusted billings growth rate shown on slide 4 and will create a number of lapping dynamics as we move forward. Stepping back, the sale of the Costco cobrand portfolio highlights the continuing evolution of the competitive landscape and why we have been adapting our strategy to meet the needs of our customers and accelerate growth. We plan to continue to aggressively pursue the full range of growth opportunities that we discussed at our Investor Day in March. These efforts cut across all our businesses, customer segments and geographies, including our initiatives to grow lending, our push towards parity coverage in the U.S., our focus on accelerating growth in small business and middle market, continued strong growth outside the U.S., and of course, our efforts to grow our Consumer business in the U.S. where there will be many complex market dynamics in coming quarters. These efforts all have the common goal of helping to accelerate the company's overall revenue growth which is what we as a management team are focused on. Going forward, while we will provide the adjusted billings and revenue performance of the company for the next four quarters, our focus will be on the outcomes of all of these efforts, not just the narrower performance around former Costco cobrand card members. If we turn now to the segment and regional billings performance on slides 5 and 6, clearly Costco had a significant impact on our U.S. results, as well as on the performance of our USCS and GCS segments. Given that impact, I'll highlight a few of the other significant drivers of our billings performance during the quarter rather than reviewing the regions and segments individually. Lower gas and airline ticket prices remain headwinds across our U.S. businesses and had a similar impact to the prior quarter. International volumes continue to be strong with FX adjusted growth of 10% and performance remained relatively consistent across most regions. To turn to EMEA in particular, given the recent Brexit vote, I would remind you that the EMEA region constituted approximately 10% of our worldwide volumes in Q2. Our U.K. business constitutes 3% to 4% of worldwide billings and it has been growing in excess of 10% in recent quarters. We did see a noticeable slowdown in this growth in the first several days immediately after the Brexit vote. But that growth has since rebounded to its prior strong levels. From an FX perspective, we are relatively hedged naturally against the pound as the U.K. serves as the headquarters for many of our international operations. Like all companies with European operations, we are monitoring the situation closely to determine whether we will need to make any modifications to our business practices. At this point, we continue to operate as usual. Turning now to loan performance on slide 7. Our loans on a GAAP basis were down 13% compared to Q2 2015 reflecting the sales of the Costco and JetBlue cobrand portfolios in the first half of this year. To help understand the underlying trends, on the right side of the slide we had excluded the Costco and JetBlue portfolios from the prior year, and adjusted for FX. Adjusted worldwide loan growth of 13% is slightly higher than the first quarter and continues to outpace the industry. Now similar to my earlier comments on billings, I would point out that a portion of the loan growth in recent quarters comes as a result of our efforts to have former Costco cobrand card members sign up for another Amex product. Taking a step back, we have been pleased by our steady growth in loans for several years now and we continue to see opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing the overall risk profile of the company. Turning now to revenue performance on slide 8. Reported revenues were down 1% but grew by 1% after adjusting for changes in FX. FX-adjusted revenue growth reflected increases in underlying billings and loans, offset by declines in Costco volumes and a decrease in the calculated discount rate. I'll provide some additional details on the drivers of discount rate performance and the impact from Costco in a few minutes. Turning first, though, to the other drivers of revenue growth in the quarter, we saw a 7% increase in card fees versus the prior year. The growth was again driven in part by strong performance within our platinum, gold and delta portfolios and is a clear indication that our value propositions continue to resonate in the marketplace. Net interest income increased by 2% during the quarter, though growth did slow sequentially versus the first quarter due primarily to the sales of the Costco and JetBlue cobrand portfolios, as well as the continued drop-off in Costco loans prior to the portfolio sale date in June. As we disclosed previously, the JetBlue cobrand portfolio constituted between 1% and 2% of our worldwide loan balances. Looking forward, given all the recent uncertainty around forward interest rate expectations, I'd remind you that unlike most other banks, we benefit from lower interest rates and are negatively impacted by rising rates, due primarily to the presence of our charge card portfolio. To turn back now to the drivers of our discount rate and revenue performance, on slide 9 we are again showing the trends in our reported and calculated discount fees. As expected, discount revenue growth during Q2 was impacted by a larger year-over-year decline in the reported discount rate than in Q1, due to the prior-year merchant rebate accrual benefit. On a year-to-date basis, the reported discount rate is down six basis points versus the prior year, which is at the low end of our six basis point to seven basis point expectation from Investor Day. Similar to last quarter, we are also seeing an impact on the discount rate from the continued expansion of OptBlue and merchant negotiations, including those resulting from the regulatory changes in the EU that went into effect late last year. We do expect to see a much smaller drop in the reported discount rate during the second half of the year due to the end of the Costco relationship. Coming back to the calculated discount rate, it was down 10 basis points versus the prior year during Q2, driven in part by the six basis point drop in the reported discount rate. As a reminder, a calculated rate is also influenced by contra-revenue items including cash rebate rewards, corporate client incentives and cobrand partner payments, as well as by growth in our GNS volumes. Growth in cash rebate rewards continues to make up the majority of the year-over-year change, driven primarily by our strong cash rebate card acquisitions and billings growth in recent quarters. I'll note that while this is driving increased contra-revenues, we are seeing an offset in the rewards expense line, which I'll discuss in a little more detail later in my remarks. Moving now to slide 10, we've included our estimate of Costco-related revenues. I'll remind you that there is some judgment involved with this estimate. Based on our analysis, we estimate that Costco-related revenues declined by approximately 32% versus last year during the quarter. Based on this estimate, FX-adjusted revenue growth, excluding Costco, slowed modestly on a sequential basis to 4% in Q2, driven primarily by the prior-year discount rate benefit. On a year-to-date basis, FX-adjusted revenue growth, excluding Costco, has been about 5%, slightly above our exit rate from 2015. As we discussed at Investor Day, adjusted for the impact of Costco, we remain focused on driving revenue growth above the 4% level that we generated in 2015 during the second half of the year. Moving now to credit performance on slide 11. Our lending credit metrics have remained relatively stable on a year-to-date basis and remain best-in-class amongst large issuer peers. Overall, our credit performance is slightly better than our expectation at Investor Day that write-off rates would begin to trend up a little bit, given the seasoning of our loan portfolio. I would note that as part of the portfolio sale, we retained approximately $250 million of loan balances from the Costco cobrand portfolio, which related primarily to cancelled accounts. These accounts are not expected to have a significant impact on provision as they are already reserved for at higher levels. But they did increase our delinquency rate by about 10 basis points during Q2 and will impact our reported write off rate over the next two quarters. Turning to Provision on slide 12, total provision decreased by 1% versus Q2 2015 as you can see on the left side of the slide. But this result reflects the impact of the held for sale accounting changes. Credit costs for the held for sale portfolios were accounted for through a valuation allowance within operating expenses. When you exclude those credit costs for the prior year as we do on the right side of the slide, adjusted provision increased by 13%, which was relatively consistent with loan growth and our Q1 performance. Consistent with our Investor Day comments, we expect that both continued growth in loans as well as some modest upward pressure on our write-off rates due primarily to the seasoning of loans related to new card members, will contribute to an increase in provision going forward. Turning then to expense performance on slide 13. Total expenses decreased by 15% versus the prior year but were impacted by several discrete items. Excluding the Costco portfolio sale gain and the restructuring charge in the current quarter, adjusted total expenses increased by 1% versus the prior year and continued to reflect an elevated level of investment spending. Looking at the individual expense line, M&P was up 4% versus the prior year as we continue to invest in growth initiatives. As we've discussed, new card acquisitions has been one of the key areas of focus for our investments and we were pleased that these efforts drove 2.1 million new card acquisitions across our U.S. issuing businesses this quarter and 3 million on a worldwide basis. As I mentioned, Costco cobrand card members signing up for new cards has been a key driver of the increased acquisitions in recent quarters. But we do expect acquisitions to slow somewhat during the second half of the year. While we had previously expected our total spending on growth initiatives during full year 2016 to be similar to 2015, we now expect to spend at a somewhat higher level. The increased spending will support a range of initiatives across the company including some of the potential opportunities within the U.S. marketplace that I mentioned earlier. Our ultimate investment level will, of course, be driven by the opportunities that we see in the marketplace but we now anticipate that marketing and promotion expenses during 2016 will be at least $200 million above the 2015 level of $3.1 billion. Coming back to the other drivers of expense performance, rewards expense decreased by 2% versus the prior year despite there being a 2% year-over-year increase in proprietary billings. This trend is being driven by a shift in volumes from products that have their rewards costs classified as an expense item, such as Costco cobrand, to products that have rewards recorded as contra-revenue items, such as cash back. Total rewards costs including cash rebates, were up 1% in the current quarter, which is roughly in line with the growth in proprietary billings. While at the smaller expense line, cost of card member services increased by 16% versus the prior year. This line can be a bit volatile quarter-to-quarter due to timing issues but due to increased usage of some of the card member benefits that we've recently added, including new airport clubs and Airline Fee Credits, I would expect it to be up around 10% for the full year. Operating expenses were down 31% versus the prior year but were impacted by both the portfolio sale gain and the restructuring charge. Excluding these items, adjusted operating expenses were flat year-over-year reflecting our strong focus on controlling costs. We feel good about our progress on our effort to reduce our cost base by $1 billion on a run-rate basis by the end of 2017. As a continuing part of that effort, we do expect to incur some additional restructuring charges in future quarters as we continue to roll out our plans, though I'd expect they will be smaller than what we incurred this quarter. We also anticipate that a portion of our increased investment spending will occur in operating expenses over the balance of 2016. Turning last to capital on slide 14. We continued to be pleased with our ability to return excess capital to our shareholders. During the quarter, we finished fully utilizing our 2015 CCAR authorization, repurchasing $6.6 billion of shares over the past five quarters, including $1.7 billion in the second quarter. As you recall, our 2015 CCAR submission included a higher level of net income than our actual performance since it assumed that our relationship with Costco would continue. However, given the performance of our underlying business and the benefits from the Costco portfolio sale, we were still able to fully utilize our CCAR 2015 capacity while maintaining our strong capital ratios. We were also pleased with the 2016 CCAR results, which were released last month, as the Federal Reserve did not object to our CCAR 2016 plan to return up to $4.4 billion in the form of dividends and share repurchases over the next four quarters. These potential payouts are aligned with our Investor Day expectations and will enable us to provide a steady return of capital to our shareholders. As you are all well aware, CCAR continues to be a very complex process. In general, capital plans are governed by the Fed's model, which can have very different results from a bank's own expectations. For example, in the current year, the Fed assumed that our risk-weighted assets would increase in a severe stress scenario despite the loss of the Costco cobrand portfolio. It was very different from our own projections. I'd also highlight that we have the highest ROE amongst all the bank holding companies that go through the CCAR process. In combination with our high payout ratio, this results in a large reduction in capital levels over the CCAR period in the severely adverse scenario. For example, if we pay out 100% of base case net income, our capital ratios would be reduced by well over 50% in a severe stress scenario. Thinking more broadly, the 2016 CCAR results once again highlighted the strength of our business model and balance sheet as we generated the highest net income amongst all bank holding companies in a severe stress scenario and our capital ratios before the impact of capital actions were also in the top quartile. So let me now conclude by stepping away from some of the complexity I just took you through and going back to the key themes in our results and our outlook for the balance of the year. During the quarter, we made progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage, driving momentum on our lending growth initiatives. We also remained focused on our cost reduction efforts and continue to leverage our strong capital position to create value for our shareholders. During the past six months, we have said that our full-year 2016 outlook was for adjusted EPS to be between $5.40 and $5.70. We now believe that full-year 2016 EPS will be at the high end of this range as our year-to-date performance has been better than our original expectations, driven largely by the favorability in our credit and expense performance. As a reminder, this outlook excludes the impact of restructuring charges or other contingencies. Given that we're only halfway through 2016, our outlook for full-year 2017 EPS to be at least $5.60 remains unchanged. We continue to anticipate that earnings will be lower during the second half of 2016 due to the end of our relationship with Costco and the fact that we now expect to invest at higher levels during 2016 than we did in 2015. As we have discussed several times, there is a bit more uncertainty around our second half 2016 assumptions. While we believe that we have taken a balanced approach, we will have an updated view on the complex dynamics within the U.S. consumer marketplace as we progress through the balance of the year. And of course, we will update our guidance at the end of the third quarter. We're focused on our plan to accelerate revenue growth, optimize investments, and substantially reduce our costs. We continue to believe that the strength of our business model will allow us to drive profitable growth. With that, I'll turn it back to Toby, and then we'll take your questions.

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 line for questions. Cathy?

Yes, Jeff. Can you talk a little bit – I mean, you had a benefit from the new Amex cards to the former Costco cobrand cardholders? Is a lot of that in the run rate? Or should we see a continued incremental benefit there? And then also, can you elaborate on what you mean by complex dynamics in the U.S. card market in H2?

So I think the point I'm trying to make, Don, is we were pleased by our efforts over the last, really year-and-a-half to put other Amex products into the hands of the former Costco cobrand card members. And that's why we feel comfortable with my statement that we'd expect to track to retaining over 20% of the out-of-store spending of those card members. So I would say that in the run rate for the most part in the second quarter, it continued to build even as we went through the second quarter and should stay in the run rate, subject to the complex dynamics, which I'll come to in a second. And I mentioned that 20% in the context of the disclosure we're making about our billings and revenue, and for that matter, loan growth rates where we pull Costco out of the prior-year base. Some of the growth does come from the efforts and the success we've had at putting other Amex products in the hands of the Costco cobrand card members. Complex dynamics. When you look at the back half of 2016, it's certainly not news to anyone on this call. It's a very competitive environment right now. And you have many changes that are wrought by the switch from Amex to Citi of the Costco cobrand. You have many other competitors who have launched either new marketing efforts or new products that perhaps are targeted at some of the same types of card members. In our case, we have a range of marketing efforts targeted at lots of consumers and lots of different segments of the consumer world in the U.S., including the fact that the former Costco cobrand card members do just drop into our broader prospect pool at this time. You also for us have some complex dynamics around geographies and certain geographies where the Costco cobrand card members, for example, might have been a more significant part of total Amex card holders. So all of those dynamics are complex. And then if you think about the broader external environment, you have tremendous uncertainty around interest rates. I would point out to you, as we thought about this call, originally thought I might want to talk about the potential of lower rates when you think about the last 24 hours, you have the Fed sort of back-talking about higher ratings. We'll have to see. Certainly, all of the election dynamics here in the U.S., and for that matter the dynamics in the UK and the EU, probably create more uncertainty than we're used to. So I could go on. But I think you probably get the point that there's a lot of different changes going on that just make us a little bit cautious, so we've tried to be very balanced in the outlook that we've given you for the back half of 2016 and what that means for 2017, but we'll have to see where things really come out.

Thanks.

Hi. Good evening.

Hi.

Just wanted to touch base on the loan growth that you highlight on slide seven. Obviously it's on the ex-Costco basis but increasing accelerating growth rate over the last several quarters. Could you just give us a sense as to key drivers there? And how much of this is new account acquisition versus wallet share increase and other key drivers? And what the kind of trajectory is that you're anticipating? Thanks.

I'm just making a few notes here Betsy so I don't forget any parts of the question. I think the first thing that's important to think about is, we now for several years have been steadily growing loans at above industry rates and we've done that while maintaining best-in-class credit metrics and without seeing any significant increase in the credit metrics or changes in our overall risk profile. So this is a continuation of a trend. And that loan growth is coming from many different areas. We have a nice loan portfolio that's been growing steadily in our U.S. small business franchise OPEN. We have a range of consumer products targeted at attracting more of our customers' borrowing behavior. And for us, because traditionally and we talked a lot about this at our Investor Day in March, because traditionally over the last probably five years, six years we have probably underinvested in terms of our efforts to attract the borrowing behaviors of our own card members, both consumer and small business, as well as underinvested in terms of targeting prospects, who from a credit perspective, look just like our customers but are a little bit more revolving-centric. As we have turned our efforts more to those kinds of customers, this is not trying to get more lending growth out of our existing customers, or excuse me, out of customers where we were already tapping into our fair share of their lending behaviors. It's really, how do we tune our efforts to just attract an equivalent lending share to what we already have our customers spend share. So all of those efforts are what have led to the very steady performance you've seen. Now I think it is fair to say this quarter and last quarter you're getting a little bit of an incremental boost that will fade in the next couple of quarters as we have moved some of the lending behaviors that were being done on the Costco cobrand cards onto other Amex products. And since you're looking at an adjusted number there where we pulled all the Costco amount out of the base, that increases that 13% by a little bit. That will fade a little bit, but the broader trajectory which we feel is a very thoughtful outcome of several years of steady effort in this area, we think that outcome will continue for the foreseeable future.

Good afternoon. Thanks for taking my question. Wanted to see if we could get a little more quantification around the elevated expenses you expect for the remainder of this year and what they mean for 2017? And I'm asking this because if we look at the implied EPS for the back half of the year, it looks like it's less than a $1 a quarter. And then it seems like it would be a big leap to get from that to, say, a $1.40 a quarter which is what you need to do to do $5.60 a share in 2017. So just on the elevated expense piece, I know there's a lot of other moving pieces there, but can you help us understand what's elevated this year and might drop off next year?

Yes. That's a really good and I think important question, Chris. So couple of comments. The investment piece to start with, as you point out, we have made a decision that, as we look at all of the complex market dynamics, which I just talked about in response to the last question. We're going to increase somewhat in the second half of the year and increase for full year 2016 over 2015 our overall level of investments. Those investments take many forms. Some of them are pure marketing and acquisitioning investments, some of them are technology investments that are about building capabilities in infrastructure. All of them are targeted at a mixture of very short-term, medium-term and long-term benefits. And as we look at our performance in the first half of the year, where we've done a little bit better on expenses and provision than we expected and revenues are tracking as we expected, we felt very comfortable even going to the higher end of our guidance range in increasing the investments a little bit. Our view of 2017, though has changed in that in 2017 our expectation would be that elevated level absolutely falls away and particularly some of the capability building that we're funding here. Our projects very naturally will fall away. The question I get a lot is gee, how can you consider a more significant decrease in this investment level without thinking it's going to impact your revenue growth. Well, part of the reason is, it's the things like I just described where these are projects that we very discreetly decided to fund and they will naturally fall away. The other thing to keep in mind is that we feel we are making very good progress on our efforts to pull $1 billion out of the cost base on a run-rate basis by the end of 2017. As we have said all along, sometimes to get to those ultimate positive outcomes, we actually have to spend some money, right? If you're automating things for a little while you have to spend the money on automation before you can put the automation into place and take the costs out. If you're right-shoring things you often have to have duplicate teams in place for a little while until everything is running smoothly. In the back half of 2016 you have some of those added costs actually working against us. We are very comfortable, though, with the tract and the line of sight we have into 2017 and feel very good about the progress we're making on costs. So that will be a significant benefit in 2017 versus what you will see in the back half of 2016. So those are the components that go into what we mean when we say we're at an elevated level of investments, going to elevate them a little bit more. If that helps you a little bit think about the big moving pieces that help you get in the back half of 2016 to the EPS guidance we have given you for 2017, which as we sit here today I remain very comfortable with.

Thanks very much. Jeff, maybe just to understand the – you made several comments about trends but can you just help me think through how I should anticipate billed business growth trends across the three business lines for the back half?

Well, let me focus on the global consumer versus the global B2B segment. For the most part I would think of GMS, Eric, is just reflecting the tire company. And I think the nuances to think about here and I'll talk about all of these numbers, taking Costco out of the base because it does affect both segments. In the consumer segment, you have had the biggest benefit from the phenomenon I described about the success we've had putting other Amex products into the hands of Costco cobrand card members. As we finish lapping that, you will actually see some just due to that effect alone, modest decline in the U.S. consumer rate. That's something we anticipate and it's consistent with all the plans we've laid out. Going against that, you have the efforts we have across a broad range of products to drive more billings through a range of efforts in the consumer segment. In the B2B segment, you continue as we talked about initially at Investor Day to have the tail of a couple of different segments of the market. We are seeing really nice growth in the small business and middle market area. And in fact, I would expect to see some acceleration in the middle market area in particular as we get into the back half of the year. The wild card is in the largest corporate clients where, as we pointed out at our Investor Day, that is not particularly a growth segment for us. And that continues to be a tough segment. I don't think there's many of the Fortune 500 who are going on calls like we're having right now and talking about growing their T&E budgets. And for us in that large segment, we predominantly still have a T&E franchise. So we'll have to see how all those things play out. And, of course, you have the whole range of external factors that I talked about earlier that are a little harder to handicap. But those are a couple of discrete things that I would watch for.

Thanks, Jeff. And as I recall, did you disclose that about 80% of the Costco volume was outside the store? Is that figure about right?

So on the Costco cobrand spending, 70% of that spending was outside the store.

70%.

Correct.

Great. Thanks. Jeff, I wonder if you could kind of come back a little on talking about the things that you're going be doing actively in terms of expenses for 2017. I mean you talked about $1 billion worth of savings kind of run-rated by the end of 2017. But now it sounds like there's a going be some amount of spending in 2016 that won't be there. Can you talk a little bit about that? And maybe you talked about those projects, but how you would think about, in terms of, obviously, marketing to the existing Costco customers is probably somewhat easier. You already know who they are and where they live. Like how do you think about marketing in terms of that for 2017?

Well, kind of two questions there, Moshe. Let me take them maybe in reverse order. On marketing to Costco cobrand card members, I would remind you that we sold the portfolio. And it's very different from our situation in Canada. So we no longer have any access, or for that matter, knowledge from a marketing perspective, of the former Costco cobrand card members unless they happen to have another Amex card. Now, those people drop anonymously into the broader U.S. prospect pool that we constantly, as our competitors are trying to target with attractive offers, attractive products. But we can absolutely not do any direct marketing to those people at this point. On the expense side, the way I think about it is that there's a couple of big components of the expenses. So people costs are the largest single components, and the now $315 million or so of restructuring charges that we've taken will get at a big chunk of the people savings. When you look at those restructuring charges, for the most part, those are for exits that occur over the course of 2016, with the overwhelming majority of them done by the end of 2016. But you don't necessarily really start seeing the savings until 2017. You have other components of costs. So there's a big professional fees component where we think we can get some savings, one of which is in the area of application development where we do a lot of out-source work. Part of the elevated spending or elevated investment spending that we've been talking about is a lot of technological or technology development work that we think is going be really valuable long-term. That's the kind of stuff where we can actually dial it up even as we go through the back half of 2016 and very – roughly dial it down in 2017. Still you have a variety of other fees, renegotiated contracts, travel, all those kinds of things that constitute the remainder of the $1 billion. So while there are some savings that will begin to creep into the back half of 2017, mostly on the people side, 2016, excuse me. To a great extent, those are offset by some of the other costs I talked about earlier where we sometimes have to spend money to position ourselves to save it in 2017. So the net of all that is I feel very good about the progress we're making on the 2017 target, and we're working real hard to see just how much of it we can get quickly and early in 2017, and we'll obviously need to give you updates on that in future quarters. But I feel really good about the progress.

Thanks very much. Jeff, maybe just to understand the – you made several comments about trends but can you just help me think through how I should anticipate billed business growth trends across the three business lines for the back half?

Well, let me focus on the global consumer versus the global B2B segment. For the most part I would think of GMS, Eric, is just reflecting the tire company. And I think the nuances to think about here and I'll talk about all of these numbers, taking Costco out of the base because it does affect both segments. In the consumer segment, you have had the biggest benefit from the phenomenon I described about the success we've had putting other Amex products into the hands of Costco cobrand card members. As we finish lapping that, you will actually see some just due to that effect alone, modest decline in the U.S. consumer rate. That's something we anticipate, and it's consistent with all the plans we've laid out. Going against that, you have the efforts we have across a broad range of products to drive more billings through a range of efforts in the consumer segment. In the B2B segment, you continue as we talked about initially at Investor Day to have the tail of a couple of different segments of the market. We are seeing really nice growth in the small business and middle market area. And in fact, I would expect to see some acceleration in the middle market area in particular as we get into the back half of the year. The wild card is in the largest corporate clients where, as we pointed out at our Investor Day, that is not particularly a growth segment for us. And that continues to be a tough segment. I don't think there's many of the Fortune 500 who are going on calls like we're having right now and talking about growing their T&E budgets. And for us in that large segment, we predominantly still have a T&E franchise. So we'll have to see how all those things play out. And, of course, you have the whole range of external factors that I talked about earlier that are a little harder to handicap. But those are a couple of discrete things that I would watch for.

Thanks, Jeff. And as I recall, did you disclose that about 80% of the Costco volume was outside the store? Is that figure about right?

So on the Costco cobrand spending, 70% of that spending was outside the store.

Great. Thanks. Jeff, I wonder if you could kind of come back a little on talking about the things that you're going be doing actively in terms of expenses for 2017. I mean you talked about $1 billion worth of savings kind of run-rated by the end of 2017. But now it sounds like there's a going to be some amount of spending in 2016 that won't be there. Can you talk a little bit about that? And maybe you talked about those projects, but how you would think about, in terms of, obviously, marketing to the existing Costco customers is probably somewhat easier. You already know who they are and where they live. Like how do you think about marketing in terms of that for 2017?

Well, kind of two questions there, Moshe. Let me take them maybe in reverse order. On marketing to Costco cobrand card members, I would remind you that we sold the portfolio. And it's very different from our situation in Canada. So we no longer have any access, or for that matter, knowledge from a marketing perspective, of the former Costco cobrand card members unless they happen to have another Amex card. Now, those people drop anonymously into the broader U.S. prospect pool that we constantly, as our competitors are trying to target with attractive offers, attractive products. But we can absolutely not do any direct marketing to those people at this point. On the expense side, the way I think about it is that there's a couple of big components of the expenses. So people costs are the largest single components, and the now $315 million or so of restructuring charges that we've taken will get at a big chunk of the people savings. When you look at those restructuring charges, for the most part, those are for exits that occur over the course of 2016, with the overwhelming majority of them done by the end of 2016. But you don't necessarily really start seeing the savings until 2017. You have other components of costs. So there's a big professional fees component where we think we can get some savings, one of which is in the area of application development where we do a lot of out-source work. Part of the elevated spending or elevated investment spending that we've been talking about is a lot of technological or technology development work that we think is going be really valuable long-term. That's the kind of stuff where we can actually dial it up even as we go through the back half of 2016 and very – roughly dial it down in 2017. Still you have a variety of other fees, renegotiated contracts, travel, all those kinds of things that constitute the remainder of the $1 billion. So while there are some savings that will begin to creep into the back half of 2017, mostly on the people side, 2016, excuse me. To a great extent, those are offset by some of the other costs I talked about earlier where we sometimes have to spend money to position ourselves to save it in 2017. So the net of all that is I feel very good about the progress we're making on the 2017 target, and we're working real hard to see just how much of it we can get quickly and early in 2017, and we'll obviously need to give you updates on that in future quarters. But I feel really good about the progress.

Thanks very much. Jeff, maybe just to understand the – you made several comments about trends but can you just help me think through how I should anticipate billed business growth trends across the three business lines for the back half?

Well, let me focus on the global consumer versus the global B2B segment. For the most part I would think of GMS, Eric, is just reflecting the tire company. And I think the nuances to think about here and I'll talk about all of these numbers, taking Costco out of the base because it does affect both segments. In the consumer segment, you have had the biggest benefit from the phenomenon I described about the success we've had putting other Amex products into the hands of Costco cobrand card members. As we finish lapping that, you will actually see some just due to that effect alone, modest decline in the U.S. consumer rate. That's something we anticipate, and it's consistent with all the plans we've laid out. Going against that, you have the efforts we have across a broad range of products to drive more billings through a range of efforts in the consumer segment. In the B2B segment, you continue as we talked about initially at Investor Day to have the tail of a couple of different segments of the market. We are seeing really nice growth in the small business and middle market area. And in fact, I would expect to see some acceleration in the middle market area in particular as we get into the back half of the year. The wild card is in the largest corporate clients where, as we pointed out at our Investor Day, that is not particularly a growth segment for us. And that continues to be a tough segment. I don't think there's many of the Fortune 500 who are going on calls like we're having right now and talking about growing their T&E budgets. And for us in that large segment, we predominantly still have a T&E franchise. So we'll have to see how all those things play out. And, of course, you have the whole range of external factors that I talked about earlier that are a little harder to handicap. But those are a couple of discrete things that I would watch for.

Thanks, Jeff. And as I recall, did you disclose that about 80% of the Costco volume was outside the store? Is that figure about right?

So on the Costco cobrand spending, 70% of that spending was outside the store.

Great. Thanks. Jeff, I wonder if you could kind of come back a little on talking about the things that you're going be doing actively in terms of expenses for 2017. I mean you talked about $1 billion worth of savings kind of run-rated by the end of 2017. But now it sounds like there's a going be some amount of spending in 2016 that won't be there. Can you talk a little bit about that? And maybe you talked about those projects, but how you would think about, in terms of, obviously, marketing to the existing Costco customers is probably somewhat easier. You already know who they are and where they live. Like how do you think about marketing in terms of that for 2017?

Well, kind of two questions there, Moshe. Let me take them maybe in reverse order. On marketing to Costco cobrand card members, I would remind you that we sold the portfolio. And it's very different from our situation in Canada. So we no longer have any access, or for that matter, knowledge from a marketing perspective, of the former Costco cobrand card members unless they happen to have another Amex card. Now, those people drop anonymously into the broader U.S. prospect pool that we constantly, as our competitors are trying to target with attractive offers, attractive products. But we can absolutely not do any direct marketing to those people at this point. On the expense side, the way I think about it is that there's a couple of big components of the expenses. So people costs are the largest single components, and the now $315 million or so of restructuring charges that we've taken will get at a big chunk of the people savings. When you look at those restructuring charges, for the most part, those are for exits that occur over the course of 2016, with the overwhelming majority of them done by the end of 2016. But you don't necessarily really start seeing the savings until 2017. You have other components of costs. So there's a big professional fees component where we think we can get some savings, one of which is in the area of application development where we do a lot of out-source work. Part of the elevated spending or elevated investment spending that we've been talking about is a lot of technological or technology development work that we think is going to be really valuable long-term. That's the kind of stuff where we can actually dial it up even as we go through the back half of 2016 and very – roughly dial it down in 2017. Still you have a variety of other fees, renegotiated contracts, travel, all those kinds of things that constitute the remainder of the $1 billion. So while there are some savings that will begin to creep into the back half of 2017, mostly on the people side, 2016, excuse me. To a great extent, those are offset by some of the other costs I talked about earlier where we sometimes have to spend money to position ourselves to save it in 2017. So the net of all that is I feel very good about the progress we're making on the 2017 target, and we're working real hard to see just how much of it we can get quickly and early in 2017, and we'll obviously need to give you updates on that in future quarters. But I feel really good about the progress.

Thanks very much. Jeff, maybe just to understand the – you made several comments about trends but can you just help me think through how I should anticipate billed business growth trends across the three business lines for the back half?

Well, let me focus on the global consumer versus the global B2B segment. For the most part I would think of GMS, Eric, is just reflecting the tire company. And I think the nuances to think about here and I'll talk about all of these numbers, taking Costco out of the base because it does affect both segments. In the consumer segment, you have had the biggest benefit from the phenomenon I described about the success we've had putting other Amex products into the hands of Costco cobrand card members. As we finish lapping that, you will actually see some just due to that effect alone, modest decline in the U.S. consumer rate. That's something we anticipate, and it's consistent with all the plans we've laid out. Going against that, you have the efforts we have across a broad range of products to drive more billings through a range of efforts in the consumer segment. In the B2B segment, you continue as we talked about initially at Investor Day to have the tail of a couple of different segments of the market. We are seeing really nice growth in the small business and middle market area. And in fact, I would expect to see some acceleration in the middle market area in particular as we get into the back half of the year. The wild card is in the largest corporate clients where, as we pointed out at our Investor Day, that is not particularly a growth segment for us. And that continues to be a tough segment. I don't think there's many of the Fortune 500 who are going on calls like we're having right now and talking about growing their T&E budgets. And for us in that large segment, we predominantly still have a T&E franchise. So we'll have to see how all those things play out. And, of course, you have the whole range of external factors that I talked about earlier that are a little harder to handicap. But those are a couple of discrete things that I would watch for.

Thanks, everyone, for joining the call. We appreciate your time and interest in American Express.