American Express Company (AXP) Q1 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the American Express First Quarter 2012 Earnings Release. [Operator Instructions] As a reminder, today's call is being recorded. I will now like to turn the conference over to Rick Petrino. Please go ahead.

Thank you. Welcome, and thanks, everyone, for joining today's call. Before I turn it over to Dan Henry, I want to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those forward-looking statements, including the company's financial and other goals, 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 2010 10-K report already on file with the SEC. In the first quarter 2012 earnings release and earnings supplement, as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com. We have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Dan Henry, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q&A. With that, let me turn the discussion over to Dan.

Okay. Thanks, Rick. So I will start on Slide 2. So revenue net of interest expense for the quarter was $7.6 billion. That's 8% higher than the first quarter of last year. On an FX-adjusted basis, revenue increased 9%. Net income came in at $1,256,000,000. Diluted EPS is $1.07, that's up 10% from last year. And our return on average equity is at 27%. The decrease in shares outstanding that you see is a reflection of our share buyback program. Moving to Slide 3, which are our metric performance, billed business came in at $211 billion. That's an increase of 12% year-over-year and 13% on an FX-adjusted basis. So this year, actually, we have a benefit, we think, from leap year, an extra day. So I would characterize our growth as generally in line with the fourth quarter of 2011, which had growth of about 11%. Cards-in-force is up to 98 million. That's a 7% increase from last year. Cards issued by GNS partners grew 16%. Proprietary cards grew 2%, and so we're up about 1.3 million cards compared to the fourth quarter of 2011. Average basic card member spending is up 10%. That's continued high engagement by our customers. Loans came in at $60 billion. That's up 4% as it's growing gradually, although I note that spending on lending products is growing faster. And travel sales are up modestly. If we move to Slide 4, so this is billed business growth by region. So each region is up modestly, reflecting, I think, again the fact that we had a leap year this year. Excluding that, the growth rates by region are reasonably stable with the fourth quarter. Europe had a growth rate of 6% in this first quarter. In Northern Europe, the growth rates were higher. Germany, for instance,…

[Operator Instructions] We'll go to the first line of Nomura.

It's Brian Foran. I wonder if you could -- maybe just given how things are evolving in Europe, any color or thoughts you have on more recent customer behavior there? Are you still seeing the improvement you saw hold up or are you seeing starting to weaken again?

So the fourth quarter, we had loan growth -- not loan growth, billed business growth that was kind of in the mid-single digits. What we're seeing then is that we had stronger growth in the northern part of Europe. We had somewhat slower growth in the southern part of Europe. The U.K. was performing more in line with what we saw in Northern Europe. Actually, that trend has continued into the first quarter. So we had overall growth in Europe of 6%, stronger in Northern Europe and the U.K., a little less so in the south. So I would say the trend in the first quarter was very comparable to what we saw in the fourth quarter of last year. So some stabilization.

I guess I don't know if it's something you can comment on, but do all those comments carry through to April as well or things evolve since then?

Yes, absolutely the last couple of weeks, so we're not going to comment on April at this time.

Okay, fair enough. And then the follow-up I had was, I realized Charge Card performance is very strong in a historical context, but just any more color on why loss rates are trending up over the past 4 quarters? Anything you're observing in the data?

Yes. So the overall growth rate is 12%. We actually have very similar growth rates in lending and charge, so they both are seeing very strong growth. The tick up that we saw up to 2.3% in the first quarter this year is really a pretty minor tick up, and at 2.3% represents very low levels compared to what we've historically seen. We did notice that and we took a close look at delinquencies. And so delinquencies this quarter stand at 1.9%. And that's exactly the same delinquency rate that we had in the fourth quarter and very comparable to what we had last year. So we don't have a concern about where write-offs are. In fact, it's our expectation, as we grow the business, that we would expect to see some tick up over time in the write-off rates, both potentially in charge and in lending. But when that will happen will be dependent on the growth in the business and customer behavior. So bottom line is that tick up is not a concern to me.

And we'll go to the line of Citigroup.

Moving on to the regulatory environment, I mean, clearly, your fundamentals are great. If you could just talk a little bit about maybe the CFPB and what kind of interactions you've had with them and what they might -- where, if any, concerns you might have from the regulatory side?

Well, we started to engage with the CFPB. They are, I think, on site at this juncture. They're just starting their work. So I think it's going to be some time before we have findings from them or reports from them. The findings that the FDIC has had, which we disclosed in the 10-K, they have shared those with the CFPB. We have not heard back from them on any reaction to that. They're a new regulator, so like everyone else, we're going to have to wait and see exactly what their observations are. But we have started to engage with them. We have a number of new regulators from [indiscernible] the bank holding company. The Fed was a new regulator for us. We have worked very hard with the Fed to establish good relations. We think we've been successful at doing that. Our plan would be to do the same exact thing with the CFPB, to be open with them and listen to any observations that they have.

Okay. And just real quickly, it looks like there was a reclassification of card fees out of net interest income. Can you talk a little bit about that?

Okay. So this is -- sorry, I was getting a little help there. So there were some card fees that came with bank holding company. We decided should be included in interest income. Upon further review, we have decided that we should put it back into card fees. So there's no change in revenues at all or the economics or the bottom line. It's just a classification of what revenue line that it's on.

And what kind of card fees were those?

It's just the annual fee that we get on lending products, and there was an interpretation of a certain accounting rule that we thought would cause us to move, to split the card fees and put a portion up in interest income, but I have decided that, that is not where we should put it, and so we've really just reclassed it back. Simply low economics. There's no impact on the total revenue line or on the bottom line. And we restated the prior year.

Next, we'll go to the line of David Hochstim with Buckingham Research.

Just 2 things. Could you tell us was there any effect on expenses because of the extra day for leap year? Is it really just the revenue effect?

So I would have answered that question no, but this is like more of an issue that we should really get into here, but we actually do accrue some salaries kind of on a day basis, so there might have been a slight impact on salaries and benefits as a result of that. But I don't think there's any large impact at all here. Since you have another day of spending, you get it on the revenue level. Rewards will be an example to the extent you have more billed business, you're going to have some more rewards.

Okay. And then can you just clarify what the adjustment for the Traveler Cheque liability was, how much that could be? And then you do note in the supplement expenses for Enterprise Growth? Can you give us a sense of how much that is in the quarter?

Okay, so Travelers Cheques, to the extent that there are travelers cheques that are sold in the U.S., if customers do not redeem them, we sheet those to the States. So there's no income related to that. However, for travelers cheques that are sold outside of the United States, other countries do not have a stringent law. And so we estimate how much of those travelers cheques will not be redeemed. We actually pick up an estimate of that at the time we sell the travelers' cherub. We then step back and look at history and to see where the things are performing the way they have historically done. In a recent review this quarter, we realized that in fact fewer of those cheques were being encashed if they were older, and so we simply revise our estimates of the amount that will not be encashed. And there was a credit in this quarter related to that.

And about how much was it?

So it's small enough -- it's a big enough number that we should mention, but not a large enough number that we'd give the dollar amount.

Less than a $0.01 a share? Less than a $0.05 a share?

So I'll just say, we wanted to know it, because it's not inconsequential, but it's not significant. In terms of Enterprise Growth, we haven't disclosed the exact amount we're spending there. We do think that it represents a very good, an important opportunity for us. And so we are investing against those initiatives. At this point, they are investments that aren't generating large amounts of revenue. Anytime you start a new business, you need to continue to calibrate. Some things work less well than you thought, others better than you thought. And we shift our investments accordingly. So we are making notable investments in Enterprise Growth because it's a terrific opportunity. But again, the final number that we disclose.

Right. I figured I might as well ask because you have it in the supplement. And then can you just give us a sense of what we should expect for the tax rate for the balance of the year?

I think the tax rate, absent any specific credits in the period that occur, is generally in the low 30s, 31%, 32%. And then to the extent there's a credit like we had this quarter, that benefit will be reflected in the rate. So without any item like that would be in the 31%, 32% range.

We'll go to the line of John Stilmar with SunTrust.

Just real quickly, Enterprise Growth seems to be certainly the buzzword around American Express. Can you talk to us about a little bit of advancements that you've made in the quarter and what sort of roadmaps and things we should be thinking about in terms of announcements or progress or really frankly numerical -- numbers trying to come up to the surface in terms of progress that you've made on Enterprise Growth?

Well, I think, our whole businesses is kind of a buzzword, right? So our core business is performing exceptionally well, as you could see by a strong billed business, very good revenue growth, excellent credit performance. And the digital space, which is where Enterprise Growth is, is also a big factor in our core business. So we are doing a significant number of things in the core business. I think you can see the things that we've done with small businesses. I think we've done a number of initiatives with Facebook and Twitter, in Serve, but also in our core business. We're also enabling our customers that want to interact with us from a servicing perspective online to do that. We're also enabling people who want to acquire cards to do it online. So digital and American Express is a buzzword. We think it's important that we think about transforming the company because digital will be a big part of the future. As we've said, it's actually a big part of today. Digital spending is, last year was $130 billion of our $800 billion. So it's an important part of things that we're thinking about and investing in. Within Serve and Enterprise Growth, we are also investing there as I said. So some of the progress we're making as we've said is, we were very focused last year on signing distribution deals. And this year, it's all about executing against those distribution deals so that we can bring customers on to the Serve platform. We're very focused on that, and we haven't at this juncture decided on sharing metrics. At some point in the future, we will. And we'll really, you mentioned revenues, and again, I think this is an area where, of investment, revenues will flow more in the future. But to your point, we're not just investing without monitoring and assessing how we're doing. And so we do have guideposts out there that we're very focused on in terms of what we're achieving and what parts are being successful and which ones aren't. And as I said before, we will calibrate our investments accordingly. But we do think we're accomplishing very positive things.

Next, we'll go to the line of Brad Ball with Evercore.

Dan, I have a quick follow-up to that. Can you give us a sense as to what portion of billed business growth came from online and mobile?

We don't do that by quarter. But as I said, $130 million of the $800 million last year was digital online. And last year, we saw the digital growth at 22% of billings. So billings on the Internet were up 22%. I don't know the exact number for this quarter, but I strongly suspect it's, in all likelihood, growing at a faster rate than the average.

So faster than the 12% or 11% adjusted for the leap day?

So I haven't actually seen the number, Brad, but I would think that it probably is. Very strong growth.

And then just as a follow-up to that, a point of clarification. So you have board authorization and approval from the Fed for a buyback of up to $4 billion this year and up to $1 billion next year, but you talk about returning 50% of your capital to shareholders. So those amounts would exceed that 50%. So are those numbers just out there as sort of upside ranges? And if you don't exhaust the full $4 billion this year, is there a need to carry over into next year? How does that work?

So our overall philosophy here is to retain 50% of capital generated to grow the business, either supporting growth in the balance sheet, you need capital to do that, or for acquisitions. And to return the other 50% in the form of either dividends or share buybacks. To the extent we do less acquisitions, then we wanted to have the flexibility to do share buybacks. In 2011, we requested $2.3 billion of buybacks on the basis that we'd do about $2 billion in acquisitions. At the end of the day, based on the opportunities we saw, we did $900 million in acquisitions. And as a result, we've built over $1 billion of capital that we haven't planned on. So we made the submission this year. We did it on the basis that we would have the flexibility to do acquisitions if we identified the right opportunities, but also asked for a buyback amount of $4 billion in the event that we didn't do the planned level of acquisitions. So you're right, if we actually do $4 billion of share buybacks, we will be returning a significantly higher percentage of capital generated to shareholders. But it's really a trade-off between acquisition spending and buybacks. The less we do in acquisitions, the more we do in buybacks. The more we do in acquisitions, the less we do in buybacks.

And if you don't exhaust the $4 billion, would it carry over into next year or are you back into the submission process in January of next year so you have to see what the Fed will approve?

So I have not asked them that question, but I would assume that if we do less than $4 billion, there's not a carryover. We would do a submission next January and then that will become effective, whatever that plan is will become effective after the approval, which would be mid-March, I assume. And what you're allowed to do in 2013 will be based on the plan you submit and whether the Fed does not object to that plan. So I don't think there's a carryover except if you didn't do it, you may wind up with higher capital going in, which might give you greater flexibility in your submission.

Next question comes from Bob Napoli with William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Question on expenses, on clarity, and then tie that to growth because, I mean, over the last several years as American Express laid out very well, you were investing very heavily the benefits from lower falling credit losses in the Visa/MasterCard payments. Now you talked about the $3.1 billion of expenses in the quarter, Dan, Pages 15 and 16, and I mean I think -- and while it's clear you're going to grow expenses slower than revenue, it sounded like that $3 billion was -- as you were suggesting, that was going to be kind of a steady run rate for the year. And then, I mean, just as that ties to growth, you had -- I mean, you grew 8% historically. You've said at least 8% revenue growth is what American Express had targeted prior to the downturn. Can you still get this? Can you still drive the revenue growth with pulling back on the investment spend? So 2 questions.

Yes, okay. So we knew all along that, as you said, we were spending at higher levels in 2010 and '11. And that was helping to drive growth. But at the operating expense level that we have, which is higher than we had in the beginning of 2010 or in the first quarter of 2011, at this level, we think we have sufficient resources to drive growth going forward. So it's higher than it was back in those periods, but we think it's a level that is appropriate and would enable us to drive revenue to achieve our on-average and over-time targets. So that's our perspective. We're going to control them well, but we think we have the resources. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And the $3.1 billion this quarter through the year is, I mean, were you suggesting on Page 15 that -- I mean, I wasn't totally clear and you pointed out last year was lower in the first quarter then grew. Are you -- I mean I think it sounded like you might be suggesting that the $3 billion was going to be kind of a run rate for this year before you grow next year or did I misread it?

So it's going to be -- not to give a forecast, all right, so I don't want to do that. As you know, we don't do that. But I was simply making the observation that if operating expense continued at the current level and you adjusted for the Visa/MasterCard proceeds and then you took that number and compared it to last year, that you would have low single-digit growth, right? So I wasn't saying exactly what it's going to be, but I was trying to illustrate if it was at that level what the growth rate would be, which is in line with we've talked about being -- containing operating expense growth. But we do believe that at that level, that we have the resources necessary to continue to grow the business and achieve our on-average and over-time financial targets. Robert P. Napoli - William Blair & Company L.L.C., Research Division: So there's one follow-up on the one, I mean, quarter overall look very impressive, but the one number that surprised me that was weaker was the travel number, travel growth. And it seems like all the data, market data we look at on travel spend look like very strong growth, MasterCard and Visa giving out some very strong cross-border spend numbers. Is there a -- within GSS, the commercial business, was there a significant client loss? Or what happened to your travel business that doesn't match with the market data and the competitive data we've heard?

Yes, so I think sales were actually up slightly, but commissions were down a bit and supplier revenues, which are an important part of the economics, sometimes are lumpy. And they were down a little year-over-year. So sales, again, I guess are the key thing in this discussion about just volumes and they were off low single digits. But that's the travel experience. I don't think we had major losses that I'm aware of, but those are the volumes that we were at. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Because it looked like you lost some share, but you're not sure why.

So I wouldn't comment on share, it's more kind of a client by client is what you're doing when dealing with corporate clients, but certainly, sales for business travel were lower than what we experienced in billed business and our Card business. So that's a fair comparison.

We have a question from the line of Craig Maurer with CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: Wanted to ask you about the Membership Rewards costs. In the fourth quarter, you made a comment discussing roughly 78 basis points as a percentage of billed business ex-GNS to think of for that cost, and that we can think of that for '12. In the first quarter, it was up around 81 and I was curious if you're still thinking about that level for the fourth quarter -- I'm sorry, for the year to average out or should we be thinking about that a little differently? And additionally, can we expect going forward dividends to grow at a rate similar to earnings which I believe had been your history prior to the recession?

So let me answer the second question first. So that's exactly right. So we think about that we want to have dividends at a certain relationship to income and we kind of keep it in the 17% or 18% range. So if net income increases, then we would stay with the same philosophy and increase dividends to be in line with that percentage that I talked about, 16%, 17%, 18%. So that's exactly right. And as you point out, I mean, you can calculate the numbers. It was 78% -- 78 basis points in the last quarter and 81 basis points in this first quarter. So it's really somewhat dependent on what's happening with the ultimate redemption rate. And if you look over time, if you had, if you look at the schedule, if you look back to, say, the second quarter of 2010, many of the quarters are between this 78-basis point range and 81 basis points. The only time it's really gone above that were in the quarters of 2011 where we had higher growth in the ultimate redemption rate in each quarter than we have seen historically. So in this quarter, the ultimate redemption rate growth was more similar to the historical levels that we saw prior to 2011. But where it goes is going to be totally dependent on customer behavior. As we've said, the ultimate redemption rate goes up when we see redemption levels go up -- if we see redemption levels go up, that's greater engagement to the long-term health of the franchise. That's a very good thing. It puts some expense in the quarter, but it's very good for the long-term health of the franchise. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: So it sounds like we should think about a range similar to what you said, 78 basis points to 82 basis points or so at least for this year.

So I didn't say exactly. You said -- but I did give you those data points.

And your next question will come from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Question on the share repurchase. I was just wondering, as far as like timing and the M&A pipeline, I was wondering, I mean, could you just talk about that pipeline and how we should model in the share repurchase to the extent that there are opportunities available? And you guys may not kind of push the lever too hard on share repurchase. And then secondarily, on top line growth, I was wondering if you could just talk about billed business growth going forward. It seemed like you guys had some decent momentum in the first quarter relative to the fourth quarter, but the comps obviously get tougher as the year progresses. How confident are you that you keep that momentum going? And then just finally on the top line growth, can you just talk about the contra-revenue items as well? Are there any big kind of contra-revenue items that we should think about and how they trend over the course of the year?

Okay. So starting with share buybacks and acquisitions. So as you know, we have not relied on acquisitions to drive our growth. It's been primarily driven by organic growth and our investments in our business. Our philosophy is to do what I refer to as bolt-on type acquisitions, where we either acquire a capability that we can leverage within our existing business or acquire near-in adjacencies that are fee-based in nature. Loyalty Partner would be a good example of that. So our philosophy is that we want to take a look at acquisitions that fall within those parameters. If we see good acquisitions with good economics, then we're going to make those acquisitions. But if we don't identify acquisitions that meet our criteria, we're not going to do them for the sake of doing acquisitions. So what we actually do in 2012 will be calibrated by the opportunities we see and the assessments we make of the economics. We see good acquisitions, we'll do them. If not, we'll use the capital to do share buybacks. Now in terms of billed business, we think we have had excellent billed business over the past 2 years. Certainly, excellent compared to the industry. We've had 9 quarters in a row where we've had double-digit growth in billed business. Certainly, really excellent compared to the industry. And we continue to believe that we have sufficient resources to continue to drive strong growth and have business momentum going forward. So I think where we're constructing our plan is to continue to drive spend, focus on our spend-centric model and to be successful in the future in terms of taking share as we have been over the last decade. In terms of contra-revenues, so contra-revenues include cash rewards. As I mentioned, those are up this quarter. We issued recently a new product that was a cashback product. That higher reward level would indicate as being successful in the marketplace. We do give volume incentives to certain corporate customers. So to the extent they're hitting higher levels of spend, that's a good thing economically, but it is a contra-revenue. We also have, sometimes, signing bonuses that go in the slide. This quarter, that wasn't at a higher level than we've seen historically. And for the other impact on the relationship between billed business and discount rate is GNS, right. So GNS is a terrific success story. We share a part of the revenue with our partners. We keep some to ourselves. That has the impact of bringing down, creating a gap in that relationship. So those are the largest items that are impacting the difference between billed business and discount revenue within our P&L.

You do have a question from the line of Rick Shane with JPMorgan. Richard B. Shane - JP Morgan Chase & Co, Research Division: The one item in the expenses that was a little bit surprising directionally was the occupancy and equipment. And the reason I say that is, it's my recollection that this is the quarter where the Greensboro shutdown actually goes into effect. Was there any lingering expense associated with Greensboro or is this net of that shutdown, and the other facilities that you added actually more than offset it?

So it really doesn't have anything to do with Greensboro. The things -- the costs we were going to incur related to that, that were people related we accrued upfront. There are no notable Greensboro expenses in here. We have largely wound that down at this juncture. So that is not a factor in this quarter. So you're asking me if that was lower because we don't have Greensboro, is that the question? Richard B. Shane - JP Morgan Chase & Co, Research Division: I'm sorry you got muted out in the middle of that, but my question is I'm surprised that occupancy went up this quarter on a year-over-year basis. It was the only expense where you didn't really show a degree of operating leverage. So I'm curious with that coming out. What the incremental expense was?

I got you, okay. So Greensboro is not a large factor here in the year-over-year comparison just from a occupancy cost perspective. The reason it's up is Loyalty Partner is part of it. So we had, again, 3 months in here for their occupancy as opposed to only 1 month last year. And we do have some -- so this is occupancy and equipment. So the equipment part is we do have some higher data processing costs, which are just related to the higher volumes that we're experiencing and the fact that we continue to invest in capabilities. So those are the things that are the main drivers of the increase of 11%.

And you do have a question from Mark DeVries with Barclays.

We've got a follow-up question on your capital plans. By our estimate, under the plan, you have the ability to pay back up to about 100% of earnings. Given that you're already sitting on a pretty large capital cushion of in excess of $2 billion and loan growth has been moderate and M&A has not been that big of a part of your business recently, was there any thought of asking for a payout in excess of 100% so you could start to draw down some of that cushion?

So I think if you look at schedules that investment banks have put together, we probably are at the high end in terms of what we requested in terms of buybacks. We were sitting at 12.3%, right, at the end of last year in terms of Tier 1 common. So for the moment, that's a comfortable place to be. We don't know what all of the final rules will be as relates to what capital we'll be required to hold. In addition to that, we are still in the process of looking at Basel II, so we don't know completely what impacts that could potentially have on us. Well we simply go from Basel I to Basel III. There's not a big impact there. We've disclosed those numbers, but we've yet to complete our work on Basel II. Once the rules are completed and we have a full assessment of the impact of Basel and the ultimate rules that are out there, we'll think about exactly where we want to settle. But we didn't contemplate asking for higher buybacks to actually take the ratio down beyond what our plan that we submitted was.

Okay. If you -- if M&A was a meaningful part of your plans for this year, would you still contemplate potentially using the full authorization and bring your ratio down in that course?

So I think if we did a modest level of acquisitions, we would probably tend towards the higher end of the $4 billion range. If we do higher levels of acquisitions, then we would bring the $4 billion down correspondingly.

Next question will come from the line of Ken Bruce with Merrill Lynch.

My question relates to several that have been asked, but would like to maybe get you to step back for a second and give us a sense around the expense management. How long do you think it will take for your adjusted expenses to get back to the historical norm? Obviously, there's a couple different things that can ultimately drive those down. But I'm wondering how long you think they're going to remain elevated before you get down to that 67% level?

Yes, okay. So we said we were going to head back towards those levels, right? And in that calculation, provision is not an element. So to the extent going forward, provision is a lower percentage of revenues than it was historically if that were the case. Then really to kind of achieve the kind of margins we want, you wouldn't have to get all the way back to 67%. So we'll calibrate things based on both of those factors. I think we've made very good progress to date. We've gotten back to 71% in this quarter. So I think we're making very good progress. I won't forecast exactly what the ratios will be going forward, but as you intimated in your question, we can really get there 1 or 2 ways, right. We can get there through very good containment of expenses and we can also get there by good revenue growth. And to the extent we get good revenue growth, then we actually have more flexibility in terms of the level of operating expenses that we have. So we want to calibrate all these pieces together so that we have strong growth with the right margins and the right returns for shareholders. So I think you consider all those things as we move forward. But we think the progress that we've made is good and we think we have thoughtful plans in place as we go forward.

Okay. And just as a follow-up to that, when you look at the new businesses that you're investing in, I think you've made some comments in the past that those are very decent margin businesses. They may look different than your historical business. Your margins in the quarter were down 23% and change I think from 24%. Do you think that, at some point, your pretax operating margin begins to drift higher or do you think -- what would you kind of say is the stable level when you look at your new business investments beginning to actually kind of kick in?

It's a little hard to assess since we have to actually see exactly what the structure is for revenues. We've run scenarios, and in those scenarios, we have good economics associated with those. But exactly how that whole space will play out will take honestly a couple of years to do and we'll see what margins we have. We think about financial returns, we think about growth, we think about margins, we think about return on equity. So the total economics across all those metrics could be somewhat different or similar to what we have today and we'll have to wait and see exactly how they play out. But we think it's a sector that will have high growth in the future. We think we have the capabilities to be successful in that space, and we think the returns will be good. And concerning all those things are the reason that we're making the investments in that space.

That will come from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Dan, I was looking at the slide, I think it's Slide 12 that had -- 13 actually that had the rewards expense. And the green part of the bar that represented the increase for points previously earned, you had mentioned that, that was $188 million in 2011. So if you were to subtract that, the total amount for the first quarter this year is only less than 6% higher. So I guess, how do we kind of square those numbers given that you've got 12% growth in Charge volume and you're saying that there is some increase in the liability on top of that?

I think the green bar for the first quarter of 2011 actually has 2 pieces in it. One, we revised the estimation process in which we -- under which we actually did the ultimate redemption calculation. That was the $188 million. Also in that quarter, just in the normal course, based on the behavior of the customers, the ultimate redemption rate increased for that as well. So the green bar includes both of those pieces, not just the $188 million. Moshe Orenbuch - Crédit Suisse AG, Research Division: Okay. And also on the Slide 11, on credit, you've gone from 16 months coverage of principal down to 14. And that's kind of a concurrent measure, not a prospective one. So I would assume that you're not going to take that all the way down to 12 if receivables are growing and there's potential for dollars of losses to go up at some point in the not-too-distant future. How much room do you have to take that 14 down or from the standpoint of the reserve at this point?

Yes. So for us, this calculation was really just an outcome of how we set reserves. So we don't target a particular level of coverage. We set reserves. We have a migration model that we look at using history. If there are a need for specific reserves with something that's not captured there, we include that. We have some higher reserves for TDRs. So that is what drives where we set reserves, not this metric. This is simply an outcome. It's one that people follow, so we've provided, but it's not a driver of how we set reserves. Reserves are going to be driven by the behavior of our customer, what delinquencies are, what the migration rates are. So that's what's driving our reserves. Moshe Orenbuch - Crédit Suisse AG, Research Division: All right. Does that essentially mean your migration says that dollar losses are coming down in the future?

Well, not in the future, right. So if you look at this quarter, the migration rates were better in this quarter than they were in the fourth quarter of 2011. We're using history, right. We're using a certain period of history to help guide us there. Okay. So thanks, everybody, for joining the call, and good evening.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using AT&T Executive TeleConference Service. You may now disconnect.