Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2015 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. .

I'll now turn the conference over to Toby Willard, Head of Investor Relations. Please go ahead, sir. .

Thanks, Kathy. Welcome. We appreciate all of you joining us for today's call. The discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties..

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and earnings supplement, which were filed in an 8-K report and in the company's other reports already on file with the Securities and Exchange Commission..

The discussion today also contains certain non-GAAP financial measures.

Information relating to comparable GAAP financial measures may be found in the second quarter 2015 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com.

We encourage you to review that information in conjunction with today's discussion..

Today's discussion will begin with 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 documents distributed. Once Jeff completes his remarks, we'll move to a Q&A session..

With that, let me turn the discussion over to Jeff. .

Thanks, Toby, and good afternoon, everyone, and welcome as well, Toby, to you as this is your first quarterly earnings call since you took over the leadership of our Investor Relations function from the capable hands of Rick Petrino a few months ago..

Overall, our results this quarter reflected what we consider solid core underlying earnings performance. Reported Q2 EPS of $1.42 was relatively consistent with the prior year, while understanding our performance is more complex than usual this quarter for several reasons..

As expected, the results reflected discrete impacts, including a significantly stronger U.S. dollar versus last year, the impact of various changes to our co-brand partnerships and the initial stages of a ramp-up in spending on growth initiatives..

On a year-over-year basis this quarter, EPS growth was also impacted by the prior year net benefit related to the Business Travel joint venture transaction and, of course, Business Travel's Q2 '14 operating results..

Looking through the complexity of these items, our core underlying earnings performance was generally consistent with the financial outlook framework that we first shared with you at our Investor Day in March.

We continue to view this framework as a useful way to understand the drivers of our performance through the period of the multiyear financial outlook we first provided in February this year. Accordingly, we have included this financial outlook framework as the first slide in our earnings presentation today..

Looking at our results through this lens, we saw a revenue growth of 5% after adjusting for FX and the prior year impact of Business Travel revenues. We built upon this revenue performance with disciplined expense control and the return of significant amounts of capital to shareholders.

This solid core performance included making strong progress on some key initiatives.

Highlights included the launch of the Plenti Loyalty Coalition Program in the U.S., the expansion of our OptBlue small merchant program in Canada, the rollout of 2 new Centurion airport lounges, refreshes of our Gold and Starwood's products, as well as the launch earlier this month of Amex Express Checkout, our online merchant checkout solution.

As we expected, our solid core underlying performance was impacted by the discrete impacts from the strong dollar in FX, along with the changes in our co-brand partnerships..

In terms of our spending on incremental growth initiatives, we are really just starting to ramp these up, and you will see them much more concentrated in the second half of the year.

As a result of all this, while year-to-date our earnings are up approximately 5% versus last year, we would expect earnings per share for the second half of the year to be down versus the prior year, consistent with our discussions on Investor Day.

For these reasons, our full year 2015 EPS outlook remains unchanged as we continue to expect earnings per share for the full year to be flat to modestly down. Just where in this range we end up will be a function of the level of incremental spending we do during the second half of the year, along with our billings and revenue trends. .

We also believe our outlook, to return to positive earnings per share growth in 2016 and to be within our target range of 12% to 15% earnings per share growth in 2017, remains appropriate. As you recall, this outlook does not contemplate the impact of any restructuring charges or other contingencies..

Now to turn to a high-level review of our financial results for Q2, as you can see on Slide 3, reported billings growth was 2%. On an FX-adjusted basis, billings grew 6%, significantly higher than our reported rate, but modestly slower than the first quarter.

I'll provide more details on our billing performance shortly, but we did see some deceleration in volume growth in the U.S. that was partially offset by improving growth across most international markets..

Reported revenue growth was down 4% due to the inclusion of Business Travel revenues in the prior year and the stronger U.S. dollar. Excluding these items, adjusted revenue growth was 5%. .

Net income was down 4% versus the prior year. The decline was primarily driven by the net benefit related to the Business Travel joint venture transaction and Business Travel operating income in Q2 '14, which together contributed approximately $0.08 to EPS in the prior year..

Below the net income line, we made our first preferred dividend payment during the second quarter, which reduced EPS by approximately $0.02. .

We also continued to leverage our strong capital position to provide significant returns to our shareholders. Over the past year, we have repurchased 51 million common shares, which translated to a 4% decline in average shares outstanding.

This decline in shares outstanding benefited EPS, which was down only 1% versus the prior year, despite the 4% drop in net income. This performance resulted in an ROE of 28% for the period ended June 30, well above our on-average and overtime target of 25% and demonstrated the continued strength of our business model..

Let's now move to a more detailed review of our key performance drivers during the second quarter, starting with billed business on Slide 4. On an FX-adjusted basis, billings growth slowed modestly from 7% in Q1 to 6% in Q2. As you can see, the primary driver of that decline is the U.S., where we saw growth of 5%, down from 6% in Q1.

I'll provide more details on the drivers of the U.S. performance by segment in a few minutes..

Across our international regions, we saw strong growth in JAPA, which was again the fastest-growing region in the quarter, up 16% on an FX-adjusted basis. This solid performance continued to be powered by strong growth in China and Japan. .

We also saw improved performance in EMEA, where the growth in the U.K. remains in the double digits. The decline in volumes in the LACC region was driven by Canada, which is being impacted by the end of our relationship with Costco in Canada.

Outside of Canada, we are seeing improved performance in LACC, particularly in Mexico, where growth has accelerated during 2015..

To turn to Costco in Canada for just a moment. While it is still early, we continued to be pleased by our efforts to capture the spend of the Costco co-brand card members. As you recall, in September 2014, we launched a new cash back card in Canada that was offered to former Costco Canada card members and it appears to be resonating well.

Through the second quarter, we have been able to retain over half of the out-of-store spend related to the former Canadian Costco co-brand product..

Now, I would pause here and highlight that this result is very specific to the Costco relationship in Canada and has little relevance to the U.S. As we said, the 2 situations are very different, with the most important distinction being that there was no portfolio sale in Canada.

If you assume there was a portfolio sale in the U.S., it would have a profound impact on our ability to capture the spend and lend of the Costco card members in the U.S. Obviously, the sale itself automatically moves the card member relationship. .

In addition, as you might expect, when a portfolio is sold, there are likely to be contractual restrictions on what types of marketing activities the seller is permitted to engage in. We realize that all of you remain extremely interested in the status of our Costco co-brand portfolio sale discussions with Citi.

The reality is this is a very complex transaction, and I can't comment on the specifics during the negotiation. I will remind you, though, that our contract with Costco imposes its own constraints on the sale process. We will, of course, abide by the contract, and we'll continue to update you as appropriate..

To return to billings now and to provide you with some additional perspective on our international performance, we included Slide 5 this quarter, which shows total international volume growth with and without Canadian volumes on an FX-adjusted basis.

As depicted by the green line on the slide, international volume growth, excluding Canada, increased to 13% during Q2, and this trend is being driven by improved performance across all of our international regions, excluding Canada..

Looking at the results by segment on Slide 6. We saw a sequential decline in growth in GCS where billings were up 2% on an FX-adjusted basis. Similar to last quarter, we continue to see slower spending across a number of corporate customers, primarily in the U.S..

In our U.S. consumer and small business segment, we also saw some deceleration in growth to 6% in Q2. This performance continues to be impacted by gas prices, which were down 27% year-over-year. I would remind you that gas billings comprise about 2% to 3% of our volumes. The U.S.

billings performance also reflects the current external economic environment, which remains uneven..

Another driver of the sequential change in billings growth in the USCS segment was our Costco U.S. portfolio. Historically, Costco billings have tended to generally grow in line with the USCS average growth rate. But in the quarter, while still positive, Costco co-brand card growth rates slowed to well below the segment average.

The slower growth is in part due to a decrease in new card acquisitions. As you would expect, during the wind-down period, we have agreed with Costco to reduce our joint marketing efforts..

Turning to GNS. This continues to be our strongest billings growth segment, with FX-adjusted growth of 16% during the current quarter.

This consistently strong growth demonstrates the diversity of our business model given the much higher-than-average returns on equity of the GNS business and the fact that more than 85% of GNS volumes are from international markets.

And again, I'd remind you that the slower growth in ICS is being driven by the end of our relationship with Costco in Canada, which I just discussed..

In all international regions, you see that like 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 by 10% to 30% year-over-year against the currencies that we are most exposed to outside the U.S., as you can see at the bottom of Slide 7..

Looking at the comparison of our reported and FX-adjusted revenue growth rates for the last 8 quarters, as you can see in the trajectory of the blue dotted line on the slide, our adjusted revenue growth remains consistent with recent trends, in the 5% range.

However, during the second quarter, foreign exchange had a slightly larger impact on our results than in Q1, dragging adjusted revenue growth down by 4 percentage points..

As you know, this revenue impact is partially offset by the benefit we received from having certain expenses denominated in international currencies, but there is a bottom line impact, especially when rates move this dramatically.

Over the longer term, we continue to believe that being a global company that generates revenue in a diverse set of markets around the world is a strength of our business model.

At current FX rates, we would expect to see a similar drag in the third quarter, but a smaller impact in Q4 as we begin to lap the significant strengthening of the dollar that occurred at the end of last year..

Turning now to loans. You see on Slide 8 that worldwide loans were up 4% versus the prior year. In the U.S., which constitutes the majority of our loan portfolio, growth continues to outpace the industry and was relatively consistent with the prior quarter at 7%.

Looking forward, we continue to believe that there are attractive opportunities to gain a greater share of loans from both our existing and new customers without significantly changing the overall risk profile of the company..

Regarding the Costco loan portfolio in the U.S., which we consider, of course, to be a very high-quality portfolio, we have previously disclosed that it made up about 20% of worldwide loans as of the end of 2014.

It remains at approximately 20% of worldwide loans today, though the growth rate in the portfolio is starting to slow in line with spending..

On the international side, reported loan balances were down year-over-year due to the negative impact from FX rates and an expected decline in loans related to the Costco Canada co-brand portfolio..

So putting it all together on the revenue side on Slide 9. You can see that revenues declined by 4% on a reported basis but increased by 5% when adjusting for FX and Business Travel revenues in the prior year.

While this adjusted growth was consistent with last quarter, we did this quarter have a benefit related to certain merchant rebates accruals, and we also had some unfavorable timing impacts in the prior year.

These items collectively benefited the year-over-year discount revenue growth rate and also resulted in a 1-basis-point increase in the reported discount rate versus the prior year.

These specific impacts, as well as the decline in Costco Canada merchant volume, where we earned a much lower discount rate, more than offset the expected downward impact on the reported discount rate from growth in the OptBlue program and industry mix changes. .

I'd remind you that from quarter-to-quarter, individual merchant-related items can cause fluctuations in the reported discount rate.

More broadly, we've said for a number of years that you should expect to see the reported discount rate decline 2 to 3 basis points a year on average due to changes in the mix of spending by location and industry; volume-related pricing discounts; competition; and more recently, growth of OptBlue, amongst other factors..

Regarding OptBlue, we have been pleased with the progress we have made signing up merchant acquirers for the program and the pace at which those acquirers have added new merchants to our network. Year-to-date, we have signed up over 700,000 new merchants in the U.S.

through OptBlue, and we are focused on driving card member spending to those incremental merchants..

We are also undertaking similar efforts to improve our small merchant coverage in many other markets around the world, as evidenced by the launch of the OptBlue program in Canada this quarter..

Coming back to our revenue performance more broadly. As we've seen in prior quarters, the gap between total discount revenue and total billed business growth was again impacted by GNS and cash rebate products growing faster than the company average..

Before moving on, let me first touch on a couple other items on this slide, starting with the other key component of revenue, net interest income. Here we saw a healthy 8% growth rate driven by our continued efforts to grow our loan portfolio as well as lower funding costs.

As the majority of our loan portfolio is in the U.S., the impact of FX is smaller on net interest income than on other revenue lines..

Turning to net card fees, other commissions and fees and other revenue. These lines were all impacted to a greater extent by foreign exchange and also reflected growth in loyalty coalition revenue and some timing items in the prior year..

As we discussed at Investor Day, the loyalty coalition business is one of our most important initiatives to find profitable growth in adjacencies, and we have been expanding the business into our acquisition of Loyalty Partner in 2011.

The program is a tangible example of how we can leverage our digital capabilities to provide value for merchants while creating a new revenue stream for the company. .

During the quarter, together with our merchant partners, we were pleased to launch Plenti, our loyalty coalition program in the U.S. While it is still very early days, we have been encouraged by the initial response and the program already has more than 20 million total collectors..

Moving now to credit performance on Slide 10. You can see that our lending credit metrics remain at or near historically low levels, with our write-off rates declining slightly versus last quarter and our delinquency rate remaining flat.

As you can see on Slide 11, this steady lending credit performance as well as lower write-off rates in our charge card portfolio and benefits from FX helped to drive a 4% decline in provision versus the prior year. .

Though we experienced a year-over-year decline in provision this quarter, looking ahead, we would expect reserves to build modestly in line with loan growth and any changes in credit performance. Therefore, we would expect provision to increase year-over-year and represent a headwind to growth in the second half of 2015.

Moreover, as we discussed at Investor Day, we did build into our multiyear financial outlook an assumption that we would see some steady upward tick in write-off rates and a modest build in reserves over the outlook period..

Shifting now to expenses on Slide 12. On a reported basis, expenses declined 4% versus the prior year. Clearly, there are a number of items impacting expense growth year-over-year, including the Business Travel joint venture-related items and Business Travel operating expenses in the prior year.

Expenses also benefited year-over-year from the change in foreign exchange rates. I'll walk you through these impacts in more detail as we review marketing and promotion and operating expenses performance in a few moments..

First, however, let me touch on a few other items on this slide. Rewards expense grew by 1%, which was a bit slower than reported billed business growth. Growth this quarter does include a portion of the discrete impact from our renewed co-brand partnerships.

However, that impact was more than offset by a decline in Membership Rewards-related expenses, in part due to an enhancement to the ultimate redemption rate estimation process in certain international markets that occurred last year..

Turning to cost of card member services. You see a significant year-over-year increase of 26% consistent with the commentary provided last quarter.

As you recall, a portion of the expenses in this line has increased as a result of our renewed co-brand partnerships, and we would expect these elevated levels of growth to continue for the remainder of 2015..

Let's focus now on marketing and promotion expenses on Slide 13 and make a few points. First, recall that last year in Q2, we leveraged the gain from the Business Travel joint venture transaction to support an elevated level of spend.

Lapping this elevated level, along with this year's beneficial impact from FX, led to the decline of 21% you see year-over-year..

Second, we have been clear since the Costco decision was made in February that we intend for spend on incremental growth initiatives during full year 2015 to be relatively similar with the elevated level we were at in full year 2014. This remains our intention.

I would also point out that while the largest piece of this incremental spending will flow through the marketing and promotional line, a portion will also hit operating expenses contra revenue..

Last. Looking at Slide 13, you see that we were still in the process of ramping up our initiatives in Q2. You should expect to see marketing and promotion expense increase substantially in the second half of the year..

As we have said, the elevated level of spending in 2015 will focus on the many growth opportunities that we have across our company.

It will support key initiatives, including acquiring new card members, gaining additional spend and lend from existing consumer small business and middle-market customers, expanding our presence internationally, growing our merchant networks in programs such as OptBlue, building our loyalty coalition business with things like the launch of Plenti in the U.S.

and introducing new digital capabilities..

Turning now to operating expense performance on Slide 14. Our reported results continued to reflect the impact of Business Travel in the prior year across a number of expense categories, complicating line-by-line comparisons.

Additionally, this quarter's results were significantly impacted by last year's items related to the creation of the Business Travel joint venture.

Excluding expenses related to the Business Travel joint venture transaction, as well as expenses from Business Travel operations in 2014, adjusted operating expenses in total decreased by 5% in the quarter, aided in part by a benefit from FX..

Moving to Slide 15. Adjusted operating expense growth year-to-date remains well below our 3% growth target. As Steve Squeri noted at our Investor Day in March, however, we are not achieving this disciplined expense control for a cutback in investment levels, but rather through ongoing efforts to increase the efficiency of the organization. .

We continue to make strategic investments within operating expenses to support our growth initiatives. This is just one example. Earlier this month, we leveraged our unique technology and assets to launch Amex Express Checkout, which allows Amex card members to check out clearly and securely on merchant websites using their Amex login credentials..

Looking ahead to the second half of the year, I point out again that a portion of the incremental spending on growth initiatives will hit operating expenses, including technology initiatives to enhance our small business and corporate capabilities..

Now shifting to capital performance on Slide 16. During the current quarter, we returned 97% of the capital we generated to shareholders while maintaining our already strong capital ratios.

Our Q2 performance demonstrates our confidence in the company's ability to generate capital while maintaining its financial strength, and we remain committed to using that capital strength to create value for our shareholders. .

Looking at the capital ratios on the bottom of the slide, I'd remind you that the greater year-over-year increase in the Tier 1 capital ratio was driven by our recent preferred issuances and we made our first dividend payment this quarter.

This payment is recognized as a reduction of earnings available to common shareholders and, therefore, reduced our EPS by 1% during Q2..

Let me now provide an update on the DOJ lawsuit before I conclude and take your questions. We are disappointed that our request for a stay of the decision in the injunction was denied this quarter. We have, of course, moved forward to comply with the trial court's remedy.

As a result of the stay being denied, we can no longer enforce certain contractual provisions that prevent U.S. merchants from steering customers to use other credit and charge cards. We are appealing the trial court's ruling, because we believe it will not provide any benefit to consumers and will, in fact, harm competition..

Steering is not a good thing for consumers, and we believe many merchants agree. At this point, given that the remedy just took effect earlier this week, it's too early to tell what the impact in the marketplace will be. We are staying focused on delivering value to merchants and deeply believe in the strength of our value proposition..

I'd also remind you that there are a number of other private merchant litigation cases in the Eastern District of New York and other proceedings seeking monetary damages that will begin to progress as our appeal is being heard..

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. Our results show solid core earnings performance built upon our financial model of having diversified growth businesses, disciplined expense controls and capital strength.

While billed business growth overall slowed modestly from the first quarter, we saw positive momentum across many areas of our business, including international merchant acquisition and loyalty coalition..

Going forward, given our 5% EPS growth year-to-date, simple math would indicate that EPS growth will have to be negative for the balance of the year to meet our continued outlook for full year EPS growth to be flat to modestly down.

As I mentioned, the biggest driver of where we will end up within this EPS range will be the level of incremental spending on growth initiatives over the balance of the year, as well as our billings and revenue trends..

Going back to our Investor Day in March, we discussed our plan to leverage incremental spending in 2015 to help drive sustainable growth going forward. We continue to believe this is the appropriate long-term strategy, and also that we have a range of attractive growth opportunities.

All this is also consistent with our previous comments that quarterly earnings performance will be more uneven than it has been historically while we go through this transitional period. Given this dynamic, our focus is that on our full year earnings outlook, rather than our performance in any individual quarter..

generating EPS growth of 12% to 15%; a return on equity of 25% or better; and revenue growth of above 8%. Clearly, our top focus when we think about these targets is generating consistent EPS growth of 12% to 15%, which, in most environments, we have a fairly good track record of achieving over the 20-plus years that the targets have been in place.

Our recent revenue performance has been below our aspirational 8% target, and we expect to remain below that level during the near term given some of the discrete impacts on our performance I noted earlier, as well as the current low inflation and low growth economic environment. .

However, when you think about our financial targets, the revenue target is just one of the facilitating levers that we use to help drive 12% to 15% EPS growth. We have consistently demonstrated that we can achieve our EPS target across a variety of different economic environments without having 8% revenue growth..

In the context of our year-to-date results, we believe that our core earnings performance continues to demonstrate the strength of our business model, and that we are doing the right things to position the company for the long term..

With that, I'll turn the call back over to Toby for some details on our Q&A session. .

Thank you, Jeff. As a reminder, our ongoing goal is to provide a greater opportunity for more analysts to ask a question during the session. [Operator Instructions] With that, the operator will now open up the lines for questions.

Operator?.

[Operator Instructions] Our first question will come from Sanjay Sakhrani with KBW. .

I guess I was trying to get a little bit more color on some of the commentary you had around retention of the Costco portfolio given the sale process and how we should think about a gain that might occur if, in fact, you sell the portfolio and you can't go after those customers.

Could you just talk about how that affects the 2016 guidance?.

So all good questions, Sanjay. Thank you.

So the points I was trying to make in my remarks were we can now give you a little bit information and are trying to help you understand what's going on in Canada where there was no portfolio sale, where we were able to reissue cards with, in fact, the same card number and where we're pleased that we're tracking to retain over half of the outer store spend.

As I give people that detail, I think it's really important to realize that, that is a completely different situation from what may happen in the U.S. And if you assume there is a portfolio sale in the U.S. where all the card members are automatically moved to new cards from a new issuer.

Then if you assume that in general, these contracts, to your point, Sanjay, have restrictions around marketing, I want to caution people that you would expect to get a very, very different outcome from what is happening in Canada and if that's the way the U.S. were to play out.

When you think about a portfolio sale and assuming there’s a gain, we've been, I think, consistent for quite some time in saying that we would use that gain, or at least portions of that gain, to help fund continued spending on a variety of growth initiatives.

And when you think about our company and our growth opportunities, we have many, many opportunities to grow in every part of our business in every part of the globe.

And so the efforts we may or may not make at times around Costco card members are just one small piece of what is a much broader pie of opportunities we see to really effectively continue to spend at elevated levels, marketing, promotion and certain other things.

So I wouldn't overly try to tie, Sanjay, the elevated levels of spending with any particular segment, including the Costco segment. It's really an elevated level of funding that we are applying to the best opportunities we have, which occur all across our business. .

Our next question is from Ken Bruce with Bank of America Merrill Lynch. .

My question relates to marketing and promotion expense. You obviously are looking to increase that in the back half of the year.

Looking back at some of the recent experience going back to 2010 and '11 where you really did increase spending pretty dramatically then to drive growth, it -- the levels that you accelerated spending at that time were considerably higher than what I think you're basically guiding to for the back half of the year.

So I guess the question is do you think that taking up marketing and promotion expense to say somewhere in the 34, 35, 36 basis points per unit of billing is going to be sufficient to get to the growth you need to achieve your targets? And if I'm thinking about it wrong, is there a way to dimensionalize that?.

Well, I think the way I would think about it, Ken, it's a very good question, is we have a range of opportunities. On the other hand, we want to be really prudent about only focusing on those opportunities that offer really good returns for our shareholders.

When you look at, in fact, one of the slides in the presentation today, which lays out the last 8 or 9 quarters of spending around marketing and promotion, I would say if you steer at that slide a little bit, it gives -- will give you a more realistic sense of the range of spending that we would consider elevated and that we would consider a range where we can, very efficiently and very effectively in today's environment, deploy all the dollars.

I wouldn't -- I'd be cautious about going back and looking at analogies from 2010 and 2011. It's a very, very different situation. So I think if you look at that more recent set of histories and think about the highest levels, that's probably more what we think we can target and be really effective. .

We'll go next to James Friedman with SIG. .

My question is about Europe and the changes in the interchange environment there.

Just looking for some high-level thoughts on how you might characterize your strategy now that competitor cards have their interchange rates capped is do you see that as an opportunity going forward?.

Well, it's a very good question, James. Let me step back and say clearly, as a general matter, we don't think regulation is a good thing for consumers and merchants and for this category.

When you look at the European Union regulation and the final layout of it, it certainly confirms our view that most of the reforms are really targeted at addressing concerns around Visa and MasterCard's interchange practices.

But as we've long said, the reality is there are always impacts in these situations on our business, some of which can create challenges for us. We've talked, in this particular case, in particular about the fact that there are some new cross-border dynamics that are putting some pressure on our discount rates in Europe.

All that said, one of the strengths of our business model is we're out there every day having to prove our value to card members and merchants and every day evolving the way we work with both to demonstrate that value. That does give us an ability to flex and demonstrate our value in ways that others can't necessarily in this regulatory environment.

So we are working hard to manage some of the negative impacts of the regulation and use other parts of it to find ways to be even more creative about adding value to merchants and our card members.

And I would say, while, obviously, the legislation hasn't had any or much material impact yet, we're pleased with the results we see right now in Europe, and we're going to work really, really hard to try to continue those. .

Our next question is from David Ho with Deutsche Bank. .

Could you talk about some of the interest rate headwinds that you might face? And whether or not that's baked into the 2016 guidance? And what you may do as a company to offset some of those on-paper headwinds from the liability sensitive activity that you have currently?.

So good question, David. We, of course, are unusual in that a rising rate environment in isolation, if you hold everything else steady, is a negative for us and we put a number in our 10-K, just to use round numbers, that says for every -- all else being equal, 100 basis point rise in all interest rates will cost us around $200 million a year.

When you look at the outlook we've provided, we built it -- we're trying to be realistic in that outlook and so we built a steadily rising rate environment into that outlook. For that matter, I'd remind you, we also built a little bit of steady uptick in some of the provision costs as well.

So relative to our outlook, you would have to have a spike in interest rates that was much quicker and larger than what the general economic consensus has been to cause us to see any impact relative to that outlook.

In terms of how we think about offsetting the impact of those rising interest costs, if you look historically, there is usually some natural hedge here because as a general matter, central banks and the Fed tend to raise rates more when there's a little bit stronger economic environment and raise it a little less when the economic environment is not so strong, and obviously, the rest of our business benefits tremendously when there's a little bit stronger economic environment.

Beyond that, the reality is we -- the largest source of our position on our sensitivity to interest rates is the strength of our charge card franchise. We love that business. We think it's a great business. And so it just comes with this one aspect that we have to manage as interest rates, at some point, inevitably rise. .

And next, we have Craig Mauer with Autonomous. .

I wanted to ask if you could frame the OptBlue discussion a little bit differently. Versus your historical penetration versus Visa and MasterCard in the U.S.

in terms of merchant coverage, how has the additional 70 -- 700,000 merchants helped you close that gap?.

Well, there's -- yes, that's a good question, Craig. I think there's a couple aspects to this. So -- because you first have to close the actual coverage gap and then you have to make progress on closing the perception gap, and there's a time lag as you do both those things.

So the program that we first began to talk about a little over a year ago was one where we said, boy, if you play out the incremental merchants that we think we can get, if you look at just the cycle of those merchants and how often they re-up the smaller merchants with acquirers, then you have a multiyear process here before we believe we can get to the point where, in fact, you signed on most merchants in the U.S.

relative through a MasterCard, Visa. You could have a process that then extends beyond that to match that with perceptions and to drive card members to those merchants.

If you think about the things I said a few minutes ago, as I pointed out, that we're really pleased with our progress this year on OptBlue and we've signed 700,000 new merchants under it, we also have to wait until you get them signed up, and then you have to go through a process to drive business to those merchants.

And we're engaged in that, and we're certainly not to the point today where we would say that we have materially closed the coverage gap. So we're not going to go out and start talking about that until we've gotten further into this.

So this is clearly a multiyear effort, because you're talking about a couple of million merchants you ultimately have to add onto the roll. And it's a multiyear effort to change perceptions, but we're really pleased with the way it's going.

We feel strongly that when you take a multiyear view of this company, this is a really important part of our growth story, and we will continue to give you a sense each quarter of how it's going. .

We have a question now from Moshe Orenbuch with Credit Suisse. .

I was just wondering, I mean given the commentary you made about the opportunities for marketing, why did you wait 'til the second half? And could you talk a little bit about how some of the new products that you've been marketing and will be marketing, especially like the 6-3-1 rewards card will impact the profitability?.

Well, all fair questions, Moshe. We went into 2015, as we began the year at January, with an assumption that we would be continuing our very long-term partnership with Costco, and we set marketing plans and we set budgets and we set the management teams off to execute on that plan.

When we changed that plan in February and decided to go down a different path and concluded that we think in the long run we can generate more value for our shareholders with the path we've now gone down, we really had to do a little bit of a reset. And we manage the company for the long term.

We want to be thoughtful when we choose to do something as dramatic as we've done, go to our shareholders and say we're going to ramp up spending this year and it's going to result in not a lot of earnings growth and, in fact, EPS could even be down a little bit this year. We want to be really thoughtful about the way we deploy those resources.

And so while we began to deploy them in the second quarter to be as thoughtful as we wanted to be, the reality is it's taking us until the third quarter to get fully ramped up. So we think that's the right way to run the company, the right results.

And as we said beginning back in February, we're stepping away a little bit from overly focusing on each individual quarter. .

And the rewards -- the profit -- the impact on the rewards costs of the new products?.

Well, look, the rewards environment in general has always been competitive and it's pretty competitive right now. What we really try to focus on, Moshe, are a couple of things. Number one, ultimately this is about broad customer value proposition. Rewards is one component of that. We have a brand. We have a reputation for security and trust and service.

We try to leverage those things.

Second, we have a very broad portfolio of products in the U.S., and we do that because we think there's tremendous value in making sure you're delivering to different customer segments the things they value the most, whether it be cash back rewards products; things that use our Membership Rewards program, which is of course, still by far the largest and most diversified rewards program; or our many co-brand products.

And by focusing on the broader customer value proposition, by making sure we're being really thoughtful about how we segment the different customer groups and produce something that they're going to most highly value, we think we can get to the best possible result both for both our card members and our shareholders without having to compete dollar for dollar on every single aspect at every single product.

So we feel good about some of the latest things we've launched, and certainly, the big launch in the last 12 months was around the EveryDay card last year. That card has performed better than we had anticipated. It has reached a little bit different demographic, which is exactly what we were trying to do and so we're pretty pleased with that. .

We'll go next to David Hochstim with Buckingham Research. .

I wonder, with the benefit of another 3 months of analysis, if you could provide more color around the decline that we've seen in GCS billed business? And is weather a factor? Comparisons? What's the outlook for some improvement in the third quarter? And I guess really just wondering why that's declined so much far rapidly than USCS billed business, for example.

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If there's companies tightening TV budgets as they think about the economic environment; is it a little bit of fare pressure on the airlines; lots of -- there'd be lots of different theories and you can add your own, but that's -- those are the facts as we see them. .

Was there any change late in the quarter that would lead to a different trend in Q3?.

We're always very cautious, David, about reading too much into trends that occur over a couple of weeks. So I would say, no, we'll just have to see how Q3 plays out. .

Our next question is from Don Fandetti with Citigroup. .

Jeff, in terms of your American Express Checkout product, that was pretty interesting that you can use your existing ID and password. I was just curious what you found as you've rolled that out to merchants.

Are you having to offer any type of economic incentive? I know some of the networks have suggested that it can be a little tricky to get their merchants to prioritize that.

And how quickly do you think you can grow that penetration to your top merchants?.

Well, of course, Don, it's very, very early days here. We have just announced the product. It's available with a small number of initial websites with a longer public list of people who will soon be adding it. Certainly, we have done some pilot sites before we launched it.

And of course, the key here that everyone is trying to get to with these products is you're trying to get to a much higher percentage of people who go all the way through to the end and buy what they've been looking at in any particular online or mobile experience.

And I would say we and the couple of merchants we had doing pilots with us were very encouraged by the results that we achieved in terms of improving those rates of getting people through to the final, final step.

So when you think about the economic arrangements, I obviously can't comment on the specific arrangements, but what this is really about and the real pot of gold that everyone's chasing here is can you get those rates up significantly? And to the extent you can prove that you can, then, the economics take care of themselves for everyone.

And that's what we're seeking here. Now, I'll go back to where I started. It's very early days and we're going to have to see how things progress here, but we are encouraged by the early results. We think we have a product with some very interesting features relative to some of the other alternatives.

It is very simple, it is very quick, but we'll have to give you an update as time goes on. .

Our next question is from Sameer Gokhale with Janney Montgomery Scott. .

So just a quick first question about the steering injunction, which became effective on the 20th of July. At this point, have you notified all merchants that they can, in fact, steer? Just wanted to get a sense for that.

And then, in terms of earlier this year, there was a restructuring initiative involving 4,000 jobs and just wanted to get an update on that. Have you completed that restructuring with the 4,000 jobs? Just an update on that would be helpful. .

So let me take those one at a time. So let's start with the DOJ. So you are correct; the judge's order became effective at the beginning of this week, and we are in the process of following that order.

One part of that process is notifying all of our merchants of their right to steer, and that will be happening, per the order, in the next several weeks. There's other aspects to it, but that's certainly one of the most important parts.

As we think about the order, I think the first thing I would say is when you -- as we sit here and think about it today, we believe that in the near term, the financial impact of this order is within the financial outlook that we provided at Investor Day, reiterated it again today.

Clearly, in the longer term, we're going to have to see how the marketplace reacts to the order and think about what impact that's going to have on our business modeling. So that's where we are with the DOJ. Much more straightforward question, yes, we took a restructuring charge last year that involves about 4,000 employees.

We are well into that, however, there is still a significant portion still to come. Some of this involves fairly complex moves as we right-shore. Interestingly enough, a lot of this is moving from one non-U.S. location to another non-U.S. location. In some of our other operations, that has to be done very thoughtfully.

And so there's a very experienced team that's doing this who is involved in that process, but they won't be done until much closer to the end of this year. .

We have a question now from Mark DeVries with Barclays. .

Follow-up questions on what's embedded in your EPS growth guidance. What does it contemplate in terms of FX? Is it -- I'm assuming it's consistent with what you laid out, Jeff, for a fading headwind from FX in the fourth quarter.

And if that's the case, does it assume no further appreciation in the dollar? And therefore, what might happen if we see continued dollar strength? And also, what happens if credit is more benign than you're thinking, and you don't see the provision ramp in the back half of the year? Could we expect that to fall to the bottom line? Or would you expect to kind of reinvest the benefits of that?.

Yes, 2 good questions. So on FX, essentially, what is built into our multiyear financial outlook, to use broad strokes, is roughly the rates you see today. And so to the extent -- because it's hard to imagine, these may be famous last words, that you could have another move as dramatic as you have had in the last 12 months beyond where we are today.

If you do, that will be a tough headwind for us that we'll do our best to manage. I'd just remind you that the movement of the U.S. dollar so far, so fast against so many currencies all at once, as it's done in the last 9 months, you have to go back quite a number of decades to find another move like that. So it could happen but we'll have to see.

On credit, you're correct; we built in both in the back half of this year, as well as into our '16 and '17 outlook, some modest and steady uptick in the provision and growth of the loan provisions. Clearly, we have a very steady track record now in growing our loans above the industry average.

What happens if that is more benign? Well, that will be a very good thing.

What I would say in terms of the bottom line is what we are trying to be true to at this point is the financial outlook that we've provided to people and making sure we are really well positioned to demonstrate and to execute upon once we've lapped all the FX, once we've lapped all the co-brand changes, once we've lapped Costco in the U.S., demonstrating to people that the business model and financial model that have produced 12 to 15 EPS growth rates, 12% to 15%, is in place and is working well.

And so if credit is a little bit more benign, we will frankly look to see whether we are operating within the financial outlook that we have and whether we have other growth initiative funding that we, in fact, think it could be for our shareholders, very profitably redeployed or whether we want to take it to the bottom line to make sure we feel comfortable that we can come in with the kind of outlook we've provided.

So boy, there's always a lot of moving pieces, we'll have to see where they all come out. But hopefully, Mark, that gives you at least some sense of how we will think about things. .

Our next question is from Eric Wasserstrom with Guggenheim Securities. .

Jeff, it's Eric Wasserstrom. Just -- I just want to follow up on David Hochstim's question. One of the themes that's come out from the recent slate of bank reporting has been some enthusiasm after many quarters of maybe not so much enthusiasm about the growth in C&I, credit demand and the growing growth in middle-market demand.

And to the extent that corporates now are demanding more credit, presumably to fund operations, do you think that, that potentially signals some pick up in spending in the middle market and corporate universe?.

Well, boy, Eric, I got to say, this is the one where I hope you're right and I hope that's a signal. But all I can do is tell you what we are seeing in our corporate business.

And I'd remind you, it is a -- well, we do lots of things in the GCP segment, the biggest component is still tied to, more or less, T&E-oriented spend by mid- to large-sized companies. And so I have read some of those same comments that you just referenced. We'll have to see whether they show up in our results over time.

Certainly through June 30, it would be hard to see that. .

That will come from Cheryl Pate with Morgan Stanley. .

I just wanted to circle back to some of the earlier comments on OptBlue and sort of closing the perception gap.

Can you just maybe help us think through? Is that increased signage with the merchants? Or is it more proactive with the card members? And then how would you tie that into -- I know we've talked about in the past the economics sort of moving to the positive on OptBlue at some point this year. .

Good question, and the answer, of course, is yes, it's sort of all those things. So there's a -- not to get overly tactical here, but you have to get the merchants signed up. The reality is we have trained, over many decades, our card members do look for little stickers in the window.

And so you literally send teams of people out to make sure stickers are going up in the windows and that helps. There's an element of educating our card members. Now here, there's sort of a -- you have to think about the pacing and the timing.

You wouldn't necessarily, if you were, Cheryl, an Amex card member, which I'm sure you are, of course, want to get an e-mail from us every single time we signed up any merchant within 10 miles of you because you'd get tired of seeing all the e-mails and you'd ignore them.

So you kind of have to be thoughtful about when is the right time to communicate in the most impactful way to our card members and when do you make sure you're doing that soon enough so the merchants who sign up start to see Amex card members and feel good about what they've done. So there's no magic here.

It's a matter of balancing some of those basic blocking and tackling things we need to do, but we're very focused on it. I'll go back to that's why I said so far this year, we're pleased with all the sign-ups and we are very focused now on continuing the sign-ups but also beginning to drive more business to those merchants.

I would say we are -- remain on track for this year for the program overall to be a positive to our bottom line, when you look at the net of all the positives and negatives, and we are tracking to our plan over a couple of years to much more significantly close the coverage gap..

So Cheryl, thank you for that last question and thanks to everybody for joining us on tonight's call. I guess I'd go back probably to where I started and where I ended earlier, which is there is a lot of complexity in our results but we think that this quarter does, again, reflect solid core underlying performance. .

With that, I will wish you all a good evening and thank you for your continued interest in American Express. .

Thank you. And, ladies and gentlemen, this conference will be available for replay after 7 p.m. tonight through midnight, July 27. You may access the AT&T Executive Playback Service at any time by dialing 1 (800) 475-6701 and entering the access code 363379. International callers dial 320-365-3844 using the same access code 363379. .

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