Daniel Henry - Chief Financial officer, Executive Vice President and Member of Operating Committee Rick Petrino -

Michael Taiano - Sandler O’Neill & Partners Richard Shane - JP Morgan Chase & Co Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc. Craig Maurer - Credit Agricole Securities (USA) Inc. Brian Foran - Nomura Securities Co. Ltd. Kenneth Bruce - BofA Merrill Lynch Bruce Harting - Barclays Capital John Stilmar - SunTrust Robinson Humphrey, Inc. David Hochstim - Buckingham Research Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Second Quarter 2011 Earnings Release Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Rick Petrino. Please go ahead, sir.

Thank you, Rocco. Welcome. We appreciate all of you joining us for today's discussion. Before we start the slide presentation, it is my role to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company's financial and other goals, are set forth within today's earnings press release, which was filed in an 8-K report, and in the company's 2010 10-K report already on file with the Securities and Exchange Commission. In the second quarter 2011 earnings release and earnings supplement as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com, we have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Dan Henry, Executive Vice President and 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 and provide some brief summary comments. Once Dan completes his remarks, he will turn to the moderator, who will announce your opportunity to get into the queue for the Q&A period. Up until then, no one has actually registered to ask questions. While we attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A. With that, let me turn the discussion over to Dan.

Okay. Thanks, Rick. So I will go through the slide presentation, and we'll start with Slide 2, which is the Summary of Financial Performance. So total revenues net of interest expense was $7.6 billion. That's a 12% increase over last year. On an FX-adjusted basis, it is 8%. So even after adjusting for the foreign exchange impact, we achieved our long-term revenue growth target of 8%. Income from continuing operations was $1.3 billion, 27% higher than last year. EPS from continuing operations was $1.07. We also had $0.03 of earnings from discontinued operations, which was really a tax settlement related to American Express Bank. So EPS on net income is $1.10, but we'll focus on the $1.07. Return on average equity was 28%, and shares outstanding were even with last year. So moving to Metric Performance on Slide 3, Billed business in the quarter was $207 billion, 18% higher than last year, 15% on an FX-adjusted basis. So the second quarter was the strongest quarter for Billed business in American Express history, both on a reported basis and an FX-adjusted basis. So record spending by our Cardmembers. On an FX basis, Billings growth has either been 14% or 15% over the last 5 quarters and 15% in this quarter. Cards-in-force grew 6%. GNS cards grew at 15% and proprietary cards at 2%. Average basic Cardmember spending increased 15% and 11% on an FX-adjusted basis, obviously a major driver for the increase in Billed business. Loans grew 2%, and it's been many quarters since we've had growth in loans. Not on this chart are accounts receivable related to Charge Card, and there, we actually had a sequential growth of 6%. So looking at worldwide travel sales, it grew 17%, 10% on an FX-adjusted basis. It was primarily driven by higher air sales, where we had both an increase in transactions and higher ticket price, although the increase in transactions was the larger contributor, and we had growth in both corporate and consumer travel. Moving to Slide 4. This is Billed business growth by segment. So we continued to see broad-based growth across all the segments. On an FX-adjusted basis, all 6 segments had double-digit growth. GNS has the highest growth at 25% on an FX-adjusted basis and over the past 7 quarters has had growth over 20%. The other segments have also had consistent growth over the last 5 quarters. If we move to Slide 5, which is Billed business growth by Region. Again, here, we continue to see broad-based growth across all regions. On an FX-adjusted basis, all regions had double-digit growth. In the past 6 quarters, all regions have had double-digit growth. So again, here, in each region, the growth has been pretty consistent over the last several quarters. Moving to Slide 6, so this is looking at lending Billed business versus managed loan growth. So the solid line is growth in spending on lending products, and the dotted line is growth in loans. And you can see on the chart that the growth in spending on lending products has not correlated with the change in loan balances over the past 2 years. Again, not on this chart, but if you were to look at Charge Card billings compared to accounts receivable growth, that actually does move in tandem. So the difference in growth between spending on lending products and loans is in part due to our actions and part due to Cardmember behavior. So our actions are that we have reduced the amount of proprietary lending acquisitions, and those acquisitions are focused on premium lending. And they tend to revolve less. We've also had a significant reduction in balance transfers. On the Cardmember side, they are simply deleveraging. So the transactors have become a larger percentage of our loan book. If you were to look at the lending trust payment rate, you would see that in June of 2010, the rate was 28.9%, and in June of 2011, it's 31.6%. So 270 basis points higher. If we move to Slide 7, this is the U.S. consumer net interest yield for managed Cardmember loans. So while this time period is no longer on the chart, if you went back prior to 2009, net interest yield was generally in the high 8% to 9% range. So rates increased in 2009 in anticipation of the CARD Act. Rates have now come down in recent quarters as anticipated. As discussed in prior quarters, the impact of the CARD Act within yield is significant. However, we have worked to mitigate it through our repricing activities. So the lower yield reflects lower revolve rates and lower balances at penalty rates, offset by certain repricing initiatives. Going forward, yield will continue to be influenced by a number of factors, including our strategy to focus on premium lending, the credit quality of our portfolio, the percentage of the portfolio that is revolving and the cost of funds. If we move to Slide 8, so this is revenue performance, you can see overall revenues grew at 12%. Discount revenue grew at 16%, driven by 18% growth in Billed business. It also reflects a slight decline in our average discount rate, the fact that GNS Billed business is growing faster than the average and we have higher contra revenue items such as corporate incentives and partner payments. Card fees are up 5%. This reflects the growth of 2% in proprietary cards, and the balance of the growth is the result of foreign exchange and the weaker dollar. Travel is up 21% on 17% increase in sales and a slightly higher commission rate. Other commissions and fees is primarily driven by loyalty partners being included in this quarter, when it was not in last quarter, or the quarter last year. Other revenues reflect higher GNS partner royalties, higher foreign exchange fees, higher prepaid revenues, greater merchant-related fee revenues, and they all contributed to the 10% growth in this line. Net interest income is down 3%, and this reflects the lower yield I just discussed, offset by the 2% increase in average Cardmember loans. So overall, we have 12% reported growth in revenues, 8% on an FX-adjusted basis, very strong relative performance. Next, to Slide 9, provision for losses, and this continues to be well below historic levels and enables us to invest to drive future business momentum. The Charge Card provision is $65 million higher than last year. Write-off rates are about the same in both periods, and therefore the write-off dollars are about the same. But in 2010, it included a $60 million reserve release, reflecting the improvement in credit metrics compared to prior periods. Credit performance in Charge Card continues to be excellent. Now lending provision, as you can see, as you'll see on the later slide, the write-off rate is down dramatically compared to 2010. Reserve releases in both periods are similar. So the reserve releases in 2010 and '11 are similar. But we have a lower provision driven by the lower write-off dollars, which are a result of the lower write-off rates. Slide 10, so this is Charge Card credit performance. So Charge Card credit performance continues to be excellent and stable and at historic low levels, both in the U.S. Consumer business, International Consumer and the Global Commercial Card business. Since our objective is to grow the business profitably and not have the lowest possible write-off rate, I would expect these metrics to pick up over time as we grow the business. Slide 11, lending net write-off rate. So the U.S. and International write-off rates continue to improve. The worldwide rate is now 3.1% compared to 6% last year. The U.S. lending credit performance is the best in the industry. The U.S. Consumer write-off rate in this quarter was 3.2% and in June was 2.7%. Moving to Slide 12, so this is the lending 30-day past due. So the 30-day past due has improved in both the U.S. and internationally. Again, this is best-in-industry performance. Again, our objective is not to have the lowest possible credit metrics but to make good economic decisions that drive profitable growth. So here, we move to Slide 13, so this is USCS managed lending roll rates and bankruptcy filings. If we look at the right side of this chart, it's the number of bankruptcies, and you can see that it's up slightly from the first quarter but well below the levels that we saw in 2009 and 2010. And I'd remind you that about 2/3 of the bankruptcies have already been written off by the time we receive the notice. Now the left side of the chart is designed to be helpful as we look forward. So if you look at the upper left chart, so these are balances that roll from current to 30 days past due, and if you look at the green triangles, those are the balances that went past due in November, December and January, and they write off 5 months later if they continue to be delinquent. So those green triangles wrote off in the second quarter of 2011. Then you can see that the 3 blue triangles are lower. The next 3 blue triangles are lower than the green triangles. So if the 30-day past-due amounts to write off, which is the chart on the bottom left, remain constant, the third quarter 2011 write-off would be lower than what we saw in the second quarter of 2011. It also assumes that early write-offs or recoveries remain unchanged. Although I would note that the 30-day past due to write-off rate, the bottom-left chart, has ticked down slightly. If we go to Slide 14, so this is the worldwide lending reserve releases. This chart shows the lending reserve releases across the top by quarter. The light-blue bar are the write-off dollars in the quarter, and the dark-blue bars is the provision. So it's the dollar write-offs less the reserve releases. So in the second quarter of 2011, the reserve release was approximately the same as the second quarter in 2010. But we had a lower write-off rate in 2011, and therefore the write-off dollars are lower in 2011, and therefore, the provision is lower in 2011 compared to 2010. The reserve release in the second quarter of '11 is lower than the past several quarters. So while credit is improving, it is at a slower rate than we saw in recent quarters. Reserve releases should diminish as we go forward. Looking at Slide 15, so this is Lending Reserve Coverage. So as credit metrics continue to improve, the reserve as a percentage of loan continues to come down in the U.S. and worldwide. In the U.S., it now stands at 4.5%, and worldwide, it is at 4.4%. Reserves as a percentage of past due and principal months coverage have remained similar to the levels that we had in the first quarter. Although we released reserves of $400 million in the quarter, coverage ratios remain at appropriate levels. So if we look at Slide 16, expense performance. So expenses increased 21% on a reported basis but 17% on an FX-adjusted basis. Marketing and promotion decreased by 4% due to lower USCS product media spend, partially offset by higher investments in international markets, and I'll provide some additional detail on following slides. Cardmember rewards increased 35% year-over-year. So this is greater reward-related spending volumes and higher co-brand expense. In addition, we see higher membership rewards redemption rates that have led by a -- that led to an increase in the ultimate redemption rate. We also saw a shift in redemption mix which is increasing our weighted average cost per point. And I have a slide to talk to this in more detail in a minute. Salaries and employee benefits increased 21%, and this reflects higher employee levels, merit increases for existing employees, higher benefit-related costs and $48 million of severance costs related to reengineering and higher incentive-related compensation. Total expense adjusted for FX and if we were to exclude the reengineering cost would be 15%. Professional services increased 17%, reflecting higher technology development, including various initiatives related to digitizing the business, globalizing operating platforms and enhancing analytic and data capabilities. It also includes higher legal cost, greater third-party merchant service sales force commissions. And it also includes a reduction of the amount previously capitalized related to software development by third-party vendors, and that amount was $38 million. And lastly, we have a lower tax rate that reflects the favorable resolution of certain prior-year tax items. We utilized this tax benefit to invest at higher levels. Moving to Slide 17. As we discussed in prior quarters, the high level of spending reflects the benefits from improving credit and the Visa-MasterCard payments. As these benefits lessen over time, we have the flexibility to move investment spending towards historic levels. So if you looked at M&P as a percentage of revenues, it was 7% in 2007. During the crisis of 2009, it dropped to 7%. And in the second quarter of 2011, it stands at 10%. So when I reference moving to historical levels, I mean about 7% or -- sorry, 9% of revenues, or about $700 million per quarter. Spending on marketing and promotions in the second quarter was $795 million. Within USCS, we focused on Platinum and Charge Cards, Blue Sky, Blue Cash and Delta acquisitions, although we had lower product media spend. In International Consumer, we focused on acquisitions in our major proprietary markets and marketing related to loyalty partners. In GNMS, we focused on merchant spend simulation, perceptions of coverage and certain contractual and incentive payments. So now let's move to Slide 18, Cardmember rewards expense. Cardmember rewards expense increased $1.6 billion -- or was $1.6 billion, an increase of 35%. So this includes expense related to Membership Rewards and to our co-brand products. Membership Rewards was the primary driver of expense growing beyond the growth in volumes. So I just remind you that in our co-brand products, the co-brand partner has the obligation to deliver the rewards to the customer. We pay the co-brand partner monthly and have no liability on our balance sheet. In contrast, we have the liability for the Membership Rewards program and, therefore, have a reserve on our balance sheet for this program. The primary point I want to make before I review the drivers of the growth in Membership Rewards expense is that the increase reflects the cumulative impact of rewards program enhancements designed to encourage Cardmembers to earn and redeem points. So now, let's look at the drivers of Membership Rewards expense. So the first part relates to points earned in the second quarter. So we look at total spend. If the ultimate redemption rate and the weighted average cost per point in the second quarter of 2011 was the same as that in the first quarter of 2011 and the second quarter of 2012, then the increase in expense would equal the increase in spending in the period. But it's not that simple. We also look at bonus points, and to the extent bonus points earned in the quarter as a percentage of total spend increases compared to a year-ago quarter, then that will contribute to expense growth at a higher rate. And that was the case in the second quarter of 2011. In addition to that, if the ultimate redemption rate or the average weighted cost in the second quarter of 2011 is higher than what we had in the second quarter of 2010, that would also contribute to a higher growth rate related to the points in the quarter. Now the second part has to do with points previously earned. So when we enter the quarter, there are points that have been earned by Cardmembers that have not yet been redeemed. And we have a balance sheet reserve for that. And the way that's calculated is really the points that have been earned but not yet redeemed times our estimate of what the URR, or the ultimate redemption rate, would be -- was at the beginning of the quarter, times the weighted average cost per point that we estimated at the beginning of the quarter. So if the estimate for the ultimate redemption rate or the weighted average cost increases or decreases, the balance sheet reserve needs to change accordingly. Now you might remember, in the annual report, we point out that 1%, or a 100-basis-point increase, in the ultimate redemption rate results in a cost of $283 million. The weighted average cost, if it changes by 1 basis point, costs $60 million. So in the second quarter of 2011, as a result of the cumulative impact of rewards program enhancements, Cardmembers are redeeming at higher levels, and we are seeing a shift in the redemption mix, which is increasing the weighted average cost per point. So in the second quarter of '11, rewards expense includes the alignment of the balance sheet reserve with the current behaviors of Cardmembers, which requires an increase in the reserve and, therefore, an increase in expense in the second quarter. So let me make a few final points. While rewards did grow faster than volume in the period due to the reserve increase I mentioned, we view the underlying increase in customer redemption activity as a positive outcome that logically follows the value enhancement that we have made to the program in recent years. Redemption's rates may continue to grow somewhat. But as we have stressed before, our customers earning and redeeming points is an encouraging sign to our business model, as rewards is closely linked with engagement and loyalty to the American Express brand. We are confident that we can continue to add value to Membership Rewards program and still maintain our current on-average and, over time, financial targets. Let me move to Slide 19, operating expense. So operating expense is total expense excluding Marketing and Promotion, Membership Rewards and membership services or Cardmember services, and it totals $2.9 billion. As we've discussed over the past several quarters, investment spending is driving higher operating expense. Operating expense grew at 21%, 17% on an FX-adjusted basis. And as I mentioned before, if you excluded the cost of reengineering, it would be 15%. So if we look at the chart, we break out those items that are growing faster than the average, which are above the dotted line and those that are growing at a more modest rate, which are below that line. So within new business initiatives includes spending on LoyaltyEdge, mobile and online capabilities building, business insight, certifying and loyalty partners. Also above the line are higher levels of investment in GNS. But as I mentioned before, GNS has been growing at over 20%, Billed business over 20% over the last 7 quarters. So our investments are paying dividends. Also, you can see we continue to invest in sales force. And we're investing in technology for both our core business and digital initiatives. Below the line, you can see that we are growing support functions and global services at more modest rates. I'd also point out that the Visa-MasterCard payments are netted in operating expense. And as you know, this quarter is the last quarter that we will receive the $150 million per quarter from MasterCard. And the fourth quarter is the last quarter we'll receive payments from Visa, which is $70 million a quarter. As I indicated last quarter, we have a plan to slow the growth in operating expense, and again, that excludes provision, rewards and marketing and promotion. So we have a plan to slow the growth in our operating expense as we exit this year and into 2012. The next slide is Slide 20, expense flexibility over time. So here, we're looking at adjusted expenses, and this excludes provision. So we recognize -- so this is adjusted expenses as a percentage of revenue, but again, excluding provision. And we recognize that we are on elevated expense levels, though adjusted expense as a percentage of revenues has started to decrease. Over time, we expect this ratio to migrate back towards historical levels in 2 ways. First, through revenue growth, which is to be fueled in part by the investments that we have been making in 2010 and 2011, and second, through expense flexibility, which includes our plans to slow the growth rate in operating expenses, which I just discussed, as we exit 2011 and into 2012. Next, is Slide 21, our capital ratios. Tier 1 common has increased in the second quarter to 12.3%. In the second quarter, we generated $1.6 billion in capital, $1.3 billion through net income and $300 million from employee plans. We used $800 million for share repurchases and had a dividend of approximately $200 million. The high level of capital is the fact that we're holding capital effectively or designed to enable acquisitions in the future. So you remember that we've said we'll return about 50% of earnings to shareholders through repurchases and dividends and hold 50% to support growth in the business that requires growth in the balance sheet and for acquisitions. If Basel III rules were in effect today, we estimate that the Tier 1 common ratio would be about 40 basis points lower than the 12.3%. So we continue to have strong capital ratios. Slide 22, so this is a liquidity snapshot. We continue to hold excess cash and marketable equity securities to meet the next 12 months of funding maturities. So we're holding about $20 billion, and the next 12 months' maturities are $17 billion. Next is Slide 23, this is our U.S. retail deposit program, and you can see that direct deposits increased by $1.2 billion in the second quarter. Third-party CDs declined by about $900 million, with the weighted average remaining maturities similar to what we had last quarter at 20 months. So total deposits increased slightly to $31.6 billion. And deposits are providing a greater degree of funding diversity for us. So with that, let me conclude with a few final comments. Results for the quarter reflect a continuation of the positive business trends evident during the last several quarters. Spending growth remains strong across all business segments and geographic regions, despite difficult prior-year comparisons. We also saw a further improvement in lending trends as average loans grew year-over-year for the first time since the end of 2008 and lending credit continued to improve. Our strong billings growth coupled with higher travel revenues and miles growth in average loans enabled us to reach our long-term revenue growth target, even after adjusting for foreign exchange impacts in the quarter. Our revenue growth rate also continues to outpace our large issuing competitors, reflecting returns on our investments and the unique nature of our spend-centric business model. Strong revenue growth, improving credit trends and the benefit of lower effective tax rate provided the opportunity to invest in the business at high levels while also generating strong earnings. These investments are driving current metrics as we deliver higher average spend, grow our card base and build capabilities for the future. We are also seeing higher customer engagement in our rewards programs, which, while driving higher rewards costs, creates favorable economics through enhanced customer loyalty. We're excited about the continued momentum in the business but acknowledge that the economic and regulatory environment remains uncertain. In addition, as you know, we have received the last payment from MasterCard, will receive the last payment from Visa in the fourth quarter and face more difficult year-over-year comparisons in light of the strong volume and credit performance in 2010 and year-to-date in 2011. In light of these factors, we are continuing to implement our plan to slow the growth of our operating expense as we exit this year and into 2012. Our success in a highly competitive environment and unique business model are yielding high-quality results and strong revenue growth. As spending on our network continues to grow well above industry average and our credit performance remains the best among major credit card issuers, we are confident that our investments and business model are appropriately positioned to manage through the changing environment, capitalize on the opportunities in front of us and continue to win in the marketplace. Thanks for listening. We're now ready to take questions.

[Operator Instructions] And our first question comes from Craig Maurer with CLSA. Craig Maurer - Credit Agricole Securities (USA) Inc.: Two questions for you. On the Membership Rewards cost, we saw that line expand over 30% each of the last 2 quarters. And from your discussion, it sounds like without the increase in the cost per point, that should track with spending. So in the third quarter, should we expect that year-on-year growth rate to start to trend back towards the growth in Billed business? Or are we going to remain at these above-30% growth level -- growth rates for a period longer? And secondly, I was hoping someone could comment on the genesis of the Facebook deal, whether that was bid for or they came to you, you went to them, so on and so forth.

So as you know, I wouldn't forecast the third quarter. What I would say is the first quarter was impacted by a refinement in our estimation process with an element in the first quarter and why we had a growth rate that was higher than the growth in spending. The second quarter was a little different in that it was really driven by the fact that, because of the enhancements that we've made in the program, we saw more engagement, more redemptions on the part of our Cardmembers. And also, we saw a shift in redemption to some options that had a higher cost to it. So the things that drove the first quarter and the second quarter were slightly different. As I indicated, we could see the URR increase somewhat in the future, but that will be completely dictated by the behavior of our customers. And really, the key point here is that we want to enhance the program, we want greater levels of customer engagement. It creates loyalty. The economics around products that have the Membership Rewards feature on it are very good. So while engagement in the quarter causes us to align our balance sheet reserve with that behavior and, therefore, has expense in the period, long-term we think is very good for the franchise. So as relates to Facebook, we are constantly interacting with folks in the marketplace, thinking about how we can capitalize on the digital space. So this was not a bidding process. This was us looking to see how we can provide relevance and value to our customers broadly and, in particular, to small businesses. So this is all about creating value and relevance for both customers and merchants in a way that provides a positive result, both for Facebook, for American Express, for merchants and for customers.

And our next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.: I was hoping to get a sense of what's driving the strong spending volumes. Obviously, you guys have seen strong volume growth for some time now. I know part of it is FX-driven. But maybe you can just talk about how much of it is kind of new-business driven versus higher customer spend versus some commodity-inflation-related impacts. And then just on that URR question, what is the URR now versus what it was in the first quarter? And then just -- I was wondering how we should think about it from an NPV of customer relations standpoint. I mean, these higher costs, is that eating into the NPV of new relationships or existing relationships versus what you had anticipated they would be when you originated them?

So multiple questions there. So the drivers of Billed business. So even adjusting for FX, 15% FX-adjusted growth is really very strong. It's clearly at the very top end in the industry. Based on the data we've seen so far, I would suspect we'll continue to gain share, which is one of our major objectives. It is a combination of both performance of our current customers and the new customers that we're acquiring. So while we're not seeing large percentage increases in proprietary cards, the quality of the Cardmembers that we are acquiring is really very good. So we are focused on high spenders who want to utilize charge cards. We're also focused on premium lending. And at the end of the day, we're providing a value proposition to both new customers and existing customers that are causing them to decide to spend on our products as opposed to someone else's. At the end of the day, it's a combination of the rewards programs that we've put in place and the enhancements that we have made as well as the customer service that we provide. And as you know and I said many times, J.D. Power does the survey for the industry. As relates to service, we've been #1 for several years. So I think it's a combination of all those factors and the investments that we've been making over the past couple of years that are paying off with higher levels of spend. So to move to your second question about the ultimate redemption rate, the ultimate redemption rate in the first quarter we indicated was 92%. The ultimate redemption rate is also 92% in the second quarter. Now as I said, we've actually seen a tick-up in redemptions. So in the first quarter, it was 92%, but we were actually rounding up to get to 92%. In the second quarter, we were at 92%, but we're rounding down to 92%. So there's been an increase in what we have reserved in terms of ultimate redemption rate from the first to the second quarter, but they both round to 92%. The third question regarding the NPV of customers, so the NPV of customers that we're acquiring continues to be very strong. As you know, when we acquire customers, we think about not the cost to acquire them solely in this year or what their performance is next year, but it's really their performance over many, many years to figure out the economic value of that investment. And those investments acquiring the customers continue to be good. In terms of is it impacting the margins on existing customers, to the extent we are successful in putting the right value proposition out there, we avoid attrition, right? And if we have attrition, higher attrition, then we need to acquire more new Cardmembers. So the fact that these enhancements are lowering attrition has a very strong economic benefit attached to it. And as I said in my comments when I was going over the slides, we are comfortable that we can continue to enhance the Membership Rewards program and still maintain our current financial targets.

Our next question comes from the line of Brian Foran with Nomura. Brian Foran - Nomura Securities Co. Ltd.: I guess not to continue to ask about rewards, but I did have a broader question, which is when we look at Cap One and Discover and I'm sure if we could see it, at Chase, it seems like everyone has rewards charges happening, or at least the 4 of you do. And it also seems like the 4 of you are all kind of now moving into double-digit spend volume growth, whereas some of the other competitors are still stuck in the single-digits or even flat. So I guess what's the risk that there's just kind of a broader industry rewards war kind of happening and the few issuers who are moving market share will just structurally have to pay more to keep it going forward?

So there has been a war for the premium end of the payments industry for 15 years. And if we were back 10 or 15 years ago, we would be talking about people wanting to move into our space. And if we were complacent, I think we would lose share. But we're not. We continue to innovate. We continue to improve the value proposition that we provide to customers. That's a combination of rewards, Cardmember services, servicing. It's also us being cognizant that our customers want to be able to utilize the digital space more. We are very focused on that. You can see the recent announcements that we've made with Foursquare, with Facebook. I think those are all reflections of us innovating and providing value to customers. Now as we do that, it's important that we have the right business model to not only grow Billed business and grow revenues, but to have the right profitability associated to that. And again, over the last decade, I think we have continued to have the right level of profitability. And we think we have sufficient flexibility in our business model to continue to achieve our financial targets. So I think you're right, there's a very competitive landscape out there. We've been successful competing in that market, and we think we will continue to be successful as we go forward. Brian Foran - Nomura Securities Co. Ltd.: If I can ask a follow-up, can you remind us where we stand on all things on the litigation front, DOJ and the Visa merchant suit? And I know there's only so much you can say on things like this, but just any progress, updates or milestones we should be watching for in the near term?

DOJ was in the paper today as the cause, I guess, approved the settlement agreement between DOJ and Visa-MasterCard. As we've said in the past, we have provisions, non-discriminatory provisions, in our contract. We believe that if the merchant accepts American Express that when the Cardmember chooses to use that, our product, that they're not discriminated against. We also do not believe that we have market power. If you don't have market power, it's hard to see how we're driving anticompetitive behaviors. So we continue to plan to vigorously defend our position as it relates to DOJ. As it relates to the Visa merchant suit, you'd have to really talk to them about where that stands.

Our next question will be coming from the line of Bruce Harting with Barclays Capital. Bruce Harting - Barclays Capital: Any comments on the stronger card growth rest of world versus U.S., and then if I just look at -- stack up Billed business growth by your 4 businesses versus discount revenue growth and rewards cost, it looks like percentage changed year-over-year. It looks like the stronger growth in all 3 categories is the ICS and the GCS and GNMS. And any comments on what you're seeing, if you're just allocating more marketing spend or co-brand overseas and trends there. And then just to the degree that you have your comment you plan to slow growth of expense, excluding provision marketing and rewards, will that other other expense line be -- is there anything you can say forward-looking on where to expect the 220 toward the MasterCard fee in 3Q and 4Q, where the biggest change will come?

Okay, so that's lots of questions. Hopefully I don't miss some. So if you look at Slide 4, you're right that they are growing at slightly different growth rates, with GNS being the strongest. When we look at card growth internationally, a lot of that is being driven -- or GNS is growing cards at a faster rate than the proprietary business is growing in. I think that's a reflection of us or of our partners recognizing the value of issuing products that run on our network. Those additional cards are driving the growth in Billings that we've seen. And as I pointed out, this has been a success story over many years, and certainly over the last 7 quarters, GNS has grown greater than 20%. So I think that's a very good story. And while GNS is growing faster than the other segments, if you look at Slide 4, you can see that each segment on an FX-adjusted basis is growing in the double-digits, and they all have been doing it for 4 or 5 quarters. So I think the breadth of the growth in Billed business is encouraging and the stability of that growth is also encouraging. So even though there are slight variations, I think we're being successful across all the segments, U.S. consumer, U.S. small business, International Consumer, Commercial Card globally, they all have really very, very good growth rates. So there's some differentiation, but I think they're good. I would say that we -- and we have said that we think there is lots of opportunity in international markets. And so we have allocated more resources in terms of investment dollars to International. And we expect to get good returns on that. I think the investments we've been making broadly across the company, I think, reflect that. Also, the fact that on a regional basis, we've also had double-digit growth across all the regions, again, is encouraging because it's so broad-based. And again, we've had double-digit growth across the regions on an FX-adjusted basis for several quarters. So that's a positive. So switching to expenses and other other. So other other has the credit related to the settlement payments we receive from Visa-MasterCard. So you should expect the absence of the $150 million from MasterCard next quarter, just have that line pop up. And when we get to the first quarter of 2012 and we no longer have the Visa $70 million, it will pop up again. So as we focus on operating expense, there are lots of resources there. I think it's $2.9 billion. We're looking at the composite of that and how we utilize those resources. So we'll be looking to slow the growth in operating expense as we exit this year and go into next year. We won't necessarily be focused on each individual line item, but in aggregate, it's our goal to slow the growth rate in operating expense. So I don't know if I remembered all of your questions.

Our next question comes from the line of Rick Shane from JPMorgan. Richard Shane - JP Morgan Chase & Co: When we look at the Card Billed business domestically, both on a sequential and year-over-year basis, the revenue growth falls behind on both metrics. And Dan, you've made the comment that there are some contra revenue items running through there, and you specifically mentioned corporate rebates and partner payments. Can you just give us a sense of how much of that's recurring? Are these performance-driven, milestone-type payments? Are they upfront payments? Help us understand what's going on there, please.

So I think Billed business growth in the U.S. is really quite strong and very similar to the aggregate Billed business growth. So we're not seeing domestic U.S. spending falling behind. It continues to be quite good. If you're looking at discount revenue growing at 16% instead of 18%, if you look at GNS Billings, we share some of the discount rate with our partners. So the revenues related to those Billings are lower than if we have proprietary Billings. GNS has very good economics, good profitability, excellent ROE. It just happened to have less discount rate attached to each solidly [ph]. That's one of the factors. When you look at contra revenue, whether the incentive to corporate customers or partner payments, I think the vast majority of those are volume-related. And that's the primary driver. There may be some exceptions in there, but I think the vast majority are performance-based at the end of the day. So even if it winds up with a slightly lower discount rate, it still has very good economics attached to it. So if you're looking at U.S. Card Services information in our supplements or on the tables, the revenue line says discount revenue, net card fees and other. And so you're looking at 8% growth. That's really being driven by card fees in the other revenue lines, not by poor performance in Billed business. Richard Shane - JP Morgan Chase & Co: So you're saying that card fees in the other lines are flattish and that the mix is driving that.

Yes. I don't have it right in front of me, all those line items, but if you look at the consolidated numbers, net card fees are growing at 5%.

Our next question will come from the line of Kenneth Bruce with Bank of America. Kenneth Bruce - BofA Merrill Lynch: Thank you for providing additional disclosure around rewards expense and I appreciate that. It gives us a lot to think about. When you talk about the marketing and promotion expense historically running around 9%, that was very helpful. Is there a level that we can think about in terms of rewards expense relative to Billings historically that you would consider to be the average for that mix of business at the time? And could you provide us with what the URR would be associated with that?

So if you were to go back in history, rewards expense as a percentage of revenues would have been lower than what it is today. And in part, that's because in the first quarter and the second quarter, we've had this greater engagement by our customers and, therefore, a higher ultimate redemption rate and cost per point, that's related to the volume of those periods but also the alignment of the reserve with the most recent customer behaviors. So we have many levers within our business model that we can utilize. We can decide to acquire higher-quality customers that reduces provision as a percentage of revenue. We can decide to provide greater rewards. We could spend more money on acquiring customers utilizing MNP, we could hire more people at sales force, we could hire more people to build analytical capabilities or risk capabilities. So these are all the different ways we can use our resources, and we make decisions as we think about what our strategies are going to be and how we're going to provide value to our customers and our merchants. And we really, over the course of time, make those trade-offs. So I think going to one period and saying they're X and then try to compare them solely to another period without factoring in all the other levers that we're pulling would be kind of taking something out of context. So I think you need to look at each of these expenses as a percentage of revenue within the context of the period that you're in. Kenneth Bruce - BofA Merrill Lynch: Thank you. I think -- we appreciate that. I guess you were kind enough to give us the 7% or the 9% as a run rate of normal. I'm trying to baseline your rewards expense, it was 65 basis points of Billings back for pre-recession, and I'm wondering if that's not 65 basis points going forward, how we should be thinking about that. And I understand that there's lots of different levers, I'm just trying to find a baseline. And I don't know if you're just not able or willing to provide that, but that's what I'm asking.

So certainly, there would be a percentage, a basis point you can calculate off of Billed business. And that would be a number that gradually changes. And to the extent there are periods where we adjust the balance sheet for either refinements in our estimation process or based on greater engagement on the part of our customers, in those periods, you're going to see additional expense in those quarters. And I suspect that will be the case going forward. Kenneth Bruce - BofA Merrill Lynch: Just a follow-up, can you remind us how much of the revenue quarter-over-quarter was increase due to the first quarter acquisition? There was one month in the first quarter for the acquisition, and I think you've got a full quarter of revenue in expenses. Can you provide us with that detail here? And then just as we think about acquisitions going forward, of the 8%-or-better revenue growth, how much of that would you expect to be acquisition-related?

So we have not disclosed in the quarter what loyalty partners is. What we did say is that at the time of the acquisition, that in 2010, loyalty partners full year revenues were about $300 million. So you can think about that in terms of the contribution they're making in the second quarter. In terms of the 8% target that we have and what piece will come from acquisitions, the 8% has been our target for a while. And as you know, we have not really been an acquisitive company, and we were -- had that as our target. So it all depends where you're allocating resources at the end of the day. So we don't have a specific carve-out going forward for what acquisitions will contribute. It really depends on the nature of the acquisition what the contribution will be. So I would think about 8% as something probably we can achieve from an organic perspective, and then what acquisitions contribute will be depending on the nature of the acquisition.

Our next question comes from John Stilmar with SunTrust. John Stilmar - SunTrust Robinson Humphrey, Inc.: To follow up, kind of, a little bit to Ken's prior question, Dan, I was wondering if you could provide for as a little bit more specificity on the path to the operating leverage that we've been discussing now for several quarters. And now as we kind of see that clearly rewards themselves are a higher cost, and although that's not part of your target for expense flexibility, I'm wondering if you can prioritize for us as we move forward how much of your enthusiasm for reaching those goals comes from purchasing higher-margin businesses, actual expense-cutting or really just top line revenue growth coming from existing platform to be able to give you that operating leverage. I'm wondering if you can kind of prioritize which is the bigger driver of the path from here to there. That would be helpful. And then following up with that, we've gotten the final rules from Durbin. I was wondering if you think about your Prepaid segment any differently today in terms of the services that you would offer and the functionality that you would attach to your Prepaid debit business post-Durbin because of some the nuances in that final bill.

So as it relates to operating leverage, we don't plan to get there through an acquisition. That's not part of our plan. We really plan to get there in 2 ways. One is we expect that -- we've seen already that the investments we've been making have been paying off in terms of good performance in our metrics in revenue, so one way, part of it, is growth in revenues. And the other part is related to operating expense and to have the growth rate in operating expense to slow as we exit the year and as we go into 2012. So those will be the 2 primary drivers of improving operating leverage at the end of the day. As it relates to Durbin and Prepaid, I would say that -- point out that our Prepaid product is not subject to Durbin, okay. We were excluded from that. It refers to debit products issued by the banks. So Durbin doesn't have an impact on our Prepaid business. We think the Prepaid business is a very good growth business. We have a good position in that market. We've recently issued new products that, if you buy them online and reload them online, don't have any purchase fees. There's no back-end fees, there's no maintenance fees. So we think it's really quite an attractive product in a market that we believe will continue to grow. So we're pretty positive about our space there.

Our next question comes from David Hochstim with Buckingham Research. David Hochstim - Buckingham Research Group, Inc.: I'm wondering if you could give us some color on trends in card spending during the quarter. Was gasoline much -- did gasoline prices have much of an impact in the U.S., and is there any change in mix outside the USA? I guess I wondered, related to that, on the increase in the weighted average cost of redemption on rewards, we're seeing presumably an increase in travel-related rewards, and is that kind of coincident with higher travel spending?

So gas -- so I think the increase in Billed business is very broad-based, okay? I think travel is one of the components that is growing nicely, but it's really very broad-based across many merchant categories, and I think it's reflective of the fact that we have a very affluent Cardmember base, and those Cardmembers have the ability to spend and pay. I think that's a factor. As we've said other times, gas is not a big factor in terms of driving Billed business or discount rate for us. Certainly, the slight decline that we saw in discount rate does reflect a shift in where our customers are spending. As we broaden our merchant base, it's often in new categories that are at lower rates than our average discount rate. And I think the strong growth in International is also contributing to the slightly lower discount rate. But growth is very broad-based, which, again, is an encouraging sign. But in terms of weighted average cost per point on Membership Rewards, I think we are seeing a shift to travel-related redemption options. I think that's a reflection of the fact that in '09, we probably had a shift going in the other direction, where people were using rewards less for travel and more for everyday type of items. And I think as we move further away from 2009, we're seeing a logical shift back to more travel-related type of redemptions, and, therefore, it's having the impact of shifting the weighted average cost per point up. David Hochstim - Buckingham Research Group, Inc.: So the weighted average cost up from where it was in pre-2009 period, when you had sort of similar mix of travel redemptions, or the...

So I don't have that off the top of my head, where it was pre-'09. But certainly, it's up from the most recent quarters that we had. David Hochstim - Buckingham Research Group, Inc.: It's one of the first times you've raised the weighted average cost, because you spend a lot of effort kind of providing additional redemption options to lower the average cost.

I think we provide additional redemption items because we think many of the program participants value them highly. It does have the benefit that some of them have a lower average cost, but we're really trying to accomplish 2 things: one is the weighted average cost and providing value to Cardmembers. But you're correct that we have normally spoken about ultimate redemption rate. And the weighted average cost has had a lesser effect than ultimate redemption rate, so it was a factor, so we through it was important to mention. David Hochstim - Buckingham Research Group, Inc.: I was wondering if you can speak to what kind of the maximum is on the ultimate redemption rate. I mean, it's certainly not 100%.

Yes, so it can't be more than 100%, and it probably, in all likelihood, won't be 100%. But where it ultimately goes to probably has a lot to do with the value that we can continue to put in the program and the enhancements we make. But it will be speculative to try to guess at where it goes to. So I'll take just one more question.

Our final question will be coming from the line of Mike Taiano with Sandler O'Neill. Michael Taiano - Sandler O’Neill & Partners: Dan, just on the rewards, obviously, both URR and WAC are up. Can you give us maybe a sense of the pace of increase in the second quarter relative to what it's been in the prior quarters? Has it accelerated? Decelerated? Any additional color you can give us there?

So the first time we disclosed the ultimate redemption rate for active employees was at the end of '07. And we indicated it was about 90%. It was pretty flat in 2008, and so we disclosed it in the annual report again, it was 90%. There was some modest increase in the following year, 2010. But there was a pickup in the pace in -- 2009, I guess, it was modest increase. In 2010, it picked up, and we disclosed it was 91%. And obviously, with the refinement in how we were estimating, URR in the first quarter popped up to 92%. So again, it is higher now than it was back in '07 or '08. But again, we view the fact that we are enhancing the program and we're getting better loyalty and engagement, from an economic point of view, we view that as very positive with very good economics. And that's the -- and it provides value to our Cardmembers. So a combination of all those things. We view the Membership Rewards program as really a very important part of our value proposition with good economics, which is I think is the key factor. Michael Taiano - Sandler O’Neill & Partners: Just one last follow-up on the growth rate in Global Commercial Services. Seems like it's decelerated over the last year or so. Is there something in there? Was it the GE acquisition that drove it higher in the prior year or just something else that's causing it to trend a little bit lower?

I don't think it's GE. I think GE is far enough back in our history that, that wouldn't be a factor. Commercial Card, generally, when recession is coming, hold out longer and then drops very quickly. But it also comes back quicker than most of the other categories. So that could have been a factor in the higher growth rate that you saw in the early part of 2010. But the growth rate, again, is double-digits and continues to be very good. And we continue to be successful in the marketplace with Commercial Card globally. So we're very pleased by the performance of Commercial Card. Okay, so, with that, thank you, everyone, for joining the call. Take care.

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