American Express Company (AXP) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the American Express Fourth Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to Toby Willard. Please go ahead.

Thanks, Ryan and thanks everybody for 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 maybe found in the fourth quarter 2016 earnings release and presentation slides, as well as the earnings materials for prior periods that maybe 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 both the quarter and the full year’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.

Well, thanks, Toby, and good afternoon, everyone. I am happy to be here to discuss our results for both the fourth quarter and full year 2016 as well as our outlook for 2017. As you can see in this afternoon’s earnings release, our earnings per share, was $0.88 for the fourth quarter and $5.65 for the full year 2016. When excluding restructuring charges, consistent with how we provided our 2016 outlook, our adjusted earnings per share was $0.91 for the quarter and $5.93 for the full year. This performance is significantly above the $5.40 to $5.70 earnings per share range we provided at the beginning of 2016 and is consistent with improvised full year 2016 outlook we discussed last quarter. We are pleased that our business and financial performance enabled us to lift our earnings expectations over the course of 2016 while at the same time allowing us to substantially increase our spending on growth initiatives, particularly during the fourth quarter, to take advantage of the opportunities that we saw in the marketplace. Stepping back to provide some context for today’s call, a year ago in January 2016 on our fourth quarter 2015 earnings call, Ken and I discussed a number of challenges that our business was facing and provided detailed financial expectations for 2016 and 2017. We also outlined our plans to take significant actions to change the trajectory of the business going forward. All of these actions fell under the three overarching priorities that we outlined at Investor Day of accelerating revenue growth, optimizing investments and resetting our cost base. 12 months later, we are pleased with the progress we made in 2016 and we ended the year in a stronger position than we started it. Adjusted revenue growth in Q4 was encouraging. We completed in 2016 a record level of business building investments that will better position us for many years and we are running ahead of schedule on our plans to remove $1 billion from our overall cost base. We are now halfway through the 2-year period of financial expectations that we laid out at the beginning of last year. Our better-than-expected 2016 performance trends have built momentum that we are seeing across our business entering 2017. As a result, we feel good about our outlook for 2017 for earnings per share to be between $5.60 and $5.80. That said there is still a lot of work to do. It remains a challenging economic competitive and regulatory environment and so we are intensely focused on executing the plans we have in place. Now, let’s turn to the results. Let’s start with a review of our full year financial performance metrics on Slide 2. The full year metrics, of course, were impacted by the end of the Costco relationship in June as well as the large portfolio sale gain during the second quarter. These and other impacts produced the unevenness in our quarterly results during 2016 that we have been discussing all year. As a result, I will provide some adjusted performance metrics for both the full year and fourth quarter to help you better understand the underlying business trends. For your reference, we have included a summary of the adjusted metrics on Slide 20 in the appendix. You may want to pullout and look at as I go through my remarks. During 2016, we generated $32.1 billion of revenue, which was down 2% year-over-year, but increased by 5% when adjusting for FX and Costco-related revenues in the prior year. Our full year performance drove net income of $5.4 billion and earnings per share of $5.65. Since we have provided our 2016 EPS outlook excluding restructuring charges, I would point out that our adjusted EPS after excluding the $0.28 of full year restructuring charges was $5.93, which was within the higher revised outlook range we have provided last quarter. We continue to leverage our strong capital position to return in 2016 a total of over $5.6 billion of capital to shareholders through buybacks and our dividend, which we again increased this year in the third quarter. The share repurchase drove a 7% reduction in average shares outstanding versus the prior year. These results brought our year end 2016 reported return on equity to 26%. Turning specifically to our Q4 results on Slide 3, revenues decreased by 4%, reflecting the decline in volumes and card member loans following the portfolio sale in Q2, but excluding FX and the Costco-related revenues in the prior year, adjusted revenue growth was 6% during the fourth quarter. Net income was down 8% versus the prior year and earnings per share was $0.88 or $0.91 when excluding the $50 million of restructuring charges related to our ongoing cost initiatives during the quarter. As we discussed on last quarter’s earnings call, our Q4 earnings were down as expected versus the prior year quarter primarily due to a higher level of spending on growth initiatives and we also incurred some smaller discrete items within operating expenses, which I will discuss in further detail later in my remarks. Moving now to our billed business performance trends, which you see several views of on Slides 4 through 7. Worldwide FX-adjusted billings were down 3% during the quarter as you can see on Slide 4. As we have done the last three quarters, we also provided a trend of adjusted worldwide billed business growth rates, excluding both Costco co-brand volumes in all merchants and non-co-brand volumes in Costco on Slide 5. By this measure, the FX-adjusted billings growth was 7%, which was consistent with last quarter. Our billings performance this quarter reflects a number of trends. In the GCS segment in the U.S., we continued to see healthy performance across our middle-market and small business portfolios and adjusted growth rates improved sequentially in both segments. In contrast, spending by large corporations remained weak with billings declining year-over-year as we have seen in recent quarters. I would say that it is too early to know if any of the changes in corporate and consumer sentiment that have occurred since the U.S. election will impact corporate volume trends going forward. Our U.S. consumer billings performance this quarter was fairly consistent with Q3 and reflected our focus on building long-term relationships with customers, which generates sustainable revenue and profitability. Turning to GNS, we did see a deceleration of billings growth during the quarter as FX-adjusted growth declined from 10% in Q3 to 4% in Q4. The change was due in part to a decline in FX-adjusted volume growth in China. The volumes were still up in China nearly 20% versus the prior year. As you know, while China does impact our billings growth rates, it has a very small impact on our revenue and earnings due to the low margin that all networks earn on spending within China today. We also continue to see lower GNS volumes in the U.S. through to the end of the Fidelity relationship earlier this year. Finally, turning to international, you see on Slide 7 that our billings growth rate remains strong in both GCS and in our consumer business as we saw our third consecutive quarter of double-digit growth in FX adjusted terms. This performance reflects an accelerating FX adjusted growth in the UK, which was up 17% versus the prior year and in Mexico, which was up 14% despite the up-tick in the volatility of the currency exchange market since the election with the U.S. dollar strengthening significantly against the Mexican peso. Turning now to our worldwide lending performance on Slide 8, our total loans were up 13% versus the prior year on an FX adjusted basis, as you can see on the side of the slide, which is relatively consistent with the prior quarter. We continued to grow U.S. loans faster than the industry while maintaining industry leading credit quality and continue to see opportunities to steadily increase our share of our customers’ borrowing. Turning to the right side of the slide, our net interest yield was 40 basis points higher than the prior quarter – or excuse me, than the prior year and it’s been higher than Q3. As I mentioned on last quarter’s earning call, over the 2 years as our co-brand loans have declined, we have shifted our loan mix towards non-co-brand card members. These card members are more likely to revolve their balances. This change, along with other mix considerations and some pricing actions are driving the higher yield versus last year. Our credit performance and volume growth during the quarter resulted in total provision of $625 million, which was 9% higher than the prior year, as you can see on the left side of Slide 9. As in recent quarters, this growth rate was impacted by the provision in Q4 ‘15 including costs related to the two co-brand portfolios that were sold in the first half of 2016. When you exclude those credit costs from the prior year, as we do on the right side of the slide, adjusted provision increased 20% versus the prior year. Similar to last quarter, provision growth deferred significantly between lending and charge. On an adjusted basis, lending provision increased 29% versus the prior year, driven by growth in loan balances and as expected, a slight increase in the lending delinquency and net write-off rates versus the prior year due to the seasonings of new loans vestiges. I would note that lending net write-off rate was down slightly versus the prior quarter and remains best-in-class amongst large peer issuers. Moving to charge card, charge provision was up only 3% versus the prior year as growth in receivables was partially offset by improved credit performance in the current year. Stepping back from the quarterly credit results, I emphasize that there has been no change in our credit outlook and the credit continues to perform better than the Investor Day expectations we laid out last March. Consistent with our previous comments, we expect some modest gradual upward pressure on our write-off rates due primarily to the seasoning of loans related to new card members, which will cause provision to grow faster than loans going forward. Turning to our revenue performance on Slide 10, FX adjusted revenues were down 3% while excluding Costco related revenues, they were up 6%, a modest sequential acceleration from 5% in Q3. Moving to the detailed components of revenue on Slide 11, discount revenue was down 4% due to lower volumes, but increased by 6% on an adjusted basis due primarily to the 7% growth in adjusted volumes I discussed previously, along with the discount rate performance I will discuss in a minute on the next slide. Net card fees grew by 6% versus the prior year, due primarily to continued strong growth in our U.S. Platinum, Gold and Delta portfolios. I would note that the slower growth in card fees sequentially was due primarily to the strengthening of the U.S. dollars during the current quarter. Growth in net card fees on an FX adjusted basis was relatively consistent with Q3. The steady growth in card fees is a reminder of the strength of the value propositions we have in the marketplace and our ability to attract and retain fee paying customers even in the face of an intense competitive environment. Net interest income was down 9% due to lower average loans, but increased 12% on an adjusted basis, driven by the 13% growth in adjusted loans and the higher net interest yield that I mentioned previously. These impacts were partially offset by higher funding costs for charge card due to an increase in interest rates versus the prior year. Now given the recent changes in forward interest rate expectations, I realize there is a lot of focus on the potential impact of rising interest rates. As you are all aware, due primarily to our charge card portfolio, we are liability sensitive. In our most recent annual report, we disclosed that an immediate 100 basis point increase in interest rates would reduce our net interest income by approximately $200 million annually. I would point out though that the math behind this sensitivity assumes a beta of one relative to changes in the Fed funds rate for all of our deposits, including our $30 billion in high yield savings accounts. While future changes in these deposit rates will be dependent upon many factors, the interest rate on high yield savings accounts in fact has remained fairly consistent during the past year despite the increases in the Fed funds rate. Coming back to discount revenue performance on Slide 12, our reported discount rate increased by 2 basis points versus the prior year as lower discount rate volume coming off the network more than offset the rate pressure from merchant negotiations, including those types of new regulations in Europe, changes in industry and regional mix and the continued growth of OptBlue. The ratio of discount revenue to billed business declined by 2 basis points year-over-year this quarter as the increase in the reported discount rate was offset in part by growth in contra revenue items including cash rebate rewards and corporate card incentives. We are now lapping some of the upfront incentives we were offering new acquisitions in 2015, which are also treated as contra revenues. This lapping helps to drive a smaller year-over-year decline in the ratio of discount revenue to billed business than in prior quarters. Overall on revenue growth, we are encouraged by the progress we have made against the four key pillars we laid out at Investor Day last year though there is more work to do and we expect to see some continued unevenness in our revenue growth during 2017. First, our growth trends are strengthening in small business and middle market as we bring together and focus on our sales and marketing efforts targeted at this segment. Second, we are making steady progress on accelerating merchant coverage, particularly in the U.S. and our fourth quarter Shop Small promotion was an early step in raising card member awareness. Third, we have for several years now been steadily growing our share of U.S. lending and we continue to grow well above the industry every quarter in 2016. And last, we are seeing organizational synergies from creating our global consumer commercial and merchant groups as they better leverage best practices from around the globe. Turning now to total expenses on Slide 13, our expenses were lower than last year, both for the full year and the quarter. For today’s call, I am going to focus on the individual expense line items, which I believe will be more helpful in understanding our underlying performance. Clearly, marketing and promotion was up significantly year-over-year and I will cover that on the next slide. Rewards expense was lower in both the full year and for the quarter versus last year, primarily due to co-brand volumes that came off the network earlier this year. Focusing on the fourth quarter trend and adjusting for Costco co-brand volumes in the prior year, rewards expense would have increased in the quarter by 13% while adjusted proprietary billings in the quarter grew by 5%. We highlighted the shift in trend on the third quarter earnings call given the introduction of higher rewards on our consumer and small business platinum cards in October, and we expect this relationship to continue into 2017. I would also note that we view the enhanced benefits as important component of our initiatives to drive revenue growth. Moving to cost of card members services, we saw full year growth in this expense line of 11%. We are seeing higher levels of engagement in many of our premium services such as airport lounge access and co-brand benefits such as First Bag Free on Delta. As we look ahead to 2017, we will continue to invest through this line as we expand the differentiated features and benefits we offer to our card members. We view this as another important component of our initiatives to drive revenue growth. Operating expenses for the full year and quarter include a number of unusual items, a few of which I will touch on in a minute. But overall, we are making progress faster than we had anticipated a year ago in our effort to reduce our cost base by $1 billion. This is part of what allowed us in 2016 to invest in higher levels than we had originally planned and it will continue to provide momentum for us in 2017. Looking specifically at the fourth quarter though, operating expenses were down 13% versus the prior year. I would remind you that in the fourth quarter of 2015 we took a $419 million pre-tax impairment and restructuring charge and that this year we incurred $50 million of restructuring charges in the quarter. Excluding these items, adjusted operating expenses were down 3% for the quarter, continuing the momentum we saw in Q3. I would also point out that there were some discrete impacts in Q4 ‘16 operating expenses, including a negative impact due to the unexpected change in certain benchmark interest rates, driven by the volatility of the financial markets since the election. But the key theme on operating expenses is that we continue to expect ongoing operating expense benefits in 2017. Finally, as we expected, our tax rate for the quarter was lower than the full year average of 33%. We recognized some discrete tax benefits in the quarter related to the resolution of certain outstanding tax items in the U.S. As we look forward, we would expect the tax rate for 2017 to be more in line with our Q3 year-to-date average of 33% to 34%. Moving to marketing and promotion expenses on Slide 14, as expected, marketing costs in Q4 were up significantly versus both the prior year and the third quarter. For the full year, marketing and promotion costs were $3.7 billion, which was 17% higher than the prior year as we invested across a range of growth initiatives that we have been working on for some time. First, we provided increased marketing support for the tremendous Platinum card franchise that we have in the U.S. As we discussed last quarter, we rolled out expanded benefits for our U.S. consumer and small business platinum products during October. While it is still very early days, the initial performance trends on both products have been encouraging. Second, we leveraged our many years of sponsoring Small Business Saturday in the U.S. to build upon the success that we have had increasing our small merchant coverage in the U.S. through OptBlue. Our fourth quarter promotional campaign helped make card members aware of the many new locations where American Express is now welcomed. Third, we leveraged our digital marketing capabilities to build upon the success of our U.S. and international card acquisition efforts. During the quarter, we acquired 1.6 million cards across our U.S. issuing businesses and $2.4 million on a worldwide basis, which remains above our historical average levels and demonstrates that we have now effectively replaced Costco as a distribution channel with our own proprietary activities. Fourth, our investment mix this quarter reflects the shift towards initiatives focused on driving loyalty and building our relationships with existing card members, which is part of the strategy we outlined at our Investor Day earlier this year. And last, we supported all of these efforts through an increased brand advertising presence around the globe. Stepping back, we have been focused now since 2014 on navigating the evolving competitive regulatory and economic landscape. When we made the decision to step away from Costco in early 2015, we told you that we were embarking on a series of steps to reposition the company to be stronger without that relationship. Since then, we have made many changes, including investing in a range of growth initiatives across all of our businesses. In many ways, our marketing efforts in 2016 and particularly in the fourth quarter of 2016 represented the culmination of those efforts. We also remind you that these efforts, including our fourth quarter initiatives, have been targeted to provide a mix of returns over the short, medium and longer term. In addition, I would remind you that many of the investments that we made to drive growth, including things like the recent enhancements to our U.S. Platinum products and other differentiated services we provide to card members like lounge access are reflected in our P&L and expense lines outside of marketing and promotion. I would also note that as part of our efficiency efforts, certain marketing activities that were previously provided by external partners will be performed in-house going forward, which will move these costs from the marketing and promotion line to the operating expense line going forward. So, as we enter 2017, we are capitalizing on the momentum, capabilities, customer base and efficiencies that our efforts have produced. The combination of all of these things is what we believe will allow us to moderate somewhat our marketing and promotional spend in 2017 while still continuing to generate solid revenue growth. Turning now to Slide 15 and touching briefly on capital. We again used our strong balance sheet position to return significant capital to shareholders. We bought back $1 billion worth of shares in the quarter and again saw our share count drop by 7% versus the prior year. For the full year, we returned 99% of the capital we generated to shareholders in the form of dividends and buybacks. Our capital ratios continue to be strong. Although it did decline sequentially, which is in line with the seasonal pattern we typically see at the end of the year. We remain confident that the strength of our business model provides us with the ability to return significant amounts of capital while maintaining strong ratios. Before I conclude, let me go back now to where I started my remarks. On our earnings call last January, we provided our financial expectations for 2016 and 2017. And as you recall, we have said that we expected to earn at least $5.60 in 2017. Based on our business performance over the past year, our outlook for 2017 is for EPS to be in the range of $5.60 to $5.80. This outlook is based on what we know today about the economic, regulatory and tax environment and incorporates the current forward interest rate curve and recent changes in foreign exchange rates. We have not factored into our outlook any additional significant changes in these areas. To state the obvious, there is uncertainty about potential changes in the external environment. We will, of course, discuss any specific changes should they arise and help you understand any potential impact on our 2017 outlook. We do believe that our 2017 plans appropriately balance shorter term profitability with the steps we need to take to position the company for the longer term and in particular, our steady growth in 2018 and beyond. To provide a bit more detail around our 2017 outlook, I would remind you that in our Investor Day last year in March, we laid out one potential scenario for how we could achieve our 2017 EPS outlook, which included a 5% adjusted revenue CAGR across the 2016 to 2017 period as well as significant reductions in operating expense and marketing versus our 2015 base year. As I reflect on that scenario today with the benefit of the full year 2016 results, I would make a few comments. We continue to believe today that a 5% compound annual growth rate and adjusted revenue growth across the entirety of 2016 to 2017 is consistent with the EPS outlook we have provided. We do expect some unevenness in our 2017 quarterly revenue growth rates with lower growth in Q1, in particular, driven by the impact of leap year and some timing factors. To be clear though, we remain strongly focused on driving revenue growth to a rate above 5% and are focused on executing the strategies we have in place to do so. On the expense side, we continue to make faster progress than we initially expected on reducing operating expenses. And as I said last quarter, we now anticipate that operating expenses in 2017 will be lower than the $10.9 billion shown in our Investor Day scenario. This favorability in operating expenses provides us flexibility to spend more on marketing and promotion and we now expect to have modestly higher levels of marketing spend than in our Investor Day scenario, while the ultimate level will be dependent upon our financial performance and the opportunities present in the marketplace. Last, in part due to the acceleration of benefits from cost savings during 2017, we again expect quarterly earnings performance to be uneven with earnings notably lowest during the first quarter, in part due to the revenue impact I just mentioned. We anticipate that earnings levels will increase across the year. In summary, we are encouraged by our performance during 2016, which was a year of transition for the company. We executed well on the strategies we communicated early last year and our results validate that we are on the right path. There is of course, more work to do and we are intensely focused on executing in 2017 and achieving the targets we have discussed today. We will provide further details on 2017 and our long-term strategies at our Investor Day scheduled for March 8 and we hope to see many of you there. With that, let me turn it back over to Toby.

Thanks Jeff. Before we open up the lines for Q&A, I will ask those in the queue to please limit your self to just one question. Thank you for your cooperation. And with that, the operator will now open up the line for questions. Ryan, back to you.

Okay. [Operator Instructions] Our first question comes from the line of Don Fandetti with Citigroup. Please go ahead.

Yes. Jeff, it sounds like you are kind of maintaining that adjusted 5% top line growth in your guidance, can you talk a little bit about the components, I mean specifically on the reported discount rate what is your outlook there and why not sort of build in off with Q4, a slightly better top line outlook?

Yes. Good question, Don and thank you. To be clear, we are giving very specific EPS guidance of $5.60 to $5.80. And of course, one of the things that I think we have demonstrated over the years is the flexibility of our business model and the many levers we have to pull to achieve a particular financial performance. What I said in my remarks was that if you go back to the Investor Day scenario, which has a 5% compound annual growth rate for ‘16 and ‘17, we are certainly comfortable that you can get to the EPS range we provided with that kind of revenue performance. I would point out that the adjusted number for us in 2016 was about 5.3%. To be clear, that’s not our goal. It’s not guidance. But even if you assume no acceleration in the revenue growth rate on an annual basis in 2017 with the cost reduction efforts that we already have in place, with the several years we have spent working on different ways to be more targeted, more focused and more efficient in some of our marketing efforts, we are very comfortable that even in fact revenue performance were to come to fruition, we are very comfortable with the earning guidance. So we will have to see how things play out. Over the course of 2014, our loan growth has been very steady, very consistent and very strong relative to the industry for several years now and we would expect that to continue to be a real source of growth. Our volume growth has been steady and we see some signs of pick-up in certain segments, like the small business and middle market area and that will help us. And when it comes to discount rate, at this point, we don’t really have an update to what Anre Williams back at our Investor Day provided for 2017.

Thanks.

Thank you, Don.

Our next question comes from the line of Chris Donat with Sandler O’Neill. Please go ahead.

Hey. Thanks for taking my questions, Jeff. I wanted to ask sort of follow-up on the last question or your answer to it. On the small business side, just when you look at the monthly data you have, it looks like your small business loans are growing at 20% annual rate, I guess I am curious if that’s sustainable or do you see anything on the horizon that might slow that growth rate for small business loans?

So I think it’s a good question, Chris. And I think it’s probably fair to say that a lot of our discussions going back to Investor Day and many other forums, we particularly probably talked more about the fact that we are under-penetrated with our consumer card members in terms of capturing what we would regard as our fair share of the borrowing behaviors. That exact same phenomenon exists though with our small business customers. And of course, we have a tremendously strong franchise with small businesses across the globe and in the U.S. We have some unique features to our business model and our capabilities because of our charge card capability that allow us to be particularly effective in helping our customers meet some of their spending needs. But just like in consumer, we have not necessarily traditionally been as focused on capturing our fair share of their borrowing behaviors and so we have been making the same pivot in small business that you have seen us making in consumer and we have steadily been increasing growth rates. A lot of that just like in consumer is driven by our consisting customers. And we feel really good about our ability to continue to grow well above the market there and to maintain really strong credit quality. The one other mechanical point I would make that applies to both consumer and small business is in Q4, a modest piece of the growth is still helped from the fact that we have done better than we had anticipated at retaining some of the former Costco co-brand card member spend and lend behaviors. And if you think about the way we do the adjusted revenues, the adjusted billings and the adjusted loans, that effect helps us a little bit in Q4 and that was actually moderating to be flat with billings and loans to peak of that affect. But that will cause some modest slowing as we get into 2017, but it should remain, we believe, for a very long time well above the industry.

Got it. Thank you.

And our next question comes from the line of Mark DeVries with Barclays. Please go ahead.

Yes. Thanks. Jeff, I understand that when you make some of the investments you made, you do with an eye towards both near-term, intermediate-term and long-term benefits, but you had kind of a record quarter in terms of M&P and we only saw kind of – we didn’t really see billings growth accelerate sequentially and take adjusted revenue is only at malls, so can you kind of help us think about how you anticipate those benefits coming through over time through things like Shop Small to take you to kind of a reasonable payoff where we see some acceleration in revenue growth?

Yes. So it’s a good question, Mark. I think of Q4 – and you are correct, it wasn’t kind of a record. It was a record high level of M&P spend as reflective of the culmination of things we have actually been working on for a number of years and they happen to come together in Q4. So we run Shop Small in the U.S. every fourth quarter. It’s been a tremendously effective event for us for our small merchants. And when you think about leveraging that to begin what we have set for a long time will be the long process of getting customer perceptions about our growing merchant coverage in the U.S. to match the actual coverage, we saw a tremendous opportunity to build upon Small Business Saturday and tried to drive our card members to new small merchants. That just happened to come in Q4. We have for quite some time been thinking about the next steps to evolve our platinum products in the U.S. I would remind you, we tend to make some changes to them every year or 2 years. Those plans have long been in the works. They happen to come to fruition in the fourth quarter as well. The fourth quarter in many ways was the last quarter as I think about it in the U.S. consumer market of some of the battle going on for the spending and lending behaviors of the former Costco co-brand card members. So all of those things came together in a way that just happened to coincide with the fact that we also were performing financially well ahead where we thought we would perform and well ahead of where we have committed to our shareholders that we would perform in 2016, so those are the things that allowed us to spend at the record levels. Now, when you think about all of those efforts, they are all about driving long-term relationships with our customers and generating sustainable revenue and profitability. Most of them have very little in quarter impact. And in fact, particularly on the revenue side, when you think about the new card member acquisition efforts, those are things that we long said often take into years two and three to begin to pay off on the revenue and profit side. So we feel comfortable with the decisions we made. We wouldn’t have expected them to have much impact on Q4 metrics or results. But we think they are the right mix of things to drive the company’s results over the next several years. As you know, when we make investments decisions, we make them considering very long-term economics because this is a business where our customer relationships are sticky. Our best customers are people who stay with us and have been with us for many years and that’s really where all of our efforts are targeted at.

Got it. Thank you.

Thank you, Mark.

And our next question comes from the line of Ken Bruce with Bank of America. Please go ahead.

Thanks. Good evening. We have noticed a pickup in travel related activity and spending and I am wondering I know you mentioned in your comments around the large corporate that you thought it was too early to talk about confidence levels and it impacting business volumes, but I am wondering if in particular in that segment, if you have seen any increase in activity levels, maybe more broadly and if you could help us understand what the impact of that would be not only on the billings number, but also on the discount rate, that would be very helpful? Thank you.

So the tough thing Ken, as if you think about a lot of the changes in sentiment and a lot of the comments that people across the travel business have made in the last couple of weeks, most of them are forward-looking about the sentiment that they are hearing from the customers about the bookings they are seeing for future travel. They are not necessarily things we would have expected to see in the brief six weeks or seven weeks post election in the U.S. appeared where you have got both the Thanksgiving holiday and the Christmas and New Year’s holidays. So our results through December 31, it is hard to see a noticeable up-tick in large corporate travel spend. There is some modest up-tick and if you dig through the tables in our press release, you will see a modest sequential up-tick in airline spend. I just think we don’t have an update and it’s too early to call it a trend. So we are certainly hopeful that a lot of the other commentary from other players in the travel industry about forward bookings is correct. I just can’t really point to anything in our Q4 results that would suggest in that time period through December 31, there is any meaningful up-tick for us.

And any commentary on the discount rates that, that segment has relative to your broader business?

Yes, sorry. Ken, I should have got into that part of your question. As you know, our business over the years has become less and less T&E focused. If you look again back in the tables, you will see this quarter’s number for the percent based in the U.S. of T&E, which someone is looking up here for me. I know it was 24%. Now, that number has steadily gone down and our T&E merchants tend – there is lots of exceptions, but tend to have higher discount rates than our non-T&E merchants. So one of the reasons why we had said for years that there is a little downward pressure each year on our average discount rate is that because the non-T&E sector is growing faster that mix shift, which is ongoing puts a little downward pressure on the discount rates. So certainly, should the commentary those who say there is going to be a significant up-tick in travel and particularly corporate travel be correct, that would be helpful to our discount rate, I just can’t say that I see anything yet.

Great. Thank you.

And our next question comes from the line of Arren Cyganovich with D.A. Davidson. Please go ahead.

Thanks. You mentioned about taking a runway to growth, sometimes 2 years to 3 years for new card member acquisitions, I was wondering if you could talk about the engagement of the new card members, how that’s tracking relative to your expectations and whether or not there could be a boost in revenue accelerations related to that growth that you had over the past year?

So we really rigorously track each vintage year is the term we would use internally of new card members we acquire and we study their behaviors and how it tracks over time and think about how that relates to past vintages. And I would say that while there are really modest changes in the average pattern of how quickly we can engage customers and how their spending plays out over time, the changes are kind of slow when they evolve. You tend not to see across large numbers of customers dramatic shifts in behavior. And of course as a company, we are really focused in trying to acquire new card members with whom we can build a long-term relationship where we can really generate sustainable revenue and profitability. So when I look at the card members who we have brought into the franchise over the past 18 months, all of our experience and data thus far tells us they look not terribly dissimilar to people we have brought in, in the past. The one clear difference, which I did talk about a little bit in my earlier remarks, is that while in the U.S. consumer and small business area, the Costco used to be a significant acquisition channel. We have now replaced all the volume we used to acquire through that channel with other proprietary channels, putting people on other products. That particular shift tends to result in customers who have a little higher propensity to carry revolving balance. That does drive revenue a little bit more quickly, tends to drive a little higher yield, comes with slightly higher credit costs as well, but very, very good economics. But other than that general shift, I wouldn’t really call out any change in the makeup of the new card members we are acquiring as of today we think would drive a different profile going forward on how they come to be both revenue positive and profitable.

Thank you.

Thanks Arren.

And our next question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Hi Sanjay.

Hey, how are you? So I was hoping to get a little bit more clarity on the baseline number for 2016, if we were to adjust for some of the one-time items, I appreciate some of the commentary you have given around the revised outlook, but I am just trying to think through the different ways we can get to the 2017 and the baseline 2016 number, would be helpful?

Sanjay I am happy to go into as much detail as you like. But really, as we think about running the business, if you take 2016 and you say you got a big portfolio sale gain in there that doesn’t repeat and you have got six months of a big co-brand relationship that went away. Those two things you pull out. And look, there is lots of other one-time things and some things that surprised us in Q4 like odd movements in interest rates. But those kinds of things to some extent are going to happen every year. So you make those two adjustments to 2016. You will get when you plug in our guidance range, a pretty darn healthy EPS growth rate between 2016 and 2017, but achieving that growth rate is strictly a matter of sustaining the kind of revenue growth that we have already achieved in 2016 on an adjusted basis. We are trying to raise it, but our guidance doesn’t necessarily count on it. Executing on the $1 billion takeout of infrastructure costs and we thus far are ahead of our plans both in time and dollars to do that. And then moderating our marketing and promotional spend. And we have been pretty specific on the marketing and promotional spend in the past at Investor Day in one scenario I talked about how in 2015, we spent $3.1 billion of marketing and promotion and at the time, I said we probably pulled that down by $200 million or $400 million. Last quarter, I said with the better progress we are making on OpEx, we probably don’t need to pull marketing and promotion down quite that much. And I would also remind you, I was trying to make this point in my earlier remarks that there is many things we do to drive revenue growth. And we have made very conscious decisions for example, that putting financial resources towards improving the value proposition in the Platinum product for both consumers and small businesses in the U.S. is an even more effective use of our financial resources in 2017 than putting that same amount of money towards marketing and promotion. We have clearly done more to provide very differentiated services to our card members. And our lounge network is an example of something that we can uniquely do because of our scale. That runs through the cost of card member services line, not through marketing and promotion. But we are doing more of that now than we were a year ago. And I think you can expect to see us do more a year from now than we are today. And that’s another example of why we are comfortable that we can moderate down the marketing and promotion line, because part of what we are doing is just shifting to other kinds of spending that we think will be even more effective in driving the end goal, which is more revenue growth. So that’s how we think about it. If you just take again the revenue growth rates we are already yet, the cost reduction plan that’s well underway a little bit of moderation in M&P. And then of course, the continued steady returns of capital that we have a long track record of doing and we just completed a year where we returned about 99% of our net income to shareholders through our dividend and share repurchase, that’s the simple model that makes us comfortable with the outlook that we provided.

Thank you.

Thanks Sanjay.

And our next question comes from the line of Craig Maurer with Autonomous. Please go ahead.

Yes. Hi, I apologize if this has already been asked. But I was hoping you could comment on – provide some more detail on what you are seeing in the competitive environment, you have seen some interesting moves from Chase recently as they seemingly have pulled back on the promotional offering on the Sapphire Reserve card to fund an increase in the rewards on the Amazon cards, so one might deduce they reached the point of maximum pain, you also could see rising interest rates along with worsening credit, which might lessen the appetite for secondary players to drive easy Cashback programs, so do you see the window improving over the next 1 year or 2 years in relation to competitors?

Well, good question and comments, Craig. Look, we tried to be extremely mindful of all the things going on in the marketplace. However, we are even more mindful of what we are doing to provide the best possible value propositions for our card members, our merchants while still generating real sustainable growth for our shareholders. I think the events of the last couple of years say to us that in the U.S. and I would remind everyone on this call that your question is probably mainly targeted at the U.S. consumer market, which is really the market where we are seeing a real evolution of the competitive environment over the last years, less so in our other markets, less so in B2B, less so outside the U.S., etcetera. I think our experience over the last few years makes us cautious about making any business decision that relies on our competitors deciding to pull back on any benefits or relies on an assumption that the marketplace is going to be any less competitive than it is today and in fact it may become even more so. But even in the face of all that competition, we feel really good about our value propositions, right. We have been growing card fee revenue in the high single-digits all year as driven by fees out of our Platinum, Gold and Delta portfolios, the exact premium cardholders and our competition has been targeting at. So we are mindful of all the changes in the marketplace that you went through. Certainly, from a credit and interest rate perspective, we always make long-term decisions based on a through the cycle perspective. And certainly, our history of managing through difficult credit situations is a pretty good one where we tend to come out more quickly and more strongly than others, stay more profitable than others and in fact some like that’s been a good opportunity for us to pick up a little bit of share. But we will have to see. So we have a very clear set of financial expectations we have laid out for you, all of our shareholders and for ourselves. We feel good about our progress midway in. we are very focused no matter what happens in the competitive environment on achieving the results we have laid out.

Thank you.

Thanks Craig.

And our next question comes in the line of Ryan Nash with Goldman Sachs. Please go ahead.

Hey, good afternoon Jeff. Maybe I can ask a question around rewards, I fully understand that this is baked into your full year guidance of $5.60 to $5.80, but can you maybe just help us understand, particularly as you are enhancing some products how we should – and the competitive arm that you just talked about in Craig’s question, how can we think about the relationship between billings growth and reward growth, I mean I think you said earlier something like 5% billings and 13% reward costs, do you think we are going to see that type of magnitude for the better part of 2017 or could we start to see some of that growth alleviated?

Yes. It’s a good question, Ryan. To remind everyone, if we go back to the beginning of 2016 when at Investor Day I laid out a couple of different scenarios for growth, at that point, we built into those scenarios an assumption that our awards costs would grow a little bit faster than billings and that was just an acknowledgment of the competitive the environment that in many ways Craig Maurer just did a nice job of laying out. Now, in fact when you look at most of 2016, we have not seen rewards costs growing any faster than billings until Q4 and so that should tell you pretty clearly that what drove that change in trend was the introduction of the different benefits to both the consumer and small business platinum cards in the U.S. With that being what drove it, I think you should expect to see numbers somewhat in the ballpark and what you saw in Q4 and you are correct, on an adjusted basis, I talked about 13 – I am looking for the number here, but we talked about billings growth of 5 and rewards growth of 13. So you should expect to see something in that ballpark through the first three quarters of 2017 just from actions we have already taken. Beyond that action, we will have to see in the competitive environment, we are always looking to periodically refresh products. When we do that though our goal is to try to refresh them in a way that provides enhanced and differentiated benefits to our card members and frankly often as a result, allows us to capture a little bit more economics from the product. So our goal going forward would be to continue that trend. We also feel good about a lot of our value propositions. Our Cashback products in the U.S. have been tremendous acquisition vehicles for us with the value propositions they have. Our co-brand products we think are extremely competitive in the marketplace. And around the globe, you operate outside the U.S. in an environment where we think we have market meeting value propositions in most of the places in which we do business. So I wouldn’t necessarily look to see the trend increase from what you saw in Q4. I do think you should expect to get three quarters of it in 2017. And I think you should see – look to see us build upon the differentiated service and value propositions we can put into the marketplace.

Great. Thank you for the detail answer.

And our next question comes from the line of Jason Harbes with Wells Fargo. Please go ahead.

Hi Jeff, good evening. Thank you for taking my question. So just looking at the charge card receivables that accelerated quite nicely this quarter, I believe it was a 5-year high, to what extent do you view that as a function of some of the Platinum enhancements you put in place this quarter and more generally, how sustainable do you view that sustainment along with the double-digit loan growth that you have demonstrated over the past year? Thank you.

Thanks for the questions. Jason I think, there is really two questions probably there. From a charge card perspective, look, the charge card franchise is a tremendously strong and unique asset that we have and it cuts across both our commercial and consumer segments, of course. I think it’s probably a little early to say that a couple of months into our introduction on just one product, the Platinum product of new benefits that it had a material role in what you would have seen the quarter end. I think what you saw at the quarter end is really a function of trends across the entire charge card franchise, which is both consumer, commercial and is impacted by lots of things. And certainly, the fact that we were able to achieve that growth while also, in fact seeing improved credit quality in the charge card franchise, because as you recall when I talked about provision, I had pointed out that charge provision was actually up less than charge growth because of improving credit quality. So gosh, we feel really good about the franchise. We see continued growth. The Platinum product in the U.S. is an important component of that franchise. And while it’s too early to declare victory, we do feel good about the early returns. On lending, we are now several years into growing our lending, which is predominantly in the U.S., well above industry rates. And yet several years of doing that really doesn’t even put a dent in the under-representation that we have in our customers’ borrowing behaviors. And that’s why we feel very comfortable that we have a long runway of continuing to grow above the market, both consumer and small business lending, as we just continually capture a little higher share of our own customers’ borrowing behaviors. So I really would say we feel good about both of those trends and the charge business as well as with loans. Thank you for the question Jason.

Our next question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Hi Rick.

Thanks for taking my questions today. When I think about develop sort of a simple engagement, I think about three components, the sign-up bonus, which basically encourages people to take the card, the ongoing rewards, which is sort of had an inn place decline in terms of engagement and then brand, which has the long-term decay in terms of engagement and I think even your competition will agree that the brand is really your advantage, when you do the analysis of when your customers are taking away or engaged by competitors through either sign-up bonus or rewards and then those rewards abate, do you have any analysis that shows how they return because of the strength of the brand?

That’s a really good question, Rick. I – let me make a few comments. Certainly, we think the brand is a tremendous asset for us. But I think you have to think a little bit more broadly about what it is that causes our card members to – and this is my word, really attach to American Express in a way that I think is unusual. And my experience with other brands and certainly other card brands and part of its brand, a large portion of it is service and there is a 160-year-plus legacy of our company being all about service, all about going the extra mile for customers when something goes wrong. It’s about the scale we have, which allows us to offer some differentiated benefits and services that others find very difficult to match, right. And then I am going to come back to something I talked about earlier, which is the lounge – the breadth of the lounge access that we offer to people who hold our premium products would give them lounge access. It’s very difficult for anyone who doesn’t have our scale to ever match. And the combination of our own centurion lounges, which have been tremendously powerful in terms of strengthening the brand with the lounge access that we get through our great partnership with Delta and then the other lounge networks that we give our members access to, which are probably easier for others to replicate, but not those first two. That breadth that our scale allows us to do things with the levels of service, the long, long reputation for service, that global scale, the brand, those are the things that as we sit around and think about products and product features that we start and those are the things that we think hardest about how we strengthen the unique aspects of them so that we can do things that our competitors won’t be able to match. Now you are right, customers, particularly a subset of customers are going to think about sign-on bonuses and they are going to think a lot about mathematical calculations about rewards and we need to be responsive to that. But our view and I think our history and our performance, which say we don’t need to match necessarily because we have a brand reputation and an ability to deliver service and differentiated benefits that others can’t match. So the trick is what’s our goal is producing long-term customer relationships, which are going to give sustainable revenues and profits for our shareholders as well. And all of our thinking is always targeted and trying to achieve the balance that gets at all of those things. So, thank you for the question Rick.

Thanks Jeff.

Next question comes from the line of David Ho with Deutsche Bank. Please go ahead.

Hey, good evening Jeff. I just want to circle back on your views on potentially how much of leverage your guidance could have in an environment where you do have an inflection and kind of the organic component of spend you spend for account or a little bit of acceleration inflation, obviously there historically have been very beneficial to your model, but obviously you shifted away a little bit more from the higher – highest spend to like the more mass affluent maybe middle market, but just want to get your thoughts there on kind of – any kind of coil spring effect from the better macro environment?

Well, certainly, for some number of years now, we have been operating in a slow growth and really no inflation environment. And occasionally, they would do remind people, as you were just reminding us all, that low or no-inflation environment when you have a spend centric model is more challenging in some ways in terms of achieving some of the historical levels of revenue growth we typically are achieving. So more than anything else, what is good for us are the same things that are good for everyone in the economy, which is more robust growth than we have seen, a little bit of inflation, I think – I would probably say we are pretty neutral on. We do have to be sensitive to our liability sensitive balance sheet. Although as I tried to talk about in my remarks, while we are more liability sensitive than others, we do have a portion of our funding structure that probably has some lower beta than one rising interest rate environment. So we will have to see. There is so much uncertainty I think economically right now, what our tax policy is going to be, what’s going to happen to growth in some of the foreign markets we serve, what’s going to happen to foreign exchange rates. I guess I just summarized by saying what we are after is steadily, healthily growing economies and stable exchange rates, but we will adapt to whatever environment we face.

Ryan, we have got time one more question.

Okay. And that question will come from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Hi Betsy.

Hi, good morning – good afternoon sorry, it’s evening over here. Question on how we think about the dynamics in the charge card as you are migrating some of those people to be more on a revolving basis and it’s an opportunity that you are offering to them and certain part of it, I am just thinking how you think through that dynamic on the balance sheet?

Well, I guess I had make a couple of comments. I think Betsy you are getting at it sounds like you understand something that maybe not everyone outside the company always does, which is sometimes I think there is a perception that you got charge card customers, they have zero interest in borrowing money from anyone. And what in fact is the case, both on the consumer and small business side is we have learned over the years that some of our best charge card customers are off carrying balances on our competitors’ products, and that’s why we would become a little bit more focused on from a product perspective and marketing perspective and targeting perspective trying to in fact capture our share of our customers’, including our charge card customers’ borrowing behaviors and we have a number of ways to do that, including other lend-oriented products in hands of charge card customers or we also have – and not everyone realizes this – an ability for our customers to borrow on their charge cards with a product we call Lending on Charge. So we actually see that expansion, both on the small business side and the consumer side as a way to strengthen both our charge card and the borrowing relationship we have with the existing customer. It’s a way to grow our lending with customers who we know incredibly well from a credit quality perspective. And it has a side benefit in a rising interest rate environment, I suppose, slightly lessening our liability sensitivity as an overall company, although that is certainly not a driver of the strategy. It’s a bit of an offshoot from the real strategy, which is how do we strengthen and build even broader better relationship with some of our best customers who tend to be the charge card customers. So thank you for the question, Betsy. Toby, maybe I will turn it back to you.

Great. Thanks everybody, for joining tonight’s call and thank you for your continued interest. As Jeff mentioned earlier that our Investor Day is coming up on March 8 and we hope to see many of you there. Thanks very much.

Ladies and gentlemen, that does conclude today’s conference. As I mentioned before, it was recorded and is available for replay. If you would like to listen to the replay of today’s call, it’s available from today at 8 PM. through January 24 at midnight. You may dial the AT&T replay system at 1-800-475-6701 and enter the access code 413445. Those numbers again, 1-800-475-6701 with the access code 413445. You may now disconnect.