Ladies and gentlemen, thank you for standing by, and welcome to the American Express Third Quarter 2015 Earnings Call. At this time, all participants are in a listen only mode. Later, there will be an opportunity for As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Toby Willard. Please go ahead.
Welcome. We appreciate all of you joining us for today's call. The discussion today contains certain forward looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements are set forth within today's earnings press release and earnings supplement, which were filed in an 8 ks report in the company's other reports already on file with the Securities and Exchange Commission. The discussion today also contains certain non GAAP financial measures.
Information relating to comparable GAAP financial measures may be found in the Q3 2015 earnings release, earnings supplement and presentation slides as well as the earnings material for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. Encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's earnings through the series of slides included with the earnings activities distributed.
Once Jeff completes his remarks, we'll move to
a Q and A session. With that, let me turn the discussion over to Jeff.
Well, thanks, Toby, and good afternoon, everyone. Overall, our Q3 performance was in line with our 2015 financial outlook and reflected the headwinds that we've been managing throughout 2015, including a challenging economic, competitive and regulatory environment. Consistent with the expectations that we discussed publicly in mid September, reported Q3 EPS of $1.24 was down 11% versus the prior year. And on an FX adjusted basis, we did see a modest slowing sequentially in the billings growth rate from 6% to 5% and saw adjusted revenue growth slow from 5% in Q2 to 3% in Q3. As in the first two quarters of 2015, our Q3 results continued to reflect the discrete impacts from various changes to certain of our co brand partnerships and a significantly stronger U.
S. Dollar versus last year, both of which I'll quantify later in my remarks. The decline in earnings versus the prior year was also in part driven by increased spending on growth initiatives. I'd remind you that as we considered earlier this year the implications of the pending termination in 2016 of our relationship with Costco in the U. S, we made the decision to increase spending in 2015 across a range of business opportunities to best position the company for long term growth.
While our reported results reflect these discrete impacts, core performance continued to reflect healthy loan growth, strong card member and merchant acquisitions, write off rates at historically low levels, disciplined operating expense control and the benefits of our strong capital position. Through all of this, we continue to drive an ROE above our on average and overtime target of 25%, demonstrating the continued strength of our business model. As we turn to the slides, we are once again beginning our presentation with the financial outlook framework that we first shared at Investor Day in March, as we believe it remains a useful framework for discussing the drivers of our current performance. I'll provide more details on the specific drivers as we review our reported results. But overall, we believe we are doing the right things to achieve our multiyear outlook and position the company for the long term.
Thinking ahead to Q4, we expect results to reflect some of the same headwinds as the current quarter, including incremental spending on growth initiatives as well as the discrete impacts from changes in our co brand relationships and a stronger U. S. Dollar. I'd also remind you that in Q4 'fourteen, we had a net benefit related to the sale of our investment in Concur. Throughout this year, we have said that our full year 2015 outlook was for EPS to be flat to modestly down versus the prior year.
To be more specific, as we sit here today with 1 quarter left in the year, we estimate that full year 2015 EPS will be between $5.20 $5.35 We believe our outlook to return to positive earnings per share growth in 2016 and within our target range of 12% to 15% in 2017 remains appropriate. As you recall, our outlook for 2015 to 2017 does not contemplate the impact of any restructuring charges or other contingencies. Now to turn to a review of our financial results on Slide 3. Billings were flat versus the prior year on a reported basis. Adjusted for FX, billings growth was 5% during Q3, reflecting slower volume growth across our U.
S. Consumer and corporate portfolios. I'll provide more details on our build business performance shortly. Reported revenues were down 1%, but were up 3% after adjusting for FX. This is slower than the adjusted Q2 revenue growth rate in part due to the modestly slower billings growth and the merchant rebate accrual benefit that impacted discount revenue last quarter.
Net income was down 14% year over year, primarily reflecting an increase in spending on growth initiatives and the discrete impacts from changes to our co brand relationships and the stronger U. S. Dollar. We estimate that the changes in our co brand relationships reduced EPS by approximately 5% during the quarter and that the negative impact from FX further reduced EPS by another approximately 4% to 5%. Below the net income line, we continue to leverage our strong capital position to provide significant returns to shareholders and have repurchased 56,000,000 shares over the past 12 months, which has reduced our average share count by 5%.
As a result, EPS was down 11% versus the prior year despite the 14 percent drop in net income and a $0.02 EPS impact related to our preferred dividend payment. As we have said previously, we expect that our quarterly earnings performance will be more uneven during this transitional period, and certainly, you saw that in our results this quarter. Our focus continues to be on the earnings outlook for each year and the long term as opposed to the performance at any given quarter. Turning to our billings performance by region on Slide 4. On an FX adjusted basis, billings growth was 5% during the quarter versus 6% in Q2, driven by a sequential decline in U.
S. Volume growth. I'll provide more context on the U. S. Results in a few minutes.
So let me begin with a review of the international billings trends. While we continue to face an evolving regulatory landscape going forward, we have seen very solid performance trends across our international regions over the last several quarters. JAPA remained our fastest growth region, with volumes up 14% on an FX adjusted basis. The strong performance was again powered by Japan and China. While performance in China remains robust, year over year growth was lower than in Q2, which drove a deceleration in regional volume growth and also in the G and S segment as you will see on the next slide.
As a reminder, while China does impact our billings growth rates, it is a very small impact on our revenue and earnings due to the low margin that all networks earn on spending within China today. Moving to the EMEA region. Volume growth remained consistent at 9% on an FX adjusted basis, including double digit growth in the U. K. The year over year decline in LACC volumes is being driven by Canada, which is being impacted by the end of our relationship with Costco in Canada.
This will continue to impact our volume growth until Q1 2016, although it will begin to lessen next quarter as Costco began accepting other network products during Q4 2014. Outside of Canada, LACC regional growth remains in the double digits, including strong performance in Mexico and Argentina during Q3. Overall, international performance excluding Canada continued to be strong with volumes up 11% on an FX adjusted basis versus the prior year during Q3. We are pleased with our progress outside the U. S, which reflects strong performance in the consumer and network businesses, where we've seen encouraging returns on our recent growth initiatives.
As the largest global issuer, we constantly balance global strategies and local execution, seeking to leverage our best practices, capabilities and learnings in all the markets in which we compete. Looking at the results by segment now on Slide 5, we saw slower growth in GCS where billings were up 1% on an FX adjusted basis and in our USCS segment, where volume growth slowed to 5% versus 6% last quarter. As I mentioned in my initial comments, billings growth, particularly in the U. S, continues to be impacted by a number of headwinds during 2015. To provide a bit of color on this, on average, we are seeing lower average transaction sizes in the U.
S. As opposed to card members using their American Express cards less frequently. In total, U. S. Transactions increased 7% versus the prior year, but the average transaction size was down 3%.
We are clearly seeing this impact on gas spending, where for the industry, average gas prices are down 25% versus the prior year. Lower average transaction sizes are also a driver within airline spending, which constitutes 7% of our total volumes in the U. S. And is down 3% year over year. This decrease is consistent with the recent trends in average ticket prices and revenue performance across the U.
S. Airline industry. The slower airline spend had a larger relative impact within GCS, where airlines make up approximately 25% of total spend. Also in GCS, we saw a slowdown in growth across middle market customers in Despite this near term performance, we do see opportunities to accelerate growth in this segment as we continue to focus and leverage our efforts to bring together some of the unique products and services we can offer to middle market customers. Last, moving back to the USCIS segment.
Consistent with the prior quarter, we saw volumes on the Costco co brand products soften. Although the loan portfolio from Costco remained approximately 20% of worldwide loans as of the end of Q3. More broadly on Costco, we have not seen a significant earnings impact from Costco in the U. S. As lower volume growth to date has been offset by reduced marketing expenses associated with the co brand portfolio.
One other Costco point. We do realize that all of you remain extremely interested in the status of our Costco co brand portfolio sale discussions with Citi. Reality is this is a very complex transaction, and I don't think it would be appropriate to comment on the specifics during the discussions. We will provide more detail on the outcome and its implications for our 2016 EPS outlook as soon as the discussions are complete. Moving on now to loan growth on Slide 6.
You can see that worldwide loans increased by 4% versus last year. In the U. S, which constitutes the majority of our loans, growth was steady at 7% during Q3 and continues to outpace the industry. International loan balances remained down year over year due to FX and the end of our Costco relationship in Canada. Excluding the negative impact of FX and Canadian loan balances, however, international loan growth improved to 9% during Q3.
So we are pleased with the underlying trends of loan growth. We continue to believe that there are opportunities to increase our share of lending from both existing and new customers globally without significantly changing the overall risk profile of the company. Unlike other U. S. Companies with a significant global footprint, our reported results are being significantly impacted by changes in foreign exchange rates.
Over the past year, the dollar has strengthened significantly year over year against the currencies that we are most exposed to outside the U. S, as you can see at the bottom, Slide 7. The dollar's strength will have an impact on our performance for the balance of the year and could impact 2016 as well. Looking at the comparison of our reported and FX adjusted revenue growth rates, you can see the difference between our reported revenue growth and our FX adjusted revenue growth remained relatively consistent as FX dragged our reported revenue growth by approximately 400 basis points in both Q2 and Q3. When rates move this dramatically, there is also a bottom line impact.
And as I mentioned earlier, we estimate that the strengthening of the dollar reduced our EPS by approximately 4% to 5% during the quarter. Over the longer term, we continue to believe that being a global company that generates revenue in diverse set of markets around the world is a strength of our business model. So let's move now to our revenue performance on slide 8, where you see that our reported revenues were down 1% versus the prior year, but increased 3% on an FX adjusted basis. As I just discussed, the strengthening of the U. S.
Dollar had a significant impact on a number of revenue lines, including discount revenue, net card fees and other commissions, which all increased year over year after adjusting for FX. Other revenue also grew versus Q3 'fourteen after adjusting for FX and the gains from the sales of ICBC and Concur shares in the prior year. FX adjusted revenue growth of 3% did slow sequentially versus the prior quarter. This was in part due to the modest slowing in build business growth that I discussed. I'd also remind you that our 2nd quarter results included a benefit in discount revenue related to certain merchant rebate accruals, which resulted in a year over year increase in the discount rate during Q2.
The 2 basis point year over year decline in the discount rate this quarter was in part driven by the growth of the OptBlue program as well as the continued downward pressure that we traditionally have from changes in mix and competition. These impacts were partially offset by the decline in Costco Canada merchant volume, where we earned a much lower than average discount rate. We continue to make steady progress with the OpBlue program. With the recent addition of Chase Paymentech, all of the top 10 U. S.
Merchant acquirers have now signed up to join the OpBlue program. We are signing a significant number of new merchants through the program and are focused on driving greater awareness and card member spending at these new Amex accepting locations over time. Continuing with merchant related items in the U. S, it's now been approximately 3 months since the DOJ's remedy took effect. While the remedy has not yet had an impact on our business, it is still too early to tell what the longer term impact in the marketplace will be.
Before moving on from Slide 8, I would say we are pleased with the strong growth of 8% in net interest income, driven by our continued progress in growing the loan portfolio and lower funding costs. Turning to credit performance on Slide 9, we are pleased that our lending credit metrics remain at low levels with our write off rate declining slightly versus last quarter and our delinquency rates remaining flat. Moving to slide 10. Our credit performance during the quarter combined with higher loan balances to drive an 8% year over year increase in provision, which included a $53,000,000 reserve build. While credit metrics have been steadily improving since the downturn, they have generally stabilized at the current levels at the course over the course of the past year.
Therefore, reserve releases from improved credit performance are no longer offsetting the additional reserves needed for higher loan balances. This performance is in line with our expectations that provision would increase year over year and in part reflects the steady growth that we are seeing in the loan portfolio. Going forward, we do continue to anticipate that write off rates will gradually increase from today's low levels in part due to the seasoning of our newer loan vintages. This is consistent with our comments from Investor Day about expecting to see some steady upward tick in write off rates and a modest build in reserves over the outlook period. Moving to expense performance on Slide 11.
Our total expenses increased by 3% during the current quarter. Performance differed significantly across P and L lines and all expenses benefited from the year over year change in FX rates. On an FX adjusted basis, total expenses increased by 7% during the quarter. I'll walk you through the details of marketing and promotion and operating expenses in a few minutes. But let me first touch on a few other items on this slide.
Rewards expense increased 4% versus the prior year, a bit above the growth in proprietary billings, which excludes GNS. Performance this quarter includes a portion of the discrete impact from our renewed co brand relationships. Our renewed co brand relationships continued to have a more significant impact on the cost of current services, which was up 31% versus the prior year. As I mentioned earlier, we estimate that all of the changes in our co brand relationships reduced EPS by approximately 5% this quarter. This estimate includes the impact of our renewed co brand relationships with Delta, Starwood, Cathay Pacific, British Airways and Iberia, as well as the net impact on our Canadian business from the end of our Costco relationship.
The co brand impact is primarily concentrated in cost of card member services and rewards expenses, although there is an impact on revenue growth as well. Let's now turn to marketing and promotion on slide 12. Marketing and promotion expenses were $847,000,000 in the quarter and were up significantly from Q2 due to the higher spending on growth initiatives we did this quarter. On a year over year basis, marketing and promotion was 8 percent higher than the prior year, but was up 14% after adjusting for FX. The increase in M and P this quarter is consistent with our expectations as we have been clear since the Costco decision earlier this year that we intend for the spending on growth initiatives during full year We have also highlighted that the increase would be more concentrated in the 3rd and 4th quarters.
To provide some additional perspective about our growth initiative spending, we included the break down on slide 13 that we had previously shared in mid September. We continue to feel that this slide is a helpful way to think about what we broadly consider to be our spending on growth initiatives within the company. As you can see, while a large portion of this spending occurs within marketing and promotion, a significant amount also occurs within operating expenses. And some of the impact also shows up as contra revenue. I'd like to make a few comments related specifically to the increased spending during the Q3.
A large portion of the increase in marketing and promotion during Q3 was focused on our efforts to attract new card members across our consumer, small business and corporate franchises around the globe. For example, in our U. S. Consumer business, we ramped up acquisition efforts for our cash rebate products as well as our Gold Charge Card and Starwood Preferred Guest credit card, both of which were recently refreshed with several new card member benefits. We also increased our spending on longer term technology initiatives, including efforts to enhance the digital capabilities that we provide to middle market corporations and small businesses.
The higher spending during Q3 also helped drive progress across a number of business initiatives, including adding SAMs to our merchant acceptance network, rolling out Apple Pay to our corporate card and U. K. Card members, as well as the continued expansion of the Plenty Loyalty Coalition program. So as I just mentioned, the efforts to attract new card members are one of the key focus areas for our incremental growth initiative spending. In this context, we are pleased to see that these efforts drove a significant increase in new cards acquired across our U.
S. Consumer, small business and corporate issuing businesses during the current quarter, as you can see on slide 14. Now obviously, it will take time for the benefits from these new acquisitions to impact our results, which is why our focus has consistently been on our performance over the multiyear outlook period. Moving to operating expenses on Slide 15. Operating expenses were down 1% year over year and increased 3% on an FX adjusted basis.
As I mentioned, operating expense performance this quarter reflected an increased level of spending on growth initiatives, including a number of technology initiatives. As a portion of the spending on these technology initiatives hits the professional services and occupancy and equipment lines, I wanted to provide a bit more detail on just what is included in these This P and L line also includes the fees we pay 3rd parties for credit and collection activities as well as some of the incentives we pay merchant acquirers. Similarly, moving to occupancy and equipment, over 75% of the costs in this line on a year to date basis are related to data processing, including the license fees we pay technology providers and depreciation costs associated with our technology hardware and software. The remainder consists primarily of depreciation expense on office equipment and buildings and the rent we pay for office space around the world. Similar to our performance across other operating expense lines, we have gained efficiency in our professional services and occupancy and equipment expenses over time, as we have rationalized our technology infrastructure and location footprint around the world.
We believe there is a sustained opportunity to deliver operating leverage going forward as technology continues to become cheaper and more powerful each year and our customers and merchants increasingly demonstrate a preference to engage with us through more digital channels. Moving on, let me touch specifically on the 21% increase in occupancy and equipment expense this quarter. The increase was driven by a $91,000,000 impairment charge related to previously capitalized software development costs, primarily within enterprise growth, including the decision not to continue with certain investments within the group. We continuously evaluate our investments across the company to ensure that we are deploying the right level of resources against our most attractive opportunities. In this context, we decided to pull back on certain initiatives in enterprise growth during the current quarter, including the decision to not proceed with the launch of our serve product in Mexico.
These decisions are aligned with some recent organizational changes with enterprise growth, including consolidating the served platform and related capabilities under Steve Squeri. More broadly, continually look at ways to make our overall organization more effective, streamlining the processes that cut across multiple parts of the company and focusing the organization on our most attractive growth opportunities in both the consumer and business to business space. As we set priorities for 2016 and beyond, we will focus on those opportunities that can produce the best returns. And we will be ensuring that we have the proper operating structure to deliver results in the most efficient and effective way. To conclude now on operating expenses and moving to Slide 16, despite the greater spending on technology initiatives in the quarter, adjusted operating expenses are down 3% on a year to date basis and up 1% on an FX adjusted basis, both well below our 3% target for 2015.
Now shifting to our capital performance on slide 17. During the quarter, we returned well over 100% of the capital we generated to shareholders while maintaining our strong capital ratios. Our Q3 performance again demonstrates our confidence in the company's ability to generate capital, while maintaining its financial strength and also demonstrates our ongoing commitment to using that capital strength to create value for our shareholders. So let me now conclude by stepping away from some of the complexity I just took you through and going back to the key themes in our results. Overall, our Q3 performance reflected the headwinds and challenges that we've been managing throughout 2015.
As expected, earnings were down year over year due to the ramp up in spending on growth initiatives and the discrete impacts from changes Against this backdrop, we continue to move ahead with initiatives to build our business for the years ahead. We're investing substantially more in marketing incentives and technology to attract new card members and additional spending to our network. We're expanding card acceptance at an accelerated pace among small merchants and added Sam's Club, the 8th largest retailer in the U. S. To our network earlier this month.
We're broadening our relationship with card members to accommodate more of their borrowing needs and our loan portfolio continued steady growth this quarter. The flexibility to invest in these and other growth initiatives comes in part from our ongoing progress in containing operating expenses throughout the company. We also continue to benefit from a strong balance sheet that allows us to return a substantial portion of our earnings to shareholders through share repurchases and dividends. We remain committed to these actions and believe that these are the right things to do to achieve our multiyear outlook and position the company for the long term. With that, I'll turn the call back over to Toby for some details on our Q and A session.
Thanks, Jeff. As a reminder, our ongoing goal is to provide a greater opportunity for more analysts to ask a question during the session. Therefore, before we open up the lines for Q and A, I'll ask those in the queue to please limit yourself to just one question. Thank you for your cooperation in this process. With that, the operator will now open up the line for questions.
Operator?
And our first question, it comes from the line of Craig Maurer of Autonomous. Please go ahead.
Yes. Hi. Thanks. Two questions. First, could you talk about the magnitude to which cash back rewards acting as a contra revenue item are impacting the end of the merchant discount rate?
And secondly, you call out loyalty partner in your press release as adding to revenue growth in a meaningful way. Can you contrast that to Plenty and how we should think about growth in Plenty long term? Thanks.
Sure. Well, let me start Craig with the cash back question. Certainly in the U. S. Consumer business in particular, we have been seeing very nice growth in our cash back products.
And as you know, the accounting for our cash back products does push does make the cash back a contra revenue. So when you look at the discount rate that we report, what we try to do is reflect the actual economics that we're getting at the point of sale of the merchants. And so we try to we take that out of that calculation. When you do the straight calculation of the income statement of just discount revenue over billed business, you are capturing the higher growth rates of the cash back products. All that said, I would say that in the grand scheme of the company overall, the cash back products still are a relatively modest part of the overall portfolio, which is why we don't specifically call out the impact it has on the revenue growth rate.
In terms of loyalty partner, what I would say is to remind everyone we have a business that is more mature in a variety of other countries around the globe like Germany, Poland, India. It's a little bit newer in Mexico and in Italy. And we're really pleased with the way the business has developed in all of those countries as it has gotten to profitability. When you go to the U. S, we're really pleased and excited about the launch of Plenti earlier this year.
It's very, very early days in the U. S. And so we're very encouraged by the growth that we've seen and the number of members that Plenty has been able to attract. I think you've heard several of the other partners in Plenty talk about their view of the progress and it's all very positive. What I would say on the U.
S. Is it's still early days and we will need to see how it progresses over the next year or 2 before it begins to have a more material impact on the company's financial results. Thank you.
Okay. Thank you. And the next question comes from the line of Dan Fandetti of Citigroup. Please go ahead.
Hi, Jeff. Just wanted to ask on your GNS business and I guess also on U. S. In general, do you think you're holding your market share in GNS? You clearly laid out some issues around the pressure from airline pricing and maybe China was off a little bit.
But if you strip that out, do you still that's always been a kind of a very strong area for you. Can you talk a little bit about that? And then on the U. S. Side, or I should say more on the corporate side, do you think you have a structural issue there or are you just kind of weak because of general economics and some of the issues you highlighted last quarter around airlines?
So a couple of good questions there, Dan. I may parse it into pieces talking a little bit about G and F, little bit about the U. S. And share and then maybe a little bit about corporate. So I'll leave each of those briefly.
If you look at G and S, just to remind everyone, our G and S business generates about 85% or so of its billings outside the U. S. And about 15% come from in the U. S. And so you really have a broad range of market conditions.
You have markets like the U. S, Australia, the U. K. Where we run a network business side by side with our proprietary business. And then you have a lot of markets around the globe, China being a good example where through a partner in effect the GNS business is how we operate American Express through a franchise model.
So across that many different markets, I think it's a little challenging to generalize about share. But I would make the general point that we're really pleased with the growth reach we're seeing in G and S everywhere in the world. And share is something that we probably think about differently in each market depending on whether it's a pure GNS market or a combined proprietary and GNS market. But I would say we feel very good about our share trends on a combined basis outside the U. S.
And when you take out the one challenge we have in Canada, I think we when you look at our overall international growth rates, we'll match up very well in the most recent quarter with the broader set of competitors that we see with. To turn to the U. S, you talked about U. S. Share.
We probably have lost a little bit of share in the U. S. In recent quarters, but I'd make a broader point that over the last 5 years we've actually gained quite a bit of share in the U. S. And we think about our prospects over the longer term.
We also are focused at the end of the day on our share of industry profits and industry revenues. We actually think we've done pretty well, including in recent quarters on that front. We're very thoughtful about what opportunities are going to produce the best returns for our shareholders. And sometimes that does not always lead you to the same answer as what might produce the largest billings share. To go to the last part of your question, to go to corporate in particular in the U.
S, as I said in my remarks, the slowdown in airline spend as an old airline CFO, it is remarkable when you look at both the large profits the airlines are generating right now given the drop in fuel prices, but also the tough revenue environment they're in with industry revenues and industry unit revenues in the U. S. Down. That's just reflected in our numbers where we don't think we're losing a share when we look at numbers of transactions, but the average transaction size is just trending right along with the airline industry spend. That does particularly impact our corporate business since airlines are about 25% of that business.
And we have seen a little bit of slowdown in the middle market part of our corporate business as I mentioned in my remarks. But I would tell you over the medium to long term, we continue to see this area of the middle market section of business in the U. S. Is a real growth Steve Squeri, because and that's why I talked a little bit about some of the Steve Squarey because that's why I talked a little bit about some of the technology initiatives spending we're doing to strengthen and refine some of our products targeted at that segment. So we haven't lost any of our enthusiasm for growth opportunities in that segment in the medium to long term, but you have seen a number of factors that slowed us down this quarter.
Thank you.
Okay. Thank you. And next question comes from the line of Bob Napoli of William Blair. Please go ahead.
Thank you. Good afternoon. I mean, you added a lot of new cards this quarter, substantial increase more than what we expected. Now, what is the cost of adding those cards? Has the cost per account gone up?
And if not, why not accelerate marketing? Obviously, that would be the best way to grow through the Costco in 2017 is to continue to add substantial number of accounts. So maybe just talk about the quality of the accounts, the cost per account and whether or not the amount of cards we saw this quarter is sustainable? Thank you.
All good questions, Bob. We feel really good and are really pleased to see the growth in new accounts. What I would point out is, we see growth opportunities across lots of the pieces of our portfolio. And the reason you've heard us talk about since earlier this year, staying at an elevated level of growth oriented spending in 2015 is because we want to do exactly what you just suggested, which is as we think about the termination of the Costco U. S.
Contract sometime in 2016, We think we have a lot of growth opportunities. We think in a significant fixed cost business, it makes a lot of sense to seize as many of the growth opportunities as we can now to position ourselves for that Costco change in 2016. When you think about what we're acquiring, we feel really good about the average quality of the accounts we're acquiring. And in terms of cost of acquiring those accounts and we look at historical trends, we also feel really good that we are spending more absolute dollars. That's what the elevated level of growth spending is all about and it's being reflected in a much higher level of new cards acquired and the average cost is pretty similar to what we've historically experienced.
So I suppose the other part of your question is why don't you do even more? Well, we're always balancing our financial, material and marketing resources and trying to make trade offs that we think are optimal for our shareholders. So we are we believe we're going as aggressively as we can and should be given the range of opportunities. And I would just say we're encouraged by the progress we saw this last quarter.
Thank you.
Okay. Thank you. And next question from the line of Bill Carcache of Nomura. Please go ahead.
Thank you. Hi, Jeff. I
wanted to ask
a question I've gotten from several investors who are wondering whether the quarter's results suggest that you guys are facing a little bit more pressure than you expected earlier in the year. I know you said that the results were in line with your expectations, but I think the reason people are asking is because the 2015 target EPS growth range of $5.20 to $5.35 that you provided implies in the area of I think like 3.5 percent to kind of 6.5 percent negative 6.5% growth. And I think people are viewing that as worse than the flat to slightly negative growth range that you've given previously. And so I was just hoping that maybe you could just speak to that?
Well, it's a good question, Bill. I think as we look at 2015 on the earnings side, the reality is it will come in very much in the range that we originally envisioned. If you go back to February when we first provided an outlook and I suppose it goes a little bit to how you want to define modestly down. The reason we gave a range, if you go back to the beginning of 2015, is we wanted to make sure in the current environment, we're giving ourselves the flexibility to do the right things for the company for the long term. If you think about the question that Bob just asked, we are pleased by what we saw in the outcome or some of the fruits of the higher levels of spending we did in Q3.
And that does suggest to us that we should continue to pursue many of those growth opportunities and stay at a pretty elevated level of spending to do it. And that does drive us probably more towards the modestly down part of our original guidance than the flat part of our guidance. I don't want to downplay the fact that as you've seen the last couple of years, it's also a tough economic environment. If you go back to January February as we were putting our plans into place and you look at all the economic forecasts and we just base our own plans on the consensus economic forecast. We don't try to say we can forecast better than anybody else.
The actuals have all come in below what the consensus was earlier this year. And look, we're used to that part of the flexibility in our business model as we've got a lot of levers to pull to make sure we can react to that. But that has been a challenging thing for us. Gas prices staying down has been challenging. Foreign exchange getting a little worse.
When we first provided an outlook for 2015, the U. S. Dollar on a weighted average basis versus the range of currencies that matter to us was probably down around 10%. It's gone down close to another 10% since then. So all those things are factors.
What we're trying to focus on are the core underlying things that will really determine the run rate of the company as we get past a range of the challenges facing us in the near term here and we feel pretty good about those trends.
I appreciate that. Thank you for taking my question, Jeff.
Okay. Thank you. And the next question from the line of Sanjay Sakhani of KBW. Please go ahead.
Thank you. Maybe to follow-up on that last question. I guess then as we look forward and you guys talk about returning to growth, How do you define returning the growth? And what gives you the confidence that you can achieve this? And I guess how does the Costco portfolio sale affect?
Affect? I know you can't really speak to Costco's portfolio sale, but how does that sale factor into the return to growth? And just one final one. How much of the run rate of cost savings from that workforce reduction is actually in this year's number? Thank you.
Finishing right notes Sanjay. That was a lot of questions. I want to make sure I get that. All right. No, all really good questions.
So how do we define growth? I guess what I would tell you is that our view of sort of absolute levels of what we believe we can achieve in 2016 has not changed at all since February. So nothing that we have seen that I just talked about in response to Bill's question are things that we don't think are manageable within all of the levers we have to pull thinking about 2016. 2nd, when you think about Costco, I'd remind you that when we first back on February 12 provided a 3 year financial outlook, we said we're confident that we can achieve the 2016 outlook we then provided, which is a return to positive growth, sort of regardless of what happens with the Costco portfolio. So we still don't know what the outcome is going to be around the portfolio.
When we do, we will talk about it publicly quickly. And when we do, that will allow us, Sanjay, to be more precise because there's a lot of there's quite a range of outcomes around the portfolio. And until we know those it's tough to give you a number. But what I want to come back to is what we're the point I'm trying to make is that the underlying performance to a positive earnings performance in 20 15. Sorry, we lost our lights here in New York.
If you think about what the drivers are next year, well, just think about our financial framework. So the co brand headwinds that we've had all of 2015, 5% was the headwind this quarter, drop away as you get into 2016. FX, particularly this quarter, is a big headwind. Now I suppose the dollar could move another 10% or 20% over the course of the next four quarters. If it does, that will be a headwind for us.
But if it doesn't, you should have an easier compare next year from an FX perspective. You brought up costs. You are correct that in fact, when you look at some of the actions that are behind the restructuring charge we took at the end of 2014, many of those savings won't really get to full year run rate until you get to 2016. I'd also remind you that we've said all along that we will be mindful as we think about volume trends and Costco going away about what further steps we can take to make other improvements in our cost structure. So all of those things, Sanjay, to conclude, combined to say my view of what this company can generate in 2016 is really the same today as it was in February when we first provided the guidance.
And my view of 2015 is we really have come in within the envelope that we set for ourselves, leaving ourselves enough flexibility to make the right decisions to run the company for the long
term. Next question is from the line of Rick Sain of JPMorgan. Please go ahead.
Guys, thanks for taking my question. Just a quick clarification. It looks like you restated book value historically. Can you just tell us what happened there?
Restated you might need to help me out, Rick. I'm not sure
what When we look back, the book value didn't tie out to what we had previously and when we went back and looked at the old numbers, there was a difference? Is there anything there or are we just screwing something up?
This may be one we need to take offline. I'm looking around at my colleagues here and we're not quite sure, but let's get to the bottom.
Okay. We'll follow-up with you offline. Thank you, Jeff.
All right. Yes. Thanks, Rick.
Okay. Thank you. And next question from the line of David Hochstien of Buckingham Research. Please go ahead.
Thanks. Hi, Jeff. I wonder, could you expand on your comments about enterprise growth and the changes you made? And I guess, I really want to understand also if the $91,000,000 impairment charges sort of a one time item or is that kind of recurring because it's really equal to the FX headwind and the co brand headwind if it's not recurring?
Well, so a couple of comments. We are continually looking at all of the choices we have about where we invest our management and financial resources in order to produce the best outcome for our shareholders. And we continually learn from things we try. We continually need to react to the evolving competitive and regulatory environment in which we operate. And so one of the things that we've done over the last quarter is made some different decisions about product strategies and resource allocation around a number of the businesses as part of enterprise growth.
As you do that from a pure accounting perspective, the reality in a company like ours where you're developing a lot of software and where you capitalize a fair amount of that software is you sometimes end up with things on the balance sheet that relate to products that you're deemphasizing or not going to continue with. One of the examples I did call out in my remarks is we had planned to launch the serve products in Mexico. That may still be a good idea at some point, but we've decided looking around at all of our other opportunities, that's not something we want to further invest in right now and that does drive pulling some assets off the balance sheet. So all of that leads you to view this is certainly not a recurring event. This is a one time sort of charge that is reflective of decisions that were made this quarter.
I would just make the observation that I tried to be pretty clear in my remarks that in the current challenging competitive regulatory and economic environment, you will see us continually making changes to the organization and to where we choose to put resources. And that may from time to time drive other kinds of onetime charges or contingencies. That won't stop us from doing things that we think are in the best interest of long term value creation for our shareholders.
Okay. But wouldn't you then consider this a kind of a one time item like FX this quarter and?
Well, I suppose it depends, David, on exactly how you wanted to find one time item. I'm just trying to be clear on what the $91,000,000 was.
Okay. Sorry, I know only one question like everybody else. The Costco gain, is that included in your 2016 guidance?
No, I think we've always said going back to when we first provided the outlook on February 12 that our comment that we will return to positive EPS growth in 2016 was really agnostic on the question of what happens with Costco and did not include any particular net gain on the Costco sale.
Thanks a lot. And
the next question from the line of Chris Brendler of CECL.
Chris?
Chris Brendler, your line is open.
Sorry, I was on mute. Can you hear me now?
Yes.
Yes. Sorry. Hi, thanks for taking my question. Good afternoon. So I wanted to ask a follow-up question on the U.
S. Business. We've heard some of your competitors complaining about the competitive environment in the U. S. And just how aggressive the rewards competition has become.
And I really haven't heard American Express address that as a specific issue that's weighing on growth. So maybe you could just help me think about what's happening in the U. S. Business. It has decelerated, but is that mostly just the co brands that you've potentially lost or is there also increased competition there?
Well, Chris, I try never to complain. I try to focus on what we can do better and there's always plenty of things we can do better on. Look, it's a challenging competitive environment and we would not dispute that in any way. And I think I started my earlier comments by saying it's a pretty challenging environment. All that said, our goal at American Express is to take the many fairly unique strengths that we have and find ways to really create great offerings for our card members and our merchants in ways that are not necessarily easily replicable.
The strength of our brand is something I think nobody else can really match. The breadth of our product line, which allows us to offer very targeted value propositions, because everybody who's listening to this call will have a different range of things that they value most. And we think the breadth of our product line really allows us to hone in on the many different demographic groups and targets that we have who we think we can provide value for. Our reputation for service, our global reach, the size and scale of our proprietary rewards program membership rewards, Some of the data and analytics we get from the closed loop and the way that allows us to be very targeted in our marketing and very targeted in how we work with our merchants and how we put together offers. Those are all the kinds of things that we try very hard to leverage.
So that as we think about what is undoubtedly a very competitive environment, we're not just out there saying, boy, can we offer 10 basis points more on a cash back card than everybody else because that's going to be the whole determinant. You've heard me say on these calls before, there will always be some portion of card members who actually do want to go to a website, pop the math in and say, what card is going to produce the best math for me. And we're going to have a tougher time using some of our differentiated strengths for that sake. In our experience, that is still a minority customers. And we think the breadth of our product line and the many strengths we have allow us to compete in ways that produce better outcomes for our shareholders.
Next question from the line of David Ho of Deutsche Bank. Please go ahead.
Good evening. I just want to circle back on Costco mitigation. Obviously, it's kind of a broad based approach you're taking, but we're seeing evidence that you're targeting Costco customers and trying to maybe transition some of the value onto your existing ongoing cards like the Blue Clash every day. Is that something that makes sense in terms of transitioning some of the value into your core products for some of your more attractive Costco customers ahead of the sale?
Well, David, I'd make a few points. We see many opportunities to grow our business and to grow our card member base across all of our consumer business portfolios around the globe. One of the reasons we concluded earlier this year that in the long run, we had better opportunities than going forward with what we think it would have taken to maintain our relationship pursuing. And we're really pleased that if you just look at the new cards acquired numbers this quarter, comes from every part of our company. Now certainly, one of the avenues for growth is there's some portion of Costco card members who have strong ties to American Express, and we'd love to work at capturing the spend and lend of those people subject to, as I've also said many times, the normal provisions you would expect in most of these kinds of contracts that put a lot of limitations around how you specifically market to the Costco card members.
So we are very diligent about making sure we adhere to the spirit and letter of that contract. So our marketing efforts are really about how do we just in general market to all the many groups across the U. S. And across the globe that we think are attractive candidates to be card members of American Express. Certainly, as we do that, some portion of the Costco card members are liable to see those efforts and likely to be interested in pursuing a relationship with American Express in another way.
Okay, thanks. And on
a related note, can you please remind us how quickly when you sign up a new card customer, it really depends on the mix, but how quickly do you typically see a pickup in revolving activity after some of these new card acquisitions? Is it a few quarters? Is it 1 year out? How you're thinking about that?
Yes. I want to be a little careful about being specific because when you have the breadth of products we do from consumer to business to corporations to lend products to charge card products, the answer is a little different for every one of those types of products. As a really general matter though, look, as I said in my remarks, while we're really pleased that we acquired 2.3 1,000,000 new card members this quarter, there's a process of getting them to understand the product they have, beginning to build spend, beginning to build a little bit of loyalty to American Express. For those who are going to engage in lend or borrowing behavior that balance then has to build. As a general matter, I really think of getting to the point where you have a meaningful bottom line contribution from new cards you acquire as being something that happens in the second and third year.
You'll see other metrics show up much more quickly. But at the end of the day, we're very focused on what it takes to get people to profitability.
Great. Thank you.
Okay. Thank you. And our next question comes from the line of Cheryl Pate of Morgan Stanley. Please go ahead.
Hi, good afternoon. I just wanted to touch back on the comments earlier about the average transaction size coming down a little bit and appreciate the color around gas and airlines. I'm just wondering if there's anything else we should be thinking about there as well. For example, in some of the new card acquisitions, is that a meaningfully different customer than your current average customer? Or does something like OptBlue where we're adding a lot of small merchants, does that factor in somehow as well?
Those are all actually really good questions, Cheryl, with probably answers that are not as precise as any of us would like. I'd make a couple of points. Our transaction growth has been, to make a general statement, fairly consistent over the last couple of years at around that 7% level. What is quite striking in recent quarters is the way the average transaction size is really the trend line has really changed. Certainly, some of the things we do about our steady efforts to drive more everyday spend, you would expect over a long period of time at a gradual rate to have an impact here.
But what you really see is quite different and is a little bit more tied in timing to gas prices going down to some of the challenges the airlines have had on the revenue side. And in fact, we see the average transaction size coming down across other categories like retail as well. So I have to tell you at this point, we're still spending a lot of time thinking ourselves about just what it all means. I think there's probably a little bit of influence from some of the things we're doing internally, but I think there's a lot of influence for a variety of external factors and just what's going on in the overall very low inflation to in so many categories, frankly, negative inflation in economy that we're now doing business in.
Great. Thanks very much.
Okay. Thank you. The next question from the line of Mark DeBeros of Barclays. Please go ahead.
Yes. Thanks.
I have actually a related question that if we look back over the past 3 quarters, U. S. Card member loan growth has actually outpaced U. S. Card service bill business growth by 1% to 2%.
Historically, we've seen kind of the opposite, right, where bill business growth really kind of led your loan growth going forward. Is that a sign, Jeff, that you're kind of shifting on incremental growth towards more of a kind of a lend centric customer base than a spend centric? And if so, kind of what are the implications for the migration of returns?
That's a good question, Mark. I think you have to keep this in perspective. So if you look overall at American Express, net interest income is depending on how you want to measure it, 15% to 20% of our P and L. That's unlike any of our competitors where the numbers are 50% to 90%. We have a very spend centric collection of businesses.
When the Costco loan portfolio goes away in 2016, that's 20% of the loan portfolio that drives that net interest income. So we have, in our view, a long ways to go over the next few years just to stay in place in terms of the current contribution that Lend makes to the overall economics of the company. And that's why we do in the U. S. Consumer business, as well as some of our other businesses, see a little bit of index on our share getting our share of their borrowing behavior versus the share of their spend behavior we get.
That to us is just an opportunity too obvious for us not to continually work at and seize. And that's really what has allowed us for many quarters now to steadily grow our loan balances above where the industry was going in the U. S. While you hear us over and over again say, but we're comfortable that we're doing that without materially changing the risk profile of the company. So that's really all you see going on here.
And as I said, I think we will be quite some time once the Costco loan portfolio goes away before we even get to where we are today. But the exciting thing to us is we should see a long ramp that should allow us to continue to grow loans in the U. S. A little bit faster than the industry while not changing the risk profile of the company.
Got it. Thank
you. Rochelle, we have time for one more question.
Okay. Thank you. And then the final question then comes from the line of David Togut of Evercore ISI. Please go ahead.
Thank you. With interchange caps going into effect this December in Europe, what actions will American Express take to sustain your growth? Even though your proprietary business will not be regulated, your merchant discount rate could be twice as high as Mastercard's, which potentially could negatively pressure merchant acceptance?
So good question, David. We've said for a while that when you look at the EU regulation, which to remind everyone is really targeted at Visa, Mastercard and will cap interchange rates. That will put some downward pressure on our discount rates. And frankly, you see that downward pressure even this year. Despite that, we're actually pretty pleased with our performance in Europe this year.
And I would point out to you that we have long had in Europe, in most countries, varies by country, but in most countries a significant premium to Mastercard and Visa. So that's not a new phenomenon. What the interchange regulation will do is put downward pressure on us, not to go to the point where the interchange is capped, but put pressure on us to move it down probably to keep the differential more similar. So I think we'll have to see how this goes. I would tell you that sitting here today, we're pretty pleased by this year's results.
And you already see changes at the competitive environment as a number of issuers have announced pullbacks on the products or rewards they're able to offer. And like all of these things, our challenge and opportunity is to try to find ways to mitigate the obvious downside, which is it will put some downward pressure on our discount rates in Europe, but try to offset that with saying, but what opportunities does it create to perhaps do some things that others can't. And at the end of the day, I think what the European regulations are really seeking is a competitive and more competitive European environment. Our market shares in most of those countries are quite small, so we'd love to be more competitive and find ways to grow over time, but we'll have to see.
Thank you.
So let me thank you all for joining tonight's call. And Toby, do you want to make a few last comments?
Sure. Thanks, Jeff. As part of our commitment to provide investors with exposure to company leadership, our executives plan to speak at several events in the Q4. Looking ahead to the next few months, American Express Vice Chairman, Steve Squeri, plans to present in the Citi Financial Technology Conference in New York City on November 10. Additionally, Jeff Campbell plans to participate in the JPMorgan Financial Technologies and Specialty Finance Forum in New York on December 2nd.
And finally, our Chief Executive Officer, Ken Chenault plans to participate in the Goldman Sachs U. S. Financial Services Conference in New York on December 9. Live audio webcast of each of these events will be made available to the general public through the American Express Investor Relations website at ir.americanexpress.com. Thank you again for joining tonight's call and thank you for your continued interest in American Express.
Rochelle, I'll turn it back over to you.
Okay. Thank you. And that concludes our conference for today. Thank you for your participation and for using AT and T Executive Teleconference