Solve Part 2: Problem 2

exam/part2_problems2n3/LMD_pos_master_dictionary_2018.txt

@@ -0,0 +1,354 @@
+ABLE
+ABUNDANCE
+ABUNDANT
+ACCLAIMED
+ACCOMPLISH
+ACCOMPLISHED
+ACCOMPLISHES
+ACCOMPLISHING
+ACCOMPLISHMENT
+ACCOMPLISHMENTS
+ACHIEVE
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+ADVANCING
+ADVANTAGE
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+ADVANTAGEOUS
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+ATTRACTIVENESS
+BEAUTIFUL
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+BOOST
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+PROFICIENTLY
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+TREMENDOUS
+TREMENDOUSLY
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+UNPARALLELED
+UNSURPASSED
+UPTURN
+UPTURNS
+VALUABLE
+VERSATILE
+VERSATILITY
+VIBRANCY
+VIBRANT
+WIN
+WINNER
+WINNERS
+WINNING
+WORTHY

exam/part2_problems2n3/Poblem_2b_Top_10_Positive_Answers.csv

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+rank;call_id;answer_id;n_total_words;n_positive_words;f_positive_words;answer_text1;1;101;1;0.0099009900990099;yes, we obviously have to make some assumptions going forward in house prices and they are not that different than the assumptions you would see in most other that get published by case-shiller, etc. right now, they have a modest increase in home prices in 2013 and '14. i will stick with just those two years. but if it was 5% better than that, which is possible, that would run through our books in lower charge-offs and lower reserves. and just as a rule of thumb, $500 million for one year. it's a very rough rule of thumb.
+1;7;38;19;2;0.105263157894737;we said it was driven by derivatives. cash out of prime brokerage did better. prim did better than cash.;;;;;
+1;13;4;19;2;0.105263157894737;north america will be a tough comp. it was very strong in 2015, but europe could be very constructive.;;;;;
+2;18;14;11;1;0.0909090909090909;you should be able to extrapolate those numbers on your own.;;;;;
+3;60;2;78;7;0.0897435897435897;david, we do not expect to see any deterioration in the progress that we've been making throughout the year. so again, i think we entered the fourth quarter highly confident and in a very strong position with our stores performing incredibly well, great merchandise, a terrific marketing campaign, great digital capabilities and an expanded suite of digital fulfillment capabilities. so we feel very good about how the entire business is set to perform in the fourth quarter.;;;;;
+4;10;11;45;4;0.0888888888888889;not specifically, no. i will tell you that while we are obviously delighted with the performance it was a relatively strong market and there were some larger transactions so we're happy with the gains. i can not specifically comment on where it came from.;;;;;
+5;16;6;26;2;0.0769230769230769;yes, it's a very competitive business and it's very profitable. so all other things being equal, we would like to continue to gain share.;;;;;
+6;20;33;98;7;0.0714285714285714;yes. so look, our card spend growth at 13% up year-on-year is still very strong. so when we say moderated, it's from very strong to very strong. and it is in part due to the number of new products we've had. so we would continue -- the sapphire reserve card spend engagement is very strong, and we're very pleased with it. so it's not -- i would not say it's a moderation necessarily. it's just, at these very high levels, from a slightly higher to very strong is still a great story.;;;;;
+7;6;8;75;5;0.0666666666666667;yes, i would say it's fair to assume that our core margin should be relatively stable throughout the year, and i think plus or minus 2 basis points on a large balance sheet like ours with mix changes is relatively stable. so our expectation is for core nim to be relatively stable in 2014, to be stable to slightly positive in 2015, assuming that the implied rate curve plays out the way it is.;;;;;
+8;42;21;91;6;0.0659340659340659;we feel good about where we are. we've been working on this for a long time and we continue to deploy resources to get better and better at that. so this is just a long-term initiative that we have to continue to focus on, whether it's in food, whether it's demographics, whether it is ethnic groups, we've just got to continue to get better at our localization efforts. we think we've made good progress there and we are going to continue to focus on it.;;;;;
+9;31;7;92;6;0.0652173913043478;absolutely. the strategy is very consistent, and we continue to be optimistic about our ability to make the levers work. because our brands are strong and we're investing in them, and because our bottling system is executing very well and we continue to get better. i think one of the mantras in our team, dara, is that we've got the right strategy. but we're just beginning to hit our stride from a capability standpoint, and we have much more opportunity to improve than we have progress made so far.;;;;;
+10;20;34;47;3;0.0638297872340425;so if you think about -- our first acquisitions were in august and september. so we're kind of at the early stages. so far, very encouraging. so far, better than our expectations. but a little early to sort of draw firm conclusions on it, but very encouraging.;;;;;

exam/part2_problems2n3/Poblem_2b_Top_10_Positive_Answers_UNEDITED.csv

@@ -0,0 +1,61 @@
+rank;call_id;answer_id;n_total_words;n_positive_words;f_positive_words;answer_text1;1;101;1;0.0099009900990099;yes, we obviously have to make some assumptions going forward in house prices and they are not that different than the assumptions you would see in most other that get published by case-shiller, etc. right now, they have a modest increase in home prices in 2013 and '14. i will stick with just those two years. but if it was 5% better than that, which is possible, that would run through our books in lower charge-offs and lower reserves. and just as a rule of thumb, $500 million for one year. it's a very rough rule of thumb.
+1;3;10;2;1;0.5;good morning.;;;;;
+1;3;31;2;1;0.5;good morning.;;;;;
+1;5;33;2;1;0.5;good morning.;;;;;
+1;6;10;2;1;0.5;good morning.;;;;;
+1;6;46;2;1;0.5;good morning.;;;;;
+1;12;18;2;1;0.5;good evening.;;;;;
+1;13;1;2;1;0.5;good morning.;;;;;
+1;13;17;2;1;0.5;good morning.;;;;;
+1;13;20;2;1;0.5;good morning.;;;;;
+1;14;13;2;1;0.5;good morning.;;;;;
+1;14;22;2;1;0.5;good morning.;;;;;
+1;15;22;2;1;0.5;good morning.;;;;;
+1;17;3;2;1;0.5;good morning.;;;;;
+1;17;25;2;1;0.5;good morning.;;;;;
+1;24;1;2;1;0.5;good morning.;;;;;
+1;24;4;2;1;0.5;good morning.;;;;;
+1;24;6;2;1;0.5;good morning.;;;;;
+1;24;13;2;1;0.5;good morning.;;;;;
+1;30;16;2;1;0.5;good morning.;;;;;
+1;30;21;2;1;0.5;good morning.;;;;;
+1;32;1;2;1;0.5;good morning.;;;;;
+1;32;14;2;1;0.5;good morning.;;;;;
+1;33;2;2;1;0.5;great, thanks;;;;;
+1;34;1;2;1;0.5;good morning.;;;;;
+1;34;14;2;1;0.5;good morning.;;;;;
+1;34;16;2;1;0.5;good morning.;;;;;
+1;36;7;2;1;0.5;good morning.;;;;;
+1;36;10;2;1;0.5;good morning.;;;;;
+1;36;12;2;1;0.5;good morning.;;;;;
+1;37;5;2;1;0.5;good morning;;;;;
+1;37;8;2;1;0.5;good morning.;;;;;
+1;37;16;2;1;0.5;good morning.;;;;;
+1;37;18;2;1;0.5;good morning.;;;;;
+1;53;4;2;1;0.5;good morning.;;;;;
+1;55;7;2;1;0.5;good morning.;;;;;
+2;34;12;5;2;0.4;good morning. good morning, bill.;;;;;
+3;5;1;3;1;0.333333333333333;good morning, guy.;;;;;
+3;5;8;3;1;0.333333333333333;good morning, betsy.;;;;;
+3;5;45;3;1;0.333333333333333;good morning, matt.;;;;;
+3;14;18;3;1;0.333333333333333;good morning, matt.;;;;;
+3;15;1;3;1;0.333333333333333;good morning, brian.;;;;;
+3;15;4;3;1;0.333333333333333;good morning, jim.;;;;;
+3;15;9;3;1;0.333333333333333;good morning, betsy.;;;;;
+3;30;1;3;1;0.333333333333333;good morning, brian.;;;;;
+3;30;9;3;1;0.333333333333333;good morning, bill.;;;;;
+3;32;7;3;1;0.333333333333333;good morning, brian.;;;;;
+3;33;1;3;1;0.333333333333333;good morning, bill.;;;;;
+3;33;4;3;1;0.333333333333333;good morning, bonnie.;;;;;
+3;33;11;3;1;0.333333333333333;good morning, bryan.;;;;;
+3;36;2;3;1;0.333333333333333;good morning, dara.;;;;;
+3;36;14;3;1;0.333333333333333;good morning, bill.;;;;;
+3;55;3;3;1;0.333333333333333;good morning, david.;;;;;
+4;3;17;4;1;0.25;good morning. hello, betsy.;;;;;
+5;17;34;5;1;0.2;good morning. how are you?;;;;;
+6;7;38;19;2;0.105263157894737;we said it was driven by derivatives. cash out of prime brokerage did better. prim did better than cash.;;;;;
+6;13;4;19;2;0.105263157894737;north america will be a tough comp. it was very strong in 2015, but europe could be very constructive.;;;;;
+7;18;14;11;1;0.0909090909090909;you should be able to extrapolate those numbers on your own.;;;;;
+8;60;2;78;7;0.0897435897435897;david, we do not expect to see any deterioration in the progress that we've been making throughout the year. so again, i think we entered the fourth quarter highly confident and in a very strong position with our stores performing incredibly well, great merchandise, a terrific marketing campaign, great digital capabilities and an expanded suite of digital fulfillment capabilities. so we feel very good about how the entire business is set to perform in the fourth quarter.;;;;;
+9;10;11;45;4;0.0888888888888889;not specifically, no. i will tell you that while we are obviously delighted with the performance it was a relatively strong market and there were some larger transactions so we're happy with the gains. i can not specifically comment on where it came from.;;;;;
+10;16;6;26;2;0.0769230769230769;yes, it's a very competitive business and it's very profitable. so all other things being equal, we would like to continue to gain share.;;;;;

exam/part2_problems2n3/Problem_2_3_Sample_QandA/10_answers.txt

@@ -0,0 +1,148 @@
+Answer_1:
+
+          There wasn't anything particularly noteworthy in terms of one-time events. It was really quite broad particularly in derivatives.
+In cash the performance was I would say solid year over year because we saw strength in the Americas this year but we had strength in Europe last year. And I think the first-quarter 2014 wasn't particularly strong, so I think we were flatter a little bit with a relative comparison but it was a really strong absolute and we think probably strong relative performance.
+
+Answer_2:
+
+          Yes, this is where it would be. I wouldn't say it's a driver, but we are as you said and the whole industry is looking to work with clients to optimize the use of the balance sheet and improve returns.
+So we've seen some of that. But I wouldn't say it was a key driver.
+
+Answer_3:
+
+          It is more of the same. Obviously G-SIB took on a slightly heightened focus when we had some doubling happen in the proposal in December.
+So we've always been measuring and monitoring and tracking G-SIB at a very granular level. But we are obviously on a path now to aggressively manage it which means that we are going to be just a little bit more focused on that constraint, not uniquely also with advanced capital, standardized limits, balance sheet caps, the like. So it's more of the same, honestly, than just a heightened focus on this given the US proposal and given the impact of at least at this point FX translations.
+
+
+          And different than RWA it affects certain products more than others. And we pointed out nonoperating deposits, stuff like that. Certain businesses more than others we've pointed out clearing and certain clients more than others we've pointed out financial institutions.
+So it's just kind of a multi-variant theme. It's not mystical and we're actually already starting to reprice some of these businesses to get an adequate return on G-SIB capital. And we're seeing other people do that too.
+
+
+          That's right. We may be in a different position with G-SIB but others are leverage constrained. And just generally speaking we are starting to see a lot more discipline around balance sheet and pricing is following somewhat generally.
+
+Answer_4:
+
+          So again assuming for a second that rates don't rise until the backend if not the end of the year and we can come back to that if you like we would expect our NII dollars to be stable to slightly up because we're still seeing growth in our interest-earning assets. Obviously this quarter we were down some on day count, it was a big chunk of the quarter-on-quarter reduction.
+So we're really going to see the biggest lift in NII when we do see interest rates rise and we'll see when that is. And similarly on our NIM we would expect NIM to be stable particularly given as we talked about what we've seen dilute our NIM more particularly over the course of the last year or two has been this significant increase in cash and we're going to see some of that at least stabilize and turn as we start to reduce nonoperating deposits. So we should see our NIM relatively stable and again start to rise when rates rise.
+
+Answer_5:
+
+          Okay, so taking your first point, Erika, obviously I don't know the next time we're going to in all likelihood get CCAR instructions including the rules and the minimums is likely to be some time towards the end of this year for the next CCAR cycle as we get prepared to deliver that. So all I can say is what you know which is clearly the door was left open for the minimum to be increased or potentially to include some element of the surcharge.
+We're hopeful that that won't be the case because we would say the surcharge should be carried in baseline times to be used in stress and to have all firms end up well-capitalized afterwards. But I have no more insight than that for you.
+With respect to the dialogue with the Fed look, it's definitely much, much further progressed than it was two years and three years ago and every year it gets better in terms of the bilateral conversations and it's constructive. I don't think, however, you could today or will likely ever be able to characterize it as transparent and clear, maybe potentially by design in terms of understanding or being able to reconcile exactly what their models do and what their results are driven by. So I won't be able to clarify for you what changed in their results or what differs between ours and theirs but the dialogue itself is definitely more constructive and more bilateral and more continuous.
+
+Answer_6:
+
+          Look, I think that the best way to answer that is that we are still firmly with our guidance of adjusted expenses being $57 billion plus or minus by the end of the year or for the year, sorry. Obviously we will always try and outperform that but I wouldn't characterize one quarter as a change in that guidance at this point.
+
+Answer_7:
+
+          So look the most important thing obviously in all of that is that we were delighted to be able to partner with the large company on their strategic transformation and that's the most important thing about that transaction for us. I'm not going to comment specifically on whether or what JPMorgan would be interested in in terms of asset purchases. We're much more focused on partnering strategically with the company.
+
+Answer_8:
+
+          No, we haven't given any specific guidance, Chris.
+
+Answer_9:
+
+          In the context of the CCAR we just had?
+
+
+          We expect our -- it's a little complicated this year and we sort of articulated it at Investor Day because we're going to move at some point whether it's the third of the fourth quarter to have standardized RWA be our binding constraint. So 11% plus or minus is our target on CET1 and that's all we've said.
+
+Answer_10:
+
+          There's a couple of different things. One was a little specific.
+We had a portfolio of loans that we held for sale and have subsequently exited from the balance sheet which drives some of it. But in addition just generally a competitive environment and lower demand particularly in Asia.
+
+Answer_11:
+
+          Not specifically, no. I will tell you that while we are obviously delighted with the performance it was a relatively strong market and there were some larger transactions so we're happy with the gains. I can't specifically comment on where it came from.
+
+Answer_12:
+
+          Yes, it's definitely more the latter. So basically if you think about our E&P portfolio in particular when we think about the redetermination somewhat semiannually of the borrowing base and looked at those companies on a client-specific name by name basis there was some contraction in the borrowing base and therefore some downgrades that drive our reserving methodology.
+It doesn't mean that we feel that those companies are necessarily in significant difficulty but that's the way the reserving methodology works. And as I said we do this on a client by client basis, we're comfortable with our exposures and clients are looking to manage their own defensive position. So it's not clear that they will necessarily be realized in losses; in fact, if the implied curve rather than flat to long oil prices is in fact how things play out it's possible that there will be very little in the way of credit loss we'd experience.
+
+Answer_13:
+
+          Both. Both.
+
+Answer_14:
+
+          Yes, so first of all just on the contraction in spend driven by oil prices it's pretty typical in this part of the cycle that you would see lower energy prices in the first instance drive savings rates up and you see consumer spend for the energy dividend so to speak lag back. So the fact that we saw that happen in the first quarter is not atypical and it doesn't mean that we don't expect the spend to grow and for that energy dividend to ultimately translate into higher spend going forward. So it's more of a normal timing phenomenon is our expectation but with respect to other activity, yes we saw active equity capital markets with some defensive issuance and generally I think it's a positive overall for the businesses and for the economy.
+
+Answer_15:
+
+          Not readily but we can get back to you.
+
+Answer_16:
+
+          Yes, nothing specific to call out in the second half of the year. And we should hit 11% if not a little better, yes.
+
+Answer_17:
+
+          Look, I would say seven weeks or six weeks or whatever it is after Investor Day that the messaging hasn't really changed which is we have every intention of aggressively managing the score, doing it as we talked about earlier in a very granular way. And we're already working on that and you see that in the most obvious place which is in the reduction already to date in nonoperating deposits.
+But we continue to work on all of the things so derivative notional compression, level III assets, financing, obviously we're still thinking about what the response should be in terms of risk intermediation and clearing. And so I think six weeks on from Investor Day the story is the same, we feel we are fully committed to ensuring that we are safely within the 4.5% bucket and we may not stop there but we're only a few months into this.
+
+Answer_18:
+
+          Yes, I was obviously you noted it from a small base so that's notable. There are two specific transactions or two specific exposures that were moved to nonaccrual.
+One of them was moved on a somewhat of a technicality, a sovereign downgrade which we fully expect to recover on. But that is just the way we have to present it and the other smaller piece was one other isolated exposure.
+So I wouldn't overthink it right now. It's two exposures and it's $200 million in total.
+
+Answer_19:
+
+          The first the sovereign downgrade was did have oil and gas underlying exposure but again it was on a technicality rather than on the fundamentals of the Company. And we fully expect to recover on that.
+
+
+          Focus on the very, very small number.
+
+Answer_20:
+
+          No, I would just say that overall our sense is that the market is neutral relative to the event. We happen to be able to benefit a little from it. Some others will be more neutral and some may have lost.
+As these happen regular way in trading businesses and it just happens to be the case that that event and the volatility it drove is good for our client franchise. And I think it really just goes to show you that we're in a business where expertise matters and risk discipline matters and we were able to capitalize on both of those not just for the Swiss franc but also for the other macro events in the quarter.
+
+Answer_21:
+
+          No, I wouldn't even characterize them as one-time gains. I would characterize them as one of a number of items that drove our performance in the business.
+
+Answer_22:
+
+          Yes, so overall the total firm the reserve build that we took was a little over $100 billion, 4/5 of which was in the Commercial Bank. So we did experience -- we do all of this on a name-by-name basis, so we did it across our portfolios but the majority was in the CB E&P portfolio.
+
+Answer_23:
+
+          It was $100 billion.
+
+
+          $100 billion.
+
+
+          No worries. $100 billion, I mean look at the end of the day you can see that over the course of the last since whatever the third quarter of 2012 our cash balances grew by a couple hundred billion dollars and that has been a very large contributor to the compression in our NIM, not the only one.
+So as we push out the nonoperating deposits we would expect to see that help but remember we're still growing retail deposits. So if you look at this quarter in particular even though we reduced our nonop deposits related to client actions by about $20 billion, the majority of that $24 billion, we have flat deposits so we're continuing to grow the good retail deposits. So I would say it would be a tailwind but it would be a tailwind to a stabilizing and slightly improving NIM outside of rate rises.
+
+Answer_24:
+
+          No, I'm sorry of the top of my head can't remember the number you're saying. But no, our legal expenses, forget the legal expense that relates to reserves that we've taken and settlements that we reached, our regular way expense for third parties in legal isn't down substantially quarter on quarter or year on year at this point, although at some point it will be.
+
+Answer_25:
+
+          So specifically with respect to the quarter I would say that the wholesale parameter update -- wholesale credit parameter updates model benefits is about half of the RWA reduction with the other half coming from regular way portfolio run off as well as some reductions in market risk associated with market risk positions, reductions in private equity, reductions in commitment. So some position reductions rather than driven specifically by FX.
+Look, we're running above $1.5 trillion now and we said we're going to manage both the advance and standardize to that number over the course of the next couple of years. So if FX or if the currency translation is a tailwind then we would hope to do better but at this point let's get there.
+
+Answer_26:
+
+          So at the moment our CET1 ratio launching into CCAR was below 10%, not the 12% that we expect to run at once we have built our capital to our target level. And so you are right that right now under CCAR Tier 1 leverage was our binding constraint both last year and this year.
+And so a combination of our capital strategy around how we think about the issuance of preferred together with balance sheet actions will be how we think about mitigating that limitation in the short to medium term. But ultimately it doesn't change the fact that once we get to our target assuming that is the 12% that we articulated at Investor Day that again we don't think we should be leverage constrained, so yes we're going to work on that obviously and we are continuing to build capital but when we launched into CCAR we weren't at that level.
+
+Answer_27:
+
+          To give you a little perspective I also spoke in that the banking system is much stronger to start with and every bank in the system is much stronger. So just trying to think through what are the effects of some of these things and we look at it is kind of a warning shot across the bow. What I worry about more is what happens in a stress environment and I think people are paying attention to what's going on in the markets and if there has to be changes down the road there might be some changes that are relevant to that.
+
+Answer_28:
+
+          I think the best way to think about it is through the cycle target that Doug Petno put out at Investor Day which is 18%. So that doesn't mean to say that we will benefit when rates rise in this business and it is very competitive and spreads are compressing and there's a lot of factors going on but through the cycle 18% so we're some years below and some above.
+Just the question on core growth and security services outside of presentation changes and client exits is currently in the low single digits. So obviously a little bit muted because we're working on the balance sheet optimization but certainly growing and in the low single digits and in terms of looking at advisory and who we are gaining share from principally European banks.
+Okay, no more questions?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/10_questions.txt

@@ -0,0 +1,119 @@
+Question_1:
+
+          Hello there. Just one quick clarification question on the performance in equities was great. You mentioned pretty much across the board, do you think there's any seasonality, any one-time events, block trades, anything like that that would lift such good performance in the quarter?
+
+Question_2:
+
+          And maybe this is a related question but I'm not sure which line it would flow through. From what I understand you guys and others have been pushing or talking with your prime brokerage clients to help improve ROAs in the business. Is part of that flowing through and just better equity performance, more business with clients?
+
+Question_3:
+
+          Okay, switching gears in Jamie's letter he talked about mentioning the need to push the new G-SIB rules to the product and the client level. And it piqued my curiosity.
+I'm just curious, how different is that from what you've already done? In other words each step of the way you've been early in adopting and pushing out to the desk level higher capital charges. Does this just mean more of the same meaning, higher capital charge, higher capital charge or is there something different there that you need to do?
+
+Question_4:
+
+          Hi, good morning Marianne. I was wondering on net interest income, do you have an outlet for how the net interest income dollars could trend from here? Assuming that you don't get much help from higher rates what are the key drivers and what's your outlook for NIM and NII dollars for the year?
+
+Question_5:
+
+          Good morning. On the CCAR do you expect any potential surcharges on the CCAR to come out when the US final rules on SIFI buffers come out?
+And in addition to that have you learned anything from the CCAR in terms of the transparency of the process? Is there progression in terms of the back-and-forth with the regulators as you go through the CCAR process and their expectations?
+
+Question_6:
+
+          Good morning. The drop in the adjusted expenses I think about 3% year over year came in a little bit better than we were thinking while revenues were also a little bit better. Obviously you've got a lot of cost-saving programs underway that you mentioned earlier in the call and at Investor Day but should we think that maybe you're running ahead of schedule or that the cost saves could be more or is it just lumpiness as we go quarter to quarter?
+
+Question_7:
+
+          Okay, and then just separately obviously a big company out there announced it's exiting most of its banking assets and just wondering if there's any interest or appetite within your Commercial Bank to bulk up the acquisition there in terms of asset purchases versus a complete company?
+
+Question_8:
+
+          Hi, this is Chris Spahr on behalf of Mike Mayo. I just have a question relating to your CET1 ratio guidance. Do you give any kind of guidance on the Tier 1 leverage ratio by the end of this year given your CET1 of 11%?
+
+Question_9:
+
+          Do you think there is any way you will be able to kind of manage that ratio higher in the context of this year's CCAR?
+
+Question_10:
+
+          Thank you and good morning. Marianne you mentioned that Treasury Service revenues were down due to the trade finance revenue area. And I noticed on the balance sheet the trade finance outstandings have dropped meaningfully on a year-over-year basis. Can you share with us what's going on in that line of business?
+
+Question_11:
+
+          And then second you mentioned that you obviously had a very strong advisory business in the quarter and you gained marketshare of 150 basis points. Do you have a sense of who you took the marketshare from? Was it European investment banks or US?
+
+Question_12:
+
+          Thanks and good morning. I just wanted to follow-up on your energy comments.
+Could you help us understand what events it was that led to the reserve building? Was it company-specific events in the form of bankruptcies or just something else in your internal ratings migration?
+
+Question_13:
+
+          And just on that last point your view on that is because of a recovery in prices rather than restructuring actions or things that your clients are undertaking. Is that fair or is it a bit of both?
+
+Question_14:
+
+          Hi, good morning. I just wanted to see if I could just follow-up on the energy point.
+Obviously you have the reserving and then you mentioned the 200 basis point impact on spend. I'm wondering if you'd just expand the discussion of energy, are there positive offsets that you're starting to see in the businesses elsewhere, either in terms of whether it's credit or borrowing or investment banking opportunities that may be popping up? Can you summarize the benefit if at this point you can see any positive offsets?
+
+Question_15:
+
+          And my follow-up question is just with respect to the security services business you mentioned the change in presentation and then there was the client loss. Is there a way you can help us understand just what the organic growth rate of the business is adjusted for the reclassifications whether it's on a sequential-quarter or a year-over-year basis?
+
+Question_16:
+
+          Good morning. Maybe just go back to the capital ratio issue for a second. You noted that standardized you're at 10.8% and that you still feel that will be your constraining factor by the end of this year.
+So if you're already at 10.8% and your target is 11%, I know it's plus or minus, but it does seem like you got three quarters you hit 20 basis points. So is there anything unusual that you're expecting in the coming quarters or is it just you can never know quarter to quarter but all else being equal it looks like you can probably hit 11% if not better. Is that a fair way to think about it?
+
+Question_17:
+
+          And as you've looked at the surcharge, at the G-SIB surcharge more the proposal is do you feel better or worse, you feel is there any areas where you think you can pull the lever more significantly to improve that ratio or lower the charge?
+
+Question_18:
+
+          Thank you. Marianne, going back to the reserve build which obviously was done for the oil and gas as you mentioned can you share with us in the Corporate & Investment Bank I know on a total dollar amount relative to the corporation it's not significant but there was a big increase in the nonaccrual loans from 110 to 251 in the quarter. Can you give us some color on what drove that?
+
+Question_19:
+
+          And again that was not oil and gas related obviously, it's in the CIB area that was in the Commercial Bank?
+
+Question_20:
+
+          Good morning. You highlighted the Swiss franc is a tailwind for FICC. Could you may be size that for us?
+
+Question_21:
+
+          Sure. I know that the higher volatility of course would drive higher volumes, I was just talking about the event specifically and if there was some one-time gains involved in that so that we can adjust for a core figure here?
+
+Question_22:
+
+          Okay, fair enough. And then on the energy front a lot of the focus was on the CB and the energy exposure there but you all mentioned that there's exposures in CIB, too. Can you give us may be an update if there was any changes in any of those exposures or loans this quarter?
+
+Question_23:
+
+          Yes, thank you very much. On your deposit discussion about pushing out I think you said during your Investor Day that you would like to get about $3 billion of noncore deposits off the balance sheet and I know you said you hope to make progress in the second quarter. How should we model that out and what type of benefit have you modeled out to the NIM with that $3 billion of deposits?
+
+Question_24:
+
+          And then real quick on your professional services, professional services was down from $2 billion to $1.6 billion. Is that mainly due to some of that legal cost maybe starting to go away from the crisis?
+
+Question_25:
+
+          Hi, good morning. So Marianne I was hoping that we could dig into the RWA progress that we saw in the quarter and specifically was hoping that you could disaggregate how much of the sequential decline that we saw was a function of the planned mitigation actions and model benefits that you've cited versus actual FX driven declines?
+Because assuming that the US dollar strength persists all else equal one could surmise that we should expect RWAs in a long-term context actually coming out below that $1.5 trillion target that you've cited in the past.
+
+Question_26:
+
+          Okay, fair enough. And another question on capital but relating to CCAR. Marianne you've noted on this call and in the past that you don't expect CCAR to be JPMorgan's binding constraint longer term but just given the reduction that we saw in the ask or the need to use the Mulligan in the last exam I was just hoping you could cite some of the planned mitigation actions that you expect to take so that we could see you guys get on the path towards delivering on that 55% to 75% net payout target.
+
+Question_27:
+
+          Good morning. Jamie you warned in your annual letter about the possibility of another flash crash. Yesterday I think Simon Potter at the Fed warned about it and cited HFT as one of the issues.
+Larry Summers warned about it about a week ago. Are these warnings going anywhere, are they being translated into action anywhere in the system?
+
+Question_28:
+
+          Secondly, Marianne a question about Commercial Banking. The returns in Commercial Banking have remained in sort of the high teens over the last number of quarters and it's certainly respectable sort of 17% to 19%. Is there any way those returns improve materially or as rates go up or does that get offset by competitive factors and are we at a normalized level for that business?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/11_answers.txt

@@ -0,0 +1,284 @@
+Answer_1:
+
+          So to -- obviously we don't have any particular insight. I think the comments you're referring to were comments about the support for evaluating the possible inclusion of some or all [of it]. And so really it hasn't changed relative to previous comments and the door has clearly been left open for that, but we have no further information. And so far it's evaluating the possible inclusion of some or all of the surcharge, so we're just going to have to I suppose and see.
+Meanwhile, as you know, we are -- and by the way, if it happens for us it would happen for everyone. We have shown you before -- not that that's a good outcome, but we've shown you before that we think that regardless the competitive peers set that we have is going to cluster at or around similar capital levels. And so if everybody has to increase their minimum, it is going to be a similar position for everyone.
+Meanwhile, we are continuing to execute on everything that we've already told you we are going to do to optimize our capital. Our commitment is to go to firmly within the 4.5% bucket for the surcharge, and if we believe we can do it and it's economic and it's not going to hurt our clients, we may go further. So we will respond when we see the rules and we are not going to stop continuing to do the best we can to optimize our returns based on scarce resources.
+
+Answer_2:
+
+          We actually haven't really changed our point of view since the investor day and previously about the fact that we are expecting retail deposit -- and there are other people who have slightly differing views. But we are expecting retail deposits to reprice higher and faster in this cycle than in previous rising rate cycles, given the competition for good, high-quality, LCR-compliant retail deposits; given the advancements in mobile banking; given the awareness in the general environment around low rates and the desire to participate in rising rates. So when we think about our sensitivity and our reprice, we model it in assumption that it's going to be higher, somewhat higher.
+
+Answer_3:
+
+          Obviously, when you talk about trading, when you have two months to go in a quarter you don't know the exact number and repricing is a complex issue. I'll give you some very specific things and then I'll tell you why it's hard to figure out exactly what shows up.
+Clearing, we've definitely seen people start to charge for clearing and effectively charge the balance sheet 25, 50 basis points. It's a small business so I don't think it's going to dramatically affect those lines. Prime broker, we've seen similar type of thing.
+Repo, it seems that people are charging pretty much for repo. We need to get a return on it. Exotic derivatives, which are again very small, are being repriced to, I would say, full capital and liquidity. Muni credit has probably been repriced a little bit. Again, it's a small market.
+If you go to credit and trading, so credit we've really not seen any repricing effectively in commercial credit. You've seen a little bit in mortgage to make up for the extra costs in mortgage. You've seen a little bit in auto; it got more aggressive, not less aggressive. So trade finance you've seen a little bit of repricing, and I know these are not all trading numbers.
+What you don't see, Mike, is that in a lot of cases, while you may have repriced a little bit, you're also shedding business so that you have -- as you are protecting your margins by -- because of AML costs you are going to not do certain types of business anymore. In FHA the lifetime cost of servicing, you cut back on FHA volumes, etc. So you're protecting your margins, but you're actually shrinking your revenues in some cases. That's happening a little bit in clearing and prime broker and stuff like that; you want your best clients.
+In other categories clients are -- like deposits, we haven't seen repricing effectively, I don't think, in non-operating deposits. On the other hand, some clients are saying let's restructure our relationship; it makes more sense for you, JPMorgan. I'm willing to give you other business which is not credit sensitive, etc.
+It's kind of a whole of the amount of things taking place in there, but the goal is to get a proper return on your capital, not necessarily to show revenue growth in that line item. It's very easy to show revenue growth.
+
+Answer_4:
+
+          Mostly what you see in trading is just volume related and spread related, etc. Even in trading, spreads are narrow but breadth is also very low, which means spreads get gap out pretty quickly, which eventually could be good for trading. So it's unclear (multiple speakers).
+
+Answer_5:
+
+          I'm talking about basis points, 20 basis points, 15 basis points, 10 basis points. That's all you need in some of these things to get an adequate return on capital as we currently look at capital.
+
+Answer_6:
+
+          So what I said, and hopefully it was clear, is that we actually exceeded our commitment. We actually shrunk our non-operating deposits by more than $100 billion and not just through our consumer deposits, but we are also able to grow wholesale operating deposits. So we had a good mix shift both in consumer versus wholesale, but also within wholesale and so we feel really great about that.
+There are two priorities after that. The first is protecting that position and making sure that we are able to not have inflows of those deposits as the industry continues to absorb them. But the second is we will likely look to potentially push a little farther, but it gets harder and harder each margin, the next $5 billion or $10 billion, as you get more and more closely aligned to operating accounts and operating business. And we've always said that we want to do this for the right reasons, for capital efficiency, but not do it in a way that's going to materially harm our clients. So that's the lens.
+
+
+          The [product] has also been made in the Level III assets: derivative receivables, certain balance sheet items, RWA. So the effort to optimize the balance sheet for G-SIFI, etc., is not going to stop; that we are going to continue to do.
+
+
+          But you know what, I don't anticipate us launching another and announcing another program. We've already done a little better. We will continue to try and do a little better.
+In terms of revenue impact, not very much right now, as you might very well know, because you can see that the balance is much more on a spot basis that on an average basis. But the equation looking forward will be much the same math we said at investor day, approximately 25 basis points revenue on approximately $100 billion average for a half a year, but there would be some expense benefits on FDIC costs, etc. So not a very big number.
+I think that was the question?
+
+Answer_7:
+
+          A little bit, yes.
+
+Answer_8:
+
+          Yes, so let me do this in two parts, and I'm going to start with the consumer businesses, where the commitment is actually a couple of years old and we are sort of well, well on our way to delivering against that -- the commitment $2 billion dollars in 2017 versus 2014. It's not exactly linear, but you can consider it to flow through time.
+And if you look at the CCB page on whatever page that is, I think we show that for the first half of the year our expenses are down over the first half of last year by $0.5 billion. So that gives you a sense for how we are tracking. On the CIB, obviously the commitment is somewhat newer; at investor day this year $2.8 billion in 2017 versus 2014.
+I would characterize that in two parts. $1.5 billion is business simplification. The majority of business simplification -- not all, but the majority -- will come out of our run rate in 2015. And you've already seen that in the first and second quarter when you've seen the $300 million, $400 million expense reductions in each of the quarters on business simplification.
+The other $1.3 billion, which is all the reductions in technology and operations and headcount, is going to be things. We are working on it actively -- we have programs, we have people -- but it's going to be more of a 2016 and 2017 benefit. If I was to look at the first half of 2015 versus the first half of 2014, take the $500 billion in consumer and business simplification in the CIB space -- that's probably the right way to size it, about a quarter so far this year.
+
+Answer_9:
+
+          Yes.
+
+Answer_10:
+
+          RWA, advance RWA is down $36 billion, $37 billion; [one five three six]. We said a little greater than $1.5 trillion. We are still on track to be $1.5 trillion or a little greater, $1.5 trillion advanced at the end of the year. Standardized right now is at $1.5 trillion, $1.5 trillion, so pretty close to $1.5 trillion against the target at the end of the year of $1.55 trillion.
+That's a little better, but obviously on the standardized you have some upward pressure as we continue to grow those really great loans that we are growing. If you look to our investor day targets, we are still hoping to maintain the discipline around both of those at approximately $1.5 trillion through time.
+
+Answer_11:
+
+          Of course. I'll do it in three parts. First of all, it is growing pretty solidly or strongly, so either in-line or in many cases better than the industry across most of the product categories. The one that's growing the most strongly because of the way we are portfolioing loans is mortgage, so that's driving some of that outperformance. And the one that is most challenging, but still growing, is middle market. Fiercely competitive; everybody is chasing that sector.
+But you can go through the businesses. We had 6% loan growth, 8% loan and lease growth in auto; 6% business banking; 19% core in consumer; 4% in commercial, so 3% core in card. So it's solid to strong pretty much across the board; most competitive in middle-market and flattered by portfolio and mortgages.
+
+Answer_12:
+
+          What I said earlier is not inconsistent; it's entirely consistent with what we said last quarter. We built reserves modestly for oil and gas last quarter on the back of the spring redetermination of borrowing base. We feel another modest reserve this quarter.
+And we said we don't -- we might expect more reserves in the second half of the year. There's another redetermination cycle in the fall and it's I'm not going to say likely, but it's possible we will be selectively downgrading some clients. If none of that is out of our expectations, it's completely normal levels considering the cycle and how we think about the credits, we are still very happy.
+And we are not going to make any comments on regulators.
+
+
+          Those reserves do not mean we're going to have losses.
+
+
+          Correct. We are reserving for downgrades; doesn't necessarily mean that they are going to be cash losses.
+
+Answer_13:
+
+          So credit, like charge-offs, have been very benign across the whole sales base. They have reverted to somewhat more normal levels in auto, so I'm not expecting there to be a big step changes in the underlying charge-offs in the wholesale space. We continue to see improvements at a slower pace in mortgage, but at 21 basis points we are sort of getting down there.
+And card, while it is slightly above -- 2.6% above our 2.5% is also pretty much getting there. It's one of the reasons why we've said expect the second half to look like the first half in terms of order of magnitude and expect net-net low for long.
+
+Answer_14:
+
+          I would say in the non-credit -- sorry, just to clarify the comment on oil and gas; we said they will not necessarily translate into losses. We are not going to predict which ones will or won't.
+On the reserves, for non-credit-impaired portfolio we are continuing to see improvements in charge-offs as well as home prices, albeit a little bit more gradually. So I would still expect there to be more reserve releases over the course of the next 18 months in hundreds of millions of dollars in total; not billions any longer, of course. We have $1.8 billion reserved right now.
+In the post-credit-impaired space clearly that's life-of-loan model and so we will continue to evaluate that model against parameters that we have in it and expectations, so that will be what it is at the time. And in card we're not expecting any significant reserve actions.
+
+Answer_15:
+
+          So you are absolutely right; all the underlying phenomenon are still there. We are still seeing spread compression, but we are seeing very strong growth in spend. We aren't quite lapped yet on new accounts going through the revenue rate. We will eventually be, but it's a good thing to be adding these new accounts that will drive strong spend in the future.
+So I would say our near-term guidance is that we are expecting our revenue rate to be at the lower end of that 12%, 12.5% range. And, yes, over time as spread compression abates and we continue to drive strong growth with the quality of our products and our partnerships we would expect that to start to edge up.
+
+Answer_16:
+
+          Yes. We told you we would hope to drive core loan growth in the card space low single digits and this quarter it was 3%.
+
+
+          I just want to emphasize -- Marianne mentioned it, but emphasize; Chase Paymentech, which is seeing really good growth, probably 50% faster than the industry, but we are also signing people with Chase Paymentech combined with ChaseNet. We are running real volume across it and we are signing up a lot of folks for that and ChasePay. So the strategy of ours is kind of coming to fruition and we hope it will be a good driver; happy customers and good growth for the next 10 years.
+
+Answer_17:
+
+          Obviously we don't give you lots of details on our issuance plans. You are right; one of the drivers for us to issue in part, not exclusively, was it's not -- as you know, we were Tier 1 leverage constrained in CCAR and so as a result of issuing this we not only helped TLAP, but we help our CCAR stress capacity. And we are about 164 RWA. So we are not going to talk about forward issuance but we've made progress.
+
+Answer_18:
+
+          So to start with Volcker, we aren't expecting Volcker to have an impact in the near-term trading outlook. We've been talking very consistently over an extended period of time about the fact that we've reshaped our business through time to be compliant in substance and in form with Volcker. And so while that was real reshaping of the business, the last 18 months have been really focused on getting operationally ready around the reporting and the metrics; it's been hard work and we are ready.
+So I don't expect it to have a direct impact on our near-term trading. Clearly over time we need to continue to evolve the feedback loop with regulators, but that will be entirely gradual.
+With respect to the trading, it is too early for us to say anything specific about the second quarter -- sorry, the third quarter -- except to say we are -- all other things equal, we would expect to see normal seasonality from the market. Nothing has changed that fundamentally wouldn't have us expecting normal seasonality in the third quarter.
+
+
+          I just want to point out that trading, if you look at it over a long period of time, has been -- we've become very consistent. I think in 2014 we had no trading loss days and even this year there were only a handful of trading loss days. Obviously some areas are up and some are down, but our shares are high. I think we are doing a great job servicing clients.
+We are adopting all the new rules. Like [50%] of interest-rate swaps are on SEF today and I think it's 95% of FX trading by transaction is electronic. You can do a lot on your mobile phone or iPad now, so the business is actually doing fine. The returns on risk are very good. We used to report that, but kind of return on VAR are very good. It's become a much more stable business that clients need overtime.
+
+
+          Right. And just to add to that, I would say that we also talked about, in the period of transition towards a more normal economy and rising rates, you might see some shocks like this. We've weathered both the EMEA bond sell off and China well, and it just speaks to the strength of our risk management discipline. And we generally do pretty well in more difficult markets.
+
+Answer_19:
+
+          So with respect to -- we saw a stronger seasonal purchase market. We actually gained a little share in the purchase market in the quarter and refi held up pretty well because of pipelines coming into the quarter. But we are expecting that to grow seasonally in purchase and in refi to pull that down to smaller levels in the third seasonally. And no direct impact from the disclosure requirements.
+
+
+          Part of the quarter is the reserve takedown, so don't double count that. That may not be there next quarter.
+
+
+          Right.
+
+Answer_20:
+
+          The way I would think about it is normal tax rate for the year is 30%, plus or minus. Just given the way tax reserving is it's usually biased to being fairly conservative and so, as you know, we have seen discrete tax gains periodically, some of them not insignificant, resulting from completion of settlements and audits with tax authorities. Not to say that you should necessarily model in directly 30%, but we don't predict or forecast the tax benefits.
+
+Answer_21:
+
+          It's definitely the latter and I think it's perhaps a little too early to tell on the former.
+
+Answer_22:
+
+          Jumbo.
+
+
+          Yes. So over half are jumbo, the other are conventional performing fee plus.
+
+Answer_23:
+
+          We have a fairly large securities portfolio and our decisions around that are in part driven by our overall interest-rate risk positioning, but with respect to the mortgages it's fundamentally a better execution decision for us. We will portfolio or loan where it makes economic sense to do it relative to distributing it, other than jumbo where, clearly, they will always go on our balance sheet.
+
+
+          If you can put a jumbo on a higher ROE than a Fannie/Freddie, you would do that. And part of the investment portfolio is for liquidity and obviously, because non-operating deposits are down, proportions of that will come down too.
+
+Answer_24:
+
+          There's been a lot of press and reports, including recently, on market liquidity and there are a number of factors playing into it. It's true that liquidity, in some cases, has dried up quite quickly when there's been extreme volatility and it fed on itself. But the reality is that we've talked about the fact that that was likely to be a phenomenon that happened more frequently as we transition to a more normal environment.
+We are very disciplined about how we trade and support our clients and generally we've been able to weather them very well, as has generally the community. Not that we know, but we haven't got any stories or horror stories around (inaudible) a bond sell-off or other things this quarter. So I think it's definitely an issue; one that we need to watch, one that has multiple root causes, and one that we are generally taking in our stride.
+
+
+          And look at the big picture and we pointed it out, the financial system -- like in the United States banks are much more sound. Trading books have more capital liquidity. The whole system is better off. So you can't look at one piece and say what will that do.
+The second is that these -- obviously there's less liquidity in the marketplace and it's a whole bunch of factors. It's hard to tease out exactly which one, but trading books have more capital and more liquidity. I think people are a little worried about potential Volcker rule violations, so they are being a little more cautious.
+There are obviously structural changes in electronic trading, HFT, and each business is slightly different. So not every -- I wouldn't say everyone is affected exactly the same. It's also true that the system is pretty resilient to what happened with the currencies and treasury, and that's a good sign.
+I think what we are going to be really cautious about is when markets aren't that good. JPMorgan is fine. We are not talking about whether or not JPMorgan is going to have a hard time with liquidity. We are not. The question I really would have is, when markets are tough, will there be a feedback from -- these violent markets, will there be more volume or less volume.
+Someone was quoted the other day saying markets always pull back when there are tough times; that is true. The question is will be harder and worse, will it feed back into the real economy. It's not will there be lack of liquidity.
+During the crisis they were two market makers out there and we were one of them and so you need them a little bit, but it doesn't stop markets from gapping out. We are not saying this is a terrible thing, just being very cautious about it. And we are always trying to be very cautious.
+
+Answer_25:
+
+          So I can tell you that obviously we took the feedback from the regulators as the industry did exactly as you would expect, entirely seriously; put loads of resources and effort to bear in making as much progress as we thought was humanly possible over the course of the period. And we feel that we made very, very -- I would agree with you; the industry, but JPMorgan specifically, made very, very significant progress in addressing the feedback between getting it and the July submission date. And obviously we feel like we have a credible plan.
+That's not to say that we won't continue and some of our plans, and you saw it in some other disclosures. We are going to continue to work very hard at simplifying our legal entity structure over the next few years and interconnectedness and operational resiliency and all the things -- and reporting readiness, all the things that are going to make it even better.
+So we think we made very, very significant progress. We think our plan is credible. We don't know exactly when we will get feedback, probably in the fall.
+
+
+          And we respond to every single thing regulators raise with the huge resources to meet their needs. It will probably be iterative over time about they'll make more demands this year, etc. and --. By the way, I think there is a 50-page public part that you can actually read and it shows you. That's a 50-page summary of I think a 200,000 page detailed report.
+
+Answer_26:
+
+          It's very broadly competitive and we compete obviously with big banks, regional banks, and non-banks. It's not that we are losing loans and deals most often on price. It's normally on size of holds or non-bank taking whole deals or on structures, but it's very, very competitive. Everybody likes the sector for growth and everybody likes -- so everybody is trying to make progress.
+We are being very, very disciplined, and as a result of that, slightly lower growth than the industry average. And you might not always want us to always grow at the industry average. You want us to hold true to discipline.
+
+
+          Remember, we looked at the whole relationship. I forgot the exact number, but if you look at the middle market relationship, I think something like half, maybe even a little bit less, of the revenues are from the lending.
+
+Answer_27:
+
+          The way I would characterize it is we had a period of time following the Wampum merger where we were in new markets and we didn't have the right distribution footprint where we were building. We said about a year and a half ago that we felt like we had the right footprint as a macro matter, about 5,600, and that now we are around perfecting that, which is about consolidating certain branches where it makes sense but building new ones where makes sense. Consolidating them together where it makes sense.
+You will see I think Gordon said approximately 150 net down in each of the next couple of years and that's probably still the right way to look at it, but it's really perfecting the network. Moving branches to the areas we like where there's a high density of affluence. And then, as you know, really looking at the nature of branches: so the footprint, the way we are using them, the way we are staffing them, importantly, moving them to more advice and less transaction, more automation.
+Definitely responsive to the evolution in customer preferences. And mobile and online is not only a fantastic customer experience evidenced in our experience stat, but it's also a lower cost to serve, so we are also improving the profitability of the very highly transactional customers. I think Gordon used the word omnichannel. We have a place for everything in our suite and branches are very important. We're just going to be evolving them to continue to meet customer needs.
+
+
+          One add is that we are thinking about attacking a new city for the first time, like in a major way, because we want to see how that works out.
+
+Answer_28:
+
+          In the non-operating deposits within the wholesale deposits, the majority is the CIB, but not quite two-thirds. And then you've got the commercial bank and you've got a little bit in asset management. So it is the majority of the number, but there are still sizable numbers, particularly in the commercial bank in the financial (inaudible) space.
+And then, when you look at our overall balance sheet, you see cash going down because of the deposits. You see securities going down, but strong loan growth offsetting, and then small reductions in trading and secured financing.
+
+Answer_29:
+
+          Are you doing year-over-year?
+
+
+          You're starting in the wrong time period.
+
+
+          Are you starting at the year-end or year over year?
+
+Answer_30:
+
+          Well, we are getting more operating deposits, too.
+
+
+          We talked about the deposit reduction is overachieving in non-op and improving mix in operating. So, trust me -- and I'm not looking at what you're looking at, so I do trust you -- but trust me that 60%-ish of it is CIB.
+
+Answer_31:
+
+          We will clarify off this line because (multiple speakers).
+
+Answer_32:
+
+          The M&A -- we don't think Greece has affected the M&A dialogue very much, because it's been very active pretty much around the world. And when I say around the world, it's also like European companies coming to America and American companies going to Europe, etc., and those conversations continue.
+
+
+          A lot to Europe, yes.
+
+
+          A lot to Europe, yes. So Greece had no real effect on that. Greece is a very, very small percent of the Eurozone in total, so economically it's not a driving factor for most of the companies there. Psychologically maybe it's going to affect some people, but I don't see why a company that has its own ambitions is going to change them because of Greece.
+
+
+          And would just -- with respect to the backlog, I would say it's very good.
+
+
+          We did see a tremendous amount of something that we've almost never seen before, of American companies financing in euro because it was cheaper to do that, even if you swap back to dollars. So you saw a lot of American companies going to Europe to do that.
+
+Answer_33:
+
+          I think if you go back to last quarter, Brennan, and take a look at the remarks from last quarter, we talked about the change in presentation of some expenses versus revenues for the ADR business that drove a reduction, but just a classification issue. And then in addition we did lose a large client at the end of last year and that is having an impact. I think if you go back and look at the second quarter, hopefully that will make it clear.
+And so the guidance, when we did those -- when we made that presentational change and obviously we talked about the client exit a few quarters ago, the guidance was, given those, we would expect the revenues to run between $950 million seasonally. And this is obviously a strong season and, therefore, it at through $950 million and $1 billion seasonally and, therefore, it's at the $1 billion.
+
+
+          So Marianne gave you all very specific guidelines, which we don't normally do, on treasury services, investor services, and expenses in the commercial bank because a lot of you have your models wrong. And Sarah finds it very frustrating that you can't get it corrected quarter after quarter, so we've said here is the number that is actually our best guess. So, please, put it in your third- and fourth-quarter models.
+And mortgage revenue was another one which has been ongoing to us. And what's the other one so we can just get it on the table whatever it is?
+
+Answer_34:
+
+          Nancy, it's really important -- when we talk about these numbers, by the way, RWA and branches, we are not making commitments to anybody. That's our best guess knowing what we know today, but we reserve the right to change that on a moment's notice for whatever reason that makes sense for the Company and the clients.
+And so branches -- it is very important that you look at branches city by city until you have the right footprint. So if you remember, the old A&P which never changed its locations and it never changed sizes and it failed. Any retail business should always be adding in new communities, subtracting in some; having the branches to adjust to a new reality, whether it's getting bigger or getting smaller.
+In our case it's getting smaller, but again we are not getting smaller because we are guessing at this stuff. We are getting smaller because of the less need for operations and branches now. People are doing far more on mobile phones like that.
+So we actually do it city by city. You don't set an overall guideline and say you have to do X, Y, or Z. It's city by city. And so, for the most part, in the WaMu footprint, I think Florida and California for the most part, city by city we went in and added what we thought we should have.
+Wampum -- remember we also added on top of that small business, private banking, some middle-market, other businesses that WaMu wasn't even in. It was part of the expansion of those businesses, too. And so when I said a new city, I'm talking about what we've never really done -- I was talking about this way back to BankOne and the stocks when we did the merger with JPMorgan -- is going into a city de novo that we never been in. There you've got to look at how many branches you are going to open, how long is it going to take. And so we do want to do one of those and that will have nothing to do with WaMu because they are also places that WaMu wasn't.
+
+Answer_35:
+
+          No. I don't think there's been a retreat from open markets there either.
+Remember, we've always said about China is you got to look and plan for the long run, which we do in all businesses. McKinsey has a report that shows that they are going to have 25% or so of some of the Fortune 1000 in I think it was 10 or 12 years. Enormous growth in their companies. Their companies are going overseas. Their companies are doing more M&A.
+We did that one unique transaction where ChemChina bought Pirelli in Italy. Obviously, when we have a unique network, we can help a Chinese company and an Italian company at the same time, so we are building there for the long run.
+As a risk management tool we've always said that the way we treat that is we will be prepared for very tough times and I think it's a mistake not to grow because you're going to have tough times. I have never seen an economy that didn't have tough times. If you went back to the United States, when J.P. Morgan was building JPMorgan back in 1850 and 1860, look every single time that you panic because America had a recession there would be no JPMorgan. So we are not going to change.
+What we've seen with the officials in China is that they are very responsive to changes, and you can argue whether they should have gotten that involved in the stock market. You can't manipulate stock markets. But they are very responsive to lending.
+They've changed their reserve policies, their RMB policies, the QFII policies, the Hong Kong Shanghai Connect. Not everything they do is going to work, but they still seem very committed to more and more market reform, more and more of taking SOE -- rationalization of SOEs and taking them public, so some market discipline there. Creating more of a consumer society.
+And what we've always said -- and I think they have the wherewithal to meet their short-term objectives of growth, but we expect that they will have bumps in the road. We expect that and we are going to look right through that. The fact that their -- I also remember their market went from $4 trillion value -- so it's a $10 trillion economy. It went from $4 trillion market value to $10 trillion; now it's back to $6 trillion. I think those are the numbers.
+The American stock market has done that roundtrip a couple times itself and so the American economy is $18 trillion. I think our stock market is $25 trillion, so there will still be huge opportunities there. If they ever completely reverse what they are talking about doing, you will see it in far more significant ways than them getting involved in the stock market.
+
+Answer_36:
+
+          Marianne, you showed a NIM thing that NIM would go back to 265 to 275. And, remember, when we say deposit beta it is by product, by --and it's got gamma, so the first 25 basis points, the second are a different 25 basis points, they are different than the third 25 basis points. It's a pretty intensive analysis to try to get accurate; that's what we're trying to do. And it's all in that number that was presented and we don't think that's changed dramatically.
+As Marianne said, we are assuming that whatever happened in the last cycle, this one will be worse. In other words, you will gather less of the benefit from rates going up than we have in the past.
+
+Answer_37:
+
+          Listen, there's a unique --.
+
+
+          Yes, (multiple speakers).
+
+
+          It is a unique circumstance when you're at zero. There are a lot of things that happen when rates grow to 25 basis points that there will be -- you will pass very little of that also. And we also see that -- we will see that in money market funds. We will see that in some forms of deposits, etc.
+The beta gets much higher as rates go up. If I had to guess, I would say we are conservative, not aggressive.
+
+Answer_38:
+
+          Yes, the credit downgrades included oil and gas and we called it out just because in total oil and gas was $140 million of our total net $250 million reserve build. But also I said that there were select names, it's like a dozen names, so it's not really like there's another sector, just very discrete names.
+
+Answer_39:
+
+          No, we are not going to give you that. We disclose -- when you say mortgage duration, obviously we build into all of our models mortgage duration. You guys can calculate that yourself by looking at disclosures in the 10-K that show mortgages at 3%, 3.5%, 4%, 4.5%, etc. And obviously we can change that at will with our investment portfolio and things like that.
+It's all in the NIM already. So obviously we have negative convexity in our portfolio.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/11_questions.txt

@@ -0,0 +1,160 @@
+Question_1:
+
+          My first question is the capital progress has currently been solid this quarter; last week, however, there seems to have been more support in the Fed in terms of including the SIFI surcharge in the CCAR test. And I guess the question is in two parts: one, what do you think the chances are of the -- any or all of the CCAR surcharge or the CET1 surcharge to be included in CCAR; and two, what are the next steps in terms of business model adjustments, if that did pass?
+
+Question_2:
+
+          Got it. And just the second question is you've clearly made also progress in terms of your deposit mix. As we potentially anticipate a rising rate environment for the back half of the year, given what the regulators have done in terms of saying, okay, here are the good deposits, here are the not-so-good deposits, how should we expect the pace and magnitude of retail deposit repricing or pass-through if the Fed does raise rates in the second half of this year?
+
+Question_3:
+
+          I see your markets revenue are down 1% year over year the way you look at this, but I'm trying to reconcile that with Jamie's comments two months ago at a New York conference where you said there is repricing in rates derivatives, prime brokerage, clearing, and trade finance. I'm guessing it's just risk off.
+Can you shed more light on what type of repricing you are seeing with any specific examples, because the transparency for us on the outside is pretty weak?
+
+Question_4:
+
+          And just one follow-up. When you say (multiple speakers)?
+
+Question_5:
+
+          When you say a little repricing, is it bigger than a breadbox? Are we talking about basis points or 1% or 5%? What are you talking about here?
+
+Question_6:
+
+          Question on the deposit shrinkage. You obviously finished the program you announced at investor day. Just wondering if you're going to take it further; what the impact on revenues has been. And do you expect that the full benefit to NIM is already in 2Q or -- in the 2Q numbers or we are going to see more benefit in 3Q from the actions you took?
+
+Question_7:
+
+          Yes, and the NIM benefit should flow into 3Q as well?
+
+Question_8:
+
+          Marianne, was wondering if could remind us about the timing of your expense reduction targets in the consumer and investment bank. Specifically, if you hit the $57 billion in adjusted expenses for 2015, how much of the ultimate cost saves does that $57 billion target for this year incorporate? How much would you have achieved already in 2015 and any thoughts on the trajectory for remaining saves after this year?
+
+Question_9:
+
+          A quarter of the total?
+
+Question_10:
+
+          Okay, great. Then a quick follow-up is on RWA. Any update to your year-end RWA targets and thoughts about how we should think about potential RWA levels longer term?
+
+Question_11:
+
+          I'm just curious in terms of your core loan growth; you mentioned that that's up about 12% year over year. Can you give us a sense as to where that's growing the strongest and where you're seeing a bit more weakness? Within the core loan growth, specifically.
+
+Question_12:
+
+          Okay, Marianne, and for my follow-up I noticed I guess you were quoted in an earlier meeting today suggesting that there could be further provisions for the oil and gas portfolio. There's been some media reports prior to this week about regulators potentially looking a bit more carefully at your portfolio as well as a number of other banks.
+Can you give us a little more color as to how you are thinking about the potential trends there and any comment you might want to give in terms of where the regulators are focusing?
+
+Question_13:
+
+          Marianne, just wanted to follow up on that last point. Your commentary about credit, for the second half, is in line, you're $4 billion plus and you've got $1 billion of charge-offs this quarter again. So on that point just one question about where you continue to see underling improvements. Card obviously is still above your guidance, but can you give us some of the thoughts about where any existing improvement can come from?
+
+Question_14:
+
+          And then to your point about not expecting to be much loss from the energy provisioning and that we could see energy provisioning, plus this quarter you had a nice $300 million release from the NCI portfolio, is this kind of it for reserve release and can you talk about your outlook there?
+
+Question_15:
+
+          Maybe we could just ask a question on card fees? That's been an area where growth in card fees have been pretty flat for a while as you ramp up reward spending. We saw a pretty nice jump quarter over quarter; some of that is seasonal, but it was a little stronger than what we saw the last couple of years.
+Are we getting to a point where you are lapping some of these higher reward costs and growth in new accounts and we should start to see that revenue line track more closely with spending, or is this something unusual this quarter?
+
+Question_16:
+
+          Okay. And on the card loan side it seemed like you saw a decent uptick this quarter. You are starting to get past some of the runoff and it seemed more of a core driver.
+
+Question_17:
+
+          So first question on capital. I just want to get a sense as to how we should be thinking about preferred issuance plans going forward now that you've met the 150 basis point RWA target.
+
+Question_18:
+
+          Okay. And then just a follow-up regarding, Marianne, your comments about the trading outlook for at least in the near term, recognizing it's still very early days in the quarter. Since the very start we've seen, or at least we've experienced, a number of global shocks and on the regulatory front we do have the Volcker implementation deadline, which is looming. So taking all those factors into consideration, how should we be thinking about the near-term trading outlook?
+
+Question_19:
+
+          You guys had a very decent mortgage banking quarter in the second quarter with rates going up. We know that the refis have started to come down, but the purchase market has been stronger I think than people expected in the second quarter. What do you see going into the third and fourth quarter, especially with the new regulations coming out with the disclosures with (inaudible)?
+
+Question_20:
+
+          (multiple speakers) Can you talk a little bit about the tax --? My follow-up question on the tax rate. Should we be modeling in 28% to 30% going forward; is that 25% just an outlier?
+
+Question_21:
+
+          The equity trading has been very strong the last couple quarters, both for you and for others, assuming it continues the rest of this earnings season. As you step back and think about some of the drivers there, you mentioned some repricing; we've obviously seen some deepening of some markets, increased volatility. Can we think about there being potentially a long-term secular recovery in the equities trading, or do you think it's more just stocks are going up, just global QE, or too early to tell?
+
+Question_22:
+
+          Okay. And then just separately, what type of mortgage loans are you adding? Are these jumbo? Are they fixed rate?
+
+Question_23:
+
+          Okay. And I guess are you choosing to add some mortgage loans instead of securities? Because you've got a smaller securities book than a lot of peers and it seems like there's capacity to add there.
+
+Question_24:
+
+          I just want to follow up on the conversation in fixed income, and I agree with you; it seems like you weathered the whole Greece and China storm pretty well. The thought on the lack of liquidity in the fixed income markets gets a lot of attention. You guys have the most market share; have the lowest standard deviation in the business. As a liquidity provider that's a good thing for you.
+But curious on how you are thinking about preparing for what seems to be a pretty serious issue and how serious of an issue do you think it is in terms of the potential disruption?
+
+Question_25:
+
+          Speaking of cautious, the last one I have is on living wills. I know we have a little bit of time before we hear anything, but if you look at the comments from the previous year, what they wanted you all to address, it seems like there was a massive amount of progress made. I'm not sure what you can tell us, but curious your thoughts on progress made and then maybe timing on when we might hear regulators thoughts.
+
+Question_26:
+
+          Marianne, you mentioned a couple of times about the competitiveness in the middle-market lending space. Can you give us some color on what you are seeing, whether it's underwriting standards, and what kind of product type in the middle market that is most competitive?
+
+Question_27:
+
+          You guys have made great progress with the penetration of the mobile banking app that you've created as well as online banking. You showed us that your branch count is down over 100 branches on year-over-year basis. What do you see for the branches as you go forward? Is that trend line likely to continue as you continue with the increased penetration from the mobile app?
+
+Question_28:
+
+          I was just curious about the reduction of the non-operating deposits and I would have expected that to come mainly out of the corporate and investment bank. But when you look at the disclosures on your average asset level, it's essentially been $850 billion plus/minus each of the last five quarters. Where is the shrink really happening, or how do we see it?
+
+Question_29:
+
+          But when I look at total assets in the CIB, it's 845 this quarter versus 846 last year. It just doesn't look like a whole bunch came out of there. It looks like it all came out of the --.
+
+Question_30:
+
+          Well, if you go linked quarter it's 865 to 845. I'm just curious; it doesn't seem to mesh up to --.
+
+Question_31:
+
+          Okay. When you see it in your public disclosures it all looks like it's coming out of corporate and other, which is down more than 100 linked quarter, so I was just kind of curious how it all works. Because if --.
+
+Question_32:
+
+          Just following up on the markets discussion. Curious whether or not you have seen some of the drama around Greece impact M&A discussions in Europe this quarter and maybe an update on the IB backlog at this point.
+
+Question_33:
+
+          Okay. Thanks for that. And then on security services, I know that you all highlighted that it's up quarter over quarter on the seasonal strength for the dividend season, but it was down year over year. Can you help us reconcile the year-over-year decline?
+
+Question_34:
+
+          Jamie, you made a comment about attacking new markets and that sort of tags on to what I was going to ask, which is whether there are any of the old WaMu markets where you've not been able to expand as aggressively as you've wanted to and that you might be thinking about exiting. So I'm just wondering, can you just tell us how you feel about individual markets right now?
+
+Question_35:
+
+          Okay. Another geographic question. I get that Greece is not that important to the Eurozone and the events of the past couple weeks seem to have been a lot of theater, frankly. But the events in China in the last couple of weeks have been somewhat worrisome. Have your plans for China changed at all, given what seems to be a retreat from open markets there?
+
+Question_36:
+
+          Just a quick follow-up. Marianne, earlier on you were talking about deposit betas and, for a lot of very good reasons, expecting that deposit betas will be a little bit faster this time around. But could you round out the conversation as to how you are thinking about how your NIM is going to traject in a rising rate scenario? Because I got a few questions on whether the deposit betas being a little faster means that the NIM trajectory is likely to be different from last time rates rose for you guys.
+
+Question_37:
+
+          Okay, because the last time rates rose your NIM didn't move up that much.
+
+Question_38:
+
+          This is actually Steve dialing in for Gerard. Just two follow-ups. You had mentioned the credit downgrades; I believe you said oil and gas. Were there any other sectors, and if there were, just some figures on them?
+
+Question_39:
+
+          Okay, great. Thank you. And just a second follow-up. Can you just give us your mortgage duration and how far you are willing to take it?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/12_answers.txt

@@ -0,0 +1,175 @@
+Answer_1:
+
+          Yes. 
+
+Answer_2:
+
+          There are a couple of different questions in there and maybe I'll try and separate them. My comments about the seasonality in the fourth quarter were most particularly towards Markets revenues and less so towards the IB revenue space. With IB revenues, it's a mixed story. Talking now about the sort of Banking revenues rather than Markets revenues. So the pipeline for M&A remains very constructive and really pretty good, so we're expecting to continue to have strength in M&A in the fourth quarter. 
+With ECM you saw obviously a pretty sharp falloff in activity in the third quarter. We have seen the pipeline in ECM to the degree that that shows you visibility into the fourth quarter which is somewhat limited. We have seen that build up and so there is possibility that we'll be able to pull through some of that into the fourth quarter. But that will depend upon how the markets behave. 
+With respect to DCM, our sort of guidance there was a commentary really mainly to the strength of the fourth quarter last year and on relative basis, the pipeline is down. And it's really to do with normal refinances are slowing and the maturity wall is smaller but it's still healthy. It's just not going to be at the same levels that we saw last year. 
+
+Answer_3:
+
+          Look, the situation for us in markets was one where there was volatility, regardless of you how you want to characterize it, and people were acting -- our clients were acting on the back of that. We were able to capitalize on that flow. We were able to intermediate for our clients, put our capital [at risk and make] some money. We did pretty well where there was volatility. Where there wasn't, it was more about, to your point, more about low levels of activity, people on the sidelines. It was tougher to make money because less was happening rather than anything else more significant than that. So far in the fourth quarter we're two weeks in, it's too early to say, but there's not been a tremendous change in the landscape. 
+
+Answer_4:
+
+          Looking at the revenue rate, the guidance, remember our guidance previously had been you should expect our revenue rate to be at the low end of the 12% to 12.5% range. The most important thing we want you to take away from talking about our co-brand partners is that we feel great about having signed up United Airlines and Southwest Airlines and partnering with them again for the medium term. 
+And the economics of those deals on a standalone basis are still really very good. But the co-brand space is very competitive and when any of those contracts are going to be renegotiated at this point, they're going to be renegotiated to competitive levels. And so, it's really the fact that we're seeing that is going to come through in our revenue rate in the fourth quarter which is going to push it down to below 12%. It doesn't change the fact that the ROE target for the business is still 20% and that the economics of those partnerships are still good. Remember, these -- 
+
+
+          Just given the numbers, it's $200 million a quarter for four quarters until it lapse. 
+
+Answer_5:
+
+          So I would say, first of all, we gave some expense goals in Investor Day for both Consumer Businesses as well as for the CIB. And those were I think pretty sizable goals, $2 billion in 2017 versus 2014 for the Consumer Businesses and $2.8 billion in 2017 versus 2014 for the CIB. And we are working through that. We are on track in both of them. I think I said earlier that adjusted, the Consumer Businesses in the three quarters so far are $700 million down year-over-year in expenses. So against the $2 billion target, we're certainly getting there. 
+And on the CIB, we expected 2015 to be mainly about forcing out those business simplification expenses and we've essentially done that too. So we're on track. We're pushing hard. We still have work to do. We are always going to be diligent on our expenses and generally speaking at Investor Day we also said we're going to be on or down which is actually pushing hard to keep them down but not at the expense of good investments in the business. So obviously we are going to respond appropriately to the revenue pressure but not overreact. 
+
+
+          I've spoken my whole life about good expenses and bad expenses. Bad expenses are waste, things you don't need. You don't have [to trade through] processing, things like that. We want certain expenses to go up. When we find marketing opportunities in Card, we're going to spend it. If the Investment Bank does better, the comp accrual is going to go up. That's how we run the Company. That's not ever going to change. 
+
+Answer_6:
+
+          So Mike, thanks for that. So $700 million, if you adjust for legal expense in the Consumer Businesses year-to-date, we'll do some more in the fourth quarter. And year-to-date on business simplification, which I think for in total was about $1.5 billion, we've done $1.3 billion. In total, that's $2 billion so far. Obviously more work to do in 2016. With respect to the adjusted overhead ratio, it speaks a bit more to seasonality of revenues than anything else. 
+
+Answer_7:
+
+          I'll start. Jamie, you can yes or no at the end. Mike, we would say that the US economy is doing pretty well there. We're seeing good demand for loans in the Consumer space and reasonably good sentiment in the Business Banking space and our core loan growth numbers do show that. There's nothing particularly funky in the loan growth numbers. We do our very best to show them in the right light. 
+I would take a slightly different perspective on the jobs report on the non-farm payrolls. And not to sort of over think it, but while I know it was somewhat lower than people were expecting or possibly hoping for, it's still at around 140,000, almost two times what would be required to have stable unemployment. So it's only one report too. You can't overreact to it. It's not that we're seeing anything that's causing us any concern and our outlook for the fourth quarter is pretty solid I think. Jamie, anything? 
+
+
+          Nothing to add. 
+
+Answer_8:
+
+          We did better than we had targeted on our non-op deposits. We worked very, very hard but we told you we would on derivative notionals, compressionals, so our level 3 assets. It is absolutely the case, not to diminish the amount of work we've done and the progress we've made, that we obviously went after the most impactful -- least impactful to the client franchise, most impactful to the ratio with a less revenue [give-up] first. We made great progress. It becomes increasingly, not exponentially, but increasingly more difficult for every net basis point. 
+That's not to say, by the way, that we aren't continuing to work very hard at it and optimize and that we won't push further. But we're not at a place right now where we're going to target anything structurally below this, except for over the longer term just continuing to work through it. And our overall capital target, we're at 11.4% now. Our overall capital target still in the short to medium term is still 12%. 
+
+
+          I just want to add, in the new world we have to obviously monitor and push down to all the business levels, GSIB, CCAR, Basel, LCR and SLR, and we want to optimize all of them. So we're only living with this for a couple years now. As we embed it in our systems, we'll have a better way to track it and monitor it. Over time, I would expect the GSIB will come down a little bit. It only comes down in lumps. You got to make a big difference to go from 4% to 3.5% but imagine over time, I'm talking about years. I'm not talking about anything you'd see this quarter. We are very comfortable where we are today. Over years, you might have to change some of your business strategies but I think it's a better thing not to be an outlier in GSIB. 
+
+Answer_9:
+
+          It has nothing to do with next year, Betsy. When I say over time, it just happens that JPMorgan built a global corporate investment bank. 70% of it is financial institutions, 30% corporate. We easily could have been built the other way around, we focused on it over time. When I say over time, it might be quite easy for us to say that over five to six years let's focus more on corporates and less on financials and that will affect your GSIB fairly substantially. That's what I'm talking about. It has nothing to do with CCAR for next year or anything like that. 
+
+
+          A couple of really small points on CCAR for next year for what it's worth is we were constrained in CCAR by leverage. We have issued $6 billion of preferreds in the year. We are reacting to try and make sure that we are managing our binding constraints or our most binding constraints. So we're working on that. 
+The other thing to note is that we're at 11.4% as we sit here now. So we're not gliding a long way from where we need to get to. Both of those things together, with obviously our profitability, should mean that we have incremental opportunity. But our range is 55% to 75% and we hope to be in that range. 
+
+Answer_10:
+
+          So just a couple of things. First of all, I think the [FSB] thing was a sort of leak. So it's as good as it is. I will tell you that the news on structured notes was not strongly positive but we hadn't banked on it being. So not entirely pleasing but not disappointing relative to our models and expectations. 
+Other things to pay attention to anyway are there's no change to the internal TLAC assumptions. The clean holding Company rule is one that we're watching out for. But fundamentally -- and then there was the timing. Is there going to be a substantially elongated transition period? I would call it all fairly marginal. It hasn't changed the overall picture for us. We're at around 16% and we'll figure out the FSB proposal that's leaked out wasn't shockingly different and we'll see how the Fed responds. 
+
+Answer_11:
+
+          So with respect to the fourth quarter, we are expecting our loans to grow and overall net-net [rotation out], cash and securities to loans would be supportive of NII. But remember, the biggest boost to our NIM was associated -- or was a big boost to our NIM was associated with changing the mix, reducing our overall cash balances. So, a few things going on. 
+The outlook for the fourth quarter being relatively flat was associated with market implied rates which are relatively flat. And so in the law of big numbers, that plus or minus a few basis points is what we're expecting. With respect to looking out to 2016, obviously we don't know what's going to happen with the rate curve. If rates stay very flat we should still have upward pressure on our NII associated with the change in mix of our balance sheet. 
+So the fact that we've got a smaller interest earning asset base and more loans and less cash and less securities should be supportive even on flat rates. We don't know when rates will rise but if market [implies] are followed or if the Fed [dots] or anything like realistic, then that will be even more constructive. Remember in the first year, we get the biggest benefit from short end rates and the first 50 basis points of them. 
+
+
+          No, unfortunately not. 
+
+Answer_12:
+
+          So I would say that first of all, with respect to purchased credit impaired, with this release we did on the $375 million, that's our baseline expectation for that portfolio. Our baseline expectation is no material incremental reserves. Obviously if things improve and they're sustained, then there may be more reserve releases. But I wouldn't try and model those. 
+With respect to the noncredit impaired portfolio we talked about, you've seen our charge-offs at normalized 14 basis points. Our portfolio quality is really getting quite high. We're cycling through most of the significant risks. Reserve releases will be more modest and a little bit more periodic and several hundred million dollars next year, maybe $300 million plus or minus but not significantly more than that. 
+
+Answer_13:
+
+          Look, our efficiency target at 55% was over three years or so and we still will be driving to get to around that level. But it does, as you quite rightly mention, include not just rates rising but a fair degree of normalization in rates. We'll see what happens in 2016. Obviously it's possible but we're not going to call an outlook on rates next year. 
+
+Answer_14:
+
+          Okay. So we've taken some large reserves in the last few quarters and our overall reserve number obviously is consistent with our expectations based upon the outlook for oil prices. There was a redetermination cycle that we reserved for in the first quarter and so there will be another one in the fall. We've been as forward leaning on that as we can be. Obviously I'm not saying that there may not be any net incremental reserve build but we're not expecting them to be significant. A lot of companies have tried to adjust their expense bases and otherwise help their position. So if energy prices stay around these levels and recover slowly, we're expecting, net, not to have material incremental reserves in the next quarter. We may see some. 
+
+Answer_15:
+
+          Let me deal first of all with production quarter-over-quarter revenues. Margins are down. Margins are down for two principal reasons. Remember, quarter-over-quarter, at least on a closed loan volume, we were at a consistent level. Margins are down because we moved a mix shift towards correspondent from retail towards purchase from re-fi as well as capacity in the industry, more capacity in the industry and therefore less constraints. So the production quarter-over-quarter revenue is more of a margin number than anything. 
+With respect to year-over-year, I do want to make this clear. With respect to the guidance year-over-year that we should expect non-interest revenue for the mortgage Company in totality to be down $250 million. That brings our total year-over-year NIR down around $1 billion, maybe a little more, which is what we guided to at Investor Day. And it's more off the back of lower repurchase reserve releases, lower gains on Ginnie Mae sales and [XI] gains, non fee-based revenues that are to do with our third party UPB as well as run off in the UPB. So it's consistent with our guidance. It wasn't fully reflected in everyone's models. 
+I think there was a third part to your question but I have to say I've -- oh, expenses, yes. Thank you. On expenses -- we continue to work very hard on our expense equation, both in terms of managing down the -- particularly in the servicing space by the way, managing down the default inventory in a number of different ways but also investing in our operating model. So in technology, to improve the production operations cycle process, also in our site strategy. So no, we are not done. We continue to work very hard at it. We have made great progress but we continue to work hard at it. 
+
+Answer_16:
+
+          Obviously, we're not going to comment on anything specific. We would be willing to take and we do take a look at things when they come up and if we are able to price for the risk and it's in a client segment or an entry we like we might be interested. But there's no -- we have no special comments on it. What we're really interested in is growing our underlying core loans with our customers that we can continue to do business with. 
+
+Answer_17:
+
+          Not as defaults happen. It's to do -- depends on whether it's reserve based lending or whether it's not. But as companies are either downgraded or as they are experiencing financial -- change in financial condition or the borrowing base is redetermined, we will act accordingly. We try to be as forward-leaning on that as is possible. We don't have perfect insight until some of that information becomes clear. That's the process. 
+
+
+          And the reserve base lending, you basically take essentially current prices, you discount at a discount rate, you assume expenses, you [active real engineer] your force and things like that, and you see if you can make rollover the loan at a sound -- I'm going to call it 65% LTV and we think it's pretty good. That's what we're here for is to lend to clients particularly in tough times. You can't be a bank that every time something goes wrong you run away from your client. 
+We also do things like stress test down to $30 oil, maintain $30 for 18 months and say, how much more reserve do you have to put up? I think I said somewhere, you can correct this number, Marianne, we're not in the same room, that if that happened, we think we're going to have to put up another $500 million or $750 million in reserves. Which is just not something we worry a lot about. 
+
+Answer_18:
+
+          Good evening. 
+
+Answer_19:
+
+          So it's obviously a really great question. Unfortunately we really don't guide to our forward-looking issuance. You're right, we are above 150 basis points right now and we're also working on our leverage balance sheet. So we're working the dials exactly what you would expect us to, but we're not going to make any comments about forward issuance. 
+
+
+          Yep, I got it. 
+
+Answer_20:
+
+          The pipeline for 2016 is building up, so we don't have perfect visibility yet. We think obviously the deals that were being done in 2015 were skewed toward larger deals and we think there may be more flow in 2016 but it looks pretty healthy to us so far, but it's building up. 
+
+
+          Thank you. 
+
+Answer_21:
+
+          I think over the last several quarters, forgive me if I'm slightly wrong but I don't think I'm entirely wrong, our sort of C&I growth has been broadly in line with the industry. Remember that over the course of 2013 and 2014, we did a lot of work on simplifying our businesses and that had an impact on the pace of our loan growth. But our mature markets are performing well. We're seeing growth in our expansion markets. We're adding new clients. We're culling our prospects. So everything is set to continue to see growth more going forward than we have in the past. 
+
+Answer_22:
+
+          There was about -- in CIB, there was about $47 million of metals and mining, about net-net $20 million of BAU growth and then just a few other normal BAU puts and takes, downgrades, upgrades. Other than those three things there was no one specific call out. 
+
+Answer_23:
+
+          Thanks, Chris. 
+
+Answer_24:
+
+          Of the $19 billion that we put on our balance sheet, around $10 billion, just a little over $10 billion was jumbo. The rest was conventional conforming. 
+
+Answer_25:
+
+          We'll have to get you the split. 
+
+
+          I think the jumbo's like a third ARM. Counting the conforming, I think it's all fixed. That's what I remember. 
+
+
+          We'll confirm for you. 
+
+Answer_26:
+
+          You are right that at these kind of 2.5%, 250 basis point levels in Card, it does speak to the quality of the loans we're originating and the engagement with the customers. Which is much more now about driving, yes, some NII but really, really good spend and therefore lower credit quality. It's an integrated equation. We're expecting, given our originations and the runoff portfolio, the work loans running off in the portfolio that we're building is really very, very clean. 
+We're expecting that those charge-off rates to be low for the short to medium term, to read out for the next year for sure. And there will be a combination of things that would drive that. But largely it would be environmental. We don't expect at this point, we have made changes to our credit box but they aren't material changes and we'll continue to test our appetite to want to do that and that may have an impact. But we're originating the vast majority of our cards in the super prime sector. 
+
+Answer_27:
+
+          Similar, yes. Compared to the industry, our originations are skewed to the prime space. 
+
+
+          And our LTVs are lower and our durations are in line or lower. 
+
+Answer_28:
+
+          The biggest comment I would make is that there was a lot of volatility, particularly in China, in the second part of or the last part of the second quarter. We were -- we did pretty well. We helped our clients. We didn't have significant open risk positions. We weren't very directional. We were able to do well in that situation. Also in the reversal, also on currency moves. It really is a comment I made about we're here to serve our clients, they were transacting, we were able to do risk intermediation in today for them and so we made money on both ends. 
+
+Answer_29:
+
+          Let me just talk qualitatively for a second and we'll get you some numbers. But we're focused on mobile and digital primarily because it's going to be great for the customer experience, it's what our customers want. And also because it's a significant enabler for reducing cost to serve and improving efficiency. So we've been very focused on whether it's quick deposit, whether it's quick pay, whether it's our mobile wallet, whether it's our mobile app and we've been seeing great results. I'm off the top of my head not going to be able to tell you the penetration rates but we can get back to you. 
+
+Answer_30:
+
+          I can tell you that we are growing our deposits nearly twice the industry. That we know. I think that's a reasonable indication for a bunch of different reasons and that we have a very highly rated app. I think the most highly rated bank app but we'll check that too. 
+
+Answer_31:
+
+          On the Fed funds and reverse repos, we had moved toward higher yielding, for example, emerging markets assets there. So we got some high yield there. We saw some yield on our trading book moving out of emerging markets. Just a bit of puts and takes. On securities, was it significant? I'm sorry, I'll come back to you. Operator, any more? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/12_questions.txt

@@ -0,0 +1,124 @@
+Question_1:
+
+          Thanks very much. So I'm curious, the capital markets related commentary, I get there could be a hangover effect into fourth quarter and I'm guessing that's the primary driver behind your analyst estimates appear high on fourth quarter. But could we talk about what you're actually seeing in terms of where the financing markets are maybe drawing the line? Meaning, are the deals that underwriting you expect to fall off in the fourth quarter based on your pipeline, is that a function of timing that you think could come back next year? Are these marginal deals where markets are drawing the line? I'm trying to get at -- 
+
+Question_2:
+
+          The ultimate question of is this the first time that FICC could actually grow in 2016 just because of the beat down it took in the back half of this year? 
+
+Question_3:
+
+          Maybe just a follow-up in FICC in general, I know none of us have a crystal ball. The slowdown in activity that we see, some of it's clients sitting on hands. Maybe you could separate that between any providing of liquidity [and marks] along the way. Because we did see a really wide credit spread widening in the quarter. 
+
+Question_4:
+
+          Thanks. Marianne, can you talk a little bit more about the Card business and try to help us understand the Card revenue pressure that we saw this quarter into the fourth? How much of that is the NII side of things and how much of that is the partner repricing? And how far past the fourth quarter do those resets continue before growth can overcome it? 
+
+Question_5:
+
+          Got it. Okay. Second question, just on -- in this tough revenue environment, first of all, can you give us a quick update on the progress on the expense plans? And then, any -- does anything change given how tough this revenue environment has changed as far as either accelerating or digging in again? I know your prior comments have focused on obviously always needing to invest. But in terms just of your focus as you think about next year and building the expense budget against the environment that we're seeing. 
+
+Question_6:
+
+          Hi. Just a follow-up to that last question. So of the total $4.8 billion of expense savings, how much have you achieved? And if you're on track, why did the adjusted overhead ratio go backwards? It's 60% in the third quarter versus 58% in the second and 59% last year. 
+
+Question_7:
+
+          All right. And one follow-up. Clearly it's due to revenues. So the question Jamie, if you could answer this, a simple yes or no question. Is the economy getting stronger or weaker? And the reason I ask that, the jobs report from a couple weeks ago seems to imply the economy's getting softer. Yet, your loan growth actually -- your core loan growth accelerated and you're guiding for faster loan growth in the fourth quarter. So is there noise in that loan growth figure or is the economy, based on what you're seeing, getting stronger and the jobs number is misleading? 
+
+Question_8:
+
+          Hi, Marianne. You saw some very good improvement in the GSIB surcharge from the 4.5% to 4%, probably came a little faster than some of us expected. Do you have good momentum there to do more there and how are you thinking about the tradeoff, the cost benefit tradeoff, of pushing further down on that GSIB bucket? 
+
+Question_9:
+
+          Hi, thanks. So just a question on the capital, getting to 4% now with a goal over time to get to something lower, 3.5%, 3%. Does it also give you more room for capital return requests next year, Jamie? 
+
+Question_10:
+
+          Okay. And then just on TLAC, I know we're still waiting for the Fed decision but we did get FSA recently. Anything in there that you can respond to as to how you're prepared for TLAC? 
+
+Question_11:
+
+          Good afternoon. Just maybe a question on NII and NIM. I think Marianne you said it would be relatively flat in the fourth quarter yet you're still expecting some pretty strong loan growth. Just wondering if you could maybe discuss why you think it would remain flat in that scenario? And maybe a bit longer term in an environment where we're looking at lower for longer potentially in the rates, how do we think about the NIM a little bit over the intermediate term? 
+
+Question_12:
+
+          Yes, good afternoon. My question is on the Credit outlook. The consumer reserve release has continued to offset the wholesale reserve build and I'm just wondering, how should we think about how much is left on the Consumer side over the next several quarters, especially given the 23% loan growth that we saw this quarter and your note saying that this momentum should continue? 
+
+Question_13:
+
+          And just my follow-up question, following on Ken and Mike's question on expenses, maybe I'll ask it another way. Over the past two quarters your adjusted overhead ratio was 58% to 60%. You noted that you think that net interest income could grow next year even if rates stay low. Could you potentially slide below the 58% to 60% band that you reported over the past two quarters relative to -- you mentioned an efficiency target of 55% if rates actually normalize? 
+
+Question_14:
+
+          Good afternoon. Thanks for taking my call. First of all, Marianne, if I could in terms of some of the credit numbers that you mentioned in terms of the Oil & Gas provisions? They seemed pretty modest in the scheme of your more than $20 billion of exposure to that industry. How are you thinking about the redetermination process that started this quarter and how would you guide us in terms of thinking about what the provisions could be in the fourth quarter following the redetermination this quarter? 
+
+Question_15:
+
+          Okay. And then in terms of Mortgage Banking, you noted that production -- the production amount was actually up quite nicely year-over-year but the revenues in terms of production and also in servicing were a bit weaker, certainly on a quarter-over-quarter basis. But the expenses were relatively stable on a quarter-over-quarter basis. Is there something going on there that we might see further improvement in the expense base on the Mortgage side of the business in the fourth quarter? Or are we sort of -- are you at where you need to be in terms of the $1 billion to $1.1 billion a quarter in that business? 
+
+Question_16:
+
+          We've seen some assets change hands and you guys have been mentioned as a buyer for some of the other assets that are out there. Just wondering on what the ability and appetite is out there to buy loans. 
+
+Question_17:
+
+          Just separately, following up on energy, how exactly do you re-evaluate the portfolio? Is it as the defaults happen, that's where there's a big boost to reserves or you get in front of that? 
+
+Question_18:
+
+          Good evening. 
+
+Question_19:
+
+          Marianne, I appreciate your commentary on the preferred issuance that you guys have done so far throughout the year. Looks like you're now above the 150 basis point target. You alluded to that being a function of efforts to manage to your binding constraint under CCAR. Just wanted to get a sense as to what -- how you guys are thinking about issuance plans going forward? 
+
+Question_20:
+
+          So just moving over to the Investment Banking side and maybe trying to dig a little bit deeper into some of the guidance you've given on M&A. Looks like the backlogs and expected completions for the fourth quarter are quite healthy but at the same time, post the August volatility, some of the historically strong M&A indicators like market cap, CEO confidence, those measures appear to be deteriorating. I just wanted to get a sense as to how you're thinking about the M&A outlook beyond the fourth quarter, just given some of the weakness that we've seen in some of those measures. 
+
+Question_21:
+
+          Thank you. Good afternoon. Marianne, can you share with us -- you mentioned that you've built out 400 new relationships in the middle market area of the Commercial bank. But when we look at the loans outstanding, they're essentially flat on a year-over-year basis whereas the Corporate Client business has grown very rapidly. Can you give us some more color behind what's driving those numbers? 
+
+Question_22:
+
+          Okay. And then you talked about the reserve build in the CIB, about $128 million was for Oil & Gas and the total number was $232 million. What was the other areas that required reserve building this quarter? 
+
+Question_23:
+
+          Mine were asked and answered. Thank you. 
+
+Question_24:
+
+          Yes. On the Mortgage Banking side, I noticed that your jumbo loans -- not your jumbo loans -- that your residential loans on your balance sheet's grown. Are they mostly jumbos and are they coming out of your normal production, that $29 billion and you're selling less to the government? Can you add some color around those numbers? 
+
+Question_25:
+
+          And are they mainly ARM loans or are they fixed rate loans? 
+
+Question_26:
+
+          Thanks very much. Marianne, if I can just follow up on some of the consumer credit quality metrics. At the Investor Day and subsequently Gordon was indicating unsurprisingly just given the very low levels that the expectation should probably be for some moderate rate of deterioration. And yet, we haven't seen it and I'm guessing that's partly because of the underwriting that's occurred over the past few years. My question is, what are the circumstances in which we should expect more significant deterioration there? Is it only macro or is there something else competitively that could influence that at this stage? 
+
+Question_27:
+
+          And are the dynamics similar in Auto as well? 
+
+Question_28:
+
+          Yes, hi. Just a quick one at this point. Equities, Marianne, you highlighted strength in Asia which I think probably was better than maybe some had expected given some of the volatility. So could you give some color on the trends you saw in that region in your Equities business? 
+
+Question_29:
+
+          Thank you. Hi, Marianne. Quick question on your Consumer business. You guys have shown very strong steady growth in the mobile users. I think it's over $22 million in this quarter. That's up from $18 million a year ago. Can you share with us what percentage of your customers are actually mobile users and how does that compare to a year ago? And what does Gordon think? What's the penetration rate that you think you can finally get to there? 
+
+Question_30:
+
+          Is there any evidence that you guys can point to where you're actually taking market share from other banks because your mobile products are just more superior than some of the smaller regional banks and community banks? 
+
+Question_31:
+
+          Okay. And then finally, your asset yields jumped this quarter which was good to see of course. Can you share with us how the Fed funds rate went up as much as it did sequentially? And also your securities yield went up in the quarter sequentially, can you give us some color behind both those numbers? Thank you. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/13_answers.txt

@@ -0,0 +1,264 @@
+Answer_1:
+
+          Good morning. 
+
+Answer_2:
+
+          So, again, I would say that the pipeline coming into 2016 in M&A was good, solid, up, in fact. Obviously, volatility can dampen the confidence of Boards and CEOs. Dialogues are pretty active, and we think the types of deals that we'll see in 2016 will look different. But I think, in the first couple of weeks, it's not been particularly strong, and we do need to see some of the stability come back, I think, for us to really see that conversion start to pick up. 
+
+Answer_3:
+
+          Yes, less mega-deals, more mid-sized deals, more cross border. It's a little different. Actually, more deal count, less big mega-deals, could be very constructive for revenue, but we're likely to see it be a little bit different in 2016. But honestly, the pipeline is good, and -- yes. 
+
+Answer_4:
+
+          North America will be a tough comp. It was very strong in 2015, but Europe could be very constructive. 
+
+Answer_5:
+
+          Yes. So, the way we do our reserves, just for context, because I think it's important is, obviously the oil price outlook is important and instructive. And it's very clearly going to drive how we think about probabilities of default and loss, given [default for] certain of our customers. 
+But I think it's also the case, just for context, to know that it is very name-by-name specific. Specific conditions at clients matter greatly. And so when we do these estimates, they are directionally correct, and order of magnitude correct. But that's just for context. 
+Oil -- we said last quarter, if oil reached $30 a barrel, and here we are, and stayed there for, call it, 18 months, you could expect to see reserve builds of up to $750 million. And that assessment hasn't fundamentally changed. 
+So, it is not the current market expectation that oil will flatline. It is the expectation, right now, that there will be a modest recovery. Based upon that, we would expect to take some additional reserves, but for them to be more modest, less significant. But that's the range; if oil's at $30 and stays here for a long time, up to $750 million. 
+
+Answer_6:
+
+          I think, first, I'd say we try to be very conservative, always, and so we're not trying to put up as little as possible. You know me, I'd put up more if I could. But accounting rules dictate what you can do. 
+And these are baskets of -- the real risk is in producing wells, cash flows are down. Surprisingly, the cost of getting the oil out of the ground has also dropped dramatically, and probably much more than most of us would have expected. 
+So, you take these producing wells, you take the cash flow, you discount it at 8% or 9%, you lend against it. And so these are our forecasts. 
+And our energy book isn't that large, relative to JPMorgan Chase. We're not worried about the big oil companies. These are mostly the smaller ones that you're talking about these reserve increases on. 
+
+
+          I also think, Mike, just -- 
+
+
+          And the forward curve is -- the end of the year, for 2016, I think is more like [$41] or [$42], or something like that. 
+
+
+          Yes, it's [$48]. So, hey, Mike, the other thing to know about the profile of reserves -- three things. The first is, it's not linear. 
+So, just the oil price decline, and the decline in the forward curve that we saw into December and to the end of the year, that's the impact it had on our reserves. It's fallen significantly in the first two quarters. That was not a knowable condition, and we can't reserve for that at the end of the year. That's why we said we would expect to take some more reserve increases in the next couple of quarters. 
+But again, it's a name-specific thing. And lots of other conditions at clients matter, including their hedging, their cash flows, the level of security, all those things. 
+
+Answer_7:
+
+          We don't. 
+
+Answer_8:
+
+          First of all, the oil folks have been surprisingly resilient. And remember, these are asset-backed loans, so a bankruptcy doesn't necessarily mean your loan is bad. 
+So, you have to be a little bit careful in -- and it's also, Mike, a philosophical thing. A bank is supposed to be there for clients in good times and bad times. So, it's not a trading market, where you try to support clients. 
+So, to the extent we can responsibly support clients, we're going to. And if we lose a little bit more money because of it, so be it. 
+And we've done that around the world. We did it in 2007 and 2008 and 2009. We try to do it responsibly. If banks just completely pull out of markets every time something gets volatile and scary, you'll be sinking companies left and right. 
+
+Answer_9:
+
+          Yes, so, let me just deal with where we are against our targets. So, the most notable targets were $2 billion in the Consumer businesses in 2017 versus 2014, and $2.8 billion in the CIB in 2017 versus 2014. 
+You probably heard my comment, but to clarify, on an apples-to-apples basis, we're halfway through on Consumer. We've done $1 billion this year. You don't see that 100% translate into the results, partly because of legal expense, which is not something that we particularly can predict, and hopefully won't be there forever. Also, because we intentionally decisioned in 2015, in the fourth quarter in particular, or mostly, to increase our investments in the Consumer businesses by $150 million. 
+So, we've achieved the $1 billion. We chose to reinvest a portion of it. Another $1 billion we're on track for. We will potentially reinvest some of that, too. And Gordon and we will talk to you about the basis for that at Investor Day. 
+On the $2.8 billion in the CIB, we're $1.3 billion through at the end of the year. And we talked before about the fact that the first $1.3 billion is largely on business simplification. We've had the revenue decline. We need to have the expense decline, and we've worked hard to deliver that, and we have. 
+The next chunk is to do with technology and operations and infrastructure and organization, and it's harder. And so, we will continue with them on track to deliver it, but it's going to be a job through 2016 and into 2017. 
+
+Answer_10:
+
+          Yes, I can give you some thoughts that won't totally satisfy you, which is our core expenses will continue to trend down, on the back of delivering against them. But we will make investment decisions that we think are good for the Company, accretive for shareholders, that will re-spend some of that money. And so we'll give you that shrink and grow at Investor Day. 
+
+Answer_11:
+
+          So, just on NII, yes, we are seeing, embedded in that NII, flat to up slightly. We are seeing a nice lift associated with the rate hike in December across businesses, as well as the continued benefit of the mix towards loans in our balance sheet. But we were flatted in our NII this quarter by $178 million on securities gains in CIO. So, that's going to mean the comparison is challenging, and then day count is obviously seasonal. 
+So, that's the dynamic. We are seeing the rate benefit. We do expect to see it, as I said in my remarks, for the full year. 
+Look, we think we are appropriately conservative on deposit [beta's]. It is not -- it is way too early to have any idea. There's -- virtually nothing has moved yet. And so, our job, and what we are doing, is paying very close attention to the competitive landscape. 
+These deposits that we're talking about, that have the high beta's, are valuable deposits with valuable clients for us, and we want to be competitive and pay fair rates. But it's so early in the movie that we haven't changed much in our modeling assumptions. 
+
+Answer_12:
+
+          So, energy, Metals & Mining, we're watching very closely, industries that could have knock-on effects like industrials and transportation. But we're not seeing anything broadly, in our portfolio, right now. 
+We're just watching very closely, which is why -- now, obviously, you can take our reserve build number, and you can say it's almost substantially all made up of Oil & Gas and Metals & Mining. And behind the scenes, we've had upgrades and downgrades of a number of other different companies, across sectors, but nothing particularly thematic yet. But we're watching. 
+
+
+          I would just point our that Credit Card, Commercial Bank, middle market, large corporate credit is as good as it's ever been. So obviously, it's going to get a little bit worse. I wouldn't call it a cycle, per se. 
+If you have a recession, yes, you will see a normal cyclical increase in all those losses. We're not forecasting a recession. We think that the US economy looks pretty good at this point. 
+
+Answer_13:
+
+          Yes, so, look, we talked about achieving 4% last quarter, I think; and for disclosure, we were quite close to 3.5%. At that point, it becomes increasingly compelling to want to look at the margin, for what you could do to get within the bucket. And so that is what we did in the fourth quarter, is spend time really focusing on getting to that achievable boundary, which we thought at that point it was. 
+And remember, it's not nothing, in the year, that we started the year thinking we would exit $100 billion of non-operating deposits. And while there still could be some volatility in that number, of course, we've almost doubled that -- or doubled that, in fact. 
+So, we got some wind to our backs in doing it. It's also the case that, when you get the entire Business and Company attuned to the sense of urgency and desire to want to be increasingly efficient in this way, that, at the margin, in a 100 different things, little benefits accrue. 
+So, look, we're at about 3.5% -- we're just inside the 3.5% bucket, as best we estimate it. It's not as much important whether we're basis points or surcharge points below or above. It's much more what we do now to get safely in the bucket. And that's going to still take work. So that's why -- we'll obviously talk to you more about this at Investor Day. 
+In terms of the give-up, from an economics perspective, we wouldn't have done it at any cost. We have done it because we think it is important to do, because we think it's going to be constructive for the Company, and because the revenue give-ups were not significant. But they weren't zero, either. But to be able to reduce a constraint that is, in one way or another, likely to bind us -- or in multiple ways, in fact, likely to bind us, it was a, I think, very good trade. 
+
+
+          It was done, effectively, client by client. 
+
+
+          Yes. 
+
+
+          To make sure we were trying to do the right things for our clients; not just jamming our balance sheet down and hurting people. 
+
+Answer_14:
+
+          The US economy has been chugging along at 2% to 2.5% growth for the better part of five years now. In the last two years, it has created 5 million jobs. If you look at the actual household formation -- car sales, wage, people working -- it still looks okay. 
+Corporate credit is quite good. Small business formation -- it's not back to where it was, but it's quite good. Household formation's going up. 
+So obviously, market turmoil, we all look at it every day. But I'm not sure most of the 143 million Americans look at it that much, who have jobs; and you have a big change in the world out there. People are getting adjusted to China slowing down. When you have commodity prices go down like that, there are big winners and losers. 
+The oil companies are the losers; consumer is a benefit. Brazil gets hurt. India benefits. South Korea benefits. Japan benefits. And those cause troubling waters. And hopefully, this will all settle down, and it's not the beginning of something really bad. 
+
+Answer_15:
+
+          Okay. So our total reserves, on balance sheet, for Metals & Mining, or notwithstanding we built $60 million-odd this year, is over $200 million. So the coverage ratio is pretty good. 
+The exposure is about -- I haven't got the precise numbers in front of me. They're [about] a third the size of our exposure to Oil & Gas, so about 2% of our overall wholesale credit exposure; so, considerably more modest. Which is why, if energy prices and general commodities weakness and stress stayed where it is right now, even for an extended period, we would think that the incremental reserves would be considerably more modest. 
+
+
+          And it's also -- that one is mostly name by name. 
+
+
+          Yes, for sure. 
+
+
+          It's not big asset-based reserves. It's just -- they're big corporate credits, name by name. 
+
+
+          And for both Oil & Gas and Metals & Mining in our portfolio, Oil & Gas is close to 60% investment grade, and Metals & Mining about half. 
+
+Answer_16:
+
+          Yes, so, with respect to home equity [re-class], remember, the majority of the problematic home equity underwriting was 2005 through 2008. So here we are, at the beginning of 2016, with [pig filling the python]. But we're monitoring it closely, and we have some re-class that have happened. 
+Obviously, interest rates are low. Home price appreciation, on the other hand, is your friend. So there are puts and takes. 
+We've been monitoring it, I would say, at the margin, or more than at the margin, at the early stages, coming in better than we had modeled. And remember, from an incurred loss perspective, we would consider these re-class risks to be largely incurred, so we've tried to reserve them, to the best of our ability. So we feel good about our reserve. I don't think we've disclosed them. But so far, from a performance perspective, I would say slightly better than our models. But we continue to monitor it, because it's still relatively early. 
+
+Answer_17:
+
+          Good morning. 
+
+Answer_18:
+
+          So obviously, you'll forgive me because we've been on calls since it came out. But, yes, we have been working on this for years. 
+The problem with this particular rule is that, as you stated, based upon the four QIS's that were done, there were some, I would characterize, significant challenges, with respect to the rules as written. And we were expecting there to be a number of meaningful changes, and there have been; in many cases, meaningful improvements. 
+But it's very technical, and there's been a lot of changes, so we need to sift through it to figure out, net-net everything. Although it is clear that net-net, despite the fact of the stated intention of the committee wasn't necessary to increase market risk capital across the industry, it will be higher. But by how much, it's really going to need to be sifted through. 
+And for that same reason -- for both those same reasons, I'm sorry -- for the reason that the rule has not been stable and there have been significant questions, many of which have been either addressed or partially addressed, and many, I guess, that have not, it would have been premature to have taken any actions in advance of figuring out where this has landed. And, as you know, the period to comply is three years. So it's more of a start from here, to figure out how to manage with this, after we've sifted through the details. 
+So, I wish I were able to give you a little bit more of a detailed answer, but we're going to need to take the time to go through it. 
+
+Answer_19:
+
+          There are always actions that we can take to reduce the impact. And so, we have to think about them in the context of our overall capital optimization program. 
+And, again, if there are -- if some of the things that we hoped -- and I -- honestly, I've been on calls since it came out. So, if some of the things that we hoped were going to be addressed have not, they could have had, or may have, meaningful impact on specific types of activity. And we will have to react accordingly. And, yes, we will take actions, if that's the right answer. I wish I could give you more details, but we just need to go through it. 
+
+Answer_20:
+
+          Good morning. 
+
+Answer_21:
+
+          Yes, so, I would say that, based upon our fourth-quarter balance sheet, given that market risk was a driver, given that balance sheet levels was a driver, particularly on standardized, we could give back, on standardized, as much as 10 to 20 bps of capital, of the 10.7% capital accretion. But the bigger point, on the RWA outlook, is that we expect to be bound, over the medium term, by standardized. And standardized is going to always have a neutral to upwards pressure, as we continue to grow these high-quality loans. 
+So, even though the RWA, being at the $1.5 trillion-ish sooner than we expected, is obviously good news. Regardless of how much of that may, in the short term, revert, our job is going to be to continue to become more efficient, to try and keep it there, just given the natural upward pressure of the standardized calculations. We can become more efficient in advance, but we're unlikely to be bound by it in the medium term. So, that's what we're focused on. 
+So, I wouldn't take the $1.5 trillion, and read through that we'll be continuing to decline from here on standardized. We'll be continuing to work hard to make sure that we can grow those loans that we love, but that have (inaudible) [risk weights] under a standardized basis. 
+
+Answer_22:
+
+          Okay. If I miss something at the end, remind me. 
+In terms of how we think about buffers, just really conceptually, the Firm manages, and the Board has set for the Firm, a risk appetite. That risk appetite has a number of features, and capital depletion in a stressed environment is one of them. And so, when we think about setting buffers, we think about it just broadly in the context of allowing ourselves enough room to absorb losses that are within our risk appetite, and not have to take premature actions, from a capital perspective. 
+So -- but having said that, our buffer has been pretty consistent, at the 50-basis-point level, for a reasonable period of time. And we'll update you on all of that at Investor Day. 
+With respect to our targets, it's a little bit more complicated than minimum regulatory capital, because as you say, we're bound, potentially, by multiple constraints, and one of them may be CCAR. Plus --  it is CCAR, I should say. Because as you know, the first two quarters of this year, our capital distribution plans have already been approved. And we haven't done CCAR, so this is not any kind of prediction, but it wouldn't surprise you to know that it's unlikely that we will pay out 100% of our earnings in CCAR, going forward. 
+So, we are on a path to continue to accrete capital, though we would like to move up in our pay-out range. So, given that we're still moving towards our 12% target, and we will update you if any of that changes at Investor Day. We're also, as you know, potentially going to understand whether or not the Fed changes any of the CCAR parameters, and whether that has an impact. 
+So, at the moment, the best we know is that we're going to continue to accrete capital, albeit more slowly, as we hope to move up in the pay-out range, but we haven't done CCAR yet. And that's if the rules don't change. So, 12% it is for now. 
+
+Answer_23:
+
+          It's both. So, think about -- in a [rate-sat] scenario, when you can pick whether you believe the market -- whether you think the market is -- or whether you believe the [FONC docs]. And I think it's going to be data dependent, so we're not going to have a stated opinion on that. 
+But because of the mix in our balance sheet in 2015, as well as our expectation of continued loan growth, we would expect mix to contribute about half of that. And defer 25 basis points about the next half because we are more sensitive to the front end of rates in the first 25 basis points. And you can see that in our earnings and risk disclosures. So -- even if we see nothing else. 
+Now, obviously, we believe, and the market believes that you're going to see a couple more hikes. That would be, on average, another 25 basis points, and that would be incremental NII again. 
+
+Answer_24:
+
+          I would say I would think about them in a somewhat similar directional way, given that our balance sheet ended below $2.4 trillion, a little bit of it market delivered, a lot of it purposeful. But we do intend to continue to gather deposits and extend loans, and while you're -- and portfolio loans, as well. So, while you will see some securities balances decline and the like, I would say again, net modest growth, but modest, and very lending driven. 
+
+Answer_25:
+
+          Okay. So, in terms of the impact of rates, obviously there was a lot of monetary policy confusion. Broadly, in the fourth quarter, the ECB underwhelmed the Fed, was (inaudible). So there was a lot of confusion. But by the time the rate hike happened, it was obviously pretty well understood. We did see strong activity, or strong client activity, relatively speaking, on the back of that in the rates business, more so than necessarily about spreads. 
+With respect to the Fixed Income business, we've always been very disciplined about how we think about the staffing levels and the expenses in that business. We've managed it very carefully. The compensation has come down across the trading businesses, and it wouldn't surprise you that some of that -- a lot of that has been in Fixed Income. And our business is at scale and productive. So -- 
+
+Answer_26:
+
+          You've seen, in Fixed Income -- we have a very good Fixed Income operation globally, around the world. Rates themselves don't filter through FICC trading directly. I think what Danny was talking about is, if you have healthy economies and confident investors, you have more volume in things like that. 
+We do see a little bit of repricing taking place, in prime broker, repo, conduit, and some of those things run through FICC. So, that is going to take place as the world adjusts to all the new capital requirements. And obviously, there's a lot of seasonality in the business, which we've experienced for the last decade. 
+
+Answer_27:
+
+          Thanks, Erika. 
+
+Answer_28:
+
+          No, we've seen no real repricing in loans on the balance sheet. You have seen a little bit of -- people are getting other revenues to make up for their credit exposure. 
+
+
+          Yes. Think about the bank loans as being relationship loans that need to be in the context of [broader] relationship, and everybody is competing for them. 
+
+
+          They barely repriced in 2008 and 2009. Banks were continuing to lend at the existing price. But that was because they -- these were long-term relationships. The bank loan market does not reprice like the markets do. 
+
+Answer_29:
+
+          We haven't seen it. 
+
+
+          Also, it's very, very competitive. Everybody has been chasing these loans, and so that's a factor, too. So, we haven't seen it yet. 
+
+
+          And then, if you -- the number in middle market lending, if I remember correctly, if you look at it by client, 60% of the revenues are not loan related. So, clients -- they also know what their relationship is to the bank. And while we need to make a good return on capital, the capital applied to the client is only partially loan related. And that capital, on its own, doesn't earn an adequate return. Simple lending, on its own, is generally not an adequate return business. 
+
+Answer_30:
+
+          I think the better way to look at it is that people seem, in certain of our businesses -- and I mentioned those, and there are some other ones -- capital has been deployed, people have adjusted to the new rules, and you've seen pricing go up. Whether it goes up a lot -- I wouldn't count on it going up a lot more from there. 
+The markets are going to be competitive at that point. But use of balance sheet, the cost has gone up; not loans, but most of the other stuff. 
+
+
+          And remember, we think about our prime brokerage business going hand in glove with equity. 
+
+
+          That's correct. 
+
+
+          And so, while the repricing is helpful, and does -- at the margin, everybody is going to continue to always observe their pricing. We've built our platform internationally; Europe, we are seeing strong demand for our [synthetic pull-outs]. In Asia, we're adding clients -- we've got the wind to our backs. 
+So, it's an important business to our clients. You're right, there are some other people, potentially, not going to be as aggressive. And if we can take share, we certainly will. 
+
+Answer_31:
+
+          Obviously, we expect any transition adjustment to go through equity. If we are able to adopt it early, we might do that. I'm not aware that we are. But I could be wrong about that. 
+
+Answer_32:
+
+          So, yes, obviously, it was -- I think if you add up [cleared plus] other servicing rules, print them out, put them on the floor and stand them next to me, they're a foot taller. So they are very complicated. There's a lot of operational complexity to complying, and we're working very hard at doing that. 
+I will say, in the quarter, we did -- as part of being cautious about making sure that we're complying, our cycle times were a couple days -- a few days worsened. And so, volumes, our origination volumes, are a little lower than we would have otherwise seen; not a lot. And that's just timing, and it's just days. But not really from a financial results perspective, because of the way we recognize the revenue. 
+So, I would call it a little bit of teething problems -- across the industry, by the way, not just us -- nothing significant. We are going to get the work finished, and so it's tough, but it is what it is. 
+
+Answer_33:
+
+          Yes, so, it's about 60% jumbo, 40% agency or conventional conforming, and it's a better execution decision. So, when we look at the better economics between selling or portfolio-ing the mortgage, we'll generally choose the better economics. But we also prefer the annuity nature of the NII -- the lower servicing risk, and the better capital efficiency. 
+So, it has been the case, over the course of the last several quarters, that it has been the best execution to portfolio these mortgages. And actually, they are generating a nice return on equity. 
+
+Answer_34:
+
+          So we have had pretty big tax gains over the course of the last -- most notably, obviously, last quarter, over the course of the last couple of years. Most of those related to the, call it, 2003 through 2008 tax periods, when we were going through the financial crisis. And so, some of the matters were more complex, and we took appropriate reserving decisions on that. 
+There are many less of those very complicated matters ahead of us, and so we wouldn't expect to see the same sort of size of tax benefits going forward as we've seen in the past. But we had some this quarter. So, we'll have a few. And generally speaking, they are, because of the nature of the reserving for tax, generally speaking, we take a conservative approach and the bias to the positive. But it could be much more plus or minus zero, at this point. 
+
+Answer_35:
+
+          30%. 
+
+Answer_36:
+
+          So, do I think it's plateaued? I think it remains incredibly competitive in card generally, in particular in the co-brand space. So, plateaued at a very competitive level, I suppose. 
+But in terms of -- I'm not going to talk about any specific names, actually, Brian, in terms of the potential for repricing. It's an important part of our Business, and we're going to defend our Business. 
+
+Answer_37:
+
+          It's a Board decision, and so, neither have we received that guidance from the regulators, nor have we done CCAR, and had that discussion yet with the Board. But we have generally said that the Board likes to have the flexibility to increase dividends over time, and we have had our dividend most recently at or close to that soft cap. 
+So, we would love that capacity, and I would imagine that, over time, it may be used. But again, it is a Board decision, not a management decision. 
+
+Answer_38:
+
+          From -- we do everything pro forma. So, first of all, I would say the following. Right now, my understanding -- and if I'm wrong, forgive me -- is that it's your spot balance sheet two years prior that would drive your G-SIB two years forward. But the reality, if you ask my opinion, given that we're going to be reporting quarterly going forward, and because of the likelihood that G-SIB may or may not feature into CCAR, I think it's going to be less important, necessarily, what you are at any one moment in time, but where you are projecting to be or stay. 
+So, I suspect that we will get the benefit, potentially, of this, not today. We just closed our balance sheet. But I think that it's going to need to be a little bit more dynamic going forward, as it gets potentially introduced into stress test. 
+
+
+          But I don't know that. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/13_questions.txt

@@ -0,0 +1,164 @@
+Question_1:
+
+          Good morning, Marianne. 
+
+Question_2:
+
+          So, curious about whether or not you all have seen the stress we've seen in some of the credit and equity markets, and some of the volatility impacting M&A velocity appetite, amongst Boards and C-suites, broadly, in your conversations and throughout the IB? 
+
+Question_3:
+
+          And just by different, is that a reference to size, or can you be a bit more specific on what you mean? 
+
+Question_4:
+
+          Okay. (multiple speakers) That's helpful. 
+
+Question_5:
+
+          Terrific. Helpful. And then, you referenced energy prices staying this low would lead to a significant reserve build, you expect, in your energy book. Can you maybe give a little bit more color around that? How would you define significant? And how long would oil need to stay down here, in order to see some of that reserve action? 
+
+Question_6:
+
+          Hi. I wanted to follow up on the Oil & Gas question. It just seems as though $124 million in additional provisions for Oil & Gas could be low, at least based on the one-year forward prices for oil, which are still in the $30s. And so, my question is for Jamie. As you look back, how does the Oil & Gas situation today compare to prior periods of stress? We have 2002; we had the TMT meltdown. 
+When you were at Bank One, you reduced the lines of credit. You got ahead of that early. In 2007, you weren't exactly at the start, but then you adjusted and you said -- hey, this is a big issue. 
+And now we have Oil & Gas, which could be another industry-specific stress, and you're only taking additional provisions of $124 million. Is that going to be enough? And one year from now, are you going to look back and say -- whoops, we didn't get ahead of this enough. 
+
+Question_7:
+
+          And how do you use CDS to help protect yourself on that portfolio? 
+
+Question_8:
+
+          Okay, you don't. And then, the last follow-up: Do you intend to keep lending to the Oil & Gas companies, as they run into problems? On the one hand, you have the risk of throwing good money after bad. On the other hand, if you stop lending as much, and you have the high-yield market retreating, and you have private equity firms retreating, maybe it becomes a liquidity crisis for some of the oil companies. 
+So, which is it? Do you lend more or less to the Oil & Gas sector? 
+
+Question_9:
+
+          Hi, good morning. Marianne, was wondering if you could remind us where you are on your expense reduction targets in the Consumer and the Investment Bank? And how does that translate to some thoughts about the expected trajectory of total Firm-wide expenses for this year? 
+
+Question_10:
+
+          And how does that all net in to an outlook for this year, if you're willing to give us some thoughts on that? 
+
+Question_11:
+
+          Thanks. Good morning. I was wondering if you could talk to us a little bit about the benefits from rates, as they come through? Obviously, your commentary that NII will be even flattish in the first quarter, adjusted for day count, and even with some securities gains in the numbers this quarter, presumes a nice helper from that first move. 
+And you guys were really conservative on your deposit beta thoughts, when you talked about them previously. I know, probably you haven't seen much change yet. But how are you expecting the deposit behavior to act? And has there been any change to your modeling expectations about what might come through, as we get through the first couple of hikes? 
+
+Question_12:
+
+          Okay. And my second question -- if I can ask an ex-energy credit question? A lot of concerns are that we're going to get into some type of broader deterioration, of which your numbers showed no signs of heading towards. What are you looking for? Are you seeing any signals of ex-energy changes in either delinquencies or watch trends? And are you still comfortable with that low [4%s] type of charge-off expectation that you guys had talked about previously? Thanks. 
+
+Question_13:
+
+          Hi, thank you. So, I think you talked about some of this, Marianne, in terms of the Method 2 G-SIB surcharge now estimated at 3.5%. I'm just curious -- I think, if the numbers are right, you took down notionals, and that there's booked $3.4 trillion, $21 billion in level 3 assets, $50 billion in non-op deposits. 
+You've said that you don't want to be an outlier, so you're whittling that down. I'm curious of the driving force behind it. What kind of revenue give-up there is, in such a move like this, because we like it. And thoughts on the go-forward? 
+
+Question_14:
+
+          Fair enough. I just have one quick follow-up, on Ken's last question: If two-thirds of the economy is consumer-led, you look at all your early-stage delinquencies, like Ken said. And, Jamie, to your comments, things look okay. I hate putting words in your mouth, but what do you think the disconnect, then, is, between what's going on in the markets versus what's going on in the trends in your Business, both in terms of growth and forward-looking credit looks? 
+
+Question_15:
+
+          Hi. The disclosure around the Oil & Gas is really helpful. And I was wondering if you could just walk through something similar on Metals & Mining? So, you gave us the -- I think you said $68 million of full-year reserve build, and you gave us the not-significant, if things stay where they are. Can you give us the balance? 
+And then, is there a comparable $500 million to $750 million stress test for Oil & Gas, or stress case? Is there a comparable -- what is the stress case, if broader Commodities, and Metals & Mining, comes in worse? 
+
+Question_16:
+
+          And then on -- I guess staying with credit -- on home equities and the whole issue of free cash from interest [home-made] amortizing, can you lay out how it's progressed, relative to your expectations so far? And also remind us how big the allocation of the reserve is against that? 
+And I guess, not to lead the witness, but is that an area where things are trending, early days, better than expected, and could provide some buffer against, maybe, anything else that happens on the C&I side? 
+
+Question_17:
+
+          Hi, good morning. 
+
+Question_18:
+
+          Marianne, I know that the Basel Committee put our their fundamental review of the trading book proposal this morning. So, clearly, no one's had time to really go through it in detail. However, I'm sure you have already gone through the prior proposals, and done the QIS for the last couple of years. The proposal is better than what had been -- the ruling is better than what the proposal -- the most recent one had been. 
+Just wanted to get a sense from you, as to how you can manage to this 2019 implementation time frame? Are there things set in motion already? Or is this something that you would start from here? And if you could just give us some broad strokes on how you think about overall impact, that would be helpful. 
+
+Question_19:
+
+          Right, I totally understand that. And I guess my basic question is: There's -- you can take action, as opposed to just deal with what the current decision would be for you. There are actions that you can take to reduce the impact? 
+
+Question_20:
+
+          Good morning. 
+
+Question_21:
+
+          I had a couple of questions on capital. The first relates to the RWA progress, which did surprise positively in the year, by about $50 billion ahead of expectations. And I was just hoping you can give a better sense, Marianne, just given some of your prepared remarks, as to how much of that incremental $50 billion reduction was a function of more proactive mitigation efforts? Maybe even tied to the G-SIB mitigation efforts that you guys had talked about, which should presumably remain in the run rate, versus balance sheet shrinkage that may be due to the risk loss environment that we're experiencing today? 
+
+Question_22:
+
+          Understood, Marianne. That's very helpful. 
+And then, maybe just switching gears to the G-SIB surcharge, clearly the progress surprised positively, getting down to that 3.5%. I was just wondering how you guys are thinking about establishing minimum capital targets? I recognize you'll likely lay that out at Investor Day. 
+Just want to get a better sense as to what methodology are you employing, in terms of thinking about a management buffer? And all the different binding constraints that you have to manage to day-to-day? And thinking about through-the-cycle target that you guys would like to manage to? 
+
+Question_23:
+
+          Thanks. Marianne, if I could just clarify your NII comment from the very beginning of the call, do I understand correctly that the $2 billion of incremental NII that you've cited is just a function of the repricing dynamics, as they move through your balance sheet, rather -- or is there also, I guess, a contribution from loan growth? 
+
+Question_24:
+
+          Great. Thank you. And so, I know we just touched on RWAs, but how do you suggest we think about GAAP assets for this year? 
+
+Question_25:
+
+          Good morning. I just wanted to -- I had a follow-up question on Fixed Income trading. I think Dan Pinto has talked about benefits from higher rates. And so, I guess number one, I wanted to see if you had any thoughts on that? Have you seen any initial benefits to spreads in the FICC trading market, with the first rate hike? 
+And in contrast, you've had a couple of competitors announce -- or at least it's reported -- that they're cutting headcount. That seems to be a little bit in contrast to the expectation that Fixed Income could pick up with higher rates. So, if you could talk through your thoughts on Fixed Income? 
+I do notice that you did mention 1Q is off to performing well, so maybe that's part of it, too. But if you could help on that, that would be great. 
+
+Question_26:
+
+          All right. So, you still feel pretty comfortable with your outlook that things could improve, and market share gain potential, as competitors pull back? 
+
+Question_27:
+
+          Hi, good morning. My questions have been asked and answered. 
+
+Question_28:
+
+          Hi. If we look at credit spreads in the bond market, even ex-energy, they've widened considerably. And I'm wondering if this has resulted in wholesale credit being repriced at all? I realize the bond market doesn't set bank loan pricing, but just wondering if you've been able to reprice some of the wholesale customers, or expect being able to do so? 
+
+Question_29:
+
+          I guess I wonder why. We saw pricing in the debt markets come in considerably over the last several years. C&I pricing came in. I realize it might take some time. But I would think there's the opportunity for at least some repricing around the edges; no? 
+
+Question_30:
+
+          Thank you. Good morning. Jamie, to follow up on your comments about maybe some better pricing in prime brokerage and repo because of the capital requirements, or requiring you guys to raise prices, can you expand upon that? Do you see it growing, where you could get even better pricing going forward, because of less competition? Can you give just more color there? 
+
+Question_31:
+
+          Great. And then the follow-up question is: Obviously, the FASB is coming out this quarter with the new loan loss reserve methodology -- the current expected credit loss versus what we're using today -- obviously, the incurred loss model. There's going to be a true-up for everybody. Have you guys given any thought that, when this goes into place, when you may take that true-up? Assuming they say you have to implement it by 2019, or something like that, would you do it much before that, or can you give us some thoughts on your thinking about what's going to happen? 
+
+Question_32:
+
+          Thank you very much. We know that you implemented a new disclosure form in the Mortgage Banking space tread. Did that have any -- you guys had very good Mortgage Banking results. Did that have any impact whatsoever on your operations in the Mortgage Bank? 
+
+Question_33:
+
+          And then a follow-up question on your portfolio: You look like you grew your residential loans by about $11 billion. Last quarter, you said it was a mix between agency and jumbo. If a big chunk of it's agency, can you give us your thoughts on portfolio of that agency product? 
+
+Question_34:
+
+          One quick follow-up, Marianne: You've had some pretty big tax gains the last couple quarters, running below 30% of your tax rate. At some point, do you pull forward future benefits, and run with a higher tax rate in the future? 
+
+Question_35:
+
+          So, what's your natural tax rate, if you don't have those? Is it around 30%? Or is it closer to --  
+
+Question_36:
+
+          I was wondering if I could just sneak in on credit cards. Do you think the competitive environment has hit a plateau? And on co-brands, are there any large upcoming repricing events? And is there any bigger than a bread box size you can give on [Marriott]? 
+
+Question_37:
+
+          Thank you. Hi, Marianne. If the regulators lift the dividend pay-out ratio in this year's CCAR to 40%, would you guys consider lifting your dividend pay-out ratio something closer to that? 
+
+Question_38:
+
+          Thank you. And then just one last follow-up: On the G-SIB buffer, obviously you guys have done an incredible job in bringing it down to where it is today. When do you expect the regulators to put you into that bucket, assuming you guys are obviously looking at the same types of numbers? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/14_answers.txt

@@ -0,0 +1,247 @@
+Answer_1:
+
+          So the first thing I'd say is with respect to oil and gas, obviously I think $529 million is pretty close to $500 million, plus or minus. So that was pretty much in line. But you are saying it'll be a little bit higher with metals and mining. We were expecting close to $100 million and there were a couple of extra downgrades that came through in the quarter, and that kind of timing is going to happen. It doesn't change the overall sort of perspective for us. 
+With respect to draws, when I gave some sort of indicative guidance about what you might expect to see potentially in the rest of the year in terms of reserve build, we do try to take into consideration the likelihood that we will see incremental draws. And clearly we will work with borrowers to try and help them such that that may not be necessary, and in other cases we can reduce our exposure in redetermination cases. But we will expect to see draws and that's contemplated in our guidance. 
+ And I want to make sure that everyone understood that we tried to be very complete. So this is not just oil and gas and metals and mining, as the [Mace] Code would suggest. We've looked at very closely related companies in shipping and marine transportation and the like. So we're trying to be very complete. 
+
+
+          We've yet to take a loss. 
+
+
+          We have taken a couple. Not very much. 
+
+Answer_2:
+
+          So of the $1.2 billion, $1 billion was a combination of oil and gas and metal and mining, so the vast majority and outside of that, consistent with my comments on contagion, there's not any sort of thematic other noteworthy thing to mention to you. And obviously as we continue to watch the cycle play out over the next several quarters and reevaluate some clients that may be experiencing stress, it's likely that we will see some more MPLs. But I gave you context around what we're expecting to see in terms of reserve. So they will go up, but not to numbers I would consider to be large in the context of our wholesale portfolio. 
+
+Answer_3:
+
+          The draws are about $1.3 billion in the quarter. So some but not excessive. And after the reserves that we put up in the first quarter the coverage ratio is 6.3%. 
+
+
+          What is it on balance and stuff? 
+
+
+          That is the on balance sheet. 
+
+Answer_4:
+
+          Sorry Glenn, just on that 6.3%, that's the Firm. If you look in the Commercial Bank, obviously it's higher. So you've got a sort of a different portfolio mix in the Commercial Bank versus the CIB. So if it's some parts of our portfolio it's closer to 9% or 10% and in other parts it's lower. Sorry. Your second question? 
+
+Answer_5:
+
+          It's a perfectly reasonable question. And obviously when we look at growth in CRE, or the commercial real estate business, of 18% it's an obvious question, are you doing something different? And the answer is, no we're not. We haven't changed our geographies, we haven't changed our risk appetite. It just simply is the case that we have a good process and we are continuing to focus on our sort of core capabilities and our core risk segments. But we've been able to take advantage of the opportunity because our process is better, and to a lesser degree, but nonetheless to a degree, given that the CMBS market has been somewhat disrupted. 
+
+Answer_6:
+
+          Hi. 
+
+Answer_7:
+
+          So Betsy obviously, with having only received the specific feedback less than 24 hours ago we still have to get into the analysis phase about what it all means. 
+I would start with your opening comment that considering our liquidity you were surprised. This doesn't appear to be a statement about the adequacy obviously of JPMorgan's liquidity, which is very significant, as you know. But it really about how we analyze and think about that at the material legal entity level and the inter-affiliate nature of how we formed our entity. So I can't tell you with any clarity exactly what will be required as we get into the analysis. It wouldn't be my core expectation that it would require us to do a meaningful overall new liquidity actions, but we have to do the work. 
+
+Answer_8:
+
+          Again, just based on our preliminary read, I think there's going to be significant work to meet the expectation of the regulators. And our plan already had us doing a lot of work around actual real simplification of legal entities and other things. So I don't know that there are going to be significant changes. It's not my primary expectation that there would be, but we do need to have a moment to go through the details. 
+
+
+          The liquidity of the Company is extraordinary. We have $400 billion in central banks around the world, $300 billion of AA-plus short duration securities, just about $300 billion of very short-term secure -- really top quality repo or type of stuff like that. The trading book is $300 billion, which is mostly very liquid kind of stuff. So the liquidity of the Company is extraordinary. 
+
+
+          I would say, just again, we need to do the work and we need to figure out obviously what the response to that will be. But it is encouraging that sometimes we're found to be credible for large systemic financial institutions. And if they have been able to adequately show their preparedness, we're confident we should be able to do the same. We just need to make sure that we understand the details of what it is that we don't have in our plan today that we need to change, and we're committed to doing it. 
+
+Answer_9:
+
+          Yes, absolutely. So I just wanted -- if you used the industry codes the way that you could if you want to expand your thinking to just what is technically considered to be an oil and gas company, you'd miss out on, for example, a marine shipping company that all they do is ship oil and therefore their financial and their performance is going to be directly related to the health of the energy sector. 
+Those companies we have identified them specifically, they are managed within our energy risk team. They are not managed by a different team. So I was simply saying that some of the companies that we are watching, and in one or two small cases that have experienced some stress, are not traditional energy companies. But their condition is directly related to oil and gas. 
+
+Answer_10:
+
+          So obviously not for us. I would say that it's competitive, as the C&I space is very competitive. Commercial real estate is also competitive, but it's not irrational. And we aren't seeing, or at least we are not seeing very rational proposals on structure and risk. 
+Meanwhile we haven't changed our risk appetite, we haven't changed our underwriting standards. We continue to have lower LTVs and higher debt coverage ratios, pretty consistent geography. So speaking for JPMorgan specifically, there's been no change in our underwriting standards. In fact if anything since the last crisis, obviously the last recession, we tightened our underwriting standards and we've moved away from some of the riskier types of that business, so home builders and a lot of construction loan business. 
+
+Answer_11:
+
+          Hey, Mike. I'll start and then Jamie can add to it. 
+So on the interest rate point, the colors are pretty consistent with what we said over time, which is we have the belief that the US economy is continuing to move in the right direction, that the consumer is on solid footing, and that despite the noise in the data and some of the volatility in the market, global growth will continue albeit at a moderate pace. And obviously stability in the markets in March has continued to help us with that thesis. So that coupled with the fact that the Fed themselves, while they are dovish in their narratives in the minutes and also they are [dots] are continuing to talk about gradual increases, and the debate around negative rates has kind of quieted. 
+So we don't particularly run the Company with a day-to-day view on what's going to happen with interest rates, we are positioned for rising rates, as you know, and have been. But we also understand what the performance of the Company looks like if there are no more rate rises, or when we stress our portfolios in lots of different ways. 
+So we are positioned for rising rates, it is our central case that will happen. The market is pricing less than one hike in this year. The Fed dot says two. Our research says two. We're just going to have to wait and see. 
+I'll also start and then Jamie can jump in on the living will thing. We have to take it at face value in discussions with our regulators that we need to meet their requirements, whatever they may be, all of the rules whether it's capital, whether it's liquidity, whether it's stress testing, whether it's resolution plans. And if we do that and satisfy them, then we can continue to operate the Company the way that we think it is best for our clients and communities around the world. 
+ So at this point we need to remediate and address the issues and the feedback they've given us and resubmit a plan for assessment that we hope will be credible. And that's certainly what we will commit to do. And that's what we are focused on. 
+
+Answer_12:
+
+          Well I don't think it's inconsistent. We're trying to meet all the regulations, all the rules and all the requirements. We've been doing that now for five or six years. What is it, six years since Dodd-Frank was passed. They had their job to do and we have to conform to it. 
+
+
+          I know it's easy to sort of overlook the quite a few statements where there's an acknowledgment that progress has been made. And none of the feedback in the letter negates the significant progress across the industry on capital liquidity stress testing. So it is consistent, but we have more work to do and we'll do it. 
+
+
+          On the interest rate stuff, I wasn't predicting it. I'm simply saying I think there's a chance it will be different than what people expect, and it will be a little -- I said it'll gradual until it's sudden. 
+
+Answer_13:
+
+          Good morning. 
+
+Answer_14:
+
+          So obviously we're the first to read out, and it's very difficult when you think about performance because you also have to think about the relative performance in the comparable periods and prior years and the like. So I would say that down mid-single digits adjusted for what we would consider to have been outperformance last year is really quite good performance. So I don't know that we gained share, but I certainly think we protected share, and it may differ across the different product sets. But I think in general we feel pretty good about our performance and we don't know anything to the contrary. 
+
+
+          I'd just add that $5 billion-plus of sales and trading in a quarter like this look as good, earning decent returns. We have good margins. We're not quite sure about share, but it was -- I would look as quite a good performance. And trading losses, while we, was it six days you said to me? 
+
+
+          Six days, yes. 
+
+
+          Six days, there was -- like $40,000. So that the actual results were just -- that's really good. I look at that as a very healthy business. 
+
+
+          And then with respect to the restructuring and whether that presents opportunities for us broadly [define], including in compensation for -- we pay for performance and we pay risk (inaudible) returns, and we're not looking to try and make changes to what we've been very consistent about over time. And you can see our comp-to-revenue ratio of 32% this quarter is in line with the ratio in the first quarter of last year, and in fact the first quarter of the year before. So lower -- obviously on lower revenues, but a fair pay for the performance. And obviously we intend to insure that we are competitive, but we're not going to take any direct actions as a result of that in terms of (multiple speakers) -- 
+
+
+          We've also got some big deals done near the end of the quarter in Western Digital and [Newmar] Cable, which is part of sales and trading. We also got -- we did this, I thought, a very creative Chase, [what I would call], a Chase Trust in order to secure the first real securitization in a long time in the mortgage business, we do revenue risk-sharing, and I think it's quite good. 
+
+Answer_15:
+
+          On legal, the number is [circ] $0. Pretax is actually slightly positive. After-tax we did some true-ups, assessments on penalty. So actually net/net about $0 this quarter, which I'll take it for the quarter but it doesn't necessarily predict the future. 
+In terms of expenses, so we talked at Investor Day, Gordon in particular but also Daniel, that we are continuing to invest in our businesses. And across the board in fact adding bankers and technology and digital, digitizing, et cetera. So we continue to do that across the businesses and I mentioned in the CCB page that the net expenses, albeit down, includes self-funding $200 million of incremental investments year over year and growth. 
+ But you did notice the headcount in the Consumer businesses is up slightly. And that's a combination of the investments we're making in technology and digital, that's about 500 of the heads and other 1500 is increasing part-time staffing in the branches so that we have flexibility to make sure that we have loading at the right times of day for making sure the customer experience is good. So I would characterize it all as very consistent and yes, we continue to invest. And that is in part what you're seeing in the headcount in CCB. 
+
+
+          And you saw new credit card Freedom Unlimited 1.5% back. We're doing a lot of stuff in Chase Pay. So the Starbucks thing, we apply the top digital side, and we continue to win awards in the Consumer Bank. So we'll always be investing there. 
+
+Answer_16:
+
+          So it is our expectation across both the consumer and the wholesale businesses outside of energy that the credit trends will remain favorable, or credit will be relatively benign. We're not expecting to see material increases, except for the fact that we are growing our loan portfolio. 
+So when we did Investor Day we talked about charge-offs this year will go up year on year, and they will go up to potentially as high as $4.75 billion. But half of that would be on the back of the fact that we are growing our portfolios. So you'd just have natural sort of BAU levels of charge-off from that and then the other half would be on energy. So we're not expecting or seeing at this point anything, other than good credit quality for the rest of 2016, outside of the obvious. 
+
+Answer_17:
+
+          So I will start by saying that as you know our regulators have extraordinary powers over a wide range of requirements for us regardless, and many ways of influencing those and you're familiar with most of them. It is absolutely the case that as you look at the resolution process that there are provisions that talk about if remediation is not satisfactory with, or cured within a two-year period, there are - there's a possibility that the regulators could jointly decide, may jointly decide, to take other actions that could include capital or liquidity or leverage or operating model discussions. So obviously they do have those powers. 
+October is not that far away. We're going to do our very, very best to make sure that we put our best foot forward and remediate the issues and then we have another submission in July 2017. So not to suggest that we won't fully remediate them to the very best of our ability, but the living will process I expect to continue to be somewhat iterative over the next several cycles, and we continue to push ourselves to raise the bar. And I'm certain that the bar will continue to be raised on us, as it should. 
+
+Answer_18:
+
+          Good morning, Matt. 
+
+Answer_19:
+
+          Okay. So we talked about the fact that if there's no change in rates and if we continue to grow our loans, we would expect our NII to go up by $2 billion. So you're right, if you look at the run rate right now that would be relatively flat from here. 
+I think in our favor, because of the easing that's still going on around the rest of the world and the sort of the dovish Fed comments, there's been a lower re-price just in the industry generally. So that's in our favor and we're much more sensitive to the front end of rates. So we're not suggesting that the long end of the curve has no impact, it's relatively modest. So $2 billion, maybe a little more. The biggest driver of significantly higher NII above that guidance would be if we had another hike earlier than December. 
+
+Answer_20:
+
+          So not going to talk specifically about the Treasuries' actions, other than saying that we would support Fed tax reform in general. With respect to the impact on our business, either historically or going forward, it wouldn't be zero and it wouldn't be significant. 
+
+Answer_21:
+
+          Okay. So obviously I'm not going to be able to talk specifically about our plans that we've submitted because we just submitted them and we haven't had any feedback and they are confidential, but I will tell you that obviously negative rates, it was the first time this has been in the scenario. It's not the first time we have thought about it, and it is not the first time that we've experienced it, and at least in other parts of the world in Europe, Japan and elsewhere. So we have had strategic discussions, we understand broadly what we think we would do and what would happen to our balance sheet. We can model it and we can effect it. So in that sense, now I mean obviously, we'll continue to work that process through if it continues to be a feature of CCAR. 
+You're absolutely right that year over year our launch point is a higher level of capital and our balance sheet and our credit quality continues to improve, and our risk levels have not materially changed. So as a general matter we would hope, and we've also added [press]. So as a general matter we would hope to have incremental capacity but nothing inconsistent with what we have said externally, which is that the Board would like over time to continue to have the capacity to potentially increase dividends and that we would likely the capacity to, within a reasonable range, repurchase our stock. And that's the framework that we have used to submit our plan. 
+
+Answer_22:
+
+          Good morning. 
+
+Answer_23:
+
+          So if I do the -- I don't want to use the word call, if I adjust for the full impact of the asset sale that was in the quarter not just the $150 million in this quarter but also the revenues that were present with respect to that in the first quarter of last year, my adjusted revenues are down about 4% to a market that on average, while I appreciate that it recovered in March, but the market on average for the quarter was down around 5%. So we would characterize that as generally in line. And similarly if you do adjustments on the balance sheet side, the Assets Under Management and client assets. So certainly you can speak to Jason afterwards and reconcile our numbers so that we're not confusing each other. 
+I'm sorry what was the second part of your question? 
+
+
+          Retail engagement. So retail engagement picked up in March, as you would expect. We saw positive flows. We obviously saw negative flows for the quarter in equities, that's not surprising. And then we saw positive flows, particularly in multi-asset. So we did see some reasonably healthier retail flows in the quarter, but primarily in March, and some were offset by outflows in equities. 
+
+
+          Thank you. 
+
+Answer_24:
+
+          As luck would have it, in this quarter there is nothing one-time that you need to adjust for. Last quarter there obviously was. So we would expect that our NIM should be stable to improving over the course of 2016. The extent to which it would improve, obviously depending upon what happens in term of gradual rising rates. 
+
+Answer_25:
+
+          Okay. So with respect to equity capital raises, I mean obviously to a degree that would be true, although those companies that were able to access the equity markets are not those that are experiencing the most stress. So obviously all other things equal it's a positive, but I'm not necessarily thinking it's going to take significant steam or the pressure off. With respect to second part of your question I'm so sorry? 
+
+
+          The C&C. 
+
+
+          Jason will get back to you. I'm sorry, I don't have the answer. 
+
+Answer_26:
+
+          Okay. So no, nothing has changed in the card competitive landscape, including in co-brands. It's still very competitive, albeit that we saw a little bit of deceleration in sales growth year over year last year and we've seen that trend back positively for us this year. So we feel good about that and we've been increasing our marketing spend and as Jamie did say, we launched Freedom Unlimited quite recently and it has been quite recent, but early feedback is very positive. With respect to Freedom with a 50% increases in activity and interest, there's going to be a degree of cannibalization of other products, we would expect that. But so far, so good. And we just like to give our customers choices. And its been favorably received. 
+
+Answer_27:
+
+          So the Manheim is down slightly. We continue to believe and expect that it will continue to trend downwards and so [also seeing] it will continue to trend upwards, just given where it is today and also the amount of leased inventory that will ultimately go into the used car space over the course of the next several years. However the fundamentals are still good, the market is still solid. 
+ We have pulled back on subprime a while ago. It's a small part of our originations. So other than seeing some delinquencies tick up, as expected, in some of the energy-related states but not very significantly, there's nothing at the moment that's on the burner. 
+
+
+          For us. I do think you'll see issues in the market. 
+
+Answer_28:
+
+          So the MSR P&L for the quarter was a positive $124 million, and they are a combination of BAU and  material factors that added up to that, and probably about half of it was a combination of hedge performance and the market. 
+
+Answer_29:
+
+          Yes, yes. So purchase applications are up 30%, I think, year on year. We continue to be positive momentum in that space, and we are seeing Spring activity continue to be robust, as expected. 
+
+Answer_30:
+
+          Okay. So in terms of run rated, the two biggest drivers of the walk that we gave at Investor Day were the card co-brand renegotiations and the mortgage banking non-interest revenue. I would just point out that while we are seeing some of the incremental impact of card renegotiation, that will play out over the course of the year. But on the positive side -- and on the positive side mortgage banking, just given where rates were over the quarter, has been positive relative to central expectations when we did Investor Day. So those two things are worth noting. 
+But we are seeing really quite good drivers in non-interest revenue drivers across the consumer space generally, in debit investments, in fees and accounts, in the sort of 4%, 5% range, and sometimes in the range higher than that. So we are continuing to see exactly what we expected, which is the majority of our businesses will continue to deliver mid- to high single digit growth, and they seem set to do that. The card impact will be what it will be, and mortgage NII will end up down year over year, whether it's $700 million or $600 million we'll see. And so the biggest driver of what the end result will be is going to be markets. 
+
+Answer_31:
+
+          Yes. Look, the business is not immune to markets either. So obviously as you look at the performance for the quarter our fees have been impacted by low asset levels. And we also have got the tail impact of some business simplification, just getting the tail of that out of the performance. We are also seeing the benefit of higher rates. 
+So I'd characterize the majority of those negatives on lower fees and simplification as being behind us. So the trajectory, if rates continue to rise, would be upwards. But that's why we said market dependence. We were not expecting our performance to go down from here. Flat to up, but depending on rates. 
+
+Answer_32:
+
+          So -- 
+
+
+          I'd just use 32%. 
+
+
+          We've given a range 30% to 35%. We've been at the lower end of that range. When we performed very strongly we could drift up. If we perform less strongly, we pay for performance and I think we did a good job in the first quarter. 
+
+
+          We have among the lowest ratio. 
+
+
+          We're paying our people properly and well. 
+
+
+          And consistently. 
+
+Answer_33:
+
+          That's very fair. And we've talked about it pretty often, that people when they restructure, they restructure out of the things that they were less strong at, less comfortable at, and in many cases they double down where they continue to have strength. And we are seeing that. And that's what we mean when we say there's always someone left to fiercely compete in every part of our business, and equities is no exception. It's not the poster child for that. 
+ However, the equities business here at JPMorgan, we've rebuilt our technology platform. We have rebuilt the prime -- we've built the prime brokerage, international capabilities. The two of those work hand in glove. And we have every opportunity to continue to gain share and win. 
+
+
+          And we've done very well gaining share in electronic trading and the prime broker has been built in Asia and Europe where we had weaknesses. So you've seen our share go up and we intend to win it. We have topnotch research, which obviously helps drive the equity business too. 
+
+Answer_34:
+
+          That's correct. 
+
+
+          Give or take, and that's right. Obvious are there's a high degree of variability around it. If we had complete ability to understand it we would lean into those reserves. But it's name specific and situation specific, it would evolve over time. We just wanted to give you an indication that there's likely to be some more costs. It could be plus or minus quite a bit from that because we've had to make stress assumptions in there. But $500 million for nine months, yes. 
+
+Answer_35:
+
+          Yes. No Gerard, I'm not going to make any comments about SNC, except to say that everything that we know and aware of is reflected in our results. 
+
+Answer_36:
+
+          Correct. Yes. 
+
+Answer_37:
+
+          They changed by a couple of billion dollars on a single name that we like, up. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/14_questions.txt

@@ -0,0 +1,158 @@
+Question_1:
+
+          Good morning. Thanks for taking my questions. Marianne, maybe a couple of questions on energy. You noted that the provision was slightly above your guidance this quarter relative to what you mentioned you thought it might be in late February. 
+Guess I'm curious in terms of what your expectations are in terms of your guidance relative to potential draw-downs, particularly in the $10 billion of high yield loans that you have undrawn? And what your ability is to potentially mitigate potential draw-downs based on the financial condition of your borrowers? 
+
+Question_2:
+
+          Fair enough, that makes sense. But that dovetails nicely actually into my follow-up. In terms of the wholesale non-accrual balances, those are up about $1.2 billion quarter over quarter. 
+Can you give us a sense as to how much of that was energy and metals and mining? And were there other areas of the portfolio that added to that? And what's your outlook for wholesale non-accruals over the course of the next couple of quarters? 
+
+Question_3:
+
+          Hi. Just one follow-up. What was the drawn-on energy facilities this quarter? It doesn't seem to be too big, but -- and then related to that, what's the reserve as a percentage of drawn credit right now? 
+
+Question_4:
+
+          And then maybe a little bit of different question. 
+
+Question_5:
+
+          I appreciate that, and I thank you. 
+The other question is on growth. We've been waiting for a long time, but you've been seeing great growth across a lot of different products. CRE up 18% and the commercial bank C&I up 9%. 
+At this stage of the cycle, I appreciate the consumer's showing a lot of strength. Is there any growth where we scratch our heads and said, wow is that growing too much? It sounds funny for me to be asking for less growth, but just curious to get your thoughts. 
+
+Question_6:
+
+          Hi, good morning. 
+
+Question_7:
+
+          I have a question on the living wills. The indication today was that there were four areas that you needed to enhance. Liquidity was one of those and I was a little surprised to see that, given the strength of your liquidity book. I guess what I'm wondering is, does the living will submission and the changes that you have to make have an impact on your current business at all? In other words, do you need to build liquidity to meet the requirements that the regulators have, or this is in a obviously worse case scenario you'd build at that time? 
+
+Question_8:
+
+          As we think about the implications of this morning's announcement, it's around your planning and procedures as opposed to a likely impact on the business operations today and the results that you can generate, is that a reasonable conclusion? 
+
+Question_9:
+
+          Thank you. Good morning. Marianne, can you expand upon your comments in your opening dialogue about the energy exposure? You're not too worried about the contagion risk, but you did say there are a couple of specific issues relating to some very closely related companies. Can you give us more color on what you're referring to? 
+
+Question_10:
+
+          Thank you. And then on the loan growth, which is obviously very strong, what are your people on the front lines saying about commercial real estate? Are there any changes in terms of underwriting metrics that your front line people are seeing since we are starting to see in certain markets, like multifamily, which you guys have already identified as some weak spots? Are there any other underwriting issues that are cropping up now that you didn't see three months ago or six months ago? 
+
+Question_11:
+
+          Hi. That was a very serious CEO letter you had in the Annual Report. But two questions related to that. 
+One would be you, Jamie, indicate the potential for higher interest rates, and just looking for some more color into why you think that's the case and if you're preparing the bank for a scenario of higher rates or if you're just trying to set a tone at the top, or perhaps be a contrarian. I know you gave some technical factors in the CEO letter. 
+And then the second thing is just the contrast between what you have in the CEO letter, liquidity trading governance oversight with the living will letter that came out today. And just a follow-up on the earlier question, do you simply have to write a better resolution plan or might you have to change a little bit the way you do business? And does this make you have a more conservative CCAR ask? 
+
+Question_12:
+
+          Was there anything else from Jamie on that, because if you compare and contrast the CEO letter to what the regulators just said about you guys, it's not completely consistent? 
+
+Question_13:
+
+          Hi, good morning. 
+
+Question_14:
+
+          I wonder on trading, you appreciate that you reported first so you haven't seen the market yet. But two questions around the whole thesis, the last man standing versus restructures. 
+One, do you have any sense of whether your performance overall and really thick represented market share gains or not this quarter? And then two, with some of the guidance coming out of the European banks in particular being very poor and some of the restructurings maybe accelerating steam, is there any thought around comp and maybe using that as a lever to improve returns over the remainder of the year and into next? 
+
+Question_15:
+
+          Hi. Just a question on expenses. First, was there any legal expense in the quarter? And then just a broader question, Marianne. 
+Are the incremental expense saves you're getting from your programs flowing through the bottom line, or is it some of it getting reinvesting, like in CCB I noticed the headcount is up a little bit on page 11, just the last couple quarters? Is that reflect like reinvestment of the cost saves? And then just on the legal side, if you had anything this quarter? Thanks. 
+
+Question_16:
+
+          Yes, good morning. You're fielding a lot of questions on energy credit quality. But taking a step back, given that the delinquency statistics outside of energy still remain fairly stable, could you give us an outlook for how you think credit quality trends will play out for the rest of the year if the base case is slow growth in the US? 
+
+Question_17:
+
+          Great. And just one more follow-up question on the living will. Could you help us understand what you think the regulators meant in terms of if the remediation is not met by October 1 of this year that there could be more stringent prudential requirements? Could that possibly mean higher capital or liquidity standards if the expectations aren't met by October? I guess we always thought of the living will as more of a cost issue rather than a further tax on regulatory ratios. 
+
+Question_18:
+
+          Good morning. 
+
+Question_19:
+
+          If I look at the first-quarter net interest income, which was at least better than what I had, good NIM, and think about your full-year outlook. If I take it literally it implies flattish net interest income dollars from here. And I'm just wondering if that's too literal of an interpretation, or if maybe there are some offsets to the loan growth from, say, lower long-term rates as we think about the rest of the year? 
+
+Question_20:
+
+          And then just separately, any comments on the Treasuries ruling on inversion as you think about M&A, kind of broadly speaking for the industry and for you guys specifically? And if you can frame how much that driven your M&A revenues in the past, or the industry? Any color around that would be helpful. 
+
+Question_21:
+
+          Good morning. Maybe we could talk a little bit about CCAR. I've had some investors express concern about the Fed's inclusion of negative rates. Have you found that to be difficult in terms of modeling? And overall, I guess given the improvement -- on the flip side, given the improvement in your capital ratios, do you think that there's -- you should be able to see some improvement or increase in CCAR into -- now that you've looked at it for a few months? 
+
+Question_22:
+
+          Hi, good morning. 
+
+Question_23:
+
+          So Marianne, within the Asset Management segment you noted that the revenues were down in line with the market. But if we isolate the fee income components to exclude some of the gains you highlighted as well as other income, the revenues declined by double digit both quarter on quarter and year on year, which is a bit more pronounced than what we had expected. And I was hoping you could speak to maybe some of the factors outside of the market declines that may be impacting revenues in that business, specifically what you're seeing in terms of retail engagement and maybe whether you've seen improvement in sentiment now that the markets have recovered pretty nicely off the February trough? 
+
+Question_24:
+
+          Good morning, Marianne.  Quick question on NIM here. Can you talk about how sustainable you think the NIM expansion might be and whether or not there's anything one-time in the numbers we should adjust for? 
+
+Question_25:
+
+          Okay, great. Thank you. And then on the energy exposures in the loan book, can you comment on maybe whether or not some of the equity capital raising that we've seen in the energy space has perhaps taken some of the tail risk away from that book? And then is it possible also to update us on the criticized exposures in oil and gas? I believe in the 10K it was somewhere around $4.5 billion at year end? 
+
+Question_26:
+
+          Thanks. Marianne, can you comment on what competitive conditions are like in the credit card market currently and if there's been any change around the intensity of competition for co-brands and awards? And I think Jamie you alluded to the launch of a new product. I'd love to get an update on your initial thoughts about how it's going. 
+
+Question_27:
+
+          Great, thank you. And on the -- auto has been a big area of focus, and you touched on it certainly during your Investor Day. But on the mid-FICO range is there anything going on, on a macro level, that would suggest some significant likelihood of credit quality deterioration? 
+
+Question_28:
+
+          Thank you very much. In the mortgage banking segment you wrote down the MSR by almost as like $0.9 billion. Was there any hedging gains? I couldn't find them in the documents, any hedging gains to offset that? 
+
+Question_29:
+
+          And the other. And then on the mortgage banking side, have you been seeing -- you saw the MBA today release that the purchase applications are the high since 2010 or something in that order. Are you seeing the Spring buying season, especially on the purchase side, starting to pick up? 
+
+Question_30:
+
+          Hi, thanks. Good morning. Just two quick follow-ups on the fee side. Understanding that market dependence is built into the outlook to get the $50 billion of fees for the year. I'm just wondering, have we now run-rated the combination of the business repositioning, the card revenue run rate, and so -- and the toughness of this first quarter? I guess the question is really, what are the things that you expect to get better from the first quarter on the fee side upside of normal seasonality? 
+
+Question_31:
+
+          Yes, okay. And I know it's a smaller line item, but just noticing in the guide for security services to be flat from here, there's always some seasonality in there too. But I'm just wondering if you could just give a comment about what you're seeing in that business and are there any incremental challenges that leave you with a flat outlook? 
+
+Question_32:
+
+          Yes, good morning. The question is already on the compensation ratio. You've obviously done a fantastic job on the cost base. But one of the issues that strikes me is clearly with the reduced revenues, particularly in the capital markets business. Your comp down about $400 million in the --compared to the first quarter of last year. 
+Obviously what we've experienced generally is you holding the ratio steady for the second or third quarter and then tooling up with a lower ratio in the fourth quarter. So I'm looking at the estimates we have for revenues on a well-known provider of data. We've got pretty flat revenues being forecast by people like me, whether we're right or wrong. Should we be thinking about how you're going to build a bonus pool on the -- against this background and whether we should be looking at thinking -- or thinking that you're going to have to [retain] the comp ratio at a pretty similar level through the year, if indeed we don't see any uptick in revenues and they remain reasonably flat? 
+
+Question_33:
+
+          But I'm not [be] talking about the quality of the ratio. I'm interested in (inaudible) because clearly what we're seeing are mostly this, and indeed in Europe, is the difficulty of building a pool when you have been so used to having a very strong first quarter, obviously makes it quite difficult. Maybe just as a follow-up which is vaguely related, could I just ask, you talked earlier about where there's question about competition and picking up market share, which indeed you clearly have. But one of the questions I perhaps just wanted to ask is, I know that you've been pushing hard on these equities, cash equities in particular. 
+My sense is that actually a lot of the players, including the Europeans who are doing massively structural, are putting more capital into equities on the back of the fact that it's a lower capital business and therefore they think they can get higher returns. And just maybe that's why [Nomura] pulled out of European equities yesterday. What are you seeing in the equity space in particular, because I'm not seeing as much sort of withdrawal as we have done in the fixed space? 
+
+Question_34:
+
+          Thank you. Marianne, just as a follow-up I just want to make sure I understood you correctly. On the $500 million of incremental reserve build for energy for the remainder of the year, that's for the total of the following nine months is that correct? 
+
+Question_35:
+
+          Okay, thank you. And then I know there was the energy specific shared national credit exam that the first quarter results for the industry will reflect similar to your own. But we also have the traditional shared national credit exam that's been done for 20-plus years. Any color on how that's going, the normal shared national credit exam? 
+
+Question_36:
+
+          Hi. Two quick follow-ups, Marianne. Getting a couple questions about just the math on the energy reserve ratio. I think you mentioned 6.3%. Just to be clear, is that the reserve for loans, over-funded loans, and then there's an additional reserve for unfunded commitments? 
+
+Question_37:
+
+          Okay, got it. And then did you tell us the size of your energy commitments and whether they changed at all this quarter? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/15_answers.txt

@@ -0,0 +1,176 @@
+Answer_1:
+Good morning, Brian.
+
+Answer_2:
+Brian, I know that everybody is keenly interested to hear what we have to say, but the truth of the matter is it's very, very early days. The new government is just forming as we speak. Negotiations need to be given some time to unfold and take shape. So it's really too early to hypothesize.
+We would hope that we can continue to operate the way we are right now. But we will just continue to evaluate the landscape, as I'm sure you will, over the coming weeks, months and quarters, and plan accordingly. The most important thing is that we intend to continue to support our European franchise and clients throughout.
+
+Answer_3:
+So, on the card space, as you know, we have loans running off. We're replacing them all of the time. Over the course of the last couple years, since the end of 2013, we made some changes to our credit box and our credit risk policies very, very thoughtfully. And we've been monitoring them very closely.
+And what we're seeing in terms of the loss rates and the seasoning of them is fully in line with our expectations. And these loans are coming on at higher risk-adjusted margins. So, the ROEs are at or above the portfolio ROEs. So, nothing that would speak to anything other than our full expectations for our credit risk appetite.
+And with respect to Auto, not to speak for others, but obviously when you look at lower FICO scores and high LTVs and longer terms on top of each other in an environment where you've already seen used car prices soften some and they're likely to continue to do so, it's something to watch. And so we've been very, very thoughtful about that, not just today but as we've been going through the cycle. And not only on an absolute basis do we compare favorably in terms of LTVs and FICO scores and even terms to the industry, but we've been very, very careful in -- and low percentage of subprime origination -- very, very careful about looking at those layered risks.
+So nothing in our -- and remember, for Auto this year, I think the charge-off rate's going to be 40-ish basis points compared to a long-run average of more like 60. We're sort of reverting to a more normal level, if nothing else. And used car prices will ultimately come down, and we're being thoughtful about that.
+
+Answer_4:
+Good morning, Jim.
+
+Answer_5:
+At the risk of not getting like overly complicated, the long-term debt expense -- our NII was flat with loan growth. And NII on loan growth being offset by long-term debt expense, which was largely to do with the hedging of non-dollar debt and just relative quarter-over-quarter small moves in currency levels and currency basis. So, I would honestly characterize it, not to sort of underplay it, as quarter-over-quarter noise.
+Looking forward -- so when you look at our NIM, you have NII flat. You have the balance sheet growing, as we expected, both on loans and trading assets. So, NIM just naturally is down a few basis points. But we would be looking for NII to be up slightly in the third and fourth quarter, and for our NIM to be relatively stable.
+
+Answer_6:
+So, I would say there's going to be two things. First of all, obviously when you talk about Consumer, it kind of gets dwarfed by Card. So let's start with Card.
+We are growing the portfolio. We added 4% core loans year over year in Card. So naturally, as the portfolio grows over time, you would expect to add to reserves. So there will be some of that, but I would characterize it as modest.
+And then, as these vintages continue to season, we've been experiencing very, very low loss rates at circa 2.5%. They will trend up slightly. So there will be a little bit of rates impact, too, but again, as I say, with very accretive ROEs.
+I would look forward and expect there to be some reserve adds over the course of the next several quarters on a combination of those factors, but for all the right reasons. And similarly, volume-wise in Auto we should see some adds, but again, in comparison to Card, modest.
+
+Answer_7:
+So, as you know, Erika, everything that we do, we do with a view to, first of all, the client franchise and making sure that we're supporting our clients. And then secondarily, with a view to all of our binding constraints. We will provide capital and access to the CIB. But also take into consideration our overall objective of making sure that we stay in the 3.5% G-SIB bucket. So we will continue to try and find capacity to be able to recycle it and grow high-ROE/high-ROA business.
+
+Answer_8:
+Not anything significant, no. I think you've got to compare it to the prior year, which was stronger, particularly this time last year in Asia. And that's less true today -- stronger in Europe, less strong in Asia. It's more of a regional story than any particularly significant items.
+
+Answer_9:
+Good morning, Betsy.
+
+Answer_10:
+Yes. So let me -- two pieces to the story. Yes, the guidance is $2 billion-plus year on year. You'll recall when we came in to Investor Day, we said we would expect $2 billion, rates flat. It looks like rates will be flat, at least in the front end at this point, at least for the majority of the year, if not the whole year.
+You've seen already in the first two quarters that year over year we're up $1.4 billion. We were doing better than that on a combination of lower deposit bases reprices and also on strong loan growth.
+But if you annualize that, that would be too high. We are going to have some impact in NII of the lower 10-year. It's not significant. But it will offset that to a degree. We would expect our NII to be between $2 billion and $2.5 billion up year on year -- largely strong loan growth, low reprice.
+
+Answer_11:
+I would say we've been doing a combination. We've been growing our deposits more strongly than the industry. So we continue to be net-net attracting more deposits than the industry, and also, as you say, a mix shift out of securities and into loans.
+Our outlook for loan growth through the remainder of the year is to be at the higher end of our range. We said 10% to 15% core loan growth, and at this point, demand still seems robust. So we would expect to be at the higher end of that range. We certainly have been this quarter.
+So at this point I would say that it's a combination of factors. And remember that the way we think about our investment securities portfolio also takes into consideration how we think about positioning the Firm's duration of equities. So all of those factors will contribute.
+
+Answer_12:
+If I get this wrong, I apologize. But I think it was actually we make $3.5 billion on the rates implied and $6 billion on normalized rates. But in any case, let me just talk about rates flat versus implied right now. And just because things can change so quickly, let's just focus on 2017.
+Rates flat from here. So, with the 10-year at about 1.5% and IOER at 50 basis points, because of the loan growth, notwithstanding any sort of long-end pressure, we would still expect year over year our NII next year to be up between $1 billion and $1.5 billion, implied, which is actually not that much different from that. So it does have about 20 basis points better long-end rates by the end of 2017, but otherwise relatively flat through the end of 2017 would be about $0.5 billion more than that.
+
+Answer_13:
+Growing like a sunflower, not like a weed.
+
+Look, I'll say a couple of things. The first is, a lot of that growth is commercial term lending. And it is the case that we have the technology and a process that has speed and certainty of execution, and competitive funding costs. So it is the case that it's a value proposition that we're able to bring to clients, I think, that differentiates us. We're able to close in times that are a fraction of what the industry is.
+Secondarily, we're really concentrated on identified, supply-constrained markets, low-rent stabilized. So these are not the same properties that had problems in the past. We have -- since the previous cycle, we have looked carefully at our underwriting, and there are some things and some regions and some products that we either don't do or do significantly less of. So we're very, very careful. But we're looking at some really good credit quality in our commercial real estate portfolio right now.
+
+Answer_14:
+So I would say in the CIB, it's also a revenue story. So you need to consider both factors (multiple speakers).
+So let me talk about where we are on the expense commitments. And you'll recall that -- whether you remember a $4.8 billion number or a $5.5 billion number in total, we're about 70% of the way through delivering against that across the CIB and the CCB at the end of the second quarter, and we continue to make progress.
+In the CCB, obviously, it is generally more progressive. And in the CIB, it's a bit more about technology and operations, and it takes some time to deliver that.
+But fundamentally we continue to chug through that. And we will get there over the course of the next several quarters. So I would say in line with our expectations, and is a contributing factor.
+
+Answer_15:
+So I would say the comp-to-revenue ratio is an outcome, just for what it's worth. Obviously we try to give the range to give people an idea. We pay competitively and we pay for risk-adjusted performance.
+But there's nothing notable going on. We've been actually at the lower end of our range for a little while now.
+
+Answer_16:
+So it's always a little tricky. The share thing is going to become clearer with a rear-view mirror than it is necessarily at a moment in time. It does feel like we are doing fairly well competitively, not just against European banks, but just generally. And not just in Europe, but generally, because we, as you say, have continued to be there for clients across products, across the globe.
+So I would say that we feel like we are doing fairly well. We'll know whether that is share gains when we are able to actually look at that in the rear-view mirror.
+But there's still plenty of competition out there. So we're just focused on serving our clients the right way. But it does feel a little bit like we're doing well.
+
+Answer_17:
+I'm going to try to tell you as best I can, if you can hear me. So, number one, we do think it will reduce the GDP, the UK and the EU, a little bit. And obviously that's not going to affect our business plans. That will affect the economies a little bit.
+Number two, we know it's going to create uncertainty for an extended time period. So we don't think we can answer or make certain all these things you want to know because there are a lot of parties involved. We are hoping that the political leaders are very sensible. It makes sense for both the EU and for Britain to think through the process to make it sensible, whatever changes they make, to give businesses time. I'm talking about years -- time to adjust to the new reality, which we don't know what it is.
+I think the most important thing is that we will continue in every single country to serve our clients day in and day out. If it adds extra cost, so be it. I'm not really worried about it. It would be nice if it doesn't create huge turmoil.
+I'm hoping the EU is sensible, but we're going to be prepared. As Marianne mentioned, there's a range of outcomes. Any one (inaudible) we'll try to be prepared for each one of them.
+We're not going to, like, pull back on serving people in Italy, Germany, France, UK or Spain because it might lead to higher costs. I would accept the higher cost, as opposed to disrupt our clients.
+
+I would also point out, Mike, that competitively we are not in this situation alone. And so we're going to take our time to work out what the right course of action is. And obviously we'll update you as and when that becomes clearer.
+We're not going to be at a competitive disadvantage. If anything, as we talked about earlier, we feel like we're in a position of strength.
+
+Answer_18:
+The truth of the matter is, it's a bit early to say for that, too. I hate to continue to repeat that.
+I will tell you that, generally speaking, uncertainty is not particularly conducive or constructive for M&A. But in this case, I think there are some offsets. So I would start with, in terms of the actual strategic dialogue with CEOs and at the boardrooms, it is as good as it's ever been.
+If you think about the other factors that would be supportive of M&A, like cheap financing globally, low organic growth, good multiples, solid economy in the US and globally notwithstanding a bit of the steam taken out in Europe or the UK, all of that should continue to be supportive for strategic M&A. At the end of the day -- and currency could be supportive of cross-border activities. So there are puts and takes.
+I'm certain that there will be some people who think carefully through the right timing and what to do. At the end of the day, the strategic proposition should ultimately win out in most cases. And similarly, volatility, generally speaking, is not particularly conducive in terms of ECM, but investor appetite is still there, and there have been deals priced post-Brexit.
+It's a little early. There's still activity. Volatility is reasonably subdued at this point. And I think, because there are no event calendars out there right now, there's still quite a lot of opportunity in the space. Obviously, DCM, low rates would be a tailwind, notwithstanding the M&A and ECM landscape.
+
+Answer_19:
+So I'm going to start with the second part of the question. So we are still very much concentrated in the prime and near-prime space, but we have a higher percentage of our origination in the near-prime space, reasonably meaningfully higher over the course of the last couple years.
+So where we may have previously been, I think 40%, above 760. Now that's less than that, and there's more like 20% or 30% below 700. By the end of the day, still pristine credit, relatively speaking.
+With respect to delinquencies, is it a cure rate issue? Not specifically, no.
+
+Answer_20:
+We're not really doing much in the way of 2017 guidance right now. It will ultimately honestly depend on the opportunities we see in front of us to continue to invest and to add customers.
+I think we're at a very good run rate of investments. We've increased reasonably significantly in terms of marketing dollars and also lease growth. That will drive profitability in the medium to longer term.
+So it's possible, if we see the opportunity to continue to do that, we would do it. But we have no specific guidance yet.
+
+Revenue environment can change reasonably quickly, particularly, as you know, with rates, and to a lesser degree, markets. We're not going to overreact to a short-term phenomenon.
+
+Answer_21:
+Yes, taxes much -- generally speaking, the reserve changes are somewhat episodic. Outside of those, yes, 36% is a good central case for our managed tax rate.
+
+Answer_22:
+Good morning.
+
+Answer_23:
+So starting with the qualification that obviously, as you suggested, it's going to be market dependent, but also remembering that we knew when we gave the guidance that we would expect the second half to be seasonally lower. So here's what I would say -- first half, market challenged; second half, markets better. Net-net, first quarter markets challenged; second quarter better. Net-net, first half relatively flat year over year. So, call it a wash, with the acknowledgement that we knew we would expect seasonal declines in the second half of the year.
+Mortgage better -- so you may recall that we said we would expect mortgage revenues to be down year on year, actually by a reasonably significant amount. Given obviously where the rate environment is, as well as some positive MSR results in the first half of the year, we would expect mortgage revenues to be more like flat. And against that, to your point, lower IB fees and lower Asset Management revenues, given the environment.
+The way I would characterize it is there are puts and takes, but net-net it's still a reasonable central case. So we are not changing it. But it's market dependent.
+
+Answer_24:
+So I would say if you look at the last three years of PPNR, notwithstanding that there have been obviously differences in the scenarios, 2015 CCAR results, so not this year's but last year's, were low. Not to say that means that these results are more normal. I would say if you look at the three years and look at the PPNR results now, it's more consistent with the sort of portfolio risks, revenue generation we would expect. And you can see that because it's much more consistent with our results.
+So I don't have insights that I can share with you specifically to try and reconcile the Fed's results year on year, nor do we really try to do that. You're right -- operational risk is likely a piece of it. And that was disclosed in that information. So I would just say, there can be volatility but I feel like this is not an unreasonable place to think the PPNR would start, and it's consistent as you can see, relatively speaking with what we calculated.
+In respect to what that means for what's most binding, what it does mean is if you look at the analysis that we've done a couple of years in a row now, where we've said using the CCAR results from the Fed, what would that imply a CET1 ratio would need to be to pass, it had previously been a little less than 11%. With the improved PPNR and, therefore, the improved result, at this point, it would be a little less than 10%.
+So in that context, as we sort of look forward, sometime in the near future, maybe in the third quarter, to getting the sort of 2017 CCAR changes in proposed form hopefully, it will alleviate to a degree a little bit of that pressure. But I still would suggest to you, as we said at Investor Day, that CCAR may, depending on how the G-SIB surcharge is included in the minimum, may become binding, if not likely will become binding. And so we'll continue to take that into consideration as we go forward. And we are already taking it into consideration as we think about optimizing against the multiple binding constraints we have.
+
+Answer_25:
+We think about using all of our channels based upon obviously the demand, and our capacity and our appetite to want to continue to close strongly for our customers. We've obviously also been focused in the anticipation of it becoming a more purchase-oriented market very much on building out the retail channel and the retail distribution channel, and that's been very successful.
+So there's less correspondent contribution this quarter. It is a lever we will likely use going forward.
+
+Answer_26:
+At this point, I'd still say -- at this point, we would still say it will be episodic. And while we are hopeful that the overall structural costs will start coming down, or has come down, and that's a good thing, there will still be potentially some puts and takes in the legal space.
+There's no real way obviously of forecasting a run rate. I would just do what many of you have done, I think, and go back and look at what the legal expense looked like in the years preceding the crisis, and make your own determination whether it's going to be structurally a little higher. But it probably wouldn't be multiples of that.
+
+Answer_27:
+Okay. So it was particularly strong in rates, but nevertheless also very strong year over year in currencies, emerging markets, credit trading, [SPG]. So it was pretty broad-based.
+But remember, you also have to think about it relative to the equivalent course of last year, and we didn't have a particularly strong second quarter last year. So on a relative basis, that is an important factor, but it was pretty broad-based -- more volume than anything.
+And then seasonality, I'm sorry -- look, it's anyone's guess. I think you can go back and look over time. But last year we saw -- we had a weak second quarter, as I said. So we didn't see as much seasonality. But if you look at the last quarter's run rate, I don't know that would be a bad place to start -- last year's third quarter run rate would not be a bad place to start.
+
+Answer_28:
+I'm going to start with a couple of general comments, which is, we talked about the fact that the charge-offs that we've experienced in the quarter were credits that we had previously reserved for. So we're at the point now where at least as a sort of basic matter as we're experiencing charge-offs, we feel like we're in a reasonably good reserve position, notwithstanding that idiosyncratically there may be additional adds.
+What we would need to see is continued firming of sentiment in the sector, continued access to capital markets to allow companies to repair their balance sheets, and continued stabilization if not improvement in oil and gas prices. And so everything is constructive on that path, but it needs to continue along the same path.
+And yes, we are growing our portfolio. And so even if it were not for energy, we would, all other things equal, be adding to reserves, but there are also time to (inaudible) pay down -- a lot of puts and takes, too.
+
+Answer_29:
+So, I mean, just to say -- we obviously have our own spend data to look at, and it continues -- the Card spend is up 8% year on year. Energy continues to be a tailwind for consumers. The labor market continues to be solid and improving. And sentiment is still good. Housing, still improving.
+So I mean, really just looking at the same things you're looking at, and we obviously have a slightly different lens to it. But all other things equal, consumers are in very good shape, and demand is there for the product. And we've been investing outside of consumer in new products -- inside Consumer, sorry -- in the Freedom Unlimited space and also in marketing. We're growing, not only because the demand is there but also because we're investing.
+
+Answer_30:
+Our second-quarter results reflect everything that we have and we know of at the end of the quarter. And we're not going to make any specific comments on regulatory exams.
+
+Answer_31:
+Not specifically. I'm not sure; I haven't polled the dealers myself. We continue to have very high FICO scores. I'm not aware of that, but I can't comment.
+
+Answer_32:
+In our portfolio at this point, no.
+
+Answer_33:
+So we are expecting refi to be stronger in the coming quarters; and the mortgage market, as best we can tell, will be at around $1.7 trillion, $1.8 trillion this year.
+
+Answer_34:
+So we've done one, and we're looking at more securitizations in the mortgage space. And we are keeping a vertical stripe. We're retaining the loans on our balance sheet -- or the securities on our balance sheet, I should say. And in doing that we've been able to get private capital to take the majority of the lower credit risk and get better capital treatment for ourselves, in terms of the RWA that it attracts.
+
+Answer_35:
+New originations.
+
+Answer_36:
+I'll just start by sort of orientating you on why that would be the impact for us. If you look at our balance sheet and you look at what we have in fixed rate loans versus what we have in either IOER or in LIBOR loans, it's about $650 billion. So we're much more sensitive to the front end of the rate curve.
+If you look at our earnings at risk disclosures, a 100-basis-point parallel shift would be around $800 million. And so obviously we haven't seen, and won't hopefully see, anything of that order of magnitude. That kind of gives you an ability to size up, notwithstanding compounding, why you've only seen our NII relative to prior expectations come down by that much.
+
+Answer_37:
+So I think earlier on the call somebody else asked the question, and I made the comment that it's really more related to the results from our hedges of non-dollar debt, long-term debt. And so in the first quarter, the dollar weakened. In the second quarter, it strengthened. And with some currency basis in the first quarter that we didn't see in the second quarter, it really is, not to dismiss it, but it really is accounting and nothing really else than that.
+
+Answer_38:
+No shift from our desire to want to be with engaged customers and our rewards programs. Our products are all geared towards that. So it's really just a credit decision. And, yes, we do have relationships with many, many customers in that still near-prime space.
+
+Answer_39:
+Yes. So look, obviously P2P real-time payments is very important to our customers, so therefore it's important to us. It's also important for us on the industry that it's done in a safe and secure way.
+And so early warning, the fraud protection that they are able to provide, as well as bank-level cyber security and the absence of a need to provide your bank credentials we think is very strongly positive for our customers. And we expect to see volume go across that.
+As you know, we have QuickPay already, and we saw reasonably significant volume, $21 billion, on QuickPay last year and growing. So I would expect to see more and more P2P payments. And it's good for our customers, it's good for us.
+
+If you look at the whole payment space, Chase Paymentech is gaining share. Chase Net is doing very well. Chase Pay, we've signed up lots of different people. One piece of that is the P2P.
+Today, right now, if you use Chase QuickPay, it's very easy within Chase to Chase. It's now just as easy to go from Chase to a bunch of other banks, who I won't name now. We've just started rolling out -- it's soon to be rolled out to 60% of American banking accounts.
+And then we're going to make it available to all banks. So you will be able to go P2P, real time, through Chase QuickPay, there will be a special app for Chase QuickPay. It'll also be branded under another name, which we haven't rolled out yet, which I think will be rolled out shortly.
+I think it's a great success that the banks can get together and do this. This will be great service, which I think shows you the banks making progress on what you would have called prior fintech.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/15_questions.txt

@@ -0,0 +1,129 @@
+Question_1:
+Good morning.
+
+Question_2:
+I know it's very early, and it's probably limited in what you can say because you mentioned it depends on the timeline of Brexit and how passporting works, but is there any qualitative thoughts you can give us around the operational and/or legal issues we should be watching as this develops -- legal entity restructuring, net impacts of moving people versus lower-cost geographies and things like that?
+
+Question_3:
+I appreciate that. Maybe switching gears, you mentioned the Consumer business was firing on all cylinders. Clearly, there's some nervousness in the market that the credit cycle is turning.
+I wonder if you could touch on two things, which are -- maybe a little bit more detail on the seasoning impact you saw -- you mentioned in Card. Is it just seasoning or is there any like-for-like deterioration? And then in auto, you mentioned risk layering. What particular factors are you seeing layered in the underwriting box that make you concerned right now?
+
+Question_4:
+Hello, good morning.
+
+Question_5:
+Maybe just talk a little bit about the net interest margin and the outlook there. It was down 5 basis points. It looked like it was mostly in the funding costs. I just wanted to get a sense of what was driving -- I think long-term debt was an up-trading. Liability costs were up. Can you give us a sense of what's going on there and how to think about that going forward?
+
+Question_6:
+Okay, that's helpful.
+And maybe just one follow-up on the prior question of credit -- how should we think about the provisioning going forward in Consumer? Is that going to be a consistent build or is that a catch-up that we saw this quarter?
+
+Question_7:
+Hi. Good morning. So my first question is -- given how well JPMorgan did on the CCAR relative to last year's results, and it seems like RWA and SLR exposure have stabilized over the past few quarters, how comfortable are you perhaps allocating more balance sheet to the investment bank, given that you seem to be very well positioned to continue to gain market share, especially in markets?
+
+Question_8:
+Great. And was there anything to call out on the equities, the $1.6 billion equities number, that could be a little bit more one-time in nature for the quarter?
+
+Question_9:
+Hi, good morning.
+
+Question_10:
+Okay, two questions -- one on the outlook page. I see on the printed page it's the same as what you had last quarter for the Company overall, obviously. But I heard the emphasis on NII was on the plus side, right, $2 billion year on year plus. Is that the right nuance that you were trying to communicate?
+
+Question_11:
+And then on the loan growth side, you've been funding this in part from just a mix shift, right, where your loan-to-deposit ratios moved up very nicely. It's still very low at 66%, but up 2 percentage points Q on Q, and up from 61% year on year. I'm just wondering how far do you think you can take that before you might want to look to fund loan growth with deposit growth more ratably?
+
+Question_12:
+Good morning. One more rate question -- as you mentioned, you're super sensitive on the front end of the curve, and you just alluded to the curve is flatter. I'm curious about that great chart that you roll out on Investor Day that talks about -- we make $3 billion more through 2018 if rates stay flat, and $6 billion more if the curve goes down the implied path. The implied path is now lower. Just curious how much those numbers change if the current curve holds?
+
+Question_13:
+That is perfect, thank you.
+Other question was -- there's some regulators chirping a little bit about concerns in commercial real estate. Some of the other banks have mentioned that you're growing like a weed, and your credit is great. So can we just talk a little bit about what you think you're doing differently to both get that growth and then what you're doing to avoid mistakes of the past? And that'll be good.
+
+Question_14:
+Hi, Marianne. Thanks for taking my question.
+Wanted to ask a couple -- wanted to ask a question on the cost side of things where the overhead ratios, both in the CIB and the Consumer Bank, dropped fairly materially quarter over quarter. I guess I'm just looking for some guidance here in terms of how much of the expense initiatives that you've already been talking about, both in the CIB and the CCB, how much progress did you make in this quarter on that, and was that an outsized contributor to the improvement in the overhead ratios?
+
+Question_15:
+Okay. And then just in the CIB specifically, you mentioned the comp ratio there was 30%. That's sort of at the low end of your -- of the range that you typically talk about, which is 30% to 35%.
+I'm presuming that's largely driven by the better-than-expected revenues. Was there anything else going on there, or was that just pretty much a result of a benign revenue -- a relatively benign revenue environment?
+
+Question_16:
+Hi. How is CIB doing in Europe and against European bank competitors in terms of revenue growth, share, the degree of competition? Some competitors are pulling back and you guys have stayed the course. Are you seeing the benefit from that?
+
+Question_17:
+And I know you were asked already about Brexit. Maybe if we could hear from you, Jamie, about the implications of Brexit. Marianne, you said, quote, minimize friction costs. If you can just give us some sense of what that means?
+You've given us a lot of guidance about the recent quarter and the year ahead. But you have what could be a monumental event, and you haven't really talked to investors about that since Brexit's occurred. How do you think about the currency risk, the cost, the revenues? And are you delaying any investments, given the increased uncertainty?
+
+Question_18:
+Good morning. Thanks for taking the question. I just, first off, had a follow-up. So on Brexit, post this development, have you seen any impact on your banking pipelines? Has this had any impact on appetite for M&A, particularly if there is a component that involves either the continent or the UK?
+
+Question_19:
+Great. Thank you for that.
+And then one more on credit here -- so it seems as though we had 30-day delinquency rate actually go down quarter over quarter. So it seems like maybe -- in the Card, sorry, business. So it seems like maybe it's a cure rate issue. Is that the right assumption? And then, could you give maybe a little color on how much the non-prime growth has been -- has driven in recent vintages versus prior?
+
+Question_20:
+Hi, Marianne. I'm not sure if this is too early, but when you think about expenses longer term beyond this year, if you think about 2017, if we find ourselves in a similar revenue environment next year, when you wrap in your cost save objectives and where you want to be on investment spend, do you think you'll be shooting for expenses to be kind of in the same range of that $56 billion next year, if things don't change on the revenue front?
+
+Question_21:
+Sure. Just more near term, you talked at a recent conference about the tax rate going forward. Just with the kind of issues you had this quarter with the tax rate, looking at 39%, you said it would 36%. What should we think about going forward? Is it like in that 36%?
+
+Question_22:
+Hi. Good morning.
+
+Question_23:
+Marianne, I had a question on the outlook. You reaffirmed the fee income guidance of $50 billion, plus or minus, for the full year. I'm trying to gauge, just given the tough start to the year in trading in 1Q, the subdued second-half M&A commentary, and second-half trading seasonality that we would typically expect, the $50 billion target does appear somewhat ambitious. I didn't know if you felt like that was a fair assessment, or just given what you're seeing across the businesses, that the $50 billion is still ready achievable?
+
+Question_24:
+Thanks, Marianne. One more for me on CCAR -- given that you've had some time to digest the latest set of results, the improvement in PNR was probably the most impressive aspect of the release, at least based on our own findings. From what you can gather, based on your own internal assessment, what were the primary drivers of the increase where maybe we have some limited visibility, such as areas like op risk? And does a favorable CCAR outcome inform your view in terms of which constraint is currently most binding and maybe how you might change your deployment tact across the different businesses?
+
+Question_25:
+A quick question on the mortgage originations -- the correspondent channel didn't change all that much quarter on quarter, although I would have thought with seasonality and a pick-up in refis, that would have increased in the second quarter. Could you talk about how you're thinking about correspondent mortgage originations? And given that refi volume looks strong at the start of the third quarter, should we expect a pick-up in correspondent in the third quarter?
+
+Question_26:
+Okay. And I know you can't really discuss too much on the legal side, but is there a right way to think about legal expenses going forward, like an ordinary cost of doing business for a bank your size? Is it 1% of revenues as kind of an ongoing run rate for expected legal expenses going forward, or is there not the right way to think about it and it's just episodic?
+
+Question_27:
+Thanks. Good morning.
+Marianne, I was wondering just if you could -- I know it's a little backward-looking now and you've made your points already about what normal trading seasonality could be, but could you help us understand the products that drove the really strong [FIC trading] and kind of what happened in June? Was it volumes? Was it spreads widening? And then I guess I would actually ask what you typically consider what normal JPMorgan seasonality is, as you mentioned?
+
+Question_28:
+Understood, okay.
+The second question just is -- on the wholesale reserve, you mentioned -- it's been nice to see the energy prices start to stabilize, and it seems like you're able to stabilize the amount of reserve build outstanding, aside from that one credit. What needs to happen for you to get even more comfortable, where you could see some of that reserve start to come out, underneath the context of that you're also growing the wholesale business extremely fast as well?
+
+Question_29:
+Hi, Marianne. Thank you.
+Marianne, can you give us some color -- obviously your consumer loan growth has picked up quite nicely. You pointed to, it's going to be at the higher end of the range for the year. What are you guys seeing on consumer behavior? Has it improved and they feel stronger about their own job prospects, which is enabling them to borrow more? Are there any metrics that you guys are looking at from that end?
+
+Question_30:
+I see. And coming back to credit, obviously your first-quarter results had the results of the targeted shared national credit exam for oil. Traditionally obviously we have the shared national credit exam every year. Second-quarter results normally reflect that exam.
+Do your second-quarter results reflect the shared national credit exam? Or is that going to -- ?
+
+Question_31:
+Great, thanks. Marianne, just a couple of quick follow-ups on the auto lending business -- the originations came down a bit. And you talked about the dynamics around that previously in the quarter and at the Investor Day.
+When I poll auto lender or auto dealers, they say that where they had primarily seen you retreat was from very high FICO, sort of super-prime new lending and leasing, but that their experience with Chase remained very consistent in the mid-FICO range. I just wanted to see if that was consistent with your view internally?
+
+Question_32:
+Okay. Just one follow-up on auto credit -- obviously the Manheim issue points to perhaps some rising severity, given default. But at this stage, is there anything that suggests to you that we should see a higher frequency of default?
+
+Question_33:
+Yes, thank you very much. One of the things about what we saw as mortgage rates -- I mean, the 10-year dropping down to record levels and mortgage rates probably following right behind it -- can you give us a little outlook? Are you seeing an uptick in refi's? We've seen the refi indexes go up very high. Any outlook on where you think the mortgage market's going to be in the next quarter or two?
+
+Question_34:
+And the other follow-up question is -- there's some news articles out there about JPMorgan securitizing conforming loans. This hasn't really been done a lot by anybody. I don't know if you can address that, the economics behind that, or what's the thought behind that, instead of getting Fannie and Freddie wraps, you're securitizing them yourself?
+
+Question_35:
+Thank you. Most of my questions actually have been answered. Just a quick follow-up on the credit card originations in terms of dipping down to the lower prime or below. You said something like 20% to 30% had FICO scores below 700. I didn't know if that was for new originations or for the portfolio overall that you were referring to.
+
+Question_36:
+Thanks. Wanted to ask you a little bit about the focus everybody has on the flattening of the Treasury curve, but yet earlier you were able to say that going into next year you would see 2016 NII growth of $2 billion to $2.5 billion, only really fall to $1.5 billion to $2 billion, which means that flattening of the yield curve is very manageable. Just talk about asset yields as your earning asset yield actually went up 1 basis point -- what you've been able to see in the market versus what's happening in the Treasury curve.
+
+Question_37:
+In this particular quarter, your funding costs went up. Is that a lag effect from what the rate hike in December still just now coming through, or was there something else maybe more unusual about the funding cost that we saw that drove the margin down this particular quarter?
+
+Question_38:
+Hi, again. Just a follow-up on the Card new originations -- I know one of the key things that you've done for many years is to focus on relationship lending, relationship offerings. And so when I hear that 20% of the new originations are below a FICO of 700, is that a shift from the relationship strategy that you have or does it reflect the fact that you do have significant relationships on deposits, et cetera, with folks in that FICO band?
+
+Question_39:
+Thank you. As a follow-up, Marianne, your consumer business obviously has been very, very strong. Can you share with us the update on clearXchange? It's expected to be rolled out later this year, and what that might do to even grow the mobile business even more than it's growing now?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/16_answers.txt

@@ -0,0 +1,108 @@
+Answer_1:
+So I think there's three or four things to mention. The first is that I would say that the industry generally had a pretty weak third quarter last year. And so when you think about the year-over-year comparison we are a little flattered by last year's performance.
+Not necessarily more so than our peers, but nevertheless we are. Then we talked about the fact that this quarter the conditions were relatively favorable broadly and compare and contrast that to last year where there were pockets of activity and client flow but there were also pockets where people were really sitting on their hands and not transacting. So I think client flow quite broadly across the environment would characterize the quarter.
+In terms of the competitive performance I would say it feels like we did well. Obviously, we're the first to report, apart from Citi this morning. It feels like we did relatively well, so we may have gained some share.
+Certainly, hopefully the momentum in terms of the business we've been building and the way we are serving our clients will service in that capacity, not just this quarter but through time. But, obviously, there can be a bit of volatility in the market share space. So we prefer to look at it more through time and we feel pretty good about the performance.
+
+Answer_2:
+So I would say we don't specifically target a competitive set. But I will tell you that our balance sheet, we talked about it many times on this call before that we do have the capacity to put our balance sheet and our resources to work for our clients, for our best clients.
+And we think about using those resources in the context of overall relationships. So if any period is more leverage constrained and has less access we may have competitive advantage. And certainly we will continue to make those resources available to our clients.
+
+Answer_3:
+So I don't know, Glenn, if you recall that we had a bit of discussion about this last quarter and guided to the fact that we would expect to see our loss rates go up slowly, partly because, obviously, at 250-ish basis points I think we could call that pretty low historically. But also because over the course of the last couple of years we have been changing the mix of our originations a bit to the prime, near prime space, still completely within our credit risk appetite and at risk-adjusted margins that are better than the portfolio average.
+So we are getting paid for that. So we are doing it within our risk appetite, doing it judiciously. But as a result, as those vintages become a higher percentage of our overall population they will have a gentle upward pressure on the charge-off rate.
+So what we are seeing in terms of the delinquency uptick and the charge-offs, gradual increases completely in line with how we underwrote those loans and our expectations. And so as you look forward for us over the course of the next several quarters and we would expect those phenomena to generally continue, again, slowly. We are growing our portfolio, we are going to see the seasoning of those vintages as the mix increases and as they become more seasoned cause us to build a reserve but for the right reasons.
+
+Answer_4:
+No, nothing significant, Glenn. No significant changes to our sensitivity.
+
+Answer_5:
+So I would say that all of the things that you mentioned, whether it's closed loop network, whether it's our new proprietary products, whether it's our investments in the technology platform and the business in merchant services are all at good returns that ultimately will drive the business to be profitable in the future as it has been in the past. So we haven't given specific guidance for ROE targets for this business but nothing has changed over the medium term for what we think that the performance of the business would be.
+
+Answer_6:
+Yes, it's a very competitive business and it's very profitable. So all other things being equal, we would like to continue to gain share.
+
+Answer_7:
+So we haven't given specific cost guidance going out beyond this year at this point. But our objective will remain consistent with those that we stated previously which is we continue to try and become more efficient across our businesses.
+As you know, we are at the tail end but not finished on a couple of large expense programs in our largest businesses so that we create capacity to be able to invest in the businesses broadly, whether that's in products, in marketing, in investment, in innovation, all of which we're doing as much as we can as long as we do it well. So it's going to come down to if we think we have investment opportunities that we can execute well that have an appropriate return we would like to keep doing that and in order to have the right to do it we would like to become more and more efficient in our core business operation.
+So we haven't actually given guidance. I think I would characterize it as expenses under control creating capacity to invest. But we will decision investments based upon their merits and, obviously, explain them to you in the future at Investor Day, if not another venue.
+
+Answer_8:
+So, first of all, I would say that based upon the speech and, obviously, you know that there are still some unanswered questions with respect to specific parts of the proposal which I will come back to, but based upon the speech moving to a baseline minimum standard is more consistent with how we think about our capital management policy. And using the capital stack add-up using, our G-SIB score and our stress drawdown actually you would come out with a capital constraint under CCAR that's pretty much on top of our regulatory capital minimum.
+So in that sense because of the offset, because of the lack of balance sheet growth, lack of RWA growth and the curtailment of capital distributions, we've actually ended up in a place where we look to be approximately equally bound based on last year's test by both of those two measures, which is a space we've played in for a while. We've been, as we talked about before, we've been bound by many constraints, somewhat equally over a period of time and striving to operate within that constraint and maximize shareholder value.
+I think the things we don't know are, obviously, how funding or liquidity shock will be incorporated. And in any case this is not for the 2017 CCAR cycle, so it's a whole cycle away from now.
+So we will be operating in 2017 under the same basic test construct as we have previously. And so I don't think it's a clear and present danger necessarily that we will be able to look at payout ratios that are above the top end of our range. Meanwhile, we are at the top end of our range now.
+
+Answer_9:
+Yes, so I would just generally speaking with respect to our rate sensitivity, as I think you know we are most sensitive to the front end of the curve but to IOER and prime. So we do have LIBOR-based assets but also liabilities.
+A good example would be commercial loans on the asset side or long-term debt on the liability side. But our notional mismatch is not particularly big. And so as a consequence, the impact of LIBOR curve moves has been not very significant on our P&L, we wouldn't expect it to be.
+I will say that the LIBOR moves were one of the features that our rates business had a perspective around. And they got good client flow in and around that trade.
+And so it was one of the catalysts, one of many, but one of the catalysts that we point to in terms of the ability for rates to monetize flow as we had a lot of client flow around that conviction. But I wouldn't be able to put a number on it for you.
+
+Answer_10:
+I think we, obviously, did get some good inflows, liquidity flows in terms of money market reform into our government fund. But we also have been very focused in our other wholesale businesses on continuing to attract operating deposits.
+And so as I look at our overall strong deposit growth I wouldn't say it was equally but it was pretty much equally wholesale operating and retail deposit growth. So we feel good about both of those.
+
+Answer_11:
+I might just give for context remind you all, or maybe you recall, that for a number of years now, for a fairly long time we've been standing up at Investor Day and other venues saying that customer experience is the central tenet for how we think about engaging with all of our clients but certainly our retail clients in the branches. And we have been very, very focused on investing in customer experience broadly defined and have made great progress, I think, in doing that.
+And also we had talked about the fact that what we are looking for very, very clearly is deep customer relationships, engaged customers. We want to be primary bank. We want to gather deeper share of wallet.
+So balance is not necessarily products. And so, again, remember saying that cross-sell is an outcome, it's not an objective. And that certainly is a philosophy with which we have designed our compensation and performance structures for the branches.
+We review them regularly, at least annually to make sure that they continue to be aligned with our objectives and, again, objectives about the engaged relationship with customers, good customer experience in the right products, all the right reasons the right way. So as we think about those objectives and how we've designed our plan and as we look inwardly not just, obviously, because of the news now but also regularly in our BAU capacity we feel like our plans are designed to incent those behaviors.
+
+Answer_12:
+So I would say, first of all, I would say we, I will tell you, we are on track with respect to the commitments Daniel made to you to deliver over time the $2.8 billion of expense saves. While we are not finished yet we are substantially through that program. So it's moved from being a plan through execution to being in the later stages of execution.
+So we feel very good about that, which means that all other things equal that $19 billion is still a reasonable level of expense target. However, obviously we pay for performance. And so clearly if we have significant out-performance next year relative to our expectations at the time of setting those plans, there would be some variable cost associated with it.
+But for every dollar of out-performance the variable cost may not always be the same. So, obviously, it also depends upon the mix and payout ratios and all those sorts of things. But a large, large portion of it would be, it would be, obviously, as you know incredibly accretive because we would be leveraging all of our scale, so the only variable cost would really be comp, largely.
+
+Answer_13:
+So first of all based upon last year's results for us we are at the floor for the stress capital buffer. Not to suggest, by the way, that we wouldn't continue to want to properly understand and better understand how we can through time make sure that we are performing the best we can under stress within our risk appetite. But we are at that floor right now.
+So within those constraints what we are trying to do is be within our risk appetite, manage risk properly but also add shareholder value. We have to carry that capital anyway, so we would want to use it well.
+
+Answer_14:
+So for your purposes I'm going to talk about NII. We don't really manage to NIM. But you can, obviously, back into it.
+So if we ended up in a situation right now where rates were flat throughout all of 2017 which for what it's worth I don't think is pretty much anyone's central expectation right now, but if we were rate flat you've seen us grow our core loans and our loan balances pretty strongly, pretty consistently across businesses. And while we may not be able to replicate our 15% core loan growth forever, certainly we can continue to grow our loans.
+So on that plus mix shift away from securities over time we should be able to deliver $1.5 billion of incremental NII next year rate flat. You know that if rates are -- if we are fortunate enough for the right reasons that we see a hike this year, at the end of this year and get the full benefit of that next year, it will be higher than that. And you've seen our earnings and risk disclosures, they've been pretty close to a $3 billion number on a 100 basis point move for a while, most of which is front end.
+
+Answer_15:
+So look, we are aware, obviously, of the riskier types of CRE lending, the types of lending that attract scrutiny for reasonable reasons considering how they've performed in past cycles. We are also mindful of where we are in the cycle and take that into consideration in our underwriting.
+So we have and continue to avoid what I would characterize as the riskier segments and those segments that performed poorly in previous cycles. And we really stick to our knitting, if that's an American expression, in terms of continuing to do what we are good at within our risk appetite.
+And so if you think about our commercial real estate growth, Commercial Term Lending is about three-quarters of our portfolio. And you know that we are very focused on smaller loan size, term B -- sorry, class B, class C properties with low vacancy rates. So rent stabilized, supply constrained markets, underwrite to low LTVs, good debt service coverage.
+We look at forward rates and current rents. And so we really have an expertise in a specific niche and we compete on speed and certainty of execution, not on credit and structure.
+So we feel pretty good about our exposures and even in our more traditional real estate banking space we have avoided the riskier segments with limited construction lending exposure, homebuilders minimal exposure. We are pretty disciplined about it.
+
+Answer_16:
+So we are a primarily prime lender in Auto. We are the number one prime lender.
+We actually have the lowest share in subprime among the national banks. So it is less than 5% of our origination. So I wouldn't speak specifically to underwriting in the lower FICO sectors, not where we play at this point.
+
+Answer_17:
+So not that I would comment on except for we have recently decided to pull back on 84-month plus term loans on all FICO bands, just as where we are in the cycle as we see the risks of that type of lending. So we continue to calibrate our underwriting. But I wouldn't comment on seeing anything specifically.
+
+Answer_18:
+Auto?
+
+We've built $25 million of reserves this quarter for Auto and we expect to continue. We think the Auto opportunity is still strong and we have a great franchise.
+We have great manufacturing partnerships that are growing strongly, too. So as we grow that portfolio I would expect us to continue to grow reserves modestly in 2017. However, we are expecting charge-offs to stay under control.
+
+Answer_19:
+Yes, so you are right. And, obviously, even specifically for JPMorgan if you look at our stress results that [handicapped] by the Fed over the course of the last three years has been reasonable volatility. And clearly it's not the case that we will expect it to be completely stable.
+I would not expect to see the same levels of volatility going forward as we've seen historically as the test has, as you know, over time occasionally included new not insignificant features. And while that may continue to be the case I would think that there would be a bit more stability. But we haven't actually gone through and finalized our thinking about what the buffers would look like.
+
+Answer_20:
+Yes, before I talk about the prioritization of capital distributions I would just start by saying our capital management policies prior to this year's CCAR and this year's resolution had us making those actions regardless of whether they were allowed to be reflected in a test. And, obviously, as part of the resolution planning we have revised our policies to include more granular triggers.
+So our policies do with some specificity run pretty granularly through time through a stress speak to the sorts of actions that we would be leaning into and taking, even if they don't get reflected in the test.
+With respect to the prioritization, look, the soft cap on dividends has been lifted. Dividends are ultimately still a part of the baseline minimum standard, so there will be possibly some natural constraint there. It hasn't changed, at this point anyway, the Board's determination or management's determination about the order of priority.
+We would like to continue to have the capacity to grow our dividend. And I think even though there may be some natural constraints I think it would be above 30.
+
+Answer_21:
+So we are very focused across the spectrum of our businesses on developing better digital capabilities to allow seamless engagement with customers and acquisition through digital channels. There are complexities associated with documentation and standards for know your customer and anti-money laundering that we're continuing to work through. But ultimately it should be achievable, and we are working on it.
+So one of the things that we have previously mentioned is that the majority of our Consumer accounts are opened in branches. One of the reasons among others why branches are [still] important to us as well as advice centers. And we will continue to work on trying to see how far and how fast we can move people to be able to have a better digital experience opening accounts with us.
+
+Answer_22:
+Well, I will just start by pointing out that all of the businesses, all of our businesses, not just the ones that I talked about at the high level, not just macro spreads equities, but even if you go a level below that quite granular, all of our businesses did really quite well this quarter. So not to overuse the phrase firing on all cylinders but it really was pretty consistent. And normally you might see pockets of more strength and less strength.
+So I think it would be hard to imagine replicating this kind of strength through time consistently. But the fourth quarter is seasonally low and we have no reason to expect that it would not be.
+
+Answer_23:
+So there isn't a whole lot of really clear new news. So as we think about all of the -- FRTB we've talked about before, modest and manageable, nothing about that has changed for us. But, obviously, there's the advanced and standardized credit operational proposals out there.
+The most important thing that we've yet to really, and there are pluses and minuses in it and different for us than others maybe. But the one thing that we haven't really heard about yet, Betsy, is how it will all be calibrated and calibration will be very important.
+So we are expecting to hear over the course of the next short while, and maybe that will be delayed some just given some of the discussion. And we will update you when we hear a bit more about how it's all going to come together. But right now it's still a little unclear.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/16_questions.txt

@@ -0,0 +1,80 @@
+Question_1:
+Hi, can you talk about the competitive environment in capital markets? You had a strong growth. Is that due to better markets, better share or both?
+
+Question_2:
+Specifically versus the European banks, are you looking to use your balance sheet more to gain share?
+
+Question_3:
+Hi, thanks very much. Curious on Card delinquencies ticking up. I know you've been guiding towards that but when you see it it's the only part of credit that has anything but great trends.
+You mentioned on your comments newer vintages will have a higher loss rate than the portfolio average. Do you mind just drilling down a little bit more color on what exactly is driving that? Is that going down credit a little bit or is that just expected season as you'd thought?
+
+Question_4:
+Fair enough. Fair enough. Just one follow-up.
+If I could get just a high-level comment on has anything materially changed in terms of rate or curve sensitivity as you remix the portfolio? And as you are getting all this great loan growth I'm just curious on the current positioning.
+
+Question_5:
+Hey, good morning. I had a question on the Card strategy, and I know we all know that you've created the closed loop and you are using that in part it seems to drive really efficient pricing in the marketplace on the credit card products.
+What I'm obviously seeing is an increase in share on card issuance. You are taking some nice share in the merchant space, as well. I just want to understand what the goal is and how far you are willing to push this, market share versus ROA, ROE.
+
+Question_6:
+But is it fair to suggest that part of the market share improvement here is coming from some give-up of profitability and the underlying question is really how much market share do you want in this business? You are already at 18% to 22% market share of the credit card space depending on which numbers you want to use.
+
+Question_7:
+Thanks, good morning. Marianne, you mentioned that part of the increase in Consumer cost this quarter was planned investments and that you are continuing to self-fund.
+I'm just wondering as you think forward and we get past this good gear that you've had, will that be an underlying expectation for you guys, again with the understanding that the revenue environment will always take things up or down? But do you have an aspiration that you can continue to keep costs flat?
+
+Question_8:
+Understood. And if I can come back to another investment day point from earlier this year, you had mentioned that you felt comfortable with an 11% CET1. You plan to get to your CET1 to 12%. You are at 12.1% now already.
+Just within the construct of Governor Tarullo's recent commentary, does 11% still feel like the right time? Did you sense anything from the commentary that would change your philosophy around where you'd like to live in that potential comment you made at February to potentially go above 100 if, in fact, this was the right mechanism?
+
+Question_9:
+Good morning. Maybe just a quick follow-up on FICC in your commentary and maybe you can have a broader commentary around how the widening LIBOR or rising LIBOR yields helped your businesses across the board in FICC or anywhere else? Just help us understand how that's playing through the income statement.
+
+Question_10:
+Fair enough and maybe just a follow-up on deposits. You guys have had very good trends in retail but on the institutional side there was quite a bit of flow looked like, as well. Any particular drivers there, was it money market performed helping the flows in institutional or something else?
+
+Question_11:
+Good morning. In light of some of the selling issues over at Wells Fargo, I was just wondering if you've thought about reevaluating how you approach the consumer, how you compensate staff. And this was, obviously, not a JPMorgan-specific question, but just for the overall industry I think it's something folks are wondering about.
+There's clearly some stuff that's black-and-white that you shouldn't do. But I think we also worry that there might be some gray areas that are somewhat less known. So just how are you thinking about the way you conduct business and compensate staff in light of what's going on?
+
+Question_12:
+Hi, good morning. Just a question you, back to CIB, you had a slide during Investor Day that showed a walk to $19 billion of expenses by 2017.
+If some of the factors that you mentioned that drove revenues into CIB higher repeat for 2017 is that $19 billion number still achievable? Or I guess a better way to ask it, will any incremental revenue uplift from here fall to the bottom line?
+
+Question_13:
+Got it. And just as a follow-up to that, a follow-up to Ken's question actually, he mentioned the stress capital buffer. Outside of the static balance sheet and capital distribution offset, is there an element to this in terms of just getting better at the test that you could do to reduce that stress capital buffer without actually taking risk down significantly?
+
+Question_14:
+Hi, this is Tim Hayes for Paul Miller. Can you give any color on your outlook for margin throughout 2017?
+To me, Fed commentary suggests that rates could remain low and potentially hover around these levels over the next 12 months. So how can we think about your NIM in that type of scenario? And then what would a December rate hike do for your outlook?
+
+Question_15:
+Okay, thank you. And then switching gears, your CRE and C&I lending was pretty strong this quarter and regulators have, obviously, grown a little bit more cautious on those segments. So I was just if you could give any color for your outlook on lending to those segments going forward.
+
+Question_16:
+Thanks very much. Marianne, at a conference just before the end of the quarter another bank talked about improving underwriting conditions in the auto lending space, particularly in the mid to lower FICO range. Are you seeing anything similar?
+
+Question_17:
+Sure, sure. I think the reference was to below 700 which includes the bottom end of the prime segment, which has been an area of intense competitive focus. I'm just wondering if you've seen anything in that segment?
+
+Question_18:
+Got it. And is that influencing your reserve expectations for Consumer at all?
+
+Question_19:
+Hi, good morning. So, Marianne, I appreciated your remarks on the latest guidance from Tarullo relating to G-SIB capital.
+One of the questions we've been getting from a lot of folks is because this SEB is calculated based on stress losses year-to-year and historically CCAR results have been pretty volatile, I'm wondering how you are thinking about the appropriate management cushion or buffer above the minimum? Historically it had been about 50 bps just for AOCI volatility and maybe operational risk losses, but do you now have to also handicap CCAR volatility when thinking about that cushion?
+
+Question_20:
+Understood. One more question, just thinking about capital management priorities, given that the new proposal as you noted allows for curtailment of the buyback or termination of the buyback and then curtailment of the dividend halfway through the test, do these changes as well as the softening of the 30% dividend cap alter your thinking about how you prioritize buybacks versus dividends?
+
+Question_21:
+Thank you. Good morning, Marianne.
+I had a question, you pointed out that about three quarters of your credit card acquisitions organic growth were coming through mobile channels or digital channels I should say. Can that be moved over to other Consumer products or is it just unique to credit cards that you are going to be able to generate that much growth through the digital channel?
+
+Question_22:
+Okay, thank you. And then as a follow-up, obviously third-quarter results in Investment Banking were very strong.
+Fourth quarter seasonally is weaker than third quarter as you pointed out. Are there any other reasons why you think the fourth-quarter numbers may be weaker than the third quarter, other than the traditional seasonality?
+
+Question_23:
+I just wanted to follow up on FRTB and Basel IV and how you are thinking about the implications for JPM at this stage?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/17_answers.txt

@@ -0,0 +1,219 @@
+Answer_1:
+
+          Yes. So hey, Ken, you guys have a busy day today. So I would say that, the first quarter is always a quarter in which we have a bunch of different factors. And most notably, you also have day count issues in the first quarter. So I can go through that, but I would say most of the benefit which we expect to be up modestly will be driven by the rate increase, with growth being offset by day count. That's sort of fundamentally how to think about it. 
+It's probably more instructive to think about the full year. And so, if you recall back to the third quarter, just to kind of reorient everyone, at that point when we didn't have the December hike, we said rates flat. So on growth alone, we would expect NII for the full year to be up about $1.5 billion. Obviously, we have had the 25 basis point hike in December. And based upon that alone, so now the new rate flat, that $1.5 billion would be about $3 billion, a little over $3 billon. So for the full year, we're expecting on the December hike alone, that it would be about half volume, and about half rate. 
+
+Answer_2:
+
+          Yes. So I think the way to think about it, and again, I think we talked a little bit about it last quarter, and you maybe see it in the fourth quarter. So we've been growing our loans in the -- we said it was going to be a 10% to15%. We revised that, to be at the top end of that range. So we've been growing at around 15% core loan growth, the fourth quarter was 12%. So I wouldn't call it a deceleration per se, but it is a little bit lower. So I think going into 2017, our expectation is that we would continue to grow loans strongly, but possibly at the lower end of that range, rather than the higher. And of course, to a degree, it will depend upon our mortgage portfolio, but we intend to continue to add to that too. So sitting here today, I'd say more high single 10% plus or minus, and we'll give you more updates at Investor Day. 
+
+Answer_3:
+
+          Good morning. 
+
+Answer_4:
+
+          So just taking the two things separately, Betsy, I would say the NII, up 5% is dropping to the bottom line. But as we, you saw all of our underlying drivers, across all of the businesses and volumes, transactions, everything is growing very strongly. And although we still have some work to do to finish the large expense programs, we're near the end of that. So just generally speaking, we're continuing to invest in the businesses, and we'll see the improvement in our expenses flatten out, and start to grow with volumes. And that would also support growth in non-interest revenue, outside obviously of the card phenomenon we talked to you about. 
+
+Answer_5:
+
+          Sorry, carry on. 
+
+
+          Right. So when we think about our investment securities portfolio, we think about it as responding to structural changes in our balance sheet, which predominantly is driven by loans and deposits. And it's always important I think, to remember, because we focus a lot on structural interest rate risk, but it also is liquidity and liquidity risk. In this quarter, there was a combination of things. You saw that we grew deposits more strongly than loans this quarter, so we had some excess cash, as well as the fact that rates rose. 
+So two things happened in our investment securities portfolio, mortgages extended, and we did add to duration. But we have a very disciplined risk management framework that's based -- that's been consistent through time, based on our expectations of normal rates in the future, and we just executed on that strategy. 
+
+Answer_6:
+
+          Yes, we added to duration, in accordance with our framework. 
+
+Answer_7:
+
+          Great. So obviously, the Sapphire Reserve card is still quite young, or still quite new. But relative to our modeled expectations even at the intro promo premium, things are coming in, in line or better than our expectations. Now obviously, we need to continue to [back test] that [three] times. But we're very encouraged by, not only the excitement in our customer base, but also the way that the trends are performing in terms of spend and engagement. But when we introduce a new product, we intentionally introduce a very exciting premium promo, and it's intended to generate excitement. And I think you would agree it did. So we're delighted with the response that we've had. 
+And we've actually kept it up for longer than we initially expected, but it's normal for us to come down from those intro rates, as the product becomes more mature, and that's what we are doing. But to be very clear about our expectations of the performance of the card, even at 100,000 points, we still expected the card to be a strong return and very accretive. So obviously, at a lower premium, it would be more so. But one last thing I would say, is everybody gets very interested the up front points. It's our opinion that the real value to consumers of that card happens over time with their spend behavior, and to take the points down from 100,000 to 50,000 has less than a 10% reduction in the overall value through the lifetime of an engaged customer on average. 
+
+Answer_8:
+
+          So the charge-offs came in for the year at 2.63%, which is in line with the guidance that we gave, I think in November that Kevin Watters gave. He's given guidance for 2017, as we continue to see the newer vintages seasoned, are 2.75% plus or minus. And that's still our expectation, so the newer vintages are performing in line with our expectations. 
+
+Answer_9:
+
+          Yes. So I'll give you a couple of things, and hopefully that will help. So I think a year or so ago, we talked about the fact that -- I'm going to now talk about cost of controls more broadly than just regulatory, that the cost of controls had increased for the Company by about $3 billion over several years. But that we expected they would peak and start bending down, and that is indeed what we have been seeing. Now I'm not saying that bend down is a sharp bend, as we continue to be held to very sort of hard compliance burdens. But nevertheless, we are seeing some efficiencies as we mature our processes and automate them. 
+Offsetting against that, and one of the reasons why it may be less obvious, is that we've continued to increase our spend in cyber security, as we want to protect the bank and the customer's data. So naturally, that is happening. We are not going to continue at this point, carving out the costs of regulatory or control because that is our operating model, it's our new normal. And until we understand whether or not the forward-looking landscape is changed, we won't be able to give you any kind of idea about how and when that will impact our expenses. But we will continue to be more and more efficient. 
+And certainly, if we are able to take a step back, and look at the rules and regulations, and the way that they are being implemented, and make rational changes to it, if that is something that is -- allows us to become more efficient, then we will certainly do that, and keep you informed. 
+
+Answer_10:
+
+          So I think in the conference in November, Kevin Watters said that as we look at the new products, and we look at them growing, coming out in 2016 and into 2017, we would expect the card revenue rate for the year next year to be about 10.5%, after which as the cards and the accounts season and drive revenue growth, we should see that continue to trend back up to a level in the past. 
+
+Answer_11:
+
+          Yes. 
+
+Answer_12:
+
+          Yes. 
+
+Answer_13:
+
+          I mean, I think that it's actual detail of retail spend, auto sales, house prices, household formation, confidence numbers. So I'm not basing it on the market, I'm just basing it --  if you look at a broad range of things, it looks like growth may have gotten a little bit better in the fourth quarter. Plus if you take a walk around the world, Japan is doing a little better, Europe is doing better. In fact, one of the IMF [or someone else] came out yesterday, and [said] the global growth is going to tick up next year. So it's just those factors. 
+
+Answer_14:
+
+          We're not going to change our plans very much, because we don't really react that much to the weather, because we grow to add bankers and stuff. You know you have to do it through a cycle. I do think of it as some regulatory relief. You will see banks be more aggressive and growing, opening branches in new cities, adding to loan portfolios, seeking out clients they don't have. So I'm hoping to see a little bit of that too, but that will wait for regulatory relief. 
+
+Answer_15:
+
+          Well, I'm saying we don't react to the small change in the economy to how we grow and expand our business. But I just that it looks to us, if you look across the broad spectrum, capital expenditures, business confidence, consumer confidence, household building, household formation, wage income, wages going up, unemployment going down, auto sales going up, retail sales going up, it looks like it's getting stronger, not weaker. That's what it looks like to me. That's just my own personal belief. 
+
+
+          And maybe just if we give you a bit of insight into the philosophy about how we do our investment and expense budgeting. When we talk to our businesses, regardless to Jamie's point about necessarily whether the external factors are moving, the question is, what do we want to do in terms of products and services and technology and bankers and offices that we can execute on well and responsibly? And that is typically what defines us, not our appetite to invest the dollars. 
+So I think we've told you pretty consistently that, and you've seen it. We added 130 net new bankers, we opened eight offices in the commercial bank. We're investing in technology very, very broadly, payments, digital across the Company. So I would say that, we don't feel like we've been held back in terms of our appetite to invest, because of concern around the economy. And in the same way, a more confident outlook in the economy won't step change that. But we will continue to look for great investments everywhere we can and make them. 
+
+Answer_16:
+
+          So I would say, just if we separate the two, and just talk for one second about banking. The fundamentals for a solid M&A year are there, and obviously there will be puts and takes depending on what happens in the policy and reforms space. But we're optimistic about a solid M&A market, but with the continuing trend of fewer mega deals, but nevertheless good flow. At ECM, looks set to be quite active, and the IPO market continuing to recover, and debt capital markets have a solid pipeline in terms of the refinance arena, but having said that, interest rates may have an impact. So I think pretty solid pipeline coming into the year, but lots of factors will ultimately affect the full year. 
+With respect to trading, Jamie said, that we don't look at the first couple of weeks, but so far, so good. And what I would tell you is, we said this before, we're a client flow oriented business. And there will be a lot of micro and event-driven activity, and as long as it's not discontinuous, we should be able to intermediate transactions with our clients. And so far, generally there's been more risk appetite in the investor space, but that can change very quickly as we saw in previous quarters. So we will be there to support our clients. And if they are active, everything should be good, but it can change quickly. 
+
+Answer_17:
+
+          So just reminding you about our sort of philosophy on comp to revenue, we pay -- or our comp to revenue is just a calculation, obviously we pay for shareholder value-added. So you need to take into consideration the fact that we've had overtime increased capital levels and liquidity levels, and that's reflected in a declining overall comp to revenue ratio. I would say that there are three factors to it being lower. 
+The first is the strength in performance, and the pay outs aren't linear. And as you have stronger performance, you would expect to see a lower ultimate outcome. But importantly, we were -- some tail winds in the numbers this year included a stronger dollar. So as we pay -- remember comp to revenue isn't just on the front office compensation, it all supports our salaries, benefits and compensation. And we have a large number of people that we pay not in dollars. So that was a bit of a tail wind. Some of that will carry on, but maybe not at the same level. And we also just did our normal regular hygiene and productivity, in terms of the -- how we think about the workforce and pay. At the end of the day, we pay for performance, we pay, we think very competitively, to retain the best team on the street, and make sure that our shareholders are getting a fair share of any outperformance. 
+
+Answer_18:
+
+          Simplifying the securitization rules, because we've done some securitizations. We think they're excellent, but that would open up the market a little bit, clarifying the Safe Harbors on certain types of underwriting. For example, it's very hard and risky for a bank to make a loan to first time buyers, former bankruptcies, even though it could be very good people with brand new jobs, self-employed, it's hard to necessarily do all of the income verification, stuff like that. Simplifying servicing, the services standards now have, I think nationwide, we have 3,000 different standards. It's very costly. 
+It's very expensive. It's kind of risky. If you make a mistake, the punishment is pretty high. And all those things, that should be done for the good of the United States of America, not for the good of JPMorgan Chase. And so, I do think it's too tight and there's one thing, that if you get around too quickly, it will help the housing market a little bit, it will help the housing formation, it will reduce the cost of mortgages, and make it available to more people. 
+
+Answer_19:
+
+          Hi, Glenn. 
+
+Answer_20:
+
+          So starting off with sort of interest rates. And obviously, we've talked for an extended period of time about the fact we've positioned the Company to benefit when rates rise, we built the branches, we acquired the accounts, we've built the technology and the services. So we've been growing our deposits very strongly, and we're going to enjoy the benefits of that. With respect to how much will go to the bottom line, we have been we think appropriately conservative, when we've given you guidance about ultimately how much incremental NII we would expect in a more normal rate environment. 
+I mean, if you go back to Investor Days of past, you would see that we said when normalized, we would expect $10 billion-plus, and embedded in that are assumptions obviously around rate paid. We think that rate paid will be higher this time in this cycle, than in previous cycles for a bunch of reasons including as you said, competition for high quality liquidity balances. But also that we are coming off of zero rates and the improvement in technology. So we've been, we think appropriately conservative, but we'll find out in the fullness of time. 
+So far two rate hikes, absolute rates at 50 basis points, it's too early. And so far, you would expect there to be (inaudible) in there, and it's not linear, and everything is behaving quite rationally right now. So we, in fact, if anything a little better than we had modeled. So we'll keep watching it, and we think we've been thoughtful. We don't know the right answer, and we'll keep you updated as we see how things progress. 
+
+
+          And just on the tax side, so other people understand, generally, yes, if you reduce the tax rates all things being equal to 20% of something, eventually that increased return will be competed away. That is a good thing. Okay, so it's not a good thing for JPMorgan Chase per se, but it's a good thing for the world, it's a good thing for growth. And a lot of studies actually show the beneficiary of that is wages. And so, it's important for people to understand that good tax policy is good for growth and the country in general. It's not just good for companies, it will eventually be competed away. 
+
+Answer_21:
+
+          Listen, you aren't going to really know for probably nine months to a year exactly what it is, so I wouldn't worry too much about it. And I also, just remember the most efficient companies do benefit from things like this, more than others. 
+
+Answer_22:
+
+          I think if you look at -- I mean, again, there's a lot of wood to be chopped and sausage to be made before tax reform gets done. And some of these things are brand new, they've never been talked about or done before, so you can read a lot of studies in the next six months. Obviously, interest deductibility, for banks, from a net interest income, so it doesn't directly change how you look at it. For everybody else, it affects complete industries differently. How you leverage differently, and utilities will be in a different position, and unleveraged companies. And plus, I think people will be able to convert what would have been interest expense to some other kind of expense. So let the work get done, before we spend too much time guessing about it. 
+
+
+          I also think that while interest deductibility is one point, the repatriation of cash is another point. And there are puts and takes, and you have to think, you have to see the whole package, before you can see what the net impact is. But ultimately if these things get done rationally and grow the economy, then it's good for our franchise just broadly. So don't focus on DCM, focus on the whole thing. And I think when you get the whole package, if it's done well which we hope will happen, then it will be good for the economy, good for our clients, and good for our whole franchise. 
+
+Answer_23:
+
+          Yes, okay. So yes, Matt, it does include the benefit of higher long end rates. And if you get the Q, and get our disclosure on net income risk, and do some math, you'll get pretty close to numbers that looks similar to that $1.5 billion or more. And then, with respect to rate sensitivity from here, clearly it's not linear. So you can see, if we just look at the third quarter, the first 100 basis points -- this is an illustration of $2.8 billion, 200 basis points is $4.5 billion. So as we clip away, 25 basis points a time, our $2.8 billion will start to come down. And so, that's broadly the outlook. 
+
+
+          And the next 10-Q will show the next -- (multiple speakers). 
+
+
+          And the next 10-Q will show the next. 
+
+
+          But obviously, it's less and less as rates go up. It's not linear. 
+
+
+          Unless we actively change the ratio, which we may also do at one point. 
+
+Answer_24:
+
+          Yes. So I mean, what you saw happen in 2016 was not only obviously a rotation from securities and deploying deposits into loans, but also we took a very large amount of non-operating deposits out of the balance sheet in 2016. So that is having an impact. But we would expect to continue to grow our loans, to grow our deposits strongly to manage the overall balance sheet through our investment securities portfolio. And from here, if everything continues to be as the market implies, we should see margin expansion. 
+
+Answer_25:
+
+          Good morning. 
+
+Answer_26:
+
+          Yes. So answer is across the metals and mining and energy, we have a little over $1.5 billion of reserves. I mean, there is a normal level of reserves that we will have, that would be a large chunk of that. And as you saw in 2016, we did take charge-offs of a little less than $300 million. So we will continue to likely see on a name specific basis, as people work through their business models, that there will be more charge-offs. But ultimately, if energy stays stable or improves, and of course, we have to see that be somewhat sustained, and find its way flowing through the financial statements of our clients. Then as we upgrade them, God willing, then we will see more reserve releases. But it's going to take some time.  
+We'll start to see some of that -- and think about the large reserves we took. We took them at the tail end of 2015 and into 2016, we'll start to see new financial data from our clients. We'll start to do the borrowing base redeterminations, and look at the impact of prices on reserves in the spring. And so, we'll start getting some data this year, and so we may see some more releases, but it's going to come through over time. 
+
+Answer_27:
+
+          Yes, I mean, I would say that when I talk about the overall core loan growth going down, still being strong, it does reflect the fact that we've been seeing very strong outperformance in our growth over the course of the last couple of years, particularly in commercial term lending. And while we continue to believe there's great opportunities there, they will be lower. So we've been printing in the teens pretty consistently, and I would say, it will be less red hot, and maybe more in the high single-digits, but we're going to keep you updated. 
+
+
+          There's still plenty of opportunity. 
+
+Answer_28:
+
+          Well, I don't know that I would ever try to decide what moment in time, is the pinnacle. But I would say, you saw us invest heavily in the business in 2015 and 2016 across a number of different fronts. You saw us proactively renegotiating the card program deals for the vast majority of our portfolio, and investing very heavily in exciting new products. And in both cases, while it has had an impact on our revenues, in one case in the short-term, and another case more structurally, in both cases these are still very attractive returns. And so, card is still a very attractive ROE business, very important to our customers. We are after deep engaged relationships through time with them. And so, we are going to continue to invest in growth. 
+
+Answer_29:
+
+          At this point, yes. 
+
+Answer_30:
+
+          We did try to actually analyze it, because we got asked a lot about what was secular. So you could break apart your exotic derivatives, certain types of CDOs. Of course, across the whole spectrum, there are things that disappeared and won't be done no more, for better or worse. In some cases, by the way, like a CDOs it didn't go away, because the person is still a credit buyer. So they just went to another product, but that was our best estimate. I don't want to over do it or anything like that. 
+I also said that the actual market making requirements are going to be going up over time, I'm talking about over 20 years, I'm not talking about the next quarter or next month. And remember, we don't run the business next quarter, next month, because assets under management are going up, and needs of corporations are going up. The fixed income mortgage is going to go up, the needs for FX is going up, the needs for hedging is going up. So over time, we know there's going to be a cyclical increase. And we just try to estimate how much of the [downturn] is cyclical, and so, there will be a flip side of that. And I think you might have gotten to the end of the secular, end of cyclical decline. 
+
+Answer_31:
+
+          So I will obviously, give you a lot more detail about all of this at Investor Day, but really quick, because I knew the $19 billion would get some excitement. If you go back, and talk to yourself to look at the specifics on the slide, you should see that the $19 billion that he guided to did have some assumptions about some legal costs in there. The CIB didn't have legal costs in the year. And as a result, it's still a little higher on an apples-to-apples basis than that would imply. Additionally, I talked about the tail winds in terms of a stronger dollar. 
+Now for full disclosure we have intentionally reinvested some of that, but it was a tail wind that meant that apples-to-apples, it would still be a little higher. I'd tell you that compared to the targets that they set, we still have a few hundred million dollars to deliver on, and Daniel will go through that at Investor Day. 
+
+Answer_32:
+
+          Okay, so just to talk about rate trading for a second. You're right, that it was a part of the strength story in the fourth quarter this year. It was also a strong fourth quarter last year, which is pretty much the only reason why we didn't call it out as a bigger driver of the year-over-year growth, but it was a strong performance in the quarter. And we would expect that to continue. It's much more interesting to -- for our clients to trade around a moving yield curve and rates above zero. So as we see rates normalize, we would fully expect that to be ultimately a beneficiary to the franchise in terms of clients trading, and positioning, and hedging around that over time. And so, [wonderful] if that would be the case. 
+In terms of the excitement and the enthusiasm of our businesses, lending versus we're enthusiastic about all of our businesses, and would want to defend share and grow them all. I mean, the reality of the CIB revenue performance in markets, and in general, it was very strong in 2016. So we will try our hardest to replicate that. But it will be a challenging comparison, but we're proud of it. So we gained share competitively over the course of the last couple years, and so I don't think you should necessarily expect that we can continue to gain share at that pace; but defend it we will. 
+
+Answer_33:
+
+          I think the better way to look at CIB lending, is it's kind of episodic, and goes in and out. Corporations, a lot of corporations don't need to borrow, and when they do, it may be inconsistent. It might be because of M&A or something like that. Our [bridge] book will always be driven by certain types of activity, so the loan book isn't something -- the CIB loan book isn't something you're going to say, that you're growing. That is more serving clients in the way they need. 
+One of the things I just want to point out which is, of course, all of our businesses, but just take trading in particular is, we're always creating efficiencies. Part of what we're investing is big data, is [trade] through processing, electronic exchanges, online services. I think 97% of FX -- I think it's 50% to 60% of US interest rate swaps, all these things have become electronic and digitized, as trade through for clients. So that's where some of the investments are going. And you're going to see more of that not less, but it also creates another round of efficiencies every time we do that. 
+
+Answer_34:
+
+          Good morning. How are you? 
+
+Answer_35:
+
+          Yes, so we talked before about -- we had in certain markets already pulled back, not necessarily because we had a crystal ball, but because we saw them getting soft before the energy decline. Dallas and Houston would be examples, parts of Brooklyn would be examples of that. I would say, watching more carefully -- you've seen us, we have that there is some supply coming through in markets, Seattle, Denver, D.C., San Francisco. We're still very active there, but just keeping an eye on those markets. But the supply pipeline, while it's real does not look like it did when we saw the real pressure on the term lending business, the real estate business back in the 1980s and 1990s. So we're keeping an eye on it. 
+
+Answer_36:
+
+          (Inaudible) I'll add, we don't want to give you all of our secrets in that business, but we do (inaudible). But we're very disciplined about where we see supply, and supply and demand and pricing, and we would have no problem, not growing at all. We don't sit at meetings here and say, can you grow at 10%, can you grow to [12%]? No, if we can't meet what we think is proper risk return, we're not going to grow at all. We'll shrink. We have no problem doing that. And so, the other thing I want to point out about CTLs, the exceptional performance of the CTLs through the last Great Recession. I mean, we were really pleased with how that happened. So we try to look at all these things through the cycle, not just what are they doing in good times. 
+
+Answer_37:
+
+          We don't disclose that. 
+
+
+          Thank you. 
+
+Answer_38:
+
+          So, there's a couple different things. First of all, we, about a little more than half of our originations are jumbo. We retain all of those. And then, when you look at the conforming space, it's really, honestly, consistently the best execution decision. And so in particularly in this quarter, it speaks a bit more to our correspondent conforming volume, it's the lowest margin product. And it does somewhat frequently toggle backwards and forwards in terms of better execution, whether we would retain or sell it. 
+But we intend to keep adding to our portfolio, we like the mortgage asset classes. Even those spreads have compressed in the fourth quarter, OAS and ROEs are holding up. And so, I would expect us to continue to grow it strongly. And from quarter to quarter, it may go up or down a few percent, but over a year, we'll continue to add to the portfolio. 
+
+Answer_39:
+
+          No. 
+
+Answer_40:
+
+          I think there was a little bit of that in the fourth quarter, particularly around actively managed product. I think you're accurate. But we haven't seen everybody else yet, but I think you will be true, when we see everybody. 
+
+Answer_41:
+
+          That's a really hard question to answer. I'd have to think about that a little bit. 
+
+Answer_42:
+
+          I think that -- I mean, everything is going to end up being reasonably named specific, so I mean, that may be true in some cases. But for some companies in industries, where deregulation and that would be more helpful. But generally as I said the trend is towards lower -- I'm sorry, less mega deals, more flow, and the fundamentals are in pretty good shape, and then there will possibly be tail winds, in terms of tax reform and other things. So I think net-net, we think the underlying flow in the M&A market, and the fundamentals are set to have a pretty positive year. 
+
+Answer_43:
+
+          We'll see. No more questions, operator? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/17_questions.txt

@@ -0,0 +1,173 @@
+Question_1:
+
+          Hi, thanks. Good morning. Marianne, I was just wondering -- I know you'll give us more at Investor Day, but just in terms of that first quarter starting point for NII, and just how it translates between growth in the balance sheet? And then, you mentioned the benefit from the roll over in rates, can you help us just try to think about -- just you parse those views out, and think about volume versus rate? 
+
+Question_2:
+
+          Understood, great. And if I could ask a follow-up? Just on the volume side, you had another great year of double-digit loan growth. And obviously, we're at this intersection between kind of the what was, and then the what will be. Any change to that expectation you could just grow the loan [bit] book, a core loan book that is, as strongly as you have in the past few years? 
+
+Question_3:
+
+          Hi, good morning. 
+
+Question_4:
+
+          I just wanted to dig in a little bit on the forward look. NII up a bit, but also expense is up a bit. And I just wanted to understand is that because you've got the opportunity to reinvest in things that you haven't been able to? And if you could just speak to what kind of time frame the reinvestment will yield returns, because the question I've gotten from people is, why aren't you dropping the NII benefit to the bottom line here? 
+
+Question_5:
+
+          And then related follow-up has to do with, how you're thinking about the excess cash you've got, and the balance sheet duration? And if there's anything in this new interest rate environment that you would be seeking to do -- (multiple speakers) to optimize -- 
+
+Question_6:
+
+          Okay. So no change to the duration? 
+
+Question_7:
+
+          Hi, good morning. Marianne, I was wondering if you could comment a little bit about some more color in card trends? You have exciting new products out there. How are the economics of the Sapphire Reserve card been coming in relative to your expectations, and what factors drove the decision to cut the original  promotion award back, and should that affect your account acquisition costs? Thanks. 
+
+Question_8:
+
+          Okay. And just as a follow-up on that, in terms of the card, credit quality, it's been very good. Would you still expect to see though some seasoning as the book matures? What kind of outlook would you have on the card charge-offs? 
+
+Question_9:
+
+          Hi, good morning. I know that you've said previously that regulatory reform or regulatory relief will unlikely have any fundamental change in terms of how you're thinking about budgeting. But I'm wondering if you could help us understand, sort of over the past few years, how much has regulatory costs grown, and has that peaked anyway? And can you give us a sense of how that could trend over the next few years, either the natural trend of it, or what the impact would be of regulatory reform? 
+
+Question_10:
+
+          Great. And just as a follow-up to John's question on card trends, when you look at the card revenue rate declining about 200 basis points or so year-over-year, is your response to this question essentially implying that we've potentially hit peak promotion in 2016, and perhaps the revenue rate will have some stability to it in 2017? 
+
+Question_11:
+
+          Hi. Is Jamie on the call? 
+
+Question_12:
+
+          So Jamie, your comment said that the US economy may be gaining momentum. 
+
+Question_13:
+
+          If you can give some of the basis for that comment, is it more risk borne by investors, or more CapEx by companies, or is this more hope? 
+
+Question_14:
+
+          Is that enough for you to say you're going to invest a little bit more, or hire more people, or expand a little bit more? And along those lines, how do you see market share gains potentially from now? 
+
+Question_15:
+
+          Why are you saying this might be a little bit more than just weather, that this might be more sustainable, when you say the economy might be turning? 
+
+Question_16:
+
+          Hey, good morning. Maybe we could talk a little bit about the investment bank? Obviously, your peers and a lot of investors have been growing in their optimism for this year, in terms of animal spirits and everything else, and just want to get a sense of how you're thinking about it? Do you share that optimism, and any commentary on how we can think about both banking and trading into the New Year, with all of the moving parts that we have around policy, et cetera? Thanks. 
+
+Question_17:
+
+          Okay, that's helpful. And maybe as a follow-up. On the expense side, the comp ratio in the investment bank, I think dropped around 240 basis points this year or last year. Do you think that's sustainable into 2017, assuming flat to up revenues, or was there anything unusual in there? 
+
+Question_18:
+
+          Yes, thank you very much. Hey, Jamie, one of the things that we're seeing, some of the new politicians, coming in talking about opening up to credit box, especially in the mortgage world that has been really shut down over the last years, mainly due to the rules coming from all of the things, Fannie, Freddie, [UB]. What type of things do you need to see or do you think they can do to open up that credit box, where banks can take more risk and be protected? 
+
+Question_19:
+
+          Hi, thanks. 
+
+Question_20:
+
+          Hello, there. So I guess the question for either one of you is, if we do get some lower taxes and/or a better rate environment, I'm curious on your confidence on how much of that can fall to the bottom line? Because there's a lot of optimism about what can happen if stocks have moved well, we're expecting that to move to the bottom line. There's the big concern that people have is, that it gets competed away by irrational behavior. So curious to get your thoughts on that, just big picture in general, if things go well how much of that are you repaying? 
+
+Question_21:
+
+          So when should I take that lower tax rate out of my model? I'm kidding (laughter). 
+
+Question_22:
+
+          The real follow-up I had was, that the concept of interest deductibility, if that is the means that they use to pay for the tax hikes, it feels tough, like a bad thing. I'm just curious on how you think it impacts your franchise, from anything from debt underwriting to anything else? 
+
+Question_23:
+
+          If I could circle back to the discussion on net interest income and the rate leverage. I think the outlook for net interest income to grow over $3 billion versus $1.5 billion before the rate increase. That's obviously a nice lift for just a 25 basis point bump on the short end. So I guess, one, does that include the benefit of longer term rates since they've moved up as well since 9/30, which I assume it does, but just to confirm that? And secondly, what's the leverage to rising rates from here, as we think about movements in both the short and long end? 
+
+Question_24:
+
+          And that is actually  -- getting to my follow-up question. I  mean, on the size of the balance sheet, you did talk about loan growth of about 10% this year. If you look full year 2016 versus 2015, the balance sheet or the earning assets only rose 1%. So maybe tie that into, as you think about duration, the fact that you're sitting on a lot of liquidity and cash, and how we should think about both overall growth in the balance sheet, and then potentially some more remixing? 
+
+Question_25:
+
+          Hi, good morning. 
+
+Question_26:
+
+          Just a quick question on the credit and reserve releases, as it relates to the energy and metals and mining portfolio. Now that you've actually seen some better credit in there, how much of the reserves are left in that portfolio, and can you still see reserve releases going forward? 
+
+Question_27:
+
+          Okay, thanks. And then, also on CRE, again strong loan growth year over year. I mean, I understand that you're focusing in these housing-constrained markets, but is there a limit to how much you can grow in those markets? 
+
+Question_28:
+
+          Thanks very much. Marianne, just to follow-up, a couple more questions on card. I know you've talked quite a bit about it already. But one of the sort of conventional wisdoms at the moment is that 2016 represented the pinnacle of the intensification of the competitive environment. And I just wanted to get your thoughts on whether that's an accurate assessment or not? 
+
+Question_29:
+
+          Great. And just on that point, the ROA expectations that you have as a consequence of the trends that you just underscored, do you consider these to be, sustainable as you get back to that 11% kind of revenue yield? 
+
+Question_30:
+
+          Hi, Jamie. I wanted to start off with a big picture question on the trading side. You made some recent remarks talking about the outlook for the [FICC] business, and alluded to roughly half of the declines versus the peak being attributable to cyclical as well as secular factors, and a lot of FICC optimism in particular that we've spoken with have really latched on to your remarks. And I was hoping you could provide context as to how you determine the 50/50 split. Should we be taking those comments so literally? And how you're thinking about the FICC fee [portfolio] trajectory overall, as some of those cyclical headwinds abate? 
+
+Question_31:
+
+          Thanks, Jamie. That's extremely helpful color. And Marianne, maybe just switching over to the expense side for a moment. You also provided very helpful detail on some of the drivers of the strong expense progress that you're seeing in CIB in particular. And from what I recall, last year's update, Daniel actually guided to an expense target of about $19 billion by 2017. It looks like you've gotten there essentially a year early. And I'm wondering whether there are more savings initiatives that have not yet been filtered through, and could potentially accrete in the coming year? 
+
+Question_32:
+
+          Hi, good morning. Was just wondering if we could talk a bit about rate of trading. I mean, to my mind, that was a product that's done particularly well this quarter. But I was wondering looking forward, how you see that performing, whether it's supported by what's going on in the yield curve? Or whether do you see that supported more by sort of like one-off euphoria around the election, so maybe that might tail off a little bit? 
+And then just moving on from that, how do you view the opportunities for growth in your capital markets businesses, your CIB versus say, your lending businesses? Are you equally enthusiastic about both, and given the opportunity sets going forward, or do you see some being more positive than others? 
+
+Question_33:
+
+          I mean, it sounds maybe that you'll  (laughter)  the pressures of year-on-year growth, in the CIB business but you're not really highlighting that in terms of your lending businesses, which obviously you'd expect further margins to grow, the loan books to grow. 
+
+Question_34:
+
+          Good morning, Marianne. 
+
+Question_35:
+
+          Good. Can you give us some color, in the past you've talked about -- in the multifamily, I know you commented on that in your prepared remarks, on your multifamily book, some of the markets that you continue to be a little leary of, can you give us an update to those types of thoughts? 
+
+Question_36:
+
+          Okay, great. And I know you talked about the duration of the securities portfolio, it's in line with -- (multiple speakers) 
+
+Question_37:
+
+          Certainly. And Marianne, coming back to the investment portfolio, obviously you talked a little bit about the duration. Do you have the actual duration of it in years, this quarter versus the third quarter? 
+
+Question_38:
+
+          Good morning. Just a quick question for you, Marianne. In terms of the mortgage, in the overall picture, I understand why you're talking about maybe 10% core loan growth rather than 15% more recently. But just within the residential mortgage portfolio, it looks like that slowed in the fourth quarter, third and fourth quarter from a mid teens year-over-year rate, to a low single-digit quarter-over-quarter rate. Can you give us a little more color as to what's going on there? Are you buying -- or are slowing your purchases of your own originations, or is that -- is there something else going on there? 
+
+Question_39:
+
+          Okay. So no real change in your thinking there? 
+
+Question_40:
+
+          Thanks for taking my questions. The thing that jumped out at me was, if you looked at the asset management group, you had $21 billion of long-term product outflows, and you had $35 billion of liquidity products inflows. And it seems like now that we're getting past the financial crisis, when everybody was looking at liquidity, that combining that with continued deposit growth, we're not seeing a change in that perspective, but there's still a premium for increasing liquidity still? 
+
+Question_41:
+
+          Do you foresee that premium for liquidity lessening, as we kind of go into the rerisking of a better economy, and some things that improve the outlook? 
+
+Question_42:
+
+          And then my last thought was, when you look at M&A, we had M&A kind of suppressed when things were more regulatory constrained, and the outlook was a negative on the overall economy and that uncertainty. Now we have this positive uncertainty. Wouldn't that delay some activity for at least a couple quarters, for people to kind of see where we're going to end up, and see where tax rates are, and see what we might get in deregulation that may change perspective on their long-term opportunities? So just thought there might be a little pause here. 
+
+Question_43:
+
+          I just thought maybe in the second half versus the first half, but thanks for your response. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/18_answers.txt

@@ -0,0 +1,171 @@
+Answer_1:
+
+          So in the retail space, the answer is no, not really. And to be completely honest, we've been pretty consistent that we would not really have expected there to be much in terms of deposit reprice at absolute levels of rates that are still quite low. And so with IOER at 100 basis points, we're still in that sort of realm of the atmosphere, and so we would expect that to start happening a couple of rate hikes from here maybe. We'll have to wait and see. We've obviously never really been through exactly this before. On the other side of the equation, in the Wholesale space, we are in the process of seeing a reprice happen.
+
+Answer_2:
+
+          No.
+
+Answer_3:
+
+          Yes, so I don't have all those numbers directly in front of me. I know that in the Commercial Bank, our exposure to mortgage is really pretty modest, it's around about a total of $3 billion in the commercial real estate space. And I would tell you that while there obviously is a lot of discussion around retail, and with some merit, it's very case-by-case, location-by-location-specific. And I kind of liken the discussions a lot to discussions we have around our bricks-and-mortar banking businesses, which is consumer -- the way consumers engage with retail isn't changing, it doesn't mean they will stop engaging with retailers. And so it will be very specific with respect to location and tenants. And it doesn't necessarily mean that retail is going to be in as much potential trouble as I think people are talking about. So we remain cautiously watching it but also cautiously optimistic that it's not -- that it's a bit overblown.
+
+
+          And you should assume that we've looked at not just direct retail or retail-related real estate, and all the vendors to any potentially covered retailers. When you put it all together, it's a little bit like there'll be something there, but it's nothing that will be dramatic when it's happening.
+
+Answer_4:
+
+          Are you talking about real estate related to retail? Or are you talking about retailers?
+
+Answer_5:
+
+          No, you're way out of line. I mean, direct retail exposure, we're very careful. The retail business has always been violent and volatile. You can look back through our history, and half of them are gone after 10 years. That's the normal course. So we're usually senior, we're very careful with stuff like that. And then you go to real estate, okay, most of our real estate has nothing to do with retail. So we do have some shopping centers and malls and buildings and stuff like that. But those are generally high on the stack, well-secured and not relying on single retailers, et cetera.
+
+Answer_6:
+
+          It will be like oil and gas for us, it won't be a big deal.
+
+Answer_7:
+
+          Yes. So look, I know that -- so one of the things that we want to remind everybody before we talk about the trend is that the credit card losses are still at absolutely very, very low levels. And notwithstanding whatever we would have done or have done or continue to do with our credit books, we would ultimately have expected them to normalize to higher rates regardless, so -- and then for -- obviously, the first quarter hasn't been that...
+
+
+          It's probably just the previous cycle stuff.
+
+
+          Yes, exactly. And obviously, first quarter has some seasonality. So I would just start by saying that the charge-off rates we're seeing are completely in line with our expectations and guidance that we gave you at Investor Day both in terms of 2017 being below 3% and over the medium term being between 3% and 3.25% for all of the reasons we articulated. A combination of positive credit expansion that took place over the last couple of years and the performance of those newer vintages is in line with our expectations and with high risk-adjusted margins. So it's not really about tolerating the charge-offs as long as we're getting paid properly for the risk, which is the case. And obviously, as we see those charge-off rates both normalize and reflect those newer vintages, they will go up modestly over time. And we expanded our credit in a targeted way, but it wasn't a significant expansion. And we will respond in our credit and risk appetite to whatever we're seeing in the environment. But it won't necessarily be predicated by charge-offs rates as long as (inaudible).
+
+Answer_8:
+
+          So I would say if you look back over 2016 and even 2015 and '16, it's true and clear that we gained share, not just in fixed income -- reasonable share not just in fixed income but also in equities. And our business performed well last year. And I would suggest to you that we will defend that share. But the competition is back and healthy. And you can't expect us to continue to gain share at those kinds of levels. We want to defend it, but it's a healthy competitive market right now. So I would say not really.
+
+Answer_9:
+
+          We have a ways to go before we're concerned.
+
+Answer_10:
+
+          For merchant processing, there's a lot of share you can gain. And that's not even close, because you give products and services and a change in technology. And I think we're way, way in credit card when you say, "Well, that's too big for JPMorgan Chase." There is a point where it's going to be a good question, but it's not even remotely close to this one.
+
+
+          And I would also say that Cards continue to be a  very competitive space. So we will continue to try and provide our customers with significant value and have deep, engaged relationships. But I don't think you're going to see material shifts in share in the short term.
+
+
+          And we also look strategically at credit card, debit card, online bill pay, P2P as all one big thing to do a great job for the client.
+
+Answer_11:
+
+          Not particularly at this point. I think we're very happy with the performance of the portfolios, with the growth rates we're getting. You saw that our core card loans were up 9% year-on-year. We're getting a lot of NII benefit from that. So I think we're pretty well positioned at this point.
+
+Answer_12:
+
+          Yes, I would say loan growth should be in the mid- to higher single digits.
+
+Answer_13:
+
+          So obviously, when we give you guidance, we give you sort of reasonably rounded numbers. So actually, the impact of current implied is a bit more than $500 million more than it was at Investor Day. But in the law of big numbers, that's a pretty reasonable amount. Yes, there is an element, of course, as we talked about, in the Wholesale space, where we are seeing reprice happen, and it does reflect our estimates of what we expect to see over the course of the year in cumulative deposit bases. And with respect to if there was -- and you know that the implied has priced in 1.5 more hikes, so it's -- obviously, March is earlier, so longer, there's a little bit more rate benefit. But it's sort of in line with our expectations. And if we had another rate hike, it would likely be later in the year, and ultimately have a relatively modest impact on this year but obviously be important going forward.
+
+Answer_14:
+
+          You should be able to extrapolate those numbers on your own.
+
+Answer_15:
+
+          I think it's important to put that slowdown into context. I mean, we did have 8% growth year-on-year in C&I. We're just saying sequentially, things are a bit quieter, and there's a whole bunch of reasons that could be driving that. And importantly, you mentioned it, when we're in dialogue with our clients, they are optimistic and they are thinking about growing their businesses and hiring, and all of those things are true. And so putting aside those that have access to capital markets for a variety of reasons in newer bank loans, it's completely understandable that optimism would lead actions. And so as to what that lag will look like, we'll wait and see. But fundamentally, a pro-growth series of policies will be constructive to the economy, to our clients, and ultimately, will end up in them hiring, spending, and they already are, and we'll see that translate into loan growth. Whether that's in the second half of this year, we'll see.
+
+
+          I would just add that I wouldn't overreact to the short term in the loan growth because there are so many things that affect it. When you go through the episodic part, if you look at CIB, I wouldn't look at loan growth at all, because companies have a choice of doing loans and deals and -- or bonds, something like that. Look at credit card looks okay. Mortgage is obviously affected by interest rates. Autos is obviously affected by auto sales. And middle market was okay. It was like it was slow, but it was okay. So I wouldn't overreact to that. And the second thing is you all should expect as a given that when you have a new president and they get going, that the 9 months after the 100 days is going to be a sausage-making period. There will be ups and downs, wins and loss, stuff like that, okay? But it is a pro-growth agenda, tax, infrastructure, regulatory reform. And that is a good thing, all things being equal. And we think that if that took place, it would be helpful to Americans. But to not -- to expect it to be smooth sailing, that would just be silly.
+
+Answer_16:
+
+          It looks fine. And of course, it's episodic.
+
+
+          Yes. And I would also say that while, of course, people's dialogues include a degree of discussion around regulatory reform and tax reform and the like, it isn't stopping the strategic dialogue and it isn't stopping people from -- or boards from considering strategic deals partly because of what you said, partly because there is a recognition that these things will take some time to ultimately get finalized, and that they don't want to put their strategic agenda on hold. So in some ways, you get both sides of the equation. People aren't going to wait indefinitely to get certainty on issues when there are good strategic deals that can be done, and that's past the dialogue. So not to say it has no impact, but it's still quite healthy.
+
+Answer_17:
+
+          Can I just answer that? Marianne has given you guys some very specific guidance on interest rates. When interest rates got to 0, remember that when it floored, those -- no one expected the first 25 to 50 basis point to necessarily be paid out, because of the cost. Marianne also gave you at Investor Day a very forward-looking view of that, where it kind of normalizes, okay? And it's different for every different type of deposit. For wholesale deposits, commercial credit deposits, company deposits, treasury deposits. They're all different. So it's hard summarize it all. But at one point, you're going to go back to kind of a normalized spread, and in terms of just retail, I would say that's like 3%.
+
+
+          Maybe a little less than that.
+
+
+          Maybe a little less.
+
+
+          And I would also just say, I am glad that you brought up one point because it's something that I'd like -- a point that I'd like to make, which is when people think about the benefit we get from NII on rising rates, there's an element of people making it sound very passive. Yes, you're correct, we did build those branches, we acquired those customers, we built the product, we invested in the customer service to be able to enjoy the industry-leading deposit growth that we're having. But I would also make the -- and so as margins improve, then, we will obviously enjoy the benefit of that. And to your point, we invested to be able to. But I will say that if you -- we look at the performance of our branches every single week, month, individually, put together by market, and the very, very, very vast majority of them, meaning that only a handful do not, are profitable in their own right today at these spreads on a marginal basis. So the branches are doing very well.
+
+
+          There's another number we give you all that you should look at. We give you what we expect normalized margins and normalized returns to be in Consumer, Card, all these businesses. Those numbers include normalized credit card charge-offs, like the credit card, the number we now use is for in a quarter, something like that, and in retail, going back to normal spreads. That's what those numbers include. And of course, it all bounces around. But we kind of look at them to be priced for normalized results. We don't price for them to be overearning or underearning or to have too much credit or too little. And that's kind of how we run the business.
+
+Answer_18:
+
+          We've built that into every number we've given you. We've always told you the beta and gamma.
+
+
+          Yes, I can point you to a presentation in May of 2014 where we showed exactly what we expected the complexity of deposit reprice to look like based upon historical moves. So what we have actually seen to date looks incredibly similar in terms of realized reprice. You're absolutely right. I will tell you though that history may not be a precise predictor of the future because we've never really been in this exact position before and other things play into the equation, including the fact that the industry, but us specifically, have significantly invested in other customer service products, items like digital and the like, which will change the dynamic one way or another on reprice. So you're right, historically, 100, 150 basis points should dot [ph] see some movement, we'll see.
+
+Answer_19:
+
+          Yes, but I'd be a little cautious there, too. I mean, we feel great about the deposit growth and the account growth. So you have new accounts that are growing and existing accounts are growing. Remember, there you also -- history -- you've got to be very careful, because if rates were higher, people do different things with their money, like CDs. And then how they view the stock market, that money -- some of that attracts lenders to the market. So we're always conscious of the fact those flows kind of ebb and flow, and history is only somewhat of a guide to that.
+
+Answer_20:
+
+          So I picked that category out precisely because it didn't take legislation and it was very important. And my point isn't about banks versus nonbanks. My point is about the United States of America and what these things did to the availability of credit to a certain class of people. I was very specific, and we actually published a research report in mortgage land, which you can go get, by Mr. Jozoff, that really breaks it out. But because of the cost of servicing delinquent accounts, $2,000 a year, because of the additional cost of origination, because of the potential litigation, because of the not clarity around the QM, because of the forward claims that the consumer's both paying more and the credit box is wider than it would otherwise be. And that we actually believe that credit box is hurting first-time buyers, younger, self-employed, prior defaults, someone who when they defaulted passed his reserve, who always say deserves a second chance. So that policy has restricted that. And the shocking thing to me is the absolute size of that, which we think could be $300 billion to $500 billion a year. That one thing alone could have added -- because of a secular stagnation, could have added 0.3% or 0.4% a year to growth. So if you'd changed it 5 years ago, you're talking about a lot of growth, a lot of jobs, a lot of new homes, a lot of young families into homes and a very positive thing without taking a lot of extra credit risk. It's not -- it was about America, is why I wrote it. I could care less whether the banks and nonbanks do it. My point about that was how it's hurting the growth of America and hurting that class of citizens. And I really think some of you should be writing about that more because that's how important it is. That was one example.
+
+Answer_21:
+
+          Okay. So I would just start by saying we've been consistent that our operating model, including the diversification of our businesses, has been and was a source of strength not just for us but also for the financial markets during the crisis. And there is strength in the way the company operates that can't be discounted. I would also say that the commentary feels unnecessary given where the industry stands on capital liquidity and regulatory reform broadly. And I would just point, as I'm sure you all read, to most recently, Governor Tarullo making comments about this but historically, other thought leaders in the financial stability space talking about it. And I would further say that it doesn't feel, for the reasons that you just articulated in terms of structural reform or structural change in the model of banks, that, that would be consistent with a level playing field and pro-growth agenda in the U.S. So that's kind of how we feel about it. I can't give you specific reasons to not continue to monitor the situation. But it doesn't feel consistent with the rest of the objectives of the administration. And with respect to Investor Day a couple of years ago, lots of things have fundamentally changed since then, but the ultimate conclusion hasn't, which is that we believe that there's significantly more value for our shareholders, and as I said before, for the economy with this company the way it is today than in some other form.
+
+Answer_22:
+
+          First of all, we don't overthink the shape of the curve or the process of normalization in any one period. We think about the reason for the actions. And ultimately, as long as they're kind of growing, you'll see both of the short and the long end of rates ultimately go up. And even though I know that it's lower than what we've broken down, broken below a little bit of the lower bounds, it's been in the kind of 2.30%, 2.60% range for a while, so we're still within -- largely speaking, within the range. And our central case is that we're going to see the 10-year higher by the end of the year. And if you look at our earnings and risk disclosures, we're much more sensitive to -- as a pure NII, NIM matter, to the front end of rates. And so not to say it would not have an impact, but it would take a while for that to have an impact that would meaningfully offset any of the benefit of higher short-end rates.
+
+Answer_23:
+
+          Well, I mean, ultimately, sort of any actions by central banks, any change in the shape of the yield curve, anything that is presenting an opportunity for clients to transact and trade is an opportunity for our businesses. So as long as it happens in a reasonably rational fashion and there are no significant events, it should create an opportunity for clients and an opportunity therefore for us.
+
+
+          Always keep in mind that why they do something probably is more important than the what they do. So if they are doing it because the American economy is getting stronger, that is more important than the direct effect of adding -- letting securities mature, et cetera.
+
+Answer_24:
+
+          It could, I just wouldn't put that in your models.
+
+Answer_25:
+
+          So well, I mean -- so in terms of rates, obviously, the loan balances are seasonally low in the first quarter and charge-off rates are higher in the first quarter. But overall, we're not expecting to see abnormal patterns in our charge-offs.
+
+Answer_26:
+
+          Because it happens every 5 to 10 years, so why would anyone be surprised? And we've always been very conscious of this and very careful about how we do leases, we do them conservatively, we've got...
+
+
+          But we only do them to our strategic manufacturing businesses.
+
+
+          And only to strategic manufacturers, and we properly account for it. And we have loss mitigation. That's pretty important. So no, we're not surprised, it's going to happen every now and then.
+
+Answer_27:
+
+          I have no idea.
+
+Answer_28:
+
+          So it's actually got somewhat less to do with our marketing strategy than it has to do with the fantastic success we've had with the new products, particularly Sapphire Reserve, in the fourth quarter and in the first quarter of this year. But fundamentally, if you go back, I think, to a conference that Kevin Watters spoke at last year sometime in, I think, September, he said, look, we're going to see the revenue rate be lower about 10% and some for the couple of quarters while we acquire all of these accounts. Once we've hit a pace, we should see it middle out at 10.5% the full year of 2017, so the first quarter lower and subsequent quarters continuing to now start rising back up towards the 11.25%, which was our ultimate run rate target. And that's still fundamentally what we're expecting to see, which is we're at a -- assuming that our expectations of what we're going to see in account growth over the future period continues to hold, we would expect to see an increase from here in the second quarter, the overall year, to be sort of finish the mid-10s and the year 11-ish, and then go back to 11.25% over the course of the next couple of years.
+
+
+          (inaudible)
+
+
+          And we have great new products.
+
+Answer_29:
+
+          I said I'm not interested. I'm kidding.
+
+Answer_30:
+
+          Look, I've been clear. I think that Gary Cohn and Steve Mnuchin are doing the right thing. They want to find the right people for those jobs. They're talking about -- I gather they're talking to lots of people. But even after they announce it, remember, they need to be vetted and confirmed, and that's -- that normally could take 90 days. Well, the sooner, the better, but I think getting the right people is as equally important.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/18_questions.txt

@@ -0,0 +1,120 @@
+Question_1:
+
+          So I had a question about any early signs of deposit beta and elasticity. I guess, on the consumer side, in your retail banking area, are you seeing customers increasingly ask for higher rates in their deposit accounts or any activity where they're moving from kind of checking to savings and kind of early signs of pressure on deposit pricing?
+
+Question_2:
+
+          Got it, okay. And in terms of customers, they're not really asking yet or behaving in a way that they're looking price-sensitive, you're not seeing early signs of it yet?
+
+Question_3:
+
+          I wanted to maybe get out in front of what could be some brewing issues in retail land. And the perspective I'm looking for is you have plenty of gross exposure to retail and retail-related. However, there seems to be plenty of collateral, and you're typically at the top of the capital structure, too. So can you talk about both direct exposure in some of the problem retail areas and the related exposure in, like, commercial real estate and on the mall side?
+
+Question_4:
+
+          Is the main reason you're positioned in the stack, meaning I notice you have a lot of collateral against your exposure, and like I said, you tend to be at the top of the stack. Is that the main issue? I remember doing this with you guys 2 years ago in oil, while oil was dropping, and it turned out you barely came out with a few cuts and bruises. There seems to be more collateral here, but I don't want to put words into your mouth.
+
+Question_5:
+
+          I'm talking both because you do have hundreds of billions of direct retail exposure plus the commercial real estate exposed to it. I'm just thinking you have...
+
+Question_6:
+
+          Okay, I was just looking at taking a temperature.
+
+Question_7:
+
+          Can you give us some color on the credit card area in terms of -- I know you upped your credit card losses earlier in the year at the Investor Day in the fall of last year. What's your guys outlook for the credit losses in the credit card portfolio? Where would you tolerate it to? And at what point do you really change the underwriting standards if you need to?
+
+Question_8:
+
+          Got you. And as a follow-up, obviously you had very strong investment banking on the FICC trading side, very strong capital market numbers. Are you guys seeing further evidence of taking more market share from your competitors in any of the product lines, whether it's investment banking or FICC trading or equity trading, et cetera?
+
+Question_9:
+
+          A couple of questions, one on Card. How large are you willing to be in Card? I think on various metrics, you're between 15% and 22%, depending on if you're looking at things like merchant acquiring or the balances in Card in general as a percentage of total outstandings in the country?
+
+Question_10:
+
+          I'm asking because in the last cycle, you were really nimble. And do you still feel that you can be nimble at this market share?
+
+Question_11:
+
+          And then when you're thinking about the credit box, I know a while back, you mentioned, okay, we widened the box to 680. Is there any interest in widening it further?
+
+Question_12:
+
+          So loan growth should probably stay in line with where it is or slow down, is that how should we be thinking about it?
+
+Question_13:
+
+          I'm going to follow up on the NII question. I think your implied guidance of $4.5 billion higher than 2016 is now $500 million from where you were at the Investor Day. Is that the lower deposit beta experience? What's driving, I guess, the modest increase? And then just as a follow-up on that, in terms of if we do -- the implied curve, I think, has about one more rate hike in June. If we were to get another one realized, a dot plot, say we get another one in September, would that be a material increase in that expectation or just incremental or just how do we think about that?
+
+Question_14:
+
+          Okay. So anything in September would be sort of incremental?
+
+Question_15:
+
+          Marianne, you had noted the obvious slowdown we've seen in C&I, and Jamie, in the press release, you talk about the consumers and businesses being healthy and the pro-growth initiatives. Since the Analyst Day, we obviously had Obamacare not go through, and then there's been some doubts on tax reform. So just wondering, can you help us understand just where you're seeing that slowdown in C&I? And how would -- where are we in terms of that confidence turning into real results? And how much is just the wait and see versus where the economy actually is?
+
+Question_16:
+
+          Yes, fair points. And just one quick follow-up, just on the deal making side. M&A has slowed a little bit, but I'm assuming it's the same point, Jamie, just in terms of just pipelines and expectations that corporates have about transacting. Does that fit into that same vein? Or is there anything different in terms of just companies getting -- strategics getting more aggressive in terms of acquiring and adding to their businesses?
+
+Question_17:
+
+          I wanted to focus on deposit pricing in the sense that before the Feds started moving up, deposit rates and the Fed funds rates were right on top of each other, around 15 basis points. Now the effective Fed funds rates is around 90 basis points and deposit costs are only 20. So that 70 basis points on your $1 trillion of deposits basically gives you about $7 billion worth of incremental revenue that's needed to cover the cost of branches and other things for those deposit franchise. At what point do you hit a targeted kind of spread? And where is that where you begin to at least breakeven on those costs versus revenues?
+
+Question_18:
+
+          A follow-up to that is really what I'm getting at is last year, everybody was assuming through the cycle kind of betas, and we were saying that they were going to be much lower early on. We do think once you get to a certain target, usually about 100 basis points of spread, you start to see a little bit more pricing pressure starting to kick in, just like you were saying, Jamie, in the sense of different products...
+
+Question_19:
+
+          And the last component of this is the balances continue to grow. So as long as we're seeing double-digit kind of sequential, annualized and year-over-year growth in deposits, that provides a little bit cover in a sense of what you're talking about as well. We may see a little bit more lag just because we're still continuing to get deposit growth.
+
+Question_20:
+
+          I had a few questions on deregulation. Jamie, in your shareholder letter, you dedicated a lot of time on mortgage and having -- opening that up for banks to originate more of the percentage of mortgage in the United States. As we look forward, do we need legislative change for the banks to gain more market share from nonbanks and mortgage, like clarity in QM or the CFPB? Or would a change in supervisory attitudes be enough for that to shift on the mortgage side?
+
+Question_21:
+
+          That's clear. And the follow-up to that is a couple of -- a week ago or so, there was a lot of talk from Washington about the current administration potentially supporting Glass-Steagall. And of course, a lot of your investors called in concerned. And Jamie and Marianne, a 2-part question, I'm wondering if that's a real worry for JPMorgan's shareholders? And second, Marianne, maybe at an Investor Day 2 years ago, you mentioned that the capital and the cost that a breakup would save was not that much. And I'm wondering if you could also, if you remember, refresh us on that analysis.
+
+Question_22:
+
+          We've obviously seen quite a bit of flattening of the yield curves. And it could reverse pretty quickly if there is progress made on the pro-growth agenda. But just talk about at what point does the flatter yield curve start to impact NIM. And I guess I'm thinking specifically if we get a couple of more hikes on the short end, but the long end either doesn't move or the long end comes down more, how do we think about the breakpoint in terms of NIM benefiting the short end being offset by the flatter yield curve?
+
+Question_23:
+
+          Okay. And then separately, as we think about central banks winding down, some of the QE and the Fed actually shrinking their holdings, how do you think about that impacting your businesses? And obviously, there might be a rate impact. I think you talked about your rate expectations quite a bit. But just how do you think it might impact, say, the markets business with potentially more assets kind of out there to be purchased and sold?
+
+Question_24:
+
+          I guess there's 2 thoughts on -- there's the impact of QE on the economy, and then the impact of QE on some of the markets businesses that maybe there's been a crowding out from all the QE, so as they unwind, that it could actually boost activity levels.
+
+Question_25:
+
+          Just a couple of questions on consumer. We've talked a lot about card losses. But one thing that seems to be a little bit unusual is that a lot of the commentary across many of the card issuers is for the expectations of losses to be higher in the first half than the second half. And I just wanted to get your perspective on the likelihood of that trajectory.
+
+Question_26:
+
+          Got it. And then just to follow up on auto, your release alluded a little bit to the impact of declining residual values, which has been, of course, a focus for the past couple of years. Was there anything unusual in your view about the pace of decline in resid values in this first quarter?
+
+Question_27:
+
+          But in terms of the pace of resid values from here, similar or different in your view?
+
+Question_28:
+
+          Marianne, let me start with a question on the net revenue rate in the Card Services business. That's been relatively steady, a little over 10%, for the last couple of quarters. I presume, given your outlook, that, that would stay pretty close to the 10.1% level that you reported for the last couple of quarters? Or are you thinking about a change there as you slightly change your marketing strategy?
+
+Question_29:
+
+          Fair enough. Jamie, a question for you, just another one on the regulatory landscape. There are a number of open positions inside the Beltway at a number of the primary bank regulators, and I'm just curious in terms...
+
+Question_30:
+
+          Well, somebody should fill those spots if it's not you. And I'm just curious what you're thinking is of the timing of those appointments and how quickly those could get filled and what benefit that might provide to the banking industry.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/19_answers.txt

@@ -0,0 +1,150 @@
+Answer_1:
+
+          Yes. I would just stop for a second to just point out that what Jamie actually said was, "This is uncharted territory. It's not something that we've seen before." And so while it is the case that the Fed is communicating clearly and has every intention to make this gradual and predictable, things can change, and we should just be prepared for that. Not to say that, that would have a particularly significant impact necessarily on JPMorgan but that, that would just be a downside risk, not a probability. So on the balance sheet, it's still the case that we expect to start seeing normalization in the balance sheet in September; if not in September, by the end of this year. And we're still actually calling for the next rate hike in December; the market is calling for March of next year. And as we said, the communication has been pretty consistent and pretty clear across the Fed space, which is to say that it's mostly priced into the market at this point as far as we can tell. And so based upon what we've understood, all things equal, we would see the balance sheet shrink about $1.5 trillion over about the next 4 years. So that would ultimately slow growth, not stop growth. And if we saw $1 billion -- sorry, $1.5 trillion come out of the Fed's balance sheet, empirical evidence would suggest that we don't see dollar-for-dollar reduction in deposits. So if you just pick a point between $500 billion and $1 trillion of deposit outflows, at our 10% market share, that would be about $75 billion over 4 years. So it would slow growth. It would not stop growth. And it is what we've been expecting and what we've been talking about now for an extended period, and gradual is good in that sense. In respect of which deposits we would like to see, so that's the sort of growth scenario. In terms of liquidity, again, evidence would suggest, and we've been communicating this quite clearly, that we think the preponderance of that deposit outflow would be wholesale deposits and that would -- it would be nonoperating deposits. And those are deposits we ascribe little to no liquidity value to. So assuming that we're close to right, we would see those deposits ultimately leave the system, but it wouldn't affect materially, if at all, our liquidity position. So ultimately, the yield curve has priced, I think, all of this in. What I think the Fed had been clear about is that they expect the balance sheet or hope the balance sheet to be in the background and to use short rates as their primary monetary policy tool. And so as a result, we would ultimately expect to see perhaps a flattening yield curve, but with the front end ultimately pulling the long end up. And you heard Yellen -- Chair Yellen talk about being conscious of the shape of the curve as they go about normalization. I think you may have asked something else. Did I miss anything?
+
+Answer_2:
+
+          No, we -- that's correct. If you saw the -- compared to a $400 million expectation, we were up $150 million. So it would be fair to say that most of it was in this quarter. We had also -- when we gave the last set of guidance at $4.5 billion, we pointed out that the 10-year was low and that, that was ultimately pressuring that $4.5 billion. So it really isn't that significant of a change. The only thing I would caution you to remember is that when we think about asset sensitivity and we think about NII, market NII, which we wouldn't consider to be, in a traditional sense, core, can exhibit volatility geographically with NIR. If you think about a market-making business where we can have assets that are throwing off NII hedged by derivatives that ultimately have an offset in NIR, we actually think about that in total revenue numbers. So there could be a little noise in there, but no, I'm not expecting there to be significant changes. But I think what this makes me realize acutely is that no good deed ever goes unpunished. And chasing our tails, reforecasting the full year NII every 3 quarters isn't as important -- or every quarter isn't as important as keeping our eye on the long term, which is nothing has changed. We are absolutely realizing the benefits we expected in the banking book assets and liabilities, and that means that our long-term projections will be good and the path is a little bit less important.
+
+Answer_3:
+
+          Yes. So I understand why you're asking. As you look at the loan yields, they look relatively flat or even slightly down. If you adjust for the mortgage, it would be flat. If you decompose them into wholesale versus retail, we are absolutely seeing all of the yield improvement on the wholesale side, about 10-ish basis points. And on the consumer side, at this -- with respect to this quarter, there were some mix impacts in the Card business as we saw a higher level of transactors and saw a few other things. So it's not to say that the loan yields aren't moving in line with our expectations, and they are, but mix will matter for any one quarter.
+
+Answer_4:
+
+          Yes, that's right. And if you look back last quarter, they did, too. It's just that we've had a couple of opposing things going on this quarter.
+
+Answer_5:
+
+          Yes. So obviously, one of the biggest drivers over the last recent while in card revenues has been the extraordinary success we've had in capturing new Chase Sapphire Reserve accounts. And so the end of the third quarter both -- importantly, both the fourth quarter and the first quarter were extraordinary in terms of the number of accounts we acquired. And of course, we amortize or contra revenue out those expenses over 1 year. So at 10.5% revenue rate right now and with those -- having adjusted the premium with those originations stabilizing out into the second quarter, we will see ultimately -- we'll lap that impact a year from now. And we'll see our revenue rate start improving from here towards the 11.25% that we sort of guided to in the medium term. And we expect to get to that point, all other things equal, kind of mid-next year. And of course, that's just one facet. We're also seeing significant momentum on the sales front. Obviously, as a result of those accounts, we're growing our core loans, up 8%. And so we're having higher NII on those balances. So there's a lot of dry powder. We just need to get past these account acquisition costs, which we will. And I always feel compelled to point out that these are extraordinarily good customers. Their characteristics, their engagement, their spend, these are the customers that everybody wants to acquire. We now have them, and we intend to deepen relationships with them.
+
+Answer_6:
+
+          So I would characterize our strategy as unchanged. We've always been pretty consistent over an extended period that we would prioritize, first and foremost, strategic investments for growth in our businesses, be that organic or otherwise. And obviously, you've seen us be investing, whether it's in growing loans or introducing new product, hiring bankers, opening offices in our expansion markets and the like. But yes, it's been heavily skewed to being organic over the most recent while. We've also been pretty clear and active, I would say, in terms of partnering with, investing in, collaborating with partners that can accelerate our growth potential. So we would always be interested, whether that's fintech or otherwise, in getting capabilities that allow us to accelerate our growth potential. We don't have big gaps, but we would always be interested in that. Having said that, I'm not going to comment on the state of the regulatory environment except to say you should expect, for any of these events or transactions, that we would have the appropriate regulators at the -- conversation with regulators at the appropriate time.
+
+Answer_7:
+
+          Yes. So obviously, we are supportive of the new hedge accounting rules, and it will allow us to consider taking advantage of hedge accounting for a wiser set of products than we currently do. But we actually have reasonably limited hedge ineffectiveness in our (inaudible) right now. So from a practical perspective, it won't make a big difference to the business, but it is more flexibility in terms of the scope. And we're looking at that.
+
+
+          I would just add, as a policy matter, we make economic decisions, not accounting decisions. Accounting is a fiction. And Marianne spoke about the credit card. You expense the acquisition costs over 12 months. The benefit comes over 7 years. So we make huge investments all the time based on economics. We will never make a decision based upon accounting. And then we'll describe it to our shareholders to understand why we're doing what we're doing.
+
+Answer_8:
+
+          Yes, it's seasonality. So you've seen the first half at or around that guidance level. We would expect that to go down slightly just from seasonality in the second half for a full year a bit below 3%.
+
+Answer_9:
+
+          So I would say, obviously anytime you reach an inflection point, you need to be cautious about understanding the pace of change. For -- at least for 2018, 3% to 3.25% feels right. I think as -- when you get beyond that, we'll be updating you with our views as we experience a bit more in reality. It doesn't feel significantly different from that, but I think 2018 is a good number. And 2019, we'll update you.
+
+Answer_10:
+
+          Yes. Okay, so just talk about what we've seen so far, I think the industry has been really quite disciplined, which is what we would have expected at this early stage of a normalization in terms of the rate cycle. It is a tale of 2 cities. We've said that (inaudible) the wholesale space necessarily experiences higher reprice more quickly, and we are seeing that pretty much in line with our expectations. It matters, you need to get granular. The type of deposit, that client segmentation, it matters. So in the wholesale space, we're seeing it. We're on that journey. In the retail space, we haven't seen that yet. So while there have been small changes in the industry in CDs, there's been nothing in checking or savings. But again, I'd just point out to you that we wouldn't have expected there to be at this point yet in the cycle. And I would say, with respect to deposit betas and the Fed's balance sheet, if we are right, and we believe we'll be close to right, and that we see the wholesale nonoperating deposit flowing out of the system, assuming everybody else has reached that same conclusion, then it really shouldn't materially impact the liquidity position of financial institutions. And if you couple that with the expectation of a very gradual and measured pace, which gives people a lot of time and opportunity to plan accordingly, we wouldn't expect there to be a significant impact on betas, if any.
+
+Answer_11:
+
+          Yes. I would say -- first of all, I would say, focusing on any one -- so we would be very supportive of changes to how operational the capital is treated under [reg] capital rules. But I think focusing on one facet and not the whole thing -- it's unlikely to be that only one thing changes. So we'd like to see changes made over time. But for the foreseeable future, as we're growing our loans quite strongly, and these are extraordinarily high-quality loans where the differential between advanced and standardized is quite big, we still expect standardized to bind us.
+
+
+          And as you pointed out, the standardized were 100% in the United States. In Europe, they're talking about 75%. So there are -- will be some changes over time in how all these capital ratios get calculated for international competitiveness reasons.
+
+
+          Yes. So whether it's because the operational risk rules change or whether it's because the standardized rules become at least somewhat more risk sensitive, there should be changes over time, but I think for the foreseeable future, this is what we expect.
+
+Answer_12:
+
+          Yes. So I would start with, if you go back a couple of years ago, 2013, '14, '15, when we were doing our business simplification agenda and derisking and uplifting the controlled environment, the Commercial Bank was blocking and tackling and doing a lot of inwardly focused work. And we talked, I think, all the way back in 2016, that there were outbound calls, opening offices, hiring bankers, and that if you waited a minute, you'd see that come to our results. And this is the sort of fruits of that labor. So I do think it is sustainable. There's nothing in these results that is particularly noisy outside of reserve releases, which I'll come back to. And I would also say the partnership between the Commercial Bank and the IB in terms of covering our clients, the introduction of 16 specialized industries, which is an advantage we can bring to our clients nationally and, in fact, globally, that other competitors can't bring, all of those things set us up for continued solid growth. With respect to loan growth, I would say, if you look at our C&I loans, this quarter, as an example, was pretty broad based. There wasn't a specific -- in the Middle Market, there wasn't a specific industry or market segment that was strong. But over the last -- stronger, I should say. But over the last few years, a lot of our growth has been driven by the investments we've been making in the expansion markets. So we got into some new markets with the WaMu acquisition. We continued to build out those markets, add bankers, open offices. And that has been a source of growth for us that perhaps others haven't been able to enjoy. And also, as I said, specialized industries. And then...
+
+
+          And I would just add, we -- I think we're in all major 50 markets now, unlike retail, where, one day, we'll embark on an expansion in cities we're not in. And the product set is just fabulous. We're adding more and more online things. We're adding simpler and faster credit approvals. We're adding -- making it easier to do merchant processing when you sign up for Middle Market loans. The online systems are great. So all that stuff, I think is -- this is going to grow for a long period of time.
+
+
+          All right. And then...
+
+
+          And thanks for pointing out how well it did. And Doug Petno, if you're listening, congratulations.
+
+
+          And then the only thing I would say on commercial real estate, just because I think it's really important, is commercial real estate, it depends what you do. And more than half of our commercial real estate exposure is Commercial Term Lending. It's a very specific strategy. We don't deviate from that strategy. And I would just point to you, because it was interesting to me, if you look at the Fed's CCAR stress results for commercial real estate across the industry and look at how our results compared to others, I think you can hopefully get somewhat more comfortable, and we are very comfortable with what we have right now. Now that said, the performance this quarter did benefit from reserve releases and benign credit, and at some point, there will be a cycle. But the risk appetite we have and the way we've managed with discipline, we're very happy with that.
+
+
+          And the IB, bringing JPMorgan Investment Banking to Chase corporate clients, we still think has a long way to go.
+
+Answer_13:
+
+          I would look at it the other way around. So we've, for -- since the Great Recession, okay, which is now 8 years old, we've been growing at 1.5% to 2% in spite of stupidity and political gridlock because the American business sector is powerful and strong and is going to grow regardless -- when they wake up in the morning, they want to feed their kids, they want to buy a home, and they want to do things. It's the same with American businesses. My -- what I'm saying is that it would be much stronger growth had we made intelligent decisions and were there not gridlock. And thank you for pointing it out because I'm going to be a broken record until this gets done. We are unable to build bridges. We're unable to build airports. Our inner city schoolkids and are not graduating. I was just in France. I was recently in Argentina. I was in Israel. I was in Ireland. We met with the Prime Minister of India and China. It's amazing to me that every single one of those countries understands that practical policies that promote business and growth is good for the average citizens of those countries, for jobs and wages, and that somehow this great American free enterprise system, we no longer get it. And so my view is it -- and corporate taxation is critical to that, by the way. We've been driving capital and bringing it overseas, which is why there's $2 trillion sitting overseas, benefiting all these other countries and stuff like that. So if we don't get our act together, we can still grow. I would say it's unfortunate, but it's hurting us. It's hurting the body politic. It's hurting the average American that we don't have these right policies. And so no, in spite of gridlock, we'll grow at -- we can grow at 1.5% or 2%. I don't buy the argument that we're relegated to this forever; we're not. And if this administration can make breakthroughs in taxes and infrastructure, regulatory reform -- we have become the most -- one of the most bureaucratic, confusing, litigious societies on the planet. It's almost an embarrassment being an American citizen traveling around the world and listening to the stupid (expletive) we have to deal with in this country. And at one point, we all have to get our act together or we won't do what we're supposed to do for the average Americans. And unfortunately, people write about the thing like it's for corporations. It's not for corporations. Competitive taxes are important for business and business growth, which is important for jobs and wage growth. And honestly, we should be ringing that alarm bell, every single one of you, every time you talk to a client.
+
+
+          And then I would just say that in terms of how our clients are behaving and how the (inaudible) going, whether you look at Middle Markets, Corporate Client Banking, M&A, it's not to say that the possibilities of reform and the impact that, that could have isn't a part of the dialogue, but they're fundamentally really just getting on with things. And so if there's a client that has a compelling strategic deal to be done or some spending or hiring or growth, then they're pretty much getting on with it, which is why we're seeing solid growth.
+
+Answer_14:
+
+          Yes. So look, obviously, you know the deal with CCAR approvals, which is it is capacity. It's not necessarily a commitment to utilize it, although we are -- as we fairly clearly articulated at Investor Day and as you see in the numbers here, we are at 12.5% in terms of our CET1. And we believe we ought to be able to, over time, operate the company lower than that, within the range of 11% to 12.5%, albeit that we would take time to do that. So we're in the market buying our stock every day. We're at 1.8x tangible book value. So in Jamie's shareholder letter, we still think that there's significant value in the stock. We believe in the earnings power in the franchise that we have here. And so I'm not to say that we will utilize all the capacity because other things can come up, but we put in the request based upon our desire to want to ultimately move lower.
+
+
+          Yes. And there's a very important policy issue here, too. So our preference is always to build organically, to not buy back stock but to build branches and grow and lend more. But there's an argument that people are making that banks can't lend it, and even if there is excess lending capability, they wouldn't have done it. And that is not true. The counterfactual would have been, had banks been free to use their capital and their liquidity 5 years ago, there would have been a lot more lending in the system. And we've pointed out 2 areas where it would have taken place. One is mortgages, where regulations have held back lending to first-time buyers, immigrants, self-employed, prior defaults, et cetera. And the second is small business, where it's not existing small businesses, think of it as start-up small businesses and that they are having a hard time getting capital maybe at the community bank level, et cetera. The counterfactual would have been that $1 trillion or $2 trillion would have been lent out had these rules been changed 5 years ago. That's the counterfactual. It's not that, well, the banks wouldn't have lent the money. And so again, there's a false notion that all this stuff didn't hold back the economy. Yes, it did.
+
+Answer_15:
+
+          Yes. So obviously, they haven't been specific. Although the Treasury report had some ideas, they haven't been specific about what the calibration would look like and whether there would be recalibration to the numerator and the denominator or one or the other. Clearly, we've been pretty clear that we think cash at central banks shouldn't necessarily be included, and there are other things. Different people have different opinions. So we've done the calculations. I would just point you back to the fact that we have some 20 potentially binding constraints right now, of which leverage in a variety of forms is part of that. So to the degree that we get the opportunity to recalibrate that, it could have impact at the margin. But we take all of those things into consideration when we think about the direction of travel of the company. So we're being as thoughtful as we can. We are not specifically leverage constrained right now. That doesn't mean we're not supportive of making those changes and we will obviously model it out. But we take the potential for those changes into consideration when we think about the direction we grow our businesses.
+
+Answer_16:
+
+          So I think -- I want to point out something because I know that Sapphire Reserve gets a significant amount of attention for obvious and good reasons. But it is only one product in a platform of successful products, both proprietary and co-brand. And so in reality, while we obviously do all the modeling and the math, it's not about what the cost of any one individual card acquired is or the NPV of that, it's how the portfolios ultimately together perform over time. And it's still very early on Sapphire Reserve. I mean, it's not even a year old yet. And these are portfolios and products that develop and season over time. And as I said, these are extraordinarily good customer relationships. So you know we've done a bunch of things in the card business over the last few years. We've renegotiated our co-brands. That was ultimately with lower economics but still very good economics. We've been out on the front foot issuing new products, not just Sapphire Reserve but Freedom Unlimited, the Amazon Prime card, Ink. And so we think about everything in the total portfolio and its collective performance over time, and it's still generating very good returns.
+
+
+          Let me just mention about the regulatory SLR. So looking at it very broadly, if you look at -- it's not just capital liquidity but mortgage rules, requirements, capital liquidity, collateral rules, what collateral can be used and not used, if these things were just calibrated differently, the cost of credit would go down, swap spreads would go down, mortgage would become more available, the cost of mortgage will come down. And those are kind of important in total if they're done right without changing at all the risk to the system. In fact, the system is healthier if the economy is healthier.
+
+Answer_17:
+
+          So when we think about the sort of liquidity position of this company, we're obviously managing not just to regulatory requirements but also to what we want the ultimate sort of duration of equity and position of our balance sheet to be through the cycle. So we take into consideration not just the amount of liquidity we have and how that could be utilized but also the mortgage portfolio we have, agency MBS. So all of that goes into our determinations. And we will continue to add to duration opportunistically when it makes sense to do it and manage our balance sheet with discipline.
+
+Answer_18:
+
+          Yes. So I would start by saying that a lot can change between now and the next cycle of CCAR or the next 2 cycles of CCAR. And so we never did actually say that we necessarily wanted to get the low end of the range but just to operate for the short and medium term within the range while we let all of the potential changes to the sort of regulatory environment at large play out. And so as to whether or not, over time, there's a sort of recalibration of whether 11% is our minimum, that will play out over time. So for the next 1 or 2 cycles of CCAR, this cycle and the next one, I would just expect that we want to be on a measured pace to be within the range to allow us to better understand all of the changes that will take place over time and make appropriate decisions. I wouldn't start imagining necessarily how low that goes. I think we would want to operate with a sufficiency of capital and liquidity.
+
+Answer_19:
+
+          So I would say, of course, it's possible. We've seen a number of situations where implementing global standards in the U.S. have differed in meaningful ways from how they've been implemented elsewhere. You have rarely seen that be to the advantage of the U.S., and the SLR is no exception. So while there may be recalibrations of either the numerator or denominator, know that to the Europeans, 3% standard. Our current depository institutions are held to a 6% standard. So there's plenty of room for there to be adjustments before it would create an unlevel playing field. And my suspicion is there will also be adjustments elsewhere. And it's supposed to be, as I think Chairman -- Chairwoman Yellen said, a backstop, not binding in the way that perhaps it has become. So I think the answer is yes, but we'll see.
+
+
+          So -- and the key point Marianne said is almost every single thing that's been done in America added to Basel requirements, the gold plating, SLR, calculation of LCR, calculation of stress, G-SIB, almost every single thing. And remember, America doesn't have to listen to Basel either. And you may -- we may have noticed that basically France, Germany, India, China are all telling Basel they better take a deep breath and stop doing more of what they're doing.
+
+Answer_20:
+
+          And so -- sorry, go ahead.
+
+
+          Go ahead, go ahead.
+
+
+          No. So look, there are a number of different people talking about the forward-looking standard for operational risk, Basel -- under Basel III.5 or IV or whatever is talking about it, there were some proposals in the CHOICE Act. So there's no question that there should be a revisitation of the mechanism to calculate operational risk. And then you're right, the way that all of these rules ultimately interplay with each other matters. And so from a pure stress test perspective, at the margin, we had a little bit more binding constraint on leverage than CET1. But if you look at just what we could run the company at if CCAR was the only constraint, it would be lower than where we are. So it's a complicated dynamic of trying to make sure that we're maximizing against all of these constraints and not just the mathematical ones but also the operational and practical ones. So I mean, it's necessary to go back and rethink the calculation of operational risk just because it's the right thing to do. Ultimately, how that plays out into how we optimize against our constraints is less of what we're focused on.
+
+Answer_21:
+
+          I wouldn't imagine -- it's not going to change our risk management strategy in a meaningful way, so I wouldn't imagine it would be...
+
+
+          Just the (inaudible) corporations, though. The new hedging rules would affect other corporations are nonbanks.
+
+Answer_22:
+
+          We haven't looked at whether it creates more demand from the other -- from the corporate side. So we'll look at that and see.
+
+Answer_23:
+
+          No. It is still this quarter. There are requirements to make public disclosures in August. So depending on whether you make them in your Q, in your Pillar 3 or not will determine whether it's the beginning or middle or end of August. We, as you know, have -- as an industry, are being quite public about the fact that we think -- by the way, we provide an extraordinary amount of real-time granular -- same-day granular information on liquidity to our regulators in order for them to be able to properly supervise not just us but the system. And so we believe the regulators do have and can have anything they need when they need it. It's just a question about whether there is any added benefit of those informations being made public near real time. While it wouldn't matter today when everyone's running very significant liquidity surpluses, it could have unintended consequences if we were in an environment that was more stressful than we are today. So right now, the requirement is that we have to disclose. I suspect, although we've asked for a delay, as an industry, that we might have to disclose. We will continue to debate, I think, with regulators the merits of those public disclosures over time.
+
+Answer_24:
+
+          Yes. And we -- I mean, I would suggest, although it's not something we show you every quarter, that we've been pretty forthcoming about showing you the level of our deposits and the split, at least in Investor Day now and then, between operating and nonoperating deposits. And as we start to see the impacts of the Fed balance sheet unwind and the like, we will be very forthcoming. We try to be incredibly transparent, and we'll take that under advisement, regardless of what the regulatory disclosures are about the quality of our deposit franchise. But we have, I think, periodically, been more disclosive than most in terms of the quality of our deposits.
+
+
+          And knowing that, you could see that we have $500 billion of cash, $300 billion of securities, $300 billion of repo. I mean, it's a pretty liquid company, as liquid as any bank I've ever seen on this planet. And...
+
+
+          And we removed $200 billion of nonoperating deposits proactively. So we manage it very carefully.
+
+
+          Yes. There's nothing that would happen because of all this that would affect JPMorgan that much. And the very important thing about LCR, it's not -- we -- it doesn't affect us, okay? We're fine disclosing whatever they want us to disclose. It's an issue of whether the monetary -- whether it's good for monetary policy. And would it -- will it cause a problem, not for us, for the system when there's a crisis. Like do they want banks to use their liquidity or not? Very simple. Because if the answer is you've got to maintain over 100%, then you can't use your liquidity. That's what it means. And then so they -- and they've said publicly -- some of have said publically that, "Well, if there's a crisis, we'll let you go below 100%." And we're saying, "Well, what bank is going to be the first to go below 100%?" And so it's kind of a policy issue. Whatever happens, we're completely fine at JPMorgan. If I were the regulators, I wouldn't want to put myself in that kind of position.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/19_questions.txt

@@ -0,0 +1,96 @@
+Question_1:
+
+          During the quarter, Jamie had made a comment on potential disruptions related to the unwinding of the U.S. balance sheet. And I'm just curious, it's supposed to be slow and deliberate, but I'm curious how you think that impacts liquidity, the yield curve, trading, deposit betas and is there anything you can do to protect JPMorgan against those disruptions?
+
+Question_2:
+
+          No, that was absolutely awesome. I do have one tiny follow-up. You always get a little more than you wanted. The one tiny follow-up, Marianne, is I just want to make clear, the whole $4 billion versus $4.5 billion, and you spelled out what happened in the quarter, it sounded like most of that full year guidance happened in this second quarter. But I'm just -- I just want to clarify that in terms of the second half NII, do you think it's overly different from where we were a quarter ago?
+
+Question_3:
+
+          I want to follow up on the loan yield side, which were not much moved. You mentioned the $75 million in mortgage. Can you just help us walk through the loan portfolio and whether you're seeing the assets move, whether there's a lag or whether there's any spread compression underneath that?
+
+Question_4:
+
+          Okay. So that -- would that naturally say that, as we go forward, that should -- if they're moving the right way, mix adjusted, they should kind of move the right way from here?
+
+Question_5:
+
+          Understood, okay. And then my second question is, it was nice to see the card revenues on the fee side and the revenue capture rate move towards the way you've been saying. It actually eclipsed the 10.5% you'd said for the year already. Can you just help us understand like have we turned the corner then on card income and your expectations for that going forward?
+
+Question_6:
+
+          Two questions. One on M&A strategy. There was discussion that maybe you were interested in acquiring something. That's not really the question, to comment on that specific rumor. But more in this regulatory environment and the changes that we've had already, do you feel like there's a little more flexibility for your strategic actions or outlook than maybe a year ago?
+
+Question_7:
+
+          Second question is on -- a little bit of a ticky-tacky, but on FASB. They're working on changing some of the hedge accounting rules. And I wondered how you're thinking about areas in your balance sheet you might be able to utilize that in a way that makes your business more efficient. I don't know if that's something that you're thinking about.
+
+Question_8:
+
+          Marianne, wanted to ask about credit cards. The outlook for charge-offs remains the same at about -- below 3% for the year, and you're about 3% now in the first half. So maybe you're expecting a little bit of improvement in the back half of the year. Is that seasonal?
+
+Question_9:
+
+          And then at Investor Day, the outlook for the medium term was not much higher, 3% to 3.25%. Does that allow for the seasoning over the next year or 2 of all the growth that you've had and allow for some normalization, too? Is that enough cushion to get all that in there?
+
+Question_10:
+
+          I just wanted to follow up to the questions that Glenn and Ken had on margin. Marianne, could you give us a little bit of insight on how deposit betas trended wholesale versus retail during the quarter? And also, just back -- going back to your comments. If the Fed balance sheet reduction drives wholesale deposits out of the system, can we assume that, that should not affect deposit betas negatively for JPMorgan?
+
+Question_11:
+
+          And my second question, you mentioned in the beginning of the call that standardized will ultimately be your CET1 binding constraint. And I'm wondering, if you were allowed to float off your op -- current op risk floor, and I think it's still $400 billion, does that mean, if standardized is your constraint, that being able to float off the floor and model out your op risk may not be an incremental source of capital because standardized is binding?
+
+Question_12:
+
+          First question is on Commercial Banking. Can you just comment a bit on the sustainability of the growth in profitability you've had there? Your earnings are up 30% year-on-year; loan growth, C&I, 9%; CRE, up 15%. And we're not talking about small numbers anymore. I think your loan book now is about $200 billion in Commercial Banking. And can you just talk about some of the initiatives that you've discussed of the Middle Market, the IB and how sustainable that is and whether you're comfortable with the risk profile of the books you -- of the book you have there? Because you are growing quickly, it is a big book now, and you're certainly growing faster than the industry.
+
+Question_13:
+
+          That's great. If I can follow up with a bigger-picture question. And Jamie, you've been -- and correct me if I'm wrong, you've been pretty vocal about believing that the underpinnings of our economy are healthy and strong and not buying into this whole secular stagnation argument. But at what point does political dysfunction and political paralysis really start to dent that confidence? And because you've also indicated that we do need structural reform to lift trend growth, whether it's infrastructure, tax reform, whatever it is. And can you just comment on that? And I guess as an adjunct to that, what are your conversations with clients like? And is there a risk that is materializing that clients are also starting to become more frustrated with the lack of progress politically?
+
+Question_14:
+
+          You guys obviously had a very big approval for share buybacks on the latest CCAR here. And I just wanted your thoughts on terms of using it all, given where your stock price is, given loan growth has slowed a tad and given the flatter yield curve makes buying securities a little less interesting. How do you put that all together?
+
+Question_15:
+
+          Marianne, can you give us some color -- Federal Reserve Chairwoman Yellen indicated that she sees that there could be some relief on the horizon for the banks. And one of the areas that's been talked about is changing the calculation of the SLR. Have you guys modeled out what that could do to your SLR and then how that may change your view on capital going forward, if there are changes where, for example, they take the cash that's sitting at the central banks out of the equation?
+
+Question_16:
+
+          Very good. And then as a follow-up and coming back to credit cards, obviously the Sapphire has been a huge success in growing your business there. Are the acquisition costs higher today than when you compare them to maybe 2 or 3 years ago? And in that vein, when you guys look at the economics of putting on new cards, is the net present value or whatever measure you use to determine the economics, has that improved, stayed the same or weakened from maybe a year or 2 ago?
+
+Question_17:
+
+          So Marianne, I wanted to start off with a question on liquidity. You spoke of how the Fed balance sheet unwind should have little impact on your LCR. But just given the strength of your liquidity position and the significant excess reserves that you have at the Fed, how should we be thinking about the current capacity to deploy some of that excess into higher-yielding MBS? And maybe what's your appetite to redeploy, just given some of the tougher liquidity treatment for agency MBS in particular?
+
+Question_18:
+
+          Okay, understood. And then just one more question from me, just on capital targets, and I appreciate all the detail, Marianne, you provided indicating that, over time, there could be a path or trajectory towards getting to the lower end of that 11% to 12.5% range. And I'm just wondering, given some -- the very favorable CCAR results we saw this year, coupled with some of the Treasury reforms that have been outlined, is there the potential for you to actually manage to a target even below that 11%, especially if gold plating of G-SIB surcharges, in fact, goes away?
+
+Question_19:
+
+          Just coming back to the Treasury's proposals for the new calculation of the SLR. Can you give any color as to whether that's actually even possible within the glib context as to how the Basel Committee wouldn't want harmonization across the whole world? Of course, if it did happen, then you would have a massive advantage along with other U.S. banks versus other European investment banks.
+
+Question_20:
+
+          Great. And just a follow-up question also on the reduction in the op risk. I mean, you talked about advances for standardized, but I mean, looking at CCAR, your SLR is a binding constraint there. So isn't it really a moot argument, a non-argument really, as to whether that happens or not, i.e., if you reduce your op risk, it doesn't really change your excess capital?
+
+Question_21:
+
+          Just 2 other quick things. One, on the accounting with hedge, just to get back on that a little sec, the question also was, was there any opportunity for your clients, too, because if there is an opportunity for, say, institutions to hedge their books of business more, that could feed into your revenues?
+
+Question_22:
+
+          Yes. In the sense that you can potentially hedge your commodity risk, so wouldn't that be something?
+
+Question_23:
+
+          Yes, okay. And then is there a time frame here where you have to start telling us what your LCR is? I wasn't sure if that was coming up soon. Was that this quarter or next quarter? Has that just been put on hold?
+
+Question_24:
+
+          I get that. I'm just thinking that there's the opportunity to show us the nonoperating deposits going away, which would help people understand the strength of the deposit franchise.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/1_answers.txt

@@ -0,0 +1,348 @@
+Answer_1:
+
+    Yes, we obviously have to make some assumptions going forward in house prices and they are not that different than the assumptions you would see in most other that get published by Case-Shiller, etc. Right now, they have a modest increase in home prices in 2013 and '14. I will stick with just those two years. But if it was 5% better than that, which is possible, that would run through our books in lower charge-offs and lower reserves. And just as a rule of thumb, $500 million for one year.
+
+
+    It's a very rough rule of thumb.
+
+Answer_2:
+
+    Yes, no, we are required under Dodd-Frank to disclose our stress tests. Remember, we do -- in March. We do it almost immediately after the Fed's report. And remember, we do hundreds. The Fed is four. So we look at multiple kind of stress tests and we are going to try to give you a full view of how we look at the Company under stress. I should point out that a lot of you did it yourselves in the past. You were pretty accurate some of you.
+
+Answer_3:
+
+    Just to give you a view, we have $200 billion of equity and $250 billion of unsecured debt. That is $450 billion. That is a lot of capital before anyone else bears a loss. It is not clear to me that subordinated versus just unsecured, and it would take time to develop those markets. If a bank has 50/50 or -- obviously it changes the nature a little bit over time, so it will take time to develop. But I think we're working with the authorities to get it right, to do the analysis right, to have the right numbers. I think you have a little time before someone says it has to be this amount.
+Remember, we have got Basel I, Basel II, Basel III, OLA, LCR NSF and the new one and we are going to be able to accommodate all of them. It will take a little bit of time. I do want to point out that we fully intend in 2013, late 2013, to be a 9.5% Basel III and to be fully compliant with LCR.
+
+Answer_4:
+
+    Well, we had done giving you some numbers in our annual report last year about where it is a no-brainer to buy back stock, which I said is tangible book value. Tangible book value is now $38 or $39, which has gone up, what is it, $4 this year, almost $5 this year. So we still think if you haircut earnings and buy stuck at these prices, it's probably still a good deal. We got permission to buy back $3 billion in the first quarter. Obviously, it is going to be a little price-sensitive and then CCAR will set what we can buy back for the next four quarters after that. I hope that answers your -- yes.
+
+Answer_5:
+
+    You can do the same numbers at today's prices. Discount, if you want to be conservative, discount earnings, buy back stock. At the end of a two or three-year period, you will apply earnings per share and higher tangible book value per share even at these prices. It seems like a pretty good deal to me. Typically, you have a good company.
+
+
+    And you are not going to need the capital down the road. I am not talking about for one year, but down the road.
+
+Answer_6:
+
+    Think about it as all in and we are expecting our run rate in the future to be I think $300 million to $350 million, as I said, excluding the items we talked about. Including IFR, we are at $725 million. We have got a ways to go, but it is coming down. Think about it in there.
+
+Answer_7:
+
+    Well, I think let me just put out first off that our comp ratio was 33%. If you, by the way, if you added back some of the bonuses paid in corporate that don't show up as comp in the IB, it would be like 35%. We think that the roundest number is kind of an ongoing run rate. We have formulas. We don't pay out necessarily by the formula, but we have formulas that are capital-adjusted, risk-adjusted, etc., etc. that -- that is what really guides it and it is not -- so it is really done at a much more detailed level than it will bounce around that 35%.
+I should point out that again we feel good that our ROE in the investment bank was 17% this year. It was 16% or 17% last year and the year before and we are paying our people fair and well. I feel good about that. That is a good thing. That is a good business model to have something like that.
+
+Answer_8:
+
+    Yes, I think that is probably true, but other firms have ratios of 50%, 55%. Ours is already fairly low. We want to win in the business. We are going to be competitive in compensation and obviously that will adjust over time as competition changes.
+
+Answer_9:
+
+    At Investor Day, we will try to give you a better view of that. So there are clearly some negatives and we don't know all the rules, also some positives. So we are in a position between custody and clearing and our brokers businesses to provide some of those services for investors so they can allocate capital properly, transform the collateral and serve them better. So let the rules come out. Obviously, this is going to affect our revenues a bit, but there will be opportunities there too.
+
+Answer_10:
+
+    No, here is my caveat. We are going to meet LCR this year whatever it is. It doesn't matter to us whether we like it or not. Now to answer your question, there were some changes in LCR; I think they were good, but they still capped the benefit like mortgages and we have like almost $90 billion of MBS. So government-guaranteed MBS is in what they call level 2 and therefore, you are restricted in how much [capital] liquidity.
+Now personally I think that is wrong, but it is okay. We will live with it, we are moving on. I don't know why the American regulators would agree to that. Government-guaranteed MBS in a market you want where they treated liquid and remember, they already have a 15% haircut. I could argue they don't need any haircut, but look, whether changes are made or not, we are going to be compliant. It is not going to affect our earnings that much.
+
+Answer_11:
+
+    Yes, so hey, Betsy, we talked about the third quarter being -- peaking at over 200 basis points before the margins compress in some 40 or so basis points in the quarter and we do expect that to continue into 2013, not at that level. If you go back in time, you would see gain-on-sale margins more in the 65 basis points. I don't know if that is where it will end, but certainly we expect for that to be seen through 2013, but with gaining marketshare. We hope to keep our volumes up.
+
+
+    Obviously, it will normalize over time, but it may not go that low because our expenses could also be permanently higher. To be in the business is going to cost more money and obviously that will be part of your -- what you have to earn back.
+
+Answer_12:
+
+    Yes, so we -- the number that Marianne showed you is the Basel III Tier 1 common 8.7. If you look at what I call for the next two years passive mitigation, that is run-off and what I call normal models, so we still have to get certain models in there and there is not arguing with anybody, it's just models that should be put in place, that would add almost 1% to Basel right off the bat. About I am going to say $100 billion of that would be models, $80 billion to $100 billion would be models. Part of that is the runoff to synthetic credit, which is obviously coming down over time.
+And the other thing, which I think you're going to see, is we are pushing Basel III down, we have, but we are pushing it down at a very detailed level. I think over time you're going to see (inaudible) down capital Basel RWA even more. And there are things in Basel, which I don't know what the future portends. We have $200 billion plus of operational RWA in there now. That is driven very -- that is like $16 billion of capital. That is driven very high by obviously the mortgage litigation and stuff like that, some of which will go away. So one day, a lot -- that $200 million should come down a lot too. I just don't know the timetable for that.
+
+Answer_13:
+
+    No, I didn't mention -- we are going to get there late in 2013 whatever it takes.
+
+Answer_14:
+
+    We will answer -- to give you more feedback -- maybe we have to have a buffer. We don't know what the final rules are for capital. So you already have a conservation buffer. You go below what happens. Obviously, OCI could be a big swing. Like if you model -- I forgot -- we had modeled it. Like 300 basis points would be $20 billion after tax or something like that. But you could handle that too because it is going to come in over time and you can manage your balance sheet going forward, your stock buyback going forward. So we really need to see the future rules to make that determination. If we need a buffer, we will have a buffer.
+
+
+    Whatever that is, we will go there right away too, but we just don't know what it is yet. And we don't know whether CCAR is going to drive capital or the conservation buffer is going to drive capital or whatever. And we don't know how the G-SIFI exactly works, even though we know it's a 2.5%. We will probably find ways to reduce that over time. So we have plenty of capital. Right now, I am -- far more than I personally think we need, but we have plenty of capital.
+
+Answer_15:
+
+    Well, unfortunately, that is a one-year thing, okay and I should point out that before you ask is that when we started the dividends, we said that the intent would be to increase them a little bit every year, so you should expect to see that. We are going to ask for less capital return from stock buyback than we have in the past so where I can do $3 billion in the first quarter. We are going to do less because we have determined, and this is a Board-level determination too, that we want to get to 9.5% quicker and we don't exactly know how these stress tests work. So we think under severe stress, we would have plenty of capital, but the last time the Fed's numbers were very different. We don't understand that and the way CCAR has done this year has even more volatility. Basel 2.5 is far more volatile in how you calculate RWA, OCI and all that than the old Basel I test. So we are a little cautious, which I think is what obviously the Fed expected people to do.
+
+Answer_16:
+
+    Yes, let me just separate the two. In Consumer, credit card is near the end. There could be more, but it is near the end. It's really mortgage. Mortgage reserves are going to have to come down as charge-offs come down and charge-offs are going to come down. We are not trying to manipulate our earnings or anything like that. They are going to come down. The portfolios are smaller; housing prices are going up. We just don't know exactly the pace they are going to come down, but remember they are half what they were a year and a half ago and my guess is, in a year and a half to two from now, they will be half of what they are today, which implies the reserves will come down. We have $5 billion left; that implied would be $2.5 billion. So nothing magical there. That is what is in the numbers. It is really a matter of timing, etc.
+On the CIB side, it was really -- we had one or two big recoveries, so we did have, what was it, $400 million, but Marianne also pointed out there were some other negatives that got booked in CIB too. So you are right; we are not going to have much reserve takedown in CIB, but the other negatives won't be there either. So it is a little bit of a wash in CIB too from other non-reserve-related stuff.
+
+Answer_17:
+
+    I wouldn't call it a strong fourth-quarter showing. We kind of made an assumption that the last two weeks of the year are pretty dead in terms of activity and we were a little bit wrong about that. But here is what I would say. Activity now is continuing; it is usually strong in the first part of the year. We don't know. But I personally believe that this has been, and I have been consistent about this, a cyclical, a secular change. We deal with 16,000 investors. Investable assets are going up; they are not going down. Global trade is going up; it is not going down. High net worth assets, I'm talking over 10 years and so there is a need that people have to buy and sell securities, etc. So I think the underlying trend is up and obviously spreads will compress over time. They have by the way for 20 years. That will continue.
+And now we have got a bunch of model changes, not models, but like business model changes from swaps and derivatives and regulations. We will adjust all that, but there is a chance you're going to wake up one day and it will be a boomer year and no one is going to predict that either. There is a chance we happen to go into recession that it will get worse, but my attitude is I think we are very well-positioned in the business. It is very broad-based between FX rates, credits, securitized products, commodities. It is very global, emerging markets driven by research, which Marianne mentioned we are number one. So over time, it will grow. I just can't predict what it is going to do next quarter.
+
+Answer_18:
+
+    Yes. Look, I think the American economy -- I've said the table is rather well set. Consumers, businesses, housing, small business they are all in pretty good shape and I think we need good policy and good fiscal policy, but yes, so we expect to see -- we have had, which I think you mentioned, we have had run-off in consumer too. Remember, in Card, from (inaudible) and some other stuff and we are running off sort of businesses and certain things we got out of, but you could start to see a little bit of growth now going forward in outstandings. Good growth in spending, a little bit of growth in outstandings.
+
+Answer_19:
+
+    Yes, so, hey, John, we will do that for you at our Investor Day in a lot of detail. I think the way to think about our adjusted expenses going forward, you should think about them being flat to down in terms of direction and we will go through all of that for you in February.
+
+Answer_20:
+
+    Yes, around $50 billion.
+
+Answer_21:
+
+    One day we hope.
+
+
+    (multiple speakers). So we don't -- yes, we won't -- we can't predict the litigation expense, I'm sorry.
+
+
+    I think the one part, which I just want to reiterate, is that obviously that one is going to be lumpy and be ongoing except the part relating to mortgages. We have done a lot of work on and we are hoping that we are properly reserved there and they are not going to see duplication of that. In the last couple of years of litigation, a lot of it related to mortgages. Not all of it, but a lot of it.
+
+Answer_22:
+
+    You have got me there. I think if we buy back $3 billion and what we issue -- I think we issue --
+
+
+    2.5.
+
+
+    -- amortizes in over time as we issue it --
+
+
+    Right.
+
+
+    -- so my guess is it will go down a little bit in the first quarter. When you issue restricted stock, it doesn't immediately go into fully diluted. That goes in as it amortizes. Remember this stuff amortizes over three years generally.
+
+Answer_23:
+
+    If we spend the whole $3 billion, my guess is it will go down, yes.
+
+Answer_24:
+
+    Yes.
+
+Answer_25:
+
+    Yes, I think, John, in part, that is it. I can get back to you with more specific details. It did come down slightly in the quarter. It does reflect the combination of our full understanding of all of the rules, plus some model changes and everything else in the quarter and BAU activity, but we can get you more detail.
+
+Answer_26:
+
+    Yes, well, so we are continuing to grow our deposits very strongly. We are continuing to grow our loans very strongly, so core loan growth up 9%. So all in all, we are generally holding pace with NIM compression and hope to see the same next year plus or minus.
+
+Answer_27:
+
+    It was better by over $100 million versus the fourth quarter last year.
+
+
+    Of course, last year wasn't particularly good by the way.
+
+Answer_28:
+
+    Completely off. Let me tell you where - you raised a lot of subjects; let me do them one by one. Obviously, when you have a problem like the whale, you have mistakes, which you should acknowledge and then fix. So we obviously fixed CIO totally 100%. People in it, reporting, risk, controls, committees, guidelines and we don't do synthetic credit there at all. But some of those mistakes obviously scared us and we went and checked everywhere in the Company. So we are fixing certain things across the Company. Not that they are bad, they are not disasters, but they require fixing. And so when you have an accident like that, you want to say we are going to use this to get stronger, better, smarter, tougher. And we have to and we are going to. Obviously you can't meet every demand of the regulators. So we have got real resources doing it. We have already done a lot of it. We are going to continue to do more. So yes, they were changes from the whale.
+Number two, we are in business to build the business over time by serving clients. That is what we do. We do it every -- we take risk. When you take risks, you make loans; you take risks when you invest money; you take risk when you build systems and branches. But that is what we have been doing consistently and I hope you see in the underlying numbers more branches, more bankers, more custody, more trading, more products, more services, more countries, happier clients in every business. Record results in Commercial Banking, Asset Management, a lot of cross-sell in that and we are going to do a lot more to describe to you the competitive benefits that we get in this Company because the different business units work together and things like that.
+So that part of the business hasn't changed. That is why we are here. Even CIO has always been doing that, investing assets conservatively because I was watching something on TV today -- you have to earn a return on your assets. The book -- you are not going to try to earn a return on your assets is ludicrous to me and to manage asset liability exposure generally conservatively. We obviously made a mistake.
+And the third thing, the reorganization, that was around -- and I (inaudible) do a lot of this for you, around the client. If you said rebuild the Company from the ground up, you probably would have organized it around the clients, not necessarily by product. It is not that we were bad or banks were bad or anything like that; it is that companies acquired mortgage companies, they acquired credit card companies, they acquired retail branches. The power of that franchise is extraordinary. 40% of our retail branches own credit cards -- are credit cards today. A big chunk of our mortgage sales come out of the branches. Most of our small businesses serve out of the branches. Middle-market is served out of the branches. The branches are becoming an enormous competitive advantage for asset management. The commercial bank couldn't survive without them.
+So all we did is say put together those businesses under one roof where you want to have -- you want to treat the client the way they want to be treated when they come in the front door. Same thing for CIB, the same client set in the investor side and the issuer side, the corporate side. So we go to any country. We serve the big companies, we serve the sovereign wealth funds, we serve the governments. We serve them out of TSS and we serve them out of the investment bank.
+All we are doing here is better coordination, which we think will have more cross-sell and believe it or not lower expenses. Plus it will help us deal with the new regulatory environment. So both of these things are going to help us deal with the new regulatory environment to have consistent standards across all the businesses, etc. So that is why we had the reorg.
+And management changes, you went through the litany of changes, but just remember Daniel Pinto has been in that business his whole life. Mike Cavanagh has been here for many years and was already running TS&S. Doug Petno has been running the Commercial Bank for several years now. Gordon Smith and Todd Maclin, we did it a little bit faster than we told people. We told people we were going to put that under one roof. Marianne Lake has been the Controller of the IB and the CFO of the consumer bank. All the people in these jobs have been here a long time and they are very good. I mean I think it is an exceptional management team.
+It is too much turnover, but again the way I look at the turnover, if I have 15 people in the operating committee, you should assume that 15% to 20% every year will turn over. Some years will be zero and some years will be more. When you have reorgs and stuff like that, it is a little bit more. Hopefully, you're going to have stability. We have got a great management team. They are working a lot of different things. Most have been here a long time. And part of it, part of it relates to -- remember if you were on my Board of Directors, you would be asking me, in fact instructing me to make sure you were putting in place in big jobs the people who have to be tested to see if they can do my job. That is -- I mentioned this many years ago, that is job number one. That takes precedence over all other things. And sometimes it leads to turnover. I'm sorry.
+
+Answer_29:
+
+    Well, look, you should get to know them, but you could evaluate their quality, their integrity, their brains. Mary Erdoes has been here a long time. Matt Zames, who is now Co-Chief Operating -- Frank Bisignano both been here a long time. So these are long tenured, very good, respected employees. And so I know it is going to work. Obviously, you have to make that evaluation yourself.
+
+Answer_30:
+
+    Not really, but the CCAR does have this qualitative aspect, which I don't exactly know what that means, but not really. It really related more to the desire -- the stock price is higher and the desire to get to 9.5% quicker. Everyone's being doing it and obviously we shouldn't lag. That's all.
+
+Answer_31:
+
+    Also, Mike (inaudible) because you had me do a little work after one of your reports came out about stock price. So do this yourself. Take Bank One's stock price from the day before I got there to today, and take JPMorgan's stock price from the day we announced the deal to today, compare it to the S&P, the bank, the bank index or all other major firms and it's actually rather good. It outperformed in both cases, the bank by a long shot. In both cases, the S&P not by a long shot but by a significant margin and almost most other financial companies. So obviously something has been working a little bit here.
+Opportunity, I think the opportunities are fabulous. So next year, we are going to focus a tremendous amount of regulatory requirements, these consent orders getting things done, but also just organic growth. Small business, Marianne mentioned, is up almost everywhere, partially in Florida and California where WaMu gave us the opportunity to do that. We opened our 1000th branch in California. We are still going to open net over 100 branches this year. Our credit card has been growing. The Chase Private Client, we have got 250 branches to 1200 Chase Private Client. That number is going to go up -- and I don't know if we've -- I don't know if that is public -- okay, now it's public -- to something like 2000 end of next year. It is really working. So it is growing dramatically.
+Our mutual fund complex has been growing. TS&S, actually not TS&S, the Global Corporate Bank has opened multiple branches overseas. We have gone from 120 Global Corp bankers to 286 or something. It is going to be north of 300 and it is working.
+If you look at Investment Banking revenues out of the commercial bank, when we first got here, I think it was like $450 million. This year, it hit almost $2 billion and we think the opportunity to continue to grow is large. So in almost every single business, we see very good opportunities to grow and obviously, we operate in a difficult world, the financial services, but in the Investment Bank, it was -- it has been -- Marianne went through the numbers, but we don't see why we can't continue to grow that around the world and serve more clients in more places like Colombia or in some of the emerging markets.
+In Commercial Banking, we opened branches in non -- states we don't have branches, which have been focused on kind of larger clients and international. That is working well. International commercial bank is working well and all these numbers are in here. You guys should go through it soon. They are all pretty good and you are going to see us continue to focus on growing those businesses in a quality way.
+
+Answer_32:
+
+    Well, I think you should look at it -- we are already fully engaged in meeting all of those concents and other regulatory demands. Remember, we have changing rules and requirements. We also have a lot of items that the regulators have asked us to focus on, their consent orders. So yes, it is a tremendous amount of resource, but it is not going to change the numbers you see. It is just the people involved -- a lot of people involved in risk credit, legal compliance, audit, HR all are really involved in getting a lot of this stuff right and we have to do that. Of course and people in the business too of course.
+
+Answer_33:
+
+    Yes, so, Matt, you would have seen that we pretty much portfolio all the jumbos we originate right now. We price them to great returns and we would continue to do that. We like that asset. I think overall across the firm, we did $5 billion of jumbos this quarter and so you should expect to see that continue.
+
+
+    I would just add that one of the things you learn to live with a little bit is that you could put a mortgage on your balance sheet and earn or 3.75% or 4% if it is a jumbo or something like that. It doesn't have OCI. It holds more capital, but it might be a wiser thing to do than taking the gain on sale and then buying an MBS at 2.25%. So there are all these opportunities to think through how to manage in the new world properly both for the client and for the shareholder. (multiple speakers). Go ahead.
+
+Answer_34:
+
+    It may be -- and that may change over time and get bigger. So we are doing a little bit more and right now, it is the jumbos. We have done a little bit like C pluses and stuff like that, but there may be others.
+
+Answer_35:
+
+    We would much prefer loans than securities like in commercial bank, credit card, etc. So the reason we have securities is because we can't generate that kind of loan right now.
+
+Answer_36:
+
+    I think the QM was a really big start and kind of well thought through, but it also needs to be coordinated with Basel III, some of these NPR rules, this whole thing about OCI. So all these things are going to affect mortgage a little bit and a lot of players involved in that who have to coordinate it. But I do think over time they will open up the mortgage markets. How rep and warranty is going to be handled, etc.
+
+
+    TRN, skin in the game. I think securitization will be important. So if I was the government, I would want to get QRM and securitization rules fixed as quickly as I can to allow people to start.
+
+Answer_37:
+
+    I would say that is probably in line with that. We have excess cash and excess capacity at central banks and that is what that reflects.
+
+
+    They are two different numbers, but they move in the same direction. And we will probably disclose more about that at the Investor Day too.
+
+
+    We will.
+
+Answer_38:
+
+    Probably not much.
+
+
+    Yes, not much.
+
+
+    The average yield in the investment portfolio is coming down a little bit every quarter and that will continue for a while.
+
+Answer_39:
+
+    No.
+
+
+    We do break it out.
+
+
+    We disclosed it. We haven't disclosed it in the fourth quarter.
+
+
+    What was it last time?
+
+
+    Probably like 3.
+
+
+    Interest duration. So it is probably about the same.
+
+Answer_40:
+
+    The other thing -- right, but the important -- I think the way to look at (inaudible), we would benefit from rising rates. So I've always said that that portfolio is subordinated to the interest of the Company. It is very short. You can extend that duration or a lot more income, but then we would be hurt by rising rates and we break out the earnings and risk from rising rates -- if the whole curve goes up 100 basis points, it is about a $2 billion plus pretax. And that comes through the investment portfolio and loan repricing, etc.
+
+Answer_41:
+
+    I can't -- offhand, it is hard for me to say that, but I think I am going to guess, but like 30 or 40 basis points. It's not a lot to neutralize it --
+
+
+    -- to eliminate -- right, something like that.
+
+Answer_42:
+
+    The margin?
+
+
+    So I think it is in the supplement. I am afraid I --.
+
+
+    It's in the production revenue.
+
+
+    Yes, it's in production revenue, which I think was close to $800 million.
+
+Answer_43:
+
+    Revenue was 3%, 3.5% and net was -- (multiple speakers).
+
+
+    So it's like 3.5 times 50, actually is on closed, not --.
+
+
+    We will do the math for you.
+
+Answer_44:
+
+    First of all, it is a Board-level decision and in some ways, it is a nice problem to have, but the way you set the question up you almost have no option. You can't buy back stock and you can't raise your dividend. All you have left is something like that. So we will get there when we get there. Again, we need to see all the new rules and how they are going to apply like this conservation buffer and we may know more by Investor Day, but when we know more, we will let you know.
+
+Answer_45:
+
+    So the first one is obviously we do budgets and stuff. We put targets in place, things we would like to accomplish. So that is in how we look at -- we are not going to disclose it to you. But I did say that we do think it is going to enhance revenues and reduce expenses a little bit. So a little bit is in there for the CIB and a little bit in there for consumer. And we are going to disclose more at Investor Day about kind of cross-sell and how we look at it and where we think we can benefit, etc.
+And if you look at risk-weighted assets, we are up to -- our balance sheet is $2.4 trillion. We have got $200 billion of money deposited in central banks around the world or in repo, very short-term investments, $350 billion in AA securities and $400 billion in securities borrowed or resales. We have a really, really liquid balance sheet. I just mentioned $750 billion, almost $1 trillion of very short-term stuff that is sitting there on our balance sheet in the asset side and our risk-weighted assets are now $1.65 trillion. They have gone up dramatically because of Basel 2.5, the fact that we don't have certain models in place that will be accepted.
+So some of the benefit arguably is going to be just -- I am going to call it run-off. Some is from models that regulators expect people to design and put in place that we don't have yet. We just don't have the history or we haven't done the modeling and that is -- a lot of it is around credit-related, synthetic credit type stuff, securitizations and things like that. So we are going to put those in place. And that is not arguing with regulators; they would expect us to do that over time. Obviously, regulators -- I know they are going to look at how people do models around the world and they want this done fairly, etc.
+
+Answer_46:
+
+    Sure. So think about repurchase. So both sides of that we do them separately. So repurchase losses, I told you you will see demand down significantly, you will see the outstanding pipeline down significantly. We have seen cure rates improve and so our realized losses were sub $200 million and it is what it is and it is a factor, a feature of activity obviously and it can vary a little.
+On the repurchase reserve side, it is obviously model-driven and we use inputs, including things like cure rates. So it is not going to be a perfect offset in this quarter. It happened to be slightly more and over time, over the next few quarters, we think they could largely offset that you might see some small pluses and minuses.
+
+Answer_47:
+
+    Yes, and I would say we are in constant dialogue with the agencies and obviously people ask about behavior and we are in constant dialogue, we think we understand the direction it is going and we feel good about where we are right now and we will continue to monitor that.
+
+Answer_48:
+
+    I don't know how to respond to that. I think -- maybe you can call later and get some more feedback on some of the stuff you said. You can call Sarah Youngwood at investor relations. But you went through a lot of the stuff that is accurate. Obviously we are in an environment -- the environment changes all the time, but we have growth plans everywhere. So it isn't like we are sitting on our laurels and just looking at what is going to -- NIM compression, stuff like that. So we expect to grow earnings next year. I may be wrong, but that is what we expect.
+
+Answer_49:
+
+    Yes, okay.
+
+
+    You're welcome.
+
+Answer_50:
+
+    I think we had said earlier, on July 13, we hope it is almost a nonissue by the end of the year. I think we are getting there. I think from the day that -- and we are not going to give you more detail than what I am about to tell you so don't ask. We had modest losses in the fourth quarter. There is no reason to have any losses going forward. The risk from the date of the investment bank got and they have done a good job continuing to derisk it are down, I am going to say, another 50%.
+So obviously, there is still risk. It is still a portfolio which has got -- the average duration I am going to say is 2, 2.5 years left. So if you did nothing, it is going to diminish dramatically over time, but I think we have got it well-controlled at this point. There could be some volatility because of the nature of it. It has got some idiosyncratic exposures in there, but we think we are fine. We don't think there's anything that anyone needs to worry about anymore.
+
+Answer_51:
+
+    You have got to do it a little bit by business because I think in consumer mostly sticky, but it is probably a little bit of TAG -- like you guys had an estimate for that.
+
+
+    Yes, like (inaudible) plus or minus. Mostly those deposits we would consider core and sticky.
+
+
+    Right. And then TS&S is a lot of seasonal year-end deposits, so it bounces all over the place. Asset management I put in the sticky category. Commercial Bank has been kind of flat, but it is sticky.
+
+
+    It is flat because the loans are starting to grow and it is huge. Commercial has $190 billion of deposits. I think that number was $100 billion 3.5 years ago. So they have a lot of money there. We actually expect that might have come down one day as companies start to grow and expand more aggressively, which would be a good thing.
+
+Answer_52:
+
+    That's a woulda', shoulda', coulda'. I don't know, Guy, the answer to that question. I think if they had been put in place -- it depends how they would have ultimately been put in place. So they were delayed to get more work and how it gets done. I think if they had been put in place for JPMorgan where the rules constrained us overseas, but didn't constrain other companies overseas, we would be down from what we might now have. If the rules were put in place as we can compete freely in Frankfurt, London, Singapore and Shanghai, my guess is our US revenues would have been down a little bit, our international revenues would have been up a little bit.
+
+Answer_53:
+
+    No, so private equity is $8 billion invested. We expect to earn a return on that. We are obviously getting a great return on it, so that is lumpy, but it should be more than $50 million on average. Treasury -- think of treasury as NII. It is very predictable. The NII (inaudible) by quarter. That number will go down a little bit. That is just how we allocate capital and funds between all the business units. And then how we invest the assets.
+So we can change that tomorrow by having longer duration in our investment portfolio. The lumpier part of treasury and CIO is when we have mark-to-market gains and securities gains. That bounces around a little bit and again some of that is discretionary. So we don't look at that -- we should almost call it a net loss, and that number -- I think the $300 million will come down over time, not go up for a whole bunch of different reasons, which I won't go through right now.
+And then the other corporate -- that has net allocations, BOLI, COLI, taxes, all these lumpy items and we will just try to tell you it should be plus 100 -- it could be on average 100, plus or minus a couple hundred because of lumpiness of those items. Like corporate taxes are lumpy for a whole bunch of different reasons and so our numbers would be 100 on average. And we always explain the difference if there is ever a big difference there.
+
+Answer_54:
+
+    It has got not a damned thing to do with exotic investment strategies, zero, nada, nothing, okay? The bulk of those assets are always invested conservatively, AA plus. We had to do it around the world, so deposits around the world, etc., nothing to do with that. It has all got to do with some of the NIM compression that shows up there because obviously investment portfolio yield has gone down a little over 2%. It was 4% three years ago and how we allocate capital and things like that.
+The changes you have seen. Some of them are the differences due to the regulatory changes of B3, RWA and stuff like that. So we will try to make this a little bit clearer going forward. But on average, that number will come down, not go up over time.
+
+Answer_55:
+
+    Yes, when we allocate the new Basel III operational capital debt, the capital allocations will go up mostly to the CIB by I am going to say 20% or so and to the commercial bank by 20% or so or maybe a little bit more than that. And that will obviously change the return targets for those units. It will also be very healthy, so it will just come down. The Company will be exactly the same.
+I mean so we just have -- I think when we allocate all this stuff intelligently, it will actually probably end up driving better returns over time as people learn how to manage it a little bit differently. So we will be allocating -- again, it eventually will show more. We will be allocating out -- think of it as everything at one point, LCR, G-SIFI, Basel III, Basel II, whatever comes down the pike will be allocated out so our managers can manage through it.
+
+
+    And the other thing we haven't decided permanently is how you look at each business because my feeling has been, this is open for debate, is that the business should be capitalized the way its competitors are going to be capitalized so they would feel free -- they are free to compete in that category. I think the people lump their capital ratios around their competitors. That could be very hard for someone for example to be -- run with 7.5% capital and all their competitors are at 10% or vice versa.
+
+Answer_56:
+
+    No, cost is cost. It has nothing to do with that. I am talking about capital -- saying we may capitalize the commercial bank at 8.5% and the investment bank at 10%. It may not be 9.5% for everybody because they have to operate, they have to compete in different environments. So that is where you just -- we just haven't figured out exactly how to do that yet.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/1_questions.txt

@@ -0,0 +1,227 @@
+Question_1:
+
+    Hi there. Thanks. So over time, we have talked back and forth about housing improving and you were right and it is improving. But curious if you have any metrics for us on say what is built into the reserve models and how -- what kind of sensitivity we could have on say -- let's just say hypothetically housing improves 5% in 2013 and again in '14. Just -- I don't know if you can put metrics around it, but -- (multiple speakers).
+
+Question_2:
+
+    I appreciate that. From what I understand on CCAR this year, the Fed is going to be taking a closer look at internal stress testing and all the procedures that go around that. And I think we are going to get to see -- you are going to be disclosing some of those results. I am not front-running what we are going to see. I am just curious. In general, are we going to see that at the same time, are we going to see that on a lag basis and what you plan on disclosing?
+
+Question_3:
+
+    Jamie, maybe the last one, on things related to part of the liquidation authority. I know we haven't seen the white paper yet, but there has been a lot of back-and-forth and I am not a believer that we are going to get the worst-case scenario that some of the people at the FDIC had thought about, but long story short is, as ironic as it is, every bank has spent the last couple of years reducing their subdebt because Basel III doesn't count it. Now, shocker, we are going to have to (inaudible) some more because the OLA is going to want it. Just curious on how much prep you can do ahead of that and what your expectations are in terms of a phase-in if that is going to be impactful in the near term.
+
+Question_4:
+
+    Good morning. Thanks for taking the question. So you all are about to start buying back stock here in the first quarter and the share price is at about $45. Ironically, this is the price point historically where there has been an indication of some price sensitivity. So maybe I was hoping for an update on your thinking on that front.
+
+Question_5:
+
+    Yes, no, I think so. So basically we can look at the tangible book value growth versus the last comments and imply from there?
+
+Question_6:
+
+    Fair enough. And then the $100 million to $150 million that is coming out of your legacy costs, is that part of that $500 million per quarter that you all have highlighted in the past or is that in addition to that?
+
+Question_7:
+
+    Okay. Good deal. And then the comp ratio in CIB is down this year or I should say maybe full-year 2012 about 2.5 percentage points from year prior. How should we think about the comp ratio in the IB on a going-forward basis? Have we hit a structural shift here?
+
+Question_8:
+
+    Sure, but probably, on the whole, upward comp pressure across the street competitively is probably nowhere near as it had been. So in improvements and increased cost leverage is probably decently sustainable wouldn't you say?
+
+Question_9:
+
+    Okay. And then last one from me, as we start to move forward towards the central clearing of swaps here late in the first quarter of '13, do you maybe have an updated view of what this transition might mean for JPMorgan's FICC business or your capital markets revenues for 2013?
+
+Question_10:
+
+    Hey, good morning. A question on LCR. Jamie, you mentioned that you were going to be -- looking to be 100% compliant by the end of 2013 and I wanted to understand did the Basel release on LCR align with your sense of how it is going to shake out in the US? And I ask because the RMBS looks like it was very tightly worded, so I wonder if there is any caveats to your comment that you will hit the 100% by -- (multiple speakers).
+
+Question_11:
+
+    Okay. And then just separately, a small item, but on mortgages, you talked about the gain on sale that came down on the quarter and that you are looking forward to that normalizing over the course of the next year or so. Could you just give us a sense of how much we are talking about normalizing because we could go back to precrisis and it is a much bigger implication on mortgage revenues than if you are talking about just before the long end of the curve started to come down dramatically.
+
+Question_12:
+
+    Yes, good morning. Jamie, a quick question. Any update with respect to how quickly you expect your Basel III risk-weighted assets to decline? We saw a little bit of a decline this quarter, expecting more decline, but is there sort of any change in the outlook for the pace of that decline or how you are thinking about it?
+
+Question_13:
+
+    Okay. And then just a quick follow-up to that, you mentioned wanting to get to 9.5% by the end of 2013.
+
+Question_14:
+
+    Okay. Along with that, we see a number of companies sort of building a little bit, 50 basis points or something like that, of sort of a buffer on the buffer to account for AOCI fluctuation and things like that. For you guys maybe getting up to 10% or wherever the ultimate endpoint in, is that more of a '14 event or is that also something that you would like to get done this year?
+
+Question_15:
+
+    Well, I think everyone is trying to sort of do math on how much capital you might return this year. So all of those are questions -- (multiple speakers).
+
+Question_16:
+
+    Good morning. Some of the pushback that I have gotten from some investors on your strong quarter is on the provisionals overall. So I guess I want to follow on Glenn's question because clearly CIB is unsustainable from a provision basis, but it seems like there is still a lot of leverage left on the provision side from CCB. So Jamie, was your comment that if house prices were up 5% over what is in your model, the additional leverage provision is $500 million per year?
+
+Question_17:
+
+    Got it. And in terms of CIB activity levels, I think that the investor base did expect some strength this quarter more than seasonal. I guess could you give us a sense of whether or not the strong fourth-quarter showing is sort of a harbinger for activity levels finally picking up in 2013?
+
+Question_18:
+
+    Okay. And just I wanted to sneak one more in on Card. We appreciate the color on sales volume in Card and I think there is a thesis out there that if the US consumer is taking home less because taxes are higher, but the underlying economy is okay, then that could potentially translate into receivables growth finally. Is that a reasonable leap to make as we look at receivables growth for next year?
+
+Question_19:
+
+    Yes, hi. Marianne, it looks like your adjusted expenses ex-litigation IB comp came in around $49 billion or so for the year. Do you have an outlook for this number in 2013? Are you looking for some improvement in that above and beyond what you save from the foreclosure settlement?
+
+Question_20:
+
+    Is that the right number like flat to down from around that $49 billion or so level?
+
+Question_21:
+
+    Okay, okay. And then that excludes litigation. It looks like litigation for the full year came in at about $3.7 billion. That is down from $4.5 billion the year before. Do you expect that trend of declining litigation expense in '13?
+
+Question_22:
+
+    And then on the buybacks, the first quarter is usually a big issuance quarter for you on shares, but knowing you have approval for $3 billion of gross repurchases, do you expect to have a net reduction in your share count by the end of the first quarter?
+
+Question_23:
+
+    Okay. Like for 2012, your share count didn't go down. That is because you suspended the buybacks and it didn't do enough in the first quarter to take the share count down. I assume you would like to see it decrease at some level.
+
+Question_24:
+
+    And then when you say you are going to ask for less, just to clarify, you mean you will ask for less than $3 billion per quarter?
+
+Question_25:
+
+    Okay. Last thing, on risk-weighted assets, it looks like your assets were up 2%, but Basel III RWA came down. What drove that delta? Are we starting to see the mitigation take effect?
+
+Question_26:
+
+    Okay. And one more thing. Your net interest income grew in the fourth quarter despite the NIM headwinds and the runoff. And I understand your NIM percentage outlook, but I guess what helped you grow NII dollars this quarter and do you think you can grow NII dollars in 2013?
+
+Question_27:
+
+    Good morning. Just first a factual question. How much were fourth-quarter performance fees in asset management?
+
+Question_28:
+
+    Okay. My main question is does the CIO incident change how JPMorgan is run? And as you said, you have had record net income, 15% return on tangible equity. I think you said in the past -- someone at JPMorgan at least implied that the CIO incident shouldn't change things. On the other hand, you have the new cease-and-desist orders, regulatory actions by the Fed and the OCC and this change in reporting format is the most radical that has ever been put in place since, Jamie, you have been CEO and then all the changes in management. You have a new head of consumer, commercial, investment bank, international, CFO, CIO.
+So on the one hand, you highlighted the record net income. I guess my question goes to sustainability of the results over the next several years given how many people have changed, the change in reporting format and the regulatory action. Maybe it is like if you are driving on the Long Island Expressway and you get a ticket for going 80 miles per hour, then you drive 50 miles an hour. Is that just completely off?
+
+Question_29:
+
+    I guess we will hear more at Investor Day next month, but what are you watching for since there is so much rotation among top managers around the same time? What are you looking for to make -- ensure that this current team will work?
+
+Question_30:
+
+    Then last follow-up, does your positioning to ask for less than $3 billion per quarter in buybacks have anything to do with the regulatory actions that recently came about?
+
+Question_31:
+
+    Great. Jamie, I was wondering if you could kind of talk just a little bit about given the strong results that you've got and kind of the hopes of continuing to drive them, which areas you think are the best in terms of where you can see investment in either share gains or growth into 2013.
+
+Question_32:
+
+    Just as a separate issue, you have obviously responded to the orders from both the OCC and the Fed. Are there any kind of impacts while those are out there until they have kind of deemed them to be kind of fully dealt with and what is the timeframe for that?
+
+Question_33:
+
+    Good morning. A couple questions in the mortgage banking business and as we think about the mortgage asset, I guess the first one is what is your appetite either now or as you look forward to actually portfolioing some of the mortgages you originate?
+
+Question_34:
+
+    That is really what I was getting to because I think you have one of the shorter MBS books out there. Obviously has a strong mortgage origination platform. And as we strip out kind of the legacy residential mortgages, what you are left with is not a huge number. So just trying to gauge what the appetite might be to --.
+
+Question_35:
+
+    Okay. And then maybe somewhat related, as we think about just the underwriting standards in the mortgage business --
+
+Question_36:
+
+    As we think about underwriting standards in the mortgage business -- I mean we can see the average FICO scores that the banks do collectively that Fannie and Freddie backed still quite high. There has been some good progress with dealing with the legacy issues, not just for JPMorgan, but for the industry as a whole. Got the new guidance from the CFPB, home prices going up. What else do we need to see for banks to loosen underwriting standards of mortgage a bit?
+
+Question_37:
+
+    Good morning. Maybe a question for Marianne. Marianne, I noticed that the global liquidity balance was up about $50 billion quarter-over-quarter to just a little bit under $500 billion. Is that in line with your guidance that you are going to meet the LCR requirements by the end of the year or is there something else going on there?
+
+Question_38:
+
+    Okay. And how much of an effect, if any, was that on the margin in the quarter?
+
+Question_39:
+
+    Thank you. Good morning. Could you tell us what the duration of the securities portfolio is?
+
+Question_40:
+
+    Okay. And I may have missed this, so I apologize if you -- (multiple speakers).
+
+Question_41:
+
+    How much would you estimate at the long end of the curve would you need to see the long end of the curve go up to mitigate the margin pressures so that you could actually see maybe margins not go down?
+
+Question_42:
+
+    Yep. The other question, and I apologize if you guys already gave this answer, but what was the gain on sale of mortgages this quarter?
+
+Question_43:
+
+    And what was the spread, like 3%, the revenue spread?
+
+Question_44:
+
+    Okay. And then coming back to the return of capital, Jamie, I know this at a stock price you are not going to want to buy back your stock. I am not asking for that stock price, but let's assume for a moment bank stocks do well this year, your stock gets to that level where you are not real comfortable in buying it back. Would you guys consider, as the excess capital builds up on the balance sheet and the Fed limits your regular dividend to maybe 30% of earnings, would you consider special dividends as an avenue to give back that excess capital if you feel it is not -- you are not comfortable buying back the stock at the price at some future level?
+
+Question_45:
+
+    Yes, good morning. A couple of questions. The first one, on the latest reorganization, I guess that comes with you in the light of having completed the integration of both Bear Stearns and Washington Mutual. It makes complete sense, but have you actually set any targets in terms of both the revenue and cost synergies you think you might achieve in the medium term? That is the first question.
+And the second one was on the $80 billion to $100 billion of RWA you think you could shed by reworking your models. Something ironically you have been pretty critical about in the past in terms of the Europeans' view on that. But can you just tell me is it getting more difficult to do that in the market (inaudible) at the moment? We are getting some pushback from (inaudible) on some of the risk-weighted asset calculations or are you finding it pretty straightforward to actually negotiate that?
+
+Question_46:
+
+    I wanted to ask a detailed question about the mortgage rate purchase expense. You were able to show this quarter that you had a reduction in the reserve of $249 million and only experienced $196 million of losses. So you actually net brought down the impact there. And in your outlook, you talked about being able to offset future losses with release of reserves. So I wanted to ask that question first and then I had one more follow-up after that.
+
+Question_47:
+
+    So we should see a -- we have gone through an inflection point here where you think the demands are coming down and improvement of what you are seeing overall but that drain should be somewhat mitigating going forward?
+
+Question_48:
+
+    And then as we look into 2013, I was trying to take a little bit of your outlook and just kind of create a net progression. If you look at the $1 million that you basically highlighted in margin compression, you have a natural offset that you have explained in the servicing expenses for about $400 million. So if you take your current run rate of operating of $1.35, annualize that to $5.40, you have probably got somewhere between $0.07 and $0.10 worth of negative that comes out of that from netting out the positive that you have in the servicing expenses from margin compression.
+If you then move incrementally for growth, if you offset a lot of the margin compression with loan and deposit growth, then you are being able to generate about $1 billion of incremental by just growth and overall balance sheet. If you look at expense savings and then some reduction in shares, you can kind of look at how you would layer in towards something like 10% kind of growth next year as you kind of mirror those kind of big moving pieces. So I just want to make sure we were tracking those and if you had any other thoughts about incremental opportunities to create EPS next year?
+
+Question_49:
+
+    And I guess, Jamie, the bottom line is that you have product growth to offset margin compression, but then you have got share repurchase and some efficiencies that create incremental growth. I guess that is the bottom line.
+
+Question_50:
+
+    Good morning. Can you just give us an update on where you are on the synthetic portfolio? I know you probably don't want to give a dollar amount, but is it mostly gone and what the timeframe is of that -- even if it is a modest drag, just having that off the books completely?
+
+Question_51:
+
+    Okay, that's helpful. And then maybe just on the deposit growth, I think you were up on a period-end basis $54 billion. Is there any way to kind of get a sense of how much of that is stickier? Was that just sort of fiscal cliff concerns or was it the TAG-related deposits? Do you have any sense on what was driving that and if it is just more sustainable organic growth that would be helpful?
+
+Question_52:
+
+    Yes, good morning. This first question is a little bit short term, so forgive me, but the CFTC, as somebody mentioned earlier, did push back the timing of some of the OTC reforms with respect to central clearing. And I guess my question is, from your point of view, all other things being equal, should we expect stronger fixed income revenues as a result of that in the first half than we otherwise might have?
+
+Question_53:
+
+    Okay, that is actually real helpful. Thanks. My other couple of questions have to do with your outlook slide. First of all, on corporate private equity, I just want to make sure that there is no distinction that I should read. When you talk about treasury and CIO, you talk about the net loss of $300 million plus or minus specifically in the first quarter. When you talk about the other corporate $100 million, you don't mention a timeframe. So does that mean that you expect more potential variability over say the course of this year in the treasury and CIO number than the other number, which is more of a run rate?
+
+Question_54:
+
+    So if I add the two together, and obviously we know there is lumpiness, but just adding those two numbers together at face value, we are talking about a quarterly loss of a couple hundred million. You used to guide to quarterly earnings of I think it was $100 million to $200 million on that kind of combined line. So if I was trying to assess what the swing had been relative to a few years ago, how much of it would you say is just the compression of net interest margins and how much of it is moving away from some of the, pardon the word, but exotic investment strategies that CIO used to --?
+
+Question_55:
+
+    Okay, that's fair. And then the final question I have is just on the [firmwide] right below that. You talked about capital allocations a moment ago. It sounds like your LOB return on equity targets are, like you say here, are going to come down for some units and therefore overall but the corporate guidance is the same. So does that mean that basically all this change just is because you're allocating more capital out to the business units and you will have less at the corporate parent? That is the only real change?
+
+Question_56:
+
+    So you are going to try to move both capital and cost allocations more to each unit being on a stand-alone basis, is that right?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/20_answers.txt

@@ -0,0 +1,166 @@
+Answer_1:
+
+          So Betsy, there's no change in our transfer pricing methodology or even the way we compute it. It's to do, as you appreciate, with, obviously, higher rates and the fact that we are in a very disciplined environment at this point on deposit reprice. We would expect to continue to see the margin expand over the course of the next several quarters, but we would also expect to continue to drive higher NII as we're growing our deposits. [And those remain] in FTP.
+
+Answer_2:
+
+          Yes, yes.
+
+Answer_3:
+
+          Yes. So I mean, I think the way to think about it, not to sort of diminish the importance of any individual breach or situation, is that we are, honestly, under constant attack both in a more general side, but also from a fraud perspective. And so while we will always react and learn lessons from every individual situation, this is not the first breach, nor will it be the last breach. And so as a result, we have been constantly evolving and refining the way we think about fraud prevention, detection, underwriting, continuing to move to multifactor protocols around customer identification, looking to leverage all of our data to sort of better inform our underwriting decisions. So the reality is that, as important as it is and as much as we -- as each individual breach could impact the overall equation, we have had to evolve over an extended period to the position that we're in now. And so as a direct result of this, there won't be specific, meaningful changes, but a continuous evolution. And so when we are looking whether it's at sending out preapprovals or marketing offers or receiving inbound applications, we are increasingly looking at a number of different data points and facts to be able to identify the customer and understand the application.
+
+
+          And just -- let me add. As part of a breach -- so if your name was taken, and we know that as Social Security, a driver's license, we can put in a lot of enhanced controls that we do about your name specifically. We don't have to rely on those things. We can reduce reliance. We can greatly, dramatically include antifraud on your account. So we do, do that to dramatically diminish any effect on our customers.
+
+
+          And the reality, Betsy, is that we kind of operated over an extended period now on the presumption that while we happen to know about this breach, there will be others either right now that we don't know about or over time. And so we have to be proactive, not reactive. And we'll obviously look to learn anything we can, but we continue to evolve so that we can use all of the information at our fingertips. And as a practical matter, we are not seeing a specific increase in fraud.
+
+Answer_4:
+
+          Correct, correct. As a result, we're already spending the money that we need to spend to keep, hopefully, ahead of the curve on all of these things. Our operating losses are -- I will say, the combination of all of the information that has been compromised over the course of the last several years has put pressure on fraud costs, but nothing incremental from this. And so no impact on expenses or loan growth that would be measurable.
+
+Answer_5:
+
+          Yes. So look, we -- obviously, apart from the rate hike in June, nothing has really happened much since last quarter. And so the landscape is looking pretty similar, and -- not because that's surprising, so I'll come back to that in a second, which is to say that there's been very little to no movement in the repricing of deposit accounts. There's been some incremental movements in certain savings and CDs, but nothing systematic in the consumer space. But that's pretty much as we would have expected with rates at these absolute levels. And so at some point in time, and that may be a couple, 3 more rate hikes from now, the dynamic may start to change, and so we haven't changed our perspective about what we think the ultimate reprice will look like. In Asset & Wealth Management, the story on deposit pricing is somewhat similar. A little bit more movement, but nothing particularly meaningful or dramatic. The story there is very much, again, as expected. At these levels of rates, you are seeing customers start to make choices to move certain of their deposit balances into investment assets. That's normal migration, migration that we expected and that we've modeled, and we are retaining those balances. So we are starting to see some of the dynamics we expected play out. That started happening at the beginning of the year and has continued to progress. And then in the wholesale space, there is a spectrum as well. So I would start with we're firmly on a reprice journey in wholesale, no doubt. And depending on where you are in the spectrum, it ranges from the smaller and lower middle market companies, where the reprice is modest, but present to the higher end, where it's reasonably high. And so overall, if I step back, that's where we are. If I step back and say, "Have we learned something new in this cycle that we didn't know?" The answer is, "No, not really." If you look at the first 4 rate hikes of the previous normalization cycle, the overall cumulative deposit reprice was pretty much the same as it is now. So we continue to believe that the dynamics that we've been talking about over the last several years and that we've expected will play out. They may not play out exactly as we have them modeled, but they will ultimately play out that way and that we have appropriately conservative reprice assumptions.
+
+Answer_6:
+
+          So at the risk of sort of hedging, it's actually a bit of both. The reality is there's always been 2 different camps on the reprice theories for consumer. There's been the camp of acute market awareness, low for long, technology enhancements allow movement of money to be easier, competition for retail deposits and good liquidity deposit is high. Therefore, reprice higher. And the counter to that, which has merit and which we are seeing to a degree, is customers feel that they're weighing a more balanced scorecard of things when they choose where to keep their deposits. And customer satisfaction, the suite of products and simplicity, the digital and online offerings as well as the safety, security and brand all matter and that price is a factor, but not the only one. So I would say we certainly feel that having a leading digital capability is critical to, overall, our customer franchise, and it will, in all likelihood, have an impact on the stickiness of deposits because customers value that kind of convenience very highly. I would also say one other thing about where we are right now, is that, as you know, as much as you're right about the sort of potential demand for these sort of high-liquidity value deposits, there's a lot of excess liquidity in the banking system. And although loan growth is solid, it's solid. So we aren't seeing a frenzy, albeit that we're very proud of our deposit growth.
+
+Answer_7:
+
+          Yes, welcome back.
+
+Answer_8:
+
+          I don't have that off the top of my head, but we can get back to you.
+
+Answer_9:
+
+          I fear -- here's what we'll do. I fear if I give you a ballpark, I'll get it wrong. While we're on the call, we'll get someone to send the details and let you know.
+
+Answer_10:
+
+          So we're doing a bit of all of the above. So I'll start with the comment which you heard from us before, but which we still strongly defend, which is that branches still matter. That 75% of our growth in deposits came from customers who have been using our branches. That, on average, a customer comes into our branches multiple times in a quarter. So I know that all sounds like old news, but it's still new news at -- or current news. So the branch distribution network matters. Customer preferences are changing, and we are not being complacent to that. So we are, underneath the overall 5,000-plus branches, continuing to consolidate, close, move, grow, change all of our branches in line with the opportunity in the market that we're in. So net for the year, we'll be down about 125 branches. We've closed more than that, consolidated some and added some. So we're not being complacent to the consumer preference story. But branches still matter a lot, and we're building out all of the other sort of omni-channel pieces, as you know, so that we have the complete offering. And if the customer behaviors start changing in a more accelerated fashion, we will respond accordingly.
+
+Answer_11:
+
+          Yes. So I would characterize this as -- over the 2 quarters of normal. So you may recall last quarter, there were a couple of things that we talked about. First was that there was a $75 million sort of onetime interest adjustment in mortgage, which artificially reduced loan yields for the quarter. And secondly, that seasonality and mix in Card similarly. So we would normally, in the law of extraordinarily big numbers, expect for a 25 basis point rate hike that we'd see about 10-ish basis points of improvement in loan yields across the whole portfolio. We didn't see that last quarter. What you're seeing this quarter is the reversal of those factors and the normal benefit of the June rate hike.
+
+Answer_12:
+
+          Yes. So as we look at the loss rates for this year, they're coming in, as we expected, at less than 3%. And as we look out to next year, based on what we know today, it's still in that 3% to 3.25% range, albeit maybe at the higher end of that range. So it's broadly in line with our expectations. So the reserve build -- and we -- in the consumer space, we move our reserves in -- not in dollar increments. But the reserve build is about a little less than 1/3 on the growth and a little more than 2/3 on normalization of rate.
+
+Answer_13:
+
+          I think that was about...
+
+Answer_14:
+
+          Yes. So -- yes, NII, so a couple of things. The first is just to sort of repeat the standard. Just as a sort of macro matter, we're more sensitive to the front end of rates than to the long end of rates, particularly over any short period of time. And so intra-quarter volatility in the 10-year, while it's not nothing, it's not like it would have a material impact on the run rate. We're -- clearly, an overall generally flatter long end of the curve, in general, on average, through the year, all other things being equal, will have had a dampening pressure on our expectations. And it's part of the reason why they went from 4.5% to 4%, not the only one, as we progress through the year. But generally speaking, intra-quarter volatility is not something that would have a meaningful impact on our run rate.
+
+Answer_15:
+
+          Okay. So on the first, I think it's quite important to, like, not look at the average and to kind of decompose it into constituent parts. Because we've talked before about the fact that we use our balance sheet strategically in CIB, but loan growth is not really a thing there. And so this quarter, we saw no loan growth in CIB. So no big deal, but it means that, that 7.5% core growth for the whole portfolio would have been, outside of CIB, closer to 9%. So start with that. Consumer has been pretty consistent. So across the consumer space, whether it's our jumbo mortgages, whether it's the Business Banking, Card, Auto loans and leases, they've been growing at reasonably solid and consistent high single-digit territory or even low double digit for mortgage over the last several quarters. And at this point, we don't really see anything that is suggesting that, that will moderate meaningfully. So where you're seeing -- and similarly, in Asset & Wealth Management on the banking side. So really, where you're seeing the growth moderate is in commercial, and it's in both the C&I loans and the commercial real estate loans. And they each have a story. With the commercial -- with the C&I loans, for us, the story is about moving from meaningfully outperforming the industry to being more in line with the industry. So over the course of the last couple of years, as we've added expansion market, opened new offices, added a couple hundred bankers, developed our specialized industry coverage models, we've been growing meaningfully better than the industry. And so you see that even in this quarter in our year-on-year growth, 8%, as compared to the quarter-on-quarter growth, where it is flatter. And that, to me, is really a factor of the fact that in this stage of the cycle, our clients have strong balance sheets. They have a lot of liquidity. They have had access to the capital market. And so GDP-plus growth is not unlikely to be a level for the foreseeable future. With commercial real estate, it's slightly different. We're still outpacing the industry, but we've kind of gone from very strong to strong, and we would continue to expect that to slowly moderate. And that's a number of things. It's some higher rates. It's actually a lot of competition. And then it's a lot also about client selectivity given where we are in the cycle. So we are being very cautious about new deals that we add to the pipeline and the client selection that we have. So all of those factors, I think, weigh into the commercial real estate space. Just -- tax reform, so fiscal stimulus. The reality right now is, although I think everyone and ourselves included are hopeful, obviously, that tax reform is done for the right reasons and that the economy responds accordingly, at this point, it's not front and center in the dialogue we're having with our clients about whether they should or shouldn't do a strategic deal or take an action. So I would say it's neither holding up business, nor spurring business, but that could change. So at this point, I'd say it's a factor, but not a driving factor, and that could change.
+
+Answer_16:
+
+          Well, so -- I mean, we'll just deal with the fourth quarter because I think the landscape of rate hikes for 2018 is an open question. But no, we would expect loan yields to hold relatively flat, all other things being equal. It's a very competitive environment. We aren't seeing -- we're seeing some pressure in commercial real estate spreads. We're seeing, generally, spreads holding up. But I would expect competitive pressures to keep loan yields relatively flat.
+
+Answer_17:
+
+          Yes. So we are -- at this point, we are, at that 3% charge-off rate, rising to 3% to 3.25% next year and growing, so you should continue to expect that we'll be adding to reserves. Our outlook for reserve adds next quarter is below this quarter. But obviously, we will continue to observe that. And with respect to the hurricanes, right now, in this quarter's results, in the credit lines, in mortgage particularly, and to a much lesser degree, in wholesale, we built -- effectively built $55 million of reserves. To sort of contextualize that, we have used our unfortunate experiences of Sandy and Andrew and other natural disasters to calibrate the assumptions we're using. At this point, it's early to be able to say how the losses will actually manifest themselves. It could be that it's lower than that, but that's also the central case right now, $50 million in mortgage and just a handful of million in the wholesale space.
+
+Answer_18:
+
+          Yes. So I'll just start with a bit of a philosophical discussion, which is it is our opinion that now, as much, if not more so than ever, the investments we're making in technology will effectively breed and deliver the efficiency. So to the degree that we are able to find incremental investments or accelerate them, we'll be willing to do that. And our expense numbers, our outlook has never -- have never been target. So that's just a sort of mental -- philosophical point of view that we would deliver any technology innovation and investments that we could execute well, that we think would be either accretive to our returns through revenues or efficiency. Specifically, when you look at the simulation, this is a point of technicality. In 2018, middle -- probably middle to third quarter of 2018, we are expecting that the FDIC DIF fund will reach its level at which the surcharge will be able to be reduced. That's a meaningful positive for us. And so if you look at the implied growth in expenses from '17 through the medium term, they are larger than is implied. But if we found the opportunity to do more or to accelerate more, we would do it and explain it to you. So we'll come back to that at Investor Day.
+
+Answer_19:
+
+          Yes. I think I'm -- so when we did some conferences at the end of the last year, I think that we said that we'd expect the revenue rates for the full year this year to be 10.5%, and it will be a little better than that. And the revenue rate increase in the quarter speaks to a little bit of spread and a little bit of lower premium. It will go down the next quarter because of the fourth quarter effect of the Sapphire Reserve travel credit for overall, call it, 10.6% for the year. But yes, we do expect to hit the 11.25% in the first half of next year. And we've reached the inflection point end of the third -- second quarter and into the third quarter, where growth is offsetting the impacts of the significant upfront investments in Sapphire Reserve. Then we'll see revenues grew from here.
+
+Answer_20:
+
+          Yes. So I'll just start with credit for a second because although we absolutely expect at some point that we're going to see normalization of credit -- we haven't seen that yet, I just want to make that clear, that we are appropriately cautious in sharing everything, but we're not seeing any deterioration or any thematic fragility in our portfolio that we're concerned about at this point. With respect to the revenue side of the story and the efficiency side, I mean, it really is a story of all of the things you mentioned sort of all coming together at the same time. So we have been adding to -- we have our expansion markets from the Walmart acquisition. We've been adding new markets and opening offices. We've been adding bankers. And as you know...
+
+
+          We're in all 50 of the top MSA now.
+
+
+          Yes. We are in all 50 of our top MSAs now. And we've been adding bankers. And as you know, when you add all of these investments, for a period of time, when they are still in the buildup mode, you don't see that drop to the bottom line or to the top line. And now we're starting to see our bankers hit their stride, become very productive, the balances are building. And then I would also say that this is a -- the epicenter of delivering the whole platform to our clients. So if you think about what we're able to offer our clients in terms of international capabilities, banking coverage across industries, core cash, global payments, we have a platform offering, I think, that is -- well, it's certainly complete, and it's somewhat differentiated. And then the third thing I would say is that it's a buttoned-up business. We have been looking at efficiency and expenses and really working on making sure that due to simplification processes that we went through in 2013, '14 and '15, that we are focusing all of our efforts on our core strategic clients, and it's paying off.
+
+Answer_21:
+
+          Yes. So I would say it's almost -- like you said, there are so many uncertainties that it's almost talking about hypothetical at this point, as encouraged as we are with the ongoing dialogue. My view is sentiment is relatively high. In fact, it's ticked up slightly over the course of the last short while. So from that vantage point, we're in a position of strength. And there would necessarily be some lag, so whether that is a couple of quarters or longer. So certainly, in the foreseeable future, you would hope to be able to see increased demand and confidence leading to action.
+
+Answer_22:
+
+          Yes. So I'll start with the excess liquidity question because while we feel very, very good about our liquidity position, and you will have seen in the recent disclosures where everyone is positioned and necessarily, even if LCR was the only consideration, people would want to be running a Basel II LCR. So -- but LCR is not the only consideration. And the other most notable one I would point out to you would be resolution planning. So know that when we have our overall liquidity position, we're taking into consideration a combination of constraints. And so what may look excess in one -- on one lever may not be as excess on another. The second I would say is that when we look at the deployment of our HQLA, we look at it in the context of our sort of target for what we want the duration of equity for the company to be over the course of the normalization in rates. And obviously, it's not just about liquidity. It's also about duration. So we're comfortable with our liquidity position. We have a framework for deploying it and for thinking about the spot and forward-looking duration of the company. That's not to say that we are not opportunistic in taking advantage of moves that are technical in the long end of rates to either deploy or to undeploy dry powder, and we still have some. So it's more than just liquidity. It's also duration, and we've taken the overall balance sheet and our expectations and our target into consideration, albeit that we still have some dry powder.
+
+
+          And we maximize for between loans, securities.
+
+
+          Yes, yes.
+
+Answer_23:
+
+          So it will be over the short while, and our full expectation outside of any other, like, stimulation is that as the front end of rates goes up and as gradual QE unwind happens, that you're going to see the long end of rates go up, albeit more slowly. So it's pretty typical at this point in the normalization cycle to have a curve flattened. That's what we're seeing. That's what we would expect. I would expect to continue to see the long end rise. And yes, it should be NIM-accretive.
+
+Answer_24:
+
+          So I would say it's wallet share. It's blocking and tackling. We did pretty well in Europe, and -- but there is still a lot of competition. So I would say it's less about the specifics of any one competitor because the environment is pretty competitive and just about sort of reasonably broad strength. Two things that I would also point out is, the first, in equity underwriting, similar to -- in FICC, we gained a couple hundred basis points a share in the third quarter of last year. So on an apples-to-apples basis to where we would normally expect our shares to be, we're still doing very well.
+
+
+          I would just say, I think the competition is fundamentally fully back.
+
+
+          Yes.
+
+
+          It's not that they're -- or most of these players are all out there. Some specialize in certain areas, but it's fully competitive. And you have new entrants soon, like the Chinese banks, et cetera.
+
+Answer_25:
+
+          Okay, that was a lot. So look, first of all, we welcomed the report. And it's a long report, a couple hundred pages. There's a lot of recommendations, very comprehensive. So kudos to the Treasury for delivering it. And we are supportive of those recommendations kind of at large. And I think the most important thing to remind you is that this is not about materially changing the legislative landscape. It's about recalibrating -- sensibly recalibrating the specifics of individual rules over time. And so we're still digesting the report, but we are supportive. It is very comprehensive, and it could be very beneficial to the liquidity and depth of the capital market, which is what we should all hope for and not contrary to safety and soundness. So in that sense, very supportive, all good. It's going to be complicated, and it will take time, but the will is there. And so whether it's the administration or the regulators, there's a general recognition that there's the ability and the appetite to want to make rational change. And so if that helps to grow the economy and all the things that come with that, we're working as constructively as we can on that.
+
+Answer_26:
+
+          Yes, so we're building, obviously, kind of beta platforms for trading and investing and things like that. And also, the P2P, Zelle which is doing quite well. We look at all those things as things you want to -- from the client standpoint, we want to offer to a client. And at one point, we'll be talking about a more -- testing what we think might or might not work, and then we'll give you more of a strategic view of that probably around Investor Day.
+
+Answer_27:
+
+          So we have a fairly large mortgage loan portfolio in addition to having a large portfolio in our investment securities in MBS. So we are already reasonably equivalently mixed in terms of our percentage of mortgage exposure to our total assets or loans to the competitive landscape. And so trust me when I tell you that you talk about excess liquidity because of LCR and we are thinking about more than just LCR. And we do -- as I said, while we do maintain a short position and the cost of being short is relatively cheap, we don't have the kind of capacity to invest $100-plus billion in MBS right now or anything that's meaningful like that to generate higher returns without blowing through our duration target.
+
+Answer_28:
+
+          No, no, no. We haven't. We -- as we talked about before -- a while ago, we made some surgical changes to our credit box in the Card space, but that's, if anything, I would say, incredibly granular, incredibly surgically tightening, not the reverse. Whether that's in Card, in certain micro sales or whether that's in Auto, I would say we've been pretty conservative. And we're probably doing, at the very margin, a little bit of tightening.
+
+Answer_29:
+
+          No. So I mean, congratulations to them if they have a high degree of confidence on what 2018 CCAR is going to look like. So I will tell you this. We said very clearly that we feel that the company should operate within the range of 11% to 12.5%. We feel like it should be lower in that range. And having a capital plan approved of $19.4 billion of share buybacks over the next 4 quarters and over 100% payout based on analyst estimates is a start. So nothing has changed about that objective, but we would want to be measured about the pace at which we do it until we have a bit more final clarity on what the new generation of capital rules will look like. So we hopefully will know more as we go into the next cycle of capital planning. We haven't changed our point of view that we should be able to continue that journey down into the range, and that would be our objective. To tell you that we can give you the road map for that today, I think, is not accurate. So -- but you can do your -- you can and you have done your own math. You can -- your base -- look at our earning outlook in your earnings models and payouts of over 100%, and you can see that we can move down in that same time frame to something much lower than we are now. It's not towards the bottom, but that's not to say that we will be able to do that. We need to go through tests.
+
+Answer_30:
+
+          Yes. So I think I got that. So the compliance burden and the readiness and the work to be ready is a significant heavy lift not just for us, but, as you say, for all market participants. And so there is the possibility that effective at the beginning of the year, there will be ongoing work that needs to get done. We feel like we're reasonably well positioned and -- to defend our position. But there's no doubt that over the course of the year and beyond that people get clearer and clearer on transparency and cost to execute versus advice versus content that there may be competitive dynamics to change. And we feel like we've been building for the last several years to be ready for those dynamics. So there could be some bumps. I don't think it's anything that we're concerned about at this point, and we will all learn a little more as we go through 2018.
+
+Answer_31:
+
+          So I would say that, for sure, has to be part of it. And even with the auto situation, what you're seeing is, I think, a marketplace that is much more responsive. So while we felt like we got ahead of the issues and tightened early, you've seen the sort of industry generally move in that direction. So I think there's no doubt that the environment, in totality, sort of capital liquidity controls regulation has led to higher-quality loan books. And so yes, we have been pressure-tested. Energy was a 1 in 100-year flood. And I think the industry, and specifically our portfolio, performed really quite well. And that's not to say that there isn't a point of pain out there somewhere we just -- that we won't see. We just feel like we'll be in a good position to get through that.
+
+Answer_32:
+
+          Yes.
+
+
+          Yes, but no. Yes, (inaudible). So I would tell you that we are seeing that rotation start. If you go back even 3 years ago, we kind of gave you an outline of what we thought would happen. We said we're going to see rotations from the high wealth segment into investment assets, followed ultimately by the consumer space. We'll see retail deposits move into money funds. We'll see outflows of wholesale, not deposits, as the Fed shrinks its balance sheet. But those things are going to play out over the course of the next -- depending on the rate cut, over the course of the next 2 to 4 years. So we've begun to see it. It should be expected. I don't think it tells us anything new or different necessarily at this point.
+
+Answer_33:
+
+          Yes. So look, our card spend growth at 13% up year-on-year is still very strong. So when we say moderated, it's from very strong to very strong. And it is in part due to the number of new products we've had. So we would continue -- the Sapphire Reserve card spend engagement is very strong, and we're very pleased with it. So it's not -- I wouldn't say it's a moderation necessarily. It's just, at these very high levels, from a slightly higher to very strong is still a great story.
+
+Answer_34:
+
+          So if you think about -- our first acquisitions were in August and September. So we're kind of at the early stages. So far, very encouraging. So far, better than our expectations. But a little early to sort of draw firm conclusions on it, but very encouraging.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/20_questions.txt

@@ -0,0 +1,136 @@
+Question_1:
+
+          Two questions. One, on the revenue lift in the Consumer & Community Bank. I know on Slide 4 you highlighted that the 6% up year-on-year is driven by the higher NII and deposit margin expansion. Could you just describe a little bit if this is just the start of an improvement in transfer pricing that the Consumer Banking division is benefiting from? And is there a lag that, we should expect, would continue to drive up this revenue lift over the next several quarters?
+
+Question_2:
+
+          And then -- right, but that FTP methodology should continue to drive up margin -- deposit margin over the next couple of quarters.
+
+Question_3:
+
+          Okay. And then the second question is just how you're dealing with the Equifax fallout. The real -- the question here is, does the breach that occurred drive any changes to how you are assessing credit requests that come in, how you're filtering for what you perceive as fraud risk and how you're managing the book of outbound credit requests that you're looking for from a proactive perspective on your loan book?
+
+Question_4:
+
+          And as a result, expense impact, loan growth impact, de minimis from your perspective?
+
+Question_5:
+
+          I wanted to follow up to your responses, Marianne, on no pressure on deposit pricing. I'm wondering if you could -- especially in light of your deposit growth strength, and especially in the Consumer, give us a sense on how repricing trends are today in terms of the consumer wealth management versus wholesale deposits.
+
+Question_6:
+
+          Got it. And my follow-up question on that is you're one of the few firms that have been really talking about anticipating the impact from a Fed balance sheet reduction over the next several years. And the question I often get from investors is, obviously, in particular, retail is valuable not just for the price of it today, but on an LCR basis. And how would you respond to the question, given the 6% growth in digital in the consumer bank and 12% growth in mobile, does technology help with the stickiness of the consumer deposits? Or does it potentially aid in the velocity of switching?
+
+Question_7:
+
+          Can you hear me?
+
+Question_8:
+
+          My question is on the consumer and the community bank, a 3-part question. First, what percent of your customers have online bill pay? I'm trying to get back to that stickiness of the deposits.
+
+Question_9:
+
+          Okay. Can you give a ballpark? I don't think you've disclosed that before. Is it, like, to the nearest quarter or...
+
+Question_10:
+
+          Okay. And then the second part is -- I mean, you're talking -- the deposit beta has been lower. You gave your caveat. But mobile bank customers are up 12% year-over-year. Why do you still need 5,200 branches? Isn't this a good time to close branches when deposit competition isn't as tough as it might be in the future?
+
+Question_11:
+
+          A question first on the loan side, on the yields. So last quarter, they held flat. And this quarter, they're up 16 basis points. I just wonder if you could help us understand, was that more just the mechanics of timing of hikes moving through your variable rates? Was -- is it any element of pricing? Or any other things you could just help us understand why we saw that great, nice improvement there?
+
+Question_12:
+
+          Got it, okay. And my second question, with the Card build, you took the reserve for Card to around 3.3%. I know you had talked about staying below a 3% Card loss rate for this year. But I'm just wondering, as we get into next year, you kind of had a medium-term idea of 3% to 3.25%. How are you feeling about that in terms of the seasoning of the Card book and loss rates?
+
+Question_13:
+
+          I don't know. Maybe it's a little nitty-gritty, but you're definitely the person for this. Point to point, the yield curve was about the same. 10-year was about the same.
+
+Question_14:
+
+          10-year was about the same, point to point. However, throughout the quarter, the curve was much flatter. I'm just curious if that has any dampening effect in any given quarter. And maybe the better way to ask it is, could it have a little bit more of a positive run rate as we go forward?
+
+Question_15:
+
+          Okay, cool. And in terms of the loan growth, I think it's completely normal to see some moderation, and you're still doing reasonably better than the industry. I'm curious on the main source of maybe the moderation ticking down a little bit. And then more importantly, is it too soon to ask if any of this talk on tax reform and decent economic data is having a pickup in the conversations on the loans growth side?
+
+Question_16:
+
+          Maybe just a quick question on the outlook on the net interest margin, if -- should we still expect some grinding higher of asset yields even without rate hikes? How do we think about that trajectory, assuming we don't get any more rate hikes from here?
+
+Question_17:
+
+          Okay. And just maybe on the reserve build outlook. Should we still expect it to kind of track with growth and keep the reserve ratio kind of similar in Cards where we are now? Or do you still anticipate some additional building? How do we think about that? And if you could size the hurricane impact, that would be great this quarter.
+
+Question_18:
+
+          Marianne, I was wondering if you could discuss how you're balancing all the investments you're doing in IT and business growth with the efficiency mindset that you guys always have. I guess one of the frameworks is if I look at the 3-year simulation you provided in February, a lot of the expense growth seemed to happen this year. We have kind of a $2 billion increase in adjusted expense. And post-2017, the expense growth looks very modest. So maybe just talk about -- a little bit about the leverage you're using to keep expenses in check as you're doing all the investments.
+
+Question_19:
+
+          Okay, and then just a follow-up. You mentioned the Card revenue run rate has moved up again nicely this quarter. It seems like you might be able to get to your target by the early half of next year. Is there upside to that revenue run rate target? Is that -- are things coming in better than expected in terms of the moderation of promo rates and things like that? Or maybe could you just give a little color there?
+
+Question_20:
+
+          Just following up on, Marianne, on the Commercial Banking business. You've had -- you've obviously -- you've had very good momentum there over the last couple years, and you did talk about credit dynamics in moderation in credit growth and sort of a normalization back towards industry trends. But can you just comment a little bit more broadly about some of the initiatives you've had there from a revenue standpoint, whether it be the middle markets initiative, BI -- the growth in IB, international and whatnot? The earnings growth has obviously been very, very strong in this business, and it's starting to move the needle a little bit. But if you can just give us a little bit of color on the opportunity set you see there.
+
+Question_21:
+
+          No, that's great. I guess sort of a related question on the Commercial Banking business that's a little bit of a follow-up as well on tax reform. Obviously, the Congress -- or the administration and House Ways and Congress released a blueprint so Congress can now start to flesh out a tax plan. And obviously, there's a lot of uncertainty as to the content, the timing, heck, whether it even happens or not. But how -- if we do see something that is sensible, however you want to define it, how quickly do you think that we could start to see that beating through into better sentiment and ultimately, into better demand or increased demand for credit?
+
+Question_22:
+
+          Can you talk about how your -- can you just talk a bit about how you're managing the excess liquidity? You've obviously continued to build cash. The securities book has shrunk. It makes sense given the flatter yield curve, but you combine that with still good deposit trends and a strong loan growth and obviously, a challenge as you think about protecting them going forward. So maybe you just talk about the dynamics there and how you're thinking about the yield curve, how to manage that.
+
+Question_23:
+
+          And then just a follow-up on the rate sensitivity. I mean, you mentioned before -- or you reiterated before you're more leveraged through the short end of the curve. If we get continued increases on the short end of the curve but the 10-year doesn't go anywhere, is that still NIM-accretive as it's been thus far?
+
+Question_24:
+
+          You touched on this a little bit, but maybe you can give us a little more color. You mentioned in your opening remarks you increased your market share in investment banking. Can you share with us, is it -- are you getting a bigger wallet share? Or are you winning more customers? And also, are -- some of your competitors are still struggling. Is that also a factor?
+
+Question_25:
+
+          Very good. And then possibly, Jamie, if you want to weigh in on this, what's your guys read of the new Treasury report on changes coming in the capital markets that was released in early October? Any specific items in there that you guys looked at that would be specifically beneficial that you'd like to see change? And what's the probability of it happening? And could it happen sometime next year?
+
+Question_26:
+
+          Jamie, I was actually hoping you could update us on your efforts to launch your online brokerage offering, it's something that you had mentioned in your last letter, and was curious, since it comes up with investors quite often, how you view the opportunity set in that business for JP, whether it's an effort to just build a moat around your current client cash balances and maybe fill a void. Or is your intention to become a bit more disruptive in the space and actually attract many more customers and potentially even offer more aggressive pricing and terms?
+
+Question_27:
+
+          Got it, okay. And Marianne, just wanted to follow up on some of the discussion around excess liquidity management. And I appreciate the fact that you guys certainly want to be conservative in thinking about duration and maybe taking a more holistic view of the asset side of the balance sheet. But looking at the LCR disclosures and just given the stark contrast in terms of how much you have parked in the way of excess reserves and relatively low levels of MBS compared with your peers, how you're thinking about duration management and whether you do have additional capacity to actually remix some of that cash of the Fed into higher-yielding MBS, especially as we think about the Fed balance sheet unwind dynamics.
+
+Question_28:
+
+          Just a quick question on loan growth. You just had another decent quarter of the growth in residential mortgage. Maybe looking across Consumer, is there anywhere where you've had to kind of open up a credit box in order to growth there? I know you mentioned that loan yields are expected to be tight on competition, probably not increase as much, but have you had to go down market at all for loan growth?
+
+Question_29:
+
+          I was wondering if you could talk a bit more about the quantum and timing of return of excess capital. Of course, one of your notable competitors has given a very detailed strategy of how to do this by the end of 2019. Are you in a situation to adopt a similar strategy?
+
+Question_30:
+
+          Okay, fair enough. And I have a different question. MiFID II is high on everybody's minds. I think everyone's focused on the impact on equity research and FICC research. But I mean, there's broader implications possibly for how that might impact trading, not just from your own point of view but also from the point of view of clients who might not be compliant by the end of the year. How does that weigh on your mind? And what impacts could we expect there?
+
+Question_31:
+
+          I was going to ask you about the credit. You pulled out and highlighted auto after we went through kind of an episode of possible deterioration. You put that together with energy and what we experienced last year, those are our first 2 pressure points on the credit cycle. And really, we've come through without any real heartburn from either. Does that tell us something about the derisking and underwriting discipline that the banks in particular have adopted since the financial crisis?
+
+Question_32:
+
+          And then flipping over to deposit growth. What we saw -- as you kind of layer deposits and institutional deposits, corporate deposits, retail deposits, we're starting to see a little bit of a pressure in the sense of institutional deposits and wealth management began to decline. Corporate and retail still show a lot of strength. Just kind of think about that dynamic because that's really where you begin to see pressure on betas as typically when you see pressure on volumes, we just haven't seen it in the core deposit base yet. So a premium for liquidity that's been kind of pushed into those core customers from corporate and retail seems to be pretty persistent, which will mean the duration and the length and the growth of deposits will be much longer than what we probably anticipated before.
+
+Question_33:
+
+          A follow-up question. So Card revenues are tracking well per your other comment, but the year-over-year Card spend growth has moderated some. Can you talk about the trend with the Sapphire Reserve card?
+
+Question_34:
+
+          And with such a great deal a year ago, are you -- what's the attrition like with the customers?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/21_answers.txt

@@ -0,0 +1,105 @@
+Answer_1:
+
+    Yes, Bill, I think -- I've recently been to Korea, to Australia, in the last 10 days to also southern Russia and Sochi, but I think essentially in Europe, there is a sentiment there that people are beginning to feel that it's not going to get any worse, that there will be some expansion happening as we move forward instead of just purely fiscal restraint and monetary restraint. So there is that feeling beginning to emerge, but I think it's going to be a long recovery. 
+Certainly in China, we are seeing the transition happen from a purely export-led economy to one that is more balanced with consumer spending and a combination of consumer spending, as well as export-led a balanced economy. I think there were some challenges in that transition initially where there was a divergence between GDP growth and pure disposable incomes for a while. But I think long-term, that's going to be very beneficial for everyone, this transition in China. I think in general, Japan is going to also -- I think the consumer sentiment will continue to be modeled and volatile there and subdued. 
+The rest of the world, whether it's Africa, the youngest billion, Latin America, Eurasia, Middle East, we see -- and of course Asia, Southeast Asia and other parts of Asia, Indian subcontinent, we see growth. We see very disciplined monetary policy, balanced budgets, good banking system, and the consumer is more positive. And so it's modeled and it's mixed. 
+And here in the United States, we see some signs of improvement. We need to wait and evaluate the impact of the payroll taxes, as well as the higher gasoline prices. It's too early to say, but it's a recovery that is at best lukewarm, but we feel that it could get better. That's how we see the world. And based on that, we continue to invest for opportunity. We continue to invest based on our long-term models and plans with our bottling partners, to continue to generate both volume, top line, and income growth. 
+
+Answer_2:
+
+    Are you just -- sorry. Are you talking about just the restructuring? 
+
+Answer_3:
+
+    Yes, it's got nothing to do with that at all. Think of it as last year we announced a new productivity and reinvestment program that includes continued synergies from our North America CCR, Coca-Cola Refreshment operations, to be able to enable us to continue to invest in our brands to grow in North America. 11 quarters of consecutive quarters of growth. When we first talked about growth in North America back in '09, people thought that we were trying to go to the moon with a glider. And now, it's reality. 
+11 quarters of consecutive growth. And we intend to continue that. We see this as a growth market. And therefore, to enable us to continue to invest in our brands, this is just ordinary course of business. Think about it exactly like that. It's not a big deal, ordinary course of business, and therefore, it's got nothing to do with the United States bottling structure. It's just part of ongoing business and I'll have -- Steve Cahillane is here with me on this call, as well as Ahmet Bozer and Irial Fanin, so I can ask Steve to also comment. 
+
+
+    Muhtar, you said it very well. This is very much an effectiveness play. Two years ago when we put these businesses together, we had a simple mantra. First, we were going to make it work. Then we were going to make it better. Then we were going to make it best. 
+We've learned a lot over the course of the last 2.5 years. One of our most successful organizations is our food service organization, which is aligned around three geographic units. We're moving our national retail sales and our field sales organizations also around the same three units, which will really build our total efficiency and effectiveness, our ability to work together, our ability to continue to invest in this market, invest against our brands, put more feet on the street. So we're very excited about the new organization and think it will get us from making it better to making it best. 
+
+Answer_4:
+
+    Thanks, Bill. Yes, and I was trying to be pretty clear, but let me be very clear. We expect to hit our long-term growth targets both in 2013 and in long-term. But that applies to 2013 as well. So we're comfortable with that and would expect to be able to deliver that. 
+The second thing is we have always had a mantra that you invest through a crisis. We've been in a global crisis for a number of years now. But we've got history and we've seen what happens when you invest through the crisis, when you come out the other end. As Muhtar says, we think -- see things slowly improving across the world, but we expect to come out at the other end much stronger than we were even going in. So we're going to continue to drive efficiencies, productivity, and then reinvest that back to grow the business and growing the brands. The brands are stronger than they have ever been, but we think we can drive it even further so. We're going to continue to invest behind the brands. 
+
+
+    And just one point to add on that, Bill. I always say, as you go up, the air gets thinner. Always remember, we're adding on top of significant increases from prior year all the time. Just on sparkling beverages alone, we've added 500, over 0.5 billion cases each year. So we are cycling that every year and we're continuing to grow. I think that is really important. 
+And in three years, the worst, I guess,  probably macroeconomic environment, we've seen for a long time. We're able to generate volume growth in line with our growth expectations, revenue growth in line with our growth expectations and income growth. Generating record revenues of $48 billion, record income, as well as record cash growth. It needs to be taken into that context, continue to crack the calculus for growth. 
+
+Answer_5:
+
+    I think in the United States, we are -- as you have heard, we've gained -- continued to gain both volume and value share. And in all over the world, our share is at an all-time high, everywhere across the world, in NARTD, as well as in the different categories that we're operating in and competing in. We choose to compete in. And therefore, and similarly in China in sparkling, we've widened our gap to our nearest international competitor in sparkling. In Europe, I think there have been a month or two where we've had some challenges. But overall for the whole year, we've, again, gained share across the whole of broader Europe, in Western Europe, as well as Eastern Europe, and in Southeast Europe, across the whole continent in both volume and value share. 
+And to be -- I think to be frank, we see competition is healthy, and it keeps us on our toes, it keeps us executing better and being better, becoming more efficient and more productive, and that's all we strive every single day as a business system, together with our 275 bottlers around the world, is that we strive to get better. Better at making decisions quicker, so that we can be more nimble and more innovative and, as you know, we've launched more than 800 different products over the last four or five years. Many of them are new, innovative products that are gaining great traction, as they are in the United States. 
+Look at the still -- performance of our still business. Look at the relative performance of our sparkling business. I mentioned that between 2009 and 2012, spend per person on our brands went up from $56 to $60. So transactions are up in the United States. Our brand price pack channel location architecture is working in the United States. So both in China, transactions are ahead of our volume, as well as in the United States immediate consumption business. 
+So judge us not only by pure volume. Judge us by the quality of our volume and transaction growth. We sell -- in the end, consumers buy packages and products, combination of packages and products, each one at a time. They don't buy liters. That is really important, I think, to understand and how we think about our business. 
+
+Answer_6:
+
+    Judy, we're actually fully hedged on the Yen, Euro and Sterling, and in fact, the Yen positions that we have are actually in the money. They are in good play. That's not an issue. When you look at the first quarter, it was actually -- I said 4%, it was 3% pre-Venezuela. It is 4% now. The Venezuela devaluation obviously is a big one, when you devalue 50%. So that's number one. 
+But number two, the real impact is not what you would expect, is not the Yen. The impact are the rates that we're cycling in the emerging markets, particularly Latin America. If you look at Brazil, look at Mexico, those -- look at the rates at early last year, and then they started devaluing South Africa as well. If you look at those, you'll see there's an improving trend. So towards the latter part of 2013, based on where spot is today, we actually turned positive with kind of even to minus one for the full year. But it is front end loaded negative and then improving throughout the year. 
+
+Answer_7:
+
+    We've got a loss on monetary assets. That was the 100 to 125. And so if you look in the Wall Street Journal article this morning, we just joined a list of other companies that have the same issue. So that's kind of a one-time item that I'm just telling you has occurred and will occur. And then the translation impact of the revenues will be about a 1% drag in the first quarter. 
+
+
+    Thank you. 
+
+Answer_8:
+
+    John, let me see if I can get the first half of your question. First, below operating income growth, you're right, because we will see net interest flip from interest income to interest expense. There are a couple of things going on in there. Primarily, it's rates. And just rates are down, particularly in some of the emerging markets where we've got some cash which was generating a lot of the interest income. You saw that happening during the latter part of this year. 
+And the reason that interest income was actually a lot better than in the fourth quarter than I told you to expect it to be was actually we put on some interest rate swap hedges a couple years ago. There's a small ineffectiveness piece to that hedge and the ineffective piece has to go through the P&L. That was actually pretty large this quarter positive, and it gave us a lot of interest income. So that's part of what you're seeing. So -- but then equity income, you're going to get some leverage. It's going to be up because of the structural items that I talked about from some of the transactions that have occurred. 
+Then if we go to, all right, the second half of your question was -- tell me again. 
+
+Answer_9:
+
+    Well, I think there are a couple of different things. There, I think we're going to see improving and slowly improving trends in many of the markets around the world. Europe, I think will improve. My expectation is that Europe will improve in 2013 from well -- pretty good improvement form the fourth quarter of 2012, so I would say you're actually going to see sequential improvement in Europe. You're going to see sequential improvement in China for sure. I think the US is poised now also in a pretty good place. 
+So I think number one, I think volumes in 2012 dipped a little bit in the fourth quarter. Our view is that is not the start of a trend, that we think that's just -- it happened, but it's not the start of a trend. And we would expect volume actually to be okay in 2013 and we think it will sequentially start coming back and be better, be okay in 2013. 
+
+
+    John, just, just to add on that, I think very little is always said about the 120 or so countries which have a per capita of around 125 in our business, where volume growth for 2012 was, again, 7%. These countries represent about a little more than one third of our total global volume, countries that we never talk about, whether it's Sub-Sahara, or whether it's in Asia or Middle East or central Asia and so forth. But -- and we grew in these countries 9% in 2010, 7% in 2011, 7% in 2012, and we keep on growing. This is the beauty of our portfolio impact. 
+So while you may have a quarter where China doesn't grow or where Europe doesn't grow, we still continue to be able to deliver on our long-term growth model for volume and also for revenues, and I think that is -- imagine what would have happened to our volume if Europe did grow this past quarter and China. So this is the benefit of having this portfolio, which is getting stronger and bigger, as we continue to invest with our bottling partners in alignment. 
+
+Answer_10:
+
+    Yes, John, that's exactly right. When I said hit the target, we hit the target before structural, but then you would have to adjust for structural. But with pretax or net income being the same, it's just what is the geography within the P&L. 
+
+
+    Perfect. Thank you. 
+
+Answer_11:
+
+    Ali, I've always said the fact we are total believers in the franchise system. It is a beautiful system when you can get it to work as we have aligned towards the vision, aligned with its goals and aligned in its ownership objectives and goals. That's what we have. And therefore, we will continue to drive this bottling system towards an aligned vision, which we have. And as I said, we've got three years that we've accomplished that and seven years to go and we're confident that we can continue to accomplish it. 
+As we move through the system, you've already heard us talk about what we see, envisage for the US system, where we have a role again for bottling partners. We are on -- we still have the same time table for that. I won't repeat what the time table was. We said about four to five years since the time we closed the transaction. And you can figure we're still -- we still believe that is doable. And as we move along different parts of the world, you see us creating stronger systems, like Brazil, stronger systems like Kanto. That is a huge milestone in the 55-year history of our Japanese business, getting the four Kanto bottlers to unite and to take costs out of the system to be able to continue to invest to drive top line growth for our system. 
+And you will see us doing more of those as we move forward. And again, refranchising Philippines is another example. So don't think of this as seismic changes in our bottling system. We will continue to fine tune and evolve as needed, as necessary to drive the goals that we have outlined. 
+
+Answer_12:
+
+    First, let me just say that everything we're doing, none of it is reactionary. It's proactive, whether it's Brazil, whether it's Philippines, whether it's Japan, and we've got more to talk about that we're not in a position to talk about right now. All of that is actually proactive. And the US is all about proactive. 
+And I can tell you very clearly, once again, that as I mentioned in Judy's question, judge us not only by the leaders, judge us also by the transactions, judge us by how we are doing in terms of the value of the business that we are creating and the consumer spend that's coming into our business, into our brand and the health of our brands. This is ultimately a brand business. Our brands are healthier than they have ever been, both in sparkling, as well as in still beverages. So I think that we see -- I repeat, we see opportunities in the United States for it to keep growing and also for us to keep generating value in both sparkling and in still beverages. And that's how we see it and whatever it takes for us to be able -- investment, proactive long-term investment is the key. Whatever it takes for us to be able to continue our targeted, thoughtful, purposeful investments, you will see us continuing to do that so that our brands remain healthy, our system remains nimble, and flexible, as far as throughout the market, as far as production and as far as distribution and sales. 
+
+Answer_13:
+
+    Brian, this is Gary. No, no changes at all. We -- you're exactly right. What we announced the beginning of last year in productivity and reinvestment was $550 million to $650 million for total company, including North America. We are still on track. In fact, well on track on that program. It was a 2012 through 2015 program and we are continuing to execute against that. 
+We're on track. We are taking the savings and from the supply chain optimization, the marketing effectiveness, operational excellence, data and IT systems standardization were the areas of that whole program, in addition to what we're doing in CCR, and we're taking that and reinvesting behind innovation, as well as marketing of our brands and that's still working well. What we talked about in North America today is just a normal part and evolution of that program and we'll continue to do that around the world to drive effectiveness, because it really helps us in several different ways. It's not only about saving money. It's about operating more effectively so we can operate faster. Being more productive means we can make decisions quicker, and those are the things we are driving for. We want to be fast, flexible and very big. 
+
+Answer_14:
+
+    Outside of North America, we probably had about $40 million to $50 million in savings in 2012, and then North America continues to drive synergies and did fairly well against their part of their targets as well. 
+
+Answer_15:
+
+    Yes, it will be. It will be. 
+
+Answer_16:
+
+    Let me, Brian, answer it this way, because as we continue -- I'll continue to update you on where we are and how big the plan is. So let's call it $550 million to $650 million today, but as you know, a few years ago, we had another program as well that we kind of concluded and then started this one. So we continue to look for efficiencies and effectiveness. But everything we look at when we evaluate it, we would expect that the one-time costs ought to be in a ratio no more than 1 to 1.5 to 1 payback. So you're talking about a 12 to 18-month payback on something that's then continuous benefit to the P&L going forward. 
+
+
+    Okay, great. Thanks, Brian. 
+
+
+    Thank you, Gary, Ahmet, Steve, Irial and Jackson. In closing, we had a strong 2012 and have once again delivered quality full-year performance results. Our business continues to grow, even in the midst of ongoing global economic challenges. Our system is aligned. And it's on track to achieve our 2020 vision. 
+Together, we are consistently investing in our brands on a global scale through world class marketing and commercial strategy. And as we get closer to the midpoint of our 2020 vision, our system remains resolutely focused on refreshing our consumers, creating value for our customers, maintaining strong partnerships with our bottling partners, strategically investing for the future, and expanding shareholder value. As always, we thank you for your interest and your investment in our company and for joining us this morning. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/21_questions.txt

@@ -0,0 +1,67 @@
+Question_1:
+
+    Hi, guys. Good morning. Muhtar, I know you have been doing a lot of globe-hopping lately, so could you talk about the global macro, maybe some granularity about regional growth rates? I know you were at [sohishina dobos], just to give us some color on how you think things are going to trend over the next year. I know you kind of covered it big picture, but maybe some more granularity. 
+
+Question_2:
+
+    Great. Thanks very much. And can I follow up with the change in the structure of CCR North America? Does this change your sort of philosophy on sort of how long you're going to own the asset and maybe how it's going to be operated going forward? 
+
+Question_3:
+
+    Yes, exactly. Like for the three different regions. There were seven different businesses before and now there's three. Does that sort of change your view on how long that asset stays with TCC? 
+
+Question_4:
+
+    Good morning, everybody. I just wanted to clarify one thing first, Gary. When you are hitting the long-term FX neutral operating target, you expect to do that in 2013, as well as in the long run? Then with close to zero operating expense leverage guidance of '13, despite the savings, you're signaling stepped-up spending. Wanted to get an idea of where you're focusing that incremental spending on. Thanks. 
+
+Question_5:
+
+    Thanks. Good morning. So Muhtar, I know you spoke a lot about the macro environment, but maybe you could speak a little bit about the competitive environment, particularly around US sparkling, China, and parts of Western Europe where you have seen some step-up in competitive pressure and how that's affected your volume performance and how you see that sort of trending in 2013. 
+
+Question_6:
+
+    Okay, and then Gary, following up on currency guidance for the full year. It seems like the first quarter guidance is actually a little bit worse than I thought. Can you help us understand, is it based on your hedge position and with the Yen moving pretty sharply, how much are you hedged on the Yen? 
+
+Question_7:
+
+    And in Venezuela, Gary, just the impact you're purely looking at transitional impact or some sort of margin impact as you have the pricing control in place? 
+
+Question_8:
+
+    Thank you. Just two questions here. Gary, just sort of more of a housekeeping type of thing. As you look at the commentary on the net interest line, seems as though that's going to create a situation where there's probably not much leverage, if any, below the operating lines. If you could just sort of confirm that. 
+And then secondly, as we look at the organic top line growth in terms of just simply the bottler case sales volume plus price mix, it decelerated looks like to me at least every quarter this year. So can you talk about how you see that trending up as we go through the course of 2012? You've got difficult comparisons in the first half of the year and sort of how that's going to play into your comfort level of hitting that 6% to 8% currency neutral operating profit target. Thanks. 
+
+Question_9:
+
+    Just looking at the deceleration in the organic top line growth and how that maps out over the course of the year and the comfort on let's say the 6% there. 
+
+Question_10:
+
+    Okay, and then finally, one housekeeping question. Gary, you mentioned the equity income line. That's coming out of the operating profit line. So is it -- as you look at hitting your target, I'm assuming that's before the bottler deconsolidation, right? So that's 6 to 8, sort of minus 1 for the bottler, minus 1 for the FX is how we should look at it? 
+
+Question_11:
+
+    Hi, guys. Can you give us a little bit more of a sense of the go-forward evolution of the bottling system globally and in the US? And you look at Germany that shrank this quarter and you want to do some system changes there. Japan certainly has seen some system changes and that's had some struggles. China is struggling a little bit and there were competitive system changes there. US sparkling volumes are still a little bit tough and you bought TCC about two years ago. 
+And whether, to Gary's point, these volume trends are a trend or not, it just seems to us that given all of that, you might actually see the next few years with very large changes to the Coca-Cola system and the industry overall. So if you were to kind of close your eyes and see with us, how would you see the structure of the system, of the future looking versus what it is today? 
+
+Question_12:
+
+    So it's helpful, and I'm still struggling with what's -- what can we look forward to changes in terms of not being as reactionary, but maybe thinking going forward. Maybe if you can help me, you mentioned the US and Steve mentioned it a little while ago, so it's been about two years since you closed the CC North America transaction. 
+Can you give us a sense of where you think you are ahead of plan and where you are behind plan? Certainly for many investors, this quarter was probably pleasing, because operating margins start in reflect positively, but is this sustainable without any more meaningful restructuring, bigger things? And how do you think about the volume trends we've been seeing so far in sparkling and whether that changes anything about how you think -- not reactionary -- but going forward about the structure here, as just another example of what you're describing, Muhtar? 
+
+Question_13:
+
+    Hi, good morning. I've got a question on the, just the productivity program, just really looking for an update. First, I think if you took the two elements of it, both what was initially announced last year plus the extension of the CCR integration, your expectation was $550 million to $650 million of annualized savings by the end of 2015. So is that still the same size or has there been any change to what you're expecting in terms of total savings? 
+
+Question_14:
+
+    How much did it drive -- how much savings did you drive in 2012? 
+
+Question_15:
+
+    Fair to say you think '13 will be a bigger aggregate pull to savings to spend back than you had in '12? 
+
+Question_16:
+
+    Okay, and then just one last one. How much in terms of charges are you expecting to take over the life of the plan relative to the savings? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/22_answers.txt

@@ -0,0 +1,100 @@
+Answer_1:
+
+    Hi, John. Good morning. This is Muhtar. First, I think it's important to realize that there's not one model for the world. There's many different models for the world, as you can see. What's happening, this has been an exciting last several months with respect to the evolution, actually continuous evolution, of our franchise system. We manage our business to create sustainable long-term value, and evolution of our franchise system continues to play an absolutely critical role in that process.
+And so what you have seen recently, the [Contal] merger in Japan, the Brazil merger of three bottling partners creating a large Brazilian-led bottling business, the Iberian merger of seven bottling partners in Iberia, the sale of the Philippines -- of the majority shares of the Philippines and the control to FEMSA, and now the US process, the journey starting in the United States, are all part of our vision, our plan, and to ensure that we can continue to deliver on the commitments we've made for our vision.
+They use, in some cases, they use partially our capital. In some cases, where there's a sale, obviously, we bring back capital back into The Coca-Cola Company, but all the time ensuring that our bottling business is fully suited for the needs of the 21st century, delivering what is necessary ahead of consumer expectations, customer expectations, and so not one size fits all. And in the case of the United States, again I'm pleased to report, we are pleased to report today, that we've reached agreement in principle to start this journey. All along, since the first day we've closed the transaction with Coca-Cola Refreshments, I've always said there will be a meaningful role to invite partners back into the business.
+When I was -- when we were asked about the timing, we've always said around the four- to five-year timeframe from the time we've closed, the close of the Coca-Cola Refreshments was, as you will recall, back in the latter part of 2010, and we are well within that timeline. And it's a continuous evolution. And sometimes it will necessitate for us to use our own capital, sometimes a mix, and sometimes no capital. And again, not one size fits all. The US model is very different, but it is, again, a model that invites partners to serve with us passionately the communities that we operate in.
+
+Answer_2:
+
+    Yes. I think from -- we can't comment on the timing for the end game, but all I can tell you is that we are intent on creating the evolution necessary for us to be able to serve both our large customers and small, independent customers in the best possible way with our bottling partners. Again, we've always said that, right from the beginning, and we're consistent to that, that the US will be slightly different. We want to create the best-in-class production, optimum cost production system, coast-to-coast, from the East to the West. That will be nationally managed.
+We also want to create a nationally managed large customer -- customer management system that will essentially have the responsibility to put together a 21st century customer plans with our large partners in the United States, and at the same time invite partners to come in and be part of this new evolution in the United States. It will take as long as it is necessary. And that is not our focus. It's going to be about doing the right thing as quickly as possible, as efficiently as possible, and as effectively as possible, and that's what we are going to be doing.
+
+Answer_3:
+
+    Bryan, thanks. There are a couple of things to consider. First is, as I mentioned previously in the prepared remarks, that we reversed some compensation accruals in the first quarter. So that gave you more leverage in the quarter, but you will not see that. That's more of a one-time impact, if you will. So it's more leverage in the quarter.
+The other significant piece is you're going -- the currencies had an impact as well, and currencies moderate going out. But the biggest thing will be geographic mix. And we would expect to see geographic mix changing throughout the year as we go through the year. And as that happens, it will have an impact on gross margin and operating leverage.
+
+Answer_4:
+
+    Yes, that's exactly right. And think about North America, actually. I would expect North America, actually in the first quarter of this year, North America's operating income on a recurring kind of comparable basis, was down 3%, and it's down 3% primarily because of two fewer selling days. So if you adjusted for those selling days, it would have been positive. But I would expect North America to actually improve versus where they were, the minus 3%, but as they improved, because it's a finished product business, it's going to have negative gross margin impact, and it'll be reduced leverage.
+
+Answer_5:
+
+    Yes. Yes, that's what I was trying to say more in code in the prepared remarks.
+
+
+    We normally don't think North America, but that's what it was.
+
+
+    Thanks, Bryan.
+
+Answer_6:
+
+    Yes, I think, Dara, I think -- this is Muhtar, I think that we haven't seen anything markedly different from previous quarters as far as the competitive environment is concerned. China remains a very competitive environment. Actually the whole world, and again, this is a competitive environment that is a mix of large international companies, but also very much local companies, very much local companies in Asia, in parts of Africa, in the Middle East. We also see a somewhat more rational pricing, particularly in Europe, as well as parts of -- other parts of the world, in Latin America, too.
+And I think -- so the way we see the environment is, it will continue to be challenged from a consumer perspective. Whether you're talking about Asia coming back, or whether you're talking about Europe, consumer sentiment in Europe, will continue to be volatile and mixed at best. And therefore, pricing is going to be critical, and therefore also ensuring leverage and ensuring productivity can be generated out of operations for us to be able to continue to invest, is going to be critical. But we are intent on continuing to invest in this environment. I'll let Steve Cahillane talk a little bit about how we manage the pricing environment in the United States (technical difficulties) price mix of 3% in terms of leverage in pricing for sparkling beverages in the past quarter.
+
+
+    Yes, thanks, Muhtar. We would -- we have seen a rational pricing environment in the United States over the course of a good period of time right now. We would expect that to continue, and I've said many times that if commodities go down, don't look for us to reinvest that in price. We've worked very hard to earn the price that we take in the marketplace. We don't have an affordability problem in the United States with our sparkling beverages, and we would look to continue to invest behind our brands.
+We've got a terrific summer program for the Coca-Cola brand. We've got an exciting new partnership with Taylor Swift around Diet Coke. We'll invest around activating those types of program to continue to focus on our most important objective, which is to continue to support, develop, and drive the sparkling, our sparkling category, inside the United States business.
+
+Answer_7:
+
+    Hi, Bill. This is Muhtar. Good morning.
+
+
+    I would say to you that this is, again, we're at the beginning of this journey. We have reached agreement in principle with these five US bottling partners. It is very important that we did reach that agreement in principle, and now we can actually ensure that we put all the details into motion, and we can implement effectively. We have always said production is, in the United States, is critical to our success in achieving a optimum cost, 21st century production system, nationally managed coast-to-coast. That is going to take place.
+We've also said that managing large, 30 or so, of our largest customers in the United States is going to be done nationally. That's also going to take place. In terms of who else would be coming in, we can't comment on that. In terms of what will happen, in what form an architecture production is going to take place in terms of what our current bottlers own, I can't comment on that. All I can tell you, and I can assure you, that we are intent on ensuring that we make the necessary changes in the format and architecture of production to achieve what I just said, which is a coast-to-coast, nationally run production system that generates the efficiencies, synergies, productivities that allow us to continue to win in the marketplace. And again, there may be a future where our partners in the United States take certain ownership in the national production. I wouldn't rule that out also, but it will be managed nationally from one point, single point.
+
+Answer_8:
+
+    Okay, Judy. I'll have Steve answer the first part of your question before Gary comes in and sheds some light on the question on profitability. Steve?
+
+
+    Yes. Thanks, Judy. First quarter clearly had a lot of noise in it. We expected a benefit from Easter being in the first quarter. It's never as big a benefit when it comes that early in the year. Easter's always better when it comes later in April because of the warmer weather. But obviously you reference the weather.
+We saw some very dramatic changes. Last year we benefited from one of the hottest summers -- sorry, hottest winters, warmest winters in the United States, and we cycled that with one of the coldest winters in the United States. So clearly that had an effect. And we saw any benefit from Easter really being washed away, if you like, by the poor weather.
+There was clearly an effect in the payroll tax. It's a little bit of art and science, trying to pick apart what's weather and what's payroll tax. We would figure about two-thirds is probably weather-related and one-third of the slowdown is based on the economy. We are, though, optimistic, guardedly optimistic, that the consumer is coming back, that the payroll tax and the economy is kind of a short-term, need to get used to the discretionary impact that that has had. So we remain optimistic that we've got the right programs in place, that the economy is on the mend, and we would expect continued good performance as we go out into the next three quarters.
+In terms of, I guess, questions around profitability, I'll turn that over to Gary.
+
+
+    Yes. Judy, I would say a couple of things on profitability. It's really kind of repeating what Steve just said. If you take the first quarter and you throw in lousy weather, payroll tax, actually the price of gasoline, what that then does to your immediate consumption versus future consumption business, it's going to have an impact on your profitability. Now, if I go back to the answer I gave to Bryan earlier, though, when I was talking about geographic mix and it's North America, I would expect North America to be improving, actually, from the first quarter and from where we were. And then North America also has this two fewer days.
+Now, I can tell you, Steve's got a number from minus 3%. I said it would have been positive. Steve's got a number, but you can calculate it several different ways as to what would the impact of the two days be. We would all agree, I think, it is positive. They would have been positive at the operating income line. But you put all that together, the weather, by the way, as lousy as it's been, and the impact on Steve's business, has been given a lot of moisture to the Midwest for the drought for the corn crops. So you look for commodities, and we'll see what happens there.
+Payroll tax, consumers hopefully are starting to get used to it. Gasoline prices, looks like they are starting to trend downward somewhat. So I think there are some reasons to be cautiously optimistic. CCR continues to execute with excellence, continuing to improve capability. So I think there are lots of reasons to be optimistic on North America.
+
+Answer_9:
+
+    Judy, I would actually say the biggest impact on the first quarter for North America was two less selling days, by far, as a whole company as well. But by far, the biggest impact was the two selling days.
+
+
+    Judy, I didn't answer this part. A secondary impact is clearly weather-impacted food service and immediate consumption more than the take-home channel. So we would expect as weather moderates, those profitable parts of our business will start to normalize as well. But, as Gary said, two less selling days, when you've got the fixed cost assets that we have in the North American business is really quite significant. Those extra two days are golden cases that are going out. And when you lose those two days, it obviously has a big impact.
+
+
+    Thanks, Judy.
+
+Answer_10:
+
+    Yes. Caroline, I think first in terms of our capability in our system in the United States is I would say the best in the consumer products world in terms of how we go to market and how we can get the product from production facilities. I would like to comment on how we can improve that. If there is a way for us to even improve and generate more productivity, we'll certainly look at it. I think the most important thing, though, is that there is room to generate significant further synergies in production. I think today I wouldn't say that the United States production system, after three years of having integrated Coca-Cola Refreshments, it is where we need it to be. And we need to achieve that -- continue on that road map to proceed towards a modern and best-in-class optimum cost production system coast-to-coast.
+That will mean, obviously, a lot of changes. That will mean building new plants. That will mean combining some facilities, but I would like to also comment, in terms of hot-fill and aseptic versus sparkling beverage plants, we will look at ensuring that we have the most modern, most productive facilities in place. I don't believe the answer is to combine all under one roof. I think the answer is to combine many that are scattered across the country, both in terms of still and sparkling separately, into some consolidation process, and I can't comment any further.
+What I can tell you is that there is room for costs to come down. There is room for efficiencies to increase, and we will achieve all of those. This is all in line with our 2020 Vision. We laid out a plan when we took over the business of Coca-Cola Enterprises. We laid out a plan when I took over as the CEO back 4.5 years ago, and we are executing it meticulously, and we are doing what we have said we will do, and we're doing it ahead of time.
+
+Answer_11:
+
+    Absolutely. I think we can improve service levels. I think we can improve execution inside the point of sale. I think we can improve availability. I think we can improve availability of cold drink. I think we can improve how we serve independents, and all of those things are going to be played out as we implement, execute this new strategy in the United States. And I don't know, Steve, do you want to comment?
+
+
+    I agree completely. Part of what we're doing with this new bottler arrangement focuses on that up and down the street, where bottlers and CCR add the most value, which is not only big customer sales, but up and down the street execution. And we've got also our venture and emerging brands unit, which you're familiar with, which brings brands like ZICO Coconut Water, it brought Honest Tea. So in those spaces that you're talking about, we are very much innovating. We've got glaceau fruitwater, which we just launched to great success a couple of weeks ago. That's being executed, not only in the large stores, but importantly in the up and down the street, food service on-premise accounts as well. We see that as a very important capability. We see ourselves as having a competitive advantage there when it comes to not just shelf space, but cold drink space and overall availability.
+
+
+    Yes, and just to finally add on to that point, Caroline. Rest assured, we are in a mode of evolution, rapid evolution, not just in the United States, across the whole world. But, and you will see us adapting, reinventing how we go to market, how we serve customers, and also how we communicate with consumers, very importantly. Our brand's at an all time high in terms of health and we will continue, again, to evolve and bring out the best modes of communication with our consumers as well.
+
+Answer_12:
+
+    Yes, I think, Mark, it's -- I can't -- we can't comment on the details. What we can say is that it will be a model that will align us fully with our bottling partners to do what is right in the marketplace, and to focus on what is right in the marketplace, with full alignment model, and I think I can't just comment any further than that. But you will see us executing better, serving the customers better, with a better production template, as well as a customer service template.
+
+Answer_13:
+
+    I think all of that will come into play, best practices, everywhere around the world. And I am certain that in four or five years time, many people will come into the United States to see the best practices, and as it used to be back in the 1980s when I used to bring bottlers, new bottlers, from Eastern Europe to see best practice in the United States at that time.
+
+
+    In closing, I would like to thank Gary, Ahmet, Steve, Irial, and Jackson, and to again say that we're pleased with our solid first quarter. We are working as a system to unlock real value, further strengthen execution, and to win at the point of sale. We are confident that a focus, a relentless focus on growth, will enable us to build capable, resilient, optimized, advantaged, and sustainable systems that are well positioned to deliver results in 2013 and achieve our 2020 Vision. As always, we thank you for your interest and your investment in our Company, and for joining us this morning.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/22_questions.txt

@@ -0,0 +1,53 @@
+Question_1:
+
+    Sorry. There's a lot of static. As you look at the bottle consolidation piece, is Spanish or Japanese bottler consolidation just sort of the beginning of the next wave of, let's say, a bottler-driven consolidation? And how much are you pushing this, as opposed to letting the bottlers lead where the system's going?
+
+Question_2:
+
+    Great, and if I could just ask a follow-up on that, which would be as you look at the different options you gave for the US pieces here, in terms of sub-bottler agreements, asset sales, swaps, things like that. Is there some way to think about the financial impact as you do this? I mean, this is a small piece of it. How long does this timeframe take out, as you sort of push these US pieces out? Thanks.
+
+Question_3:
+
+    Hi, good morning. A question for you, Gary, just on the operating leverage in the first quarter, and maybe more specifically, the gross margins. If I understood it right, this quarter would have been one of the highest in terms of the impact from commodity inflation? We also really had no positive benefit from price mix, and as we kind of look out going forward, right, we should get some benefit from price mix later in the year, and maybe some relief on commodity inflation. So why wouldn't there be maybe more leverage going through the year than we originally expected, given the leverage you had in the first quarter?
+
+Question_4:
+
+    So the geographic mix would be more negative going through the back half, the rest of the year, is that --?
+
+Question_5:
+
+    Okay. So more growth from lower margin geographies going forward, and that's what will affect sort of that margin impact?
+
+Question_6:
+
+    Good morning. I was hoping to get an update on the competitive environment around the world, both in China and Western Europe, which have been hot spots recently. And also just your thoughts around how you manage the pricing environment in the US sparkling business in 2013 and beyond, in light of the moderate commodity pressure, and if that solid 3% sparkling growth we saw in Q1 could continue in the balance of the year?
+
+Question_7:
+
+    Morning, everybody. I wanted to follow up on the US bottling announcement. Coke held onto the production assets for the territories the five bottlers picked up. Do you see these bottlers eventually contributing their manufacturing assets into a national production company to get at the cost savings opportunity that you've talked about on the manufacturing side? And also, would Coke be willing to let new partners bring in outside capital to help finance some of the additional territory sales, given the size of the territory that Coke still holds onto in the US? Thanks.
+
+Question_8:
+
+    Thanks, good morning. I just had a couple of questions on North America. First, in terms of volume performance, I think the macro data points and consumer data points have been a little bit choppy more recently. So maybe if you could give us a little bit color just in terms of category of your performance, immediate consumption versus take-home. And sort of the expectation as you get out into the back half of the year, lapping of some of the transitory headwinds, whether it's payroll taxes or weather-related, if you expect volume performance to improve.
+And then, Gary, just on the profitability in North America, I know you talked about this a little bit, but I look at first quarter. You had 1% volume growth, 2% price mix, and you did say profitability was up a little bit, but just why aren't we seeing the profitability really improve more meaningfully and what drives the sequential acceleration in North America profitability going forward?
+
+Question_9:
+
+    Okay. But from a profitability perspective, though, the bigger delta is really the mix shifting towards more immediate consumption as weather normalizes, or is there step-up in cost savings or timing of marketing investments that help the profitability?
+
+Question_10:
+
+    Good morning, Muhtar, Gary, and team. I would like to just understand, Muhtar, your vision, again, going back to the United States. You talked a little bit about how manufacturing is going to evolve. A little bit of understanding the benefits of merging the operations of food service, your non-carbs, and your CSDs into one production facility. Just can that actually be done? And are there synergies there? And then secondly, do you feel strongly that your own people have to get the product to market from the plant, or could you use a third party, such as a Sysco?
+
+Question_11:
+
+    That's excellent. I was just wondering, in terms of getting shelf space, you see a big opportunity up and down the street, and to get better pricing, much as you've done in LatAm. I'm often asked how you compete with all the new things that come in, be it coconut water, energy drinks. I know you have some, but are you convinced you can keep or improve shelf space for your carbonated soft drinks?
+
+Question_12:
+
+    Yes, thanks. Good morning, everyone. Also a question on the US re-franchising, Muhtar or Gary. You talk about this new beverage agreement being ultimately what's at play here. Could you speak a little bit to how you're thinking about that, and the role of incidence-based pricing in that? Is it right to think that continues to have prominence in this new agreement, and any distinction you might draw between how stills and carbonateds are treated as you move production more squarely to staying, if you will, at least for a little while inside Coca-Cola?
+
+Question_13:
+
+    Is it fair to think that other markets, there's a sort of a fact pattern, an experience set, to draw on as you implement this new form of agreement here in the US?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/23_answers.txt

@@ -0,0 +1,123 @@
+Answer_1:
+
+    Yes, hello, Bill, thanks. Overall both from -- in Europe, United States, India, some other parts, we did have a pretty significant impact from weather -- unusual weather, monsoons coming very early in India as you probably all read, many thousands missing in flooding, worst flooding since the tsunami back 10 years ago. So -- and then Europe -- also Central Europe, Germany, all the issues around the river beds rising and flooding and very heavy, wet conditions. So we did, yes, have impact both from a consumer sentiment, both from a mobility sentiment in the United States also, and both also from just the pure, in some cases, distribution issues that hindered our performance and as you know, when we lose a sale that doesn't recur any more, we lost it that day and so. And also in some cases we were cycling very unusually warm and favorable weather conditions from prior year in some cases like India last year the monsoons actually started later, that gave us a 20% growth in India, unusual for the second quarter in India. Usually the first half in India is always less than the second half in India because of the anomalies of the weather. So, yes.
+And then macro conditions, we all have felt it in social issues in Southeast Europe, demonstrations across the Middle East, and then more recently in Brazil, but we feel confident both in terms of looking at our plans in place, looking at current dynamics, that both Brazil will have a better second half, China will have a better second half, Russia will have a better second half, and certainly a better quarter than this last quarter where we grew volume 3%. Overall, Mexico as well as India. So while we have -- we continue to invest in our brands, our brands are stronger than ever before, we have taken market share, our system is stronger and so all these key markets we believe will perform better in the second half. In fact, as I've said, we have seen this -- we always know that the second half in a country like India is significantly better than the first half. In any case, if you look back at our performance over last few years. So -- and then in the United States, we've got very robust plans to return back to growth.
+So we feel pretty confident that this was a confluence of events that happened all at the same time. The portfolio effect of our global business did not work in our favor in this particular case in the second quarter and I feel and my colleagues feel and our bottlers feel very confident. I have been across many markets recently. I've traveled to China, Japan, Thailand, Myanmar, many other parts of Asia, I have been in Southeast Europe, I've been in France, and all in the last four, five weeks and I feel that we will look towards a definitely a better quarter volumetrically, and again, we can talk to you about how we feel about the financial numbers too later in the call and I can ask Gary to reflect on that too in terms of the second half. You want to -- Gary?
+
+
+    Sure. Well, let me continue on [then] versus the volume. On the second half on the P&L, we had a very solid first half, we would expect to have a solid second half of the year as well. We have said there would be bumps along the road, the industry had one, obviously and it slowed. But we continued to take share and we feel very confident about the second half. As we look at the second half financial results, we will be very close to our long-term growth targets, particularly in volume and earnings per share should be coming back in line with what we would all have been expecting at the first of this year.
+
+
+    Yes, I would just add, Bill, that this is more an anomaly. We should not see this as a trend or a systemic issue and that is simply how I believe one should think about it and again I can ask Steve and Ahmet to reflect upon how they see the second half from their vantage point in both Americas and International. Maybe Steve, you can start?
+
+
+    Sure. Thanks, Muhtar. Starting with Latin America, Muhtar said it well. We saw things in Brazil that we hadn't seen before the economy slowed. There was social unrest. It didn't last very long, things are slowly getting back to normal, and we expect a better performance sequentially as we progress through the year in Brazil and in Mexico. In Latin Center and in South Latin, we have seen very good results. High single-digit results continue so there's a lot still going very well that continue to go well in Latin America and Brazil and Mexico, getting back to what we would expect to see on a normal basis. In North America, Muhtar said it, it's -- we don't like to talk about the weather, but the first half of last year saw unusually good weather conditions. We had warm weather, we had dry weather coming out of winter and going into spring. This year in North America we had some of the worst weather and you've all seen it. It's been very wet, it's been very cold, it's been historically wet and cold, which obviously impacts our business.
+On top of that, we had the payroll tax effect which started at the beginning of the year, which affects lower income households, obviously much more, affects their disposable income, their ability to spend. We saw late payroll tax -- late payroll -- or tax refunds coming into the marketplace. But as we look forward we expect the weather pattern to obviously normalize. The weather will not continue to be a factor in a country as big as the United States like it's been and from an economic standpoint, people are used to the payroll tax now. They have had four to five months to moderate their household budgets, to get used to it. The refunds, obviously, have been back in the marketplace and we are already starting to see better trends in QSR, better trends in Convenience Retail, better trends across our business. So we look forward to the second half of the year across the Americas, much more favorably than the first half. Muhtar used the word anomaly -- especially an anomaly in North America and we see ourselves coming out of that.
+
+
+    Ahmet?
+
+
+    Thanks, Steve. Thanks, Muhtar. Yes, just to build further on Muhtar's comments, I'll start with India, that's definitely completely weather-related. All our investments in the route to markets coolers and capabilities will continue to deliver the kind of levels that we are used to having from India in the rest of the year. So we are quite comfortable on that. On China, there were probably impacts of -- as you hear, the continuing slowdown in macro levels, as well as there was some weather impact, but we do expect volume to return for a number of reasons. First of all, China is a country with very, very low per capitas. I have been there a number of times in the last three, four months and we have been working on evolving our strategy with better OBPPC, more price points, and more packs, as well as improving our capability.
+As Muhtar mentioned, we have recently strengthened our Management team there, and I'm very confident that in the second half of the year we are going to start returning to growth in China, maybe not at the levels of double-digits that you might have been seeing but we will certainly be looking to returning to growth in China. Now, the other anomaly in the International results was Europe. I could comfortably say that a very, very big part of that 4% decline was driven by unseasonable weather, as it has already been mentioned. It shows the strength of our system that we were able to gain volume and value share in both sparkling and NARTD and as we see weather normalizing we again look forward to coming back to our normal range of growth in Europe. The rest of International territory, such as EAG continued to deliver at historical growth rates.
+
+
+    And Bill, this is Gary. Just add one or two other quick data points as well. When we talk about 1% volume, you have to wonder, is that a weak 1% or a strong 1%. Let me just assure you, it's as strong as it can be and still be 1%. So that's number one. The other thing is we talk about some of these anomalies on some of these markets. One of the things that gives me some confidence as well because there's been a lot of discussion about what's happening with the emerging markets and all around the world with the slowdown from China, et cetera, but we have always talked about the markets where the per capita consumption is less than 150 and has always been a real strength of ours. Well again even in the second quarter, if you looked at those markets under 150 and exclude China and India, which we have just discussed separately, if you excluded those, our volume in those markets was plus 7% in the second quarter, so it still shows underlying strength of the markets in those emerging markets.
+
+Answer_2:
+
+    Yes, John. Thanks for the question. Here's how I would say it. We are actually very close in the first half of the year, year-to-date, if you look at operating income, I think year-to-date ex structural, currency neutral is plus 5% and our volume is plus 3% so we are not that far away. So our view would be that we should be and in fact year-to-date earnings per share ex currency is 8%, rounds up to 8%. So we are not that far away in the first half. That's why I was saying, solid results, and when I say it's solid -- you've followed us long enough, we like to be at the top end of ranges and not at the bottom end of ranges. Unfortunately, we are at the bottom end right now but that's the world we are dealing with but we feel very good about the second half.
+
+
+    John, this is Muhtar. Just one point that I can add to that is the following. It's customary sometimes that when in the kind of businesses that we are in, when you have a blip in your volume because of a confluence of events, some of which are not in your control, the first thing you do is go out and cut marketing and if you look at our numbers, we have continued to invest aggressively in our brands through the second quarter, through -- in the first half and, as you know, every investment in marketing does not pay back in that quarter. It pays back in future quarters and therefore we are confident that with the share gains, we are confident with the strength of our brands, we are confident about the metrics on our brands both in sparkling and stills across the world and we are confident in our bottling partners' investment plans that are taking place in the second quarter that we can continue our momentum going into the second half of the year and also improve on it, volumetrically, but also continue with our mission to achieve our 2020 Vision through the next -- the years ahead.
+
+Answer_3:
+
+    Okay, John, first I want to compliment you on your creativity with that first question and then here's the real question. But anyway. Great question, actually. And the first thing I would say around pricing is we believe strongly that we have premium brands and our brands should command a premium in the market. And they do command a premium across the world. Number one, we are seeing pricing across -- rational and within the industry we think pricing is rational, particularly in the United States. But if you look at price mix and I'm going to go year-to-date, but the second quarter is essentially the same thing. If you look at price mix, price mix year-to-date is even. But within that you've got positive pricing and you've got negative geographic mix.
+So year-to-date consolidated, we actually have positive 1% pricing. If you look at it by region, year-to-date North America has positive pricing up 1%. Eurasia and Africa has positive pricing up 8%. Europe has -- looks like positive pricing up 2%, although I'll tell you a lot of that is because of Innocent and our acquisition of Innocent so absent Innocent, I think Europe is closer to flat. Latin America is positive 8 points of pricing year-to-date. The Pacific is even. And Bottling Investments Group is plus 2% as well. So we are actually getting very nice, positive pricing as well as category mix, brand mix, channel mix, all of those things are working.
+What's happening to us and where the ding comes in, if you will, is that we've got negative geographic mix so we've got significant negative geographic mix across many of those regions, which brings us back to even when you put price and geography together overall at the consolidated level. As I've often said, geographic mix would -- is always going to be probably negative because you're going to expect those emerging market countries to be growing faster than the developed market countries and you've got better pricing in the developed market countries. What's amplified it a little bit this quarter particularly was the result in Europe that we talked about and North America being -- coming out even where they were. So, you put all that together, we are actually getting the kind of pricing we would expect to be getting in the market.
+
+Answer_4:
+
+    Should I take this?
+
+
+    Yes. Judy, let me just reflect on that and I'll ask Ahmet also to comment. But what we have said again is there was a coming together of many events that usually don't come together all the time. We have performed overall globally at rates that are much more commensurate to what you've been used to in the last three, four years despite the fact that we've had issues, some of these issues happening to us from quarter to quarter, but you haven't felt them because of the fact that the portfolio worked. And this time, you have the issues around in Latin America and the two key markets -- Brazil and Mexico -- on slowing down and on also consumer spending being impacted because of the Brazilian crunch in consumer credit that was taken away from the consumers and generally the consumer spending went away. And then you also had China, the issues in China that was consumer spending is actually much below GDP levels and that is documented across the macro numbers in China and as well as the weather issues related to India and also other issues coming together in North America where it went for the first time in 12 quarters from a plus to a negative, which we don't expect.
+All of these things we don't expect to continue at the same time. Some of these things may still continue to impact us. Therefore, the portfolio will work. Now, related specifically to China, we are participating in two great categories in China and we are the leaders, which is sparkling and juices, those categories we have grown in and they are adding tremendous value to our portfolio and to our business in China. We have also, as we said, retargeting all our efforts in China, refocusing all our efforts. Yes, there's a different competitive landscape. We feel that actually that is not -- has not been the issue for us. The main issue for us is to ensure that we can continue to distribute in outlying areas in China that we have had some issues and we are correcting those and also that our marketing is working, which we feel definitely our brands are stronger, our innovation pipeline is working in terms of what we are providing to the consumer, also in terms of packaging.
+And we feel confident that those two categories -- playing in those two categories -- and then also innovating across some other categories like dairy is going to create the growth and the value for us starting in the second quarter but also continuing and we also feel confident that the Chinese leadership -- the new Chinese leadership -- are going to ensure that they take the right actions and we are seeing that to reposition and transform the economy without creating a major bump as they transform the economy from a purely export-led economy to a more balanced economy with also consumer spending and both Deputy Vice Premier Yang in charge of the economy, as well as the new team, we feel confident and have the plans in place to ensure that that takes place. So again, Ahmet, you can reflect more on that, as well as any other markets you want to.
+
+
+    Yes. Thanks, Muhtar. Thanks, Judy, for the question. A couple of messages here, Judy. Message number one is that the economy may be down but the growth prospects in China, even in the short term, is there simply because of the very low level of per capitas and strength of our system. Point number two, if you look at all the competitors in China, nobody really participated in all the categories. All the players have one or two categories that they are strong in and then they drive their businesses through those categories and maybe extend them to others. Our position is the same so our strategy is basically first of all, we definitely can do better in the categories that we already exist, such as sparkling. So to give you some specific actions we are taking to do that, I have highlighted the OBPPC and that's actually accelerated, we have pilots running on various multi-serve and single-serve packages for different price points in different parts of China. And as those things roll out of the pilot, we will be rolling some of them nationally, so those are already in a way in the market and they will be accelerated into the second quarter. We have also relooked at our communication strategies and we are going to be communicating more intensely on the intrinsics of our products as well as extrinsics.
+You might have heard about our nickname promotion, that's the similar promotion to the Share a Coke promotion around the world elsewhere, which is getting incredibly positive reaction from the consumer, and all the other things of improving our route-to-markets, et cetera, those are all underway and we are very confident that that's going to give us our strength in sparkling. Now we also play in juices as you know, and we, as Muhtar mentioned, we are the number one player there. We are refocusing our efforts back around Pulpy and we are just looking at an extension of that into Mango, which is getting very strong consumer reaction. So as we consolidate our efforts behind that you would see a continued increase.
+Now, obviously we are not only focused on just our existing categories. We have a pretty successful brand in Super Milky Pulpy, which is a value-added dairy, and we are beginning to increase our focus on that and we are getting high single-digit growth of that brand and we are building our innovation pipeline for the future. So it's a fairly robust strategy and, yes, under lower economic environments we might have lower growth rates than what you're used to, but we are ever strengthening our position in China to capitalize on this market for not just immediate future but the very long term.
+
+
+    And we have Irial also, which oversees Bottling Investments Group and, as you know, we are one of the three system players in China in terms of bottling. Maybe, Irial, you can comment on what you're seeing down on -- very close to the ground?
+
+
+    Yes, Judy, good morning. Just to build on something Muhtar said earlier, which is around investment and I would say from a bottling perspective, we continue to invest heavily in the market and particularly in our execution capability, route-to-market capability, and critically in developing the talent to be successful in the next years ahead. So when you add those to the revitalized marketing strategies, OBPPC, I actually feel very confident about the future. Yes, we have bumps along the way but our Business is growing, our challenge is to grow a healthy long-term Business and I think, from a bottling perspective, we are really putting in place the infrastructure and the capability to really drive a success for the future and that's basically where I would leave it.
+
+
+    Judy, what I would just say finally is I wouldn't read anything more into this than what it is. As Gary said earlier, we were fractionally away from rounding up to 2% and we could -- it would not have been hard for us to do something which would not be right for this Business and take the volume up to 3% and selling low, cheap product. That is not what we are about. We are about investing. We are about doing the right thing for this Business and we are about -- and I've always said there may be a bump along the road, the one bump along -- we have grown this business consistently in line every year on an annual basis since 2008 on our way to our 2020 Vision in the range -- in the upper range of our long-term growth plan despite very, very challenging macroeconomic conditions and that is going to happen in 2013 also.
+
+Answer_5:
+
+    Yes, let me just comment on what you just said. We are not -- this is not about managing on a day -- yes, we manage this business on an hourly basis but it's not healthy to comment on what has happened in the last two weeks. Yes, of course, we expect the weather to normalize. As you know, whoever is in the Northeast now and whoever was in the West Coast of the United States in the last 10 days, you know that weather has -- it does normalize. That's probability and statistics, so it just happened all in a very short period of time where everything was negative in many major markets, it's -- and it will turn -- it will normalize and that's what we are saying, part of what we are saying, so I have every confidence that with the normalized conditions, as I've said, we will again, 2013 will be another year when volume will grow at the range of the long-term growth model. As far as the margins are concerned, I will turn it over to Gary in terms of what -- the margin of what you mentioned in terms of the margin numbers in Europe.
+
+
+    Yes, in Europe it's a structural anomaly. It's actually Innocent. So when the juice business, juice having lower margin, when it came in, that's what changed the margins. It's nothing more than that.
+
+Answer_6:
+
+    Yes.
+
+
+    And that's actually the flip side, if you will, of what I said when I was answering John's question, that if you looked at price, the price inside of price mix in Europe is actually plus 2%, but it's really Innocent giving us a lift on price but it gives the opposite effect on the margin.
+
+Answer_7:
+
+    Yes, exactly right.
+
+Answer_8:
+
+    Yes, great question, Bryan. Well, first, you will see that we did accelerate purchases in the first half of the year. As I said, if our annual target was in the $3 billion to $3.5 billion range and we actually have repurchased $2 billion in the first half, we did exactly what you said and we accelerated in the first half of the year. Where we are right now is we are sticking with the annual target, which we originally set at $3 billion to $3.5 billion and I'd just tell you, we will give you an update on that at the end of the third quarter.
+
+Answer_9:
+
+    I've learned to never say never to anything.
+
+Answer_10:
+
+    Perhaps, Mark, let me take the margin question and then we can come back to the innovation question. But this is actually -- let me get back into actually what I talked about, price mix and margins when I was talking about Innocent. The same thing applies actually at a higher level for the total Company. So what you've got is very positive pricing and you're seeing that and that being offset by geographic mix. But what you're seeing is when an operation like North America is minus 1% in the quarter, that actually -- this is counterintuitive -- but it actually improves margins, okay, because North America having the finished product business has lower margins. So in our expectation is, number one, to continue to get positive pricing and we are going to be rational in pricing and we intend to stay premium as I said earlier. But in addition to that, we expect North America's performance to improve in the second half of the year, which will actually put pressure on margins, which is why we said earlier that we would expect gross margins to moderate over the second half of the year and it's really the geographic mix of where the income is coming from. Does that make sense?
+
+Answer_11:
+
+    Yes.
+
+
+    Yes, also on innovation, as we have said before, we don't look at innovation only as ingredients, we look at it as packaging, ingredients, equipment, even in terms of the marketing, social media, the brand price pack channel, architecture, occasion architecture, all of that is working for us and also our -- in terms of our new campaign to be part of the solution around the world, working closely with local governments, national governments, working with the government of Mexico, working with mayors in Chicago, in San Antonio, other parts of the United States, in different states, in Atlanta, and you can look at the patents that we have been filing of recent. So we are working and freestyle and the next generation of what is behind -- what's coming next after that, we are working on a host of new innovations.
+Also ingredients. Continue to work with our partnerships across the world in different incubators around the world. The best -- we always believe here in The Coca-Cola Company, the best ideas are outside. So the plant bottle came from the outside from one of the incubators in India. Many new ideas are coming from different incubators in Israel or in China or in Japan or in Latin America. We have many -- we have substantial partnerships from here in -- with the University of Georgia to across many institutions around the world in techno parks. So, yes, we are very, very active and we are content that we have the right pipeline and maybe I can ask Steve to reflect on -- from just a North America and Americas perspective.
+
+
+    Yes, thanks, Muhtar. From a -- starting with the Latin America perspective, we've got Coca-Cola Light, which we are kicking off in Argentina. Which we are excited about watching the prospects of that. We are doing terrific innovation around our Jugos Del Valle platform in juices in Latin America, as well as in North America we have launched Fruitwater, a brand new product off to a very good start. Powerade Zero Drops have joined Dasani Drops as a very exciting innovation. NOS Active, with is a fusion between sports drinks and energy, kicked off in April, again off to a very good start. From a packaging perspective, we continue to innovate around our price package architecture. We've just launched 16-ounce sparkling icy cans in our major packages. We've got Taylor Swift Slim cans coming into the marketplace. We've got 19.2 ounce sparkling cans coming into the marketplace. Again, lots of excitement around the packaging innovation.
+In terms of some marketing innovations, we've got Coke Zero, which is going to be launching College GameDay this fall, which we are very excited about. We've got Caffeine-Free Coke Zero coming into the marketplace. We feel very good about that. Really building out the Coke Zero platform as an all-day brand, so we've got lots in the marketplace and lots more coming into the marketplace and it builds on one of Muhtar's earlier points that throughout this rough period of time, we have continued our marketing pressure, we have continued our marketing investment. We have not cut it. We have increased it and it allows us to continue to innovate and bring new innovations into the marketplace.
+
+Answer_12:
+
+    Yes, I would just comment on that that it's all about ensuring that you provide the right choices at the right time for the right consumers in the right environment and that you shouldn't read that we have an increased resolve to use any specific ingredient. It's all about ensuring that we do have viable lights and no-calorie versions for every one of our major brands available to the consumer, ensure that we [front the pack] label transparently, ensure that we have active lifestyle programs, as per all our global commitments, and ensure that we have responsible marketing. That's our -- those are our four commitments and our Business, we've said many times, is about brands. Today, we have $16 billion brands, that are growing. We have in the pipeline another 19 brands that are bigger than $750 million in revenue and less than $1 billion. Those are all going to become $1 billion brands in the next increment of time because they are growing and we are confident that we will have multiple -- more $1 billion brands than we have today and I think that's what this Business is all about, adding value through brands to our system and I'm confident that you will see us add many more $1 billion brands to our [rostrum] in the near future.
+
+Answer_13:
+
+    Steve, you want to go?
+
+
+    Yes, thanks, Ali. I will start. In terms of pricing, we have always said that our pricing strategy in North America is consumer-based and it continues to be consumer-based. We captured, if you look at Nielsen, we captured very good pricing across our portfolio in North America and we think it was an appropriate amount of pricing by channel. The unfortunate 4% volume decline was, as we said, had a lot more to do with weather and the economy, at least 60% to 70% having to do with a one-time, really poor weather event, so we didn't put more price in the marketplace to try and chase volume that wasn't there. We put appropriate price increases in the marketplace and we maintained our margins and we maintained our price strategy going forward and we continue to bring new products and new packages into the marketplace to help our whole architecture achieve the type of pricing that we deserve.
+And we have given some examples of this in the past and a good one is our 1.25 liter, which continues to be very successful. One-third of the 1.25 liter volume is in fact incremental volume, so it is good in and of itself but it has also allowed it -- so if you look at our 2-liter pricing over the course of the past 12, 15 months, we are out of the $0.99 price promotion for 2-liter and have been for quite some time. So we are not going to put too much price in the marketplace. We take appropriate price, based on what the consumer and what's right for the consumer and what's right for the customer and we fully expect that based on the price plans we have in place for the back half of the year, based on the innovations we have on the back half of the year, that sparkling volume will in fact improve from what happened in the second quarter.
+
+
+    Ali, I would move onto your question on China. The answer is there's absolutely no plans for increased price promotion. In fact, the reason for having a evolving OBBPC is to have more sustained volume at the right price point and the right packs for all the consumers. Now, to give you an example, you might be familiar that there's been a lot of upsizing going on in China and we have launched our 300 mL package last year. Now, we will tactically respond to such upsizing to be able to balance our volume and share performance but that's a -- those are limited tactical moves rather than a strategy to have increased price promotion so that's not really in the cards. Now, to maybe build on this a little bit and also to address some of the innovation questions that I didn't have a chance to share, is that we have small cans -- either slim can or sleek can -- and small PET launches all across the International territory, all across Europe, all across Eurasia Africa Group, and some of the Pacific markets.
+That I believe is an important innovation in a way and also allows us to drive revenue and gross margin. In addition to that, let's also keep in mind that we had some very successful products such as Pulpy that hasn't been fully launched in all of our International territories. Eurasia Africa Group, for example, have taken that and they have launched it in Morocco. In a very short period of time, we were able to achieve a 20% plus market share with that launch. We've just had a recent launch of extensions of coffee into PET in Japan. In the CVS channel, the recruiting female consumers were quite happy and pleased with the results of that. We have been innovating in energy drinks in Russia and Turkey by extending them into PET packages, resealable PET packages that the consumers want so we continue to innovate in different packages, different categories across our International territory as well as using successful innovations from the previous years.
+
+
+    Thank you, Jackson, Irial, Steve, Amit, and Gary. Our Business continues to grow and to capture global volume and value share even in the midst of ongoing global economic challenges and importantly we do not manage our Business for the short term but rather for the medium and long-term and, as I mentioned earlier, our focus on achieving our 2020 Vision is unwavering with current dynamics leading us to believe that our performance will be better in the back half of this year and beyond. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/23_questions.txt

@@ -0,0 +1,52 @@
+Question_1:
+
+    Muhtar, I was hoping you could step around the world and dive a little bit deeper into certain markets and regions to help us separate out the impact of nonrecurring factors that hit your second quarter. First is any macro related factors that can continue to pressure the business in the second half. You had mentioned macro factors in Brazil, Mexico, Europe, and China. Will those continue to be as big an impact in the second half as the second quarter and if not why? And then maybe if you could help quantify maybe what you think the weather-related impact was in the second quarter?
+
+Question_2:
+
+    Gary, I just wanted to ask a clarification about the back half of the year. Your commentary on the financials, it sounds like you're saying you're going to get to that level in the back half of the year and not the back half of the year will get you to the long-term algorithm for the full year. At least that's how I interpreted it. Can you just clarify that?
+
+Question_3:
+
+    Got it. Okay. Thanks. Then my actual question here was, Gary, you got positive price mix in the vast -- in every region this quarter with the exception of Pacific. And yet it's not going up to full positive price mix here. How do we view the regional price mix versus the geographic offset and how does this fit into your long-term algorithm? Because it seems like this is something that's most likely going to continue to be a notable overhang?
+
+Question_4:
+
+    I just wanted to go back to the second half expectations and clearly you can't control the macros and the weather, but I would just like to hear a little bit more specifically on some of the actions that you're doing to improve the volume performance, particularly in markets like China where there's a macro issue but there's also competitive issue, there's also portfolio issue just in terms of not participating in some of the fast growth segments. So can you just talk about how you're thinking about marketing investments, how you're thinking about your portfolio? Can you accelerate price tag architecture strategy more aggressively to really get the volume performance even if the macros don't come back and/or the weather continues to be challenging?
+
+Question_5:
+
+    Just two quick questions. What are the trends like recently? It seems like you're pretty bullish in the back half. So as you exited June and got into July, it looks like some of the weather normalized, so what are you seeing more recently? And then minutia but the big margin decline percentage year-over-year in Europe, what's the primary driver of that?
+
+Question_6:
+
+    Got you but so they should be down going forward though because of that because Innocent is now fully consolidated?
+
+Question_7:
+
+    Got you. So from a dollar margin perspective it's almost neutral but the percentages change because of the price component?
+
+Question_8:
+
+    Gary, just a question for you related to share repurchases. With the stock the way it's performed in the second quarter, did you accelerate or do anything different in terms of timing of maybe pulling forward share repurchases? And then the business right now is bouncing around the low end of your algorithm and the stock has bounced around in a pretty tight range here recently. So is there any consideration to maybe even buying back more stock than you originally planned just because you've got an opportunity to buy it here at the -- around the $40 level?
+
+Question_9:
+
+    Okay. But not out of the realm of possibility that you could go higher if you chose to?
+
+Question_10:
+
+    Muhtar or Gary, question on the gross margin evolution. I don't want to put words in your mouth but it seems like one of the silver linings here is that the price pack architecture work you've been doing over several years has allowed you to put up a pretty decent gross margin number and offset some of the corresponding earnings disappointment that comes from the revenues being what they were in the quarter. If that is a fair assessment, can you give us a bit of an update on what's going on in terms of innovation, not in terms of the price, the pack but in terms of what's really in the bottle because that seems to be one of the problems you're facing from a larger share performance absolute NARTD performance perspective?
+
+Question_11:
+
+    It does, yes. Absolutely. The geographic headwind is what it is.
+
+Question_12:
+
+    That's helpful. And if I could simply follow up on this subject of a stevia-based sweetener in the brand -- on the door, so to speak. Coca-Cola, we have seen what you've said recently about globally taking down the portion of your volume that is in the full-cal portion of your business. Should we infer here that there's an increased resolve to use organic sweeteners against the main brand here and there's some optimism globally for that potential?
+
+Question_13:
+
+    So the general theme of my couple questions is really what we are all trying to figure out, which is, what's going to get better from here and why, and not only in terms of volume but also in terms of some of the other key drivers of profitability. So if I may, my first question is around North America and although you say in the press release, you remain committed to rational pricing, price mix was only up 1% and do you think volumes would have been down more than negative 4% if you had taken more than 1% pricing so taken 2% to 3% pricing or can we hope for that part of the business, the pricing in North America improving going forward? And as a follow-up to that, in a completely different per cap market like China, following up to Ahmet's point a second ago, I just want to get a better sense of if evolving a strategy has anything to do with increased price promotion as well, as it sometimes does with some companies?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/24_answers.txt

@@ -0,0 +1,154 @@
+Answer_1:
+
+    Good morning.
+
+Answer_2:
+
+    Yes, Dara, good morning. I think first it's important to realize that there is different timing across the world to some of the volatility and macroeconomics, and particularly what's interesting for us which is disposable incomes. So I think China has already had a slowdown and is beginning to recover. We see that. And there's always also a lag between the GDP per capitas and disposable income. So also important to realize that they don't all happen at the same time. The numbers don't correspond to each other one-to-one.
+And so we do see an improvement in Southeast Asia and parts of certainly China, where things have stabilized and things, people are beginning to normalize their habits. And in the last three, four months we've seen a flight of currency from emerging markets, market stock exchanges in countries back into North America. That's had impact on disposable incomes in Latin America, in Eurasia, in countries like Turkey, and other countries, in certain other countries in North Africa. So, yes, those -- and you can track stock exchange indexes and you can track disposable income growth or slowdowns. They are all very related and we do see that the world is not just one city or one element of volatility. There's different pockets of volatility happening at the same time. And what is, what we are fortunate with is the great portfolio, a wonderful portfolio where India slowed down maybe seven, eight, nine months ago.
+We see some comeback in terms of disposable income I'm talking about, and China is the same. Southeast Asia I would say are similar. Philippines also pretty much in that camp. And then we certainly also see that we've still got some headwinds maybe in other parts of the world. So there's some tailwinds coming and some headwinds coming. And we continue to invest in our brands and when you look at our performance, we have sequential improvement in many parts of the world, particularly when you look at places like India, places like China, Atayan, even also developed markets such as Australia and also South Africa. And our African continent, I haven't mentioned that, countries that are some sub-South Africa that are usually south of 80 per capita, again, grew in a very healthy manner this past quarter, about 5% up. And we expect Africa to continue to generate good results and economies in Africa seem to be pretty buoyant and seem not to be too impacted. But of course they are very slow level of their per capita development as well. I hope that helps.
+
+Answer_3:
+
+    I thinks it's pretty -- as I said, different pockets showing different results, but we have a very, very sharp focus on -- I was down in Latin America recently a month ago. I visited many countries in Africa recently as well as in Asia. We have an incredibly sharp focus on brand price pack channel architecture, new price points, lower price points, more focus on affordability, more focus on returnable packs and smaller packs. Individual packs that help continue to keep the drinkers' base growing, which is key and essential to when economies also start turning up and when disposable income starts heading north.
+
+Answer_4:
+
+    Good morning.
+
+Answer_5:
+
+    Yes, thanks, Bill. First, philosophically, from a strategic vantage point, the whole story of balanced growth we believe is still very impact. Balance being growth in western markets, growth in emerging markets, balance being growth in sparkling and growth in still beverages. And you see that happening in this past quarter as well. So we've grown in markets like the United States, which we believe is a long-term growth market. When you think about it, 14 of the last -- of the last 14 consecutive quarters, we've grown in all but one of them. And now we've generated, again, 2% growth, with 2% growth of brand Coca-Cola.
+So we -- Australia grew. Many important markets in Western Europe grew. Germany grew again 3%. Countries in Northwest Europe generated good healthy growth for us. And then emerging markets. Yes, there's some headwinds that are happening in emerging markets but we believe they are very temporary. The whole demographic, the whole investment, the whole story of 1 billion new middle class still holds very strong in our opinion by 2020. Over this past decade that we're in, this decade that we're in, a billion new middle class.
+That bodes very well for the industry we're in and we believe we can continue to generate very healthy good growth. We believe we can continue to generate very healthy price earnings. I mean, I'm sorry, price mix. And we believe that, therefore, in this, like in this past quarter which was where we did see a lot of headwinds, we generated 4% revenue growth and 8% currency-neutral operating income growth. And we believe that we had a lot of headwinds. So as economies begin to move, I think we'll see a lot of improvement. And I'll ask Ahmet as well to make some comments on this and if need be also ask Steve to add his commentary.
+
+
+    Thank you, Muhtar. Bill, you mentioned a few items. I'll just focus on a couple of them. Emerging markets, as you know, if you look at the history that it goes through cycles. So it has a cycle of years and years of growth and every now and then you have economic headwind, and you manage through that. But emerging growth, emerging markets growth economically certainly isn't over, and we have a formula which pretty much closely shows that as personal consumption grows, we actually grow with it.
+Now, having said that, in some of the emerging markets where there might be personal consumption and macro headwinds, we could still grow, like India, because we have very low per caps and we have significant investments in feet on the street, infrastructure, brands. We're just really building our business. And India showed that again this year. So that's what I would say about your comment of emerging markets. The growth story there is far from over for a long time to come. And I guess the rest were about US pricing and decline in soft drinks. So maybe I should just pass that on to Steve.
+
+
+    Yes. Thanks, Ahmet. First, I would just underscore on the broader question, what Muhtar said in his prepared remarks, that in this quarter we delivered the highest number of servings ever reported in the third quarter. So I think that bodes well for our growth story going forward. But with regards to North America pricing, which I heard you ask, Bill, and in particular, sparkling price. We feel good about delivering positive price mix in the quarter of plus 1%, in line with our strategy to consistently earn at least 1 to 2 points of sparkling with consumers. And in the US Coke system remains committed to taking rational pricing and we've done this very well over the past several years. In fact, we achieved 2 to 3 points of price mix in sparkling beverages and across our total portfolio in both 2011 and 2012. Year-to-date, we're 2% sparkling price mix, which we feel good about.
+But I think it's important to remember, we've always said that we're going to focus on consumer-centric pricing. And if I can give you an example of that, the average price today of an 8-ounce serving of Coca-Cola is $0.25, exactly $0.25. This is up over 5% versus two years ago and it's up nearly 10% versus three years ago, which compares very favorably to the US inflation market. And this tells me really three things. First, at $0.25 we do not have an affordability issue. Coca-Cola remains a very affordable indulgence. Two, we've been able to earn price above inflation in the United States. And three, we still have plenty of room to continue to take price.
+But now addressing the third quarter in particular, we acknowledge we did strategically invest in select promotional activity in the back half of the summer through the Labor Day holiday. Given that we essentially didn't have much of a Fourth of July holiday and Memorial Day holiday, this Labor Day acted much more like a Fourth of July holiday. But these investments were tied to specific occasion-based brands and packages to help drive incremental household penetration, which they did, attract more consumers into the category, which happened, and is very much in line with our long-standing North American strategy. And all of these activities that we did, all of them, to take price in the marketplace, I think set us up very well to take more price in this quarter and going into 2014. So we're very confident that the pricing environment in North America remains very rational and that we'll be able to continue to earn price in the marketplace in this quarter and going forward in the next year.
+
+
+    Yes, just let me round out that question with one final remark, Bill, and that is that once again if you take our world average per capita of around 90, just under 90, and you take the most populous nations of the world that are less than half of that per capita, India, China, Indonesia. Way below that number, way below half of that number, we believe there's -- and many other parts of the world as well in Africa, the youngest billion, we believe the critics, whoever they are, are wrong. I don't understand that sentiment. We're growing while others are not at the moment. And our business and balanced portfolio is built for times like these. So we see this as a time of opportunity.
+
+Answer_6:
+
+    Good morning.
+
+Answer_7:
+
+    Yes. Look, Bryan, firstly let me just address that by saying regressive taxes do not work, period. And wherever we have seen them being implemented in some cases, they have been taken away by the government after two, three years, basically like in Denmark. They are not working wherever else they have been implemented, and so the consumer suffers in them. It's proven time and time after again. We've made our case to the government. We have tremendous respect for the government of President Pena Niento. And we need to understand that, and we've made our case that this really does not have anything to do with health policy. In order to address the health policy properly, we have to come and work together with government and with civil society to raise the awareness and to create programs that really work. That really drive physical activity and, therefore, just a regressive discriminatory tax on one part of the food industry just is not going to work and apparently that's all I would really like to say, because its discussions are in progress and I don't want to comment any further.
+
+Answer_8:
+
+    I just don't want to comment on it at this moment. As I said, there are a lot of discussions going on and it would be wrong for me to publicly comment on any of those discussions and, therefore, we'll deal with whatever the result is in the most effective way. I can assure you that we will continue to prosper the business. We're one of the largest, we are the largest consumer goods business in the country. We are one of the largest contributors to the GDP in that country by a big margin, and we support millions of retailers in the country effectively for their livelihood and, therefore, I think that we will certainly find the right way forward, whatever happens.
+
+Answer_9:
+
+    Okay, John. Let me see how well I can do on this and then you can come back and ask. But first, going to price mix, and just as a reprise in general on price mix, generally what we see, and I'm going to take this in steps, generally what we see is you see pricing. So you see rate and mix, positive rate and mix, would be positive across almost all of the groups. You would then see negative, generally, you would see negative geographic mix and it's basically a function of higher growth in emerging market countries than developed market countries, which would give you a negative geographic mix. Then on top of that, and you're absolutely right, then where we own bottlers and they're growing, and that gives you then a positive price mix because they're finished products versus concentrate.
+So a couple things. So if you go back to the second quarter, I talked about margins and I thought margins would moderate and because of geographic mix. And the follow-up to questions I remember, I said because we expect North America to actually perform better and that will actually hurt margins because it's a finished product business where margins are lower. But it helps price mix. And what you're seeing today is while price mix in North America was even for the quarter, we are getting positive price mix from our finished product businesses.
+Going forward, and not talking specifically about 2014 because we're still in the midst of planning 2014 and we'll give you a full review on our views on next year in the February call, we are planning to take appropriate pricing and Steve referred to taking pricing in North America as well. So we are expecting to take pricing. So going forward, what I would expect to see is that we should have a positive in rate going forward. We should have a positive in mix going forward. We should have a positive from finished products going forward. And we should have a negative from geographic mix. So that's the kind of -- and if you add all of that up, it should be a positive price mix. That's what we would expect and it's what we would expect as what's in our long-term earnings road model, is positive price mix long term.
+Now, let me see if I can turn to operating income. When I was talking about operating income, it was definitely currency-neutral. It was -- and ex structural. So let's be very clear on both of those, currency-neutral and ex structural So operating income was 8% currency-neutral ex structural for the quarter, and 6% year-to-date currency-neutral ex structural. And what I said was we now expect the full year to be generally in line with the first half of the year. So somewhere in that ball park and that is net of currency-neutral and net of the structural impact because I can tell you with the structural impact, it's a point of negative structural impact and so that would take our year-to-date from 6% to 5%, for example. So just to be clear, ex structural, currency-neutral.
+
+Answer_10:
+
+    Yes, without giving guidance, what we're basically saying is that the full year we think ex structural and ex currency, it ought to be in line pretty much with where we are year-to-date.
+
+
+    Yes.
+
+
+    Okay.
+
+Answer_11:
+
+    Yes, Steve, you want to address that?
+
+
+    Yes, thanks, Judy. First, I did talk specifically about diets. I would underscore that we have a very wide portfolio in North America led by brand Coca-Cola, which is twice the size of Diet Coke, and brand Coca-Cola, as you know, grew 2% in the quarter which we're very pleased with. Diet Coke is like a lot of diet products in the United States, and not just beverages but across the whole array of food, are under a bit of pressure as people are questioning ingredients, ingredient safety, and so forth. But we believe very strongly in the future of Diet Coke, the number two sparkling brand in the United States. We've got terrific programs against it. We're actually seeing increased incidents in the past quarter, between 19- and 24-year olds. We think a lot of that has to do with the exciting new promotions with Taylor Swift, some of the new packaging we're bringing into the marketplace, an increased focus on Diet Coke.
+But there are headwinds. There are headwinds that we're facing. And we face headwinds in a lot of different areas, a lot of different places, and this is just one of them. But last year it became the second best selling sparkling in the United States and we're continuing to focus on it. Coke Zero, also a part of our zero-calorie portfolio, grew mid-single digits in the quarter. So we're very happy about that. We've got a great program around Coke Zero, College GameDay just kicked off, it's really becoming ever-more relevant with young males. So we're confident that throughout our whole portfolio, we're offering consumers exactly what they want, when they want it, how they want it, at the right prices that they want it, and we'll continue to focus on any of the headwinds around Diet Coke. And we're confident that it has a bright future in this country.
+
+Answer_12:
+
+    Well, Judy this, is Muhtar. First, I think it's important to understand that, and I've said this in the past, that economies that are performing at a different pace in the continent of Europe, not everywhere is really bad, not everywhere is really good. And so you still have very challenging consumer sentiments in Spain and Italy and Greece and Portugal and the South, in Southeast Europe, in what used to be termed as the Balkans, Romania, Bulgaria, former Yugoslavia. It's very challenging environment. And then you've got a better environment in Northwest Europe and then certainly the best environment still in Germany. And so based on those, our business also reflects some of those conditions and so it's a pretty good mirror actually. And I'll ask Irial to comment on Germany and why we've been consistently performing in Germany and growing our business and, again, there is tremendous sequential improvement versus the first half in many countries of Northwest Europe, in Scandinavia and also Northwest European countries. Irial?
+
+
+    Thanks, Muhtar. And this actually goes back to one of the earlier questions. I think in Germany we've got an economy that's doing okay. We have got actually really good marketing married up with continued excellent execution. And you bring all of that together and you get great results. And for me in Germany, it gives me great confidence about the future of our business, quite frankly, because we are seeing where we put in the hard work, where we do the right things in the business, we do get good results. And Germany is just an example of what can happen, quite frankly, in many markets around the world as the economies turn and improve.
+
+
+    Ahmet, do you want to comment?
+
+
+    Yes, I just wanted to -- hello, Judy. I just wanted to add to the others that we had a very, very strong Share a Coke campaign across Europe this summer that worked extremely well. We are ever-more closely aligned with our bottling partners, really driving growth. And just on the macro, I would like to add that there's a clear divergence between North and South. So North continues to do better and South continues to do worse. So our business in the North certainly is reflective of that.
+
+Answer_13:
+
+    Good morning.
+
+Answer_14:
+
+    Yes, I think it's on target, as we have said, reported previously, where we make very sound significant good progress with, in discussions with some of our existing partners, as well as discussions ongoing with some other prospective partners. So we are on target, if not a little bit ahead. And I think you'll hear more about it in the coming period ahead of us, and I'll ask Steve just to maybe shed some more light on it.
+
+
+    Yes, thanks, Muhtar. Bill, the one thing I would really underscore is we absolutely have not hit a lull. Don't take the absence of public commentary to mean that we are not making very good, very constructive progress. All our bottling partners, both current and prospective, are extremely excited about this business in the United States, about the opportunity to continue to be franchise partners in the United States, to grow the business in the United States, and we're making very exciting progress and we'll have more to report in the coming months.
+
+Answer_15:
+
+    Talking about productivity, Bill?
+
+
+    I'll ask Gary, do you want --?
+
+
+    Sure, Bill. Within the quarter, we continue to invest in marketing, so marketing is actually up in the quarter and up year-to-date. We had significant productivity savings in the quarter. We have some previously announced productivity programs that we announced back in 2012. Those 2012 programs will go through 2015, and really focus around productivity and then reinvesting those back into the business. They were focused on information systems, marketing, supply chain, innovation, operational excellence, that sort of thing.
+I can tell you, we'll give you a full update on it at the year-end call, so I can give you the full year. But we are making very good progress against the goals and you'll see that on the February call when we go through a full update. And we've got hard savings and soft savings. So let me give you some examples of what's happening and it's adding into the productivity and some of the leverage that you're seeing.
+So in things like supply chain, if you buy things cheaper, hard savings. And we're doing a lot around supply chain and actually getting a lot of hard savings. And those you're seeing being reflected. In marketing, if you can buy media cheaper, then we just buy more media basically is what we're doing. So we're reinvesting back into marketing and being able to buy more media for the same price, if you will. So we, as I say, we'll give you a full update on all the productivity programs in February at our year-end call. But we're making excellent progress and you're seeing a lot of that just what's coming through the G&A line with, as I say, within that marketing, SG&A marketing, being up for the quarter and year-to-date.
+
+Answer_16:
+
+    Very, very little. There's a huge cycling of last year in the fourth quarter, as I've mentioned earlier. But there's very little. I mean, there's a little bit but nothing of significance in the quarter this year.
+
+
+    Thank you.
+
+Answer_17:
+
+    Yes, thanks, Ali. I think that's a fair interpretation of what I said. This was a very different summer. It's been a difficult year starting with the fiscal cliff and sequestration and payroll taxes and so forth. And then the summer was very sluggish and it's very important in our business to keep consumers engaged with our brands, to make sure that we're in the households, to make sure that teens are being recruited. And so Labor Day acted very much like a Fourth of July or Memorial Day, whereas typically it would not. It would be the end of summer.
+And Labor Day acted like the only summer, so it was more promotional than you would have seen. It would be more promotional than what we would expect going forward. But those things happen from time to time. And we think that the pricing environment will continue to be very strong, very rational, and because of all the investments we're making in our brands, we feel that we have the opportunity to earn even more price going forward in the marketplace. And that would be absolutely our intention to do that.
+
+
+    And I just want to add one thing. In terms of the Nielsen data, yes, that's exactly the reflection. But don't underestimate. We took very healthy pricing and I see also in the quarter. And so, overall, that's how you get to the one price mix positive on sparkling. And so, don't let that point go unnoticed at the moment.
+
+Answer_18:
+
+    I would say that first, we believe that our long-term growth model, with appropriate mix which we believe we can take and we can generate, it would definitely get us to our 2020 vision of, from a system revenue point of view, of doubling our business with the base of 2010. So that's the sort of trajectory, if you like, and we're on track in terms of moving ahead to doing, achieving our goal. The second piece is we'll always be looking for any kind of bolt-on acquisitions that may make sense, but that's the extent of what I would say that right now we would be looking at. Bolt-on acquisitions and if there's an opportunity, we will look at it seriously.
+
+Answer_19:
+
+    Sorry, say that again?
+
+Answer_20:
+
+    I don't think materially. You know, if you look at our long-term growth of corridor of volume plus what we've been achieving, I think the balance is still there the same as it used to be.
+
+Answer_21:
+
+    Yes, I'll have Ahmet just comment on China. Then maybe Gary can finish off the second part of the question. Sure.
+
+
+    Thanks, Wendy. You might remember that in our last call, we talked about the fact that we were evolving both our organization and our strategy in China. And what we see in the third quarter really encourages us that we had not only 9% growth in total, but also 8% growth in sparkling. And that's pretty much delivers on the expectation that we've said that we would expect sequential improvement from the first half results, in the second half of this year, and we expect that sequential improvement from the first half results to continue into 2014.
+To your question of pricing promotion, we did not have any significant marked pricing promotions in the marketplace. It was basically a combination of, A, beginning to implement parts of our new strategy in the marketplace, B, the same Share a Coke promotion as we're scaling up these wonderful global assets in all parts of the world. And then our new team beginning to gel together, connecting with our bottling system and really improving execution. So we are encouraged by those results and we expect to continue to, as I said, improve sequentially from the first half results.
+
+
+    Okay, Gary.
+
+
+    Yes, Wendy, relative to share repurchase, let me first, let me just start with a preface that don't particularly agree with you on saying our share price is relatively underperformed for the last two years. But absent that, a couple of thoughts on share repurchase. Our view on share repurchase is that share repurchase is value neutral. It is not something that grows value. It does for the short-term holder. Because maybe you can get a bump in the share price. But for the long-term holder, it is not something that is value-enhancing. It is much more like a cash-efficient dividend, which is the way we treat it in that our priorities for cash are number one, to reinvest in the business, to grow the business that would include bolt-on acquisitions, et cetera.
+Number two would be dividends which we have increased for the last 51 years, 10% this year. And third, excess cash would be put into share repurchase and just because we don't need that cash in the business. So it's a return of cash to shareholders. But leveraging the balance sheet to do something that we would view as value-neutral, we don't think is the right thing to do so we continue to just perform exactly in line with the targets that we set at the beginning of the year. Thanks.
+
+
+    Thank you Gary, Ahmet, Steve, Irial, and Jackson. We delivered sound third-quarter results within an ongoing challenged macroeconomic environment. While we saw sequential improvement in the business, we remain constructively discontent and resolutely focused on further advancing our growth trajectory. Our 2020 vision and long-term strategies remain firmly intact. And together with our global bottling partners, we're investing in our brands and our capabilities to further strengthen our system and to drive sustainable growth and value. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/24_questions.txt

@@ -0,0 +1,86 @@
+Question_1:
+
+    Good morning.
+
+Question_2:
+
+    Muhtar, I was hoping for more granularity on emerging markets given the Q3 slowdown, particularly in Latin America, which was in contrast to some improvement we saw in China and India. So can you give us an update on the macro environment as you look around the world? And also, some of the strategies you mention you were implementing, are you gaining traction at this point from a market share standpoint? And should we expect to see volume performance in emerging markets improve as we look out going forward from here?
+
+Question_3:
+
+    Yes, that's helpful. And then some of the strategies you're implementing, do you think it's helping to drive an improvement in market growth at all or drive market share gains? And do you feel comfortable that emerging markets trends have bottomed in general at this point and we should see some improvement going forward, or is it still too volatile to call right now?
+
+Question_4:
+
+    Good morning, everybody.
+
+Question_5:
+
+    Muhtar, critics have said that Coke's growth story is over, reflected in the stock price, pointing to the slowing emerging market growth you were just talking about, declines in diet soft drinks. Some say the pricing in the US is irrational, and an inability to grow in big markets like US and Mexico. Can you explain why you still see solid growth ahead for the Company? And what the Company is doing in terms of innovation, productivity, you mentioned price pack earlier, to drive that growth and why the critics who have declared the growth story is over are wrong? Thanks.
+
+Question_6:
+
+    Hello, good morning.
+
+Question_7:
+
+    Question about Mexico and excise taxes. It's been in the press over the last, especially more so over the last couple of weeks, and in speaking to some of your bottling partners in Mexico specifically, it seems like they are more resigned to the potential that it's going to be a reality. So if you could talk a little bit about just how you see the situation unfolding in Mexico and to the extent you'll get an excise tax increase, how you plan -- or do you plan to do anything differently in Mexico in response to it? Maybe some thoughts about elasticity? And then finally, just any concern that there's spill-over into other markets would also be helpful?
+
+Question_8:
+
+    Are there any preparations for -- I guess, just trying to understand if it does become a reality, do you have plans in place to deal with it if it does occur?
+
+Question_9:
+
+    Thank you very much. Muhtar and Gary, you guys talked about the price mix number improving sequentially, which was good to see. So Gary, can you talk a little bit about how you see this playing out over the next 12 to 24 months? Where you have the negative geographic mix offset by the positive mix on a per case basis is the bottler territories, where you own the bottler gets better like North America, versus the absolute level of pricing. How should we look at those factors competing against each other to try and map something out?
+And then one other housekeeping question, which was your comments on operating profit for the year, could you just revise those and, or restate those, just because there's some confusion about whether it was currency-neutral or non-currency-neutral, what have you? Thanks.
+
+Question_10:
+
+    Okay. So, and I'm not trying to trick you into guidance or anything here, but it basically sounds like you're saying currency-neutral, ex structural, mid-single digits year-to-date. So, therefore, that implies the Q4 but then you talked about the currency impact. So as we're looking at those, should basically offset to get you to slight operating profit growth for the quarter?
+
+Question_11:
+
+    Thanks, good morning. I had one follow-up question on North America and then a question about Europe. So in North America, there's been a lot written about the declines that we've seen in diet sodas. And, Steve, I'm not sure if you went through that and whether you shared some of the similar concerns that people have written about the decline in diets and your perspective on whether the artificial sweetener issue is impacting that category at all and from your strategy in dealing with that situation?
+
+Question_12:
+
+    Okay. And then just on Europe, the improvement that we saw in Northwest Europe and Germany as well, to what do you attribute that to? Perhaps weather getting much better in the quarter as opposed to the macros in consumers and what you guys are doing to really rejuvenate growth in those markets?
+
+Question_13:
+
+    Hello, good morning.
+
+Question_14:
+
+    Hey, can you just talk about the timing of some of the refranchise in the US? Because I think we talked a lot about it earlier in the year and it's kind of hit a lull recently? And then I have a follow-up, if I may.
+
+Question_15:
+
+    Great. Thanks so much. And then just on the SG&A costs, can you just give us a little bit more color on what drove some pretty significant efficiencies, which is obviously great, but with the advertising ratio flat or up and then maybe what drove some of the other improvements on that line item?
+
+Question_16:
+
+    Got you. Was there any benefits from the incentive compensation accruals either this quarter, maybe into the fourth quarter as well?
+
+Question_17:
+
+    Hello, guys, thanks. Just one quick thing and then a real question. So I just want to underscore something again, because it's a key controversy and, look, I'll be fair. I think what Steve said a moment ago is music to a lot of investors' ears. And I want to just replay to make sure I understand. So did you say that the past couple months in North America from a price promo investment perspective, we're a little bit more of a blip and that we should expect something like higher pricing that we saw in 2011 and 2012 going forward in North America?
+
+Question_18:
+
+    I appreciate that. That makes a lot of sense. And then a broader question, and I don't know how often you revisit this, but what do you think the Company has to grow volumes between now and 2020 to deliver on the 2020 vision, given some of the recent slowdown in volumes? And I guess in that context, do you think as a Company you have to acquire more to reach that vision?
+
+Question_19:
+
+    And from a difference of volume versus price mix to reach the system doubling goal, has it shifted at all between the two?
+
+Question_20:
+
+    Well, so to double the system sales by 2020, there is perhaps an ingoing assumption of what would be from volume and what would be from price mix. Has the recent global slowdown shifted that mix at all between volume growth and price mix growth to reach the doubling of sales?
+
+Question_21:
+
+    Hello, thanks, good morning. First question on China, can you talk about the acceleration, the pickup in volumes there, whether that was driven by any change in pricing or promotional levels? And what your outlook of a normalized run rate, because that region's just been so lumpy in terms of volume growth as we go into 2014, where's a base case of volume growth?
+And then my second question is looking at the buyback program, the stock's on track for two years of relative under-performance, and we haven't seen that for a while and yet your target for buybacks hasn't changed since the beginning of the year. So I'm kind of surprised with the balance sheet you have, with the weakness in the stock, and certainly, Muhtar, with your resounding confidence about the long-term outlook, you're not getting more aggressive on the buyback here? Thanks.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/25_answers.txt

@@ -0,0 +1,121 @@
+Answer_1:
+
+    Sure, Bill. Good morning. This is Muhtar.
+Let me first just take a step back and just say that, in a way, we've had a speed bump. We know it would have come on our road to 2020. We dealt with commodities and in 2011 and 2012. Volatility in weather has become a norm.
+Uncertain economies -- internal, also execution issues caused us to under-perform versus our expectations in 2013. I'll start by saying that.
+We have looked at everything. We have looked at our people, priorities, marketing, selling, and innovation, and we have refreshed our plans with a simple but scaled up set of priorities on marketing our brands, system execution by our franchisees and bottling partners and Company-owned bottlers, and on innovation of all kinds. Business models like the one that we recently announced with Green Mountain, brands, equipment, packaging, the lot.
+Our long-term outlook is our performance algorithm which we have and will deliver going forward. And 2014 will be a year of steady improvement as we get back up to speed.
+But make no mistake, our leadership team is confident, accountable. Our system will market well. We will sell well and we are going to achieve our 2020 Vision.
+Now let me just take you through a quick tour of the world and I'll ask Ahmet also to comment. Starting with Asia, China is going to sustain its growth, India in terms of its macroeconomic outlook, and we will continue to benefit from that.
+In India, there is elections coming up and usually when there are elections, there is a little bit of easing of fiscal discipline. That will play into a little bit of added disposable incomes.
+In Southeast Asia, certainly we've seen quite a lot of political turmoil, especially in Thailand. That will -- as we go into 2014, my expectation is that, that will ease a little bit.
+Indonesia, also there's an election coming up. But Indonesia is certainly having some macroeconomic issues that will probably continue into 2014. Philippines, we'll see a slightly improved outlook in the Philippines versus 2013.
+In Japan, obviously everyone is looking very closely at the new policies of Prime Minister Abe's government. There's a new tax coming up. We'll see how that impacts but certainly we all feel -- that our operating in Japan -- feel that there is some hope for a little bit of more inflation in the economy that will benefit also businesses like ours. Although recently, the last economic numbers from Japan were a little bit below expectations.
+Africa, youngest continent, we're very well-positioned. We feel that we will continue to grow well in the years to come in the African continent and benefit from also improvements in governance across the whole continent.
+In Eurasia, there's elections coming up in Turkey. Lots of again political issues in the Middle East will continue.
+Russia, all Russians can be very proud of the Olympics that are taking place. We will as we move forward -- and I was there in Russia, looking at some of the great activations that we've had in our Business -- and Russia, our Business will continue to grow in Russia with all the investments that we're making with our bottling partners.
+Europe is a continued tale of two cities. If you take the southern zone, the high unemployment and low growth is going to continue but it's not going to get worse.
+As far as northern Europe, Britain is certainly ahead of all the other economies in terms of the growth outlook. Germany also is in that area. We will continue to benefit from the robustness of policies in those two economies and the rest of the continent is somewhat behind Germany and England.
+In Latin America, again, 2014 is going to be a year leading into an election in early 2015. We'll have also the benefit of the World Cup and our biggest ever activation globally on the World Cup. Southern Cone -- Argentina, Chile -- we should continue to see the benefit of all the programs we have in place and also continued inflationary environment in those two areas.
+Mexico, President Pena Nieto's programs are taking effect, all the reforms. Long-term, that is a benefit to our Business, to the economy, to the people of Mexico. Again, as I said in my commentary, it's too early to say about the impact of the price increase we've had there.
+So I hope that gives you a good tour of the world. Then finally, in terms of our flagship market in the United States, clearly the best right now, as far as we can see -- the best Western developed economy in the world, we think we will see slightly improved mobility in the United States in 2014 versus 2013. We hope that, that will also mean a little bit of increased spending for consumer products as we go into 2014.
+So -- and again, we will benefit from all the robustness in our marketing programs and our increased expenditure and quality of marketing as we move into 2014 for our flagship market.
+Ahmet, do you want to add some commentary?
+
+
+    Yes, I'll add a few things to really compare some of these issues that have existed even last year, how they are different now. So for example emerging market currencies, when the first news on discontinuation of tapering came out last year around May or June, there was a bit of a shock in emerging markets.
+We see that over the last seven or eight months, these emerging markets are finding ways to deal with it -- by no means it's certain, by no means it's perfect -- but it certainly feels a little bit more under control compared to when it first came up, and the interest rate and things like that have been baked into those expectations. So the message there is countries and our Business, we are finding ways to deal with that new reality of less liquidity coming out of the United States.
+I would just add, Muhtar, to your comment on Europe north-south divide, that is very much true but we are beginning to see different shades of gray in the south as well. There are some encouraging signs in Spain; less so in Italy at this point in time, although there's a new prime minister there and we're hopeful with the new programs to be announced if they are.
+And Eastern Europe -- it continues to struggle in terms of consumer confidence and economics. So North continues to do well and South is even showing different performance now.
+The other point that, Muhtar, you mentioned, is political uncertainty. It's another common theme to many of our emerging markets. They eventually could impact the economic realities, but again, so far, in countries like Turkey and Thailand, it's been fine.
+And let me, just, in the interest of giving time to other questions, let me just stop it here.
+
+
+    Sandy, do you want to add any commentary to North America? It's important to say in North America that we believe in the North American market; we believe in the demographics; we believe this is a growth market.
+We have grown in all but 2 quarters of the last 15 quarters in the United States. We believe we can do better and we're intent and resolutely focused on achieving that. Sandy?
+
+
+    Thanks, Muhtar. We have a great Business in North America. Our focus in accelerating the Business is on our brands, on our customers, and on our capability.
+I'm really happy to be working with Irial and Paul and all of our US bottlers. Irial Finan and Paul bring a tremendous amount of selling and executional energy that will help us build on our momentum.
+On my end, over the last 6 to 7 weeks, Paul and I have met with our major customers, we've met with our bottlers, and we've gone through the brand plans in detail looking at opportunities to focus and strengthen them and to move resources to emphasize advertising and brand-building on our largest brands. With the plan in place, our focus as a system -- Irial, Paul, and I, and our bottlers -- is to improve all aspects of our execution whether it's marketing or sales or in the marketplace.
+We believe as a result of that, that we will improve steadily over time, and we share the confidence that Muhtar expressed in the long-term health of North America. It's a great market, it will grow, and I think we can be confident about our long-term future there.
+
+Answer_2:
+
+    Bryan, thanks, and let me see if I can go through all of those. Let me start at the top.
+When you're the industry leader, you have to believe in rational pricing and we believe we should get pricing for our brands because our brands are worth it and we would expect to have positive price mix this year to go with the volume that we will have this year. When you look at commodities, they're fairly benign from what we're seeing for 2014 so not a big deal.
+Now let's say currency, among the worst we've seen in years. There's not a whole lot you can do about it when all the emerging market currencies melt down as they did earlier at the end of December, early January. With that said, let me be very clear. Ours is a growth business, is a business model that is built on growth, and we know that we cannot save our way to prosperity.
+We will have productivity, but that productivity will be reinvested for growth. While we are reinvesting for growth in our marketing, we have -- our goals are also, in addition, while we're increasing the marketing, we will also have a goal and it is the goal for this year of hitting our long-term growth models this year. So we're going to significantly increase our marketing but at the same time the goal is we will hit long-term growth model this year.
+
+
+    Right. Thank you.
+
+Answer_3:
+
+    John, this is Gary. Thanks for the question.
+First, as Muhtar said in the prepared remarks, it's too early to tell what's going to happen in Mexico. We have planned around Mexico of what we believe is the most likely case, but we have a portfolio of brands that are marketed and sold across 200 countries, and our job is to manage that portfolio.
+So unless something unforeseen should happen, the answer has to be yes. It includes what could happen in Mexico. If that changes, we'll update you obviously, but we're going on what we believe would happened today.
+
+
+    And just to add to Gary's answer and to the second part of your question, John, I'll just tell you very simply that the Coca-Cola way is to grow our way to success. We invest for growth together with our bottling partners and we have the greatest system in the world.
+We have a tremendous amount of experience to say that good marketing, good selling works for our Business. And it will work for our business. We have numerous cases to prove that.
+We're going to continue to build on our marketing in both quantity and quality. This is a global increase in marketing.
+In every country that we operate in, large or small, we know it works. When we invest in marketing, our global partners invest in feet-on-the-street, in more coolers, in more trucks, in more [lines], and that's what we see happening. That's what we will see, we believe, happening to our Business as we restore steady momentum in through 2014 and beyond.
+
+Answer_4:
+
+    Judy, it's Gary. Let me take the first part of that question on the fourth-quarter operating profit declined was down 12% in the fourth quarter. By the way, I know the answer to this one specifically because I asked the same question some time back and got into the minute detail on it.
+100% of that change is because it's in all in OpEx, or primarily all in OpEx and it's what we're cycling from 2012. There were some incentive compensation accrual reversals in the fourth quarter of 2012 that did not happen in 2013. That cycling caused a significant change in OpEx swing year-on-year in the fourth quarter only and it's what swung North America to that 12% operating income loss.
+So it's much more reasonable to actually look at North America, look at it for the full year, and you'll get a better picture of actual performance versus the fourth quarter. When you look at the full year, then you will see that is where we've got some challenges, as Muhtar said, around volume and particularly in sparkling -- around diets and lights. But that's what we're specifically on.
+
+
+    Yes, just let me add to in terms of the outlook, and that is that, as I said, we are confident about and excited about, first, our performance our algorithm worldwide. But also in terms of steady improvement as we get back up to speed in the United States and that will -- when we start restoring the momentum in the United States, which we believe is going to happen, that will also bring the financial results that we will be happier with as we move into 2014 and beyond.
+It's going to take a while. This is not an immediate fix but we know that it's going to be a steady improvement.
+
+Answer_5:
+
+    Can't give you the specifics on the geographic mix, Judy, but as we announced, it's about $1 billion by 2016. And it is a global number.
+Again, there will be a good distribution. We will be again also looking and tracking through franchise leadership, resulting also system increase in investment in all the key markets.
+
+
+    Yes. See you Friday. Thanks.
+
+Answer_6:
+
+    Thanks, Dara. Sandy, you want to take the (multiple speakers) and then, Irial, you want to comment?
+
+
+    The key to the North America growth algorithm is investing in our brands and our feet-on-the-street. A key element to that is getting our pricing so that we can have the revenue to be able to reinvest in sustainable growth.
+Where we've had issues over the years, in my experience, in North America, is when we did not get the price we needed, when our marketing execution was not what it need to be, and therefore the feet-on-the-street started to get reduced and ultimately it hurt sustainable growth. Our plan going forward, and it's going to take some time, and we're focused on improving it, is to make sure that we get the price and that we execute the marketing well and feed the feet-on-the-street, which creates the virtuous cycle in the United States just like it does around the world. Irial, do you want to add to that?
+
+
+    The only comment I'd say -- Muhtar already mentioned that we are an industry leader. And industry leaders have to set the tone in terms of price, in terms of how to market the brand in any given markets.
+Actually less than 50 days in to my new involvement in North America, I'm really excited about the future. I'm excited about the enthusiasm, the passion of our people, our job -- mine, Paul's, Sandy's -- is really to make sure that excitement translates into performance and to results.
+As Sandy said, it's not going to happen overnight. I feel we've already started on the journey, and over the next quarters and next couple of years, you will see very positive momentum in our market in North America.
+
+Answer_7:
+
+    Yes. Nothing different than before. So no change.
+We're obviously very excited with our new opportunities for consumption as will be brought to us by the partnership with Green Mountain over time. The key is to fuel the power of partnerships.
+The Coca-Cola Company and system is an incredible integration of power of partnerships in every respect. And therefore, this is yet another one. So think about -- if you look at household consumption, in particular the Western markets, there's a tremendous opportunity to gain incremental consumption occasions for our brands through these kind of partnerships.
+This is what the Green Mountain partnership is all about. When you look at how beverages are consumed at home and when you look at trends in the next 10 years, people are going to spend more time at home.
+They're going to work more from home. Home is going to be an even more important place for people, for consumers. And we need to be present there with different technologies, different packaging, different ways to serve our brands, and that's why this is important and partnerships like these are going to be important for us over time going forward.
+Our thinking has not really evolved or changed in terms of bolt-on acquisitions. If we see opportunities, we will get them, like Innocent, like [Oshan] and so forth. And we will continue to seek new power partnerships -- to leverage new power partnerships also going into the remaining part of our 2020 Vision for the next six years.
+
+Answer_8:
+
+    First, Ali, I disagree with you. We have a great portfolio of brands; we have a great system, the best consumer product system in the world; and I believe that our programs will work and have worked.
+We've significantly outperformed and grown since 2010. Yes, we've had a speed bump and certainly that makes us even more focused and more resolute to continue on our road to 2020.
+We have -- I will share at CAGNY on Friday, the real reasons why we believe in our future. And so that's all I would say.
+
+Answer_9:
+
+    I understand. I understand it's easy for people to have very short memories. But we have the experience and we know what we are doing and we will continue to do what we believe and we are focused and we will execute the best and we will achieve our 2020 Vision.
+That's what this is all about. So that's what I will say.
+And we have talked about pricing. You've heard my colleagues also talk about pricing. And we don't want to repeat ourselves.
+
+
+    Thank you, Gary, Ahmet, Sandy, Irial, and Jackson. We've delivered sound full-year financial results. We're implementing the strategic actions that will enable us to restore momentum in 2014 and we see many reasons to believe that we can accelerate our growth over time, achieve our long-term growth model targets, and realize our 2020 Vision.
+Our global beverage industry is healthy. The trends that have historically fueled it continue to be strong, and our global systems' commitment and reach are unparalleled. This commitment has never wavered and the strategic decisions that we have made over recent years have not only enabled us to deliver solid financial results, they've also advanced our competitive position, enhanced our capabilities, and strengthened our resolve as a global system to achieve our 2020 Vision.
+That is our promise to our investors, to our customers, to our consumers, and the daily objective of the more than 700,000 associates of the Coca-Cola system all around the world. As always, we thank you for your interest, your investment in our Company, and for joining us this morning.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/25_questions.txt

@@ -0,0 +1,40 @@
+Question_1:
+
+    Can you please talk about the outlook geography-by-geography and then maybe how the pace of growth is going to differ between volume and pricing given some of the big currency moves and also obviously the tax in Mexico? I have a follow-up if I could?
+
+Question_2:
+
+    Just a follow-up to Bill's question, if we think about 2014 there's a lot of moving parts, with exchange rates and some of the volatility in emerging markets. Gary, could you talk a little bit about how we should think about currency-neutral and also maybe neutral of the effects of structural change?
+Are you still looking at a currency-neutral on-algorithm year in operating profits? And also just some of the other major drivers behind volume that might influence that cost of goods sold inflation, price mix, country mix, that sort of thing? That would be helpful?
+
+Question_3:
+
+    Just one quick follow-up to Gary's question and then a question for Muhtar or Gary to answer, rather. Gary, does that include a Mexico impact in hitting your long-term algorithm program in 2014?
+Then Muhtar, responding to Gary's question about ramping up the marketing, how do we view -- there's a sense out there in the market that given the headwinds for the category, that adding more marketing could be pushing on a string, so to speak. So what is it that you're seeing that says these headwinds that you are facing can be offset with higher marketing? Thanks.
+
+Question_4:
+
+    A few questions. First, just the North America, Gary, the profitability decline in fourth quarter was pretty surprising. So maybe you could give us a little bit color in terms of the components of the profit decline in North America?
+Just broadly in North America from a profitability perspective, the Business hasn't really grown since the acquisition of the bottlers. So as you think about the next couple of years, thinking about the refranchising opportunities, and all the productivity savings, are we at a point where we can actually see growth in this Business from a profitability perspective in 2014, or is this more of a transition year still with the investment that's going on?
+
+Question_5:
+
+    And just in terms of the media investments, is there any color you can give us in terms of the breakdown by regions, by categories? Is North America likely to get a disproportionate amount in terms of the media spending increase in 2014?
+
+Question_6:
+
+    I also wanted to touch on profit in North America. It sounds like, in 2013, you view the profit challenges as more driven from a volume perspective, but given that diet soft drinks worries seem to be more secular around longer-term health concerns, I'm just wondering if going forward, you may manage more for profitability and lean more on pricing than driving volume growth. Is there any change as you look at the algorithm between pricing and volume and which metric you'll focus on going forward?
+
+Question_7:
+
+    Okay, and then Muhtar, post the investment in Green Mountain, I was just hoping to get an update on how important a role acquisitions might play in meeting your 2020 Vision goals. You mentioned the focus on partnerships earlier in the call -- I was hoping you could elaborate there? And if acquisitions are a greater priority here given some of the difficult macro conditions and a somewhat favorable environment with your healthy balance sheet and still low rates here?
+
+Question_8:
+
+    The frustration I'm hearing from many investors and a lot of questions on this call is just that there's a feeling that the Company isn't doing enough to change itself, despite that the world around it has clearly changed and many, like us, believe secularly. There is continued emphasis on the Coca-Cola way and history, which is respectable in volumes, market share, spending even more on marketing, blaming some short-term externalities. But it's been a little while now that we've seen tougher volumes, North America profit pool continues to shrink, there's only $1 billion cost savings, when some of your competitors are doing more [only] from a pro rata basis. There is limited movement on refranchising your health innovations so far.
+So might the Company ever believe that it needs to focus on new levers of shareholder value creation, like pricing up even more, lower promotions, massive cost cutting, big portfolio or innovation change, and indeed returning more cash to shareholders? I know there's lots there, but should investors expect bigger, bolder change at KO to meet this truly different world and if so what should specifically should we be looking forward to, to just sharing in your confidence about the story, or should we just expect the same status quo, going forward?
+
+Question_9:
+
+    But I don't disagree with you about the strength of the brands at all actually, Muhtar. And I don't disagree with you about the strength of the system. I'm just looking at the results and I'm trying to figure out whether enough is changing, enough is different and whether you guys actually do you the world as different enough and so you're taking action but I actually don't disagree with you--?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/26_answers.txt

@@ -0,0 +1,120 @@
+Answer_1:
+
+    Thank you, Bill. 
+
+
+    Thank you, Bill. 
+
+Answer_2:
+
+    Thanks, Bill. Good morning. First let me say again, that I am pleased to report that our growth momentum is improving in line with our expectations. And in the midst of still -- continued volatility headwinds, achieving sequentially stronger 2% volume growth, that means delivering an incremental 100 million unit cases in the past 90 days or so. That means incrementally, every single day, an additional 27 million actual servings per each day. As the base grows, we are still very proud that we can continue to drive growth. 
+This is a quarter that is where Easter has shifted, where we were cycling 4% from prior year, whereas I said macro volatility continued, and where we had the harshest winter in northern hemisphere particularly in the US. We don't think this is a great result, but satisfying, as one step in the right direction to restore momentum. Germany, US was flat. In the past quarter, we think, given where -- what we went through and what economies and consumer and climate. Turkey was up 2%, Japan was up 3%. France was up 4%, Brazil was up 4%, India and Russia was up 6%. China was up 12%. These are -- these show, and give us the proof points that our actions are working. 
+And I think this is a quarter again where only a small fraction of our incremental marketing went -- was deployed. I would say probably around -- so 5% of our total incremental marketing for the year was deployed in this quarter. As we ramp up the quality and also quantity of our marketing, I believe that certainly we are going to drive better alignment. We have really good plans in place, fully aligned with our bottling partners. And I would be disappointed, as would be all my colleagues and associates, if we don't go back into the corridor of our long-term growth algorithm for volume growth. 
+But also importantly, we are driving not just volume growth, but we are driving immediate consumption growth. When you look -- which is really important for our business. When you look at -- say in this past quarter, of top five countries growing as -- China up 18% in IC growth. Indonesia up 9% in IC growth. Vietnam up 8%, Brazil up 5%. 
+These are really important numbers, because it is sustainable growth. It is profitable growth, and it is growth in transactions, which is directly married to the health of the brands, and the health of our portfolio. So from that perspective again, I want to just register cautious optimism that I feel we would be disappointed if we do not fall back into the corridor of our long-term growth algorithm for the remainder of the year, in terms of the volume growth picture, and also the other key metrics that follow on from there. 
+
+Answer_3:
+
+    Thanks, Bryan. 
+
+Answer_4:
+
+    Bryan, good morning. Last question first on Brazil, I think Brazil was out the gate first, in terms of the FIFA World Cup activation, a lot of noise around that, a lot of activation in stores. And I think that certainly, we also see a little less malaise in terms of the macroeconomic environment. So and again, in terms of also the relationship between durables and nondurable consumer goods was a little bit more in favor for us. 
+So we feel that is going to continue, and that Brazil will have a better year. And I think the government is also aware of what they need to do, as they lead into one of the biggest events in their history, which is hosting a memorable event like the World Cup. 
+As far as Mexico is concerned, I think sparkling volume for us was sort of in the mid single-digits decline for the first quarter. The important thing here is that, because of the strength of our brand, because of also the incredible richness of our packaged portfolio, and our occasion brand price pack channel architecture, the strength of that in Mexico, we are seeing that we are gaining market share, versus both local competitors and our international competitor in Mexico as well. And that -- and again, we -- it is too early days related to Mexico. But I would say that we are again, executing with great precision and passion in Mexico with our great bottling partners. 
+And then, in terms of price mix, including a favorable geographic mix, other points came as the result of high inflation in local markets. And again, I will ask Gary to comment related to the Venezuela piece. 
+
+
+    Yes, Bryan, Venezuela definitely contributed positively in the quarter to positive price mix. Now with going forward, that will no longer really be the case, because we have adjusted the -- as of the end of the quarter, we have adjusted the exchange rate and we will be using the [VEF]10.8 exchange rate going forward for most of the revenues, a large part of the revenues in Venezuela. So that will come down. But that impact is included in the latest currency forecast that I gave you. So again, some of the other currencies actually have improved from what we talked about in the February call, that offset now by Venezuela. So still at the same 7% impact. 
+
+Answer_5:
+
+    Oh, yes. (Multiple Speakers). Definitely positive price mix going in there. And I think the other thing to point out, and Muhtar said it, I said it. But I think it is really important as you look at this quarter how we drove value share ahead of volume share. So we are definitely focused on rational pricing across the world, and getting -- earning price. 
+
+
+    Thanks. 
+
+Answer_6:
+
+    Thanks, John. 
+
+Answer_7:
+
+    Yes. Well, I will try John, and we will see how this goes. But basically, they are -- let's go to marketing first, and let's talk about it in two different ways. One is, how much of the marketing is actually in the market. And that is what Muhtar was referring to, how much is -- of the marketing is actually hitting the consumer, and a lot of our incremental spend actually has not hit the consumer yet. It will -- it is much more weighted, starting in the second quarter going through Q4. A lot of the first quarter really focused on getting the quality of our marketing up, and that sort of thing. 
+That is different from the way we account for marketing, and marketing as you referenced is on the sales curve. So on the sales curve, that incremental marketing is included in what we expensed in the first quarter. Now, then we get into the marketing that we are cycling quarter by quarter from last year. And so, it was an increase in marketing. In the first quarter, the increase will significantly grow during the year based on what we are cycling. That is part of why I said, that 4 points of operating leverage will go to even to slightly positive, and we are also benefiting from some other timing in the first quarter in just some of the OpEx expenses as well. 
+
+Answer_8:
+
+    Yes. I would say the mood is positive, in terms of their willingness to invest, their appetite for new territories. I have always -- you have heard me say this before in terms of litmus test for the health of the business. There is a lot of appetite for growing in -- horizontally in territory, and trying to get -- expand. And I think in terms of the quality of our marketing, in terms of the quantity of our marketing, I feel that based on all the bottlers that I have [priced] in this past quarter, I feel good. 
+I feel positive about the sentiment, both here in the United States, as we start our path to franchising, and as we look at how we expand and how we hasten the pace of franchising, but also across the world. I have recently have been with many bottling leaders, and talked to many of them. We have a global system meeting next month. Also, about 50 of the top bottlers get together with their CEOs and Chairmen, and we are there to further align our plans for 2015 and beyond. But I feel good related to the plans in place, related to everyone's desire to execute better and to invest more into the future. 
+And again, based on the investments that have gone into the marketplace, in the third and fourth quarter of last year. I feel -- that is why I feel confident that you are going to see us back into the corridor of the 3% to 4% long-term growth algorithm for the balance of the year, as we keep restoring momentum. So that is what I would say. 
+Do we have some pockets of challenges? You mentioned Coca-Cola Amatil. I feel, again, very cautiously optimistic as Alison Watkins assumes her new role there, and we are working very closely with her and her team. And again, we are very much aligned as to how we move forward with SAB Miller and their management team related to their nonalcoholic beverage business. 
+
+Answer_9:
+
+    Thank you, Judy. 
+
+
+    Thank you. 
+
+Answer_10:
+
+    Thanks, Judy. I will ask Ahmet to give you a response onto your question. Ahmet? 
+
+
+    Yes, thanks, Judy. Yes, the results obviously for Europe for the first quarter was less than what we would have desired, with the minus 4%. A lot of things came into play with that. You mentioned that Easter obviously, that was definitely a factor. And Muhtar has mentioned the transition into a new future consumption pack in GB. 
+I would add to that, that there was sort of a pricing activity in the marketplace on future consumption packs that had also had some impact. And we are in very close discussion and alignment with our bottlers to make sure that we actually sort of respond in a way that we maintain rational pricing in the marketplace, but also balance volume growth and value growth at the same time. So that was one. 
+You mentioned southern Europe. The slight improvement that everybody sees in Iberia and Spain, that we see as well. Our numbers had a bit of noise in it, with regards to the strike in our Iberian bottling partners that you all have heard about before. We have had great mitigation plans in place and executed them. And the negotiations --  or sorry, the restructuring is expected to end in May, and we continue to see improvements in our Iberian business as well. So we expect, as we move into Quarter 2, remove the effect of Easter, fully implement our OBPPC in GB and continue to finish our restructuring in Spain, we expect to see improvements in Europe over the next quarter and the rest of the year. 
+
+Answer_11:
+
+    Yes, Judy, this is Muhtar. Let me frame again, just a couple important takeaways. For Britain, rational pricing was really the theme for us in Q1. And the very -- the strength of our marketing program, the strength of our commercial program leads us to believe that we will see improvement as we go into Q2 and Q3 and Q4 in Britain. That is the takeaway, I would say. 
+Again, the same phrase and motto for our US business, rational pricing. That is the takeaway. And we had 2% to 3% price mix in our sparkling portfolio in the US, and you will see that continuing. And I will ask Sandy to and Irial to reflect on further details on that for the year. 
+
+
+    Thanks, Muhtar. Pricing, we expect pricing for the full year in sparkling to actually improve from the first quarter. Our plans are in place with our customers. The market is rational. Our focus on immediate consumption growth will drive mix, and our rate should continue to be healthy, and even improve as we move through the second quarter and into the third quarter where we are lapping some promotional activity. So that is point one, 
+Point two is, on stills, the case pack water business continues to grow, so it pulls down mix. We see opportunities, however, on a targeted basis in our bottle can stills to improve pricing, and we will take action to do that. Paul, Irial and I see opportunities on a category by category basis. 
+And then finally, in our chilled juice business, we have just fielded a significant price increase to respond to the commodity issues with our orange juice in Florida, and that is taking root. And our juice business continues to be advantaged from a share perspective. 
+And I think all of that wraps up, from a pricing standpoint to a much more favorable profit outlook for the full-year. I mean, we saw some timing related issues, and obviously we have talked about having 1 less selling day in the first quarter. But all of that is going to come to do with our price and volume plan for the year to produce profit growth for the full year. Irial? 
+
+
+    Yes. The only add I would give is, we are about building a long-term sustainable profitable business in the US. And to do that, we must have a balance of pricing and volume growth. And pricing is a really critical part of that, and we will in this year end up with sparkling in the 2% to 3% range in pricing, or price mix, I should say. 
+And that is really it, and that is what we are focused on. That is what Sandy, and the team, Paul and the team, all of us together are focused on delivering that -- delivering a healthy business that is going back to growth as well. 
+
+Answer_12:
+
+    Yes. Michael, this is Muhtar I will say, just a couple of top line, and then ask again, Ahmet to contribute. But I will repeat what I said about IC, particularly pleasing was China, IC  was up 18%. Indonesia, IC was up 9%, Vietnam up 8%. These are really important for us when --  as we drive profitable growth in our business. And again, our newly architected packaging portfolio in China is really working with the smaller packs and the new price points. 
+And I think also, the new team certainly is really delivering what we expect of them, as well as our bottlers with renewed focus. Both the Bottling Investments Group but also Swire as well as COFCO are really doing a good job in the first quarter. And I think a lot of really good investments and activity and commercial leadership is in place to continue to drive that momentum, both in the stills as well as in the sparkling portfolio in China. And so, again Ahmet, if you want to just -- (Multiple Speakers). 
+
+
+    Yes. Thanks, Muhtar. Yes, I think, Michael, you have listed a lot of reasons. But my headline would be, it is all of the above. But let me color it a little bit. 
+Certainly, the new team and the new strategy that we covered with you last year is really coming together nicely, and we are happy with the quality of the growth. Sparkling is growing. Juices are growing and those are the categories that we have told you that we were betting on for our growth in China. 
+You might see us -- growth in waters. That is an important category. But we just had some recent launches into a [RMB2] water, which improves the profitability of that. Very, very early days, and it is doing well. Also, we are quite encouraged with, again very early results on some of our innovations with Schweppes and plus. And just a couple weeks out, the plans is our isotonic. So we are getting that good mix of sparkling juices and innovation that is beginning to work for us. 
+I would just caution us though, you did mention the easier cycle rates from last year. That is definitely the case, and 12% growth we are very happy with. But we would expect to see growth in China, continued growth in China, probably in the range of mid to high single-digits that we could expect over time. So that is basically -- I think covers everything. 
+
+
+    And just one other point I would highlight, Michael, is Japan, very pleasing that it grew 3%, 3% in sparkling and stills grew 4% in Japan in the quarter. And again, despite the longest monsoon that I have ever experienced in terms of seasons and how long it took, India grew 6% and should do much better going forward. So and again, I am certainly very proud that this is the 31st consecutive quarter of growth in India for us, including continued share gains. 
+
+Answer_13:
+
+    Yes, and again, Michael, that is very important market for us, and we have been focused on aligning with our bottling partner, Amatil, there on a new plan. Or let's say, an evolved plan as was the case in China with the revised OBPCC investments in sparkling and still beverages. There has been a recent change in management in -- on the ground. And all of that again, we are cautiously optimistic about the progress we are making in Indonesia, are beginning to deliver good results. And certainly, that market has a -- has so much more opportunity to grow in the coming years. 
+
+Answer_14:
+
+    Thank you. 
+
+Answer_15:
+
+    Now -- no changes as far as my perspective is concerned. And I can confirm that both our entire team, as well as our bottling partners feel the same way as a system. We are blessed to be in a great business, both in the sparkling area, as well as in the stills. We continue to innovate. I believe that we have a great future, where so many hundreds of millions of people in so many large markets haven't tasted a Coca-Cola in the last month, or in the last six months, or in the last year. 
+We have tremendous opportunity going forward. And I believe that innovation, packaging, equipment and great marketing will continue to grow our business going forward, both in sparkling and in stills. And I feel confident that we will go back into the corridors of our long-term growth algorithm this year and years to follow. 
+And with new innovations, like creating new paths to consumption, creating new consumption occasions like the Keurig Green Mountain innovation, like Freestyle that is driving, we know everywhere, every time, it is actually installed in an outlet, it drives traffic, it drives incidence, it drives increased sales, and it drives excitement for the consumer. 
+And at the same time, our contour packages, you will see us being focused much more on the contour. Next year is the 100th anniversary of the contour bottle, the iconic contour bottle. You will see a lot of activity around that also. So we feel we have a lot of work to do. But we feel that, isn't that a great place, where you have a lot of work to do, and you believe in your future. 
+
+Answer_16:
+
+    I think they will -- I am certain innovation is going to be impactful, and I can't give you any more details on timing. 
+
+
+    Yes. Sure. So just thank you again, Gary, Kathy, Ahmet, Sandy, Irial, Jackson, we are just once again, firmly committed to advancing our growth trajectory in 2014. Our strategic priorities are yielding tangible and measurable results, and they are consistent with our long-term goals, and our overarching business strategy. Increased marketing investments and a focus, a relentless focus on execution underscore the confidence we have in our systems alignment, as we seek to execute these strategies, while we further strengthen the foundation for profitable and sustainable long-term growth. 
+Our 2020 vision calls for a well-balanced growth, that is growth in sparkling beverages, and also growth in still beverages across more than 200 markets, countries, and in revenues and margins. And thanks to this balanced growth in both portfolio, as well as geographic mix, we see a path that leads to global volume, revenue and profit growth in line with our long-term targets. Our focus is unwavering, and our execution of our five strategic priorities is going to enable us to restore momentum for growth to our business. Thank you for your time this morning, and for your continued interest and trust in our Company. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/26_questions.txt

@@ -0,0 +1,70 @@
+Question_1:
+
+    Good morning, and congratulations again, Gary and Kathy. 
+
+Question_2:
+
+    Muhtar, if you could talk about what gives you the confidence that Coke can hit its long-term growth algorithm in 2014 specifically? And also, when you look at the improving momentum here in the first quarter, how much would you attribute to any relief you are seeing in external headwinds versus the impact of the internal actions that you are taking? Thanks. 
+
+Question_3:
+
+    Hello, good morning, and Gary and Kathy both, congratulations to both of you. 
+
+Question_4:
+
+    So just wanted to drill in a little bit further on Latin America, and I guess, sort of three topics. One, in Mexico with volumes, the volume decline was a little bit less than we thought. So if you could talk about whether what we are seeing now is sort of the expected elasticity? Or if there is something else in the future that might change the elasticity, so has the consumer really seen the full effect of the pricing? 
+And then second, if you could talk a little bit about some of the drivers of price mix in the Latin America segment in the quarter, how much of it was driven by Venezuela? And then finally, just in terms of the Brazil comp being better sequentially, how much of that do you think is just that -- maybe the consumer is a little bit better? Was there anything specific that Coke did in the first quarter to drive that better performance in Brazil? 
+
+Question_5:
+
+    As we're modeling price mix in Latin America, just going forward, there is some price mix in there that is positive excluding Venezuela? I guess, that is what I was after. 
+
+Question_6:
+
+    Thank you very much, and Gary, it has been great over the last 14 years. So best of luck, as you move forward, and Kathy, looking forward to working with you as well. 
+
+Question_7:
+
+    Gary, I had to finish off with sort of one accounting question here. So you drove tremendous SG&A leverage in the quarter, and you talked a little bit about sort of how you haven't put a whole lot of marketing spend to work yet. 
+So can you walk us through maybe how we should think about the sales curve over the next couple of quarters, and what we should look for on the SG&A line as we look to model out the balance of the year? Thanks. 
+
+Question_8:
+
+    Okay. And then, Muhtar, if I could ask you a follow-up question on -- you talked about the strength of the bottling system. And obviously, the equity income line is getting hit by FX, but we have seen some comments from Amatil, in terms of what is going on there. And then, also SAB talked about cutting some positions in their soft drink business. 
+Can you just talk a little bit about the mood of the bottlers and what they are seeing now? And how we should look at some of the headwinds they are facing in the shorter-term? And how that maybe will differ with what happens in the longer-term there? Thank you. 
+
+Question_9:
+
+    Thank you. Good morning, everyone, and I also echo my congratulations to Kathy. And Gary, it has been great. We will miss you. 
+
+Question_10:
+
+    So just wanted to maybe delve a little bit into Europe in the quarter. And the question, number one, just relating to Great Britain. Obviously, sparkling being down double-digits, if you can give us some context of trends that you have seen throughout the quarter? And sort of strip out some of the one-off factors with respect to the Easter timing, as well as some of the transition into the 1.75-liter packaging, and whether you are seeing some improvement there? 
+And then, just in terms of southern Europe, we are hearing more from some of the consumer companies that things are trending a little bit better in markets like Spain and Portugal. So maybe you can also just give us whether we are seeing a similar improvement for your business in that part of Europe? 
+
+Question_11:
+
+    Okay. Great. And then, if I can follow-up on North America, just on the pricing side. So sparkling up 2% seems encouraging, but the broader North American pricing kind of being flattish. How should we think about that going forward? Do you expect to see the still pricing being a little bit more pressured, or do we see improvement there going forward, for the broader North American pricing turning positive? 
+
+Question_12:
+
+    Good morning. I was wondering if you could comment on the performance of your key markets in Asia, and particularly China and Indonesia. The China volumes have rebounded quite strongly now for two or three quarters, and I was just hoping you could shed some light on what has been driving that? Was it the new strategies and the new team that has been put in place there, whether that is all paying off, or whether it is really mostly due to relatively low comparison basis still? 
+And then, a similar question on Indonesia, volumes continue to be strong there. I am just wondering what is driving that? 
+
+Question_13:
+
+    And in Indonesia, could you just comment similarly? 
+
+Question_14:
+
+    Good morning. First, Gary, congrats on a great run, and best wishes on the farm, and congrats to Kathy also. 
+
+Question_15:
+
+    And Muhtar, I was hoping to discuss if your expectations have changed at all here over the last year, just regarding the long-term growth potential of the sparkling category? Not necessarily from a market share front, but more just in terms of category growth? 
+And if one looks at industry data, it looks like sparkling trends slowed more in 2013 than we have seen in other CPG categories. So I was just hoping for some perspective on that, the drivers behind it, and expectations going forward? 
+
+Question_16:
+
+    Okay. And on the innovation front in the US, can you give us a bit more detail in terms of maybe potential timing of sweetener innovation? And how impactful you think natural sweeteners could be to your top line results eventually? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/27_answers.txt

@@ -0,0 +1,134 @@
+Answer_1:
+
+          Thanks, Judy. Again, just to quickly go through the quarter, as you said, volume was up 3%, sparkling volume really importantly was up 2%, and brand Coca-Cola up globally in North America. Those are really three important points. 
+Also, another quarter of value market share gains, I think more than 25 consecutive -- 28 to be exact -- consecutive quarters of gaining value share. You see us having at, with our system, very clear focus on priorities. We had our entire global bottling system get together with us a couple -- a few months ago, and again a recommitment to the focus on our priorities. 
+Sequential improvement in a lot of large markets, particularly Europe, France, Germany, Great Britain, Italy, Spain. And good results, very strong results out of Eurasia and Africa and improving in Nigeria, South Africa, Turkey, improvement again if you take Asia-Pacific. Again very strong quarter in China as well as in India, double-digit growth in India, Thailand again saw --. 
+So if you take all of those margins that are improving, gross margin has improved in the quarter compared to the prior year. Clear path on North America franchising. Strong belief that what we're doing is working in our system, is really important. Good bottler alignment. Yes, there are a few exceptions, but there always have been and will be, and more work to be done. 
+I am the first to say we operate in a very volatile global environment, both politically and economically. China is slowing down is impacting many commodity exporting countries and from Africa to Latin America. But overall, what we're doing is working: more marketing through productivity gains, better marketing. 
+We mentioned Share a Coke program in over 80 markets, tremendous leverage on our World Cup program in more than 170 markets with probably the biggest activation that we have ever had. And all this will not generally have an impact on the quarter that you spend in. It comes in after with better incidence, better brand loyalty, better purchasing time that we're all seeing. 
+What is happening in North America in terms of sparkling price mix also, you can see that we have a very disciplined approach both in the United States and globally where we have been able to achieve a 2% price mix on a global basis. And yes, there was Easter shift, but at the same time, our gallon shipments were below our unit case volume for the quarter. And if you say that would be a -- neutralize the benefit that we may have got from Easter, then I think overall we feel pretty confident with, again, the caveat that we need to do a lot more work and continue to do a lot more work, more focus, better execution. 
+But the five priorities are working, and early shoots, green shoots. And we expect that the balance of the year, as I mentioned in my script, that we should be able to fall within the corridor of the long-term growth targets. 
+And again, there may be issues along the way, bumps along the way. But the most important thing is that we are resolutely focused on continuing to build momentum here. 
+
+Answer_2:
+
+          I will say a few things and pass it over to Sandy, but all I will say is take note of the fact that a very big portion, percentage, 60% to be exact, of the growth came from smaller packages. That is obviously an enhancement of the mix driving revenue, but also rate. 
+So, I will ask Sandy and then maybe Irial if he has any commentary on North America, but we are operating with tremendous diligence and the discipline in the marketplace. And success for us is a combination of both the growth that we have on the volume, but importantly also growth in transactions which is a really good litmus test of the success of the business that is coming more into play each day as we progress. Sandy? 
+
+
+          Thanks, Muhtar; hello, Judy. 
+We said at the beginning of the year that our focus in North America was going to be a disciplined combination of volume and price and that we would see that as a strategic priority. And the second quarter really reflects that; 3% price mix on sparkling while achieving volume growth on Coke. And Muhtar mentioned the importance of smaller packages in driving that outcome. It is also important in driving growth because consumers want more smaller packages, and we've been working on developing that as a part of our overall strategy. 
+So lots of discipline. As we look ahead, we are lapping some very promotional activity in the third quarter of last year, and our discipline will remain. And the bottlers in the Company around the country are focusing on marketing and selling our way through and maintaining an extraordinary amount of discipline on pricing, and we are optimistic that we will be able to hold that strategy. 
+
+
+          Yes, it is Irial. All I can add is really repeat what Sandy said, and I have said in the last three calls now, which is we really are focused on building a long-term sustainable business. That is mixing pricing and volume and transactions in a very balanced way and coming up with a great result for our Company. And we will do that, and we continue to do it. 
+
+
+          Yes, the only thing I would add here also, Judy, is that I think we see a path forward to being able to build more romance with the brand through smaller packages. And that is really an important element in what is also being discussed. 
+
+Answer_3:
+
+          Yes, Kathy? 
+
+
+          Hi John, and thanks for the question. 
+The Venezuela impact, yes, that is a two penny drag on a comparable EPS, as well as reported EPS. So if you look at Venezuela, you take it in two pieces; there is currency impact as well as impact of the provision. The provision is less bolivar nominated revenue because of capital margins, and it is gone straight to the bottom line. And then the FX is, the impact is because, as well, we do not have as much bolivar-denominated revenue in income. So you could split those two pieces, and yes, it is comparable, as well as as reported. 
+
+Answer_4:
+
+          So I would split the question into two, and Ahmet will help answer with it, but the margins in Latin America have been impacted this quarter by the Venezuela provision. And then when you look at ongoing buying growth in contribution into the Company, I will let Ahmet -- 
+
+
+          John, a couple of points. The rest of Latin America, the margin and the growth in profitability overall is in a good direction. No important issues there. Also keep in mind that we've been able to realize positive price mix in high-margin places like Europe, and we have been able to grow in Japan, so we are able to balance across the international territory to have positive price mix and margins. 
+
+
+          John, just to add, I think yes, you are right in saying that Latin America has slowed down to where it traditionally has been. And we have seen these cyclical slowdowns in Latin America. 
+And as some parts will get better, I think, starting towards the end of the year, we also see some other volatility, continued volatility in like Argentina and other markets. But overall, I think for most of what we are cycling as well, we expect major markets in Latin America to have some sequential improvement in the second half of this year. And then overall longer-term, we feel very confident also about what is lying ahead in Latin America. 
+
+Answer_5:
+
+          Okay, hi Brian, thanks for your question. 
+Our outlook for leverage in the currency neutral basis remains flat to slightly positive. When you think about gross margins, so gross margins have improved for the second quarter and year-to-date. And when we look at -- when we look at our margins for the back half of the year, we delivered sound financial results, and we anticipate that we will continue to deliver sound financial results for the rest of the quarter -- for the back half of the year. And we do anticipate that margins will continue to in the same way they have been in the first half of the year. 
+
+Answer_6:
+
+          Yes, we are continuing to invest behind our brands. So yes, that is part of the leverage story. But that is causing the North America from negative -- slight negative leverage in North America because we are spending behind our brand. So, we are getting pricing and we are committed to rational pricing, so we're getting pricing which is helping us with the margins the gross margin, but we are continuing to invest behind our brands. 
+
+
+          Just add to that, Bryan, if you look at the second quarter compared to the first quarter, marketing is substantially higher in the second quarter than it is in the first quarter, and particularly towards the back end of the second quarter, substantially higher. So, that explains some of the things again, what Kathy was saying, but also our productivity is on target. It has been on target for the first half of the year and will be on target for the second half. 
+
+Answer_7:
+
+          Yes Michael, it is Muhtar here, and I will ask Ahmet to provide additional commentary. 
+Think of Brazil as having a very tough macro environment in the first half. So if you look at the entire consumer disposable and non-disposable consumer goods sectors, we are under tremendous duress in the first half of the year, particularly leading up to -- particularly -- more so in the second quarter. 
+Think of it this way -- had it not been, the result would not have been what it would've been had we not done all that activity. So from that perspective, I think we see brand getting stronger, incidents and purchase intent getting stronger in Brazil as a result of all the activity, and I think that should benefit us going forward in Brazil. 
+So certainly the macro environment in Brazil, as you can read, as we can all see, has been very challenging. And so given that backdrop, I think, our results -- we're content with where we are, and we believe that what we have done will benefit us in the second half and going forward. In terms of Mexico, I think both times prices were adjusted, they included a certain portion for also inflation, so take it as that. But again, I will ask Ahmet to provide any further commentary for both Brazil and Mexico. 
+
+
+          Thanks Muhtar. 
+On Brazil, the only thing I would add Michael is that we had a pricing packaging architecture which allows us to have different tax both for immediate and future consumption at different price points, and we are executing those with great discipline. And that in fact is helping us navigate this challenging external environment. 
+And we expect that to continue to bear fruits in the third and fourth quarters along with the strong marketing programs we have. With respect to Mexico, the only other thing I would add is that we do have a not just passing the tax and the inflation, but a consumer-driven pricing approach which has been very carefully calculated, and the elasticity that we have calculated in reality are happening better than that we have expected. So in other words, our Mexican business is showing more resilience in this area. 
+
+Answer_8:
+
+          I think success for us is certainly continuing our value share gains. You cannot obviously -- only value share gains without volume is not sustainable over the long term, but we have a very disciplined approach just like in North America, also for our international business related to more smaller packaging. 
+So the mix will benefit us, but also very importantly it is critical for us to achieve price mix on a global scale. Different geographies will again price differently into the picture. We have such disparate pricing per case depending on the geography we're talking about, so geographic mix is an important piece of this, as is package mix, as is rate. 
+
+Answer_9:
+
+          I will just say that once again, smaller size packs contributed significantly to, say, brand Coca-Cola volume and revenue growth into Q2 and year-to-date as a matter fact. So, if you take over 60% of the growth in brand Coca-Cola in Q2 was driven by double-digit growth in our mini can and 16-ounce immediate consumption packages, I think that is how I would like to leave you with -- that is what I would like to leave you with as an opportunity. 
+
+Answer_10:
+
+          Yes I will take the last first. The strategy is driven by what consumers want, and that is not just a phenomenon for the United States but smaller packages are a key focus. So that helps the mix. That helps the revenue. That helps also the price mix. 
+Then, couple that with a very disciplined approach towards also having the right balance between value and volume share gains. And so it is really important. 
+In terms of concentration of volume growth, I think the important thing is for you to focus on the improvements from quarter to quarter. If you take key geographies like Europe, France had an improvement, Germany had an improvement, Great Britain had a significant improvement. 
+Italy had a significant improvement, Spain had a significant improvement, and Europe overall had a huge improvement when you look at total. And again, this is just pure simply for volume, and if you look at pricing earnings, you will get also a similar picture. 
+So I think focus on the sequential improvements. Focus on us delivering on our focused priorities. And so what I see is that we will strive, and diligently strive to continue with sequential improvement, building momentum as we go forward. And I also mentioned as an answer to a previous question that I thought that in Latin America, we would also see sequential improvement. 
+
+Answer_11:
+
+          Well we announced significant cost cuts over the last four or five years, different programs. And as I mentioned earlier, again we are on target with our productivity. And that productivity is being reinvested to drive growth. 
+
+Answer_12:
+
+          I will talk about a couple of levers, and then ask Irial to join me. The growth and profitability in North America, the major opportunity exists in pricing and the overall effectiveness and efficiency of the system. 
+We talked about price as a lever and an area of discipline and focused, and price is achieved through rate as you know, and also mix. And a whole lot of innovation is going on inside of packaging to give consumers what they want and to earn a return as a result of that. 
+Couple that with our overall system architecture work, which Muhtar described earlier which is on track as we overhaul IT, product supply, as we overhaul customer management and shared services. And the refranchising progress which is on track with our bottlers, will create a system that is on one hand more effective and grows faster and on another level is more efficient at generating better margins. 
+But at the end of the day, that combination needs to be built on accelerating growth. And the focus of the near-term has been to reinvest the proceeds into marketing to rebuild brand momentum and brand momentum at price point. We're optimistic about the progress, but we have a lot more work to do. 
+
+
+          Yes, the only add I would give is [we're in] to the bottling houses, we remain absolutely committed to deliver one of our core priorities, which is excellence and execution in the marketplace. And as every day goes by, I get more comfortable that we are starting to do things better every day, every time we go to an outlet. 
+And fundamentally that is the other piece that gives us the capability to get extra price and mix in the marketplace, and we will continue to do that. And it is a journey. It is not turning the light switch on. It happens day by day, weak by weak, month by month. 
+I feel pretty good that over the next number of years, our capability in the marketplace, married with great marketing, is going to deliver the price mix we all desire. And that is why the discipline in remaining focused on price mix married with transaction growth and married with volume is why we feel confident about the North American business over the long-term. 
+
+Answer_13:
+
+          Yes Bill, I think in the UK most of that loss was in Q1. If you look at Q2, we have had sequential improvement in the UK. And we expect that going forward in both Mexico and in Brazil that more minor losses to the B brands and local players will reverse themselves in the course of the year. 
+And we already see that happening in both markets. I think that was the difficult operating environment in Brazil in terms of also us having discipline in our pricing, and the same goes for also Mexico. 
+
+Answer_14:
+
+          And very transitory. 
+
+Answer_15:
+
+          Yes, two things. Spending increased as we moved through the quarter, and there was much more spending at the end of the quarter than there was at the beginning of the quarter. And therefore you would expect that not all of that benefit is going to flow, obviously, into the quarter. And this is again about generating long-term sustainable momentum, which we believe is happening. 
+Again I want to remind everyone that I am pleased with these results in a difficult operating environment. And to get growth back into sparkling is a significant achievement, to get growth back into Coca-Cola in the world globally and in the United States is a significant achievement, and we will continue to focus on where we need to be quarter after quarter, one quarter at a time. I just want to say that I believe our approach is working. 
+
+Answer_16:
+
+          Yes, Kevin. 
+Obviously, I cannot walk you through a wish list; that would be too much information to the whole market and everyone that plays in the market. But I would say our portfolio is really very rich, as you saw as from our $17 billion brand and so many more in the pipeline. 
+And again, our sparkling brands have really performed well on a global basis. Sprite and Fanta and Schweppes in addition to Coca-Cola. So, all of that tells me that what we're doing in different brands and creating more incidents, more transactions is working. 
+And you heard the numbers that I mentioned in tea both in the US and globally, in premium waters, in juice and juice drinks, in sports drinks, all of that. We are pleased with a much richer portfolio than we had, say, three years ago. And that portfolio is again yielding very good results, particularly, also, Simply in the juice category, [Dasani], Innocent, all those different brands. Del Valle across the world yielding very good results, and also in China too, and southeast Asia with new innovations that are really working well for us in both the fusion of dairy and juice, as well as pulpy drinks and  also juice and juice drinks. 
+
+
+          And on the second part of your question, yes, I believe the Company has always been very focused on driving long-term sustainable growth. And we have done that in a very consistent and disciplined way. We are very focused on reinvesting in the business and to accelerate growth and create value. I believe we focus on making sure we have share repurchase and we do give a healthy dividend back, but we will continue basically like we've been going with focusing on driving long-term growth. 
+
+
+          Thank you Kathy, Ahmet, Sandy, Irial and Jackson. The performance year to date, progress against each of our strategic priorities and the positive signs that we are seeing in many global markets all illustrate our view that the 2020 vision and strategic plans are solid. 
+Proof points are out there. 3% growth in the quarter, global price mix of 2%, increased global media spending reflecting our confidence in building on the strength of our brands and also in our ability to engage our consumers and customers effectively, and global year-to-date value share growth in our categories. 
+And so we are winning in the vibrant beverage industry and also coupled with sound financial performance during the first half of the year. So we're making steady progress. And we are where we are expected to be at this stage in the year. 
+I look forward to providing all of you with additional updates as we continue to restore our global momentum in the months ahead. Thank you for your time this morning and for your continued interest and trust in the Coca-Cola Company. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/27_questions.txt

@@ -0,0 +1,81 @@
+Question_1:
+
+          Muhtar, if I look at your second-quarter performance buying growth of 3%, sequential improvement versus Q1, global price mix held steady at 2%. I guess second quarter also though benefited in part because of easy comp, and you had the Easter benefit. So can you talk about your ability to sustain the top line momentum as you look at the back half of the year and be mindful of some of the macroeconomic conditions that you see in the marketplace?  
+
+Question_2:
+
+          Okay, that is helpful. If I can just quickly follow up on North American pricing, particularly in the sparkling side, where you've got the 3% in the quarter. Maybe a little bit more details around the drivers of that, whether it was -- how much was mixed versus rate -- and your views on whether you can sustain that pricing and maybe even see acceleration if you look up the next -- 
+
+Question_3:
+
+          Thank you, good morning. Just wanted to get a clarification if I could, when you talk about the $0.02 impact, you mentioned it was comparable EPS, but it sounds like that is reported EPS, as well. Is that correct? 
+
+Question_4:
+
+          Okay great, thank you. 
+Kathy, if I could just follow-up, we are continuing to see weaker volumes in some of the higher-margin regions, like Latin America or Europe, what have you. So can you talk a little bit in terms of how you're going to look at--how should we think about margins going forward if these types of -- this type of relative weakness in some of these higher margin market continues, particularly Latin America which is your highest market region, and it's been a little bit softer over the last couple of quarters. 
+
+Question_5:
+
+          Good morning. 
+Kathy, I wanted to follow up on John's question relative to leverage and I have two parts to it. One, I think I caught in the prepared comments that you mentioned that on a comparable currency neutral basis, you would expect some leverage in the second half. So I am just trying to make sure I heard that correctly in that we should be thinking about ex the Venezuela impact and ex the structural change in currencies, there would be currency neutral operating profit growth. 
+And then second question, if I have done the calculations correctly, it looks like on a comparable basis currency neutral gross margins in the quarter were up. So if you could just talk a little bit A, is that true? And B, if you could talk a little bit about how you would expect gross margin to evolve going forward, what type of inflation you are seeing and just how what factors you might see driving gross margins in the second half. 
+
+Question_6:
+
+          So there was nothing unusual about the gross margins in the first half? We could potentially see more progress on gross margins and we're just spending more money back which is what is getting the leverage to slightly flat. Is that a good way to think about it? 
+
+Question_7:
+
+          Good morning. 
+Can I ask a couple of questions, couple of specific questions on Latin America? First on Brazil, given all of the investments you made in the market and the World Cup, I was just wondering why volume performance was not stronger in the quarter. 
+You mentioned in the release a tough macro environment and some competitive activity, but I was hoping you could give us a bit more detail. And second, with regards to Mexico, I know you've taken all of the pricing related to the tax increase early in the year, but have you also passed on pricing now for general inflation in the country? 
+Thanks. 
+
+Question_8:
+
+          Thanks, good morning gentlemen, hello Kathy. Muhtar, as you think about the sparkling global outlook and your efforts to build on where you are here in the second quarter, is it fair to think your emphasis will continue to be on volume share gains more so than dollar share gains, or do you think there is potential for more dollar share growth in spite of the volumes being a little below what you were hoping for?  
+
+Question_9:
+
+          Obviously, a lot of markets to talk about, and this call is not useful for going into many of them, but when you look at North America specifically and you see the 3% price mix on the carbonated and a bit of growth there on the stills, but you also have the flat volumes. And then data we look at is CPI for the larger carbonated space, which continues to be down, so retailers continue to promote the carbonated component of your business. How are you thinking about the opportunity for better value share performance in North America, given the volume share situation you are facing? 
+
+Question_10:
+
+          Hello. If you would've predicted back in December that price mix in North America was going to be up as much and your volumes would've remained flat. And Latin America, you indicated volumes would've been flat even with all the Mexico tax issues, I think I would've said you are being optimistic, but that is what you are delivering, which is good. 
+But it does raise two questions for me. One is, it is concentrated your volume growth in only two of your six reporting segments. I want to get a better sense of how comfortable you are with those two currently and your expansion of volume growth in the other segments, like what gives you confidence that the others can grow, as well? And then secondly, a question about the mix between volume and price mix, which if you look over the past 10 years, it is mainly driven by volume, obviously pricing now much more balanced. 
+Some try to understand how much of that is actually a change in strategic intensity that you described versus just FX driving you to raise more pricing? If you can help those two, that would be great in the broader volume context. 
+
+Question_11:
+
+          Okay, thanks. 
+And one other things you've been asked a bunch on this conference call is about margin and margin mix. And one of the things obviously that can offset margin pressures is incremental cost cutting. And you talk a little bit more about how you view incremental cost cutting versus what you've announced so far, what you think the potential is, and when you think we might hear more about more cost-cutting at the Company? 
+
+Question_12:
+
+          Thanks. 
+Maybe building on that and focusing back on North America, as you talked about, you had good price mix realization in sparkling, 3%, and you did see margin grow in the quarter which is great. But overall, we only saw 1% price mix, and year-to-date margins remained slightly below last year's level in the US based on my math. 
+So as I think about the path towards refranchisement and smoothing that path, it seems a greater profitability is a great enabler of that. What needs to be done? Is there a way to get even more aggressive on price mix realization or to Ali's point pushing on productivity more to get the North American profit pool to expand to facilitate entry of new partners? 
+Thanks. 
+
+Question_13:
+
+          Good morning. Can you just comment about some of the market share losses in Mexico, Brazil, and then a much smaller market in the UK? 
+So what do you think is driving that? And then when you think some of those trends will reverse. 
+Because some of these losses are substantial. I think it was a little over a point of value share and scan channels loss in Brazil, about a point in Mexico and then similar trends in the UK. 
+
+Question_14:
+
+          Got you. So you think your losses are really a function of maybe the more aggressive pricing you took and maybe as that stabilizes this year --. 
+
+Question_15:
+
+          Good morning, everyone. 
+Quick question I had is, if you think about the quarter and how trends move through the quarter, I am just curious if you actually saw correlation with the higher level of spending as the quarter progressed and your volume growth. Just again trying to understand if the spending is actually working. And when you think about the ROI in that spend, what discrete things and specific things is Coke doing to make sure there is a glide path to getting a better return out of that spend. Thanks. 
+
+Question_16:
+
+          Thanks for the question. 
+First Muhtar, you talked about increasing or broadening your product portfolio. So, maybe without tipping your hand too much, what would be the top of your wish list by product and geography, and do you still feel comfortable with your energy drink strategy? 
+And then separately, Kathy, now that you bring a fresh look here, do you plan on doing anything differently from a capital structure perspective? And I say that within the context that there is an argument to be made that Coke is under leveraging and could potentially add leverage, or by adding leverage could add value to shareholders. And we have seen a number of companies in the CPG space that have been rewarded by the market for such action, so any thoughts there would be appreciated. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/28_answers.txt

@@ -0,0 +1,152 @@
+Answer_1:
+
+          Yes. Bryan, good morning, again, this is Muhtar. I think the most important is that our EPS target remains high single-digits and our target for profit before tax is still 6% to 8%. Beginning in 2015, revenue growth will be added as a metric in the Company's incentive plans as well. So we're obviously looking at a metric, really, where the target remains 6% to 8% and moving the target to PBT really brings net interest and equity income into consideration. If you look back at the last three years, there really has not been a leverage between OI and PBT, meaningfully so. It would not have really made a difference. 
+Having said that, it does go back to what we said about broadening our long-term net revenue target to mid-single digits. We think that there's opportunity to grow equity income as we advance our existing partnerships, as well as explore similar models in the future. Using PBT instead of OI should make operations, in a way, agnostic in terms of evaluating alternatives to extract value in a certain given category; for example, what you mentioned also, which is partnership model versus concentrate model. So I think it's a better broadened way of ensuring that we can deliver long-term sustainable value to our shareowners. And I'll pass it on to Kathy if she wants to add anything. 
+
+
+          I'd just also say, Bryan, remember we anticipate and we've been saying that with the increases in interest rates, we will have interest expense versus interest income that we've been generating. So we don't anticipate interest providing leverage below the line going forward. So the bottom line is we can't make the 6% to 8% PBT without a significant amount coming from operating income. 
+
+Answer_2:
+
+          No. Not at all. 
+
+
+          No suggestion in any respect. 
+
+Answer_3:
+
+          Hi, Ian. This is Muhtar. Good morning. Firstly, let me just give you some context around the base. If you take, firstly, that's why we put out two numbers out there, $2 billion by 2017 and $3 billion by 2019, in order to ensure that everyone sees that this is not back end-loaded, it's just a number that really will be generated and the run rate will be flowing through into our system and then we will invest some and use some for margin enhancement. We did say that it will take some time to achieve. 
+2015 is a critical year where we really -- it's the most important year for us to make the changes that I mentioned to you in terms of a leaner, better operating model and therefore, I think that year should be seen as a year in transition. The base, really, when you look at our Company, you see about $5.5 billion in total in marketing, about $4 billion in OpEx, and really, of the $3 billion, about $1.5 billion will come out of that base of around $9.5 billion to $10 billion and then the other $1.5 billion of the $3 billion will come out of the about $25 billion COGS base. 
+It's important to understand for everyone that we will not be taking down the second number, $1.5 billion, when we refranchise with our aggressive refranchising program, particularly for the United States, between now and 2017. So that number will stay that way and then the bottlers will get additional opportunities for COGS synergies as the territories get refranchised on top of the $3 billion. So I hope that gives you some flavor and explanation into and answers some of your questions. Kathy, go ahead. 
+
+
+          Ian, if I could just add, on the initial $1 billion program, $400 million was in 2014 and we are on track. So it continues into 2015 with the rest of the productivity giving us the flexibility to achieve our targets over the long-term. 
+
+Answer_4:
+
+          Yes, I think given the macroeconomic volatility out there and given the fact that marketing investments are taking some time to flowback in terms of benefit, I'd just say that's the best we see right now and we will come back with a more robust and more detailed discussion on 2015 in our December call. 
+
+Answer_5:
+
+          Yes, Ali. I think what we're talking about is a balanced approach that will bring us back to our long-term growth trajectory in terms of our financial performance. That is a combination of both growth, more realistic and better sustainable growth on the top line, as well as margin enhancements. So as we said before, this additional program of productivity will yield, will generate two things: we believe clearly better growth, as well as better margin enhancements. 
+The important thing here is that we will have a much better geographic segmented analysis of countries where, if you take the developed countries, we will be driving profitable growth through innovation and productivity; for example, with countries like Spain, Korea, Great Britain, Japan, US, France, and so forth. And then in terms of the developing countries, they will have a slightly different role maximizing value through segmentation and ensuring that we continue to build consumer loyalty markets like Latin America, Turkey, Poland, Nigeria. And in emerging markets like China, India, Indonesia, Thailand, and so forth, we'll be maximizing more skewed on the volume side and investing for accelerated growth. 
+That is why we believe we need to continue to invest and the world is a very big place. It's not just the countries that we live in and we know. It's a very wide place out there and there is significant opportunities to continue to generate growth, while at the same time -- and we believe that there is a very good line of sight of how we invest and how we get return from that investment, very disciplined and very important transparent line of sight. 
+That's the way we look at the segmentation approach and therefore, revenue, which is the target of what we've indicated to you will be a composition of volume and price and so we're not throwing volume out of the door. It's a very balanced approach towards how we will generate revenue, how that revenue will flow into bottom line, both through the additional revenue growth achieved, as well as through enhancements in terms of the margin. 
+
+Answer_6:
+
+          Yes. I think we're not ready to share that detail with you right now. However, I think as we go along, we'll give you more insights. But certainly, it will not all be invested and it will not all flow into the bottom line, but I think we see a clear balance there as we go forward. And I think there's a different role -- obviously, there's a different role of how you should think about the $1.5 billion that is coming out of the base of total marketing and OpEx and also the $1.5 billion that is coming out of the COGS and I think both of them have slightly different roles in how they will be played out. 
+
+Answer_7:
+
+          I think you should think of the entire Company as evolving and changing. But as I said, Dara, I think the important thing is roles and responsibilities on a geographic basis with complete clarity of roles. So if you take the markets like -- the more developed markets of Korea and Spain and Great Britain and so forth, Japan and United States, Canada, more focused on the balance of revenue. What will drive the revenue? Slightly skewed in favor of price versus volume. 
+What will happen in the developing markets, more like Latin America and some Eastern European markets, and so forth, Turkey, much more straight line, right in the middle balance of how that revenue number is going to be generated, that revenue growth target is going to be generated. Then you take the lower per capita, more emerging markets that I mentioned, of the Indonesias and Indias and Chinas of this world and Southeast Asia as skewed more towards volume. But that doesn't mean that there's not a pricing metric and that doesn't mean there's no incentives based on revenue. It's just how they're skewed. 
+
+Answer_8:
+
+          I'll ask Sandy to comment on that North America number. Sandy and Irial are here and I'll ask Sandy to first comment on that. 
+
+
+          Yes, Dara, our view of the pricing strategy in the US is being very consistent with what we said at the beginning of the year. Very focused on making sure that we get our price, that we balance that with a package strategy that's focused on our premium packs and our smaller packs, which consumers want, and continue to grow double digits. We're pleased, as you can see in the Nielsen data and the marketplace, the consumer's responding with accelerating sales growth. Actual volume was slightly better than we expected and clearly the volume on the premium packs that are the focus of our brand building agenda and supported by our advertising are driving the train. We're just at the beginning, though. 
+I think North America's ability to play a primary revenue growth role in the Company with this disciplined balanced strategy is in the early stages and we see a rational environment and we see a good competitive environment in which the category sales performance is accelerating and we're optimistic about the future. 
+
+
+          Irial, do you want to add to that? 
+
+
+          Yes, I'd just remind all of us, in the first quarter, we said we were going to have a very disciplined approach to pricing in North America and the last three quarters we've demonstrated that and the intention is to keep doing it. We feel good about it. We feel we're going the right direction and feel very confident as we actually head into the future on pricing in North America. 
+
+
+          Yes. Maybe I'll ask Ahmet to comment also on the same subject as it pertains to Europe and as it pertains to Latin America and some other markets. Ahmet? 
+
+
+          Thanks, Muhtar. As we talk about the revenue focus, we are also focusing on balanced revenue growth in Coke International. Maybe a couple of examples I could share is in Mexico for example, where you see 2% growth in volumes for the quarter and more or less flat volumes, we're actually seeing fairly healthy price mix of about low to mid-single digits and our revenue growth reflects that as well. Likewise in Brazil, we're also seeing mid-single digit revenue growth, even though our volumes are up only 1%. We are quite cognizant of balancing our revenue growth with appropriate pricing realization and volume at the same time. 
+
+
+          Do you want to say anything about Europe? 
+
+
+          And in Europe, obviously we are not pleased with our volume performance of negative 5%, but the challenging macros are bringing with it a fairly aggressive pricing environment in the marketplace. We are always trying to balance our pricing with volume. In this quarter, I would say that we were a lot more in favor of pricing where we have realized 3 points of price mix in Europe, which resulted in a revenue decline of 2%, while our volumes were 5%. 
+Having said that, this is a journey and an ongoing balancing act. We would be focusing on balancing that a little bit better so that our share performance continues to be strong, which it has been for the last four years, and we are on that journey in Europe. 
+
+Answer_9:
+
+          I think, Bill, firstly, it's fair to say that we are in a challenged disposable income growth environment. That's no question. The consumer is challenged everywhere around the world. It's not just related to the Western developed markets of Europe and Japan and United States and Canada, but it's also related to emerging markets. There's a lot of volatility in the world when you look at in the currencies, when you look at interest rates, when you look at the growth rates, and when you actually factor in all the different geopolitical issues around the world. There just is a lot of apprehension. 
+Less people traveling because of disease, because of scares, because of other things, mobility is down and traffic is down and that all impacts, particularly, our immediate consumption business. So we've got to find newer, better ways to ensure that our products, our brands, our 3,000 products, 550 brands can meet up with consumers on different occasions, on better occasions, on newer occasions, and on more innovative ways to get our products in front of our consumers. Certainly, we recognize that, that is a challenging environment. We operate in that environment, but we have still one of the most dynamic consumer goods businesses in the world. 
+We believe that it can still, over time, grow at the rate that we have just outlined to you in terms of revenue growth. Is that going to happen overnight? No. Can we get there? Absolutely, yes. Then we have other elements to deal with in terms of trends. So we recognize that we have to do more work on diets and lights, for example. We continue to innovate. We continue to launch new products which have different sweeteners and different sweetener bases. That will continue in an expanded mode: more innovation, more packaging, and newer ways for consumers to connect. 
+Next year is the 100th year of the contour and we certainly will be expanding our IC focus -- our  immediate consumption focus in the market, which is a really important way to build habit and build trends and build [team incidents] and then improve our marketing and improve our commercial strategies with our bottlers, which we keep working at. So that's where we are. It is a very challenging environment anywhere you go around the world. It's not different. 
+Everyone is apprehensive, whether it's governments, whether it's NGOs, whether it's businesses, local businesses and International businesses. I don't see that improving overnight, but I think it's the new normal. In that new normal, we need to generate better growth. 
+
+Answer_10:
+
+          No. No specific read through. I would just say that given where we are right now, this is the guidance we thought we should provide at this time. 
+
+Answer_11:
+
+          We did give a different outlook on currency, which does impact cash. 
+
+Answer_12:
+
+          It's Irial. On the supply chain in North America, basically this is a continuation of what started a few years ago and it's made up of many different aspects, which we'll share in due course, as Kathy has already said and Muhtar. But the key is that we're looking at becoming more effective and more efficient. We have a very substantial supply chain footprint and we believe and have the plans to make sure we become truly efficient and that means by streamlining in many different ways. 
+Simple illustrations are things like the bottle life weighting, which is pretty well carried out across the world today, whether it's mechanizing at different parts of our supply-chain, whether it's our footprint, our supply chain and so forth. So many different aspects, but very clear plans behind it and a high degree of confidence that we will achieve the synergies that we've set out. 
+
+
+          On that, once again, I wanted to reiterate the point that I made earlier, this is Muhtar, that of the $2 billion by 2017 and the $3 billion by 2019, the incremental synergy program, that is not going down as we substantially refranchise our business in North America. 
+
+Answer_13:
+
+          Judy, this is Muhtar. Good morning. Yes, we are streamlining and simplifying our operating model for better speed, better decision-making and enhanced, also, local market focus that will help us to drive better growth. This work is moving forward aggressively. It's global. It involves a center and involves the entire Company and we expect to refocus the role for our corporate center and further scale our back-office to support our processes and also policies on a global basis to get more synergies there and better service to our business units that operate around the world that basically make up the Coca-Cola Company. 
+This will enable those operations to fully focus intently on demand creation in their market. So this is really important. It's a delayered organization. It is a simplified organization. It's less touch points, it's faster decision-making and that will take place, starting with the beginning of the year and you'll hear more about that in the coming weeks. So that's important. 
+I think it's important, if I just take back a minute and just to say again, this is certainly a difficult operating environment and that is clear. No question about that. But today, we're announcing, I believe, definitive actions as a team to address that environment and improve our execution. The $3 billion in synergy enhancements are an added layer and an added layer of segmented analysis on top of the $3 billion in metrics on a market-by-market basis is clear evidence, I think, of us taking action to control, in a way, what we can control. I'm so pleased that we have a team that has basically worked together for a long time and we know what it takes to win. Today, we are taking essentially additional steps to get us back on track over the longer term and we will do whatever we have to do to get there to get us to that bridge. 
+We know it can be done and we know we will do it. I think the synergy program will help, the new operating model will help, the enhanced execution will help, the better marketing will help, and the improved commercial strategy will help along those lines. Is the operating environment tough? It is tough. But we are fortunate to be in a business that is one of the most dynamic businesses in the world; the nonalcoholic, ready to drink business. And so that's what I would leave you with. 
+
+Answer_14:
+
+          Thanks, Judy. We don't like to talk about weather too much in this, but I would say there was probably not so favorable weather. You mentioned the macros. Let me start with China. You could see from the numbers in China that total food and beverage industry, NARTD industry is actually under pressure and the growth rates are coming down. But I'm very pleased with our performance in China because now we see a lot of traction on sparkling beverages, which actually grew in the quarter. Trademark Coke was up 4% in China, which shows that the strategy that we have shared with you all, beginning of the middle of last year, of segmented focus of our beverages in China is actually working. 
+We're very pleased with our new launches of the isotonics. That's doing very well. Very pleased with our innovations in sparkling with things like Schweppes C'Plus. So for China, I'm very pleased with the results and we're gaining share and our initiatives are working for us. 
+When it comes to Europe, I have shared with you all a little earlier, it is more a matter of balancing our price realization and volume a little bit more in the favor of volume and share, still realizing good price mix. I would say other than that, Europe performance was mostly to do with the macros and you've mentioned weather. I will not. 
+
+Answer_15:
+
+          John, this is Muhtar. When you look at the current revenue figure that we've put out there, if you take the midpoint of that, it's only 50 basis points different than what was out there before earlier. So I don't see that as a major difference in terms of the category, in terms of the cyclical long-term macroeconomic. I think we see tremendous opportunity in this segment, in this very dynamic consumer goods industry. So I see that's not any major shift. We've been pleased with productivity in terms of what we've done to date. Macros have not improved and so we have to do what we need to do in order to ensure that we can cross the bridge and get to better both top line growth, as well as bottom line delivery of performance and that's what you see us doing right now. 
+In the past, you would have cycles in macro, you would have a year or two years of down and then coming back up and now it's constant volatility and actually increased volatility every day around the world and increased apprehension by the consumer. So we have to do more. We have to ensure that we create the flexibility to deliver our results and that's what you see us doing. 
+
+Answer_16:
+
+          Kathy, you want to add anything in terms of investment, in terms of the efficiency, what John talked about? 
+
+
+          Sure, Muhtar. First of all, going back to the first question around the net revenue, the two things that are primarily driving the change would be the value growth that we see coming from emerging markets, as well as the more volatile nature of the emerging markets and then recognition that our partnership models will drive value for the business that will impact equity income. So I just wanted to add that particular point. Then on the productivity -- sorry, I don't remember the productivity question. What was the question? 
+
+Answer_17:
+
+          Yes. There actually is, John. What we have done in the past is we've said that productivity, the original $1 billion is made up of both OpEx as well as reallocation of marketing to ensure that marketing is more effective and more efficient in terms of its delivery of results. So that is an ongoing program that we have in terms of how we will continue to reallocate marketing to drive better value and better return. That is there. That is ongoing. 
+However, of course, the scale of what we're doing in terms of OpEx flexibility is going to be much, much bigger here, but the vast majority of the additional savings program is hard savings in productivity. The vast majority is hard savings as opposed to reallocation. We will ensure that the amount of money that's invested has a return. That's a different answer, but we will make -- it is actually, I'd say, the vast majority, in fact, is hard savings. 
+
+Answer_18:
+
+          When all is said and done I'd say probably, Mark, it will be about mid-single digits in 2014. I think we'll give you, again, in December, we'll come back and give you more flavor about how we're thinking of that in 2015 and beyond. 
+
+Answer_19:
+
+          I wouldn't assume that. 
+
+Answer_20:
+
+          Look, I said the vast majority is hard savings in productivity programs and that is composed, as I mentioned earlier in answering another question, that is composed of a base of about $9.5 billion, $10 billion comprised of marketing and OpEx and then another base, which is driving about a $1.5 billion by 2019. The other half, $1.5 billion by 2019, is driven by COGS savings. But these are hard savings, not in terms of just soft or reallocations. 
+
+Answer_21:
+
+          This is Muhtar. First I think, based on the collective judgment of myself and my team, as I said to you, this is an acknowledgment of a continuing difficult operating environment and controlling and taking action to control what we can control. That will mean two things: create flexibility through the synergies and also ensure that we can enhance our margins and build a credible and sustainable revenue growth on the top line. That is the key here, which at this industry, lends us to believe and clearly, the history has shown that this industry is the most dynamic and it continues to be. 
+Therefore, we believe that when we segment our markets in the way we have segmented them, continue to ensure that we have the right metrics in place and the right incentives in place, that we will perform better. We're almost finished with this year and we're going to be embarking upon implementing this now so that we can start the year running. We will give you a very clear dashboard in December where you can -- with three or four things to follow you can judge our progress -- judge our progress as to how we're implementing and generating the results out of this program. That, to me, I think, is going to be key, following our progress and we will follow it and you will be able to follow it. 
+We'll give you that dashboard so that you can ensure that every quarter we can have a discussion on the key four or five elements of success on how we implement the new operating model, how we implement better marketing, how we implement better commercial strategies, and how that's impacting the top line and what impact that's having on margins. 
+As far as the North America franchising, I'll ask Sandy to comment on that. But, again, it's a clear timeline. First, by 2017 and then what we will have left is about one-third and then what we do with the rest is latest by 2020, again, finding the right home. Sandy? 
+
+
+          Sure, Steve, on North America refranchising, I go back to the objectives of the effort, which is to restructure a system that was in place for over 100 years to get it in better position for growth with better focused customer management, more efficient product supply, and back services and to refranchised to the best Coca-Cola bottlers in the United States under a new franchise agreement that is fit for purpose of growth. We are very optimistic about our ability to deliver that kind of growth profile and to do that in a way that makes our business more economic and makes our system more economic going forward. 
+So as we point to the December discussion that Kathy's going to lead, we'll have a number of the details that will help you model this going forward. But our strategic mission has not changed and our optimism for success in doing this with our bottlers is as high as ever. 
+
+
+          Thank you, Kathy, Ahmet, Sandy, Irial, and Tim. Despite gaining global value share, our year-to-date performance is not where it needs to be. The scope and pace of our actions have to increase and we're moving very quickly to streamline our operations and further align our incentives to drive revenue growth while simultaneously driving costs out of our business through an aggressive plan. 
+While the short-term macroeconomic environment remains challenging, we are confident in our ability to return to sustainable growth as the long-term dynamics of our industry remain promising. Our brands and our global system are unparalleled and we are all fully dedicated to strengthening our position as the world's leading beverage company. As always, we thank you for your interest, your investment in our Company, and for joining us this morning. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/28_questions.txt

@@ -0,0 +1,87 @@
+Question_1:
+
+          There's a lot of questions that could be asked, but I guess one that I wanted to focus in on is the change in target from focusing on operating profit growth to pretax income. It sort of suggests that there's a contribution that will come from growth in equity income. Can you just give us some sort of gauge in terms of how much of the growth you actually expect to come from equity income? How much comes from operating profit? Just trying to get an idea of the proportions and whether or not there's actually a suggestion that operating profit would glow grow slower than that in that goal? 
+
+Question_2:
+
+          Okay. So no suggestion that there was a material change in operating income growth, it's just trying to collect the other pieces below that? 
+
+Question_3:
+
+          Previously, you'd indicated on the $1 billion product due to savings that will be all reinvested in media. Perhaps you can give us some idea of how much of the $3 billion will be reinvested and also what the phasing of that will be through to 2019? It strikes me with the US production changes that's going to be quite back end-loaded in that timeframe. 
+
+Question_4:
+
+          If I could come back on the 2015 guide, which obviously looks quite bearish versus where the Street is, you seem to be highlighting there's going to be quite a lot of extra costs there without savings. Is it also a comment that you're quite cautious around revenue growth, i.e., you seem to be implying it will be in more in line with 2014, which is more like a 2%, not a 3%-plus. Is that right? 
+
+Question_5:
+
+          I think we're generally pleased that there's more urgency around price mix and North American [franchisement] and the cost-cutting. But I do want to understand a little bit better how much of the cost cutting you think you're going to need to reinvest and really, why you think you have to reinvest? And I say that because you're going to reinvest something and I want to hear what, but you're only going to get back to your previous growth rates, but this whole time, a lot of the discussion is about blaming mostly short-term macro issues. 
+So is there something that's underlyingly falling worse, e.g., perhaps consumer trends toward health and wellness or something? And in fact, is it a good ROI to reinvest in the business in marketing versus taking some to the bottom line and to shareholders who have been rather disappointed recently? So any help there would be great. 
+
+Question_6:
+
+          So that's very helpful. In terms of the clear line of sight, can you give us a sense of, this $3 billion, is it half reinvested, half of the bottom line? Is it 60/40? Can you give us a better sense of the split of reinvestment versus bringing it back to the bottom line? 
+
+Question_7:
+
+          Muhtar, I wanted to delve a bit more into the changes in price mix versus volume focus and the incentive plans. I'm assuming the enhanced pricing focus is more of a developed market phenomenon, but maybe you can review for us how much of the change in focus going forward is in developed markets versus emerging markets versus how you managed previously? Then in North America, has this enhanced pricing focus all ready played out to some extent, given you've already had compensation changes there or should we expect North America to be part of that change in focus going forward also? 
+
+Question_8:
+
+          Okay. That's helpful. While we're on the subject of pricing, can you characterize the pricing environment right now in North America? Obviously, the 3% sparkling number in the quarter was more favorable than you've seen recently, so I wanted to get an update there on how sustainable that performance could be going forward. 
+
+Question_9:
+
+          Can you just comment on how much you know, relative to the environment, what's secular and what's cyclical and then how your strategy changes if it's more secular than cyclical in terms of some of the consumption trends? Obviously, Muhtar, you have considerable experience here. Has there been a period where you've seen things as difficult as they are now and what it took to pull yourselves out of it? 
+
+Question_10:
+
+          Great. Thanks. Kathy, just one quick one: the share repurchase went from a range of $2.5 billion to $3 billion, now it's at the lower end of the range. Is there any read through on that, in why you guys took it down? I know it's not hugely substantial. 
+
+Question_11:
+
+          Okay, but is cash flow coming in softer? I'm just trying to figure out why it would come down if there's no change in the cash flow algorithm. 
+
+Question_12:
+
+          I was hoping you could provide us with some more detail regarding the restructuring of your North American manufacturing footprint as one of the areas of the productivity program you talked about earlier? What's the scope of that program? What are the milestones that we should be looking for? How does that tie in with your commitment to refranchise the bulk of your territories by 2017? 
+
+Question_13:
+
+          First question is just relating to, really, the new operating model that you're planning to implement. I'm just hoping to get a little bit more clarity around exactly what you're doing to change the operating model, both more at the business unit level and maybe even at the country level? Is this something that gets rolled out globally or does this have a phasing of how it gets rolled out? I know that you really have been emphasizing patience and just taking time to implement these changes, but just wanted to get a little bit better sense of what takes longer? What can be implemented more quickly and where can we see the benefit to some of the changes more quickly? 
+
+Question_14:
+
+          Okay. If I could follow-up, Ahmet, the two markets, where, obviously the volume was very challenged were Europe and China, which presumably had both the weather impact, as well as the macro impact. So if you can give us a little bit of color just in terms of how much you think the weather did play a role? It sounded like in the fourth quarter, you really are not anticipating much improvement, globally, from a volume perspective. Is the weakness expected in these two markets primarily or are there other markets that you think could potentially be weaker or more volatile as you get into the fourth quarter? 
+
+Question_15:
+
+          A couple of questions here. One on the change to the long-term algorithm: you talked about NARTD growth being more mid-single digits going forward. Going back to Bill Schmitz' question, is that going down permanently from the 6% number that you guys had put out there before or are you structurally calling for lower category growth? 
+Then the second question I had related to the restructuring program -- I guess two questions on this. First, is it the macros? Is it the lower structural growth of the category that's causing you to up this just eight months after your last program? And then a clarification on the numbers which is, part of the savings program announced in February related to not necessarily productivity, but more efficient spending? Is there any of that's built into this new $2 billion? Thanks. 
+
+Question_16:
+
+          Got it. Again, just a clarification on the reallocation versus what we would view as incremental cost saves. Any color on that? 
+
+Question_17:
+
+          What I was asking is, if I remember correctly, the February productivity program included some true productivity and then some sort of reallocation of spending to more efficient methods. I'm asking is there any of that also built into the incremental $2 billion from today? 
+
+Question_18:
+
+          Also on the subject of media and marketing spend, when all is said and done, Kathy or Muhtar, for calendar 2014, you mentioned a double-digit increase in media in the quarter. But when we look at the total marketing spend, how much do you think that'll be up when all is said and done for 2014? When we think about the comparatively lackluster 2015 you're talking about, how much of that is attributable to the rate of increase and marketing spend you're intending next year? 
+
+Question_19:
+
+          Is there anything -- is it reasonable to assume it goes up at a faster rate in 2015 given the top line challenges? 
+
+Question_20:
+
+          Okay. Just one point of clarification back on John's question, about the $3 billion, you mentioned, Muhtar, the vast majority being OpEx. Are you talking 80%, 70%, 90%? Can you give us some sense of that number? 
+
+Question_21:
+
+          Two questions if I could: first, despite some disappointment in some quarters, from a strategic standpoint, this does seem like a fairly substantial change from where you were in July, strategically. Can you talk about the process that you went through internally to get here? Do you view these changes more reactive or proactive? To the extent that much of the work has been accelerated since midsummer, how confident are you that this is the right program? Why is $2 billion, for example, the right number and not $3 billion or some other figure? That's the first question. 
+Secondly, as you seem closer to a defined timeline for refranchisement in North America, can you help us dimension the financial terms and the economics of that activity? Just in broad brush strokes, acknowledging you'll probably cover more this in December, but do you anticipate refranchising to result in economic loss or gain versus your 2010 investments? How much dilution should we expect as we go forward through the program, again just in broad brush strokes? Thanks. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/29_answers.txt

@@ -0,0 +1,111 @@
+Answer_1:
+
+          First, just at a very high level, 10,000 feet, 2015, we expect the macro environment to even become a little more volatile versus 2013 and 2014, as the microeconomic vagaries get worse in certain parts of the world. Rate of interest, currency, certainly, will add to the volatility. 
+Growth gap will -- in some part versus other parts -- are going to grow. Take, for example, the United States and Great Britain, two large western economies, starting the year 2015 strong, whereas the eurozone, Japan, and most of the emerging world starting the year slower. 
+So there is this gap and some catching up to do. We're gaining share across the world in sparkling juices, important categories. The industry -- we see some evidence that there's some things that are working for us, but we need to be cautious and take it quarter-by-quarter. That's really important. 
+As far as Latin America is concerned,  Colombia seems to continue to do really well as an economy.  There's some more lifting to do in Mexico and Brazil and south cone, but I was recently in Latin America, and our business there continues to -- we have a fantastic group of bottling partners investing for the short- and long-term growth and we continue to gain share. We have a very strong package product channel segmentation and architecture in pricing, competitive, but at the same time, great revenue growth management strategies working there. 
+Europe, as per the last quarter, quarter four, which we are just reporting on, the southern European countries continue to be challenged. Germany, our business was very much in the positive. Northern Europe was a better environment for us than the south and Eastern Europe is again challenged by some of the macro volatility that spills over across from the east. So that's how we would see them. 
+Asia, we're still very bullish, and Africa. You see the actions we've taken related to reorganizing our bottling structure to even better suit the growth potential and the opportunities, there, in both Indonesia, the fourth most populous nation in the world, as well as the very dynamic 1 billion-plus consumers in Africa. 
+
+Answer_2:
+
+          Yes. When you look at LRB or nonalcoholic ready-to-drink beverages, Bryan, what you would see, probably, is maybe 100 basis points less growth versus the previous years, but, it's again, anybody's guess as to how quickly some of these economies are going to come back. 
+We have definitely those contingencies built in. Maybe I can refer to Ahmet to give you a few more snapshots of the world in terms of micro and macro picture? Ahmet? 
+
+
+          Thanks, Muhtar. Bryan, the only thing I would add to Muhtar's characterization is that volatility comes on top of a slowdown, but what's working for us, is that we are getting more and more traction on our plans and programs working with our bottlers. I was in about four or five different countries over the last couple of weeks. 
+Even though we witness economic volatility or uncertainty, even in even in Northern Europe, yes there is quantitative easing, yes, there is lower oil prices, but it is uncertain yet whether the consumer will really benefit from that. But even within that, our plans that address the right pricing and packaging and the right level of media investments and our alignment with our bottling system, is giving us confidence that we could actually weather this volatility in line with the guidance that has been provided. 
+There are a couple of bright spots, too. I was in India, probably one country where there is a lot of optimism inside the country in terms of economic development. As you know, we have an incredible momentum in India over the last seven or eight years, especially last year. Our plans continue to build on each other from year-to-year. 
+I was in Brazil. Again, a similar story. After the elections, there was some cautious optimism and that caution side of that continues. There's still a bit of optimism, but we do continue to deliver our results despite that environment. As you know, Brazil had a mid-single-digit growth over the end of the quarter. 
+Yes, it was cycling better numbers from last year, but we've also had very strong share gains in Brazil. So I would say that is our story. There is volatility on top of a slowdown, but we do have traction with our plans and programs in the marketplace with close alignment with our bumpers. 
+
+
+          Bryan, last thing I would add to what Ahmet and what I had said earlier, to your question about does it make sense to invest in media and marketing, and the answer is, absolutely, yes. When we are able to target our investments in media and the way we are doing it, segmenting them by the different countries and the different regions of the world and improving not just the quantity but also the quality of the media, that's one of the main important factors that we see driving a better revenue number, a better price mix number. So the two are really connected and that's what I really want to -- gaining share, improving on the top line through all the actions we're taking, of which targeted media, increased and improved quality media, is one of those. 
+
+Answer_3:
+
+          I'll let Irial answer that question, and then also, Sandy will add flavor to that, too. 
+
+
+          Good morning, Judy. The most important thing is, four quarters ago, Sandy and I spoke on the topic and we reiterated our belief in having balanced price mix volume growth in North America. We've delivered on that in every quarter this year and our plan is to deliver again next year in the same way. 
+In terms of your question on mix and headline price, it's a balance approach. Yes, in the fourth quarter last year, we were trending some lower numbers where we had some promotional activity, but when you look over the half-year, as Muhtar said, we grew pricing 4%. 
+So we feel very good about the actions we are taking. We're feeling very good about how the trade is reacting and more importantly, we are feeling very good that our marketing and our execution are coming together in a way that really adds incremental value to our system. I will maybe ask Sandy to add to that. Sandy? 
+
+
+          Good morning, Judy. As Irial said, it's a consistent strategy. The strategy is [born] of where the consumer wants us to go. The consumer is buying smaller special packages of our sparkling beverage brands and accelerating that purchase and we're seeing the kind of mix benefit from that, that you describe. 
+But that couples with a disciplined approach to rate and volume. Because in the end, what we're trying to do is expand the value and usefulness of our brands and create value for our customers. Through the consistent execution of that strategy, we are seeing, in 2014, a solid year, but a year of improving performance through the year, and we will continue to pursue that disciplined strategy in 2015. 
+
+Answer_4:
+
+          Okay, Judy. Our commodities environment for 2015, commodities we expect really to be benign for us, right? There are some that are absolutely favorable, but then we have other challenges, and depending on -- not a North America, but outside of North America, we also have impact of secondary exchange embedded into our commodities. So we really anticipate it being more of a benign commodity environment  for us versus having any significant benefit from it. 
+
+Answer_5:
+
+          We're all going to watch what's happening with quantitative easing, John, in Europe, 18 months of the planned amount, EUR60 billion a month kicking in, whether that will have an impact or not, we will watch and see. Stability is the keyword for Europe, as we go into 2015, so not getting much worse, and in some areas, continued volatility. 
+South Europe is going to continue certainly to be challenged, so I don't think there's going to be suddenly a lifting of the cloud for the consumers in the southern belt of Europe. German -- the current exchange rates will help exporting countries, for sure. How soon will that trickle in related to Germany, related to other export markets from Europe? 
+But that's a positive. Quantitative easing is a positive. The notion that most consumers now are used to this environment and feel that it is not going to get much worse; it may get a little better because of the QE. 
+So we'll have to see. But we think that it will continue to be challenged, and then you've got, of course, the whole political environment to, basically, weave into the equation. That political environment is something that is an unknown for us all. 
+That's how I would see. As far as growth, yes, there will be pockets of growth in Europe and there will be continued pockets of challenges. What we see -- we have very strong plans in place with our bottling partners for growth in Europe and we will see how -- we have all kinds of contingencies built into the plan in Europe, also, and we're going to take it quarter-by-quarter. 
+
+Answer_6:
+
+          Sure, John. For 2016, we are also hedged on our major currencies at this point, and also have some on other currencies, as well. So we will manage the impact and we are at pretty good rates at this point with our hedging, so basically we don't think that there is a relative issue at this point. 
+
+Answer_7:
+
+          Steve, this is Muhtar. Good morning again. As far as the rate versus mix, it's basically completely dependent on the country and the environment and the region. There's no trend globally. This is, on average, this much rate and this much -- it all depends on our price/pack channel architecture, our position in our market, the strength of our brand, how effective is our marketing driving the results that we need, which is all work in progress. 
+So it all depends, and I will let Sandy comment on the United States on that, but it's very much dependent on the region and dependent on the country and dependent on the circumstances. That's really what I would say. Sandy, you want to just address the United States part of that question? 
+
+
+          Sure. Our strategy in the US is, again, as Irial said, very consistent. We view there to be a significant upside pricing opportunity in the sparkling beverage category. We are driving that with significant investments in brand building and execution of a bright package architecture that will expand margins for our system and also for our customers. That involves a very healthy rate program. 
+But at the same time, we are executing with a tremendous amount of energy, multiple proprietary and other small packages that the consumer is buying at accelerating rates. For example, mini cans increased by 15% in the fourth quarter and that's us following the consumer to smaller package sizes of the brands they love. That combination of rate and mix is creating a good balance with volumes to a healthy top-line growth picture. 
+
+
+          Steve, just on your question on productivity, I would say to you that the reorg and how we are flattening the Organization and the number of announced cuts were all part of the program, totally part of the program, so, there's nothing that has it's just been executed. That's all. 
+We stand by what Kathy said in the modeling call in December. We are on track with the $500 million-plus piece of the productivity program for 2015 and we are on track with that. But just to emphasize, all of what you see, what you hear, what you read, was part of the program. 
+
+Answer_8:
+
+          Just quickly on the last piece of your question, it was part of the initial $2 billion. Then, as far as the rate increases, I'll defer to Ahmet if you want to just refer to that part of the question. 
+
+
+          On markets like EAG, we price in line with inflation. We may be slightly below inflation, slightly ahead of time. You should expect to see consistent rate increase more or less in that range. 
+Fourth quarter for EAG was a bit of an anomaly. There was a geographic mix impact that was driven by cycling of [jobend] shipments, so if you look at full-year price mix realization at EAG, it's a healthy 4 point, so, I wouldn't look at Q4 to draw any conclusions. 
+
+Answer_9:
+
+          Ali, just on a broad-based answer to your question, it's really critical that we balance the needs in the marketplace and the need for us to be healthy in the marketplace on a both medium- and long-term basis. That's why we hold accountable all our business unit presidents for local currency. We're very happy with our progress so far, with what we are doing with our productivity initiatives and what the current results are for those productivity initiatives, so far. Early days. 
+But we certainly are looking to do more where it makes sense. But one thing you will not see us is taking, basically, actions in the marketplace that weakens our position for the medium and long term. That's the critical piece that I want to stress. 
+
+Answer_10:
+
+          We work with all the different levers that are available to us, how our better marketing, more marketing is working, driving results, how the investments are working, that we're putting in the marketplace with our bottling partners, our basic brand strength in the marketplace. All of those things. Essentially, in terms of commodities, again, that's something that is very volatile in the world that we live in. 
+Four or five months ago, if someone said we'd be looking at current price of oil, no one would have believed is. So everything is changing very rapidly and we are remaining flexible and what we can achieve to the best of our ability, both in pricing, both in terms of investing for the future, as well as making sure that our investments are targeted and our segmentation works. 
+There is not one solution. The segmentation is really driving better results than we have anticipated when we put that program into place. 
+
+Answer_11:
+
+          I will just leave it at what I said. 
+
+Answer_12:
+
+          Based on our 4-4-5 calendar, the six additional days get pushed into the first quarter, but they come out in the fourth quarter. 
+
+Answer_13:
+
+          That's all local currency. So it is what it is. What we talk about is all pricing in terms of the local currency we take. Whether we measure that in SICAD 1 or 2, it will be the same number. 
+
+Answer_14:
+
+          For next year, the impact of fair pricing law will continue in Venezuela. That is what actually impacts our revenue in Venezuela. It caps our ability to take revenue. 
+That does continue. Obviously, it starts over in 2015, but it will not be a structural item because we cycle it as of the second quarter. So, then, yes, we also do have an impact to our revenues from a different exchange rate and that would be considered currency. 
+
+Answer_15:
+
+          Bill, this is Ahmet. I will try to address that. One big thing was the timing of the Chinese New Year, but I wouldn't conclude my comments without saying that the market in China, especially the food and beverage market, has been weakest in the last 10 years. But I would also say that we've been consistently applying our strategy that we have covered with you guys a number of times before and resulting in fairly significant share gains in China. 
+As you know, in Japan in the middle of last year, there was an increase in taxes and we're continuing to see the effect of that, but, still delivering almost close to flat but not that close. It's minus [1%]. But the biggest item there was the timing of the Chinese New Year, as well as continued industry headwinds in China. 
+
+Answer_16:
+
+          The Corporate unallocated line. Yes, that is one place where you will be able to see the restructuring come through, but as Muhtar said, we are on track and with everything that we have announced to date. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/29_questions.txt

@@ -0,0 +1,68 @@
+Question_1:
+
+          I've got a question about -- Muhtar, in your prepared remark, you mentioned the consumer environment remaining volatile in terms of your expectations for 2015. Can you talk a little bit about what range of volatility you might have embedded in your plans for 2015? 
+Maybe talk a little bit more specifically about the consumer environment, both in Europe and Latin America, where since those are really two important markets for the Company and where it seems volatile? Finally, just maybe how that might affect your decision to spend more marketing in those markets this year given the volatility? I know there's a lot there, but thanks. 
+
+Question_2:
+
+          Fair to say that you've got a wider range of volatility or contingencies for that type of volatility built into the 2015 plans? Just maybe the normal, just since it's such a volatile environment? 
+
+Question_3:
+
+          My question is really relating to the strong price mix that you saw North America in the quarter. Obviously, you've been focused on getting mix impact and rational pricing. Can you just speak to how much of the improvement was mix-driven, as opposed to maybe cycling some of the heightened promotional environment last year, and as you think about 2015 and beyond, just thinking about some of the mix acceleration potential and the pricing side in North America? 
+
+Question_4:
+
+          Got it. Okay. Then Kathy, if I could just have a quick follow-up on just in terms of the commodities in 2015. What have you locked in, in terms of your exposure are there? As you think about different commodity complexes that are turning more favorable, how much of that could we expect to see drive some of that margin improvement, particularly markets like North America? 
+
+Question_5:
+
+          Wanted to follow up a little bit on, Muhtar, on your comments on Europe. Obviously, it's been a difficult market over the past couple of years. 
+What's the right way to think about a glide path getting back to growth there? Is it something where QE works and we start to see the economy come back, do you think you can get back to consistent growth? What are some realistic ranges of expectations for 2015 and potentially into 2016? 
+
+Question_6:
+
+          Great. Thanks. If I could ask one follow-up to Kathy. Kathy, you talked about your FX coverage on translational for 2015. Obviously, what this can lead to sometimes is a year or two year impact. Any thoughts on 2016 and how you'll manage what could potentially be some FX headwind there as the hedges roll off?  
+
+Question_7:
+
+          One quicker clarification question, then a slightly more thematic one. First, obviously there are a lot of moving parts driving price and mix in the quarter, globally. I wondered if you could just focus in on rate increases and talk about trends there because my guess is that rate lagged overall price mix in North America, which you talked, but Europe, the bottling investment, Latin American, and then rate was probably stronger than price mix in Eurasia, Africa, Pacific, and across the whole Company. Any help there would be great, just parsing out overall rate trends? 
+Then more broadly, it sounds like your productivity targets remain unchanged from last fall, which isn't really surprising as it has only been a few months. But at the same time, we've already seen announcements of headcount reductions that likely were not envisioned prior to your October update. I'm wondering why we are not seeing more incrementality sooner on that front, or perhaps we are, it's just being absorbed by the macro headwinds? If you could clarify that, that would be great? 
+
+Question_8:
+
+          Okay. Just two points of clarification, just to follow-up on those answers. Thank you very much. On the price mix, maybe just Kathy, specifically to Eurasia, Africa, where I'm assuming rate pricing in Russia, for example, is quite positive, should we be expecting this negative mix trend to persist in 2015? This is one follow-up on pricing. 
+Then Muhtar, to your point on the part of the plan, does that mean that the headcount reductions, for example, that were announced, was that part of the original $1 billion or was that part of the additional $2 billion that was announced last fall? 
+
+Question_9:
+
+          Given the pressure that currency is placing and all this macro volatility, do you anticipate or can you, actually, accelerate anything around your cost-cutting plans to offset this or do you plan taking even more pricing in places like Europe, Eurasia, Africa, or Asia-Pacific, where it does not look like you are offsetting your currency moves as much? 
+
+Question_10:
+
+          So in other words, we shouldn't anticipate more pricing as FX continues to be a negative pressure? If you can answer that, also, in the context of the benignness of commodities in 2015, and if that is a limit on your ability to take pricing, again, to offset FX and in the broader price context? 
+
+Question_11:
+
+          Okay. I'm just trying to understand. We could anticipate, if the consumer is ready to do it and if the segmentation suggests, we could see more pricing align with inflation because of currencies being so negative. Is that fair of what you are saying? 
+
+Question_12:
+
+          Just a quick one, Kathy, a technical question. The six additional days in the first quarter, is there some level of give-back later in the year? Do we see a reversal of that in the fourth quarter, for example? 
+
+Question_13:
+
+          One is a housekeeping question. Can you just tell us what the pricing would have been in Latin America if you were at SICAD 2 for this year and last? 
+
+Question_14:
+
+          Okay. I was just trying to get at what impact Venezuela had on the price, just for modeling for year, if there was a Venezuelan anomaly this quarter that might have take that pricing down next year? 
+
+Question_15:
+
+          Okay. That's very helpful. Thanks. Just on Asia-Pacific, it came in a little lighter than our expectations. It was one of the lowest volume outcomes in a while. In your prepared comments, it seems like you are fairly sanguine about that segments, so was there an anomaly this quarter that took the volume a little bit softer and the price mix, so negative? I know there was a mix element there, but any comments on that would be very much appreciated? 
+
+Question_16:
+
+          Great. One quick last one, if I could. Just to gauge the progress of the productivity program. Is a good metric to look at the Corporate unallocated line on the segment data? Does that come down as the restructuring savings come through? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/2_answers.txt

@@ -0,0 +1,306 @@
+Answer_1:
+
+    John, we can't hear you. Apologies, John, we didn't hear the question. 
+
+Answer_2:
+
+    Yes, we can. 
+
+Answer_3:
+
+    We're growing, as you've probably seen, we showed you on Investor Day. And while there was a little bit of lower growth this quarter, we do expect to grow loans in our commercial bank loans in Asset Management, wholesale loans, Mortgage Banking. And we're growing our deposits very strongly. So it's really just the underlying business driver growth that we've been seeing and expect to continue. 
+
+Answer_4:
+
+    Yes. John, actually, if I refer you back -- and from recollection, I'll do it for you -- but if I refer you back to Investor Day, it's based upon our adjusted expenses, which are defined as our expenses excluding corporate litigation and foreclosure-related matters. Which in 2012 was $60 billion, plus or minus. I think $60.1 billion. And we're expecting to be $59 billion this year. And that's what we're on track to deliver. 
+
+Answer_5:
+
+    A little higher than that in the first quarter. But the first quarter is seasonally high. 
+
+Answer_6:
+
+    Yes. The fourth-quarter normalized run rate was $725 million. This quarter it's down a little off that, as you would expect, given the IFR completion. We said that we expected the fourth quarter to be running at $600 million. And we said that at Investor Day and we're still on track to do that. And we've also said that the long-term run rate for that part of the business would be about $325 million a quarter, and that would be over the next couple of years. 
+
+Answer_7:
+
+    The litigation dropped quarter over quarter. Clearly we had a large number last quarter on the back of IFR. And we did have litigation expense this quarter, you'll see in the supplementary there, just over $300 million. 
+
+Answer_8:
+
+    Yes, that's right, John. 
+
+Answer_9:
+
+    Yes, but also remember, we didn't buy back shares in the fourth quarter or the third quarter. So there was an overall net $2.6 billion  gross] $2,6 billion net of employee issuance. 
+
+Answer_10:
+
+    Yes. 
+
+Answer_11:
+
+    No. I think the issuance number is fairly level and consistent quarter by quarter, because it's really based upon amortization of restricted stock and all that. And the buyback, the $2.6 billion, remember, that was over the course of the quarter, so it averaged out to 50% of that for the quarter. So we can give you more detail a little bit later. 
+
+
+    Yes, we'll come back to you John. 
+
+Answer_12:
+
+    But the $6 billion will offset how much average amortization over the same 12-month period, like $2 billion. 
+
+
+    Yes, $2 billion. John, that's a good way of looking at it. The $6 billion we're authorized to repurchase relates to employee issuance over the same period of just a little bit over $2 billion. 
+
+
+    For accounting purposes. 
+
+Answer_13:
+
+    The second one is the big one, that's June 11, or something like that. 
+
+
+    Yes, June 11. 
+
+
+    And that's where you have a lot of bigger client stuff like that. People are still getting used to it. So we think -- I think we've got 30% or 40% lined up to do it. They're still reading documents, have to sign new documents. So hopefully it will go smoothly. It's unlikely to go smoothly the first round. The first round were really large participants and swap deals, et cetera. We'll have to just wait and see. 
+
+Answer_14:
+
+    Look, we really don't know. I would say temporary but probably still down a little bit because of the reason you gave. Some feel and just say -- we don't need to do this anymore. And we also know all the final rules, by the way, and how the SCFs are going to work in bidding. 
+
+Answer_15:
+
+    Yes. If you take -- our Basel I RWA went up about $200 million. That's all about the implementation of the new market risk rules in Basel 2.5. Which is also why you saw our ratio go down from a reported 11% last quarter. It's really all explained by that. And our Basel III RWA was flattish quarter over quarter, with some pluses and some minuses. 
+
+
+    That was already in there essentially. 
+
+
+    Yes. Of course, yes. 
+
+Answer_16:
+
+    My recollection -- and, again, Glenn, forgive me if I get this wrong -- it's on the slide from the firm overview and Investor Day -- but I think that 100 basis points equates to about $180 billion of RWA over the next two years. But, remember, the passive runoff will take place over time. Not completely linearly but over time. And the model enhancements can be a little bit lumpier and a little bit more back ended. So we'll just have to see how that plays out. But, yes, we're still expecting for those things to happen, for us to get 100 basis points of benefit from that, and that's without the active mitigation. That's going to happen over the course of time. Just check that slide for me, Glenn, when you get on. 
+
+Answer_17:
+
+    Glenn, I actually think you all on the line should be dealing with this issue a little bit because the reason you have companies is because they serve clients well at a good cost. There's a reason our numbers are good, because we have cross sell and clients come to us. And there are reasons for global banks, just like there are reasons for community banks. I think the real issue -- again, you guys do the numbers -- is the banking system has gotten so much stronger in the United States. And it's not just capital, but it's capital, liquidity, oversight. Activities that people like are no longer being done. Derivatives are going to clearing houses. And the initial wave of OLA and living wills, et cetera, those things should all work. I hope at one point we declare a victory and just stop eating our young at this thing. 
+
+Answer_18:
+
+    Betsy, there was a little bit of passive mitigation. There was a little bit of run-off. And there was also some declines as we purchased back some AFS securities, and those were offset by some other things. It wasn't a very big number because, as I say, that will bleed in over time. And the model enhancements which are about 50% of the 100-basis-point benefit will be a bit back ended. 
+
+Answer_19:
+
+    That's right. Yes, some of it later this year, some of it next. 
+
+Answer_20:
+
+    Yes. We showed you at Investor Day that we had a gap to be fully compliant. We're going to be fully compliant by the end of the year. We did close that gap this quarter, not completely, by about one-third. Obviously we also disclosed -- on the slide you'll see our HQLA, our high quality liquid assets which has a relationship. They've gone up. But that's the numerator and the denominator changes, too. So think about it as we've made good progress. We've closed the gap by about one-third and we're on the way to compliance. 
+
+
+    And I think, when Marianne gave you the forecast going forward for NIM, that includes changing how we create more LCR. 
+
+Answer_21:
+
+    On the quantitative stuff we passed. And that's why we got the capital plan. There are criticisms around qualitative. And from what we know now, and we're still doing work, we're going to give you more, is around -- they want more granular type of forecasting. They want more idiosyncratic type of forecasting. So we're having conversations with them. Marianne has formed a CCAR department which is going to become experts in CCAR. 
+
+
+    And, Betsy, in terms of the time line, we're resubmitting, as requested, in the third quarter. We're doing everything between now and then to remediate and improve our processes following their feedback. So we're committed to being successful. 
+
+Answer_22:
+
+    Yes, so Brennan, I think it's very hard to predict. And you're right, it bounces around and it can be noisy. We had a higher level of litigation reserves in the first quarter of last year. And we hope that the numbers will remain low but we can't predict them for you, I'm afraid. 
+
+Answer_23:
+
+    They're always going to be lumpy because we have to deal with these things in due course. I think in the prior years we put away a lot. We've always kept the same, predominantly mortgage, largely mortgage, et cetera. And obviously the fact we're not doing more means we think we've gotten there. We did a lot of work on that. It could always change. But we've done thorough analysis. As a lot of you all did, by the way. We did it at the tranche level almost. So, could it be permanently lower? Yes, it could be permanently lower. It doesn't have to go higher. But, obviously, a lot of things coming our way and we'll have to reserve appropriately as they come in. 
+
+Answer_24:
+
+    Yes, it's tough to predict but maybe the thing you could look at is, if you take our pretax spread right now of 100 basis points, that compares to a longer-term average run rate of 65 basis points before the crisis. We've been stepping down from a very high level at the beginning of 2012. And we're back to a level where, frankly, we're not that far away from the longer-term run rate. And it's driven by the primary-secondary spread, which came in about 20 basis points in the quarter, back to levels that, again, feel more normal. I don't know I could say what inning we're in, I'm not a sports person, but it doesn't feel like we have another big step change to go. 
+
+
+    But we expect it might be up a little bit next quarter, not down, for a variety of reasons. 
+
+
+    Yes. There's going to be volatility quarter on quarter, but for this year we think we're in and around this range. 
+
+Answer_25:
+
+    A lot of that business is -- we call it flow business. So we look at credit, emerging markets, rates, FX. The clients -- we deal with clients all around the world and they need those services. Obviously, we always try to become more efficient. So if you look at FX, I'm going to say 80% is electronic. If you look at rates, the electronic number's going to go up. And so we're going to drive efficiency. But we still think clients are going to need it. There will be spreads to pay for it. And, obviously, everyone is going to be adjusting to Basel III. As you pointed out, some people leaving the business, some are getting into the business. We think it has a good future. We don't think it's going to go away. 
+
+Answer_26:
+
+    I think you're confusing two different things. I really think that quality -- they're going to give us more feedback on where they say we fell short in quality. I've mentioned them -- idiosyncratic, more level detail, more enterprise-wide type of forecasting, et cetera. That's one issue. The second is the actual dollar amount. The Fed has made it very clear, they want people to get to their Basel III targets. Ours is at least 9.5%. Ben Bernanke said on a speech he gave that the banks that they did the stress tests on have more capital after extreme stress than they started in the crisis. So the Fed, I think, is feeling more and more comfortable, not just individual banks but the system as a whole. And we reduced the 15 down to 6 because we wanted to get to our 9.5% target faster. That's why we did it. We just changed our mind. We want to get to 9.5% this year, we want to get to LCR this year. And obviously they may change the stress test next year. And assume we're going to have a conservation buffer coming in. And we don't know how the interplay of those two things will work. 
+
+Answer_27:
+
+    I think it's too early. 
+
+
+    Yes, it's too early for us to tell that. Remember, that's going to relate to how fast you grow and other requests from regulators. So we'll take that when we get there. 
+
+
+    Yes, but we do -- Erika, we do expect that we will be continuing to grow capital just through this 100 basis points of passive runoff from mitigation. Certainly our capital levels will be stronger and we're just going to have to see how things play out. 
+
+Answer_28:
+
+    So, if I could -- a little difficult to side it for you. But we did see a lot of still the pull forward to the fourth quarter, just given the year-end issues that people were concerned about. And so that has had an impact. I think it's slightly less of an impact than in terms of the competitive landscape. And there are deals being done with terms and conditions and pricing that we're not comfortable with at the moment, and we're just remaining very disciplined. So that has had an impact for us. 
+
+Answer_29:
+
+    Broadly flat. Broadly flat, around 32%. 
+
+Answer_30:
+
+    Broadly flat at around 32%. 
+
+Answer_31:
+
+    Correct. 
+
+Answer_32:
+
+    Broadly flat. Flat. 
+
+Answer_33:
+
+    Actually, we saw declines in deposits. So they're using their cash. They're waiting it out. 
+
+Answer_34:
+
+    Mike, it's Marianne. We're in constant dialogue with our regulators. And so we know that we should be expecting some more consent orders. But to clarify for you, they relate to issues that we've been working on over the course of the last several years. So these are not new breaking issues that will surprise you in any material way. 
+
+Answer_35:
+
+    Mike, we can't really go into the detail of the reports in specifics. But we obviously respect the work of the subcommittee. We respect the findings they had and we're working very hard to fix our issues. As it relates to the proposal and the recommendation to require documentation associated with portfolio hedging, identifying the specific risks that the hedge is designed to mitigate, and then monitoring it over time, we tend to agree that that makes a lot of sense in the context of what we face. 
+
+Answer_36:
+
+    No. And actually there's a couple of things I would say. First, that we're organizing ourselves around the control and regulatory agenda because it's a high priority for us. And we're getting ourselves organized in the same way as we would around a merger or an acquisition. And in doing that we are prioritizing our work. But we're not changing our overall strategy. We're not going to change the way we treat our customers, how we think about growing our businesses. But at the margin we're going to refocus our energies on making sure that we execute on the commitments to improve the control and regulatory environments. 
+
+Answer_37:
+
+    Yes, so applications actually have come back up. Rates have come down a little in the second quarter. For us in particular, starting there, we're expecting re-fi volumes to stay high. We did see a little bit of an increase in purchase volumes in the applications in the first quarter, albeit from a smaller base. And also we did the Met Life transaction so we have the opportunity to be working that portfolio. So our view on volumes for the year is that they're going to remain solid, although there will be some volatility really on the back of continued strength in refinancing. And you saw the HARP extension so more broadly for the market I think re-fi including HARP will be a level of support for volumes this year. 
+
+Answer_38:
+
+    Honestly, it's really all part of how we think about positioning the organization. And being compliant with LCR is part of our new reality. It's just a part of -- we've embedded it into just how we're thinking about the overall positioning of the firm. So it's not something we're separating out for you. 
+
+Answer_39:
+
+    It's hard for me to predict the second quarter. It is a real reduction in risk across the portfolio including -- and not driven by but including -- the synthetic credit portfolio which we continue to derisk. But it is important to note, if you look across the asset classes, there's been a very significant decline in the levels of volatility that affect the time series for our lookback period. So that, necessarily, bad days rolled off and better days rolled on. And so, when we compute our VaR it's pushing the VaR down lower. So, as long as volatility remains low and we continue to derisk, there's reasons to believe they'll be at or around this level. But it is going to be subject to changes in volatility, as and when they happen. 
+
+Answer_40:
+
+    It's factored in. 
+
+
+    Yes It's an all-in number for us. So, to the degree we expect that to happen by the year end, it's all part of the number, including some capacities to buy shares, the whole thing. 
+
+Answer_41:
+
+    I'll take the two things separately, the PPNR separate from trading losses. On the trading losses, obviously there's a number of different stresses that we do. And while our number was different, I don't think we feel like there's anything about our processes that is materially going to change. But as it relates to PPNR, we did get feedback that we need to look at certain of our revenue models and we need to look at them more centrally. And, as Jamie said, with a slightly more negative view, idiosyncratically. And we're going to do that. 
+
+Answer_42:
+
+    So, a couple of things. One is, we are expecting to, and hoping to -- we've set a target for ourselves to gain share -- we do expect volumes to be supported by refinancing this year. That is our expectation. It could change, of course. As it relates to the cost structure, obviously that comes down a little bit more slowly over time but we're making progress. And we talked about the fact that we expect that to be down at $600 million run rate for the fourth quarter. And down to $325 million sometime over the next couple of years. And we're actively working on optimizing our servicing business, both the core performing servicing -- and you saw that obviously with the Met Life deal -- but also, where it would make sense, we would be open to doing sales on subservicing of delinquent loans. And we're working through all those things to try and get to cost structures to the best place it can be. 
+
+Answer_43:
+
+    The private equity, we've always told you, is lumpy. It was just markdowns and write-downs of existing positions. And we don't go through the specific names. But, obviously, we hope it will earn a profit. It just wasn't a particularly good quarter for private equity. And the private equity legally can survive Volcker and all those things. We like the business. We like the people. And you just have to do it in a different basis, that's all. 
+
+Answer_44:
+
+    No. There's no seasonality in private equity. It's constantly being reviewed. 
+
+
+    And it's lumpy. 
+
+Answer_45:
+
+    Absolutely. Guy, it's a big change from the fourth quarter, off a small number. So, not to diminish the size of the numbers, but positive $50 million, negative $80 million, plus or minus around the zero level. What that's a factor of, Guy, is that the reserve release is based upon our model, and realized losses is based upon agency activity. So the timing isn't exactly perfect. So realized losses came down from about $200 million to $180 million. And we didn't build reserves. We released them, just not at the same order of magnitude. And it's really to do with timing, which is why we say that we do expect over time they'll net to zero. Last quarter it was a small positive. This quarter it's a small negative. Nothing to read into it. 
+
+Answer_46:
+
+    We're in constant dialogue with the regulators. We obviously can't comment on the specifics of our conversations with them. We've had some very constructive conversations as we came out the 2013 CCAR process. And on the basis of those we're actively working to make the improvements they want us to make. But also expecting to continue to get more and more detailed feedback and actually hope to get some industry best practice information, too. So we're going to be working in partnership with them, in constant dialogue, all the way through this year so that we can be clear on what success looks like. 
+
+Answer_47:
+
+    We haven't gotten a lot of feedback yet. So there will be more to come. But we're going to be geared up to do it. And I think we want to be best-in-class in CCAR. The answer is [absolutely positive] in PPNR. I mentioned just one -- idiosyncratic exposure and risk in PPNR. When you go through a stress test, you can assume that your company is just dealing with all those macroeconomic factors with your forecast. You can assume your company is going through those macroeconomic forecasts plus you're under some other kind of stress and you can lose market shares. Obviously that would change your PPNR. So we'll be having more dialogue and trying to figure out and make sure we do the right thing here. 
+
+Answer_48:
+
+    No. This is just a resubmission of the progress program. And they like to see qualitative improvement. This is not a change of request at all. This is the one that Marianne referred to that will be in the third quarter. 
+
+
+    We'll obviously do another CCAR in January. 
+
+Answer_49:
+
+    No. The through-the-year accruals is almost exactly the same. It's based upon -- there's a lot of stuff that goes into that number but that really hasn't changed that much. 
+
+
+    Yes. And actually you've got to normalize out the DVA, which was a large loss last quarter. If we normalize that out, revenues are down. So it's not comped down on revenue. (multiple speakers) 
+
+
+    I was referring to that we're constantly putting in new operationals, new systems to reduce overhead. Marianne already mentioned a bunch of things we're doing in Mortgage. You're seeing similar efforts in Consumer. That's a constant effort. We do have names for some of them, by the way. I'm just not going to mention them here. 
+
+Answer_50:
+
+    No. 
+
+
+    No. 
+
+Answer_51:
+
+    I think you're referring to the CTL, the commercial term lending, which is lending against multi-family. And we have seen growth in it. Remember, that stuff is like 65% LTV. It did great through this last downturn so we're very comfortable with that kind of lending. I forgot where you --. 
+
+Answer_52:
+
+    I would say a little of both. 
+
+Answer_53:
+
+    Are you talking about the commercial bank or the total Company? 
+
+
+    We would expect to be flat to down a little bit as companies use their -- they have a lot of deposits. So I think we, at Investor Day and earlier, told people they were really high and we expected it to come down, particularly before people start using their revolvers. So they do relate to each other. 
+
+Answer_54:
+
+    I don't know the answer to that. 
+
+Answer_55:
+
+    We did a whole page for you on where we thought the through-the-cycle reserve levels should be by business. And there are some businesses -- mortgage, most obviously -- that still have a way to go. And there are other businesses in the wholesale space, in the commercial bank, that are below that through the cycle. I would refer you back to that page. If you do the numbers, from recollection, on an annualized basis, our charge-offs have been more like $7 billion or $8 billion, which, while that is not dissimilar to charge-offs we've seen, it's for different reasons. So I would take a look at that page. 
+
+
+    It's mostly mortgage that will come down. Think of everything else as close to normal. Mortgage, which in total is $9 billion, will eventually be a lot lower than that. But that could take a couple of years. 
+
+Answer_56:
+
+    To talk for us specifically, as you probably know, we've been very successful and proactive as it's relating to HARPing our own book. And by the end of this year we fully expected to have been as successful and mine that as far as possible, or they will carry on. That's not the case in the industry. So it's great news that HARP was extended out to the end of 2015. And it will allow for other servicers to get their ducks in a row and potentially to have cross service to HARP. Which, in turn, should be good in terms of volumes, although I don't think it will be a step change. For us we're not expecting it to be a significant difference in our production or in our MSR value. 
+
+Answer_57:
+
+    We talked about we peaked in our HARP volumes in about second quarter of last year. I think overall, first half of last year was high, came down slightly, overall 15% last year. We talked at Investor Day that we thought that would go down to the high single digits this year, and it is, in terms of percentage of our production. And we are very active and have been very proactive in mailing our HARP population. And expected to have completed the program by the end of the year. So we were on track and this doesn't change our expectations. 
+
+
+    I think the total -- if you take all mortgages, I think the number's like 4 million would be HARP-able today if they went to it. I'm somewhat surprised that more people don't do it, to tell you the truth. Anything the government can do, either PR, I think the cross-servicing is probably a bigger one, will make it slightly better. The thing was just slightly better. It's not going to dramatically change mortgage. 
+
+Answer_58:
+
+    We hope so. We don't know any better than you. 
+
+Answer_59:
+
+    You really have to ask them. We'll leave this to them and the regulators, okay? 
+
+Answer_60:
+
+    You've got to ask them. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/2_questions.txt

@@ -0,0 +1,240 @@
+Question_1:
+
+    Good morning, Marianne. On the last point about NII outlook, what are the drivers of the strong growth(technical difficulty)? 
+
+Question_2:
+
+    Can you hear me? 
+
+Question_3:
+
+    Sorry about that. Can you tell me on the NII outlook, what are the drivers of the strong growth in earning assets you expect that you just mentioned on the NII page? 
+
+Question_4:
+
+    Okay. And on the expense outlook, you mentioned for the adjusted expenses to be down about $1 billion. What's the base that we should look at for you to be down from? Do you have that? 
+
+Question_5:
+
+    And what was it in the first quarter? 
+
+Question_6:
+
+    Okay, got it. And then can you repeat your outlook on the default servicing expense line? That came down a lot this quarter nicely and you mentioned the target for the end of the year. 
+
+Question_7:
+
+    Okay. And then the litigation dropped significantly this quarter. I think you said it was immaterial this quarter on the litigation provision. Is that right? 
+
+Question_8:
+
+    Okay. And the last thing is on the buybacks. You did a healthy buyback this quarter but the share count didn't shrink that much. Is the first quarter heavier than usual in terms of your issuance? And the question's getting at, would $2.6 billion of buybacks in other quarters be expected to shrink the share count in quarters when it's not the first quarter? 
+
+Question_9:
+
+    Okay. So your issuance is more weighted towards the first? Is that right? 
+
+Question_10:
+
+    I'm just getting at how that translates to reduction in the share count. It's offset by what you do issuance, right? -- each quarter? 
+
+Question_11:
+
+    Was this a normal quarter of issuance? So a $2.6 billion buyback keeps the share count flat? Is that the kind of ratio we might expect? 
+
+Question_12:
+
+    Okay. But it was steady throughout the year. That's what I was getting at. 
+
+Question_13:
+
+    First one. The first deadline for compliance with Central Clearing came and went, and it clearly didn't have much of an impact on your first-quarter FICC results. So I'm curious, I hear commentary in the market that a lot of clients might not be ready for either the second or the third deadlines later this year. Curious what you're expecting and if you do think it could produce any hiccup in activity levels. 
+
+Question_14:
+
+    And even on the wait and see, if some aren't ready, do you think of that as a temporary and just literally a function of processing, not -- maybe we don't need insurance anymore because it's too expensive? 
+
+Question_15:
+
+    Right. Okay. Marianne, on the RWA front, a bunch of little things in here. But Basel I RWAs were up 11% quarter on quarter but Basel III were pretty much flat. I know that has something to do with 2.5 starting in the first quarter. But if you can help us. 
+
+Question_16:
+
+    So that leads into the comment you made towards the beginning on any passive runoff and model enhancements are not pulled forward in your results. And I think you said it could be about 100 basis points. Is there a dollar amount of RWA natural runoff that we should be thinking about? Because obviously capital's building. 
+
+Question_17:
+
+    Will do. Last one, Jamie. I know you addressed some of this in your shareholder letter. But between everything related to Basel III -- stress test, Dodd-Frank -- in place already, and then OLA and living wills coming online, it feels like we're going down the path on containing too big to fail. But yet there's a steady drum beat, including Brown-Vitter, to change things. Just curious on where we're headed in this and what will stop the drum beat. When is enough enough? 
+
+Question_18:
+
+    Couple of follow-ups on RWA. How much of the passive mitigation was embedded within the RWA results for Basel III this quarter? 
+
+Question_19:
+
+    Okay. So, really, that's going to come later this year, is what you're saying? 
+
+Question_20:
+
+    And then on the NIM and the LCR, there's obviously an interplay there. And could you just give us an update on where you are with the LCR this quarter? Because your NIM decline this quarter actually was a lot lighter than what we were expecting. 
+
+Question_21:
+
+    Right. Okay. And then lastly, just on the CCAR conditional approval, can you just give us a sense? Because I think people were a little bit surprised to see that you had the conditional approval results and yet you were able to do the buyback and the dividend hike that you asked for. So the underlying question is, what can you speak to with regard to what's being asked? And what kind of time frame do you think you have for satisfying the regulatory requirements here? 
+
+Question_22:
+
+    Just a follow-up on the question on litigation. That dropped to the $0.3 billion. Is that potentially -- are we now adjusting to a lower level? Or was that just noise in what is an extremely volatile number bouncing around a little? 
+
+Question_23:
+
+    Sure. Okay. But said another way, you guys don't see anything changing in the environment that would lead you to believe or be comfortable with a lower level of assumption of litigation expenses when we think about you? 
+
+Question_24:
+
+    Let's hope so. Okay. And then the spread in mortgage compression was meaningful here this quarter. What inning do you think we're in there, ballpark? I know it's tough to predict, as well. 
+
+Question_25:
+
+    Okay. So this is the right way to think about it. That helps. And then last one from me, when you think about your cap markets business and the pending change, you guys chatted a little about it with Glenn on the swap clearing, that June seems like the bigger date, Basel and all of the subsequent changes to the competitive environment, competitors adjusting the size of their business and what have you, how do you feel about your business there, particularly on the fixed side, more capital intensive businesses? Do you think that this presents an opportunity to maybe go through review and right-size, maybe increase the efficiency measures there? Or do you feel comfortable keeping your business where it is, roughly? 
+
+Question_26:
+
+    Good morning. I just had one follow-up question to Betsy's inquiry on capital return. Clearly we now have two years of this stress test behind us. And you were initially approved in 2012 for a $15 billion buyback and $6 billion this year. What does the Fed need to see -- and you're building capital, clearly -- what do you think the Fed needs to see from you in terms of the qualitative issues, to get back to the kind of capital return that they clearly in 2012 -- they thought you had plenty of capacity to pay out? 
+
+Question_27:
+
+    Okay. And given what you just mentioned, is it too optimistic to assume for next year a buyback in the $12 billion to $15 billion range? 
+
+Question_28:
+
+    Loan growth, it's a little bit softer. And I think you mentioned there was some push forward to the fourth quarter. But you also mentioned more competition and lower levels of demand, if I heard you correctly. So my question is how much of the softer loan growth is due to JPMorgan perhaps pulling back and how much is due to the economy? 
+
+Question_29:
+
+    So, really, on the lower level of demand, what was your loan utilization in the first quarter versus the fourth quarter? 
+
+Question_30:
+
+    I'm sorry? 
+
+Question_31:
+
+    32%? 
+
+Question_32:
+
+    And so what's that? Flat or down a little bit? 
+
+Question_33:
+
+    Flat. And is that just -- why aren't people borrowing more? 
+
+Question_34:
+
+    Okay. And then a separate question, looking at the annual report. Page 4 of the Chairman's letter refers to regulation and some of the issues that you faced, and said we will see more of these. So when you say we will see more of these, Jamie, what are you talking about? Because people's imaginations can go in a lot of different directions. Are we talking Department of Justice, SEC, FBI? Were you thinking of anything in particular or in general or a time frame? And really what I'm asking you to address is the regulatory tail risk of we don't know what we don't know in terms of potential government moves as it relates to JPMorgan. 
+
+Question_35:
+
+    Okay. And was there anything new as part of the '11 hearings that would change the way you would think about the London Whale incident because there was some pretty damning information, some unknowns, at least to those of us who follow the Company. But from your perspective, is there anything else you need to do as a result of the information from those hearings? 
+
+Question_36:
+
+    And then, lastly, when you talk about some additional changes that need to take place -- and I think some of these are organizational -- is there anything major new that you did not cover at the Investor Day recently? 
+
+Question_37:
+
+    Good morning. I wanted to drill down a little bit on the mortgage side of things. Mortgage originations were a little bit stronger than we expected, up about 3%. Applications were down about 8%. You suggested that you thought the gain on sale margins might be relatively flattish going through the next couple of quarters. I'm just curious as to what your thoughts are in terms of the mortgage origination market away from the gain on sale issues that you've been facing. 
+
+Question_38:
+
+    And then, Marianne, a question on NIM. Clearly, your moves on the LCR had some effect on NIM over the last quarter or two. Can you separate what you think the net interest margin movements will be for JPMorgan, excluding your moves for the LCR? Or is it just so intertwined that you really can't do that? 
+
+Question_39:
+
+    Okay. And then, just finally, we saw a fairly sizable decline in value at risk, both in the CIB and overall. Can you give us a little more color as to what's going on there and what we might be able to expect in the second quarter? 
+
+Question_40:
+
+    A couple of clean-up things. When you are looking at getting to the 9.5%, did you factor in that 100 basis points or is that something that would be on top of that? 
+
+Question_41:
+
+    Got it. Okay. And talking qualitatively about the CCAR process also, there was a pretty large impact on PPNR, which seemed to be like the Fed's looking at pretty harsh -- a pretty harsh look at trading losses. Have you had any clarity from them about whether they're looking at that revenue stream differently than other banking revenue streams? 
+
+Question_42:
+
+    Okay. And then, lastly, on the mortgage business, it looked like in the core production, the expense reduction was about 50% of the revenue decline. How do you think about, as that business continues to normalize, as you said, it's probably mostly normalized from a gain on sale perspective, although you probably have some volume issues as we go through the rest of the year. How do you think about the cost structure of that business as you go forward? 
+
+Question_43:
+
+    Good morning. I thought this was one of the cleaner quarters in a while. So I just had one follow-up here. In the private equity, you took some losses from the private portfolio. Just wondering what drove that. And then also the outlook for this business under Basel III and Volcker, even though we don't exactly know what Volcker is yet. 
+
+Question_44:
+
+    Is there any seasonality in terms of getting year-end or mid-year statements on the private portfolios? 
+
+Question_45:
+
+    The first thing I wanted to ask was if we could dig in a little bit on the repurchase losses within mortgage servicing. Such a big swing versus the fourth quarter, an $81 million -- it sounds like a reserve build because I think I heard you say that your actual realized losses were not significant. And yet the guidance remains that it should be a net zero. So it just seemed like there were a lot of moving parts there. I was hoping maybe you could give us a little sense for why you had the $81 million hit. 
+
+Question_46:
+
+    Okay, thanks for that. With regard to the CCAR process and some of the changes that the Fed is asking you to make, first of all, just qualitatively can you give us a sense for the amount of dialogue that you have with the Fed as you work towards satisfying their request, so that you really know exactly where they thought the deficiencies were? Or is there a lot of guesswork for you on that? 
+
+Question_47:
+
+    Okay. And just if I can follow up on I think it was Moshe's question about the PPNR. It sounded like you were saying that many of the deficiencies that they were focusing on were in the inputs to the calculation of the stress PPNR specifically. Did I understand that right? 
+
+Question_48:
+
+    Okay, that's very helpful. Thanks. I hope this doesn't sound too crazy but just to think about it the other way, is there any chance that after the resubmission, or as part of the resubmission, given how close you are to your Basel III targets, and with some of that 100 basis points coming in, is there any chance that you would ask for and could get an increase for this year? 
+
+Question_49:
+
+    Got it. And then final question. You mentioned, Jamie, in the shareholder letter that just because you don't have big fancily-named cost-cutting programs, it doesn't mean you're not very focused on cost reduction. Is that what we're seeing in the fact that if you look at the CIB your comp was down 7% versus your revenue being plus? Or is it that you did something different in the way you think about through-the-year accruals? 
+
+Question_50:
+
+    Okay. But there's nothing different, like you said, in terms of the way you accrue for bonuses within the investment bank? 
+
+Question_51:
+
+    Thank you. Good morning. I had some questions on the Commercial Banking line of business. You had a nice increase in the real estate lending area in the first quarter. It looked like it was about $9 billion after four quarters of essentially flat to down real estate loans. Can you give us some color on where the growth was? 
+
+Question_52:
+
+    Are you guys finding greater demand or are you just more comfortable with it now than you were maybe a year ago? 
+
+Question_53:
+
+    Following up on your answer about corporate deposits dropping in the quarter, which obviously is a good sign if companies are using this for capital improvements, what's your outlook? Do you expect that to continue? Should we see that as a continued positive trend? 
+
+Question_54:
+
+    I agree. Are your guys on the front line hearing that from your customers, that they expect to use more for the remainder of the year, do you think? 
+
+Question_55:
+
+    Okay. Coming back to loan loss reserves, obviously you've got a great capital position. You pointed out that Bernanke has indicated that the banking system is super strong going through the stress test. With the current level of loans of about $729 billion, what would be a normal reserve level in normal times compared to where you are today? 
+
+Question_56:
+
+    Yes, thank you very much. I know a lot of my questions have been answered but we saw yesterday that they extended the HARP out another two years. And there's also some discussion coming out of some of the -- inside the White House, really, that they could put some type of PR plan behind HARP to try to get more people to HARP. Do you think this will have any impact at all in getting more people off the sidelines and refi-ing through the HARP programs? 
+
+Question_57:
+
+    I don't know if you can disclose this or not, but how much do you think you have HARP eligible? And how many of those HARP-eligible loans did you do on a percentage basis? Do you think you've touched most of them already? 
+
+Question_58:
+
+    Okay. I think a lot of companies have told us that they think that they've gotten through most of the low-hanging fruit with HARP, and that the people that aren't HARPing they doubt they will ever HARP. So I'm just wondering, if there's a big PR push, if some of those guys will wake up and say -- maybe I need to look at this program. 
+
+Question_59:
+
+    A quick question back to the Brown stuff that's hanging around out there. I'm reading what everybody else is, that they're looking at a 10% capital ratio, with the possibility of another 5% buffer on top of that. And basically throwing away the concept of risk-weighted assets. And more or less eviscerating Basel III, as far as I can see. Do you guys have any sense where this 10%, 5% number comes from? Is there some empirical evidence? Or is this just a back door way to try to get the biggest banks to break up? 
+
+Question_60:
+
+    Do you have a sense where the numbers are coming from? What that 10% capital ratio, where it comes from? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/30_answers.txt

@@ -0,0 +1,144 @@
+Answer_1:
+
+          Good morning, Brian.
+
+Answer_2:
+
+          Bryan, it is Muhtar here. Good morning again. In North America, I will start with North America, I'd say that the outlook appears to be trending a little positive, raising hopes that potential wage growth and lower fuel prices could translate into consumer spending. In Latin America, Mexico is, the best way I would say is, relatively stable and continues to track closer to the United States, because they're so closely linked. Brazil continues to deteriorate faster than we expected. I'd say that.
+Venezuela continues to increase as a concern given the growing difficulty on maintaining supply in the marketplace. And Argentina just continues to be challenging. And Colombia is again a star in Latin America in terms of performance and macro conditions.
+In Europe, I think there are also some green shoots on the back of monetary easing, but it's early days. That just started. Deflation still remains a concern this year, and overall, consumer spending in Europe I would say is still sluggish, as it will take time for I think monetary easing to flow to the consumer pocket and translate into increased consumer spending, and then risk to recovery [remains] a still volatile environment. Then of course you have the possible Greece exit issues lingering on.
+In Eurasia and Africa, Russia continues to see significant challenges, the Russian consumer, and we expect it to continue to remain challenging throughout the year this year. Sub-Sahara Africa is a strong bright spot, and we are seeing that in our results. And then Middle East, we have got some pockets where it's defying the geopolitical environment, but overall, obviously increased geopolitical risks there.
+Then in Asia and Pacific China continues, the disposable incomes, consumer spending, CSE in China continues to decelerate. We saw that happening in Q1, versus the stated GDP of 7%. Japan remains sluggish, I would say similar to Europe, although we are starting to see some green shoots in the economy.
+And finally in Asia-Pacific, India continues to be a bright spot I would say inside the BRIC end markets, the four BRIC markets. That's a walk-through.
+Then the commodity environment, again, talking about what we can control and what we can't, remains fairly benign, compared to previous years, stable and benign. Given that value growth for us is highly correlated to PCE growth, I hope I have been able to give you a quick walk-through of what is good and what is not so good and what is more stable.
+
+Answer_3:
+
+          Brian, as Muhtar just said, commodities for us will be benign this year. In this quarter, and the first half we're cycling higher prices, in the first half of last year. And thinking about something like oil, oil doesn't really impact us. For our commodities, we are hedged. We basically are not going to see specific benefit there, and they are going to be basically benign.
+
+Answer_4:
+
+          Okay, John, I will take the first part of that question. The gallons and the cases definitely, when you make the adjustment for days, gallons are behind cases, and that will moderate. That will be based on, as you just said, what we see in the first quarter is the higher revenue for CSE, and so we did benefit from positive geographic mix in our price mix. That will moderate.
+We will start to see when it catches up more of the geographies that provide the lower revenue for CSE coming through, which will then give us the negative geographic mix coming through as well in the balance of year. I think the second part of your question, on the outlook of pricing, Sandy, do you want to talk about at all the North American pricing specifically?
+
+
+          Sure, Kathy. Good morning, John. The North America pricing situation is really the continuation of the strategy that we have been talking about for the last year and a half. Irial and I talked about this I think six calls ago that we were going to focus our business on the sustaining strategy of disciplined price and volume mix to maximize revenue, with an emphasis on price as a driver in the US business. That is exactly what we have been doing, and what we continue to plan to do with a lot of discipline and focus.
+As you look at the first quarter, if you look at each business by themselves, we met our pricing objectives in the first quarter. We saw a little bit faster growth in our fountain business, which created a little bit of negative business mix, but net-net, the year started according to plan. We see the outlook as being rational, and our strategy remains very consistent. Ahmet, you want to talk about Europe?
+
+
+          Thanks, Sandy. Hi, John. Just a couple of comments in general and then Europe, we are following exactly the same strategy of managing our product mix and price versus volume around markets international. In fact, we are getting some pretty good results in many of our big markets. Specifically in Europe, one must remember that last year, we have had some fairly aggressive pricing, which resulted in our view somewhat of an imbalanced progression of our business, where we have lost some market share, but got great pricing.
+We were saying before that we would be moderating that somewhat this year, so that we have a more balanced growth of volume and revenue. What you saw in the first quarter is a result of that moderation, but we do believe that we would be achieving reasonable price mix in Europe in the course of this year.
+
+
+          John, this is Muhtar. I will just add one other point, which is related to what I already mentioned, that we are reorganizing and have reorganized our marketing around the different clusters of developed, emerging, and developing markets. I think that is also working, beginning to yield some early results, and I think our new marketing leadership is very committed and very much part of this new reorganization of our marketing around the clusters. I can say very clearly that marketing is playing an important role in how we are generating enhanced revenue in our business. That is really an important takeaway, I think.
+
+
+          Thanks. I feel good. It is just my voice.
+
+Answer_5:
+
+          The price mix obviously is 3 points, as I just spoke about. We did benefit from positive geographic mix in the first quarter. As we will get as concentrate shipments and timing starts to catch up, we will have the impact of a negative geographic mix which for us is not a surprise, in that it is normal run rate for several of our geographies.
+We did get the pricing in the quarter and the benefit. Then the other side of that would be the costs, and when you adjust for structural, and you adjust for currencies, cost of goods is really in line with concentrate shipments.
+Then the other issue would then just be commodities, and then as we said the commodities are basically going to be benign for us, and in the quarter, we are cycling higher costs from last year. That was a slight benefit. For the most part, I'm looking into the rest of the year, commodities are going to be benign. It is really basically the pricing that we got this quarter, offset by the costs that were better than prior year because we cycled better costs.
+
+Answer_6:
+
+          I also would add one other thing in addition, in North America specifically, we had better business mix, which basically was around our food service business. For the first quarter, in a transition year, we are obviously very pleased with our results. And I would say that I would expect pricing to moderate for the back half of the year, and to continue with -- the cost of goods sold continue to be in line with the concentrate shipments. We were basically given the quarter in line with our expectations and we expect to be in line with our full-year expectations that we have provided.
+
+Answer_7:
+
+          Steve, the comments I would make about overall pricing are, to reiterate what I said earlier, which is that on a business by business basis, our pricing results in the first quarter were solid. You saw in Nielsen, very strong price growth. Some of that was driven by wholesale improvement that we were achieving with our customers. Some of it was lapping some really aggressive promotional activity that happened in the end of February and early March, and some of it was our customers making more money in the category. The net effect of it was a really good start to the year, in line with our plan.
+If you cross our business over into our chilled Minute Maid business, we saw price realization there. We launched some new items that drove some incremental revenue. Then as I mentioned, the fountain business was stronger than we expected at the beginning of the year, which creates a business mix drag overall.
+What I would say from a profitability standpoint is that the combination of rate and mix was in line with our expectations, but I would also point out that as we get into the second half of the year, you are going to see more difficult pricing comparisons. We will continue our strategy of rigorous and disciplined and focused price volume management, but we will be lapping ourselves, and we'll be continuing to do so, but against a little bit tougher comparison. Net-net, off to the start we had hoped to. Irial, any additional dimension?
+
+
+          (Inaudible) repeating what you said, but I'd go back, and I've said this for six calls. We are being very disciplined and rational about our pricing. What we achieved in the first quarter is pretty well in line. Sandy's mentioned there's maybe some channel mix impacts in there, but generally speaking, very much in line.
+We intend to stay disciplined, and I'd used the word [nearly] be boring in terms of how we approach the business. We want to remain disciplined and focus on doing the right things for the business. We believe we are on a good track. We intend to stay on that track, and I think as each quarter goes by, you will see positive momentum in the business.
+
+
+          Can I just add one more thing? What Irial just said then creates the environment for our small packages to grow. The consumer is moving strongly to small packages, and we are continuing to see low- to mid-teens growth in those packages, and all of which is supported by the impact of a step-up in marketing, which gives the whole thing more sustainability, as we work through the more challenging comps.
+
+Answer_8:
+
+          The expected margin improvement over the balance of the year, as Sandy just said, so we got good pricing in the quarter. Irial said we are very focused on continuing to rationally price. We have higher comps in the back half of the year for pricing that we have to cycle.
+As far as the refranchising is concerned, I wouldn't expect to see much benefit at this point from the sub-bottling payments. And as you know, if you look at it from an (inaudible) perspective, we structurally adjust those. We pulled them out. We pulled the benefits, so would we put it back on an apples-to-apples basis year-over-year.
+There is not a big difference at operating versus PBT in our North American operations at this point. For the margin expansion, that is basically really good pricing. As we get really good pricing in the fourth quarter of last year, they are very focused on pricing. That will continue, but we are cycling higher prices in the back half of this year.
+
+Answer_9:
+
+          Good morning, Bill.
+
+Answer_10:
+
+          Bill, on Diet Coke, I would describe Diet Coke still as a work in progress. We have done a number of things on the basics of marketing, graphics, advertising, packaging. We have some very advanced big data driven customer relationship programs going on, with consumers who love Diet Coke. We are seeing some improvement in the year-over-year revenue, but we are still very much focused on that as a work in progress and expect to.
+But I would say this. The team and I, and our whole system, believe that in fact we will return Diet Coke to growth in the long term, but recent improvement, but still work in progress.
+On refranchising, the refranchising is going according to plan. It is, as we said before, a massive project. We are putting the entire system in on a common ERP system, and refranchising the territories one sales center at a time, to make sure that the capability that we build continues to grow, and that our customers are well served in the process. We are pleased with the progress. We have a plan in place that we expect to meet or beat, and we are always looking for opportunities to accelerate it, but not at the expense of really high quality customer service and capability.
+
+Answer_11:
+
+          Ali, this is Muhtar. First, if it wasn't for the savings, we would not be able to do what you see us doing in terms of generating that increased marketing, generating all the other things that basically are part of our five point strategy of focusing on revenue, focusing on productivity, focusing on better and more marketing, rewiring the organization for better impact, and focusing on our core, which is the franchising that we talked about.
+I would just say to you, had it not been for the productivity, we certainly would not be able to enable our organization to generate the kind of momentum that you see beginning to come back in. That is clear. There is no question about that.
+This is not a four or five sequential compartments. These are a very integrated approach to how we bring more momentum into our business, and everything that I mentioned is happening at the same time, more better [wired] organization, better marketing, marketing that works around clusters, more effective marketing, linked to social media, as well as into a better cost per GRP, all of that funded by incremental productivity. I think that is how you need to see our entire different buckets of our strategy coming to life.
+
+Answer_12:
+
+          First, I will just say that I agree with you, that those bottlers are doing really well. Germany is certainly a star in Europe. Southeast Asia bottlers are doing well, particularly Vietnam, the big one that we are running. I think it is important to keep in mind for you that Germany was not in a position to be re-franchised until after 2012, because the consolidation was still taking place. It is really been ready for the last, I feel like 18, 24 months.
+It has been the real bright spot in Europe the last couple of years. It is profitable. We need to ensure that we find the right home and the right structure and the right value. And so I could be clear with you that Germany is not a strategic long-term holding, and the right home will be found. None of our, if you like, [BIG] operations are in a way long-term strategic holds. That is what I would say about your question. Irial, you want to add anything to that?
+
+
+          The only add I would give is the three markets you mentioned actually are not in a hospital ward. To Muhtar's point, actually they are all performing very well now. We have been very transparent about re-franchising. I've said this many times at conferences that we would re-franchise at the right time. Germany, we've clearly said is ready for re-franchising.
+In the meantime, it continues to perform exceptionally well. We have a fantastic group of associates and management in Germany, and feel very good about it. I have also said we expect to get a fair price. Not get overpaid, but get a fair price for territory because we owe that to our shareholders. We take it from there.
+
+
+          Just to build on what Irial said, we are looking for three things in terms of the right partner, description of the right partner: one, proven management team; two, strong financial capabilities; and three, willing to invest in the business and grow the business. Those are the three things. I am confident that we will reach that goal.
+Finally, on your question regarding head count reduction, I think you have heard about our previously announced plan, and we are sticking to that plan, simply said.
+
+Answer_13:
+
+          Ian, it is Muhtar. It fits right into the strategy of what we said is bolt-on acquisitions where they make sense, and we will look at them, and where we believe that they fit into our portfolio, where they actually add value. We can generate value for our bottling partners through that acquisition, and it fits right in there, and so that is all I would say about that, Ian.
+
+Answer_14:
+
+          Our equity income is impacted by currency. We actually don't pull out all of the currency that impacts that because if you think about some of our locations, they have, their geography, they have many geographies. When we report, we take the main currency, and translate that into US dollars. That means that there is still often a lot of currency impact in those numbers. I would read into it that it is a very, very difficult currency environment out there at the moment.
+
+Answer_15:
+
+          No, there is nothing one-off that I'm aware of in the equity holdings.
+
+Answer_16:
+
+          Good morning.
+
+Answer_17:
+
+          I guess, Bill, the way I'd think about it is if you take our unit case sales of one and use that as a surrogate, because that doesn't have the extra days in it, and you take pricing of three, (inaudible) pricing, and then I would say that did benefit from positive geographic mix. That will moderate over the back half of the year, so I guess I would think of it using this price mix and average unit sales, unit cases.
+
+Answer_18:
+
+          The operating expenses, I would say no, there was nothing specific in operating expenses that was helped by the 6 days. Then the sales and distribution expenses are impacted by the 6 days so they wash out, and I would say there is nothing there.
+
+Answer_19:
+
+          Again, I hate to keep repeating myself, but then we did benefit from the size of the geographic mix, so I think the only thing I would say in terms of it will moderate in the back half of the year. We will get more of our normal run rate of negative geographic mix from concentrate shipments.
+Then Sandy talked about the impact of the business mix with the food service business in North America. I think those are the things that basically would say that that number will moderate over the back half of the year, as we are still in a transition year.
+
+Answer_20:
+
+          Yes, there is no issue there. We always expected it to close in the first quarter. Then basically just the regulatory process that we have to go through that is delaying the close. We fully anticipate that it will close.
+
+
+          Certainly.
+
+Answer_21:
+
+          Good morning.
+
+Answer_22:
+
+          Hi, Judy. On the structural, the structural is impacted by the timing of the Monster transaction. Then any time we accelerate into the re-franchising, that is also going to impact our numbers. That is why we gave you different structural guidance.
+Then on the re-measurement gain, yes, that is basically, where we re-measured that euro debt, that impacted currency positively, and so that is what changed the outlook for currency over the back half of the year, and also the impact of Venezuela and change, using the Simadi rate going forward.
+
+Answer_23:
+
+          The distribution is starting to transition. It has not fully transitioned. That transition will take place over the year, and so at various times, that is not something that is really under our control. That is really under Monster's control, as they transition that. We put an estimate of how we think it is going to transition, so it is not something that is already into our numbers. That is what is slowing up, slower than expected. We expected it to start earlier.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/30_questions.txt

@@ -0,0 +1,101 @@
+Question_1:
+
+          Hi. Good morning, everyone.
+
+Question_2:
+
+          I guess as we look at this quarter, it just seems like some of the things that you laid out at the beginning of the year that were within your control have tracked in line, maybe even a little bit better than expected. It sounds like the refranchising in North America is pacing maybe a little faster. Closing the Monster transaction is taking a little bit longer, and it sounds like you're tracking pretty well in terms of cost savings and redeploying or spending more in marketing.
+I guess when we think about the factors that are outside of your control, which would be I guess some of the macro factors, the change in the Venezuela exchange rate, how some of the markets are moving, I'm not sure if we have a great sense for maybe what is worse or what is better. If you could just maybe lay out for us versus where you were earlier this year, when you initially gave us guidance, what is better and what is worse, especially focusing on some of the things that are outside of your control?
+
+Question_3:
+
+          That is very helpful, Muhtar. Thank you. I didn't mean to have you talk so long. Your voice is definitely under some pressure this morning. Kathy, if I could, just one follow-up on the commodity piece, the comparisons were a little bit better in the first quarter. Just looking forward, is there anything that we should be looking at that could make it maybe more favorable as the year goes on? Like how much of it is locked in and how much of it might move based on commodity movements? Thank you.
+
+Question_4:
+
+          Thank you. I wanted to follow up on two questions related to the price mix number which is I guess one, if we look at the gallon variances you mentioned, it skews a little bit more towards high revenue per case. Can you give us an idea in the quarter in terms of how much of that benefit in geographic concentrate shipments, how much we'll need to take out over the balance of the year?
+Then going back to some of the comments that you guys made, I think back in December, about a different global pricing strategy in terms of really trying to find the right balance region by region, can you talk about the outlook for pricing in Europe? It was obviously price mix was flat this quarter, but that's one where it seems like there are some opportunities going forward. What is the medium to longer term view on pricing in Europe? Thanks.
+
+Question_5:
+
+          Hi, guys. I will give Muhtar's voice a break, and maybe start with Kathy. The quarter came in better than expected from a margin perspective clearly versus consensus, but with the extra shipping days and Easter shift, it is tough to judge your margin performance. I was just hoping you could give us some perspective on where margins and profit came in this quarter versus your original expectations, and some of the key puts and takes in the quarter, again versus those original expectations.
+
+Question_6:
+
+          Okay. Then net-net, when you put everything together, would you say from a profit standpoint, or margin standpoint, where did the quarter come in versus original expectations at the corporate level?
+
+Question_7:
+
+          Thanks. Muhtar, feel free to weigh in, but I will also try to give you a break and direct questions to Sandy and Kathy. Guys, on North America, the price realization was solid, but it was actually a little lower than I at least had expected just based on market data. I know were you lapping some fairly intense retailer promotions, so maybe that played a role. Maybe it was again negative mix from still. I know you mentioned fountain dynamic, Sandy. I was hoping you could just expand on the trends there and whether you think 2% is a representative number for the year, at least in terms of way you're targeting it.
+On a related note, I was wondering if you could dimension for us the profit contribution to this price mix you're getting. Because clearly, if it was all rates, pure rate, then it would flow through 100% to profit, all else equal, but given a lot of what we're seeing is category mix and these are just introduction of new package types, I'm wondering how to think about the profit contribution. Should we be assuming 50% as a rule of thumb, roughly? Or are there reasons to be more optimistic or cautious related to extrapolating price mix to profit flow-through?
+
+Question_8:
+
+          Okay. Maybe if I can just follow-up, related theme, different angle, and maybe this is for Kathy, but I noticed you changed the reporting of regional profit to profit before tax, so regional operating profits, to profit before tax, consistent with the incentive changes you made.
+North American PBT was up like 100 basis points, 180 basis points or so, but I was wondering if you could comment, A, if there was any material benefit from sub-bottling payments in the quarter, and B, if [OI] margin trends would have mirrored PBT?
+Then assuming so, how much of that 180 basis points improvement was driven by some of the better pricing realization, the better productivity, commodities, that can continue as a run rate versus timing benefits in the quarter related to the Easter and the calendar shift? If 180 is representative of the underlying OI trends, and then what is the real run rate that we should be thinking about as expected margin improvement on the year? Thanks.
+
+Question_9:
+
+          Thanks, good morning.
+
+Question_10:
+
+          I guess two questions, I will lump them together. One, on Diet Coke in the US, it did look like most recently the Nielsens looked like actually a positive number, and we haven't seen that in a while. I just wanted to see if maybe the trends, you feel like you've gotten behind that, where we could see some growth going forward or at least stabilization?
+Then the second question, on the refranchising, anything you have seen thus far? I know it is early, where it is may be accelerated even further in terms of the bottler network, where it is maybe you have more of an update later as we move through the year?
+
+Question_11:
+
+          Hi, guys. Throughout the press release and your commentary, we pleasingly had heard and read about marketing increases, so that is a good thing. That is very much on plan. However, we didn't really see or hear much reference to cost-cutting benefits offsetting or funding some of those at this point.
+The only thing you said was we are on track for $500 million of cost savings this year, but we are not hearing or seeing a lot of that flowing through, even offsetting things. I'm not saying all the way to the bottom line but at least offsetting some of your investments. When can we start hearing more about that savings offsetting your investments?
+
+Question_12:
+
+          A follow-up on that, and a separate question for Irial, just to follow up on that, Muhtar, if you could, is particularly in terms of the head count reduction and the savings there of, should we see that ramping up throughout the year?
+At risk of being cut off, let me (inaudible) my second question here on a separate topic is we do keep hearing Germany, India, Vietnam bottlers in [BIG], continuing to do actually quite well. I always pause whenever I see that, and obviously there's been controversy about some of those names including (inaudible) Germany, but when is the right time to divest those and get them out of the hospital ward? What are you looking for to make sure that happens or potential buyers are looking for at this point to commit to buying them?
+
+Question_13:
+
+          Good morning. You announced a deal in China last week, and I was just keen to get a bit more detail of quite how that fits in. It is obviously a very different structure to what we have seen with the more recent deals of Monster or Keurig.
+
+Question_14:
+
+          Okay. Thank you. To follow up, for Kathy. I know it can be quite volatile but equity income at this time has almost gone to zero. Is there something specific in that that's causing that?
+
+Question_15:
+
+          Okay. This is not a case of there being some big one-offs in some of the equity holdings there?
+
+Question_16:
+
+          Hi, good morning.
+
+Question_17:
+
+          Is there any way to strip out what the benefit in the quarter was on the operating profit side from the extra days?
+
+Question_18:
+
+          Okay, but there is no fixed cost leverage or anything with the extra days that might have helped the gross and operating margin?
+
+Question_19:
+
+          Okay. That is very helpful. Just on BIG, the year-over-year margin expansion was awesome. Massive. What is driving that, and how sustainable is it?
+
+Question_20:
+
+          Okay. Great. Then just lastly, very quickly, the delay in the Monster transaction, is there any more color you can give us on why? I think it was supposed to close maybe late 2014, early 2015, and then you guys said March, and now it is towards the end of the quarter. Is there still a high probability that it is going to close then?
+
+Question_21:
+
+          Thank you. Good morning, everyone.
+
+Question_22:
+
+          I guess most of my questions were answered, so just a couple of P&L questions, Kathy. One, just in terms of the structural items impact this year, it sounds like a slight negative on revenues now as opposed to the prior call. Just a little bit of clarification of the puts and takes on the revenue impact, it sounds like the impact on bottom line is pretty minimal.
+Then on the FX, you had the re-measurement gain in Q1 that was about a little bit more than a penny. Is that really what is the difference in terms of your full-year outlook for [PDP] impact being at the low end of that 7% to 8% that you had called out last time?
+
+Question_23:
+
+          The timing of the Monster transaction though, the deal itself is delayed, but you are getting the distribution into your bottling in this quarter. That would be still a positive in terms of the revenue benefit, but is re-franchising pacing really what's dragging down in terms of the revenue impact?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/31_answers.txt

@@ -0,0 +1,121 @@
+Answer_1:
+
+          Good morning, John. It's Muhtar here. I'll just say a few top line remarks about it, and then also ask both Sandy and Ahmet to give some more specific details on their -- in specific markets. 
+I'd say overall, pleased with our initial results. But as we've previously discussed and as I have just recently said, it takes some time, anywhere from 12 to 18 months to realize the full value in terms of a return on those investments. We've found that disciplined quality marketing investments drive growth better than any other strategy or action. 
+We're seeing good initial results in markets that have received the incremental media investment, and also have improved the quality of marketing in our case. The marketing investments in North America is a great point.  Which is a real contributing factor in the strong performance in the quarter, continued strong performance in North America. And the performance is getting better, with 5% growth in organic revenues and 4% price mix. That price mix, and that volume and that, therefore, growth in organic revenue would not have been achieved clearly without the infusion of that marketing and the quality and the quantity. 
+In China, also seeing positive trends, strong marketing activation, as I mentioned in my remarks.  Sparkling growing at 7%, (inaudible) Coke growing at double digits in the quarter, allowing us to gain -- continue to gain significant share in that market. And additionally, we're seeing accelerated trends in our value sharing gains where you compare them against our trends a year ago. 
+So with that said, clear that it'll take some time for the full benefit on a quarterly basis as these investments take some time to ramp up. Also challenging consumer environments and macro environments. And so those are really what I would say. And in terms of our results, you see year to date, our marketing investments are growing and our margin is expanding by 50 basis points.  
+So I think the key is to be able to achieve both, and we are confident that we can -- that we will continue to see more positive results. With that, let me turn now for some more specifics to Sandy and then to Ahmet for international example. 
+
+
+          Thanks, Muhtar. And good morning, John. 
+The core driver of our business across the world over time is the quality and quantity of our advertising, and the related execution and activation by our bottlers. And in the US over the past 18 months, we've vigorously pursued that strategy, increasing our advertising spend significantly. And you're seeing the payoff in the top line results that Muhtar just went through. But underneath that, a metric that you can watch also is just the price elasticity of our brands, and how volume reacts to price over time. And it's a good metric of the payoff of advertising, along with the efforts of our bottlers in the marketplace. 
+As we look ahead, we see advertising as an important proactive item to grow the business. But as you start to see in North America over the past few quarters, we're now leveraging the P&L so that the infusion of advertising is coming from the accelerated top line growth and expense efficiency across the total business.  
+So net-net, it's part of our outgoing algorithm, and an important part of the way we intend to drive growth going forward.  Ahmet? 
+
+
+          Thanks, Sandy. Hey, John.  
+We have a very similar story in Coke International. The bottlers and our teams have strong conviction about how better and more advertising drives top line. The example that Muhtar quoted, there's more depth to that. I would add developed markets such as Germany and Spain to that list. I would add a developing market such as Mexico to that list. I would add an emerging market such as Nigeria, as good examples. And there are other examples where we increased media, and we improved the quality of that communication, revenue results improved. 
+Having said that, the history of this increase is less than a year for most Coke International markets. I would caution that it is early days, but definitely we're seeing the positive examples of this action. 
+
+Answer_2:
+
+          Sure, Steve. On the share buybacks, basically, we've given the range of $2 billion to $3 billion, so we're still in that range. We looked at where we were for the first half of the year, and then we looked at cash, particularly because of the currency getting worse in the back half, and just tightened the range. So basically, we're still in that range and that corridor. We just tightened the range. 
+And then on the second question on productivity. We have basically stated that we are about $500 million for the year -- we are on track. The working capital has allowed us to basically focus on share repurchase, even with the significant currency headwind. So on our productivity initiatives, we are on track. 
+We didn't give specific initiatives that we were working on for this year. You know about the people initiatives that we had, and we said we're going to be on target with the $500 million for this year.  They're still coming from the three areas, so we're still actively working on reducing our cost of goods sold and moving D&E from more promotional activities into media spend. 
+So we are basically on track.  I don't how -- I can't give you any other specifics other than, we are basically on track for the $500 million that we anticipated that we would have for this year. 
+
+Answer_3:
+
+          I don't know that I can quantify how they come throughout the year.  Part of it was dependent upon when we started to see movement with some of the people.  And we've not gotten -- for instance, Europe had to focus on the working -- had to work with the Work Council,  So their initiative was people really just starting, although everybody is aware the movement of people is just starting. 
+So part of that will be coming out now that they've been able to focus on their moving people initiative.  But I don't know that I can quantify the how and when it all comes through, because we focus on dealing with the work first. And we deal with the work first, and then a lot of the other impact will rail making sure that we deal with -- that the organization is appropriately set up for success going forward. Which included focusing on the global organization, and restructuring how we worked with the global organization. So all I can say is, we're on target with everything that we've done. 
+
+
+          Just adding to what Kathy mentioned, Steve. I'd say that also in terms of simplifying our organization, wiring our business units closer and more directly to the functional centers in our Company, that has largely taken place. We have essentially eliminated a functional layer in the Company, allowing us to make faster and quicker decisions -- and more effective decision making in the Company. That is already largely in place. And I think lots of continued work streams going on in COGs that will continue to benefit, and help us to deliver more than the $500 million in savings for the year. 
+
+Answer_4:
+
+          First, Mark, good morning. On the Asia PAC, I think it pretty much came in line with what we were expecting and it's related to timing. It's related to how you look at it on a year-to-date basis.  And I'll have Ahmet comment on that once I finish. I'll just say a few things about the second question. 
+In terms of scale M&A and bolt-on M&A, I think you need to think we will be again looking at bolt-on targets that fit our strategic portfolio. That's the way you should think about our continued interest in any M&A and how we target M&A. Just the same way as you've seen us look at it in the last three, four, five years, how we look -- how the acquisitions that we made in terms of innocent, in terms of honesty, in terms of [zeco], in terms of other bolt-on. And then more recently, the announcement from China that we had. 
+So essentially, bolt-on acquisitions that complement our current portfolio and that give us the ability to also scale it up from a geographic scale goes up from a geographic point of view. Just like you saw us launch Smartwater in other new European markets more recently. That's a good example of how the scale up continues. And how we've converted -- how we've turned Smartwater into one of the leading premium waters in the world, both here in the United States and now in some other new markets. Ahmet, comments on Asia Pacific? 
+
+Answer_5:
+
+          It excludes anything. But I'm saying our focus would be -- I think you should assume that it would continue in that area. If there's something that obviously -- the future, none of us know what the future holds. We could never be -- we're always guided by the past. The future is something, and there may come some opportunities that we'll look at.  But right now, what I will say to you is, base it on what I've said as the past few years being an indication of the future. 
+
+
+          Mark, just to add on to the price mix on Asia Pacific, the minus [6%] was not a surprise to us. It was expected, and there was a lot of timing between the first and second quarters. If you look at first half price mix for Asia Pacific, we're in negative [2%].  Which is very much in line with what has been happening in Asia Pacific due to geographic mix and other channel mix issues. So no surprises there. 
+
+Answer_6:
+
+          Thanks. I'd say, look, I think North America delivered strong second quarter revenue profit value share performance driven by better increased marketing, better marketing, and a disciplined approach to both volume, price and mix management.  
+Few things, mix management is working in our favor. Consumer is very much approving the smaller packages. Smaller packages are growing much faster than larger packages. Smaller packages have a higher NSR per liter, per gallon, whatever per case. And therefore, there's -- that way price driven by -- and the ability to keep the volume where it is and gain the price mix are historic bests in terms of the past quarter performance in the United States. Why is that happening?  More marketing, and more focus on better marketing as well. 
+So the rate is coming through, mix from transactions and packs coming through. That is the general comment I'd make. And, Sandy, if you want to provide more color to this. 
+
+
+          Yes, I absolutely agree with that, Dara.  And our strategy is, as Irial and I said a year and a half ago, we were putting in place a strategy of building strong valuable brands, with accelerated quantity and quantity of marketing.  And we were going to take proactive opportunities to get our price in line with the value of the brands, and to lead price up in a consistent and strategic way. Working on the development of packages that consumers want, in particular premium packages.  And the consumer is pulling very clearly to smaller packages, so they can enjoy the ice cold refreshing taste of one of our beverages but in a portion size that they want. 
+The net effect, as Muhtar said, is that we have a benefit from mix but our strategy as we look forward is to continue to lead. We see this strategy of disciplined price pack volume management underneath the brand building of strong powerful brands as a long-term strategy. And we continue to take action across our system every day to reinforce it, to grow our capability, and to continue to grow our business in a very balanced and disciplined way. 
+
+Answer_7:
+
+          Absolutely. The strategy is very consistent, and we continue to be optimistic about our ability to make the levers work. Because our brands are strong and we're investing in them, and because our bottling system is executing very well and we continue to get better. 
+I think one of the mantras in our team, Dara, is that we've got the right strategy. But we're just beginning to hit our stride from a capability standpoint, and we have much more opportunity to improve than we have progress made so far. 
+
+Answer_8:
+
+          Sure, Vivien. First out, I'd say the challenge is never taken for granted, but the challenge is broadly very much a US centric one. So let me just preface that, and then have Sandy comment on what's happening in the United States. And also comment -- give you some more comment on other diet drinks like Coke Zero performance and so forth. 
+
+
+          Sure. As we've discussed in several of these calls and in our interactions more one on one, the diet and frozen parts of the food and beverage industry have been struggling for a number of quarters. It's getting into years now. 
+As the consumer -- the US consumer moves really strongly to fresh. It's a good dietary change actually for the country, but the impact on categories, and particularly categories that are appealing to diet oriented positionings has been pretty negative. Inside our particular portfolio, we have brands growing and have brands struggling. 
+Coke Zero, as Muhtar mentioned, grew in the quarter. Diet Coke continues to struggle. Our near-term improvements, though, are we're starting to see the consumer base stabilize. 
+We have an incredible number of very loyal drinkers in Diet Coke, that love Diet Coke. And our milestone that we're seeking to achieve soon is to level our revenue. To match price and volume, such that Diet Coke's revenue gets to flat and then starts to grow again. 
+As we look ahead, what I would tell you about Diet Coke is that we believe strongly in the Diet Coke franchise. Diet Coke, the brand, is the number one diet beverage in the United States, and it will be for a long time to come. 
+We also are looking at changes in the category. Our largest competitor is changing their formula, and they'll be launching that in August, and that will create a lot of buzz in the category. Some of it good, as the good science of the safety of non nutritive sweeteners gets out in the marketplace and is reinforced. 
+We are looking at multiple programs, to not only strengthen Diet Coke but to offer consumers adjacent innovation in the Diet Coke franchise. And we're excited about the long-term future. But as we say around here, it's work in progress and a lot more work to do, but we still are very optimistic about the long term. 
+
+Answer_9:
+
+          Hello, Bryan. Yes. On the margin question, our margins were negatively impacted by currency and by structural. Obviously, there's always some negative geographic mix that plays into that. But as you look at our margins and if you look at the specific growth margin, first of all, and if you look at them on a comparable basis, we lost some margin. 
+But then if you take out currency and then you take out structural, then we were at positive margins again. So -- and the issue more is about growth margin, it's not so much about operating margins.  When you -- then your second question which was -- 
+
+Answer_10:
+
+          It's normal in the Pacific to have negative geographic mix, just because of the base of the country, Japan, and then all of the emerging markets there. So, yes, I would say for the remainder of the year, I would anticipate that we would have negative geographic mix in Pacific. Ahmet, you want to comment on that? 
+
+
+          That's definitely not in the numbers that we've seen in the second quarter, but the general trend of around a couple points of to date number. However, we do continue to aggressively implement our more balanced top line growth in terms of price and volumes across the territory, and we are aiming to improve on that. 
+
+Answer_11:
+
+          Before Sandy comments on that, Bryan, let me just also say that, also in many parts of the Pacific, since your question was somewhat related to the Pacific and in terms of geographic mix. I think sparkling and particularly, Bryan, Coca-Cola, again, with things that are happening around advertising and media spend and better quality is getting stronger. 
+Whether you take Indonesia, or whether you take Southeast Asia, or whether you take China, sparkling is getting stronger and momentum on sparkling is getting better. And therefore, I think you're also seeing a positive shift in category mix for us that is somewhat countered by continued geographic mix. 
+So I think there's a balance there, and I think we're happy to see that balance coming through. I just want to mention that, that important this year, we see that balance beginning to come through, more favorable balance coming through. And then, Sandy, if you want to talk about the smaller packages reference. 
+
+
+          Sure. The growth in North America transactions is healthy. And that's coming from a number of things.  But the small packages clearly are driving a tremendous amount of positive growth. Some of it is cannibalistic, but the cannibalistic nature of it accrues to higher margins. So the mix shift is positive, and then you have the incremental transaction growth that's being driven there. And the primary reason is that the consumers want smaller packages, that's why they're buying more Cokes. 
+Our marketing model is about more people, enjoying more Cokes, more often for a little bit more money.  And that's what we seek to accomplish in the marketing and execution of our brands. And what you can see by the mid-teen growth of the smaller packages is they're driving that transaction growth, and transaction performance is positive. So the net effect of it is that it's positive in net-net. 
+The other comment I would make is that we have data in some of our retail partnerships that shows that moms in particular like small packs and are returning to the category to use small packs as a way of giving treats to teenagers and others in the household.  And it's a particularly positive thing, because moms can do that with a pack that isn't too big. Whereas, for many years in the category, we marketed packages that were too big, that were either wasted or over consumed. Our package mix no longer does that, and it's one of the reasons why our growth is accelerating. 
+
+Answer_12:
+
+          Thanks, Nik. First thing, I would say to you, as I mentioned in my scripted remarks, that we had a very successful global system meeting back in May. And I see the much more improved engagement, and also commitment by our bottling partners across the board, small, large, Asia, Europe, Latin America, Eurasia, and Africa, North America. 
+So I'd say to you, it's broad based.  And I'd say to you that there's a great deal of excitement that is around our plans, particularly our reinvestment plans, and also great amount of commitment for better execution and more investment on the side of our bottling partners. So as I look at the pipeline of investment, I would say I am much more encouraged today than I was, say, 12 to 18 months ago. And I believe that that's driven by our plans and our -- basically our belief in the future and what is being -- and what is happening is yielding early results. And that is driving that engagement. 
+
+Answer_13:
+
+          No, we'll see it this year, and we will see it at a trend that continues to increase next year and beyond over -- certainly over a three-year period. Here in the United States, in Latin America, in Europe, in Asia Pacific, in Eurasia and Africa. 
+
+Answer_14:
+
+          So, Ali, volume, the algebra is volume times price, is what we generate as revenue. And I think it's good that you ask that question, and it's one of the important elements of the algebra. I think we're encouraged by actions where we basically expect it to be. We're cycling 3%, and we generated 2%. And I think the volatility, as I mentioned in Russia on the verge of a recession today, from a macro point of view.  Or Brazil where there's still very significant challenges in disposable incomes. China disposable income levels haven't improved significantly. 
+But importantly, improving trends on share, we're at all-time high in many markets. Value share, particularly, which is very important, and value share is driven again by the actions that we're taking. 
+So based on your question, have you seen the bottom? I'd say we're about where we expected to be.  And we see that what we're doing is continuing to help keep that equation in place at an improving trend. The equation being, if the marketing wasn't there, the volume wouldn't hold up where it was and the price wouldn't hold up where it was. See it in that respect, both being propped up by the investment that we're putting into the marketplace and those investments being driven by the zero-base work that we're generating. 
+
+Answer_15:
+
+          I think you said it. Those are continuing to improve. As they improve, they become -- there's more that are getting in line for those assets, and that's a good place to be. And I think that basically we see those are great markets, not just in our hands, but in the right hands. And that's the way we see it. And I think that we are encouraged by the internal plans we have, and I think that that's all I can say right now. But we have -- we're in a place where those -- let's call it this way. The fruit is getting riper. 
+
+
+          This fruit will never get overripe. It will be good on the tree and off the tree. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/31_questions.txt

@@ -0,0 +1,69 @@
+Question_1:
+
+          Thank you. Good morning. I want to talk a little bit about the advertising spending. There's been some questions and I've had to myself in terms of whether you're just sort of fighting a headwind in terms of trying to advertise the categories. 
+So can you talk a little bit about what you're seeing? How you're gauging the success that you're having? And what we should expect from an advertising spending increase as a percentage of sales as we look out over the next 12 to 18 months? Thanks. 
+
+Question_2:
+
+          Hello. Good morning. Thanks. I guess first could you just -- maybe I missed it, but could you just address the reduction in net buybacks for the year and what lies behind that? Is free cash flow coming in weaker? Because that would be surprising just given your working capital comments, et cetera. Or is there a competing use for cash that we should be considering? Just a housekeeping question.  
+And then a broader question on productivity. The update in the report card you provided was certainly helpful. But I was wondering if you could maybe quantify what those initiatives translated into in terms of savings in the quarter, and how far along you are, admittedly early, against that ultimate $3 billion goal? Because I think that would help just frame where you are in the overarching initiative. And actually, if you could perhaps talk about other initiatives underway and what kinds of achievements we should look for on Q3 or Q4 report cards. That would be great as well. Thanks. 
+
+Question_3:
+
+          Okay. That's helpful. Is it fair to assume that the savings build and that there's more of an impact in the second half versus the first half, or is it more ratable throughout the year? 
+
+Question_4:
+
+          Thanks. That's Stifel Financial, but good morning, everyone. I guess two questions here. 
+One, a region question, Muhtar, and then a more strategy question. With Asia PAC, at least versus my model, the price mix was  disappointing. It's only a quarter, and you highlighted China and I think some product mix issues. But when you think longer term about price mix in Asia PAC given the superior growth I think you expect from China, what's a sound way to think about that region in the larger Coke system? And then unrelated to that, or less related to that, when you think of scale and bolt-on M&A, can you just update us on you're thinking for the larger Coke, how you're thinking about scale M&A, and how you're thinking about bolt-on M&A? 
+
+Question_5:
+
+          Can I just ask one quick one there as a follow-up, Muhtar. It sounds like what you're saying there is precludes an interest in scale M&A. The focus -- just to be super clear, the focus is on bolt-on to the exclusion of scale. And we could debate scale I realize, but sounds like that's the focus. 
+
+Question_6:
+
+          Good morning. So, Muhtar, clearly, very strong 4% pricing in North America. Can you run through how much of that was mix versus price? And then comment on the sustainability of higher pricing as you look out for the back half of the year once you cycle the higher pricing from last year? 
+And longer term, how you think about any pricing? Clearly, we've seen a big improvement here over the last year. Looks like it's worked well in terms of limited demand elasticity, so more longer term type thoughts on pricing in North America. 
+
+Question_7:
+
+          Okay. So it sounds like the way you approach pricing in North America going forward, you think you'll continue to see progress both for main mix and rate perspective. And obviously, while we could see a sequential slowdown as you comp over this period, you're pretty committed to the efforts longer term.  Is that fair? 
+
+Question_8:
+
+          Hello. Thank you so much for taking my question. I was going to focus on Diet Coke. While your total sparkling unit case line growth was clearly impressive, Diet Coke continues to be challenged. So, Sandy, could you please update us on what you're seeing in terms of North America? And then, Muhtar, if you could comment on any other geographies where you're seeing diet present a challenge.  Thank you. 
+
+Question_9:
+
+          Good morning, everyone. So just I had a question about geographic mix. I think it came up earlier the geographic mix was negative in the quarter. And could you -- is there any way you could outline for us if geographic mix also had a negative effect on profit margins or profitability? 
+I know there is a lot of moving parts in the P&L. But when you look at it currency neutral, you saw some margin expansion. And my thought is you actually had, within that margin expansion, you actually had some negative geographic mix on margins. So any help on that would be helpful. 
+And then related to that, as we're modeling out the balance of this year, and I guess it goes to Mark Swartzberg's question about the Pacific region. Should we continue to expect to model in negative price -- geographic price mix into our models for Pacific in the back half of the year? Thank you. 
+
+Question_10:
+
+          Just related to price mix, price mix in Pacific. Should we continue to see negative geographic mix there? 
+
+Question_11:
+
+          All right. Thank you. And if I could sneak just one last one in for Sandy. 
+If we're looking at smaller pack -- the affect of smaller pack sizes in North America and just simply looking at it on transactions, I know it's kind of early, but is it incremental? So if we were just measuring transactions, are the purchases of those smaller packages, are they incremental to base business or is it cannibalistic? Thank you. 
+
+Question_12:
+
+          Thanks for the question. So I just wanted to go back to the bottler reinvestment question. And maybe, Muhtar, you can give us some perspective on where the bottling match in resourcing has been most significant. Just so we can get an understanding of where there could be potential leading indicators on that impact on volume growth. 
+
+Question_13:
+
+          Muhtar, are we starting to see cooler placements actually hit the market and more feet on the street?  Or is this bottler commitments on that they're going to do it at some point in the next quarter or two? 
+
+Question_14:
+
+          Hey, guys, thanks. A couple of things I wanted to talk about if possible. One is around top line, and one is around asset base. First on the top line, I think you guys have done a good job explaining and playing out the thesis out in terms of price mix, which is great. 
+On the volume side, how would you describe the Company trajectory right now from a volume growth perspective? So do you think we've seen the bottom in terms of volume growth after a series of plus 1% to now a 2% and some user comps going forward? So do you think we should be projecting a turning point upward in terms of volume growth for the Company going forward? And I'll come back with the asset question in a second. 
+
+Question_15:
+
+          Okay. Very helpful answer. On the asset side of things, if you look at Germany and India and Vietnam, NBIG, those continue to do quite well. Seem like they're improving. And in North America from the discussions we've had, this call, other calls, looks like that's getting better, too. With productivity and profit actually growing finally.  
+Are -- do you think there are ways or are there -- what are the hurdles given all those improvements for you not to be able to divest or refranchise those assets more quickly? And have a smaller access base, which is the long-term plan, even more quickly than you've laid out so far? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/32_answers.txt

@@ -0,0 +1,113 @@
+Answer_1:
+
+          Good morning. 
+
+Answer_2:
+
+          Yes, thanks for the question. What I would say in general overall is, yes, we're pleased with the quarter and the progress we're making, but lots of more work to do. This is a transition year. 
+When we talked to you about 12 months ago, we outlined to you that with the changes we're going to make that our goal is to get to mid single digit, currency neutral revenue growth for the comparable revenue growth for the Company overall.  And I think if you look at our progress to date for the first three-quarters of the year, we're at sort of the bottom end of that range, the mid single digit. 
+If you look at where we are in revenue in terms of currency neutral comparable, and what we have posted in this past quarter, the third quarter, you would see us, if you take those numbers that you mentioned in terms of volume growth of 3% and price mix of 3%, at the top end of that range. 
+So, in essence, we're pleased with the progress -- what all the five-point strategy and executing it diligently over the last nine months and even starting at the end of last year has brought us to where we are.  And so we feel that -- we've always said the marketing has a lag, the incremental marketing, there's a lag in terms of when we input it and the results that we're getting. 
+But we see that the plan is working, and we certainly see that we're taking a very strategic approach in terms of marketing spend versus optimal levels.  Consistent quality investment in media continues to be one of the strongest drivers of our business, enabling us to generate that revenue. We look at each market, how many weeks of consumer engagement there is.  The goal over time is to apply the right pressure in the right way to each of our brands, and each of the segments that you mentioned, which is developed, developing and emerging. 
+The system alignment in our bottling system is matching our alignments with investments -- I'm sorry, with capabilities, execution, output development, cooler placement, et cetera. So we're pleased with what we see there. And, of course, all of this being said, we have a volatile macroeconomic environment which obviously is not getting any better anytime soon. 
+We realize that the global growth for 2015 is projected to be below last year, and even having said that, the disposable incomes are even lagging the growth rates that are projected. So, yes -- but in general, that's how I would frame your question, and both James and I and Kathy believe that the incremental and better marking is certainly giving us the results in terms of the top line currency neutral comparable top-line growth. 
+
+Answer_3:
+
+          Thanks, Steve. What we said again at the beginning of this journey back three, four years ago, is that we said that we have an intention to create a system in the United States that can benefit from the local empowerment in each of the communities in the markets that have built our business so successfully over the last 130 years, the franchise system, the alignment that that brings, the value and trust between us and our bottling partners.  
+But at the same time create the mechanism, so to speak, the processes, flexible processes in the marketplace, whether it be information systems, whether it be the customer management system, so that we can speak with one voice to customers coast to coast in the United States, and the national product supply system. 
+All of those negotiations with our expanding bottlers took some time to achieve. They are all achieved. That's why we're progressing with rapidly with our refranchising program, which is working very well, because when we have those processes in place, we can refranchise with confidence and speed and have the business continue to generate the results and the growth that we are seeing in revenue, particularly in the United States of America.  
+And the United States nonalcoholic beverage business is healthy. It is growing in revenues and dollars and cents, and that's the really important measure -- important element that I want to leave with you. But just to add more color and flavor to the National Product Supply System question that you had in terms of the governance model, I will ask James to comment further and give you more insights. James? 
+
+
+          I think just specifically on governance, it's not going to be around unanimity.  It's going to be based on the driving of the business case. Everyone is committed to doing what is economically the most rational answer for the system.  Again, when it comes to the national issues, it's not necessarily the management of each local plant which will remain the job of each of the participating bottlers, or CCNA. 
+
+
+          Steve, did that address your question? 
+
+Answer_4:
+
+          We're not laying out the precise mechanics, but I can tell you that there's not going to be a full consensus required for every decision. It is going to be a large majority, and if they support the economic case, then that's what's going to move forward. 
+We're not creating a system that can become blocked. We're creating a system to focus on the best economics of the system in North America and there are mechanisms for that to go forward. 
+
+Answer_5:
+
+          Correct. 
+
+Answer_6:
+
+          Judy, thanks. This is Muhtar.  Good morning. Unit case, as I just said, did grow 4% in the quarter in Europe. They were cycling a minus 5% from prior year, and sparkling was up as well as stills growing faster than sparkling in Western Europe. Then our concentrate sales did trail also the unit cases in Western Europe as it did for the whole Company. 
+And I'll ask -- and we were pleased with the results and certainly, again, some early results from the marketing, but more to come. And I will ask James to add more color to that. James? 
+
+
+          Thanks, Muhtar. As Muhtar referenced, we were cycling a pretty poor quarter from last year, so I think it was a favorable comparison. We had strong results from very favorable weather in the Southern and the Central part of Europe. But I wouldn't read too much into the one quarter. I think if you look at the longer-term trends, you can see that we're getting some volume growth in the year to date where the price mix is bouncing around flat.  
+I think it's important to recognize two things as it comes to price mix in the case of Europe. One is the general deflationary nature of the European market. Retail pricing is zero to one, at best in general. And then secondly, it's worth remembering that the starting point of pricing in Europe is, in comparison to the US, higher. So the opportunity is to drive price mix on a sustained long-term basis. 
+In a sense we've already captured some of that in Europe, and we will be chasing that in the US. So I don't think we'll see the same sort of price mix over time in Europe given our starting points. 
+
+Answer_7:
+
+          Good morning, Brian. 
+
+Answer_8:
+
+          Sure, thank you, Bryan. So the foreign exchange for next year, if you remember, we had said that for our hard currencies we are hedged, and so our real exposure is around our emerging currencies. That being said, we do have to cycle that euro debt bond offering which impacted the first and second quarter of this year, and for the full year it was about 3 points benefit to us. 
+So we do have to cycle that next year on top of the change in the rates and probably a more difficult currency environment going forward. So we will give more color on currency in February when we give our full-year results for 2016.  But our issue is really going to be around the emerging markets where we've just -- it's not cost effective to hedge more than about a quarter at a time. 
+And then in terms of the structural impact, yes, Germany will be a structural impact next year. Obviously we continue with the North American refranchising, so that will still have a significant impact in North America. And there may be some slight impacts from whenever the things -- Africa closes -- the Africa transaction closes.  But the majority of it will be the Germany transaction and the North America refranchising. 
+
+Answer_9:
+
+          Yes, I want to -- Bryan, this is Muhtar. What I'll say is it's in the regulatory approval process, and that's all I would say right now. We expect it to close sometime over the next three to four months. That's what I would say. 
+
+Answer_10:
+
+          Sure. So the unit cases to concentrate shipment, they were really impacted by Asia Pacific and Latin America. If you look at Latin America on a year-to-date basis, they are absolutely in line. And with Asia Pacific, on a year-to-date basis we expect them to be generally in line. So there's really no story there in terms of that gap. 
+When you -- moving on to productivity, so productivity initiatives, obviously we are seeing some benefit from productivity. In our margins, there is an impact in our margins from basically the structural changes. So if you were to exclude structural changes, gross margins and operating margins would be higher, and you would see margin expansion. 
+When you look at the third quarter, when you look at the leverage, so we are getting some productivity, but we also have an impact from timing of the DME from--  basically from prior years that's impacting that timing from this year, that, by the way, turns around in the fourth quarter. So I think there are a lot of puts and takes going on around productivity. You are seeing some productivity coming through. We are continuing to reinvest behind our brands, though. 
+But our margin expansion is masked right now by currency and structural. So if you pull those two things out, you see very good margin expansion. 
+
+
+          And I would just add one point, Ali. I think what we saw in this past quarter in terms of operating margin expansion on a currency neutral comparable basis of about 100 basis points, we were pleased with that expansion. Now, the key is to do everything we can to continue and ensure that we execute fully on the five strategic points going forward so that we can continue to improve our trajectory. 
+
+Answer_11:
+
+          We will not comment on any specific matters related to our customers, bottlers, or any M&A matters. So I would just leave it at that. 
+
+Answer_12:
+
+          John, this is Muhtar. Actually they're not in conflict at all. They're basically very complementary to our strategy which is to ensure we have the local touch, and we have also the scale, and we have the processes to meet customer demands and customer partnerships.  
+And in the United States we've actually not -- you mentioned the word fragmented. We have a national customer management system. We have a national production system. We have a national information system that is basically all with their own governance models, and they're very fluid and very flexible to suit the needs of the business today. 
+And then at the same time, every piece of the United States that has those elements really have enough size for scale. And then we have the much smaller, the smaller distributor bottling system that also the smaller guys are doing a great job in growing the business for us. 
+And then in Europe, basically what we have is the customer landscape in Europe is much, much more concentrated in Western Europe where just a handful of customers account for a very large portion of the total future consumption, the retail business in Europe. And, therefore, when you look at what we have created in western Europe, it basically suits our future needs in terms of working proactively with our customer partners and also it gives the scale and also it gives the local touch in each of the markets. 
+So from that perspective, just like what we've done in Japan, just like what we've done in South Africa, in large markets I'm talking about, it basically very much aligns to our strategy in how you think about what we're doing in the marketplace. 
+
+Answer_13:
+
+          Well, the customer base in the United States and Western Europe is very, very different in terms of how it's structured. And so we follow the customer -- the needs of the customer, what matters. We follow the scale; we follow the necessity for speed. And we feel that the model that is being created in Western Europe will serve us very well for the next decade and beyond. 
+And the same thing goes for the United States. It is proving that it is serving us very well in terms of getting us to scale, in terms of getting us the costs in production and cost of goods sold, but at the same time retaining the local touch and retaining the local element that is really important in our business. Both of those are valid for Europe and for Western Europe and for Japan and for South Africa and for the United States, or wherever else you are seeing us create a better bottling system. 
+
+Answer_14:
+
+          Good morning. 
+
+Answer_15:
+
+          Well, I think based on what we're seeing is we're able to generate revenue growth both in the sparkling category very much so, as well as in the still side, and, therefore, that's what my comment referred to. This is not just one quarter, this is multiple quarters. 
+At the same time, inside that LRB category that is showing very good resilience in terms of both price elasticity, price discipline, approach with customers, generating value for our customers, both in the sparkling side, as well as large and small customers in the still side, we're also seeing that this is the 22nd consecutive quarter of us gaining value share in the marketplace in North America. 
+And then the mix is really working for us in terms of generating the marketing where the North American market is the first market where we've started employing incremental marketing, better marketing is generating also positive results for us in terms of the revenue growth from sparkling derived, particularly -- purely from sparkling as well as from the still side of the business. James, do you want to add any color to that? 
+
+
+          Yes, I think, if you take a look at how we're driving the sparkling business, you can look at the transaction packages which represent about 15% of the volume, and they're growing still again this quarter into double digits. So we're very pleased with the marketing and the OBPC approach is driving positive revenue growth for sparkling on a consistent basis. 
+
+Answer_16:
+
+          So, of course, we need to wait and see whether the recent vote produces the [act of] law by the end of the process. It's only gone through one of the stages, so we'll see where that ends up. Obviously, we are in favor of reductions in discriminatory taxes. 
+I think as we look out on how that has impacted the world and how that's being viewed, and it will be used as a case study around the world, the data we have so far is the impact of the tax was to bring down about six calories from the Mexican diet by the end of the process. So we're conscious that obesity is a crisis, we know we need to play a role. 
+We don't think this is the silver bullet that anyone was looking for, and we think that much more work needs to be done if, indeed, a solution is to be brought to bear on the whole obesity crisis, which overconsumption of anything, including soft drinks, would be a contributor and a part of the problem. 
+So we'll see where this tax ends up. Clearly taxing diets and [lights] doesn't seem to be the right way forward, and, therefore, if this measure goes through, I think it would be positive. 
+
+Answer_17:
+
+          Yes, I mean, Nik, I'll just say, very broadly, at a high level, we're pleased with our performance in China. Obviously a lot of noise around China these days, but we have, as mentioned earlier in the script, we have an all-time high share for brand Coke in China and we're growing in China and we're gaining share in China and we're investing in China. And the same goes for India, two of the very large markets in Asia, certainly pleased with the results there. 
+We had some weather-related issues in the quarter before, but we're coming back, the business is really coming back and performing much better in India. So overall, I think -- and then in Japan we're seeing some green shoots in terms of disposable incomes. We're very early still to call it any color. But overall, I'd say -- and then obviously, back in South -- Australasia, the economy was very much related to commodities, and it has suffered, and we're seeing the macro spillover from that.                                                                                                                                                                       
+But I would say, overall, in this past quarter, we're happy with the results of the big economies, and recognizing that we've got more work to do. And that's how I would leave it. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/32_questions.txt

@@ -0,0 +1,78 @@
+Question_1:
+
+          Hi, good morning. 
+
+Question_2:
+
+          So, Muhtar, it's been a year since you announced the plans to focus on greater pricing in developed markets as well as boost marketing spend starting in 2015, and I was hoping you could just take a step back and give us a more detailed review of your progress on those fronts, how much top-line growth is responding to those efforts relative to your expectations, both in terms of the market share payback from the higher marketing as well as the demand elasticity from the higher pricing. 
+Then just in terms of the quarter, on an adjusted basis ex the concentrate lag, it looks like underlying revenue results are returning to your long-term goals with 3% unit case result and 3% price mix. So at this point, do you feel comfortable you can generally meet those long-term top-line growth goals going forward, ex any timing issues, or with emerging markets macros still decelerating and perhaps easy comps from this quarter it's a bit too early to call for that? Thanks. 
+
+Question_3:
+
+          I actually want to talk a little bit more about the National Product Supply System that James detailed. And I guess specifically, maybe Muhtar or James, could you talk more about the governance process there and the makeup of the managing Board? As I understand it, there are five voting members, CCR, Coke North America, and then the three bottlers, Consolidated, United, and Swire. 
+I'm curious as to how you ensure that tough decisions get made in structure and implemented in that structure? Do you need unanimous consents? Is it majority rules? And if there isn't unanimous consent or support for a given measure, what gives the NPSG the power to enforce successful implementation? Thanks. 
+
+Question_4:
+
+          Yes. Sorry, I was on mute. No, thank you, that does help. But I guess, James, just to follow up, if there is friction on a given issue, or if there is debate about what is in the best economic interest of the system, what's the tie-breaker? How does the majority view get pushed through? 
+
+Question_5:
+
+          Great. There are mechanisms in place to break a tie? 
+
+Question_6:
+
+          I guess I was hoping to get a little bit more color in your performance in Europe this quarter. 4% volume growth, certainly an improvement there. You called out some of the factors, the green shoots in Europe, you've got the favorable weather conditions, as well as the marketing spending step-up. 
+So, number one, can you just talk about a little bit more about what really drove the volume improvement?  How sustainable those improvements are in terms of volume? And then if you think about price mix performance in Europe, kind of flattish performance in a more developed market, how should we think about that number? How much was that geographic mix? And are you seeing actual price realization in some of the markets, understanding that obviously it's a tough deflationary market there. 
+
+Question_7:
+
+          Hi, good morning, everyone. 
+
+Question_8:
+
+          Kathy, just a question for you.  And just thinking about some of the, I guess the macro drivers of the P&L as we move into the fourth quarter and maybe beyond into 2016. Other income this quarter was an expense that had all related to the euro bond gain that you had in the first half and how we think about lapping that next year. 
+FX, the negative effect on operating income is greater in the fourth quarter than it was in the third quarter. So should we think about FX carrying into 2016? 
+Then in terms of structural change, I guess with Germany now essentially being contributed to the partnership, or the new entity in Europe, that will be a structural change for next year. But just anything we should be thinking about in terms of changes in the structural change component of modeling, I guess, going into the fourth quarter and maybe into next year would be helpful. Thanks. 
+
+Question_9:
+
+          Okay. Thank you. With the Africa JV, do we still expect that that will close before the end of the year, or is there any update on timing there? 
+
+Question_10:
+
+          Hey, guys, just a few things. One is I was hoping you could set people just more at ease around the closure of the gap in unit case volume to concentrate sales. Getting a lot of questions there. If you're real comfortable with that, if that's the case, that that closes for all the regions in the world, it certainly does look like there's an inflection on top line.  
+But are we now comfortable enough to also start talking a little bit about perhaps a crossover point or an inflection point in the productivity savings being higher than reinvestment rate as well so margins can also look like they're expanding? It looks like you had flat operating margins here, including the FX effects there.  But that's better than it has been in a little while as well. So can we clarify and give us a sense on the margin inflection potential as well? 
+
+Question_11:
+
+          Okay, that's helpful. Just from a structural perspective, as you mention it, one of the big changes obviously in the marketplace is the ABI SAB deal which is agreed upon, I guess. Can you talk about any of the deal implications to you structurally in that context? 
+For instance, would you let them produce both for you and the blue system?  Is that something you can shed a little bit of light on as now it's an agreed-upon deal it sounds like? 
+
+Question_12:
+
+          Yes, thanks. I want to go back as sort of a little bit of a follow-up to Steve's question. If I look at slide 10 in the handouts, if I look at North America, you guys are fragmenting that sort of last piece to market, that last piece of the route to market.  And then also to some extent the manufacturing piece, yet you're telling us on the flip side, as we look at Europe, as you create this wall that goes across Europe of all one big bottler, that consolidation is something that seems to be the right thing for Europe. 
+So can you talk a little bit about why fragmenting North America, yet consolidating Europe at the same time, those are both the right strategies when they -- I don't want to say they're diametrically opposed, but at least they appear to be somewhat in conflict with each other.  Thank you. 
+
+Question_13:
+
+          Okay. If I can just ask a follow-up, I guess you talked about local touch with the smaller local bottlers in the US, then you also talked about local touch in Europe.  And I guess, again, just to play devil's advocate here, aren't you moving away from the local -- I realize you are going to try and keep some of the local pieces through the new bottling entity, but it seems to me that's moving less local. It sounds like you're trying to have it both ways. 
+I guess I'm just not following why one is so dramatically better than the other? Is it just simply the smaller account piece on the US side that creates the difference here? 
+
+Question_14:
+
+          Hi, good morning. 
+
+Question_15:
+
+          Muhtar, I wanted to circle back on the comment that you made  about the health of the US LRB category. Clearly that's apparent on the still side of the business.  But as I look at the syndicated data for carbonated beverages in the United States, it does look like the category is softening a bit.  And I think your revenues were down three out of the last four months. So I was hoping you could comment on the evolution of the US CSD side and demand elasticities and how they're evolving, please. Thank you. 
+
+Question_16:
+
+          Good morning. Thank you very much. I was wondering if I could ask you about the recent vote in Mexico. It looks like there's a proposal to reduce the tax on soda by about half on products with five grams of sugar or less per 100 milliliters. First, I was wondering what you thought about the prospects of that? If you could give us any clarity on what percentage of your portfolio that would cover? 
+And then if we just think about it from a high level, and maybe, James, you could give us some color for a number of these markets. If we look at the Mexican soda tax as a template for the rest of the world, does this suggest any tempering of how some of the regulatory authorities are looking at the category broadly speaking? Thank you. 
+
+Question_17:
+
+          Thanks. Just a quick question on Asia. Perhaps you can provide a little bit of context. It looks like that business may not be performing as well as you would like broadly speaking. Is this a portfolio issue? Can you just talk a little bit about what's going on across that region, so we can just think about that as we go into 2016? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/33_answers.txt

@@ -0,0 +1,140 @@
+Answer_1:
+
+          Good morning, Bill.
+
+Answer_2:
+
+          Great, thanks
+
+Answer_3:
+
+          Yes, thanks Bill. Ever since I took over as CEO, I've always emphasized the importance of our franchise model. One of my clear priorities was to accelerate growth in our biggest profit pool, the United States. We bought the business of CCE US operations with that goal in mind. When you think about it, now we've been able to prove to ourselves we can accelerate the business in North America. We've had the best year in 2015. You saw the results from the quarter.
+These results show our strategic focus on driving consumption of smaller package sizes is continuing to pay off. Transactions are growing. Price mix is healthy. Bringing those two things together, both the goal of going back, returning to our core model, which we've always emphasized -- even the first time we announced the purchase of CCE's US operations, we said there will be a role for partnerships going forward, as soon as we can put some things right.
+We have got the three legs of the stool in place: the customer governance, production governance, and the IT platforms. We feel very confident. We have proven to ourselves that we can do it, and we feel very confident that this is the time. The new model is established, bottler performance is improving. We have a new structure to last us the next number of decades, and we've put the bottlers -- we're putting our bottlers in the right hands. As Kathy said, the bottlers a very healthy, and thanks to the great leadership and capability of our Bottling Investment Group.
+Yes, we are now going to the core. This is the time, and we feel very confident that we can do the two things together -- accelerate momentum and bring the franchising to a bookend that really we feel is going to be very beneficial, both to our Company, our share owners, as well as leading to better customer service and better value creation on the bottler side. It's really a win-win from all those perspectives, Bill.
+
+Answer_4:
+
+          Good morning, Bonnie.
+
+Answer_5:
+
+          Sure, Bonnie. I'll say a few words, and then I'll let Kathy and James comment, too. I'll say that certainly we have the proof point in the United States. Our Chinese business, for example also, is giving us great -- has great momentum, gaining share, and growing in that difficult environment, if you look at the quarter, if you look at the full-year results. The capability that has been put into place in all of our expanding bottlers everywhere is really giving us the confidence.
+Also, just look at the momentum of the business. Our revenue growth was a priority. We've got it up to the 4% to 5% range. The increased marketing is working, clearly. Now better marketing is even going to enhance that. At the same time, we feel that every time the territory has transitioned, it's actually continued to do well, continued to gain share, continued to drive momentum, continued to drive incremental transactions. From that, any of the territories in the last four, five quarters that have been transitioned, we've seen without exception that to be holding true.
+If you look at all these bottlers that we re-franchised, look at the performance of our German bottler. It really has the greatest momentum and the confidence of Europe right now. All of these bottlers are going in to a system, to a structure, to an architecture, to a geography that will continue to do even better when you combine it and when you create the synergies with the combination. We feel confident.
+What took a little while to get right was the governance model around production in the United States, the governance model around the IT platform, the governance model around the customer service. All those are in place and working well. I'll hand over to James to add some flavor to that and more details, and then Kathy can comment also on your questions related to the financial aspect of the cash.
+
+
+          Bonnie, let me add one thought to what Muhtar's laid out there on we've been fixing and building and we're finding the right partners. A simple way of looking at why it's working is there's just more people coming to the table saying we want to be partners. Our existing partners want more territories, and new people who aren't in the system want to get into the system. They are seeing we fixed the business and we've built momentum, and so there's a lot of heightened interest in being part of a growing Coke system, particularly in North America.
+
+
+          Okay, Bonnie I think the last part of your question you asked about the incremental dilution and the impact of that, as helping with the impact of that. For 2016 we gave you the impact. For 2017 we are doing several things, because we know you all have lots of questions about 2017. We are going to provide revised operating segment financial information later in the quarter.
+At CAGNY, we're going to give you a look at what to anticipate the business will look like after everything is finished in 2018, because the actual dilution depends really on the timing of these transactions. The best way we can give you some indication of that is really to help you understand what our business will look like when everything is said and done in 2018 and beyond, which is what we're going to try to do at CAGNY. I would ask you just hold off on that, and more to come on that.
+On your question about cash, we -- the cash will basically go into basically our capital structure and be part of our normal mix. At this point, no Board-level decisions have been made. We anticipate these proceeds will be used to strengthen our balance sheet.
+
+Answer_6:
+
+          Thanks, Dara. As I mentioned, we're pleased with our market-share performance, value share gains across the world. I'll let James highlight some details on that.
+
+
+          Yes, thanks Muhtar. Dara, let me give you a quick run around the world in terms of share. Firstly, on an overall global basis, perhaps consistent with our strong fourth quarter, we gained a little more share in the fourth quarter than we had in the whole year, so a better performance at the tail end.
+In terms of how that played out across the world, you see again in line with the volume performance, strong results in North America. We gained share in sparkling, we gained share in still, and we gained share overall in the quarter and in the year. Good momentum in North America coming through in share.
+In Europe we're gaining share in sparkling and in stills. Given our different starting point, that's netting out to being flat overall; but we've got a strong growth in Europe as we build our stills business. Latin America, this is a long-term track record of success, so small gains there, building on a long history of building a great position.
+Eurasia, despite some of the volatility in that part of the world we gained share in both sparkling and stills, and overall pretty strong momentum there in terms of share. Then in Asia-Pacific we focused more on re-staging and re-energizing the sparkling business where we're gaining share. We lost a little bit in stills and overall flat. I think wherever you look around the world, we're largely flat to gaining, so inconsistent with our volume growth, which is broad-based and across the world, we're also larger winning across the world.
+In terms marketing pay-back, what you are seeing is there is results in the marketing pay-back. Our revenue in 2015, organic revenue growth in 2015 was better than 2014. We're guiding for a good number that's ahead of 2015 in 2016. We see the marketing pay-out beginning to build the momentum globally.
+I think if you double down on that one and look under that, North America was one of the first places we started with the incremental marketing, and that's self-evidently building momentum. We see the underlying business results coming through in revenue very much tied to where the extra media money is going.
+In terms of macro outlook and risk to top line, I think we feel we got underlying structural momentum in the business. Now when I said the macro, we are planning on the macros slightly better in 2016, and I really do mean slightly. I wouldn't be surprised if that was the same growth rate in 2015. But we think we have the right portfolio and the rate optionality to be able to deliver our financial numbers in that environment.
+
+Answer_7:
+
+          For 2017, we are also fully hedged on our major currencies. Obviously the emerging market currencies are the ones where you can't really hedge more than a quarter or so out. Obviously we have done nothing on the emerging market currencies. On the hard currencies we are hedged at rates slightly worse than in 2016. There will be a slight impact, but it's not -- I wouldn't think it would be terribly significant.
+
+Answer_8:
+
+          The gross margins in the fourth quarter impacted by the six fewer days, and the currency and then the structural impact. If you take all that out, basically, we had good growth margin expansion in the fourth quarter and for the full year.
+For the balance sheet, basically as we've got so much cash that's outside of the United States, we are taking a little bit more of a conservative approach with our balance sheet. It was just more prudent to manage with the longer-term maturities than with short-term maturities. We still have a robust portfolio of commercial paper. We're just balancing that out differently.
+
+Answer_9:
+
+          Yes, basically it's going to be on the interest expense line. I think we're expecting much more interest expense given the rate changes, but also the longer-term maturities are also causing more interest expense.
+
+Answer_10:
+
+          Brett, I think if you look at our overall for the whole year and as well for the quarter our price mix globally, you can see that has improved. As was mentioned, part of the reason for that is we're beginning to see the results of increased marketing play through, as well as our packaging strategies and mix management. Coupled with that, the value share gains, which is even more pleasing, given that we're able to get healthy pricing in our business and in our markets around the world. I will let James comment in terms of Europe and Japan, and what's being seen in some of those developed markets, in addition to the United States. Okay?
+
+
+          Yes, thanks Muhtar. I think firstly it's important to remember, starting with Europe, that our price positioning in Europe, we have over time substantially taken a lot of rate and mix in Europe, such that we are more premium priced compared to our competitors than we are in North America -- less runway in that sense.
+Now having said that, we continue to focus on smaller packages, more premium offerings in terms of the brand portfolio, such that despite what is a pretty deflationary retail environment in a number of western European markets, we're getting price mix in Europe, both in the quarter and for the full year. I think going out one should not expect the same levels the US has been able to develop, especially given the macro environment in Europe at the moment.
+In terms of Japan, we are very focused on rebuilding our ability to get positive price mix in Japan. We've recently been able to get some. Again, very focused on leveraging both packaging options and the brand portfolio to re-shape it to allow us to drive positive mix. Again, I don't think you will see in Japan the same sorts of levels as the US, as much as anything to do with the deflationary pressures in Japan. But we are starting to see chances of a better pricing environment in Japan.
+
+Answer_11:
+
+          Good morning, Bryan.
+
+Answer_12:
+
+          Certainly. We will lose about $500 million of productivity, primarily out of cost of goods sold. Again, we are committed to making up that lost amount, and we're going to make it up between cost of goods sold, operating expenses, and DME.
+
+Answer_13:
+
+          Well, we always said we were going to continue to look for additional productivity opportunities, and we have done just that. We've learned a lot about our costs as we have continued the programs -- ZBW, as well as other cost-optimization programs. Basically we've looked end to end, and we were able -- we saw additional opportunity, and we're going to take it.
+
+Answer_14:
+
+          No, I think it will be captured by the system.
+
+
+          We're even hoping they can find additional areas, Bryan, to even increase that going forward. Part of the whole plan around the production governance is also to ensure that we can actually lever and pull more synergies out of our production system in the entire template of North American production. Yes, the answer is a definite yes.
+
+Answer_15:
+
+          That's right.
+
+Answer_16:
+
+          Sure. Let me start with the price mix in Asia-Pacific. I think the most important thing to know here is because the different geographies in the Asia-Pacific group have quite different pricing, and concentrate shipments can be lumpy, you do get some erratic price mix numbers on a quarterly basis. That's exactly what you're seeing in the fourth quarter in Asia-Pacific. There were more shipments to somewhere like India than Japan.
+You can actually see the flip side of this in the Eurasia group, where we get very strong price mix in the fourth quarter, which was the flip side. We had more shipments to places like South Africa than the Middle East. This is all about country mix. I think it's important for particularly those two groups, Asia-Pacific and Eurasia, to look at some longer-term four-quarter trend line on price mix, given the very impactful country mix issue, and the lumpiness of concentrate shipments. That's the key thing there.
+In terms of China, clearly not as much as we would have liked to have grown in China in the first quarter. I think that the environment in China is pretty clearly having slowed down. But we think we had a strong momentum over the last couple of years coming back into China. We're looking to do better in 2016, but we don't actually provide country-based forecasts. What I would say, however, is we're continuing to do very strongly in terms of share, particularly in sparkling, as we have re-energized that business.
+
+Answer_17:
+
+          Yes, Steve. Related to juice and hot-fill and stills, stills continues to perform very well in North America for us. The template for stills production is completely different in terms of how it's configured to cold-fill. Therefore -- and juice is an integrated business.
+Given those aspects, we intend that for the future to not change the structure related to both hot-fill as well as to juice and our food service business all will remain as integrated in that respect. They're doing very well, and we feel they add value to the overall structure of North America. They're an important strategic part of how we move forward and continue to make increase momentum in North America.
+India -- look, you saw that number. Given all these changes we're announcing, basically if you brought it back to 2015 the total bottling assets that we would have under our management and on our balance sheet would actually go down from 18% of the total mix globally to about 3%. Yes, India there are opportunities in other parts of the world remaining, but it's a very small template based on where we are. We'll look at opportunities.
+As James said earlier, one of the litmus tests I've always said, one of the great litmus tests for the health of the Coca-Cola business is the desire of investors and franchise partners to have more territory -- that's at an all-time high. Remains that -- we expect that to remain high, and therefore there may be other opportunities in the remaining geographies. But I can't comment on that any further right now.
+Then I'll pass it over to James to take you through the longer-term question on portfolio stills versus sparkling, and then Kathy the question of 4% , 5% organic growth volume versus price. James?
+
+
+          Sure. Look, I think our aspiration is to have both of them growing, both sparkling and stills. That's what we achieved in the fourth quarter and in the full year of 2015. Now I think in a total portfolio sense, much in the same way it's happened over the last decade or so, we've gone from about 10% of the portfolio being stills to roughly 25% of the portfolio being stills. I think mathematically the stills will grow as a percent of total portfolio.
+I would note, as Muhtar commented earlier, I think we need to break out the stills, and not just look at them as one thing, but look at them in terms of their individual categories. We gained share in packaged water. We gained share in juice and juice drinks. We gained share in energy, and we gained share in ready-to-drink tea. We think we can do well in each of the categories that represent non-alcoholic ready-to-drink.
+In particular, we can still grow sparkling. That growth of sparkling into the future is not just in aggregate; but I think over the long-term we will see increased growth of low-, no-, and reduced-calorie variants. I know that's not the case yet in North America, but globally in our international business, those drinks out-grow the regular drinks within sparkling, and they're fueling our growth, so broad-based growth.
+
+
+          Okay. On your question of 4% to 5% organic growth, volume versus price mix, we expect that to be balanced, volume versus the price. As you know, we have the strategy where we are now focused more on net revenue and segmenting our markets, and we're focused on price realization. We do anticipate that strategy will continue, and that will be a balance between both volume -- and we will achieve a balance between both volume and price.
+As advertising and promotions -- in 2014 we announced this program. We said $800 million to $1 billion that we would invest. We are still going to invest -- continuing to invest behind our brands on that program, although we're also going to start investing in R&D. Basically, we're still on our program we announced back in 2014, so you will continue to see investment in marketing slightly above gross profit.
+
+Answer_18:
+
+          Well Ali, let me start with the last first. When we announced the acquisition of CCE, it was essentially a 25-year-old problem. We said it would take a while to basically course-correct. The level of investment was not where it was needed. Also, the level of customer service was not where it was needed.
+Essentially, we believe that having more than just one bottler essentially having that big a territory was a better way -- scalable-size bottlers, right ownership values, right structure and right capability. That's what we have today in North America. We feel very good that this is a model that is going to stay where it is and continue to add value. It's not going to require any further -- all the time they'll be tweaking necessary, but not the scale that was needed when we did the transaction back at the end of 2010. That was a core decision that was needed. There was a major surgery that was needed, and that's really what took place.
+As far as the juice business is concerned, as I said before, it's an integrated business. It basically performs well as an integrated business, similar to other juice businesses that we have around the world. It's a very different model, it's a very different production, it's a very different growth to table model, and requires a different way in terms of its distribution, especially when it's chilled. That's really where a lot of the growth is in value-added dairy.
+That's what you see, whether it's in Fairlife or that's what you see whether it's in juice. It's a very distinct production model, very different, as well as the hot-fill is also the same. Same within a sense in Europe, the same with many parts of the world. [Kukustevayey] is also very similar in terms of the way it's produced. That is just a needed aspect for success and for performance in the hot-fill and juice business -- very different. To your other question related to dilution from franchising, maybe I'll pass it over to Kathy.
+
+
+          Certainly. We've given you guidance for 2016. 2017, it totally depends on timing. We plan to give you more information to help with that, with your modeling, between CAGNY and what we will give you before the end of the quarter. It's all based on timing. In 2018, you asked when will we grow out of this. The program -- we plan to complete the program by the end of 2017, so 2018 we are out of it.
+
+
+          Yes, and our long-term outlook -- just to add for the industry -- remains very positive, Ali. Our system is extremely well positioned to take advantage of this. We're going to be a much more focused Company. We're going to be building brands, leading the system, and driving new growth platforms. Our core business will have attractive growth going forward, in terms of ROIC, free cash flow, and so forth. We're very confident and very excited about where the Company is going from that aspect.
+
+Answer_19:
+
+          Basically, 2018 obviously we will be -- there will be some dilution effect because of the -- we have -- the base hasn't been totally adjusted by that time. Once we get the base adjusted, short of other structural impacts -- which will not be North America re-franchising, obviously -- but other structural impact, we will have quote gone through that re-franchising impact.
+Now we do have some residual costs that will come out, as I said, throughout 2016, 2017. There will be a little bit left in 2018. Certainly by mid to late 2018 even the residual costs will be gone. I think once the base is reset, short of other types of structural impacts, we will have transitioned through that.
+
+Answer_20:
+
+          Ali, it's James here. Look, I think in the US business we did reasonably well in growing Coke Zero, or getting Coke Zero back to flat, and there's still a decline in Diet Coke. I think the bigger picture is in the 80% of our business which is the international business, the diets and lights and Coke Zeros out-grew Coke Classic. We're seeing broad-based growth outside the US of those Coca-Cola variants. That's what gives us the belief that in the long term we will be able to turn around the business also in the US.
+
+
+          To finally add on that, Ali, also with our recently announced one-brand approach to marketing trademark Coke, we are extending the strong brand equity of Coca-Cola across the trademark to offer consumers more choice, and to also better promote our great-tasting diet and light portfolio, which is going to no question help. I think that's going to also help us with the stability that is the target. I'll just leave it at that.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/33_questions.txt

@@ -0,0 +1,87 @@
+Question_1:
+
+          Hi, good morning.
+
+Question_2:
+
+          I'm great. How are you?
+
+Question_3:
+
+          Can you talk about why now is the right time to pull all this stuff forward on the re-franchising front, because obviously there's a ton of macro-volatility? I know there's some challenges as you wanted to standardized the IT platform and even some of the key accounts stuff, which I thought had a little bit of longer tail. Any thoughts you have on that would be appreciated?
+
+Question_4:
+
+          Good morning.
+
+Question_5:
+
+          I was hoping you could actually give us a concrete example that gave you the confidence to make the decision to accelerate your re-franchising plans? While your margin should certainly expand and your returns will increase, could you help frame for us the incremental dilution expected from the new system? Finally, I would like to hear what your plans are for the cash you will receive from the planned sale of the 39 production facilities, which I guess I assume should raise a fair amount of cash, considering I think the earlier sales of the nine sites had a book value of $280 million, if I'm not mistaken?
+
+Question_6:
+
+          Hi, good morning. Muhtar, you posted a couple quarters in a row with volume growth back up in the 3% range, along with solid pricing, despite the difficult emerging markets and macro-environment we're seeing. I wanted to get an update on your market-share performance. Obviously you're gaining share, but have you seen a relative change in terms of incremental market-share performance, and what level of payback you're getting on the higher marketing? As you look out to 2016, 4% to 5% organic sales growth is a fairly tight range. How much visibility do you think you have around that? Could macros pose a risk to the guidance, particularly given you're assuming higher GDP growth? Thanks.
+
+Question_7:
+
+          Okay, great. If I could slip a detail question in, Kathy, I was hoping you could give us clarity on the impact to 2017 earnings from FX if spot rates stay at this level, given the hedging in 2016 and how much hedging you have in place for 2017 on some of the hard currencies?
+
+Question_8:
+
+          Thank you very much. Good morning, everyone. Two questions here. First off, it's a little tough with all the restructuring, the re-franchising of the bottlers to get a handle in terms of what's truly going on, on the gross margin. Can you try and strip some of the impact out from the re-franchising, and give us an idea what the underlying gross margin's doing?
+Kathy, going back to your points on the balance sheet, can you talk about what you're seeing out there that's causing you to maybe term out some of the longer-term debt? Is it the short-term market volatility, or is this something where you would expect to maybe go with a more conservative balance sheet approach on a go-forward basis? Thanks.
+
+Question_9:
+
+          Okay. If I can ask one quick follow-up on that, in terms of the interest income line and some of the cash balances overseas, any change in that approach, or is this mostly going to be on the interest expense line?
+
+Question_10:
+
+          Good morning. One of your stated strategies was to improve the balance of price mix and volume in your developed markets. We've clearly seen that in the US, but I was hoping you could walk around the world and offer us what you're seeing in other developed markets, provide with your prospects and confidence for improving price mix in other developed markets around the world going forward? Thanks.
+
+Question_11:
+
+          Hi. Good morning, everyone
+
+Question_12:
+
+          I wanted to get a couple of points of color on the productivity program. Kathy, to start, you were keeping the original $3-billion plan, but a portion of the COGS opportunity is now going to go off with the re-franchising. Could you give us some idea of just how big that is, how much you had to make up in terms of keeping the $3 billion where it is?
+
+Question_13:
+
+          Net, this productivity plan is actually now a little bit bigger than it originally would have been. Is that just a function of as you're doing more you're finding more savings, or was the re-franchising motivating you to look for more savings? I'm trying to get a sense if there's more momentum building on the productivity program itself?
+
+Question_14:
+
+          Okay. One last one. Of that $500 million that essentially goes off in re-franchising, will that actually still be realized within the franchise system? Does the Coke system itself still see the $500 million of savings, or is that lost because it needed to be integrated with Coke to get it?
+
+Question_15:
+
+          Okay, from our systems perspective this is truly incremental savings, it's just a matter of where we're seeing it?
+
+Question_16:
+
+          Thanks. Good morning, guys. I want to come back to the Asia-Pacific region. I have two questions, first is on price mix, and then second on China specifically. Price mix in the quarter was down 9%, and margins were down pretty significantly. James, I think you talked about re-staging the sparkling business, and I know there's been some negative geographic mix. A little more color there would be helpful? Then the second piece on China, 1% volume growth but you were cycling a pretty soft compare of down 1% last year. Maybe you could elaborate a bit on what you are seeing in that market, and your expectation here over the next 12 months? Thanks.
+
+Question_17:
+
+          Thank you very much. Actually, a relatively quick set of questions for each of you, if I could. First, Muhtar, on re-franchising and the decision to retain hot-fill and juice assets, is that an indefinite plan, or is that subject to further review? Similarly on China, or thinking about China and rest of world, should we be thinking differently about your plans in India in terms of future re-franchising in that market, as well?
+Then Kathy, the 4% to 5% organic growth you were calling out for next year, can you give us a rough sense of volume versus price within that, and how much if any you expect to spend incrementally on A&P in order to achieve what amounts to underlying acceleration?
+Finally, James -- sorry for all the questions -- we debated this a while back, and I'm wondering if you've got additional thoughts in terms of your longer-term growth -- how much you expect the portfolio to lean on stills versus sparkling? Do you think you have the right balance of demand-building support against each of that, in order to achieve your long-term goals? Thank you.
+
+Question_18:
+
+          Hi guys. On re-franchisement, obviously good news that it's going faster, but I still have a few questions on this. One is I get the discussion about holding on to juice. I'm not quite there on hot-fill, so if you could elaborate on that, that would be helpful? Trying to get a better sense secondarily about when you think you will actually be able to grow out of the dilution. It's clearly dilution right now, then 2016 three to four, and then probably 2017. At what point will you be able to grow out of the dilution, given better margin top-line growth, et cetera?
+The core question is you mentioned your goal was by buying North America bottling you would be able to accelerate momentum for sales and profitability. I agree you've done that, going to smaller pack sizes, increasing prices closing some plants, increasing media spend, improving IT.
+I'm still confused why you have to buy the bottlers -- or one consolidated bottler, I guess, in North America, to do a lot of those changes. Why do you have to spend billion of dollars to push these changes through? Was there not a more efficient-for-shareholders way to do it?
+In that context, how do you give investors confidence? I get this question a lot. How do you give investors confidence that five, 10 years down the line, you won't have to buy these bottlers back again in North America?
+
+Question_19:
+
+          I apologize, maybe I wasn't clear on the dilution piece to it. I understand the timing of the program. I'm not looking for timing in terms of when in 2017 something happens. I'm more looking longer-term. If you're getting rid of these businesses, you will be a better-growing business, right -- better margin, better-growing business, that's the hope, that's I think all of us, as we're trying to estimate longer-term.
+I'm just trying to figure out, because you're going to be better, when do you offset the dilution? You're growing faster, you've taken a hit. When are you going to offset the dilution? At what point in time effectively do you become net positive and go beyond? That was the question; maybe Kathy you can refine your answer. I'll leave it at that, if you could help there?
+
+Question_20:
+
+          Okay. Just one last question, sorry, on diets. It looks like volumes were down 5%, but that's better than we've seen recently. Can you give us some color on whether you're seeing that actually stabilize or perhaps a little bit improve, or is it because Pepsi changed formulation and you guys are getting the benefit of it? Some idea whether that's getting better on diets would be helpful? Thank you, that's it for me.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/34_answers.txt

@@ -0,0 +1,117 @@
+Answer_1:
+
+          Good morning. 
+
+Answer_2:
+
+          Hi, John. It's Muhtar here. I'll just preface by saying the following, and then pass over to James. First, you know how much we've done and how much we focus on creating successful brands in our still portfolio. Of the $20-billion brands we have now, 14 of them are still brands, and our still business is performing well. Whether we take value-added dairy or enhanced hydration or juices and nectars or juice drinks, we play in all of those categories. In 2015, we gained share in all of those categories. 
+If you look at how -- whether it's in developed markets or emerging or developing, our still beverage portfolio is being enhanced all the time. Also, and even in the case of waters and premium waters from Japan all the way through to Latin America, performing very well. 
+You just heard now again, we've invested in -- we just recently invested, as you know, in Suja in the United States. We invested in Chi and Culiangwang in China. We continue to always reference that wherever we look, and if there's opportunities for bolt-on acquisitions, we will look at those favorably. If there are also opportunities for organic development of brands like Fair Life, we will certainly look at those also favorably, as we have done. 
+I think we're very satisfied with our portfolio. Certainly we've got more work to do, as we have said in the call and in the remarks; but right now we feel that we've -- our portfolio is being transformed very well, and transitioned very well, and we are in a pretty good place -- and more work to continue. James? 
+
+
+          Let me add one last thought, perhaps, John. At CAGNY, we talked about we have a 50 share of sparkling, and a 15 share of the stills. I think it's worth remembering that over the last 15 years we've gone from stills being less a single-digit part of our portfolio to now over 25% of our portfolio. 
+I think there's a long-term track record of generating growth and value in stills. Even given today our market position, we expect to continue to grow faster in stills. As we said in the call, we are gaining share in every sub-category apart from one where we held it. We'll continue to look for bolt-on acquisitions to accelerate our growth. I think it's going to continue to be a faster-growing part of the business. 
+
+
+          Also, just on the sparkling you asked, we certainly see also continued growth opportunities in our sparkling portfolio. That is naturally with the focus on revenues, it will skew more towards revenues, but certainly also as we have demonstrated and with our new campaign for Taste The Feeling campaign just being launched, and everything else that we are doing in terms of the investments with our aligned partners, we see growth opportunities in revenue, and also in volume in our sparkling beverage portfolio. 
+
+Answer_3:
+
+          Hi, Steve, it's Muhtar. First, I think we did expect the first quarter to trend slightly below the full year, driven by a couple of things. One, the macros are trending to the bottom -- toward the bottom in the first quarter, recognizing that the environment continues to be challenging, but we will continue to monitor that closely. 
+The launch of our new campaign in the first quarter will certainly benefit the back half of the year. The benefit of Olympics marketing as we move into the second and third quarter, one less selling day which certainly you also mentioned. I think we are confident definitely in the strategy and initiatives in place to support our growth targets over the course of the year, and believe that we will land again in the corridor that we have stayed at in the past in February. James or Kathy, do you want to add anything? 
+
+
+          No. 
+
+
+          All right. 
+
+Answer_4:
+
+          Sure, Mark. There are really -- we look at the margins in CCR, the three primary drivers for what you're seeing. First of all, we have shifted some of the territories. We have transitioned some territories to date. We did that obviously before we put the financials out there earlier this quarter. 
+Then if you remember, we incurred back in early 2010, 2011, 2012 time period, there was a significant hit to us from a run-up in commodity prices that certainly adversely impacted margins. Then the third thing I would say was we had to incur incremental costs to prepare that business for now being ready to be franchised and to strengthen that business. I think what we're seeing is improvement in the results that I would say today. Those three things really are impacting what you saw in the financials that we put out there. 
+
+Answer_5:
+
+          It's James here. Look, volume grew 2%. Core price mix was 2%, so that's the right answer. 
+
+Answer_6:
+
+          Judy, it's James here. A couple of things on Europe. One, it is worth noting that in this quarter, there was a disruption to the business in GB due to the supply chain. There's a one-off impact that we expect to see not recurring in the balance of the year. I think that's worth taking into account, and it was a material impact. 
+Now looking for the rest of the year, you will see in the numbers we had pretty decent price mix in Europe in this quarter, and we are also looking to see volume improving versus the fourth quarter -- not just because of the supply situation, but also the new programs, the launch of the new marketing campaign, the launch of a new Coke Zero variant starting in GB, plus the Euro Cup, which will be in France this year. 
+Of course, shortly we will hopefully complete CC Coca-Cola European partners, where there are very strong plans being put in place to drive that forward. I think some temporary factors, and the build-up of our ongoing investments should drive a better result in Europe in the balance of the year. 
+
+Answer_7:
+
+          Sure, James here. Let me -- I'll come to the numerical piece. Let me start off with -- the Asia-Pacific price mix is always a little bit of an oddity, because it's a group that brings together Japan and Australia, which are very high-revenue markets, but don't grow as quickly, along with a lot of emerging markets -- not just China, but India, Indonesia, and the Philippines, which grow much faster. 
+There is an ongoing mechanical effect that creates a negative price mix for this group, which you can see over the years in Asia-Pacific. In 2013 full year it was minus 4%. In 2014, it was minus 2%. In 2015, it was minus 2%. In the first quarter of 2016 obviously it was minus 5%, but it was cycling a very atypical plus 3% in the first quarter of last year. 
+I think what you will see is in the future quarters, it is a little volatile and bumpy, but the long-term trend is for a negative price mix in Asia, because of the dynamic of the fast growth of the emerging markets versus Japan and Australia. 
+
+Answer_8:
+
+          Ali, I'll start just by saying, as I indicated, first on the core, with one less selling day and on the core price mix of the core business without BIG, we certainly did get to the 4% in this quarter. What we feel looking at the downhill comparisons and looking at also all the programs in place, looking at how our business performance in all the different quarters and different groups, we feel confident that we still will achieve what we have said in February in terms of the top line for the full year. 
+The marketing program, the additional marketing, the new marketing program that has just been launched, and then not having the one less selling day. Then also the continued franchising and all the programs that the bottlers have in place. Our US business is performing very well with its revenue growth, with its price mix, with its brands, with its portfolio. That will continue in -- we have every confidence that it will continue. 
+Then we will see -- we do believe that macros have -- are at the bottom, and that there will be in the second half a certain degree of improvement in the macros. Even if they do not -- if they stay the same, we feel confident with the current macro situation that we will get to the corridor that we have specified, we have indicated and shared with you in February. Any other comments, James, Kathy? 
+
+
+          No, I think the one thing I would add, Ali, is obviously there's a strong momentum in the North America business. We called that out as the place where the strategies are working. Then the other countries I put in the other two buckets, there's degrees of implementation of the strategy. You can go to around the world. There were places which were struggling in 2014, and maybe even in 2015. As we've been executing the strategy, the momentum is starting to come back to some of those countries, and it's starting to build over time. 
+I think, as Muhtar said, the first quarter was within the envelope of expectation for our guidance, and we can see based on what we are doing within our control, within a reasonable scenario of macros, we will stay within that corridor for the rest of the year. But in the end, only results will answer the questions. 
+
+Answer_9:
+
+          I think on that, predominantly we have existing bottlers that are expanding, if you look at the percentages of territories that have been franchised. Then we have, in order to ensure that we can get to the right level of diversity in our bottling business and the right level of also representation, we have also selected some new partners like in Florida, like in Chicago, and like now, the most recent one announced. 
+We feel that is a healthy mix and that's also a healthy balance, and we have the right -- very much the right approach and the right alignment with our expanding bottling partners, whether they are just entering our system, or they are proven expanding bottlers like the ones that we have mostly franchised new distribution to in the past year. 
+
+Answer_10:
+
+          Certainly, Bill. Really, the gross margin decline is really impacted by two things, really. It's currency and it's the structural impact. Currency, I think like 80 basis points, would have added 80 basis points back to our gross margin. The structural impact actually would add significantly more than that. It's really as simple as that. It's really about currency and our structural adjustments. 
+
+Answer_11:
+
+          Let me take a bite of that, Kevin. I think the answer on the slow-down, we don't get all the category numbers necessarily. Clearly, as we're gaining share in that top-line number, there's got to be some weakness in the category versus the long-term target of 5%. I think we talked a little bit about that at CAGNY, about how our expectations for 2016 and 2017 were below the long-term 5% dollar value for any RTD. There's definitely some of that. 
+I think you can see the macros influencing the industry in the sense that a number of the emerging markets, particularly the commodity ones, where we have had the slow-down, and that's clearly flowing through into the industry. 
+I think what I would highlight is we're going to focus on what we can control. We have a long-standing game plan of what to do in countries that are in crisis, focusing on really gaining a lot of share to set ourselves up profitably for the long-term, as we did in a lot of countries in the past. It seems to be working now as we gain share in the Chinas and the Russias and Brazils. It will pay off in the end. 
+I think the visibility, look, we are managing to our corridors at the top and the bottom line. We feel that this quarter was within the envelope. Clearly the macros slightly better, slightly worse, will be an influence in where we end up; but we've got a lot of management left to do in the balance of the year. 
+
+Answer_12:
+
+          Good morning. 
+
+
+          Good morning, Bill. 
+
+Answer_13:
+
+          Bill, this is Muhtar. We've said from the beginning first that the new campaign is not just a new campaign, but also it's a new strategy in terms of the one-brand strategy, and that it's got many advantages. We expect it to give us significant efficiencies and effectiveness. 
+But also in terms of how we communicate with our consumers, it will certainly play into that as we execute the strategy, and we've now launched the new campaign. Then I'll let James comment in terms of you asked the Mexico specific example, but also there's also many other places where it's been tested, and tested favorably. Go ahead, James. 
+
+
+          Yes, Bill, a few thoughts. One, the initial pilot markets, the two sources of very clear impact were one, it helped us expand and grow the zero-calorie variant of Coca-Cola by driving availability and driving trials. We would expect to see benefits on the zero-sugar variance. 
+The second big area of benefit is it helps us create what we would call corporate blocking.  In other words, we execute in stores all the variants of Coca-Cola together as one big block, has a much greater store impact, visual impact, engagement with people who are shopping the stores. 
+I think slightly more strategically and back to Muhtar's point, this is an implementation of a strategic idea. I'm sure we'll evolve it. I'm sure we'll make it better, but it's the strategic idea that's important. It's not just about the efficiency in the advertising. It's about helping consumers join and stay in the Coca-Cola franchise, whatever the ingredients they want to manage, including their management of added sugars, whether that's in drinks or any other categories that have added sugar in. This has a number of benefits that are going to play out strategically, and we will keep improving the execution. 
+
+Answer_14:
+
+          Good morning. 
+
+Answer_15:
+
+          One point I would just add, Amit, would be that the US compared to the rest of the world, the prevalence of small packages was much less in the United States three or four years ago compared to the rest of the world. If you look at Europe and places like Spain, or if you look at many countries in Latin America, you had much more prevalence of smaller packages then in the United States. 
+In a way, the United States in the last four or five years, but particularly last two and a half years, has moved very rapidly to the 12-ounce glass to the 8-ounce glass to the 7.5-ounce can, to the 8.5-ounce aluminum bottle. That has really worked. Those are all growing double digits in the United States because of two -- the consumer customer preferences, and also benefiting our system because they have a higher price per liter. That's in a way playing out from what was already prevailing in many parts of the world in the past. 
+
+Answer_16:
+
+          Good morning. 
+
+Answer_17:
+
+          Vivian, I think a couple of things. One, obviously most of our campaigns are weighted into the second, third, and fourth quarters. Those are the biggest quarters. Even Taste The Feeling, we announced it this quarter, but it's only really hitting at towards the end of the quarter and rolling out in the rest of the year, as with the Euro Cup and the Olympics. I think a lot of the programs are going in later this year. They -- obviously the execution is there, so we would expect to see better performance in trademark Coca-Cola going into the downhill. 
+I would make one other note, which is the relative change in where global growth is coming from, or industry growth is coming from -- a little more in developed and developing, a little less in emerging -- tends to create a portfolio effect that weighs a little more against sparkling and therefore Coca-Cola, because those emerging markets tend to be more sparkling orientated. You see North American, Latin America, Japan, with stronger stills growth. We do expect to see growth. We would expect to see it coming back. There is a geographic mix impact, but when we look at the markets, we believe we will be back on track with Coca-Cola. 
+
+Answer_18:
+
+          Robert, it's Muhtar here. I think first, in terms of the efficiencies, the most important benefit will be simpler and less-fragmented communication with the consumer. That will be the biggest benefit. But also, it will certainly help provide -- create more efficiencies and effectiveness in our non-working DME, and therefore will also provide some productivity in that respect. But the most important benefit will certainly be a less cluttered and better and more direct communication with the consumer base. 
+In terms of the trial of product, that will certainly come as a result of that, of what James mentioned in terms of better presence in the store, in terms of better merchandising, in terms of better interruptions in the store, and also in terms of the communication piece. 
+We believe that the most important benefit of this will infuse and will come to brands like Coca-Cola Zero with more availability, better communication, and have the broad perspective of the global campaign, as opposed to every different brand under the Coca-Cola trademark having their own campaigns. That will be how I think the benefits will come. We -- trials and pilots so far have proven that in Europe and other parts of the world. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/34_questions.txt

@@ -0,0 +1,77 @@
+Question_1:
+
+          Thank you. Good morning, everyone. 
+
+Question_2:
+
+          Good morning. As I look at your revenue performance this quarter, it highlights a concern that maybe the portfolio was still a little too CSD-heavy, despite some of the great results on the non-carb side. You've talked about -- James talked about this at CAGNY, 5% NARTD dollar growth longer term. 
+But given the fact you guys still under-indexed on the non-carb side that's providing really the majority of the growth in both dollars and volume for the category, don't you need to further accelerate the shift in the portfolio away from CSD, sparkling into non-carb? Is there a way to move that faster? On top of that, obviously the weakness in the CSD side this quarter with flat volumes, what do you think is really the right volume number on the CSD side going forward that gets you to your algorithm? Thank you. 
+
+Question_3:
+
+          Great, thanks. Good morning. Maybe sticking with the top line, I just want to better understand where you expect to source top-line acceleration from over the remainder of the year, against a difficult macro environment, and increasingly difficult year-over-year compares. I get that you were probably closer to 4% organic growth this quarter excluding the calendar shift and the price mix drag of BIG, but BIG will be with you over the balance of the year. In that context, is there truly enough in your control to have confidence in sequential improvement, or are you expecting the macros to improve? Along side all that, is it fair to say you're guiding us more towards the lower end of 4% to 5% at this point versus the mid-point? 
+
+Question_4:
+
+          Thanks. Good morning, everyone. Question on North America. We now have the filings you've given us, and we can therefore see the level of profitability here in CCR, which is pretty low. I think when you back out the numbers, you get a 2% operating margin. I'm sure there's some accounting matters in there that this isn't the forum to go into, but it does raise the question of what really has been going on in terms of profitability for CCR here in North America. 
+Could we -- if you think it's appropriate, I think it would be helpful to talk a little bit about the trends in that business as you have seen them, now that we're seeing a level -- the margin I'm getting is a 2% operating margin. Can you talk a little bit about the trends and what you think they reflect? It certainly speaks well to what you get left behind, if you will, but it raises questions about what someone might pay for that kind of business? 
+
+Question_5:
+
+          Hi. Good morning, everyone. I wanted to go back and tie a couple of comments that have been made about the effect that BIG had on organic sales growth for the quarter. I want to make sure I understand it correctly. If we look at sales excluding BIG and we add back the extra -- the effect of the extra day, organic sales growth was around 4%, is that correct? 
+
+Question_6:
+
+          Thank you, good morning. One of the markets where you point out you're taking more actions is Europe, and certainly from a top-line perspective, continues to be a pretty challenging market -- deflationary pressure there. I wanted to get a little bit more color. Really, what are some of the more tangible actions that we can see? How much dollars are really going in, in terms of the marketing investments that we should expect to see some of that improvement really coming through, and how long that would take as you think about for the balance of the year? 
+
+Question_7:
+
+          Hi, good morning. I wanted to delve a bit more into the Asia-Pacific pricing number in the quarter, a negative 5%. Can you run through how much of that was due to geographic or product mix or other factors, and thoughts going forward in the remainder of the year on if that pricing pressure will moderate, and how mix should trend in that segment? 
+
+Question_8:
+
+          Hi, guys. I'm still getting a lot of skepticism from investors about the 4% to 5% organic revenue growth target for the year. Openly, you don't sound 100% confident, and it feels likes there's a lot of kind of messiness and moving parts. Can you try again? Can you talk about what specifically you're seeing right now that gives you confidence in the 4% to 5% organic sales growth for the year? Clearly whether it's a 3% or a 4%, you delivered a 3% in some sense this quarter, so you're below pace. 
+Maybe in that you can tackle what you expect Eurasia, Africa to get to, why do you expect it to get better? Europe, you mentioned you're going to invest more and you hope that to get better, but we've sometimes heard that before. Why is it going to be better in Europe? 
+Then maybe as a jumping-off point as well, you can talk about what you're learning in North America, because that seems to be doing better for sure. A footnote, I'm not quite sure where you grow organically North America, because you want us to add 3 points back for concentrated sales up to unit case sales for one day missing. I'm not quite sure how to get there, so some explanation would be great. But just more specifics, very clearly on what gives you the confidence in your top-line target for the year? Thanks. 
+
+Question_9:
+
+          Thanks. The re-franchising that you announced today includes the creation of a new bottler from outside the industry. You have spoken a lot about the collective willingness of your existing bottlers to invest and a desire for more territory. Can you help us understand why you went outside of the existing system for this re-franchising? Is there something you're seeing from other new bottlers that makes this more appealing to you guys? 
+
+Question_10:
+
+          Hi, good morning. Can you guys give us a little bit more granular bridge on the gross margin decline this quarter, and then maybe some broad-stroke outlook for the rest of the year? I know the comps get easier as the year progresses, but it would be really helpful to aggregate the FX impacts, some of the re-franchise impacts, then what you're thinking for the rest of the year? 
+
+Question_11:
+
+          Thanks, good morning. Question, how much of the slow-down in the top line in the quarter was macro slowing in the NARTD category versus execution? You spoke to share gains in both stills and sparkling, so it would certainly seem to be broader slowing in the category? 
+Then of course there's been a lot of discussion on the top line. It would seem like the lower end of your 4% to 5% organic sales outlook would be prudent at this point. A follow-up question on that. How much visibility do you have on productivity and other levers to deliver the high end of the ES growth guidance range, should you come in toward the lower end on the top line? Thank you. 
+
+Question_12:
+
+          Thanks, good morning. Can you just -- 
+
+Question_13:
+
+          Talk a little bit more about, now that you've unveiled the one-brand packaging -- I guess it's being launched in Mexico -- expectations for that, and maybe what you've learned as you've tested it out? I say that just -- I understand it's certainly going to be more efficient from an advertising, marketing front on the one brand strategy, but didn't know if you expected a sales lift, or if there's been any confusion from consumers as they have seen it? Thoughts as we've started to launch that? 
+
+Question_14:
+
+          Hi. Good morning, everyone. 
+
+Question_15:
+
+          Thank you. 
+
+Question_16:
+
+          Good morning. 
+
+Question_17:
+
+          I was hoping we could talk a little bit more about the health of brand Coca-Cola. In your press release, you called out softness either around the total brand family or trademark Coca-Cola in a number of geographies. While I appreciate that you have a lot of new initiatives between Taste The Feeling and new packaging, in the past you guys have said that it does take time for some of those advertising initiatives to actually gain traction and show up in brand health and volume. How should we think about the trajectory of trademark Coca-Cola as you roll out these new initiatives, please? Thank you. 
+
+Question_18:
+
+          Great, thank you very much. I wanted to follow up on the questions on the one-brand strategy, and specifically ask when you look at let's say the full implementation of that two, three years from now, do you think the benefit will be 50/50 between cost savings and efficiency and greater demand? How do you see that breaking out? Specifically, also in terms of the answer to the prior question on that, how exactly is this strategy helping drive trial and availability for Coke Zero? Thank you. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/35_answers.txt

@@ -0,0 +1,87 @@
+Answer_1:
+Okay. Good morning, Steve. Let me try and get to China, and let me start from the top and work downwards, if I may. Firstly, it's clear that when you look at the whole company, almost half our revenue comes from bottling versus the other half comes from concentrate and franchise. But given, as you all know, that our bottling business comes with 4 to 5 times more revenue per drink sold and the accompanying cost, any effect on the revenue of the bottler is going to have a magnified impact on revenue and much less on profits, which is part of this dynamic. 
+In China, it's our largest international bottling operation. We own bottlers that are roughly 20% of the global business. But the business one outside the US is China. So, that's where it's coming from and it's the mechanical impact of being hit in China where we own about one-third of the system that is creating that whole difference between the 3% and 4%. 
+And what we have assumed in our outlook, just to be more confident and clear in our competence going forward, is we have not really assumed that China is going to get better in the rest of the year. If it did, that would be great, but we are assuming it's not in terms of our outlook and guidance, but obviously we're working to try and make it better. 
+Now, as I said, what's changing as you try to split the difference, what's changing is both the consumer and the supply chain. I think in round numbers from a revenue perspective, you've got about half the impact coming from the consumer and half coming from the supply chain. What's happening on the consumer, you can see it in the scan Nielsen, and the non-scan Nielsen is probably a bit worse than the scan Nielsen in terms of slowdown in sellouts to the consumers of all types of FMCG categories. So, it is a broad-based consumer slowdown. 
+Within that, from a beverage point of view, you have juice drinks and juices which are more to the rural areas and blue-collar. They are down double digits in terms of revenue from a consumer point of view. Something like Coke is down low single digits and premium waters is growing. 
+So, there's a shift in the category mix going on, which also actually impacts revenue because juice drink prices tend to be higher than sparkling or water. That doesn't flow through to profitability. So, there is a rebasing going on in there. 
+But, as I said, about half of it is the supply chain, the whiplash effect of the destocking by the customers. And that, as you say, is likely to be a much shorter-term impact. But, again, we're working on it but we're not including any improvement on that in our outlook, although clearly we want to get focused on it and get it to work. 
+I agree with you, the consumer thing will take a little more time to come back, which is why we are focused on the game plan we know that works in downturns where we focus on affordability, on premiumizing for those parts of the country, like the premium metro areas, and bringing out new products to them, and that way we believe we can gain value share, which we continue to do in China so that we are set up as the consumer starts recovering. So, about half and half, and we believe that the consumer will come back and the supply chain will sort itself out in the relative short term in the rest of this year. 
+Now, with regards to the refranchising, obviously can't really comment on the M&A, but I would say that we and our partners all believe in the long-term potential of the China market. We are very excited. And, as I said, because a large part of what's happening in the short term is destocking and inventory, everyone is looking past that and looking to the long term. And I think there is still good motivation and animation by everyone to get the deal done. And we'll obviously, from our point of view, make sure we do it on the right terms for ourselves, and they will be looking for the right terms for them, but we still think it is the right deal for everyone and with a good likelihood of getting done. 
+
+Answer_2:
+Dara, I'll just comment first and then maybe I ask Kathy and James if they want to add anything. But certainly you've answered part of it by saying that, yes, revenue challenges are coming from those areas that have much lower margins, number one, for sure. And then, secondly, productivity efforts are continuing that is driving the margin expansion in quarter two. Kathy mentioned the significant margin expansions that we achieved and I think productivity efforts are going to continue. 
+And then, finally, I think there's also a mix. Some of our better markets are doing well, like the United States and Mexico, and also in the Far East and Japan. So there's a mix issue. 
+And then, finally, the commodities continue to be pretty benign in terms of the outlook. So, those are the things that play into altogether, but primarily also the one that you mentioned which is the revenue, challenges are coming from much lower margin areas in terms of our business there. Kathy, anything to add? 
+
+No, I would say those are the reasons, which I would say probably you're picking up the fact that we do have more difficult comps in the back half for some of the things that Muhtar mentioned. But we are confident that we will still be on our guidance. 
+
+Yes, we are overall very confident. The changes in marketing, the strategy on innovation pipeline, the one-brand strategy which is just at the beginning, the promotions that we have in store in the summer around the Olympics, the price/mix expansion that we've experienced in quarter two, all of that we feel play into the equation, and give us confidence in the back half that there are slightly more challenging comps in the back, that we can actually cycle them and achieve them going forward, and feel confident that we can. 
+
+Answer_3:
+Okay, Ali. Basically, it's in the rounding. So, yes, we gave comparable currency-neutral guidance on EPS of 4% to 6%, and that was comparable currency neutral. So, then when you either take out another rounded point of structural -- so it rounds it down but it's really a rounding point of structural -- and if you take out currency, that gets you basically in that, the actual numbers, if you take out only 1 point of structural, gets you to 3% to 6%. But then it's in the rounding, so that's how we came up with the 4% to 7%. 
+If you start with the 4% to 6%, you back out the currency and you back at a rounded point of structural, that gets you down to your 3% to 6%, and then it's really in the rounding you get to the 4% to 7%. 
+
+Answer_4:
+No, that's correct. 
+
+Answer_5:
+Sure. I think perhaps that's two questions in the second question there, Ali. But let me have a go. In terms of re-assessing the actions, that's both on the places with momentum and the places that are suffering. There are parts of the business that are growing strongly, whether that's at one end of the spectrum like US and Japan where we've got good momentum. The US grew organically 4% in the quarter. Japan is growing well. 
+We are increasing the amount of spend as we see the tailwinds and the effectiveness of the market being the innovation or the execution. So, we are reallocating money to the places that have momentum. And that's on the developed end like the US and Japan, it's also on the emerging end like Indonesia and the Philippines and places like that. So, we are going where we see the opportunities to get the biggest bang for the buck. 
+Now, we're taking some of the money from those markets that are under the most pressure and in those places we are prioritizing. Yes, there's still some advertising, but we are doing innovations and we are doing execution, and, very importantly, doing affordability. The most extreme example, perhaps, is Venezuela where there was no sugar and we've actually doubled down and really driving Coke with zero sugar in Venezuela with a full read one-brand look. 
+There are places where we are adjusting to the need. Just because you advertise doesn't mean people are going to buy if it's an affordability problem. I think China is a good example of where affordability is in there, as well. And I think I've talked a bit about China. 
+But the game plan that we've used in those emerging markets under pressure, we're really rolling out. So, that reassessing is moving some top-line money to those with momentum, and doubling down on execution and affordability and innovation in those pressured markets. 
+That goes a bit to the advertising. Advertising is up this quarter as we continue to see the value of advertising as part of the marketing mix in combination with innovation and execution. It's only when you get all of those together that you really get the best returns. So, we always look to make sure that all three are there, otherwise we'll end up wasting our money. 
+We are out there and we're pushing ahead with it. And I think what we always have said is that advertising takes some time to work. So, for example, the one-brand strategy that we launched, announced, in the first quarter we started the rollout, the latest iteration of the graphics went into Mexico a couple of months ago. That sort of marketing innovation takes time to build up an effect. 
+So, we will keep pressing away with the investments and keep assessing. It's too early to call the success. We'd do that towards the end of the year. But we are focused on making that work. 
+
+Just to add to the point of ROIC on the marketing, when you take into account the price/mix expansion going from 1% to 3% in the quarter, when you take into account the core business that we have, which is really the Company that's emerging out of this very rapid transformation and refranchising, is growing still at a point ahead of the total Company currently, consolidated number, which is at 4, which is within our long-term growth targets that we've espoused to and talked about. I think that's also not maybe a micro metric but certainly an important metric to consider in terms of the payback on also all the activity. 
+We're still in the early days of the one-brand strategy just launched in Mexico a few months ago, just launched in Europe and parts of Europe. Again, we feel confident that is going to continue to work in our benefit, coupled with the marketing that James talked about. 
+
+Answer_6:
+Sure, let me start. I don't think any of the unit case pressure in the second quarter was due to the reorganization. I think the trends on unit cases -- and let me just put out another way of looking at it -- have started at the beginning of the year. 
+I think it is probably one of the few times we've seen the developed and our developing countries grow volume, and actually seen the emerging markets decline in aggregate. I know we only put out the numbers by groups but if you look at developed economies and developing economies, you see volume growth in both those blocks of countries. 
+In the end, our business, when you take the segmented roles, we've got volume growth and price/mix growth in developed and developing countries, which is very positive in terms of the long-term trajectory of the business. North America has got multi years of making that work in the revenue line. So, that's very strong. 
+The volume weakness is all in the emerging markets and it's all concentrated in a few of the emerging markets. It's big in some of those markets but it's very concentrated. And the people then on the country levels are all largely still the same and working on these problems. 
+So, hopefully that gives you a little insight on where the volume weakness is, but I don't think it has anything to do with the reorganization. In fact, I think the reorganization is helping us bring some refreshed views and some experience on what to do in emerging market weakness going forward in the downhill this year and into the future. 
+And then on the price/mix, 3% is a good result. I think we've always talked about, our long-term growth model calls for 4% to 6% revenue growth, and we see a balanced split between volume and price/mix into the future. So, that gives you a 2% to 3% for price/mix component of the long-term growth. So, 3% is a strong result. Long may it live. But the long-term growth model, we are looking for 4% to 6% in a balanced way. 
+
+Answer_7:
+Sure. On Europe, I think Europe got a little bit better this quarter. There are things weighing on our business. I'm not a big fan of calling out weather as a driver of performance. The weather occurs for good or for bad all around the world. 
+Now, in the case of Spain and also France, that end of the Mediterranean, it was particularly poor in the middle part of the quarter. So, that's really what's driving, what's going on in the Spanish business, and also it impacted the French business. 
+We see Europe getting a little bit better. We had some good results out of Germany, and, as you said, some sequential improvement out of GB cycling out of some of the supply chain problems as they got fixed that came out of the first quarter. So, we see that starting to improve going forward. But I think -- I hate calling out the weather but I think that's really the reason in Spain and France, and I think we'll start to see those businesses get better. 
+Now, it is worth saying that we've got a lot of good programs in Europe, but the recent tragic events in Belgium, in France and recently in Germany, do weigh on consumer sentiment and consumer behavior. They go out less. We have strong on-premise businesses -- in fact, particularly in Spain -- and that is being dragged down as people respond to some of these tragic events by perhaps staying at home a little more. That hopefully will get better in time as the security situation improves. 
+But I don't want to get into weather and global events. I think the business in Europe can get better. We've got a lot of launches coming up and we've got some strong programs. So, I think Europe can continue to perform. 
+
+Answer_8:
+I'm not going to comment on the beginning of July from a volume perspective. I would note that I think July was the biggest ever month for Spain last year, so they've got some tough comps to cycle. They had a record summer last year. 
+The underlying business in Spain is improving. Firstly, the economy's getting better. Secondly, the supermarket environment in terms of rational pricing and some of the activities is getting better. And the Spanish bottler made a massive investment going into last year to reinvest in returnable glass, which is one of the preeminent places in the world where this is true in the on-premise account, and that's starting to show good results, notwithstanding the weather and the security impacts in the year to date. 
+And now with the CCEP deal closed, and management fully focused on leveraging the best of the marketing, the best of the innovation, and really doubling down on the execution, I think we'll start to see improvements in Spain and the other CCEP territories. 
+
+And on currency, yes, we did not change our guidance this quarter. We've had a lot of movement in some key currencies but basically they are offsetting each other. 
+Given the volatility that we've seen across the portfolio, some currencies are getting better, like Brazil; some are staying the same or getting worse like in Mexico. Our hard currencies, we are hedged 100% basically. And then we hedge our emerging market currencies on a short-term basis opportunistically. With 2017 being fully hedged for our hard currencies, obviously our exposure then would be basically in our emerging market currencies. 
+
+Answer_9:
+2017, that's correct. 
+
+Answer_10:
+Judy, good morning. Again, it's Muhtar. First, I think James talked in detail about where the volume shortfalls were coming from, and specifically related to certain large emerging markets that drove that number. That's related to Brazil, that's related to China, being the large ones, but also Russia. All of those emerging markets that used to have better disposable incomes, better macro conditions, basically drove some of that. And going forward certainly we expect some improvement in that area. That's number one. 
+Number two, I think important to note that, again, mentioned the developed markets grew and developing markets grew volume, and were ahead of the total Company number, which was flat, and ahead of emerging markets. That itself will tell you that certainly the price/mix coming from those markets and then the total geographic mix that coupled with that is something that was instrumental in driving our price/mix number in the way it landed in the quarter. So, all of those factors and all the algebra coming together is what made that -- the country mix coming out of that, the geographic mix, and then the volume coupled with the pricing that we got. 
+Today, when you look at our US business, with 4% organic revenue growth in North America, that tells you that is in the upper certainly and very much in the upper quartile of all large consumer businesses in the country. We're doing very well. Japan performed well. Again, Mexico performed very well in terms of the volume and pricing combined driving the total number, of price/mix. 
+So all of that really goes to explain and hopefully that answers your question on that. Anything to add James, there? Okay. 
+
+On the price/mix question, Judy, we did have this quarter price/mix was positive across in all other groups -- yes, primarily driven by Latin America and inflationary pricing but also operational pricing in EAG. But then it was offset by segment mix coming from the bottling investment segment. 
+So, as James said, pricing of 2% to 3% is what we expect and what we would think would be very good pricing and in line with our segmentation strategy. Even though EAG was probably out of its normal range at this point, North America pricing is still very strong. We do believe in the segment strategy, and the 2% to 3% is what we expect going forward. 
+
+And then the sparkling segment, just to finalize that, continues to be a segment of the nonalcoholic ready-to-drink where consumers continue to spend a very large amount of money in terms of consumer spend and in terms of the dollar value. It's still very healthy and that's why it gives us confidence looking into the future about what we are doing in terms of the segmented revenue growth strategy and in terms of the marketing approach and the one-brand strategy in taking the lion's share of that spend going forward. 
+
+Answer_11:
+I think, in your first question, our medium-term outlook for the industry hasn't really changed. We're still expecting robust growth in the industry in the long term, driven by disposable income, urbanization, the middle class, innovation. We see these things expanding now. We've talked about that being in the 5% ballpark and then probably in the next few years talked about it being in the 4%. So, we do see it coming back over time, but we do see industry growth slightly moderated in the short term, as we talked a little bit about in some of the previous conferences. 
+Now, you did ask the question, we seemed short-term. Give me a second to just read on the line. From our point of view, the biggest mechanical impact in the quarter and the year to date is this asymmetry between where we own bottlers and where it's less than 20% of the volume, or about 20% of the volume, versus being in 200 countries. If you pass the bottling side and just look at the core concentrater franchise, we are running organic at 4% and we are meeting our profit guidance. 
+We are not trying to say small ups and downs in the macro economies is what should buffet us every quarter. We just need to deal with those things. I just think there's this one asymmetrical effect at the bottling thing, which is important, which is affecting the number. But I don't want to give the impression we're seeing a massive, or trying to signal a deterioration in outlook for the concentrater franchise business. 
+Now, with regard to Coke FEMSA, yes, we've talked about looking at some territories on a preferred basis. I'm not going to get into exactly how that means in terms of what preferred means versus exclusive, but they are our biggest bottling partner. We have a very strong relationship. We have made an agreement on how we're going to create more value together in Mexico and how they can look to participate in some of the refranchising of the territories that we own in bottling. And we're very excited about doing more stuff together. 
+
+Answer_12:
+Yes, in part, please read into this that we are moving the business to more of a revenue focus. Absolutely, under the heading -- everything communicates -- that is part of what we're trying to say. We believe in our segmented revenue approach. It's not that we have forgotten about volume or don't believe it's an underlying driver in the long term, particularly in the emerging markets, of what's going to create the business over the long term. 
+But as we look at places like North America and some of the other developed markets, clearly we're going after more of a revenue strategy that's driven by smaller packages, by some pricing actions. We do want to call out that perhaps the best way to think about health of the business going into the future is the revenue growth. And that's where I think what we're trying to say is, not just the beverage industry, the sparkling industry category and brand Coke all remain healthy in terms of revenue growth. All three of those are growing revenue globally, and we continue to see good attraction both in the US in terms of sparkling revenue growth and internationally in terms of sparkling revenue growth. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/35_questions.txt

@@ -0,0 +1,45 @@
+Question_1:
+Great, hi, good morning. Maybe we could start with a question for James on China mainly, because it sounds like that market was the biggest driver of the gap between your reported 3% organic growth and the 4% core number that you cited. And I'm guessing it cost you roughly 1 point of unit case volume in the quarter, as well. So, first, is that right? 
+But, more importantly, is there a way to parse how much of the adverse impact is tied to the macro slowing, which I think is more likely to persist, versus supply chain corrections and wholesaler inventory destockings, which might hopefully be more transitory? I'm really trying to assess just how much of a headwind China was in Q2, and then how severe you expect the ongoing headwind to be, acknowledging the improvement initiatives that you called out? 
+And then, finally, do the issues facing BIG in China impede at all your ability to refranchise that market on time and on favorable terms? Thanks. 
+
+Question_2:
+Hi, good morning. I wanted to better understand why you maintain the FX neutral income before taxes guidance despite the negative full-year top-line revision. I'm assuming part of that is just the top-line weakness in lower-margin areas, so probably less of a margin impact. But can you give us more detail on why the local FX profit goals have not been as impacted by top-line weakness, and how much visibility you have on the profit side, and any leverage you have to protect downside if macros weaken further? 
+
+Question_3:
+Hey, guys, just a couple clarifications. One is, back to guidance, and look at comparable currency-neutral income before taxes is still in the 6% to 8% range for 2016 relative to Q1 guidance, so you gave that same guidance in Q1. And the structural move only went from negative 3% to 4%, to negative 4%, so like a 50 basis points change there. Currency is still an 8% to 9% drag. 
+I'm confused about what's driving the EPS guidance effectively down by 2 points at the midpoint. So, what's going on between before tax and the EPS to drag it down another 2 points? Because the only thing that seems like it's changing is the structural, in what you've told us, relative to Q1. That's my first question and I have another one, if you permit me. 
+
+Question_4:
+Okay. I have trouble getting there. Maybe I will follow. I still see it being an incremental point somewhere in there. But basically you are saying there's no real difference between -- there's no change in the gap between PBT and EPS, taxes and changing. There's no other things in there, right? 
+
+Question_5:
+Okay. Maybe I'll follow-up just about the rounding point to help me with my math. 
+The second piece is, in the press release, and, James, in some of your comments, I think, you said we are -- I'm quoting from the release -- re-assessing local market initiatives. Can you tell us a little bit more about what you mean exactly? So, where? Is it all about China, perhaps Argentina? And is advertising spend as a percentage of sales still up for you in the quarter? And does it impact in any way this confidence we had a year ago, six months ago, about really good ROIs on the marketing spend? Thanks. 
+
+Question_6:
+Yes, thanks for the question. Just two quick ones for me. There's a lot of stuff going on at Coke right now -- international organization, management, refranchising and accelerated pace. I'm just curious if you can give us some clarity on maybe how much of the volume issue this quarter was partly related to disruption. 
+And then just on the price/mix, it's a pretty good number. We've seen a 3% price/mix a couple times over the past two years. Just curious on what you think the sustainability of that magnitude of price/mix is as we think out the next one to two years? 
+
+Question_7:
+Yes, thanks. Good morning, everyone. Two questions, one on Europe specifically, James. I am surprised Spain was down in the quarter. You cited weather but it's been doing pretty well. So, what is going on in Spain beyond weather? 
+And can you give us any color on Great Britain, because Europe overall had a nice sequential, or at least did better than where consensus was. So, looking for some color there. 
+And then, Kathy, on FX, really no change in your FX view for the year. Can you remind us how you are hedged on some key currencies and how that might play out the duration of those hedges and what those currencies are? 
+
+Question_8:
+Great. And a quick follow-up on that specific to Spain. What does your work say about underlying health of the business either because of performance in July? You're saying it sequentially should get better but I'm just wondering what's underlying that? How are you getting to that? 
+
+Question_9:
+So, you said you are fully hedged for hard currencies for calendar 2017, for the duration of 2017? 
+
+Question_10:
+Thank you, good morning. I wanted to go back and follow-up on the price/mix question. Clearly the 3% is a good number, but obviously you are benefiting from pretty high inflationary markets. So, I just wanted to better understand how much of this is really coming from your segmentation, the revenue segmentation strategy, versus the price growth that you are seeing in inflationary markets. Any granularity that you can give us will be helpful. 
+And then a little bit related to that, I think the flat volume growth that you've seen this quarter, I can't recall the last time you had this kind of volume trend. So, again, how much of this is really a function of your strategy to focus more on revenue and not chase unprofitable volume growth, and if this is something that you'd be willing to accept for some period of time? 
+
+Question_11:
+Hi, good morning, everyone. Just two quick ones. One, for James, you talked a lot, I think, on this call about some of the short-term things that have affected organic sales and changes sequentially in the environment since the start of the year. Can you just update us on what your view for the industry forecast is, maybe not so much for this year but just over the medium term? Has there been any change in terms of what you think the nonalcoholic ready-to-drink beverage industry is going to grow over the medium term? 
+And then, second question, you had mentioned Coke FEMSA earlier. It looks like you've got an agreement with them to negotiate on a preferred basis. Can you just expand upon that a little bit? Are they exclusively looking at some of these territories or is it a matter that they are just getting the first look? Thank you. 
+
+Question_12:
+Hi, good morning. Thank you for the question. As I look at some of the disclosure in the press release, it seems like you've broken from convention a little bit -- a lot less brand disclosure, trademark Coca-Cola only hold out in North America, you guys aren't breaking out sparkling and stills anymore. So, I'm just curious if we can get a little more color on trademark Coke outside of North America and China, and also whether the change in convention speaks to a broader shift in terms of how you are thinking about balancing volumes across your portfolio? Thank you. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/36_answers.txt

@@ -0,0 +1,87 @@
+Answer_1:
+Nik, good morning, this is Muhtar. Thanks for your questions. Look, I think first, once again, I want to reiterate the scale of what is being done here on a global basis. As I mentioned in my remarks, the geographies and the regions impacted by this refranchising, massive refranchising, is really, when you aggregate it all, is roughly around 50% of our -- it will impact 50% of our global volume. So this is really, really big, number one. 
+Number two, the early indications that we have from both the US refranchising efforts, which is the largest one, but also the European restructuring under the Coca-Cola European partners umbrella, which was the biggest refranchising in Europe in history, in its structure, essentially, has been -- early indications have been positive. In the United States, if you look at it, the last six quarters, consecutively, we have had volume growth and very encouraging price/mix in the United States continued. And the last sort of year, four quarters, have been the highest in terms of refranchising activity. 
+So early indications are positive. Europe, the same. And James mentioned the positive numbers coming out of the last quarter. Yes, helped by many other things other than just refranchising, but the impact is that there hasn't been the disruption, it has been going on very smoothly. And you know, when you look at this going forward, we've got four to five quarters of intense refranchising remaining, as we bring out at the other end of the tunnel a company that is going to be totally transformed, revitalized in terms of its organizational capabilities, leadership structure, revitalization of the brands, also with the investment in our brands as a new marketing, revitalization of our portfolio, of our bottling system, as well as our cost base. 
+So we are encouraged with what we see, as the transformed Coca-Cola Company coming out, and also the integrity of the refranchising, as evidenced by the continued good results in North America and in Europe. 
+
+Answer_2:
+Good morning, Dara. 
+
+Answer_3:
+Dara, this is Muhtar here, I will just mention very briefly, and then pass it over to James, that it is unusual, what you have just said is definitely is the fact that developed markets are growing at a higher pace than the developing and emerging markets, but it is not a surprise, given the volatility that we all know that is taking place. 
+But it is a mixed bag. It is not just a uniform, all emerging markets. Africa, for example, continues to be a very strong performer, both west Africa, led by Nigeria, but also other markets in Africa. So it is -- Mexico, to name another one -- so it is a mixed bag, but let me ask James to comment in more detail on how we see the future also in terms of the balance between emerging and developing versus developed markets. 
+
+Yes. I think it is worth, as we go into this, just underlining, the collection of the developed markets are growing volume, growing price, strong revenue growth. We think we are taking actions to sustain that. 
+The emerging markets, I think it is going to be a combination here of doing the things that we need -- we know we need to do and can control, and then of course there is the question of what do the macro economics do, and what actions do each country's governments take to put them on a better course or not. So that is part of the unknown going forward at this stage and the uncertainty. 
+I think quite clearly, you see, as Muhtar commented, a mixed bag, across the world you see those markets that are doing well, sustained growth, and he called out Nigeria, South Africa, the Philippines, and other parts of the emerging market. So it is good. But it is a mixed bag. And I think the actions are under way in a number of these countries to stabilize them, where they are a little tougher like Brazil, like Argentina, which are called out on the call earlier. 
+And we will have to see how long it takes for this to take hold in the countries from a macro view. We don't have a clear sight on that. But what we do know is we need to focus on what we can control in those countries and go back to affordability, go back to execution, go back to the basics and build ourselves a better position with more market share so when it does turn, and that combines with the growth in developed markets, we can be solidly in our growth rates for our long-term model. Thank you. 
+
+Answer_4:
+Hi, Bill. So on your first question about the 3%, yes, we didn't find another way to make one and one equal three, it is rounding and it is really balanced. So it was in the rounding, but it was a balanced impact on volume as well as a balanced impact from pricing. 
+
+On your second question, Bill, James here, I think what is worth remembering is essentially we are not trying to pass through the devaluation. We focus on being competitive in each local market beverage and fast moving consumer goods industry, and especially when the economies are in tough times, focusing on staying competitive and gaining share for the long term. 
+The net of all of that means we are much more likely to follow or be close to local inflation rates rather than adopt a strategy of a full pass-through of the devaluation of the dollar, so obviously if the exchange rates change, that will mean different dollar numbers for the Corporation. But the local strategy remains, stay competitive in the marketplace, and it looks more like local inflation. Does that answer your question? 
+
+Answer_5:
+Sure. I mean let me start by saying you're approximately right, in volume terms, on the current split between sparkling and stills, about 70/30. I think it is worth noting that that split has been moving in the favor of stills by about a point a year. The turn of the century, 10, 15 years ago, it was a single digit percent of the mix. It is going up at about a percent a year. Now, part of that is organic on the things we are doing, and part of that is the net or some of the bolt on acquisitions but it is going up about a percent a year of mix. 
+I think as you look forward, clearly, we, given that we have 50% of the sparkling industry value share, and 15% of the sum of all the stills categories value share, we fully expect to be able to grow faster in the stills categories, because it will be the culmination of the category growth rate, plus our ability to gain share, which then feeds into your third question, which is how are the investments aligned? 
+I feel they are aligned. Obviously it is an ongoing process. Each year, we look at it in the business planning process and we will be doing that again this year, but I would not characterize it as we are over-invested in sparkling and under-invested in stills. We are invested behind what is growing. And actually just add a little more texture to it we are doing the right things on sparkling, and we tend to be pushing more money towards driving the zeros, the lights, the smaller packages in the sparkling business. 
+In the stills, it is not a one size fits all category. In fact, we model categories and there we are selective on which ones have a most on trend with the consumers and which ones have more premium pricing. And therefore, we are very selective on where we funnel the dollars and invest ahead of the curve or in line with the growth rates that we are expecting. 
+
+Answer_6:
+Yes, Andrew, this is, good morning, this is Muhtar, I think you would expect us to be looking for proven capability, alignment, and bottlers that have already got a track record in our system, and that we have actually delivered together in alignment, where -- and we have good examples of that, that we can refer to. But that is basically, it in a nutshell, and I think, I know you probably have a loaded question, but you know, in answering to your actual question, that is what I would say. 
+
+Answer_7:
+Good morning. 
+
+Answer_8:
+We certainly did well in a number of the categories, particularly some of the premium categories. What was a little weaker in this quarter was some of the juice businesses and some of the tea businesses, which are not as high value to us. So that is what netted out on the 2%. 
+What you think -- what I think you see is over the year, you see very strong growth in Vitamin Water, in sports drinks, and some of the other categories, as well, so I think it is a broadening of the portfolio, a focus on innovation, but yet there's some head winds on juice, linked somewhat to commodities. 
+
+Answer_9:
+Sure, good morning, Ali, James here. 
+Look, North America, I think is a combination of many, many things. I mean it has I think been the result of a number of years working on multiple fronts. Working on innovation across the portfolio, getting into categories, refining the propositions, learning, refining the propositions. It is about, in the sparkling business, the better marketing, the more media spend.  It is about the focus on the pricing and packaging architecture, with more smaller packages, and it is about getting the execution right.  It is the refranchising, bringing new excited bottlers in. 
+In the end this is a result that has been built by a great team of people, who have been very focused over a number of years about regenerating growth in the North American business. As Muhtar said, they have had six very solid quarters of volume and revenue growth. And I think there are a lot of learnings. There is no silver bullet, but there are a lot of learnings. 
+Having said that, Japan has also been on a good run, the past three quarters are very good volume growth, you know, doing well on offsetting deflationary pressure. Again a similar story. The team is very focused on a multiple category approach, innovation in the products, increasing the quality and quantity of the marketing. But always in parallel and in alignment with the bottler where you got to get better execution. Good marketing on its own is not going to get you the answers. There's got to be more and better marketing along with more and better execution. I think that's you see. 
+And to some extent, Western Europe, that kind of came, new Coca-Cola European partners came well out of the stables on the first quarter. I think the formula is going to be the same. More and better marketing. More and better execution. And a multilane focus on categories and cranking out the learning, the [trying stuff], the innovation, and pushing ahead. And I think that is something we are going to continue to press across the developed markets. 
+Now, turning to China, I think China, again, I don't think, if I gave the impression it was all weather, that would be unfair to the team on the ground in China, and the system there. They have done a lot of work to address the big change in how the consumer responded to the economic circumstances in China. I think part of it is, you know, it is a part of the world that has had such consistent growth rates over the last decade, but a little bit of a slowdown maybe towards some exaggerated pull-back on spending, so I think there is a little bit of stabilization coming through in the macros. We saw that. 
+We have definitely taken action in the things that we can control. Not just in the commercial policies, to strengthen the wholesaler and distributor network and working through the inventory problem, but also on the pricing and packaging. To give you one example, a very small example, but it is symptomatic of how fast China can change. If you go to the cafe channel in China, all of the noodle shops up and down the street, people go there at lunchtime. 
+Last year they were packed with people. This year, you go, they are a third empty. You go okay, maybe the economy slowed down. No, that's not what is happening. 
+The explosion of online to offline ordering and the availability of lots of people on bikes and motorbikes to deliver stuff and the apps the aggregate wraps to buy food, it has been an explosion of ordering online and delivery food. Such that there's just as many people buying from these cafes, but sometimes in some parts of China, a third of it is being delivered to people, whether it is work or to students, so we have to adapt that packaging. Having a returnable glass bottle in that cafe doesn't help you with offline delivery. So we have had to revamp the packaging offer so we are there with the right package to go where the consumer is going. 
+That is a micro example of the sorts of thing we have had to do in China to adapt to how the market is changing and is contributing to the stabilization. But it is as I said, a country undergoing change in its economic model and that will throw up new and different consumer behaviors to which we will have to adapt. 
+
+Answer_10:
+Good morning. 
+
+Answer_11:
+Hi, Bryan, it is James. Look, we have had a much better run in the Philippines in the last few quarters, actually, strong numbers the first three quarters.  This year actually, last year, was three very strong quarters as well;  so I think since FEMSA has been in, there they have built on the work that [BIG] did, they have gone about fixing the fundamentals.  There were some fundamental structural stuff that still needed to be improved and I think they grasped that in the early days an we are starting to see the benefits of that coming through in the last six quarters. 
+Again, it is not silver bullet stuff. It is not too complicated in the sense of, you know, it has been about adapting the price package architecture, it is about some of the emphasis on of some of the sparkling brands in the Philippines, some of the local brands that we de-emphasized and re-emphasized some of the more global brands and the stronger local brands, rebuilding and continuing to construct a more solid distributor network. 
+Obviously Philippines is complicated given all of the islands and the issue of moving product around. I think they have kind of worked the system in terms of getting the thing nicely oiled in terms of the cogs so the product could get everywhere, backed up with a little more marking and a little sharper focus on certain categories and I think that's played through. I think the team on the ground has done a good job of taking the performance to a higher level. 
+
+Answer_12:
+Good morning. 
+
+Answer_13:
+Hi, Brett, this is Muhtar. First, let me just say that over the last four or five years, we have been actually working really, really hard to reconfigure the Japanese bottling system. We had 13 bottlers what, back five years or six years ago, and now we are working towards having 85% of the total business in Japan, which as you know is a very large business for us, under one roof. And I think that [itself] first, and without looking outside, without looking anywhere, it is a huge re-architecture that is yielding substantial savings, and we can redeploy that into being, into route to market, into ways we actually get our products the most effective efficient way to the customer, and through the customer to the consumer in Japan. 
+Regardless of any encouragement from the outside, we are on track to end up in a very efficient, very 21st century bottling system and consumer goods delivery system in Japan that is working well 
+Now, are there other communities, as that is just not related to cost savings?  And yes, there has been early, very early discussions in Japan. I can't say any more than that and we will continue to look at opportunities to see if we can even make our Japanese system even stronger. But that is very early days, again, in terms of the level of discussions that have taken place. 
+
+Answer_14:
+Good morning, Bill. 
+
+Answer_15:
+Sure, let me say a couple of thoughts, and then Kathy will give you some comments on the margin. Look, the stills, if I can say one thing, which is the stills is not a category. It is a combination of many different categories and even those categories re-segment between premium, mainstream, and more affordable. And so what we are focused on doing, as we invest in the stills business, is yes growing in aggregate, in top line numbers, but we are being selective on focusing on those places where we think we can generate a better return in the long term. 
+It is not a growth of bulk water. It is a focus on where is the consumer demand, what is on trend, and if you just pick out a couple of things that are on trend, things like coconut waters, or premium juices or premium ready to drink coffees, these are all very high revenue products. Kathy, do you want to talk about the margins? 
+
+Sure.  Hi, Bill.  You are going to see some impact on margins, but mostly initially, because as we are going into these businesses, whether we are developing them internally or whether they are through bolt-on acquisitions, they do have a margin impact. But then as we get scale, as we continue to work on the supply chain, et cetera, we do start to improve the margins. 
+So I would say the initial issue for margins and then over time, we are able to do things that will improve the margin impact. But initially, yes, as a category itself, a lot of these stills have higher cost of goods -- they have higher revenue but higher cost of goods, so that does impact margins. 
+
+Answer_16:
+Sure. James here. Look, I think it is important to say that the premium opportunity in China is big, but it is not as big as the mainstream opportunity. We are absolutely focused on investing in that premium opportunity. It is very much about the big cities, the white collar. It is going to be also about some of the premium parts of the still categories. We are going to go after that. 
+But in the end, the biggest mass of consumers, the biggest mass of disposable income will be in the mainstream. So it will have to be a combination, of yes, addressing the premiums, but also going after the mainstream with the greater affordability, expanding the distribution reach, upgrading the execution into the third tier cities and in the rural areas, that is also going to be a big driver of our revenue. 
+In terms of the categories, I think what has been going really well, by example, is we have taken an approach of premiumizing our water business in China. One of our most recent billion dollar brands, Ice Dew, comes out of China. Effectively, we are driving the business from -- in the end -- a one RMB price point to a two RMB price point. That is one of the biggest drivers of growth, is the water at the two RMB. 
+The places where we have taken -- had a little tougher time is perhaps in the juice category, with sparkling in the middle. Again, when you look at what is growing in terms of the categories, what you do see is it maps quite closely to the consumer segments in terms of who is suffering and who is not suffering in terms of disposable income. The juices, the kind of ambient, more going to the rural areas, have been hit a little harder. The premium waters which are perhaps more in the cities have been doing well. 
+
+And on the second question about the structural impact, so we will obviously give more information on 2017 later, as we get closer to the beginning of the year. But I will say that in the -- particularly in the North America refranchising, the impact will be significant in 2017, because as we are moving to get all of the refranchising completed in 2017, that is, we will be moving more than we have moved in all of 2015 and 2016 combined. So it will be a large impact in 2017, and we will work to give you all more color on that later in the year, or early 2017. 
+And as far as 2018 is concerned, the refranchising will be done, but it will be -- the impact will be basically the cycling of it, obviously the timing of these transitions will be significant, not only to 2017 but also the impact it will have on 2018. And then we have some costs that we have to get out in 2018 that we will be working to get out in early 2018, that will be basically a function of the refranchising as well. So we will give you more color as time passes. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/36_questions.txt

@@ -0,0 +1,58 @@
+Question_1:
+Thanks, good morning, everyone. So just a quick question for me on the refranchising. Now that you have kind of gone through the process, and we're getting toward the end of getting all of the announcements out of the way, can you give us any early indications on kind of what the growth delta has been in the markets that have been refranchised versus not? 
+And then also wanted to get some context on what is going on in Western Europe, obviously with the CCE integration going on there, have you seen any disruption? And if you think that will start to phase out over the coming quarters. Thanks. 
+
+Question_2:
+Hey, good morning. 
+
+Question_3:
+Developed market volume growth outperformed emerging marks in the quarter, that is fairly unusual. I was hoping you could give us a bit of a review in the emerging markets. You obviously had a number of cautionary notes in the prepared remarks, but are you seeing any signs that the macros may be close to bottoming here, or are things pretty tenuous? 
+And more importantly, as we look out to 2017 and beyond, do you think the year to date trends are more of a new normal, or is there hope that with easier comparisons and some of the strategy adjustments have you made, we can start to see emerging markets rebound closer to historical levels? 
+
+Question_4:
+A couple of quick questions. The first one is how do you get 3% organic in the quarter from 1 and 1? Was volume better? Or price/mix better? I know they both probably rounded but I was just curious. 
+And then the second question is, the inflationary pricing in Latin America, is that mostly currency pass-through or is there sort of real price realization in the market and kind of what happens into next year if these spot rates hold when some of the currency cross rates are to ease a little bit? Thanks. 
+
+Question_5:
+Thanks, good morning. I would like to actually go back and focus on the stills versus sparkling portfolio changes, James, you referenced in your prepared remarks. Correct me if I'm wrong, I think your level portfolio still skews, at least 70/30 toward sparkling but as you look forward, I am curious as to what percentage of your growth you expect will come from traditional sparkling versus still, I am guessing it is probably not 70/30, but is it 50/50 or some other split you could frame for us? 
+And more importantly, do you think your growth investments today are in line with the distribution? In other words, if it is 50/50, for example, are your incremental growth investments aligned with that? Or is there still a legacy skew toward sparkling that might need to be rethought. 
+I think from the outside there is still a perception -- right or wrong -- that your incremental investments are a bit over indexed towards core CSDs versus their future value contribution and I was hoping you could help clarify your thinking around that. Thanks. 
+
+Question_6:
+Hi could I just ask you, something, whether you could talk a little bit about the key qualities that are you looking for in a new bottler partner in Africa. Any particular experiences or qualities that you are looking for? 
+
+Question_7:
+Thank you. Good morning. 
+
+Question_8:
+I was actually hoping you could give us a little more detail on your stills portfolio in North America. You reported high single digit growth in Vitamin Water and then solid results in Smart Water, but your still portfolio only grew 2%, so curious what has been the drag there? And then do you expect some of the innovations that you mentioned to drive growth in your stills portfolio back up towards the mid or even high single digit range? 
+
+Question_9:
+Hey, guys, I would just like a little bit of your perspective on two markets, kind of at the extremes of maturity right now for you guys. So first on North America, which obviously remains a key concern when I talked to investors, just given the views of consumer preferences, but North America is doing pretty well, pretty robust, stable growth, and 3% organic sales growth, you know, good volume, relatively good volume, relatively good price/mix. 
+And what is working well for you in that market? Is it price and pack architecture? Stills? Better marketing? I'm assuming it's all that stuff? And what are you learning from that, that might work for similar geographies like Western Europe or Japan? Should we expect kind of in those markets a little bit of a similar ramp-up as we are seeing in North America? 
+And then as the other extreme, can you tell us a little bit more about the China rebound so to speak. I know you mentioned weather there, clearly the weather must have helped, but can you give us a sense of what you think the underlying growth is? Has the market gotten any better? Clearly you have worked through thanks to weather some of your destocking issues. But I want to get a better sense of China at the other extreme. Thanks for your time. 
+
+Question_10:
+Hi, good morning, everyone. 
+
+Question_11:
+Can you give us an update on the Philippines?  In listening to the Coca-Cola FEMSA results last night, it sounds like volumes are up there, margins are improving, it is one of those markets  where it has been sort of a long-term project to get that turned around. Could you just give us a sense of sort of you with you feel  the Philippines are at this point, and maybe what have you done to improve things there. 
+
+Question_12:
+Good morning. 
+
+Question_13:
+If we look back, we have seen you implement a pretty significant cost savings program. What I think we would describe as accelerated or accelerating M&A activity in your bottling system yielding synergies. 
+And now there is talk in the system of looking outside and seeking efficiencies in Japan. Are there more innovative ways that are you open to, to help the system find funds to be more competitive? 
+
+Question_14:
+Thanks, good morning. 
+
+Question_15:
+Just wanted to follow up, back on Steve Power's question.  There is definitely a noticeable kind of increase in talk about the still growth and investment in the last conference and on the call today. And just trying to understand -- I mean I certainly understand there is an opportunity, but what that means for margins as we move, especially gross margins going forward, because I think it is still much lower gross margin; and so you expect margin degradation? Or has the mix of business, with tea or higher [intake] products offset so as we look at kind of 2018, '19, we don't see that kind of margin degradation? 
+
+Question_16:
+Thank you, good morning. I wanted to go back to China and ask a couple of follow-ups. So one is within the 2% growth in China, can you talk about sparkling versus still? 
+And then I think, James, we are seeing certainly in that market, the premiumization is one of the key trends and just wanted to get a sense of how big you think that premium segment within NARTD in China is, and what the growth rate is and kind of what you are doing to sort of tackle that consumer preference. 
+And separately, Kathy, the structural impact obviously the fourth quarter is still a pretty big headwind. Is there any color you can give us as we think about 2017, sort of how much the structural impact kind of lingers into 2017 and maybe even 2018? Thanks. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/37_answers.txt

@@ -0,0 +1,101 @@
+Answer_1:
+Thank you.
+
+Answer_2:
+Sure. Good morning, Brian. A couple of thoughts there. Over the long term we said we are looking for a balance between price and volume, or price mix and volume, and that's certainly our long-term objective.
+Now, given what's happening I think it's almost as you said, it's easier to divide the world into the developed and the emerging markets. In the developed countries, we are looking to drive, probably a little more price than volume and you can see that happening in the US marketplace as we focus on smaller packages, as we focus on higher value categories or subcategories. So, you see that across North America, Western Europe is a little more balanced and similarly into Japan. So, that's our approach for developed markets.
+In the emerging markets, obviously over the long term, we expect them to be a bigger source of underlying volume growth and that will bring the total Company equation into balance. So they would be more volume driven and less price driven. Now what's happening is in some of the markets, say for example, a Brazil, where the macros are really under pressure, I mean GDP over the last three years in Brazil has probably declined by more than it did in the great recession or the lost decade of the 80s.
+So there what we focus on is in any moment we will do those promotional things that make sense and return. So we don't over protect volume. We do what makes sense on a quarterly or monthly basis and the principal access we act on is trying to reform the packaging strategy to make it more affordable. Whether that be smaller one-way packaging or more returnable packages backed up by good marketing, that really empathizes with the economic situation the consumers are in, and obviously great execution by the bottling system.
+So net-net, likely over time developed markets will get more price mix and slightly less volume and in the emerging markets more volume and slightly less price mix, with that caveat that those markets that struggle, we have a game plan that we've developed over the years and that we find helps us really build a good, strong consumer franchise going forward and balances the short-term.
+
+Next question please.
+
+Answer_3:
+Thank you
+
+Answer_4:
+Sure. Well, I think you saw lots of flow-through actually in the fourth quarter. Operating income, currency neutral ex-structure, was up 18% off of gross profit of 8% so there was 10 points of leverage, so we got a lot of leverage coming through.
+The reason I didn't translate from operating income to PBT, is more of those other factors like interest or other corporate items. The underlying operation, actually when I talk about PBT growing at 8% in 2016 and what we've guided in 2017, actually, the underlying operating income performance is actually even better than that. And then we've got a bit of a headwind in interest in some of those other items.
+So there's actually a lot of leverage coming through from the operation as we focus on segmented revenue, as we focus on higher value categories, as we focus on smaller packages, we are getting a lot of operating leverage between that revenue line and the operating income line. Some of its getting netted off in the headwind. So, it is there.
+In the fourth quarter, just to make the point, 6% is not projectable going forward. You will see in the numbers, for example, we were cycling a big negative in Asia from Pacific from last year so we've got a big positive this year. We had some very good results in improvements where we own bottling operations like China which was very -- much weaker in the first half.
+So there's some oddities in the fourth quarter. I would encourage everyone to look at maybe the full-year 2016, look through to the core operation where we were drawing at 4%, 8% PBT, bear in mind some interest headwinds as a higher operating income growth, lots of leverage. This is the game plan for 2017.
+
+Answer_5:
+Good morning
+
+Answer_6:
+Sure. Of course I'll save some things for CAGNY. Let me start with the sparkling business is growing revenue. It grew revenue in 2015, it grew revenue in 2016, momentum's rebuilding. If you look at the US sparkling was up 1% in the fourth quarter in the US, in aggregate, in volume and obviously much more in revenue so there is the sparkling category is growing revenue.
+Another piece under that just take a couple of examples, in this quarter and last quarter as well, total if you take the combination of Diet Coke, Coke Light, and Coke Zero, they came into robust growth in the back of the year. The growth of those all together, so no calorie colas exceeds the growth of -- sparkling actually exceeds the growth of our total portfolio in most of our other categories.
+So, there's robust growth that we press into Zero sugar colas. We're getting the growth and in North America and some of the other places where we are pushing smaller packages we're getting the good growth. Smaller packages in the US grew almost 10% in the fourth quarter.
+So, the game plan out there of smaller packages, Zero sugar, re-engagement with the sparkling category, is driving the revenue growth and we believe it will continue to do so and the shape and the quality of that, in terms of sustainability, is looking better over time. Obviously tuck-on M&A won't sparkling related, we've consistently done a few things each year, hopefully we'll do a few in 2017e will do those that make strategic sense, financial sense, and where we find willing partners.
+
+Answer_7:
+I'll start maybe and then, Kathy, if you feel like jumping in at any point let me know.
+
+Okay
+
+The 2017 3%, I think we see a similar year in 2017 in terms of macros that we did in 2016. And I think we are making a prudent call given everything that's going on in the world on a consolidated basis we are expecting a similar outlook and a similar number for the total Company. Obviously as Kathy said, we'd like to see the core business grow above that as we did in 2016 where the consolidated was 3% in the core was 4% which is at the bottom end of our range and then obviously lots of operating leverage. So, that's how we are seeing it, we just see the way the world is going.
+In terms of 2018 obviously we are not providing guidance on 2018, we are just providing some of the elements that we know are important from a modeling perspective. So obviously 2018 conversation will have to wait. But we wanted people to understand the structural piece because obviously the timing of when we sell those transactions makes a big difference. And so as timing varies the structural adjustment can move backwards and forwards between 2018, so we just wanted to give people a total perspective. I don't know Kathy about number three. I'm not sure we have the thing in front of us, Ali.
+
+The bridge of total structural versus what we shown at CAGNY. Part of what I think is a misunderstanding [stood in] structural adjustments, is particularly in this year we talk about the 5% to 6%. The two additional things you can factor in in your structural adjustments -- the CCR business is not standing still, it's continuing to grow, as well as the fact that they are taking out stranded costs.
+Now, we think of stranded costs a lot like productivity, if you will, and so we have embedded those and that's why I said in my prepared remarks we have two points of productivity -- of two points of stranded costs that are coming out as well in our numbers. But the stranded costs are more like productivity and that they don't just transfer with the territories. There's work to do to get them out, and for some reason if they don't transfer, they are part of our business, and we have to do the work to get them out long-term.
+So, the stranded costs, we treat that as part of the business and you can choose to net those or not to better understand the structural impact. But that's how they represent themselves in our numbers. And again we are not giving any other underlying growth guidance for 2018 at this point.
+
+Answer_8:
+Good morning.
+
+Answer_9:
+Good morning, Bill. James here. Firstly, the aggregate amount of marketing spend is slightly below [gross profit] you are correct. Now, what is super important to know, within that, is we will continue to increase what we would call working spend of the marketing ahead of revenue, but we are driving material productivity in the way we organize and produce the marketing to become much more efficient.
+So, we are able to grow media, if you like, in all its different forms ahead of revenue, but with the extra productivity initiatives we are actually growing total spend less than revenue. That's how that dynamic is working. So we will be able to do much more in the marketplace in a more efficient way.
+And then secondly, on Coke Zero Sugar, absolutely, you should expect us to move around the world things that are successful and that had a great start in GB in the backend of 2016, was growing double digits, very good start. We are rolling out in Europe, it's just launched in Australia, so you can absolutely expect us to push it into those markets where we think it can be really effective, including Latin America soon. So, absolutely and I think that is part of why you are now seeing the continued acceleration of Coke Zero sugar each year.
+We grew several points faster in volume in 2015 than 2014 and we grew several points faster in 2016 than the rate we were growing in 2015. And as I said aggregate, no calorie colas, is in good mid-single digits growth as we exited the year.
+
+Answer_10:
+Thank you.
+
+Answer_11:
+Sure. Clearly there's a -- I'm not -- disconnect. The Nielsen universe is a much smaller piece of our total business. Obviously when you look at the aggregate of North America, fountain is very important to us, it's almost a third of the volume in North America and that's not going through Nielsen and obviously there's a lot of warehouse business there, where we sell some of the still categories directly.
+But we have not deviated from our strategy. We talked on previous quarters that sometimes the pricing will be, at least -- the apparent pricing and Nielsen look a little softer or a little better. The important message is we have not changed our strategy. We continue to focus on realizing pricing intelligently and through packaging and pricing in the sparkling category and focusing on those bits of the other categories that we believe have value in terms of revenue and profitability. And so every now and again you will see this disconnect between Nielsen and our total results, but know that our strategy has not changed and we plan to continue to pursue it into 2017.
+In terms of the other categories, absolutely we continue to innovate and invest there. I think the underlying trend is even better than it what it jumps out in the volume. Bearing in mind the strategy is to participate in those categories of the highest value to us, both in revenue and in terms of profitability.
+So for example if you went to China and you looked at what was happening, some of the stills categories, maybe water, you'd see a growth rate of x, but what you don't see in the volume is actually, we are selling less of the cheap water and more of the higher value water as we cycle and re-innovate our business to drive the positioning and the premiumness through different brands and reset the way we attack some of these categories. We are after driving a consumer franchise that's about incidence of consumers, the number of times they drink our beverages, even if that's a smaller package, and about competing for value on the top and the bottom line.
+
+Answer_12:
+Yes, Nik, good morning. Absolutely North America's had a great run. The team's done a good job, the strategy's working. The numbers in 2015 in 2016 have put us at the top end of CPGs in terms of revenue growth with our customers. We are very pleased with that.
+I think what you see in the North American strategy, which is absolutely what you should expect, is a fusion. And what I mean by that is things that they have done they have taken from other parts of the world successfully and they have blended it with new ideas and things that are relevant for the North American market. And that's what turned into the winning plan they put in place and they've executed and it's been doing well.
+And so you should expect us always to be taking ideas from one place, applying the learnings in another place, and fundamentally, North America is a great example of where we reinvest marketing behind the right strategy and a balanced portfolio, with execution by the bottling system. And I underline there the importance of the execution by the bottling system and our own fountain and what wholesale business is during a time of tremendous change through the refranchising.
+
+Answer_13:
+Sure, I don't think it would be appropriate to comment on the M&A process of Bai so I'm going to skip that one, if I may. Refranchising in Africa, I think there's been a very robust process and I think the Management team of the bottler, both prior to the closing of the SAB transaction under ABI on the board as well and ongoing, the Management team has remained focused on doing the right things in the marketplace. So a creditable performance by the Management team in conjunction with the local business unit.
+So we see no disruption there and I think everything is going well. The refranchising itself, as Muhtar commented, and as you've seen, we reached agreement with ABI at the close of last year and the rest of the process is ongoing, both from a regulatory process point of view and a selection and determination of the partner, from those that will be strongest and those that are interested.
+
+Answer_14:
+Thank you.
+
+Answer_15:
+Sure, I think the emerging markets is a very mixed bag. I mean there are some which are doing well, I called out some like Nigeria, which had a very strong year even in the close of the year, as the currency came under pressure. Places like Mexico -- there are a number of emerging markets, South Africa, which we did well in.
+There are others where the macros were tough, whether that be Venezuela, very tough, Argentina, Brazil, and there we applied our strategies, a combination of what's the right tactical use of promotions to balance the system. We don't want to [do] scale but we don't want to over invest in promotions, while resetting the pack price architecture to really drive long-term affordability. It's very much a mixed bag across the world. Obviously India is something that a lot of people commented on, I'm not sure any more I can add on the India example.
+In terms of China, I think China is a great example where you see us executing the game plan I talked about for Brazil. So, the China back end of 2015 coming into the first and the second quarters of 2016, was a very rough period for CPG, a rough period for beverages in China. We went for our game plan, exactly what I said about Brazil, we started to do some promotional things and then we reset some of the pack price architecture, we focused on the right package sizes, and the right brands, doing the marketing in the right way, and a reset of what was important in terms of execution, where you should execute in terms of channels and focus of the cities.
+So, in the case of China, the markets are actually doing pretty well in the top tier cities. There was lots of growth, it looked more like the strategy of focus on the value end, focus on the premium end of the business, and then in the more rural and lower tier cities, really affordability and smaller package sizes. And then in the second half of 2016 China rebounded. We grew in both the third of the fourth quarter in volume terms and in revenue terms in China.
+So the game plan worked, obviously it's not instantaneous, but we know what to do when markets get into trouble if we focus on understanding the consumer, understanding the customer, and getting organized as a system.
+
+Yes, I'll just add one point just to complement what James said is that this was the 38th consecutive quarter for us in gaining value share -- 38th in NARTD. And in sparkling this was the 12th consecutive quarter of share gains. And then in North America, importantly, 27th consecutive quarter of share gains. So we continue to gain share as we implement this play-book that's really working and the business is getting stronger over a much, much bigger base than any one of our competitors going forward. I just wanted to add that.
+
+Answer_16:
+Good morning.
+
+Answer_17:
+Sure, Mexico, in all honesty, I'm not sure the Mexican consumers, in terms of what happened to the marketplace, the purchasing patents, really changed that much pre and post that date. I think the Mexican economy, there's been a lot of focus on it. There were the reforms, I think it's performed well and we have a great business in Mexico.
+I think our system there has been innovating. It's truly one of the places where we've been most innovative and most creative across the total portfolio where we compete in almost every category and they've done a really robust job of building a good business. And I think that is what you see in the Mexico results and they continued to build on strong a 2015, with a stronger 2016. And I think it's a wonderful operation down there and they did a very creditable result and hopefully that will all continue into 2017. Certainly we think that our system is up to the challenge come what may in Mexico.
+In terms of Brazil and India I think they are two very different examples. India, it's certainly a truly one-off event. The demonetization effectively drained liquidity. I don't think that's about price elasticity, I think that's about the shock to the circulation and liquidity.
+Clearly we're of the view that a formalization of the economy helps the formal players and I think it will be good in the medium term and the long-term. We expect the short-term disruptions to [mitigate] or to tail off as we come into 2017, though not from January 1. And I think what we just need to see is some stabilization there, and we will be able to then come back and execute our game plan. So I don't think that's particularly about resetting everything we do in India, I think it's about working through the effects of this one-off demonetization.
+Brazil is a different thing. Brazil I talked about. I think we saw -- we've taken quite a bit of pricing in Brazil over the end of 2015 in the beginning of 2016. I think the consumer environment got worse towards the end of the year in Brazil.
+I know a number of the states in Brazil had trouble with some of the public employee payrolls going into the back of the year. So there was a reduction in the mass of consumer disposable income, perhaps more aggravated Q3 going into Q4. And I think there, the elasticity's and the effects of pricing did become worse.
+The value of the promotions wasn't as good as perhaps the high-lows, it wasn't as good as it was at the beginning of the year or even in 2015. And I think that's what's caused us to do some things in the fourth quarter to balance pricing and volume, but to recognize we need to come in for 2017 with a more aggressive reset of the pack price architecture.
+Given the circumstances in Brazil they're not likely to be completely fixed overnight. I think there's some focus on improving things and we expect Brazil to slowly get better but we are going to execute and implement a packed price. Reset some parts of it with the expectation that it will start to rebuild the business as the economics get a bit better.
+
+Answer_18:
+Good morning.
+
+Answer_19:
+Certainly, hi, Bill. So, this year the commodity environment was relatively benign and we anticipate that next year -- the same thing. As we said, next year will be largely the same as what we've seen in 2016. We do anticipate that with the refranchising that our exposure to commodities goes down significantly. As we talked about (technical difficulty) CAGNY. So there is a -- we will give you some more flavor of this in the modeling call but yes, there's a significant change in the impact to the Coca-Cola Company as it relates to commodity.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/37_questions.txt

@@ -0,0 +1,63 @@
+Question_1:
+Good morning everybody. And I just wanted to offer my congratulations and best of luck to both you, Muhtar, and to James.
+
+Question_2:
+I had a question James regarding price mix. And I guess as you're looking out over what the environment is like over the next couple of years, can you just talk a little about how you are balancing the desire to get some price mix in, with how you think about that relative volume? And also relative to affordability especially in some of the emerging markets where the consumer environment is still pretty tough.
+
+Question_3:
+Thanks. Just congratulations from me as well to both of you.
+
+Question_4:
+Just following on Bryan's question on price mix. When you have a great price mix quarter like you did here in Q4, I guess the question that is in my mind is why aren't we seeing more flow through to the bottom line because in a vacuum you'd think 5 or 6 points of price and mix would be significantly margin accretive.
+So, is it the case that what may be mix accretive on the revenue line is actually margin or even penny profit dilutive on the bottom line? And I'm thinking here really around the structural shift from sparkling to stills, but perhaps some of the packaging changes and geographic shifts, in the balance of your overall business, may play a role as well. Can you just talk about that -- why we are not seeing more profit flow through on the price mix?
+
+Question_5:
+Good morning.
+
+Question_6:
+James, in your prepared remarks you touched on plans to reinvigorate sparkling growth. Can you give us more detail on where you think you stand currently in terms of the areas you mentioned? The fact that its a marketing shift to lower calorie products, et cetera and any big changes you are planning going forward to drive improved trends. And then you also mentioned tuck in M&A. So how big a role should we expect diversification into other subcategories to play out over the next few years for your Company? Thanks.
+
+Question_7:
+Hey guys, a couple questions on guidance, especially in the context, James, of your focus on EPS growth going forward. So, for 2017 very helpful in line with our thought process at least. Except, why only 3% organic sales growth?
+For 2018, it seems like your EPS would be barely ticking up based on an assumption of high single digit, comparable currency neutral income growth before taxes -- so 2017-like, based to growth. So 2018 doesn't look like it's growing EPS very much at all. Does that sound right on 2018 and why? Or is your statement in the prepared remarks suggesting that, look in 2018, we are going to do things like incremental cost-cutting, we are going to do things to really grow the EPS?
+And then I can't resist have to throw this one and as well, slightly different. But why does a total growth structural PBT headwind look like something like 9% to 11% versus what you said at CAGNY at 7.5%? Thanks for throwing all those. Thanks.
+
+Question_8:
+Good morning.
+
+Question_9:
+Could you guys just give a little more color on what sounds like a little bit lower advertising spending next year. I think you mentioned that in the prepared comments. Is it something that you realize that maybe the advertising efficiency isn't as much. And how that -- what the numbers are, is it going to be lower as a ratio and in dollars?
+And then, it seems like there's probably a lot of initiatives you [need] to support next year also, like the plan with getting Coke Zero Sugar out, beyond Europe if that's also in the plan for next year. So I tried to wrap two questions in one but it's the absolute and ratio of advertising spend and the rationale for reducing it. And then if you do in fact plan to take Coke Zero Sugar to other markets outside of Europe. Thanks.
+
+Question_10:
+Thank you, good morning, And my congratulations to both of you as well.
+
+Question_11:
+First, just a follow-up on price mix specifically in North America. Obviously we've all learned that the Nielsen data is not perfect, but there seems to be a pretty big disconnect between -- particularly in the fourth quarter, where you got the 4% pricing versus the softer pricing that we've seen in the data. So if you could just elaborate on that as a follow-up. James, I'm just wondering if you can talk a little bit about how much of a priority in 2017 is really a shift towards stills. If I look at 2016 performance, 3% growth that you got in still, it seems like it could be much stronger in the context of a lot of the categories that seems to be growing at a faster rate. So can you just talk about either on the innovation front or investment front, how much of that focus where really -- that you look towards in 2017 on the still category.
+
+Question_12:
+Thanks and congrats guys from me as well. The question, James, is when we look at North America, numbers have looked pretty good relative to I think most people's expectations going back about a year and a half. A lot of initiatives that you have put in place have started in North America. So I'm just wondering if you can help us map out how to think about what's happening in North America and the applicability to the rest of the world? That would be helpful. Thank you.
+
+Question_13:
+Great, thank you very much. Two questions. To the extent that you are able to talk about, it I'd love to understand the thought process about not purchasing Bai which Dr Pepper ended up buying. It seemed to check a lot of boxes, is it the product, is it the timing any color on that?
+And second, could you discuss whether all the refranchising, and particularly in Africa, has caused any disruptions in the business, any headwinds through that process, and a little bit more on the timing -- expected timing on Africa? Thank you very much.
+
+Question_14:
+Good morning and congratulations to both of you.
+
+Question_15:
+I was hoping you guys could drill down a little further on headwinds and the consumer in some of your key emerging markets. And then how has the overall category been performing in these markets? And, really, how has it been holding up given some of the headwinds and pressures on consumer spending and whether you are taking share? And then specifically in China, things seemed to reaccelerate in the second half last year. So could you guys talk a little bit more about current trends, whether that be near and then long-term outlook for China? Thank you.
+
+Question_16:
+Thanks. Good morning everyone, and my congratulations as well, James and Muhtar.
+
+Question_17:
+I wanted to, if we could do a tale of three countries here, James. And what I mean by that is Mexico -- your results, Diageo's results, Walmex, ANTAD retail data, it seems that the consumer is doing rather fine there. And of course there's a lot of concern about Mexico since November 8. In Mexico specifically, could you just give us a feel for what you are seeing in terms of broad consumer behavior since November 8?
+And then with Brazil and India with the pricing you have taken some of it invisible if you will because of what you are doing with price pack architecture, what's the level of confidence you have in those markets that the elasticity that you experience will not be worse than what you've actually -- you have an adverse elasticity impact greater than what your models say.
+
+Question_18:
+Thanks. Good morning.
+
+Question_19:
+A quick question on commodities. Maybe I missed it, but the net exposure as we look forward for this year in terms of headwind/tailwind. And then also, maybe help me understand how that changes with the refranchising? Do you have less exposure to certain things or is it really unchanged?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/38_answers.txt

@@ -0,0 +1,51 @@
+Answer_1:
+
+          This is Muhtar. And just let me say a few things on the global macros, and I'll pass it over to James also to reflect on your -- particularly your second question on -- and I assume the second question you had was mainly talking to U.S. bottlers, but you can clarify that. As far as -- the world growth based on recent -- latest numbers from IMF or taken from any other organization is expected to rise in 2017 from -- versus 2016 by about 0.5 percent point, so, like, going from 3.1 to about 3.5, just under 0.5%, and further expected to slightly improve in '18. Based on the latest numbers, always what we have seen in our business is that the industrial production index, IPI, kind of goes a little bit ahead of disposable income growth, and that's what we are experiencing once again here. So yes, some countries, growth looks better, China for sure. India, with the impact of the currency exchange initiative, still is moving out of that, as James mentioned. And as well as Brazil and Venezuela, I think we can term as being in deep recession. And then geopolitical factors in the Middle East and part of North Africa probably means the balance of risks remain still tilted to the downside, if you like. But there was a divergence in terms of the consumer confidence index since 2014, and that's narrowing down between the developing world and the developed world, which is a positive. That means the developing world is getting a little better from a confidence index point of view. And I think we're seeing that in parts of Africa, like particularly big markets, in Nigeria, and then, again, in -- our business in China also is reflecting the improved macros. And then we still see growth in Japan, Korea, in the industrial markets, which is a very positive sign. Again, as we -- as the emerging and developing markets get better, we see there's still growth coming from the developed markets, as in Western Europe and Japan and Korea. So that's sort of what I would like to just say on the macros. And then, James, go ahead and...
+
+
+          Sure. Thanks, Muhtar. So Nik, I think particularly as your question seemed more U.S. oriented, I mean, in the end this is an and answer. Our objective is not to run from one side of the ship to the other. This is an and answer. We need the company and the bottlers individually and collectively to make both work. And I think the U.S. is an example, where we have a vibrantly growing revenue line for sparkling and a vibrantly growing revenue line for the other categories. We're -- there, we're engaging the consumers. We're improving our execution. So I think it's about growth. It's about expanding and responding to consumer and customer needs. And I think we have demonstrated over the last number of years that we can vibrantly grow both, and that is absolutely our strategy going forward. And that'll be good for us, and it will be good for the bottlers.
+
+Answer_2:
+
+          Thanks. Thanks, Dara. And I'll probably go with the M&A and then the portfolio question. I mean, obviously, we're not going to comment on our outlook on likely M&A. I think we've said 3 things related to M&A in the past. I would re-underline them. One, anything we do needs to fit strategically in where we're trying to go. Secondly, it needs to be financially attractive, and that's not always the case. And third, there is some degree of opportunism because it takes 2 to tango. You need not just a willing acquiree; you need a willing seller. So I think whilst we have a view -- an ongoing view of what assets are out there, small, medium and large, that are attractive to us, of course, that is something that is not predictable in time. So whilst we imagine we will continue to do bolt-on acquisitions, everything else is not -- you can't predicate your strategy necessarily on that. So we focus on driving what we can organically. We have taken the rest of the portfolio outside of sparkling from a single-digit piece of our business at the turn of -- when -- 10, 15 years ago to over 1/4 of the business. Of course, we would love to increase the runway -- run rate at which we broaden our portfolio, and we were certainly seeking to do so. But the law of big numbers is also true. It's not going to magically change overnight. We need to build winning propositions with the consumers, with the customers and build the physical infrastructure that economically makes that happen in a profitable way. So yes, more acceleration outside of sparkling whilst -- and I return to the answer to the previous question, it's an and, continuing to grow the revenue of the sparkling category. And therefore, we will consecutively broaden out where we get to. At some point, will it be more balanced? Absolutely. Will it be broader? Absolutely. But we will look to do the right things at the right pace.
+
+Answer_3:
+
+          Sure. I'm not sure that I'd base the dynamic of one question at a time, but I'll give it a go and cover off some of those pieces. Look, on the categories and balancing, of course, as we approach into new brands or new categories in new countries, there is an investment curve as you build the brand. But this needs to be managed through a portfolio. I mean, one -- the fact that a new brand is being launched in country X doesn't mean it's not already developed in country Y, and therefore, it's already profitable and generating cash. So we need to manage the total portfolio effect, which is not just across categories but across the life-stage development of any one brand and category across the world because they're not equally developed everywhere. So there's a portfolio management thing. Of course, our objective, whatever the category, is to build brands and positions that are inherently profitable once we get to the appropriate scale. So we're not trying to build things that will never arrive. We're trying to build brands in categories, whether it's inherent in the brand or inherent in the package side, that can be profitable for us and the bottling system. In terms of the leadership appointments and how the work will be impacted, I mean, we've done a lot of things. I mean, a lot of the impacts on the work is the nexus of we're about to enter the post-refranchising stage. So we're going to go from well over 110,000 employees to under 40,000 employees by some point next year. There's just physically less stuff that needs to get done at the Corporate Center to support that organization. Secondly, technology keeps advancing, and what is possible to anticipate and get done using technology and change the way work can be done is a lot more today than it was a number of years ago. We need to embed that in, in the organization. And then the third thing is the ongoing efforts to define new ways of doing the same thing with less resources or getting more bang for the buck because we can be innovative in the way we run our processes. So that goes across each of the corporate functions, including the enabling transaction-based services and there's a plan in each place. Now as it relates to Francisco and that organization, I think one of the -- there's 2 points that I base our logic to. The first one is if our principal operating model is local and geographic, that is the franchise system. I mean, you got to choose one principal avenue to organize against. Anything you organize against will have its blind spots, and then you can mitigate against that. So one of the roles of Francisco's group is to provide the global perspective and the category perspective because it's the inverse -- it's a theme that the field -- the sum of the field might miss. So that's part of why the Corporate Center exists. The second reason to bring all the pieces together is as brands and experiences are created today and into the future, it's less cleanly delineated between a TV ad or a customer program or anything else. There's a much greater intersection and integration of how to engage with consumers and shoppers. And therefore, bringing together in one group the classical marketing pieces with a customer piece with a commercial piece and with the strategy, underpinned with the digital engagement, is what's going to allow us to more seamlessly operate in this new environment.
+
+Answer_4:
+
+          Sure. So I think the changes are structural and strategic. We need to reset the price/pack architecture. We're going to use more returnables as an infrastructure and investment channel. So we're resetting. I mean, it's worth remembering that the contraction in the Brazilian economy, it's contracted more in the last few years than it contracted in the last decade of the '80s and more than it contracted in the depression in the 1920s last year -- last century. So this is -- Brazil has undergone a major economic contraction. So we're resetting what we're doing in Brazil around pack/price architecture, how we go to market and how we push that forward. So it will take some time to get in place. And also, frankly, the stabilization in the Brazilian economy will continue to take time. Now the other thing impacting the Latin American numbers, it's worth underlining it doesn't always hit [ across our ] radar screen is Venezuela. And Venezuela is substantially negative in the first quarter, and I think that really is macroeconomic. And it's not about resetting our business. It's about the country is in the state it's in. But the Brazilian thing, just to summarize, the changes are strategic. They'll take some time. We expect that to play through this year.
+
+Answer_5:
+
+          Sure. So starting with the additional $800 million, I mean, the driver of the change, the principal driver is the reorganization of the Corporate Center, the 1,200 positions I talked about. That's the majority of the $800 million or a little over half the $800 million. Then there are some parts in cost of goods and a little bit in marketing. So the majority is in operating expense and in the reorganization of the corporate organization that I've just talked about. So that's what's driving it, and it's about the 3 things I said. It's anticipating post-refranchising, it's the impacts of technology, and it's the choices on what work we're doing, doing the work differently. That's what's driving the extra $800 million. Now the $800 million -- the comment around reinvesting half was related to the $800 million very specifically. So that's, that one. Now obviously, we've seen some margin expansion. I mean, implicit in our guidance this year already is some dropping of the base productivity program through into margin because you'll calculate that the revenue currency-neutral structural is at the 3 and that when you take operating income is substantially higher than that, then obviously, that's offset by some negative financing leverage. So as -- the '14, '15 and '16, I think you're largely right. In '17, you're seeing much more drop into operating leverage. And the comment is about the $800 million going forward, half -- a little over half is reinvested. As it relates to refranchising, we don't -- we still believe we can meet the deadline and get the U.S. refranchised this year. Of course, we're not going to do the wrong deals for the sake of hitting a date. But we think the right deals are possible, and we think that we are still on track with our plan. And as you say, we're seeing benefits in the refranchised territories. I'm not sure I would give a specific number that can be kind of inserted over the top on everything else. But clearly, the idea of reorientating and rebuilding the U.S. system so that it's stronger, and putting in place the different pieces, the manufacturing, the governance, the IT, the way the system works, support our long-term strategy of rational pricing and some growth for continued revenue growth in the U.S. is underpinned by the success of the refranchisings in the U.S. And obviously, we closed out on the 1st of April in China and the merger of the Japanese bottlers.
+
+Answer_6:
+
+          So firstly, Laurent, I hate to disappoint you, but we're not going to be disclosing that the starting point and break down the geographic groups as well by cluster and have all of that laid out. The goals by cluster, clearly, we have goals by cluster. The more they move from sparkling, the more they move from the things we've been building over the last 15 years, the faster we expect the percentage growth rate. But in terms in absolute, it is worth remembering that sparkling, still in absolute terms, provides the greatest incremental amount of revenue to the corporation of any one category. And the -- as I said, just let me make a detailed point. The growth officer, we're not moving to an operating model where we're having global category P&Ls and running the business through global category P&Ls. The operating model decision is to run the business locally, to drive local entrepreneurship and empowerment of the operating units but to use the growth opportunity setup to be strategic to make sure that we stay connected to what's happening when you take a top-down perspective or a category perspective and have the ripened -- and some authority on bringing those insights and those needs and those initiatives to the table so that when -- we, as the corporation, we're not going to try and run everything for the operating units, but we will make a few strategic bets, and some of those will be driven from the cluster approach.
+
+Answer_7:
+
+          Sure. I think the principal difference on the reinvestment of the half of the $800 million is up to now, I would say the majority of what we've done has gone into the sparkling category business around the world. I think here, the clear intent is that this is more directed to some of the newer categories or some of the other categories to drive growth there. So it's principally orientated around growth of the other categories. That's the headline answer there. Then in terms of the North American sparkling pricing, as you say, that's -- as we called out, that's principally timing, and it's really related to the different channels. The price, the average -- obviously, we have a large fountain operation, which we run directly in North America. And so the timing of gallon shipments, whether they go to the bottlers or through the fountain business, can move the average price/mix by North America. And it's the timing around those gallons that has created that unusually lower 1%, and that's the majority of the difference between what we would expect to happen on sparkling pricing and what actually you see in the first quarter North America. And that should correct itself.
+
+Answer_8:
+
+          Yes. Look, I don't think I would say this is a kind of a night-and-day change for us. Look, we've been on the journey for us to expand our portfolio. I think this is about making the commitment to press further and faster and make -- kind of make the full kind of psychological journey, too. This is about a full set of categories and responding to the consumer, not a central portfolio with some periphery. We're making good progress with Coca-Cola European Partners. Obviously, we did a lot of planning last year at the setup of the new bottler and its integration and the plans for the marketplace. I think you've seen a number of actions, whether it's the rolling out of smartwater, the launch of Honest Tea, where we've taken some proactive steps with them in different categories. But also, I would underline we've been very proactive with European Partners on Coke, Coca-Cola Zero Sugar, which drove a lot of growth in GB in this quarter. So we've got a great new bottler that's been stood up. We're broadening the portfolio. We're taking action across more categories, and I think that's part of the future. Now would I say that's the one place to look at? No. I think if you look at the U.S. or Japan, to take 2 other examples, you'll see a broader portfolio. And that's continuing to invest and expand across categories and even within categories, resegmenting each category for multiple different reasons to drive value growth for ourselves, the bottlers and collectively as a system.
+
+Answer_9:
+
+          I'll go in reverse order. I mean, the incentive structure is balanced between the top line and the bottom line today. Having said that, we're going to take this year to have a fundamental relook at our total compensation approach. That may result in no changes whatsoever. We may end up going, "There's no perfect solution, and the one we've got is the right one," or we may make some tweaks. That is yet to be determined. But it is worth noting, the incentives are half top line effectively and half bottom line. In terms of the tangible benefits, I mean, we're obviously not going to provide guidance for '18 and '19 and beyond at this stage. Having said that, we've been pretty clear that we want to be in our long-term growth model in terms of the top line and have some leverage within that. So to the extent that we've guided for 3% this year, we would be disappointed if the opportunities in the marketplace and the macros offered us opportunity to get back into our range, and we did not achieve it.
+
+Answer_10:
+
+          Sure. We've been steadily learning and getting better at the zero-based work over the last number of years. I think we can get -- getting better at doing less one-off events then don't necessarily always think we're getting much better at making it part of our discipline of going, how do we use the resources available for the best means possible to get the results we're after? So I think that's been a steady organizational learning process that's been going on. The latest changes are just another iteration. The $800 million is another iteration of that. Every year, we look at it. The back end of last year, we looked at the strategy evolutions coming up, imagining the post-refranchise world, the impacts of technology. And we just considered what we could do and how we could do things differently, and that's reflected in the strategy. And as part of the strategy, it's reflected in the organizational changes we are making and the increased productivity savings. We will continue to run the zero-based work process and be clear that the efficient use of resources is one of the ways to drive the top line and to enable long-term value creation.
+
+Answer_11:
+
+          Well, on M&A, I mean, we have a track record of doing bolt-on acquisitions over the years. I think there should be a reasonable expectation that they will continue at some sort of similar rate. Larger opportunities, I think about are they logical. They have to be strategic, they have to be financially viable and they have to be available. As and when things are -- meet those 3 criteria, we will look harder at them. And that's as much as I can say at this stage. In terms of retailers in the U.S., look, I think they are looking -- they have their own -- each one has their own strategies, their own positions slightly differently. So I don't think one can look at them in an aggregate and say they're always trying to do the same thing. I think pricing rationalization is certainly our strategy. We are engaged with customers in how it fits their strategies, each one individually. And largely, I would say that we're finding how to create value together. Are there risks that for competitive reasons by customers or competitive reasons by our competitors, something happens in some quarters to knock that off course? Yes. But that risk is -- has existed and still exists, but we're clear on where we're trying to get to.
+
+Answer_12:
+
+          Sure. I think look, in -- we talked at CAGNY, we have about a 50% share of the sparkling category. And of all the other categories, we're somewhere between a 10% and 15% share on a global basis. But even that's a very average number. You can go to some parts of the world, and we are clear market leaders at the same sort of share levels that we have in sparkling in other parts of the world we're operating. So there's not a short answer, except to say that we have -- we are going through and have gone through and always updating the process of looking at where are the next stages of growth, both bottom-up, each country going, "Look, I think I need to grow out this category or that category"; and top-down, both a global view and a category view, saying, "Look, if we want to progress, actually, we think we need to push out smartwater into more countries or tea, for example, Honest Tea into more countries." And that's the intersection of the global growth perspective and the country perspective. And then evolution of profitability in juice, probably depends whether we build the business through bolt-on acquisitions or whether we did it from scratch. Either way, the evolution is, as you'd expect, as we build a good, either leadership position or a close #2, we tend to come into much, much more attractive profitability status, which is why, if we have small positions in categories, we've either got to get up, have a clear path to leadership or a strong #2 or not overinvest because being subscale is not our path to profitability.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/38_questions.txt

@@ -0,0 +1,48 @@
+Question_1:
+
+          Muhtar, congrats, and James, congrats again on your new roles. I guess a quick clarification, James, and then a broader question. Just on the clarification, just when you talked about the global macros, you sounded a bit more constructive. So I just wanted to get a sense, because we're hearing from a lot of companies, yes, January and February were tough, but March seemed to have improved not just in the U.S. but globally. So just wanted to get a clarification there. And the broader question is, as I'm out in the market and talking to the bottlers, there seems to be some concern regarding the focus outside of CSDs. Not that Coke doesn't need to do it, but there's just too much emphasis outside the CSD business where, in fact, the bottlers make 85% to 90% of the profit from CSDs. So when you speak to them, how do you reconcile that dilemma? Any context around that would be helpful.
+
+Question_2:
+
+          I think down at CAGNY and again today that you're focused on becoming even more of a total beverage company. But it seems like it'll be difficult to transform your revenue mix quickly or substantially from an organic standpoint. So, a, I was just hoping for any thoughts on how quickly you can shift the business mix over the next few years, maybe what your ultimate vision is, whether that's percent of sales mix outside of sparkling or mix in low-sugar products versus today. However you define it or however you think about the topic, I'll leave that up to you. And then second, how big a part do you think M&A will play? Because clearly, that's a way of more rapidly shifting your portfolio. And then within that M&A theme, Coke staying within beverages, I think, has been sacrosanct at the company historically. How open would you be or what are your thoughts on potentially acquiring outside of beverages?
+
+Question_3:
+
+          I mean, James, maybe you could just round that up by talking about the -- just firstly, the cost side of that organic growth push. Just sort of we talked a lot about the objective, which I think we all agree with, but what's the cost side? Will structural investments and growth in new categories have to accelerate? And if so, for how long? But my broader question was actually with respect to the leadership appointments and really the new operating model that you've announced over the last few months. Can you talk more about just how the day-to-day work is to be impacted and improved as a result, and specifically, what Francisco's role as Chief Growth Officer is going to look like, maybe how large his organization's going to be, how he's going to interface with the other group presidents, et cetera? Because I guess at some level, I've always thought of the CEO of Coke as the Chief Growth Officer. So maybe just talk about why separating that function out as a dedicated role, I think, at the group president level, is set up to structurally improve things?
+
+Question_4:
+
+          I was hoping you could talk a little bit more about Brazil. I know you've talked about addressing price/pack architecture and trying to hit key price points. But it just looks like the downdraft in Latin America has significantly worsened its quarter, and I know, again, you said better by the end of the year. But are these kind of tactical changes longer-term strategic changes in Brazil that you're making? And any kind of detail would really be helpful.
+
+Question_5:
+
+          So I do have 2 questions. One is on the cost savings. Excellent that it went up. Want to better understand the drivers of change. And I also want to better understand the drivers of the increase. But want to -- also want to better understand the long-term "value creation" that you mentioned as well as that at this point, we expect to "reinvest" at least half. Is that of the incremental? Or is that of the $3.8 billion total or $4.3 billion total? Is it of the $3.8 billion at least? Because you've cut about $2 billion so far. It sounds like it should be roughly on pace to that in short order at the very least. And almost all of that, I think, has been reinvested. So if you take almost 2 on a 3.0, that's already 1/2. So how much of what's going to be on the [ come ], so to speak, what's going forward will be reinvested? Is that going to be at least half? Or is that of the total program? So a very specific question on that. And then the second thing is around refranchising. And if you can talk a little bit about some of the potential delays that may happen in refranchising, if you see anything going forward that's very much on plan. And importantly, if you see the benefit so far of the refranchise territories from an improvement of performance perspective, volumetrically perhaps but even just overall top line. And we have heard on the order of 1 point as you move from company owned to non-company owned. So would love some inkling of that from your own experiences. Sorry for the 2.
+
+Question_6:
+
+          You specified the sales growth by cluster, and that's great to give us, I mean, some more granularity of where the growth is coming from. If I may, I mean, could you tell us more specifically what's your starting point by revenue, by cluster, by region? And also, what are your goals by cluster? And what will be the incentive for the new Chief Growth Officer to achieve those goals?
+
+Question_7:
+
+          So wanted to ask just a quick follow-up to earlier question about reinvestment, the $800 million, half of that going back to reinvestment. Just how would the nature of these reinvestments differ versus sort of the prior reinvestments that Coke has made, whether it's different categories or different activities? And just a little bit of color there would be great. And then on the price/mix in the quarter and North America sparkling up 1%, I think you called out some timing issues. So can you elaborate on how much of that was a factor? And as it relates to sort of the broader price/mix question, if you look at the clusters outside of sparkling, can you just talk about how much the price/mix plays a role in growing that -- those segments' revenues?
+
+Question_8:
+
+          Just one question. And I guess from our perspective, we get a lot of questions about the total beverage company model and kind of what it looks like going forward, and it's difficult to see with a lot of the moving parts in the business today. But I guess from our perspective, Western Europe is really the one market -- or it's one of the markets this year where you can really see it sort of in action. So, a, James, do you agree with that? And, b, can you maybe talk a little bit more about sort of your planning with the bottlers in Western Europe this year and sort of how it's -- this beverage -- total beverage company model has really sort of been different in the planning process now versus maybe prior years?
+
+Question_9:
+
+          James, I wanted to come back to some of the changes you've put in place, specifically with the new growth officer and 5 category clusters. The first question would be, when should investors expect to see tangible benefits from the new structure, understanding that the macro is very difficult and the company's skew towards sparkling? Or said differently, would you be disappointed if the company couldn't return to 4% core sales growth looking out to next year even if the environment doesn't change very much, including the macro? Or is this just more of an evolution of the strategy to deliver on the company's objectives? And then related to that, James, do you feel like the company has the right incentive structure in place internally for your leadership to balance the growth agenda with profit objectives? Or do you see any potential conflict that may exist there?
+
+Question_10:
+
+          One question, James. On the larger subject of cost cutting and whether it's $800 million or some added number a year from now or 3 years from now, could you just characterize how far you believe the organization has gone and might yet go in the area of budgeting costs, whether it's on a ZBB basis or some other basis, to help us understand how you think about the opportunity to do what you're doing today as a habit, so to speak, versus something you do day 1, so to speak, as a new CEO?
+
+Question_11:
+
+          A couple of quick questions. Number one, James, can you clarify your comments about M&A? You talked about bolt-ons are always in play. And then I think you didn't rule out if something larger or bigger came along, you would look at it. That's number one. And number two, from our retailers, we're hearing a lot more focus on pricing and maybe more promotion, private label. Are you hearing anything different from the retailers about price rationality that you have seen in the CSD category? Just rule out that, that's not at risk here in North America.
+
+Question_12:
+
+          Two questions. Within your clusters, can you talk about where you have scale or the ability to lift and shift a subcategory from one country or region to another, where you see the most work needed? And then maybe as a reference for us, can you talk about the evolution of profitability in juice as you build that out to a global leadership position?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/39_answers.txt

@@ -0,0 +1,56 @@
+Answer_1:
+
+          Yes. I think the -- we've said that we're going to manage the year, and we're going to try and pull into that balance the obvious building of the business over the long term. We have stated that we'd like to get out of the trend of declining EPS, which has been the last few years, and that we are going to invest where it makes sense. So we are constantly looking at where that places our momentum, and should we invest more, and we have done so. And we have increased our plans in the downhill in a couple of places where we see really good momentum and a good reason to invest for better results. But the world remains volatile, and there are places where the environment is better suited to affordability, to returnables, to adjustments. And where markets are, just frankly, under a lot of macro pressure, extra investment is not going to drive us very far. So we will continue to manage it with flexibility. We know that going forward, we'll have some of the money we're going to generate out of lean enterprise to look across the portfolio, but we're going to decide that on an ongoing basis.
+
+Answer_2:
+
+          Yes, sure. I think a couple of things. On an as-reported basis, you will indeed see an acceleration in the back half, principally because we have an extra day in the fourth quarter, and we had the less days in the first quarter. So I think as you look at the reported numbers, there will be some acceleration. Now underlying that and seeing it in its most simple sense of taking unit cases and price/mix, as you say, we did roughly 3 in the first quarter and roughly 3 this quarter. We're guiding to 3 for the rest of the year because frankly, the world has not changed. We are doing a lot of the right things in the places that are going well, and frankly, there are some of the ones that need to be fixed. But we don't see the world as improving rapidly, and therefore, we're not banking on that happening. And so we're more focused on doing what we know needs to be done and having a moderate view of how that's going to play out in the rest of the year. And I think the expectation for the downhill should be more of the same of what we've had so far this year, hopefully with some of those macro situations improving as we get towards the end.
+
+Answer_3:
+
+          Yes. So I think the headline answer is yes, it's happening, and I think it was part of the design and the strategy. To be fair to the team running CCR, they have been improving their operations of Coca-Cola Refreshments over the years and have been getting increasingly better results over time and doing a lot of the things that set the platform for better local operations and better coordinated national operations. But there's no question that as the bottlers have taken over these new territories, they have been very energetic in trying to improve them. They've made good progress, particularly in some of the non-directly measured channels, the up and down the street, the smaller stores, where they build on their local expertise. So I think it is, in aggregate, a tailwind. It was part of the strategy that it should be that way, and I think it's a compliment to the local bottlers that they are driving that forward.
+
+Answer_4:
+
+          So the operating margin expansion, the 375 basis points, I mean, clearly, we see that we are -- that operating margins have expanded when you see that we are at 6% of profit before tax and on organic revenues of 3. Yes, that is driven by that price/mix. And so you know exactly where the price/mix came from in terms of there's a lot of it being driven by North America and EMEA and -- in this quarter. And then timing of SG&A expenses, yes, part of that is -- yes, it will (inaudible) over the balance of the year, but that wasn't really the bulk of what was driving that. It's more about the productivity and cost management that we have in the year. So we have more plans over the next couple of years for additional -- for the rest of the productivity. And that will continue to drive operating margin expansion. First, just the refranchising itself drives -- has driven a lot of that 375 basis points. As we have gotten out of the capital-intensive businesses, the more people-intensive businesses, that specifically drove that 375 basis points. So we had guided to the fact that our operating margins were going to go up after the refranchising. We plan to be in that range and continue to look for, obviously, other opportunities to increase operating margins as we go forward. But -- so basically, think about it as the refranchising driving most of that, good price/mix and the cost management and the productivity that we will continue to get over the next couple of years.
+
+Answer_5:
+
+          Yes, sure. I think we're very happy that we're doing well in teas and coffees both globally and in North America. Obviously, the Dunkin' one is early days, good start. I think Gold Peak is a good tea brand, and again, an early start on the coffee. The basis of our kind of ready-to-drink coffee business, the -- its strong global position is actually Asia. So we have some strong brands there. So I don't think you should see it as there's going to be one brand for ready-to-drink coffee and ready-to-drink tea across the world. We're going to see some strong growth coming out of Asia in Asian teas. Yes, we're launching Honest Tea in Europe as the joint venture with Nestlé winds down on teas in the European space at the end of the year. So you will see us use some of our brands more broadly, but it won't be one brand everywhere. Net-net, we're positive on the long-term growth opportunity for both ready-to-drink teas and coffees. We'll end up with a portfolio of brands, particularly as it relates to different geographies. And each will have its own positioning, but in the end, the consumer will decide the one it wants. And if all work, great. If 2 work, then we'll take one out. Maybe we'll bring one more in. But we'll continue to pay attention to what the consumer wants and help customers grow their businesses by selling our brands.
+
+Answer_6:
+
+          Sure. I mean, I'll give you a couple of ideas, but I think the net of the answer is it's more of a cultural process than a process process. Having said that, we're clear on when we're talking about test-and-learn or experiment, that people need to understand the scale and the potential impacts of the experiments they're undertaking. In other words, we are starting to use some frameworks to classify how people are going after things. So said in simple terms, if the test you're undertaking is not life-threatening, do lots of them, learn quickly and move on. I mean, if the experiment, it potentially creates a material risk if it goes wrong, then let's look at it more closely. So we're starting to push through some ways of looking at the portfolio and the market so they can categorize what sort of strategy and what sort of scale of experiment that they're undertaking, whether it's a launch of a product or a new marketing program, et cetera, et cetera. And so the risk can be managed appropriately, and it's all about what's the potential downside to the corporation and that if it's not big, or said differently, if it's very small, then it's okay to let them go. But as I said at the beginning of the answer, it's mainly a cultural mindset. It's the essential idea that the world is undergoing some important structural changes, multiple ones at the same time, and that is causing disruptions on many fronts. And we have to continue to do what we've done for 130-plus years, which is stay relevant to the consumer and help our customers grow their businesses. And that's cultural. So we need people to really be focused on where do we stand really, to be curious about what's going on in the world, to kind of look -- not look at things through rose-tinted glasses and come to quick conclusions and move on. Why? Not because it's -- we fancy it and it's a nice thing to have. It's because that's what's needed in the marketplace. And I think the employees understand that. I think that's why the lean enterprise is resonating, and I think that's why it'll get pushed through. And we'll back that up with some tools and processes to help people. We're making much more embedded into the organization the use of real agile processes and agile teams because that's the way that we're going to get to answers quicker.
+
+Answer_7:
+
+          Yes. Yes, yes, we saw some weakness in kind of the water and sports drinks categories in the second quarter. Some of that was weather in May. There was a particularly poor period there. I don't like throwing the weather under the bus, but that's for Q2. I think in the longer-term trend, we'll -- I think water will continue to grow. Particularly enhanced water, premium waters, I think you see a lot of activity by ourselves, by competitors in that space. So I think that is going to come back and will continue to be a source of growth for the industry. And we will participate very competitively, and it will be a source of growth for us. So I think it's a moment in time.
+
+Answer_8:
+
+          Sure. Clearly, I'm not going to say that 4% is the projectable price/mix for the U.S. I think that's at the top end of what would happen. I think it's important as you look at the U.S. result, I mean, clearly, it was a good quarter. And we're pleased that it comes on top of multiple years of the U.S. business performing at the top end of large consumer products companies. A couple of points that are very important to note. Firstly, we benefited in the second quarter from a little bit of extra gallons in the food service business that was kind of inventory, call that a point. So it's really more of at 4%. Now we're getting a lot of that in the non-measured channels. We're getting it through the small packs. It's about a balance between mix and rates. We've got transaction packs growing mid-single digits in the quarter, high single digits year-to-date in sparkling. So it really is a bit of a sweet spot between rate and mix. As I said, it won't stay up at that high level because of the effect of the extra food service gallons. But they are executing strategy, and I think it's playing out very nicely.
+
+Answer_9:
+
+          Yes. Let me start with Asia and then walk towards Japan, Lauren. I think there was some softness in Asia. We'd have liked to see Asia come in better. I would call out obviously the slight disruption in India from the general sales tax, obviously affected us in the back end of the quarter. As I said in the opening remarks, we think that's good for the country, but it did obviously make some impact in the second quarter. And we're seeing softness across some of the ASEAN countries. Each has their own reasons, but the ASEAN region has been soft. China bounced back a little bit. Japan had a solid quarter. It wasn't knocking it out of the park like it has on some of the previous ones. There are some kind of cycling things in there, but we've had some good launches with some local products in Japan. Coca-Cola FOSHU, it needs more time than I have now to explain it, but pretty solid results. Year-to-date, Japan is going reasonably well. Obviously, we've got the new bottler coming into being, which sort of affects the inventories that we sell into them, which kind of makes it looks like they're not doing as well as they should. But I think Japan is going to continue to do well. China bounced back. So coming back to the beginning, it's really about India and ASEAN.
+
+Answer_10:
+
+          Yes. Thanks, Kevin. Look, I think a couple of factors. Just mechanically, if Brazil and Venezuela had been flat in the quarter, we'd have grown a point faster. So I mean to say, okay, well, by next year, Venezuela will have declined so much it won't matter. And Brazil, I think there's some belief that it will get better as we come out of the year. So if you want it on a mechanical basis, [you go yes]. Mathematically, if everything else stays roughly the same, then we'll get there next year as Brazil and Venezuela [sober]. Now other countries could fall off the wagon, and so that's always an uncertainty. Having said that, our underlying core revenue growth, organic growth in the second quarter was actually 4%. So if you strip out the bottling operations that we know we're going to sell, we talked about the core growing 4% last year. It grew 4% in this quarter. So I think, in there is the seeds of that number as we go into 2018. We're not making a projection on 2018 yet, but I think underlying are the breadcrumbs towards that conclusion.
+
+Answer_11:
+
+          Look, I think clearly, the company's role is to provide some leadership to the system and, obviously, the marketing -- the brands, the marketing and the innovation to create the business in the countries that they operate in. So to the extent the company doesn't do that, it's always going to be a problem on alignment. Similarly, the bottlers not taking advantage of when there are all those things and investing in execution, investing in the capabilities to develop the marketplace, to expand the number of outlets, to build a stronger base of cold drink equipment and the sales capability to help the customers develop their businesses, then there'll be alignment problems. So net-net, both sides need to come to the table with their piece of the equation and get it done. And when either side slips, yes, we have more robust conversations, but this is a business that really works well when both are coming to the table.
+
+Answer_12:
+
+          Sure. I mean, I think, firstly, it's gone really well. I mean, global volume growth for Coke Zero Sugar has stepped up over the last few years to mid-single digits to high single digits, and now it's running in the teens. So it's done well in Western Europe, and that's really good. But actually, the global growth continues to accelerate, and we think it has a long way to go. And in terms of bringing it to the U.S., of course, we're bringing it to the U.S. because we think it'll do better and help the U.S. business grow. And you asked a question about, are we phasing out? So it is a reinvention of Coke Zero, and it is a slight repositioning. And yes, it is about helping the zero-calorie part of the portfolio grow, which is linked to playing a role in tackling obesity, and by that, I mean part of what we call the one-brand strategy. So Coke Zero Sugar, of course, is an improved version of the Coke Zero Sugar formula, but it comes in more of a red visual identity, more of a red can with more of a red label and will actually help people stay in the Coca-Cola franchise, and whether they want the original with sugar or they want a Coke Zero Sugar without any, and it's less switching between brands, which will ultimately help us keep and attract more consumers.
+
+Answer_13:
+
+          Yes. Good question, Carlos. Look, I think the first thing is it's got to be clear to the associates why we want change rather than just asking for it. And so part of the task is helping everyone understand the business necessity of the need to change. As I mentioned earlier, the world is undergoing a lot of structural change. And what it's driving towards is a place where the speed at which consumers, customers and the rate at which insights can be generated from data to give competitive advantage is changing such that the cycle of speed, experimentation and learning will create higher business value. I mean, firstly, you have to land the idea that it's got an ultimate competitive and business value underpinning rather than, "I prefer X versus Y." How do you drive it forward? Well, clearly, in order to get that done, you do need some technical skills. We'll need more consumer digital engagement-type skills, more e-commerce-type skills, more artificial intelligence-type skills and more collaboration-type skills. And in terms of the behaviors, in order to take advantage of that competitive cycle, you need greater transparency. So we need to push behaviors where the information is made available more broadly, more transparently, more quickly. We need to keep encouraging a candor of looking at where [we] really are opportunities and issues, no rose-tinted glasses because then you get to the insight quicker. That's got to go along with a greater curiosity. We've got a -- one of the dangers of being 130-plus years successful is you think you got the answer to some things, whereas we really need to have lots of curiosity about how things could be different, could be better and how we respond to the way things are changing. And then of course, it's -- there needs to be some courage to try new things. I talked earlier about that's going to be managed with risk appetite, all experiments are not born equal, and there'll be lots of tolerance for doing it in a sensible way. And then commitment to making things better, and I think all of that can be created. Of course, the tone needs to be set from the top. We need to put in place the training and the programs. And if people understand why, I think you get a much more empowered autonomous organization that's capable of creating a better future.
+
+Answer_14:
+
+          Yes, let me talk about the question around the bottling system and refranchising. The -- firstly, yes, there are some legacy small bottlers, but principally, the U.S. bottling system, by the end of this year, will be a relatively small number of bottlers, distributed in a very logical geographic distribution across the country, which has moved away from the great mosaic of the past -- of the patchwork group. I think then what we will have if people are really strong locally in their [bottling] places where they know what to do -- and the U.S. is not one place. There are lots of local differences. But the important element of the strategy in the U.S. is the putting in place of the structures and mechanisms so the system can act as one, act as one with customers, act as one from a production system, act as one in terms of IP, act as one in terms of really working out what's the strategy. So it will be a strong combination of local knowledge and the ability to act across the system. It's in place. I think they've done a great job over the last several years in bringing it to life and delivering top-class results in the U.S. environment. And I think that's going to continue to be the system of the future.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/39_questions.txt

@@ -0,0 +1,56 @@
+Question_1:
+
+          I guess my question is related to the flexibility to spend more. I guess as we're kind of watching the year evolve and watching the performance, it seems like you're having good traction with a lot of the revenue initiatives, packaging, product. So James, could you just talk to us about maybe sort of the flexibility you have within your plans to maybe increase some of the marketing investment or some of that investment to drive revenue growth given that it seems like you've got pretty good response to kind of what you're doing now?
+
+Question_2:
+
+          So I guess my one question is just around your organic revenue growth guidance for the full year and just kind of how you're thinking about the puts and takes around it in the back half. So obviously, you're doing 3% year-to-date. The full year guidance implies the continuation of the similar growth rate. I think a lot of your peers are actually guiding to acceleration in the back half, and there may be some unique timing situation for you guys, but just kind of the puts and takes as you think about the back half from an organic sales growth perspective.
+
+Question_3:
+
+          James, one of the things we've heard with regards to U.S. refranchising is that as they've taken it over, the territories, they're actually performing maybe better than Coke was when they were doing it. And you've seen an acceleration in some markets. They've been a little more aggressive. So I guess this is really one question. Is that the case? Why is that happening? And do you expect that to be kind of a tailwind for the business in the U.S. over the foreseeable future?
+
+Question_4:
+
+          Wanted to talk a little bit more about the margin expansion that we saw, so 375 basis points on a non-GAAP basis. Can you quantify the disaggregation that you lay out in words? So quantify how much comes from bottling divestitures, how much from expense management, how much from timing of expenses, which I assume that means it's coming back at some point. So really want to disaggregate that and quantify that and then think about how we should think about the sustainability of each of those going forward to really kind of draw the path on gross -- on, sorry, operating margin expansion going forward.
+
+Question_5:
+
+          I was just hoping to get an update on your Gold Peak and Dunkin' Donuts ready-to-drink coffees and whether you think there's an opportunity to expand these brands globally at some point. And then curious to hear how you're managing the launch of these in light of Monster Caffe in terms of, I guess, positioning. And then what gives you the confidence that the 3 new coffee brands will all be incremental?
+
+Question_6:
+
+          James, I wanted to build on the test-and-learn comments that you made up front and the quest for speed and agility. There's some great examples that you've highlighted today in terms of the portfolio progress, especially in Europe with smartwater and Innocent and Zero Sugar and Honest. But what I'm trying to understand is, can you talk more about the specific -- any specific steps or tools or incentives that you're putting in place to facilitate that speed and agility? Because in the end, I'm just trying to get a better feel for what that looks like in terms of day-to-day changes and how you push for speed and, at the same time, efficiently manage risk and portfolio complexity as you accelerate into new SKUs and additional category-country combinations.
+
+Question_7:
+
+          We have seen continued weakness in sports drinks in the U.S. in the scanner data. And you highlighted also that water, enhanced water and sports drinks were down mid-single digits in the second Q. So could you maybe comment on what you are seeing in the category? And would you expect the trends to improve in the back half of the year?
+
+Question_8:
+
+          I think you will have surprised many with your 5% organic growth in the U.S., especially after the soft quarter for your major competitor and filled potentially with some disruption from transferring to a bottler. So how should we think about the price/mix going forward? Is 4%, I mean, the new norm in the U.S. and, by extension, in developed countries? And if you can give some colors about what's coming from price, what's coming from mix, that will be helpful.
+
+Question_9:
+
+          I was hoping you could talk a little bit about Japan. It wasn't called out much in the release. And just Asia, at least for me, was a bit softer than I had modeled. So could you just tell us anything about what's doing in Japan, overall trends across the bigger categories?
+
+Question_10:
+
+          So James, question on the company's ability and then timing around accelerating top line growth for the company. So to your new team's credit, there's been a universally positive response from the investment community around the changes that you've implemented. But organic sales is now trending around 3%, and you're gaining market share, which is great, but the implication is that the NARTD category is broadly growing sub-3%. So the question is, how quickly can you deliver on that trajectory of about 4%, which is where I think you sort of pegged overall NARTD growth, at least something reasonable longer term? How much can you drive with strategic changes and share gains? How much of this is maybe just cycling Brazil, which is a big market for the company? How much do you need an overall improvement in the macro to sort of take this growth rate from 3% to 4%? And over what time period do you think is sort of reasonable for investors?
+
+Question_11:
+
+          From the outside, it seems bottler alignment is better than it's been in many times in the past. Just curious how dependent that is on you guys delivering better products to the market, whether that's organic, lift-and-shift, M&A or delivering better marketing, investing more in the market. And then how long do you think the grace period is for you guys to deliver something better than the bottlers before that alignment begins to break down?
+
+Question_12:
+
+          So I just wanted to talk about Coke Zero, no sugar. How sustainable do you think the growth is of that brand in Europe? And I'd love to hear more about your motivation to bring this to the U.S. Is this really designed to sort of combat sugar taxes that we're seeing in a few of the markets? And are you -- how big do you think it can be? Are you going to phase out sort of Coke Zero over time? And is it meant to really target sort of the Coke Zero customer, the Coke Classic customer or more of a Diet Coke customer?
+
+Question_13:
+
+          In order to realize the new strategic priorities, can you expand on the actual behaviors that are necessary for the next generation of leadership to succeed and how these might be different from the past? How do you provoke these behaviors, especially speed?
+
+Question_14:
+
+          Look, when I think of refranchising being completed by the end of the year in the U.S., you're going to end up with a very, very segmented bottling system, which is the opposite of what you have in other parts of the world and [that you're asking for] consolidation. So why does it make sense? Isn't that a problem? Or should we assume that 5 years from now, that system would look a lot more consolidated? And related to that, the fountain business remains in the hands of Coke, seeing it's about 35% of volumes. Does it make sense for you to -- over time to gradually convert the fountain business into RTDs or that's just impossible to do?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/3_answers.txt

@@ -0,0 +1,566 @@
+Answer_1:
+
+    Hello, John. Good morning. So we don't disclose the bank leverage ratio.  But it is lower than the Holding Company, so we would have a further way to go.  As we said, we intend to be compliant at the Holding Company level by the beginning of 2015 and work on bank compliance shortly thereafter. 
+
+Answer_2:
+
+    John, obviously the rules are fairly new, and still a proposal and not final.  So there's work to do before they get finalized. We're working through all of the things we'd need to do to comply. I would say we would aim to be compliant by the end of 2015, but we need to go do more detailed plans and we'll get back to you with some more specifics. 
+
+Answer_3:
+
+    Yes, all of those things could be considered and would be considered. 
+
+Answer_4:
+
+    So in terms of the cushion, while it's not scientific, there is a volatility in that number inherent in actually deposit flows.  So we do see some things in deposit flows, particularly wholesale flows, and that could span a quarter end and drive the ratio up or down some.  So it's prudent to run at a ratio above 100% and around about this level.  And just in terms of acceleration, we just wanted to get there more quickly.  The opportunity presented itself, so nothing more than that. 
+
+Answer_5:
+
+    So it's a great question, John, because as you alluded to in the question, there's a large number of moving parts in terms of the forecast, including points of yield on rates, which as you know have been choppy over the last several weeks.  So we base our projections on modest loan growth and on our understanding of the implied rate curves and that they could all -- they could change.  Also deposit flows, as you've seen, have been very, very strong.  So we accelerated our LCR compliance back to the majority of the NIM compression we were previously expecting and guiding you to forward; and consequently, we expect to be more stable, with some loan yield compression being offset by lower cost of debt. 
+
+Answer_6:
+
+    I'll just give you two data points, and then you can maybe go and have a look at them.  But I think in the Q, we disclose a couple of things. The first is a bit of a sweetener which says that over 12 months, it would deliver about $900 million of additional NII. It's not exactly what we've seen, but-- 
+
+
+    That's the 10-year going up 100 basis points. 
+
+
+    That's right.  That's the 10-year going up 100 basis points.  I'm sorry.  And that's not exactly what we've seen, but it's the closest thing to what we're seeing right now.  And then the other thing we've disclosed is on a parallel shift of 100 basis points, so if your short rates go up 2%, that would deliver just over $2 billion over 12 months.  And not to say that recurs, but it takes time to build up to that. 
+
+
+    And that's interest rates only, not Mortgage volume, Investment Banking volume.  That's just isolating interest rates only, assuming the Company invests the way we're planning to. 
+
+Answer_7:
+
+    Those were the numbers from the last Q, and they are not meaningfully changed right now. 
+
+Answer_8:
+
+    Yes.  So John, I would point you to -- and I can't remember the page, I apologize -- but we put a page in Investor Day that talked about what we thought through the cycle charge-off rates were for each of our businesses.  And so what I would do is look at -- take NCI loans and a reserve balance at the end of the period of $3.3 billion, take a look at that page and figure out what a more normal sort of charge-off rate, and therefore reserve balance, would be.  And that will be in large part a reduction over the course of the next several quarters.  So we expect it to be a journey to get to that level throughout 2014. 
+
+
+    And wholesale, we're kind of where we should be. We shouldn't expect much different. Credit Card, maybe a little bit more, but put that in the hundreds of millions.  
+
+
+    Yes. 
+
+
+    And on Mortgage, I think we said Investment Day, eventually it will be $1 billion to $1.5 billion, within a couple years. 
+
+
+    And PCI, if we have home improvement, we may see some reduction in PCI loan loss reserves.  Purchase credit (Inaudible).   
+
+Answer_9:
+
+    No, we haven't done that yet, John.  But the reserve release we took at NCI was driven in large part by lower severity.  So if this continues, you might see some of that. 
+
+Answer_10:
+
+    Good morning. 
+
+Answer_11:
+
+    Yes.  So Brennan, what we laid on the page was an illustration. And you're absolutely right. What it shows you is that we want to be able to close that gap much more quickly, and so that might very well be what happens. We just aren't coming out now with a target of achieving it over the course of the next one or two quarters, because we have other objectives, including the continuation of being able to have some capital distributions to you guys that we want to be able to decide when we do CCAR at the end of the year. 
+
+
+    We'll be able to do it pretty quickly when we know what it actually is. We don't want to start making actions that affect customers way in advance of knowing the real final rules. 
+
+
+    Right. 
+
+
+    But what you took away from the page was absolutely right. Closing that gap should not be difficult and could be more quick than this, but we wanted to be cautious. 
+
+Answer_12:
+
+    Yes.  So we're not going to disclose the duration, but there was some changes in the portfolio as we moved out of non-eligible into eligible securities for LCR and also maintained more cash.  So there were some changes. We also, as you saw, are making gains on sale and we were doing that. 
+
+Answer_13:
+
+    No.  
+
+
+    No. 
+
+
+    Remember, when rates go up, certain mortgages lengthen and a whole bunch of different things take place.  But in general, the portfolio is several year duration, a couple years duration, AA-plus;  and obviously, it changes over time to manage into short exposures. 
+
+Answer_14:
+
+    That's not a bad assumption. 
+
+
+    All things being equal.  
+
+
+    All things being equal, yes.  (Laughter).  
+
+Answer_15:
+
+    Exactly. 
+
+Answer_16:
+
+    The Board -- we're not going to tell you what Board deliberations are.  But the Board obviously has  talked to shareholders, a bunch of ideas.  And also, we think we have some of the best corporate governance out there, including -- which I think is more important than the separation of Chairman and CEO -- that the Board should make the decision based on the circumstance of the time.  They know the Company, the strategy, the people, that the Board always meets without the CEO, the Board in total sets the agenda, the Board is completely engaged in CEO compensation, the Board can hire and fire the CEO at will.  And those practices, some are in our charters, some are not.  But hopefully, it won't be the distraction it was last year. 
+
+Answer_17:
+
+    Good morning. 
+
+
+    Hello, Betsy. 
+
+Answer_18:
+
+    So Betsy, there's nothing underlying it.  Let me just give you, hopefully, enough. It is a little bit lower than $4.7 million.  And given that the ratio for the Bank Holding Company is 6%,  then the gap is a little bit bigger.  But measured in small terms of basis points, not more. 
+
+
+    And a lot of it's historical, how JPMorgan Chase got built through mergers over time, what ended up in the bank, what ended up in broker dealers.  And we'll have to change our legal entities a little bit overseas.  So we'll have to modify our legal entities to accomplish our the objectives, and we'll be able to do that over time. 
+
+
+    And over time, if we're able to push out, it will help.  
+
+
+    Exactly. 
+
+
+    And remember, the overriding constraint is the 5%. 
+
+Answer_19:
+
+    Yes, of course. 
+
+Answer_20:
+
+    Yes. 
+
+Answer_21:
+
+    We're not going to disclose it today, Betsy, and we can reconsider that, because we think there is some pretty fundamental issues with some of those proposals, not least of which is the absence of FIN-41 netting or netting on match securities financing, which we believe and are hopeful is going to be resolved.  But it is a add-on and it's not insignificant. 
+
+
+    And the thing that I stress in derivative receivables but not taking benefit for collateral, which we know we get.  And there are a lot of issues in there that need to be looked at and analyzed. 
+
+
+    Betsy, to Brennan's earlier question, I think in the context of what we've laid out as illustratively being achievable, then timelines would solve the problem. 
+
+
+    The other important point is one of the things that Basel and all this stuff is supposed to do is harmonize global rules. This is clearly no longer harmonization, where we have one part of the world is talking about two times, with another part of the world is talking about.  And I don't think there's any industry out there that would be comfortable with something like that in the long run.  Because in the long run, that has a lot of effects that you can't determine, quarter-by-quarter. 
+
+Answer_22:
+
+    Right. 
+
+Answer_23:
+
+    The HPI improvement on RWA has a bit of a lag to it.  So while it did contribute to the reduction in our RWA, our reduction was principally run-off, and some model enhancement and some lower risk.  But in part, that lower risk was driven by better HCI. 
+
+Answer_24:
+
+    Yes, Betsy, it's a great question.  And we will get back to you after the call. 
+
+Answer_25:
+
+    Hello, Matt. 
+
+Answer_26:
+
+    So you know, June was a bit more challenging, and so it wasn't as strong as April and May.  But it really comes down to the fact that we really do have a client driven business model.  And the client flows, they held up.  And so if you surround that with robust and strong trading risk discipline, that's pretty much how it turned out. 
+
+
+    And I think our folks in Emerging Markets also did a spectacularly good job, because I think you might see some real differentiation there from some other folks when all their numbers come out. 
+
+Answer_27:
+
+    A little of everything. 
+
+Answer_28:
+
+    I think we've been very consistent in how we look at comp and how we accrue it and things like that, after capital charges and by line of business, type of business and such, that it's just a change of mix and a change of capital, et cetera. 
+
+Answer_29:
+
+    Yes. 
+
+Answer_30:
+
+    Possibly. 
+
+Answer_31:
+
+    Good morning. 
+
+Answer_32:
+
+    Mike, all other things being equal, that's not an unreasonable assumption.  But as we said before, things are never equal. 
+
+Answer_33:
+
+    I'm sorry, Mike, say that again? 
+
+Answer_34:
+
+    Yes, I guess that's about right. Or maybe a little less.  A little less, Mike. 
+
+Answer_35:
+
+    Yes, I think we disclose all of the assumptions in the earnings risk tables in the 10-Q.  But yes, it's short rates staying low and the 10-year going up 100 basis points, I think. 
+
+
+    Yes, but it also drags up the five-year, the seven-year. 
+
+
+    Yes.  Yes.  
+
+
+    So if you use one point, it's the 10-year.  But it's the yield curve going up steeply. 
+
+Answer_36:
+
+    You're not mistaken, which is why if you actually get more of a parallel shift and short rates go up, our numbers go up by multiples. 
+
+Answer_37:
+
+    The pipeline? 
+
+
+    Activity levels picked up some, and we expect that to carry into the third quarter.  So a little better. 
+
+
+    And you saw a real slowdown when we had the volatile markets in June, but we think that's not permanent, the markets kind of open up again.  You've seen a bunch of IPOs and debt deals and a lot of M&A chatter.  
+
+Answer_38:
+
+    We didn't disclose that, Mike, for a couple of reasons. One is that, as we said, the proposals, we think, have some fundamental issues to them.  But it would be lower. The gross up to our balance sheet on top of the 3.5% sitting on the page would not be insignificant,  but we didn't disclose it. 
+
+Answer_39:
+
+    Yes, that is definitely one of the reasons.  And that's one of the reasons why we said, of course, the timeline could be impacted if there are significant changes to the rules, and that would be one of those changes. 
+
+Answer_40:
+
+    First of all, I think it's going great.  And the folks in the field will tell you that they are seeing huge benefits from putting together the corporate Global Investment Bank, the corporate Investment Bank, Treasury Services.  But you are right. There's been flattening out a little bit in Treasury Services and Investor Services, which is mostly custody. Some of that's spread, some of that's margins.  So some of that will benefit also a little bit from rising rates.  And we don't know what the peers will show yet.  So maybe you do, but I don't know yet. 
+
+Answer_41:
+
+    Mike, I don't know.  And obviously, if we lag our peers, we'll be as disappointed as you are. 
+
+Answer_42:
+
+    Your last one. 
+
+
+    Yes, it's balancing both, Erika, which is why, in response to the earlier question, we said we've been conservative on the timeline, because we want to reserve the flexibility to consider capital distributions when we do our CCAR in 2013, and it will be a factor we consider. 
+
+Answer_43:
+
+    So Erika, the truly truly variable, as in transaction variable proportion of the business, is some.  But the majority of it is related to people and systems, so there's usually a several month lag to be able to get that out of the system. 
+
+Answer_44:
+
+    I think, think about it this way. I think that revenue margins will be down on competitive pressures, volumes are down, and expenses may go up because volumes are down, for a couple of quarters. 
+
+
+    Sorry, expense margins would up. 
+
+
+    In other words, a dramatic reduction in profits. 
+
+
+    We're trying to be clear with you that this would be a significant event, if rates stay where they are, if mortgage rates stay where they are, or go higher. 
+
+Answer_45:
+
+    Yes, so let me just walk you through it. So this quarter, our expenses adjusted for litigation were $15.2 billion.  For the first half, adjusted for corporate litigation and foreclosure-related matters, it was $30.7 billion, which would be against the $59 billion target, which is running a little high.  But there are two important factors. One is in our definition of adjustment, we only adjusted out corporate litigation, so there's other litigation in the firm that's several hundred million dollars.  It's disclosed in our supplement.  You can see that.  And also in the first half of the year, we did see out performance in terms of the Investment Bank, or CIB, revenues.  And clearly, we pay compensation on that, which is a it good expense and we would waive it in all day long.  So if you take the combination of those two things that we don't technically adjust out, our underlying core expenses are on track for that number, yes. 
+
+Answer_46:
+
+    You can't really think about a run rate trend in litigation costs, because they are somewhat lumpy.  So we don't have a forecast for you, and they will go up and down. 
+
+Answer_47:
+
+    You're absolutely right. When you separate NIM, you try to tease it out and you make our interest rates.  Because you've got to look at the underlying results, underlying volumes and things like that. There's no reason to think that we aren't going to have a good trading going forward, because if the economy is strengthening, and we believe, our view is that it is, and that capital markets are going to open up again, and people get adjusted to slightly new, higher rates.  And yes, volatility helps certain trading areas. Higher interest rates hurt mortgages, but again, they can help other areas.  So it's a whole potpourri.  It's impossible almost to separate it out.  And we try to do that for you, but I think it's a little bit of a mistake when you look at the Hold Company. 
+
+Answer_48:
+
+    So we are working really hard on the CCAR resubmission.  And you're right, we're going to resubmit that before the end of the third quarter. We're in constant dialogue with the regulators, although we won't receive any formal feedback until we're in the fourth quarter.  And so we're doing everything we can to be able to be successful in remediating any of the issues they identify for us.  And if we're able to do that, then there should be no impact. 
+
+
+    It won't be for lack of trying. 
+
+
+    Yes, it will not be for the number of people who are -- 
+
+
+    You have probably a thousand people now who are devoted-- 
+
+
+    We have 500 people that are dedicated and thousands of people working on it. 
+
+Answer_49:
+
+    So just a point of clarification, if it wasn't clear, is that our guidance is that we're expecting to get our expenses down to $600 million in the fourth quarter from the level they're at now, which is $715 million for this quarter.  So just to be very clear.  And to remind you, our longer term run rate for that business is $325 million a quarter.  So it is dominated by the default side, but there is some core performance obviously in there, too. 
+
+
+    And to keep it really simple, we hope to get it to a run rate of $500 million the year after that, $400 million the year after that, and $325 million the year after, where we should be.  And we have a lot of work to do in systems, et cetera to get all that done.  And obviously the costly foreclosure, the legal stuff, is also coming down. 
+
+Answer_50:
+
+    Three-year. 
+
+
+    Three years.  And know that we're actively working the portfolio to be able to do what we can more quickly, so you would expect that we're looking at either sales or sub servicing of defaulted loans and capacatizing our performing servicing.  So we're working on all of that. 
+
+Answer_51:
+
+    Sure.  They're all calculated the same way, based upon the disclosed closed loan volumes that we have to use.  So if you take the revenues and expenses and use the closed loans volumes for the quarter, that's how we derive the margins, which is why you see some short-term noise quarter over quarter and the increase this quarter to actually 116 basis points, because we actually book revenues when we lock loans, but we report them closed. 
+
+
+    Which is different than you guys do it at Wells. 
+
+Answer_52:
+
+    Yes.  So I would tell you that it's more of what we're seeing and feeling in discussions and activity with our clients, that we feel like deal activity levels have picked up and may be turning.  And the pipeline feels a little better and solid, but not strong.  So we're expecting that to translate into the second half.  And obviously, as the economy continues to recover and confidence continues to grow, hopefully that will get even better. 
+
+Answer_53:
+
+    So I mean, listen, my comment on that is that Glass Steagall didn't have anything to do with the crisis, and our business model allowed us to be a port in the storm. Our customers like doing business with us in the model that we have now, so --  
+
+
+    We don't spend time thinking about that. 
+
+Answer_54:
+
+    Yes.  So Gerard, just to be really clear, and you look at the title there, to be illustrative, we just, for the purposes of this analysis, we just hold everything flat. That's not to imply anything about what our capital distributions will be going forward, but rather to imply we can continue to do some. 
+
+Answer_55:
+
+    Yes, I mean it's just optimizing our mix between common and preferreds. 
+
+Answer_56:
+
+    It's too early for us to talk about passes on that level. 
+
+Answer_57:
+
+    I think, folks, this just came out.  So we're trying to share information with you.  And it might, but give us a little bit of time and we'll give you a deeper feel how it might affect -- how this might affect different businesses, different products.  Because obviously when you do something like this, this will be pushed down, at one point, not just to the line of business, but to the client and the product and the country, and then we can answer that question for you. 
+
+Answer_58:
+
+    Nothing in particular, just demand.  And I should temper that with, just demand and the continuation that we've talked about of very, very strong competition.  And we are, as I said, we are prioritizing quality over growth. We would tactically under perform rather than chase a deal that we weren't comfortable with. 
+
+Answer_59:
+
+    The results are in our second quarter results. 
+
+
+    Not that material. 
+
+Answer_60:
+
+    You should probably ask them.   
+
+
+    We hope so. 
+
+Answer_61:
+
+    We're not going to give you monthly specific.  I think our folks did a very good job in June. 
+
+
+    Obviously, when spreads widen out, certain businesses are more of this than others.  I already mentioned that Emerging Markets replies to the most volatility, both in terms of spreads volatility and equity markets, did a very good job. 
+
+Answer_62:
+
+    So you should think about mortgage as having some more releases, because we continue to see delinquencies and severities improve, particularly HPI improvement.  And so you should expect that to continue, maybe not at the level that we saw this quarter, because we had a big revision to HPI, as you know, during the last several months.  And in part, we've had $1.050 billion of reserve releases in the first half.  Given what we're seeing, we expect more releases in the second half, but not at that level. 
+
+
+    Think of the several hundred million. 
+
+
+    Several hundred million dollars. 
+
+
+    It's near the end, the car.  And wholesale is kind of where it should be and will bounce around. 
+
+
+    Thank you. 
+
+Answer_63:
+
+    You got it exactly right. At Investor Day, we gave you something that was far more dramatic than 100 basis points, and we already said the duration of this thing is not 10 years, it's a lot less than 10 years.  So obviously, the effect will be less. 
+
+Answer_64:
+
+    Not really. 
+
+
+    Not really. 
+
+Answer_65:
+
+    So the Investor Day scenario was a more severe scenario than the 230 basis points you're implying. 
+
+
+    What was the number we gave at Investor Day?  
+
+
+    It was 300 basis, plus or minus.  And this is in line with our expectations. 
+
+
+    Unfortunately, OCI is not, I hate to say, is not that big a deal. We all know about it. We're all prepared for it. Rates can go up. OCI gains are going to go down. 20 basis points, you're going to see this happen elsewhere. It's asynchronous. We have OCI going through capital and the benefits going through earnings in the future.  So if it were up to us, we wouldn't have actually had this asynchronous accounting to this thing.  And we're prepared, we're going to have buffers that could compare that.  We know how a conservation buffer works, but it's not that big a deal. The duration of our portfolio, and you guys can do it yourself, AA-plus, couple your duration, you could almost calculate the number yourself.  With one caveat is that the losses are less as rates go up, because of the complexity of the portfolio, currently.  And the other thing about this, we can change it overnight at any time. 
+
+Answer_66:
+
+    If you move a trade to a central clearinghouse, it has no charge here and it has nothing to do with the margin that they put up with the clearinghouse. The trade is bilateral with us. You have the receivable get stressed, and you can't take the benefit of the fact that you're going to get collateral against it. That's the way the calculations are done.  So any trade you move to a clearing house eliminates that exposure. 
+
+
+    The margin of the clients with the clearing house is not with us. It's with the clearing house. 
+
+Answer_67:
+
+    We've already added in our forecast to you guys some moving derivatives, on liquid cap and all that.  I do think at the margins this will support things in the clearing houses.  But we don't have analysis to tell you about that right now. Will it be material? We don't really know yet. Remember, the clients, there's a lot of client business who, they are also going to determine what they want.  It won't be just up to us. 
+
+
+    And remember that the derivative add-on calculation is a calculation that is currently being rethought by the Basel committee because of some of the issues with it.  So it could also, in and of itself,  improve. 
+
+Answer_68:
+
+    We haven't done that analysis. 
+
+
+    It's hard to tell. 
+
+
+    To be honest, we were trying to be very transparent and give you some ideas about the sorts of things that we're considering. We haven't translated these into detailed plans yet, so we don't know the second order impacts of this yet. 
+
+
+    I think Marianne gave numbers to show that we can handle this.  But also, you have to be very cognizant of client effects. We have a client business, and we have to make sure that we continue to have a client franchise.  And so over time, we'll adjust the businesses, and we'll meet LCR, we'll meet Basel III, we're going to meet whatever the leverage ratio is.  And think of it in some ways of alternative minimum taxes.  So if every client will be running what's your return on Basel III capital and then what's your return on leverage capital?  
+
+
+    Stress capital.  
+
+
+    And stress capital.  So you'll try to manage all those as fair to the client and fair to the Company. 
+
+Answer_69:
+
+    Obviously, we can do stuff like that. 
+
+
+    Yes. 
+
+
+    Give us a little time. We're showing you that we can get to the consolidated pretty easily, maybe have to restructure some things and change the capital structure a little bit, and move businesses out of the FDIC-insured bank and all that. I just don't think any of that's going to be critical to the future function of our business. We'll adjust those things to accomplish what we need to accomplish. And give us a little more time.  It just happened a couple days ago. 
+
+
+    Thank you. 
+
+Answer_70:
+
+    Well, let me take do the first question -- second question first. If you have a world where some businesses have to hold twice as much capital as other companies, that obviously over time can create huge competitive disadvantages. I don't know of any industry in America who would want to compete globally in that basis. We have an interest in a safe and sound system, so not against the leverage ratio.  But we would be, we're not for a hugely unbalanced competitive playing field.  So put that aside. The regulators know that.  They are trying to -- we thought part of Basel and all that is to harmonize these kind of things.  And if you ask about it, what we show here, and Marianne just shows, anything which is a low RWA asset, including HQLA, revolvers, certain types of derivatives, those things obviously you'll look at a little bit differently because it's a leverage ratio asset.  And we don't have to do it by business yet. We'll give you more detail later. 
+Like even Marianne had mentioned that we take huge deposits in from countries and from money funds, et cetera, that you may not take in, because you can't afford capital against a deposit of $1  billion dollars you get from a money fund that you park with the Fed for 25 basis points, you pay the FDIC 10 basis points, you pay the client 5 or 6 or 7 basis points, you got to put 6% capital against it. You simply stop doing -- there are a whole bunch of things we've got to figure out how we're going to  do it.  But we want to make sure we manage the client franchise properly. We'll figure out the other stuff over time. 
+
+Answer_71:
+
+    So separate the type of deposit, okay? So if it's a consumer deposit, it has a completely different LCR, how you can invest, the kind of spread you can make. If it's what we call big wholesale short-term deposits, you're absolutely correct. We would probably restrict some of that over time. 
+
+Answer_72:
+
+    Yes.  This back up, although sharp, is not entirely unexpected.  So as we talk about our longer term plans, and when we outlined all of that and the strategy for the mortgage business at Investor Day,  that medium to long-term plan does not change.  So it may accelerate some of the activities that we have and have, as we said, some impact on the next couple of quarters' results.  But the long-term strategy hasn't changed. We're working the portfolio, optimizing servicing, trying to take costs out as quickly as possible and grow share.  And actually, we think we should be able to grow share even more strongly in a more difficult market. 
+
+Answer_73:
+
+    No.  No, Nancy.  
+
+
+    Not yet.  
+
+
+    Not yet.  And as you know, traditionally that would, in any case, lag. Of course, that doesn't mean it will, but that's traditionally what happens. 
+
+Answer_74:
+
+    This is what the issue is with all this, you spend all your time talking about accounting, as opposed to business. The business is deposits, serving clients, doing things.  And now we talk all the time about AOCI.  And we have a lot of asynchronous accounting, and pro cyclical accounting and stuff like that, that we try to explain.  But we try to look through all of that and build a business, more clients, more bankers, more branches, happier clients.  So in all of our business, that's how we look at it. We'll work through the asynchronous accounting.  If the loan loss reserve accounting changes, it would add, obviously the loan losses, though probably not as much as people think.  But we still would run the business for economics in the long run. It wouldn't change how we run the business. We would be just be holding more reserves, which would be fine with us. 
+
+Answer_75:
+
+    Well, as you know, the industry commented, we commented in terms of the proposal.  And we are generally in favor of it, but I think that a lifetime timeline is too long, so something shorter than that would make sense.  I think we need to work that through.  It would be implemented over, not the course of the next couple of quarters, but in a year or so.  So we'll wait and see. 
+
+Answer_76:
+
+    I would say, so first of all, the industry groups haven't fully reforecast the market, so we'll wait and see what they come out with.  We're trying to be transparent with our guidance, so that level, hopefully we're wrong and hopefully it will be better than that. I will say, for our own business, we didn't expect volumes to be down this much throughout the year, had this not happened with this space. 
+
+Answer_77:
+
+    Well, mostly this is refi. 
+
+
+    So purchase, we actually saw go up a little bit. 
+
+
+    They're not going to make up for refi.  But they may go up, yes. 
+
+Answer_78:
+
+    Look, we're in favor of finishing.  We've always believed in high capital, high liquidity, good regulation and things like that, and finishing it.  And obviously, there are things that all countries have points of view about which would be different.  But I think the better you get to real harmonization -- the closer you get to real harmonization, the better. If you want to start all over again, we'll spend another five years debating every single thing out there. 
+
+
+    Yes. 
+
+Answer_79:
+
+    Yes. 
+
+Answer_80:
+
+    Well, as I said, we're expecting NIMs to stay broadly flat from here. We do expect some modest loan growth, that's our outlook. I'm not going to tell you how much, but some.  And then we also have the improving cost of debt,  lower cost of debt on actions that we've been taking throughout the first half. 
+
+Answer_81:
+
+    Yes. But we also have the yield compression.  So you know, there's puts and takes.  And so relatively flat on NIM, modestly up on NII. 
+
+Answer_82:
+
+    I'm sorry, I didn't understand. 
+
+Answer_83:
+
+    Yes. 
+
+Answer_84:
+
+    We're growing loans in Asset Management.  We're growing loans in Auto.  We're adding more mortgage loans.  We're expecting some growth in Commercial. Our Commercial Real Estate is already growing strongly. We're expecting some growth in middle market and Corporate Client Banking space.  Although we've seen loan reduction in CIB, we're expecting that to remain relatively flat.  So all other things being equal, that's net growth. And Card, as I said, have hit that inflection point, so that will stop contributing to run-off, net. 
+
+Answer_85:
+
+    So our annual guidance was that, if you look at the first half of the year, you'll see that obviously already we're down year-to-date by more than that amount.  So this is relative to the third quarter, we expect NII to go up.  We're already down a little more than 1%. 
+
+Answer_86:
+
+    Well, thank you for bragging on our trading results.  And for years, the Investment Bank is building FX rates, securitized products, commodities, emerging markets, credit.  And they're good. And obviously, some go up and some go down.  I wouldn't say it was-- at least, I didn't see any regional effects. We trade around the world and the books get handed off around the world, so it's hard to give it a region.  But we build a lot of clients low businesses and that what's driving it.  
+I think it's better for the world to have harmonized rules around what Basel is trying to do, et cetera. But you're absolutely correct. It doesn't have to be exactly the same to have a competitive marketplace, et cetera. We always ran with higher capital liquidity than most of our competitors.  I just think if one is 3% and one is 6%, that becomes just too big, and over time it could have huge competitive effects.  And the regulators are working it out.  We all want a fair, safe, sound financial system, okay? So that's in everyone's benefit, and there are huge capital issues -- capital requirements, liquidity requirements, leverage requirements, stress testing requirements.  And among all of that, I feel that we're getting there.  But at one point, this should be somewhat harmonized.  
+And your middle two questions, I now forgot. 
+
+
+    Can we get back to you on some of that stuff?  We're sort of running out of time rapidly. 
+
+
+    Okay. 
+
+Answer_87:
+
+    Yes, correct. 
+
+
+    I'm sorry, David.  As of June 30, based upon the US proposed rules. 
+
+
+    Estimated to the best of our ability. 
+
+Answer_88:
+
+    So, David, we did say at the beginning that we do think that having a leverage ratio is an important part of our capital management toolkit or process, as long as it's properly calibrated.  And so for us the two questions, I think they are very important and the industry does, too.  So we're participating in discussions.  As Jamie's talked about, what should the quotient, or the ratio, be and making sure that that not only is appropriate but fair across the globe, and also what should the calculation for the denominator be.  And we've alluded already to two specific questions, but there are more. 
+One is should high quality liquid assets, most particularly cash and cash at central banks, be treated the same as other balance sheet items?  And then in terms of some of the additional add-ons that are being proposed, we think they could have issues, actual issues, for the operation of the financing market.  So I think there's going to be a lot of work that takes place. There are comments due back on all of those proposals by mid-September, call it, plus or minus.  And I think this will be worked through through the fourth quarter. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/3_questions.txt

@@ -0,0 +1,354 @@
+Question_1:
+
+    Good morning.  Hello, Marianne. I was wondering if you could -- do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6% requirement? 
+
+Question_2:
+
+    Okay.  So shortly thereafter, maybe within a quarter or two? Can you give us any feel there, or -- just to get a sense of --? 
+
+Question_3:
+
+    Okay.  And you mentioned the mitigation you can do at the Holding Company. Is there mitigation you can also do to help specifically the bank level ratio in terms of assets that could be shifted to the parent or equity that could go from the Hold Company to the sub and things like that? 
+
+Question_4:
+
+    Okay.  And then on the liquidity ratio, why have you decided to run with this level of cushion to LCR and why the acceleration in getting there now? Anything driving that, in particular? 
+
+Question_5:
+
+    Okay.  And could you give us some of the assumptions behind your outlook for stable net interest margin and modest net interest income growth in the back half of the year, just in terms of what you're assuming on rates and loan growth, and what are the puts and takes on your outlook? 
+
+Question_6:
+
+    Okay.  And then finally, I'm not sure if I saw it in here or not, but can you remind us how much you benefit from higher rates?  And which rates in particular are most helpful for you, if you can delineate between the 10-year and the shorter based rates? 
+
+Question_7:
+
+    And then that's current numbers, that's last Q or that's as of right now? 
+
+Question_8:
+
+    Okay.  And last thing for me, on reserve release, how can we gauge, if it is possible at all, how long this can go on for? Are there any base metrics that you think you can't go below that we could look at as a percent of loans or a percent of normalized charge-offs? Any help you can give us to gauge how much might be left on reserve release front? 
+
+Question_9:
+
+    You haven't done that yet in terms of taking the PCI out yet, right? 
+
+Question_10:
+
+    Good morning. 
+
+Question_11:
+
+    So another quick question on leverage. Could you help me understand why it takes until Q1 '15 for the Bank Holding Company to add the 30 basis points necessary to the leverage ratio? It looks like what you laid out puts you well above that earlier. 
+
+Question_12:
+
+    Understood.  Thanks.  And was there a change in the securities portfolio during the quarter, and maybe could you give us an update on where that duration stands? 
+
+Question_13:
+
+    So would the bias be to assume that it would be towards shorter? 
+
+Question_14:
+
+    Okay.  And then just a quick follow-up on John's question. Is it generally right, given what you guys have disclosed and what you guys just verified and what we've seen in rates, if we assume that rates kind of stay where they're at, that you would get about 75% of that $900 million additional NII in 2014, if we stay status quo to where we are now? 
+
+Question_15:
+
+    Right.  All things are never equal, but --  
+
+Question_16:
+
+    And then last one, just trying to think about maybe the potential to avoid some of the really big distraction that we saw this quarter around what is sort of becoming an annual event at the shareholder vote. Have you guys considered maybe articulating some kind of plan or a blue print or a map or what have you to get people comfortable with the future state of CEO Chairman roles way down the line when there is sort of a succession that is in place? 
+
+Question_17:
+
+    Hello.  Thanks.  Good morning. 
+
+Question_18:
+
+    So one more question on page 4. Your $4.7 million is really close.  We were looking for $4.5 million, so very much in line with what we're looking for. I'm just wondering why no bank sub disclosure.  I realize that it's different, but -- and I heard your answer earlier.  But I'm just wondering, why not just give us a number. Is it that there's too much uncertainty in estimating that denominator, you need understanding from the regulators as to what they're looking for?  Could you just help us out on a little bit of the qualitative reasons? 
+
+Question_19:
+
+    Yes, I get that. If possible, I'd love to show you what our assumptions are and maybe we could understand where we differ. 
+
+Question_20:
+
+    Okay.  And then separately, you put on here on this page the potential further add-ons for the Basel proposal.  You're talking about the Basel consultative document that came out a couple weeks ago? 
+
+Question_21:
+
+    Is there any sense as to what kind of basis point hit that is? 
+
+Question_22:
+
+    Yes.  So part of the challenge is a higher denominator in one side and a higher ratio on the other side, right? 
+
+Question_23:
+
+    Just on HPI, HPI obviously rose significantly in the quarter. Could you give us an indication as to how much that helped RWAs? Was that a big piece of the driver? 
+
+Question_24:
+
+    So can you give us a sense as to given where HPI is today, what kind of benefit that would have on RWAs if there wasn't a lag? 
+
+Question_25:
+
+    Good morning. 
+
+Question_26:
+
+    Just drilling down to some of the businesses here.  Obviously June, as you mentioned and we've all seen, was very volatile in the credit markets and the fixed income markets in general.  And I guess just a basic question, how did you do so well in fixed income? I know you commented early part of the month that things had deteriorated quite a bit, and I think some of us were surprised at how good it was in the quarter. 
+
+Question_27:
+
+    And is that just from managing a smaller inventory while the spreads were widening, or --? 
+
+Question_28:
+
+    Okay.  And I guess from the other side, when we look at the comp rate at the Investment Bank, it was down, I think, 2% to 3% both linked quarter and year over year. What's driving that? Is it mix, is it the streamlining of the business lines that you announced about a year ago fully coming together, or just paying people less? 
+
+Question_29:
+
+    And I think you've been guiding towards 35%? 
+
+Question_30:
+
+    Should we think that maybe it's the lower end of that that is more sustainable? 
+
+Question_31:
+
+    Good morning. 
+
+Question_32:
+
+    First, I just wanted to follow-up on the comment, so over the next 12 months NII should benefit by 75% of the $900 million?  So in other words, you should -- in 2014, you should benefit by about $700 million -- 
+
+Question_33:
+
+    No, I understand.  It's more art than science.  So I guess your run rate of net interest income, that would be about 1.5% of that.  Is that in the ballpark of how you think about it? 
+
+Question_34:
+
+    So that benefit would equal about 1.5% of net interest income? 
+
+Question_35:
+
+    Okay.  And when you say the benefit, it's the benefit of the 10-year increasing 100 basis points? I didn't fully hear how you explained that. 
+
+Question_36:
+
+    The reason I ask that is it seems as though maybe the 10-year is not as relevant as perhaps the five-year, or am I mistaken? Or the three-year? 
+
+Question_37:
+
+    Okay.  Separately, the Investment Banking backlogs, where are they versus the first quarter, at the end? 
+
+Question_38:
+
+    And the leverage ratio, you said under the US rules, it's 4.7%. Under the proposed Basel rules, if adopted, where would the leverage ratio be? 
+
+Question_39:
+
+    Can you give us a ballpark?  Or is that one reason you're being so conservative, you have 160 basis point potential benefit, but you're still saying wait until early 2015. Is that part of your thought process? 
+
+Question_40:
+
+    Okay.  And then last question relates to the processing business, which to me looks like it's lagging for the second quarter in a row.  And I'm asking a more broad question.  For eight years, since Bank One merged with JPMorgan, and I think for a few decades before that, it was run as a separate business.  And the fourth quarter of last year, it was merged into the Investment Bank.  And now we have two quarters in a row of what looks like performance that will lag peer.  So my question is how is the management and organizational restructuring going? Is it impacting the processing business, or is there something else taking place there? 
+
+Question_41:
+
+    Yes, I'm guessing it's going to lag. The assets under custody down 2% link quarter when markets are up as much as they are, is there anything else that's one-time or unique? 
+
+Question_42:
+
+    Good morning. My first question really has to do with some of the initial questions asked on capital.  And what is the priority here on capital distribution versus leverage ratio? Is it compliance to the 5% at the Hold Co, or is it accelerating capital distribution over the next two years relative to what you announced out of this year's CCAR, or can JPMorgan both be compliant with the leverage ratio over time and accelerate buybacks and dividends? 
+
+Question_43:
+
+    Okay.  And a follow-up question on what you mentioned, Marianne, in the beginning of the call on Mortgage. You mentioned that if loan rates stay where they are, that could mean the market shrinks by 30% or 40%. What is the proportionate expense in that scenario that you could take out of the business, and how long typically is the lag until you can take those expenses out? 
+
+Question_44:
+
+    And proportionately, if the revenues are down, let's say, origination revenues are down 30% to 40%, what's the efficiency ratio that we can think about as we think about the variable costs that can get taken out? 
+
+Question_45:
+
+    Good morning, guys. Want to ask, maybe I missed it, on expenses. Can you talk about how you're still feeling about the full-year target?  You previously had talked about down $1 billion year over year, ex-legal. Does that still stand? 
+
+Question_46:
+
+    Got it. That's helpful.  And the additional litigation costs this quarter, somewhat elevated. How do we think about them going forward, staying elevated but similar rate, or a little bit lower, or how do we think about that? 
+
+Question_47:
+
+    Got it.  Thanks.  And then in terms of the rates, obviously, impact a lot of different businesses, Mortgage, the balance sheet, NII, NIM discussion, but then also can you walk through how we should think about it in terms of the FIC business, heightened volatility, maybe more volume, but then obviously softer environment in June.  How do we think about this current environment playing out for the back half of this year in terms of trading? 
+
+Question_48:
+
+    Thank you.  And then my last question was just a clarification on there's been a lot of regulatory issues, capital, liquidity, buffers on buffers, OLA, et cetera. As well as I know you guys, I expect -- I think it's this quarter that you're resubmitting your CCAR plan. Is it fair to assume that despite all these things that have been coming out and there's still some hurdles that need to be met, that one shouldn't expect a change in capital deployment or should we? 
+
+Question_49:
+
+    Good morning. Just a couple of questions. First of all, Marianne, you mentioned servicing costs in the mortgage business being down by about $600 million in the fourth quarter. Is that largely coming out of the default side of things or is that -- do you think that will be more evenly spread between default and regular, more regular servicing? 
+
+Question_50:
+
+    So it's about a three- to four-year run rate to get down to ultimately where you want to be? 
+
+Question_51:
+
+    Okay.  Marianne, just a further clarification question. On gain on sale margins, you mentioned those were 118 basis points this quarter.  You mentioned last quarter that they were 100 basis points, and about 180 basis points on a normalized basis in the fourth quarter. Are all those calculated in the same way? Are those quarterly averages, or are those the gains at the end of the quarter?  Just wanted to be sure we understand that.  
+
+Question_52:
+
+    Fair enough. And then one final question.  Marianne, you mentioned deal activity appears to be turning, I think that was with respect to the commercial banking business. Could you provide a little more color on that?  Did June's volatility in the interest rate scenario slow down business activity in the commercial banking business?  And I'm not really specifically talking about the Investment Bank, but more in the commercial banking side of things. 
+
+Question_53:
+
+    Okay.  And just finally, there's been a lot of talk, obviously, in the last couple of days about a potential reassertion of Glass Steagall.  And I guess I'm curious, given your current business model, would that, if that were to come to pass, would that be a meaningful negative in terms of your ability to maintain your cross-sell opportunities across the businesses, or is that perhaps less of a challenge given how you currently have the businesses structured? 
+
+Question_54:
+
+    Thank you. Good morning. I just wanted to be clear, when you talk about on page 4 that you're going to hold your capital distributions flat, is that for all of 2014 relative to '13? 
+
+Question_55:
+
+    Yes, okay.  And then second, you put in here the Tier 1 capital actions could add possibly 30 basis points. Could you give some color behind what you're thinking there? 
+
+Question_56:
+
+    Okay.  And would the total leverage impact of 60 to 160 basis points, clearly that's over the 5%, I assume then that you're going to be comfortable running something north of 5% when you finally get there. 
+
+Question_57:
+
+    Okay.  In your Investor Day, you gave us the ROEs for the different lines of businesses.  And in the total firm, you felt 15% to16% was your target ROE. Will that change now that you've got to carry the higher leverage numbers? 
+
+Question_58:
+
+    Okay.  You guys have had some great C&I loan growth in the middle market space over the last four, five, six quarters. It seemed to really slow down this quarter. Anything in particular happen? 
+
+Question_59:
+
+    And finally, can you give us any color on how the shared national credit exam has gone, and are those results in your second quarter results or will they be in third quarter results? 
+
+Question_60:
+
+    Good morning. Just a couple of quick follow-ups.  I hate to focus on the leverage ratio, but just one question on the cash component. I think, by my calculation, if you were to exclude cash from the denominator, that would add almost 70 basis points to your leverage ratio. Do you think that that has any legs or any sticking with regulators, in terms of logic around excluding that? 
+
+Question_61:
+
+    Yes.  It would make some sense.  And maybe just getting to the FIC business, you alluded to it a little bit, some businesses benefit from volatility. Is it fair to assume that in June we saw things like foreign exchange and interest rate trading do better and credit and mortgages do worse, is that sort of the best way to think about it? 
+
+Question_62:
+
+    Yes.  Thank you very much. On your reserve ratios, right around 2%, and you had a lot of reserve releases in the quarter.  With credit improving, can you continue to do this type of releases in the next couple quarters or is that reserve ratio going to stick around 2%? 
+
+Question_63:
+
+    Good morning. So just looking at the hit to the OCI at $3.1 billion, it actually seems like it's less than would have been implied by the guidance that you gave at the Investor Day. Obviously, that was for a more severe shock, but just calibrating it relative to the number of basis points that the 10-year went up, et cetera.   Any comment on that? 
+
+Question_64:
+
+    And is part of the reason why, besides the fact that it was 100 basis point not a 230 basis point move or whatever, is part of the reason linked to the derisking of the Treasury portfolio that you were talking about as you prepared for the LCR? 
+
+Question_65:
+
+    Okay.  But then is there validity to the fact to the idea that if we recalibrate it for 100 basis points move versus the 230 basis points move that I think is implicit in that $15 billion number that you gave us in February, was the $3 billion in line with that or was it actually materially better?  And if so, maybe if it wasn't related to the LCR derisking, why did you have a better outcome? 
+
+Question_66:
+
+    Right.  Fair enough. As I think about the changes that you can make to the business that you referred to on page 4 to mitigate the impact of the leverage ratio changes, you talk about optimizing the use of central clearing, and yet there's also all these concerns about the disallowance of additional derivatives collateral. How comfortable are you that the way the rules are written right now, moving your derivatives business more towards central clearing really does, because of the collateral, give you a lot of relief on those leverage assets? 
+
+Question_67:
+
+    Right.  So I guess the logical next question for that is given the central clearing mandate which has started to be implemented recently, should we, and as we think about leverage ratio going forward, should we be thinking about a large part of that derivatives add in to the denominator of the ratio as basically being in run-off? 
+
+Question_68:
+
+    Fair enough. When you think about those leverage asset actions that you're talking about, is there any linkage of taking those actions that further benefits LCR? 
+
+Question_69:
+
+    Okay.  One last question I'll ask you is that, as I've talked with clients over the last couple of days about this leverage ratio issue, one of the questions that has come up is wouldn't it be possible to downstream more capital to the bank sub in order to deal with the 6% requirement there?  Obviously,  that incurs a double leverage issue, potentially. Your double leverage ratio right now is just over, I think it's like 1.05. I mean is there any room there? 
+
+Question_70:
+
+    Yes, just following up on Guy. It seems the thrust of the whole leverage ratio is that it's going to penalize the businesses that have the highest ratio of leverage ratio assets to risk weighted assets.  And can you give us an idea where that gap is the biggest, and in particular, also are any of these global businesses where this would give European banks a leg up? 
+
+Question_71:
+
+    Great.  Jamie, following up on that, it just seems like even the $100 billion of increase in deposits this quarter probably cost you 15 basis points in that leverage ratio.  And so is there any movement, do you think, during the comment period towards exclusion of any of the risk -free assets at all? 
+
+Question_72:
+
+    Right. Okay.  And maybe just a follow-up on the mortgage business. You talked about some of the financial impacts. Can we talk a little bit just about strategically what you're doing as you look at that business, and the competitive environment in a weaker refi environment? 
+
+Question_73:
+
+    Good morning. Two questions. First, on branch, on the branch banking network.  I know this back up in rates has been primarily at the longer end and we have not yet had a corresponding rise in short-term rates, but do you see any needs, at this point, to reprice products, et cetera, at the branch level due to consumer perception of rising rates? 
+
+Question_74:
+
+    Secondly, Jamie, you talked about the asynchronous nature of OCI, with OCI getting dinged now with the benefits of the future. Something else asynchronous is staring us in the face, and that's this loan loss reserve methodology possible change to expected lifetime loss. What are your thoughts about that? I mean, where does that stand in an implementation process, and would you really get dinged by that? 
+
+Question_75:
+
+    Well, do you have any sense, I mean, I realize that you're going to run the business for the business, but do you have any sense if this is going to happen and when it might happen? 
+
+Question_76:
+
+    Marianne, could you go back to Mortgage and talk a little bit about the quality of the demand you're seeing? At the beginning of the year, the industry was guiding down about 20% in terms of volumes and for next year, as well. Your numbers suggest that that's basically doubled; in other words, instead of 20%, we're looking at 30% to 40%, given rates. Would it be fair to say that the two factors are equal? 
+
+Question_77:
+
+    So you think there is definitely a price reaction out there among consumers? 
+
+Question_78:
+
+    But Jamie, back to your point about harmonization, when you look at the totality of the way regulators are treating mortgage, MSRs, for example, which have been rallying very strongly in the past few months, and your comments last year about Basel.  Should the US withdraw from Basel II?  It's so unfriendly to businesses that are very important to you and to the economy, particularly in Mortgage. What are your thoughts on that? 
+
+Question_79:
+
+    Thanks very much. Marianne, can we just go back to the sequential NII guidance? 
+
+Question_80:
+
+    Can you help me understand how much of that is coming, or what the attribution is between benefits to NIM versus loan growth? 
+
+Question_81:
+
+    So I guess a couple of thoughts then. Shouldn't, presumably then, the benefits to the funding costs should show up through NIM, no? 
+
+Question_82:
+
+    And just within the composition of loan growth, if you divorce out the credit card seasonality, it's been within a very stable range. What is it that, in your view, takes the loans out of the current range? 
+
+Question_83:
+
+    So in other words, your loan growth has been -- sorry, not your growth, but rather your loan balances have been between $725 billion and $727 billion or $728 billion very consistently for many quarters, if you divorce out fourth quarter credit card seasonality.   
+
+Question_84:
+
+    But it sounds like you have some expectation that starts to move out of that range in order to generate this improvement in NII?  I'm wondering what the driver of that is. 
+
+Question_85:
+
+    Got it.  And then just finally, on the third quarter guidance, is that consistent with or relatively better than your prior annual guidance of down 1%? 
+
+Question_86:
+
+    Yes.  Good morning. I have questions on a couple of topics.  Perhaps the first one, on Equity Capital Markets. Clearly, I think the volumes were up about 2% quarter-on-quarter, and I think we all expected you to outperform.  But it was an extremely good performance.  And I wondered if you could brag a little bit about how you achieved that and how much you thought was from the market share and perhaps how much is down to geographic split. That's the first question. 
+The second one, I'm afraid, I'll get back on to leverage. I'm intrigued by the comments on page 4, which you've touched on in an earlier question on the Tier 1 capital actions, which you suggested would be perhaps issuance of some additional Tier 1 capital,  as it's becoming now called, AT1.  And I wondered if you actually had any indication yet, I know it's fairly early, from the regulator on what the terms of that new capital would have to be to qualify for Tier 1 under Basel III?  And then perhaps talk about the $14 billion to $15 billion of current hybrids that you have within the Tier 1 calculation, which obviously you're going to phase out, I think in some cases, if not all, through to end of 2018, and what your strategy is for the placing those.  
+And just perhaps finally, I know Jamie's talked a lot about level playing field, and I asked him that last year on Basel III capital, but I'm just wondering actually the leverage ratio that you're looking to have to achieve now, whether it actually gives you a competitive advantage as opposed to a disadvantage, given 3% is pretty well being considered too skinny. Thanks very much. 
+
+Question_87:
+
+    Good morning.  Just quickly.  To be clear, on page 4, are you saying that your 4.7% leverage ratio is as of June 30 without any other assumptions or roll forward? 
+
+Question_88:
+
+    And congratulations for doing the work so quickly.  But secondly, Jamie, how will you as a company respond to the proposal? Are you in favor of it largely? Are you against it? Will you have a lot of proposed changes to it? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/40_answers.txt

@@ -0,0 +1,109 @@
+Answer_1:
+
+          Yes, sure, Dara. Look, a few thoughts. Firstly, I think the most important thing we focus on as a starting point is making sure we are bringing the innovation, the marketing and the execution to bear for each customer such that the beverage category grows faster than their overall business. And that is the basis on which you get better in-store placements, execution, and the pricing conversation becomes more manageable because the end, you're -- in the end, you're creating disproportionate value for the customer. So that's the first objective.
+The second point I would make is we -- perhaps different to some people, we are a very multichannel business. Yes, we have large presence in the grocery channel, but we have multiple other environments where we sell our beverages. And therefore, part of it is being in lots of different places that helps manage the pack/price architecture dynamics and creates value for all our customers in the different channels.
+And I would perhaps leave a last third thought on the marketplace, which is, yes, some of the extra pressures are from private labels or the stratification of retailers' own strategy in pricing is somewhat of an emerging dynamic in the U.S., but it has been present in other parts of the world, and we have found ways to work with each of our customers to make it work for them and for us. So we are believers in our ability to create value for ourselves by creating value with the customers even in this ongoing changing environment.
+And I'll leave you with the last thought, which is there's no one better positioned to understand this in the context of North America than Jim Dinkins because he's run the national sales company for the U.S. system for a large number of years. He's worked as -- leading accounts in lots of other channels, too. So he understands this dynamic very clearly, and he has been at the forefront of leading a team to build value with our customers in collaboration with our bottling system.
+
+Answer_2:
+
+          I -- well, I think the first and most important green shoot is to look at the performance once you get past the 12-month mark, by which I mean that it's much like having any new thing, management attention and focus gets heavily directed to new things. And so of course, you would expect better performance initially on refranchising, and we have got that in the vast majority of territories.
+But I think the most interesting thing is that after 12 months when it's cycling and people have got the real hard work of building for the long term, we're still seeing the vast majority of the refranchised territories performing ahead of where they were before. So they've been able to build on the great refoundation work that CCR, in conjunction with the North American team, did. And the sorts of places we're seeing that performance coming from is not just doing better with the existing customers, which is true, but also in finding new customer outlets, expanding the universe of the customer outlets and performing better in the small formats, which in a way is partly the theory of the case of why refranchise to local partners.
+
+Answer_3:
+
+          Yes. I mean, I'm not going to get into the mathematical specificity, but I think, look, the headline is that as Coke Zero Sugar is coming to marketplaces, and particularly interesting those ones where it's been there for more than 12 months, a bit like my comment on refranchising, we're seeing continued acceleration of Coke Zero Sugar. It's lifting the whole franchise.
+Yes, it is cannibalizing at times either Coke Light or sometimes Coke Original, but in the net, there is additional volume and additional consumers coming back into the franchise. I think it's unrealistic to expect cannibalization to be 0, but obviously, the key is that it be a net positive. So we're pleased with how it's playing out. It's slightly different in different countries, depending on the mix of the Coke franchise in those countries, but it's a net positive, and we are encouraged.
+
+Answer_4:
+
+          Okay. So I will take the first one, and James can decide if he plans to be generous or not.
+So first of all, we separate those 2 programs, Ali, from the $3 billion program, the original program that we announced earlier and then the $800 million program that we added on. On the $3 billion program, I would say we are on target, that the productivity is clearly coming from 3 different places: cost of goods, DME and OpEx. And we have targets to do about -- around $400 million this year. And we had always said about half of that would be reinvested and -- to drive growth.
+Of the $800 million program, that is associated with our lean enterprise activities. Those activities really just got started last quarter, so this year. So it -- they really will -- and we've said that you'll see the benefits of those in 2018 and '19, and they will be split between those 2 years. And again, about half of that will go to reinvestment, and half will hit the bottom line. So we are on target with both programs, and the lean enterprise programs have started off well so far. And we will plan to update you as we continue to go along.
+
+
+          And if we have time, we'll come back to Topo Chico, Ali, so that we can respect everyone's one question at a time.
+
+Answer_5:
+
+          Sure. I mean, firstly, we over-index in terms of share, generally speaking, online. I think the second thing I would say is e-commerce is not one thing; it's a spectrum. And in part, what I mean by that is there are pure-play e-commerce players. There are bricks-and-mortars who have e-commerce. And you could say that's the omnichannel. There are aggregators -- remember, we're not just grocery. We work with a lot of restaurants, and there are all sorts of restaurant aggregator platforms and restaurants or some QSR chains have their own platforms as well.
+So there's a wide spectrum of different versions of how consumers are interacting with customers that is digitally enabled. As I said, we very generally over-index. Our objective is to work with each customer, helping them drive value for the beverage category with their consumers. And generally speaking, we do better when that happens. And so you can see progress in the traditional grocery idea of e-commerce, whether omnichannel or pure play. You can see progress on restaurant or quick-service platforms.
+So there's a lot of growth, a lot of activity. But in the simplest sense, it comes back to the central idea: if we can work with them to help the beverage business grow faster than their overall business and be a key participant, it creates a lot of value for them. And therefore, we have a lot of engagement with many of these companies on how can we help create value for them within the context of their strategy.
+
+Answer_6:
+
+          Yes. I think let me take them in pieces as each one is a slightly different story although I -- the headline is I'm hoping to see the light at the end of the tunnel by the end of the year. What does that mean? In Brazil, we've talked about the actions we've been taking around price/package architecture, around returnables, investing in new infrastructure, not overpromoting to try and protect the volume but to try and reestablish our price/pack architecture that's going to work for the medium term.
+It's -- Brazil as a country is struggling or has struggled. There are some signs, as I commented on the script, of light at the end of the tunnel. FMCG is lagging durables a bit in that.
+Am I completely happy in Brazil? No, I wouldn't say so. I think there's more that we can do that's within our control. But I'm still somewhat hopeful that, that will all play out by the end of the year and things will start bottoming out in the fourth quarter. It has been sequentially improving as we've gone through the year. I think with more focus and more effort, we can see this play through, and so it'll bottom out by the end of the year. We'll see, but I think the signs are encouraging.
+Venezuela. Venezuela is really a very tough human situation. It's almost a tragedy. And I think that the simple reality is the fourth quarter of significant declines in Venezuela will be the fourth quarter this year, at which point it'll have got to -- it'll have shrunk to a size that it won't be able to impact our overall numbers to the same extent in 2018. I would love to think it's going to get better. I'm not hopeful in the short term, but I would say it's going to stop impacting our numbers heavily once we get into 2018.
+And then Colombia, similarly to Brazil. So I think the sum of all that is what I said at the beginning. We've been through a very tough year. We've been taking action. We are happy with some of the things we've done. We've got more work to do in places. But the floor should be set by the end of the year.
+
+Answer_7:
+
+          I think there're a few questions in there, Judy. Look, I think as we disaggregate the categories, obviously, the categories intersect with the geographies. And so the story is not -- neither clean by geography nor by category. But let me try and add a little texture to what we see going on.
+I think sparkling beverage growth got a little bit better volumetrically in the quarter, and I think that, that shows a slightly improving trend. So I think that's -- firstly, the sparkling has got volumetrically better. It's back to slightly across the 0 line, whereas it was negative at the beginning of the year, and that's coming with better revenue growth. So our focus on Coke Zero Sugar, the relaunch of Fanta, Sprite in some places, smaller packages, working with customers who are getting a better volume trend sequentially and good pricing. So I think there's good progress there.
+In terms of juices, what we're really seeing there is doing a lot better on the top end, things like chilled juices, plant-based drinks, fairlife, the premium dairy, going strongly, would love to have more capacity to grow even faster. You're seeing some growth in the juice drinks end of the spectrum where there's some volume has come out. It's more in the nectars, and I think that's part of people converting up and converting down. So I think there's continued trend there.
+In terms of teas, good growth there, volume growth, price growth. We're pleased with our performance in teas. We're going to continue to invest in tea.
+Coffee, lots of up in coffee. In the U.S., we've launched our own brands. We've launched some brands in partnerships with some other players. All of those have gone successfully well. We've got new innovations coming. We did -- we had a bit of a bump in coffee in Japan in the quarter, not so pleased about that. But we have the plans in place to do better. The one where we have done less well, and it was a choiceful decision, is on water. In some parts of the world where we have been too heavily into very low-margin, large-bulk water, we have pulled back deliberately in the quarter, and that has affected some of our water growth rate numbers.
+
+Answer_8:
+
+          So yes. I mean, we're going to reaccelerate smartwater. Look, I think the key in terms of North America is to see a bit of a trend on the price/mix. You'll remember from last quarter, for example, that we talked about a point of the revenue growth was extra inventory in our fountain business ahead of the summer. Obviously, that's been backed out in the third quarter.
+So said in simple terms, I think the easiest way to understand North America and look through inventory and look through natural disasters is, if they look to summer as the period, let's add the second quarter and the third quarter together and look at what we've got. And there, I could -- I think you can see revenue is 3% to 4%, price/mix is on average 3%, which is in line with the year-to-date trend and is in line with what we did in previous years, more or less.
+But I think when you just look past some of the blips, what you see is an ongoing successful track record of driving the North American strategy; reinvigorating the portfolio; a focus on revenue; a focus on smaller packages; a focus ultimately that drives price/mix ahead of volume, with transactions ahead of volume. And I think that's what you saw once you ignore the blips in the third quarter. And so we're committed to our strategy, and we continue to drive it.
+
+Answer_9:
+
+          Look, I think we got -- the North American market is certainly one of the most competitive markets around the world. It's not just one large competitor we face. There are multiple competitors, large, medium and small. There's a lot of activity, a lot of innovation, a lot of jockeying.
+In the end, we will continue to focus on our strategy. We have a clear strategy that's driving the portfolio inspired by the consumer, working with customers to create value for the beverage category and our underlying category because that includes all peoples, brands and products. We work with the customers to create value for the beverage category, which will drive ultimately growth. And I think that has shown that we have been able to gain share over the long term on a steady basis as we have deployed this strategy, supported, of course, by the increased and improved bottler execution investment through the refranchising.
+It's a long-term game plan. I've commented on previous quarterly calls, will there occasionally be quarters where customers take certain decisions that cause disruption to that or competitors do? Of course, that may happen, and we will respond. But we believe in our strategy, we think it's the right long-term play, and we will always look to get back to it even if we respond to short-term actions.
+
+Answer_10:
+
+          I think the top part of the answer is it's -- all the pieces work together. It's about having the right portfolio for the consumers, the right marketing, the right innovation and the right execution. There's no question that when you bring all those things together, that's when you get the best possible result.
+In terms of what better execution from the refranchised bottlers, I think that they have been able to build on the foundation that was created by the CCR team. That was -- we pushed more devolution of accountability, of empowerment down into the organization of this national bottling company. We were -- refounded some of the manufacturing, supply chain and executional processes.
+And I think the local bottlers have been able to take that, bringing their passion, their entrepreneurialism, their local knowledge, and turned that into an even better result. As I mentioned earlier, that's typified by things like more outlets, typified by things like working better with the smaller formats, yet also, at the same time, being able to increase the degree of execution and service to some of the larger customers.
+So it's been an ability to work across the board. It wasn't a silver bullet. It was, in fact, getting a little bit better across the spectrum, from the largest customers to the smallest customers, in support of our portfolio marketing and innovation plan.
+
+Answer_11:
+
+          So yes, it's safe to assume that we're going to invest where we see the opportunity for growth. And therefore, as the emerging markets begin to bounce back, I'm not sure they're all are going to bounce back to the same sort of degree as they were precrisis, but we absolutely will be investing to drive our market position. Now I would just underline that other than some situations very specifically, we don't tend to try and pull back very aggressively when markets turn down.
+We, generally speaking, adopt the strategy of when there's a downturn, and particularly, in some of the emerging markets, it's better to invest through it to gain competitive position so that you're positioned even better for the upturn. So it's not the case that we pulled the cord on lots of markets. Having said that, as I said at the beginning, we will up the investment as we start to see the acceleration, and you can see that we've talked about things we started to do in India, things we started to do in China.
+As we see the momentum starting to come back, we're investing behind those. Will it be across the portfolio? Yes. It won't be -- [shock them]. It needs to be focused on helping us achieve category leadership positions or near-leadership positions or driving new interest in consumer innovation in conjunction with the execution of our bottling partners. We're not trying to do more mediocre stuff. We're trying to generate good strong consumer brands, whether they be large or they be niche, whether they be profitable and they be successful.
+
+Answer_12:
+
+          I think, in Western Europe, we've had a very good start to the creation of CCEP. Yes, it was a little bouncy in the third quarter with some localized poor weather that offset the better weather that was in Q2. If you look past those blips, I think you see momentum in Western Europe coming back in and good growth.
+I've talked previously about expectations on price/mix where in Western Europe, I think we can have, in comparison perhaps to the U.S., a little more volume growth and therefore a little more balance between volume and price in Europe as we go forward. The U.S. is more assertively looking for a package/price architecture mix-led part of the equation. So I think that the sustained idea for Western Europe is a balance.
+In terms of China and Africa, there are slightly different situations. In Africa, clearly, there's more opportunity for expansion of the portfolio volumetrically although of course, there'll be a price/mix element. And China is, again, a place where we're looking to get -- rebuild the volume momentum with a moderate degree of price/mix.
+
+Answer_13:
+
+          Yes. I mean, there's -- I mean, clearly, the natural disasters in the whole Caribbean basin, whether we're talking Florida, Texas, Puerto Rico or Mexico with the earthquakes, all kind of occurred in the same quarter. So there's clearly an impact. I'm not going to attach a number to it because I'm not really a big fan of putting it all into the one-off temporary basket. But clearly, there was an impact.
+The weather was a bit more miserable in the third quarter. And there is a bit of -- there was a bit of softening of consumer sentiment through the third quarter in Mexico. I don't think these are new enduring trends. I mean, certainly not the natural disasters, hopefully not, but nor is the consumer one. I think that will slowly reverse over the balance of the year. We'll see.
+So I don't think there's a big issue in Mexico. Of course, it's one of those places, too, where we're looking to work on our price/package architecture and the full portfolio that we've developed as a system over the last few decades there to really be able to continue to drive revenue. And I think it was a strong revenue quarter for the system in Mexico, and I think that will continue.
+
+Answer_14:
+
+          Look, I think the leadership change in North America -- I mean, leaders don't last forever, and this is another one of those changes. There's a new chapter about to begin in North America. We've had a great run of a few years. We've successfully carried out a humongous refranchising task. And I think Sandy made the decision this time for a new leader, and I think Jim is the right person. He's got full portfolio experience. He's got marketing experience. He knows the customers across the whole spectrum, and he has the right capabilities as a leader to take us to the next stage of growth.
+What does that need to be? Clearly, it needs to be about continuing to execute the strategy we've got in place. But like all strategies, they need to evolve. In the same way that company's global strategy evolves for the circumstances we face, so will the North American one. It's not just due to the fact of the leader changes that you know you need to continue to evolve and build new capabilities. We knew that before. We had some things under development. Of course, we'll learn new things, and we'll identify new ideas. So I think it's about a continued journey of the North American business. It's a great team. It's a great system. They've got their mojo back. They know they need to do more things to execute and complete the mission in the short term and to evolve and build new capabilities for the long term.
+
+Answer_15:
+
+          Yes. Look, I think it's not just a U.S. trend. You can look at Japan where arguably, beverage diversity is even greater than the U.S. But I think the central point is the following. If you look back over time and you look at what is the behavior of teens and young adults of each generation as it comes through, there's one key fact: each generation consumes and, importantly, buys more commercial beverages than the previous one. The second important fact is they do so across a greater variety of drinks. It's not that they buy more commercial beverages and drink ever-increasing amounts of the same thing. They go for diversity.
+Therefore, you can see around the world that those places which have the highest amounts of disposable income, each generation is coming along and looking for that diversity. That's true in the U.S. It's true in Japan. It's true in other developed markets and other wealthy parts of even emerging markets. And so the learnings that are available are actually not just one-directional. They are actually from many different places across the world.
+We've got to find ways to take new learnings from the U.S., from other parts, Japan, from Europe, from Australia and finding the best of the best and allowing ourselves to fuel the diversity of the portfolio yet understanding that, in the end, what grows are the global brands. I mean, the world, over the last number of years, has been typified, at least in beverages, by outsized growth by global brands and the entry of lots of new smaller brands. The bit in the middle was tougher.
+So you either have to -- so you have to keep fueling the machine by having innovation and testing the frontier of variety yet, over time, graduating those to large-scale consumer franchises, not necessarily single-flavor franchises but consumer franchises.
+
+Answer_16:
+
+          Yes.
+
+
+          Yes.
+
+Answer_17:
+
+          No, that's the wrong conclusion, Andrew. The simple answer is that the regulatory process in South Africa is not time regulated. And the fact is we got regulatory clearance in the last month or so, and that then led us to closing. And now we will proceed to work with our -- the prospective partners that are interested, and there's substantive interest. And when we say 2018, that's because it includes regulatory and closing approval. So that's the simple answer.
+So I think that's it. That's time, ladies and gentlemen. Thank you for joining in. To conclude, I think we delivered a solid quarter. We're on track to close out a successful year. And as always, we thank you for your interest, your investment in our company and for joining us. And again, we look forward to sharing with you more during our Investor Day on November 16. Thank you.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/40_questions.txt

@@ -0,0 +1,70 @@
+Question_1:
+
+          So my question was really around North American pricing long term. Obviously, there's been a lot of concern in general over the pricing environment in the U.S., not just in beverages but across the CPG industry, with brick-and-mortar retailer struggles and theoretically pushback as they look for lower pricing to differentiate themselves or just the margin grab versus CPG suppliers. So I was hoping, in that context, you could give us a review on if Coke's increased focus on pricing in the U.S. over the last few years, is that pressured at all longer term by these retailer dynamics? How do you manage through that? What are you hearing from your customers? And also, just given the new leadership in North America as well as the bottler refranchisement, how does that play into that pricing focus longer term? And how do those changes impact that?
+
+Question_2:
+
+          James, what might be some of the green shoots of performance lift that you're seeing in the North American territories that were first refranchised?
+
+Question_3:
+
+          James, a quick question on Coke Zero Sugar. When you think about the launch in the markets that you have and also the early data points from the U.S., how much interaction is there with Coke Classic? And if you could just give us some context on kind of overlapping cannibalization rates.
+
+Question_4:
+
+          Wanted to get an update on the progress from a productivity perspective, so the $3.8 billion that you'd mentioned last time. Where are we on reinvestment phase versus dropping to the bottom line phase? And essentially, coming to brass tacks, how much in billions of dollars should we expect to drop to the bottom line? And then if you want to be generous and answer a second question, a lower-priority question, but can you talk about the Topo Chico brand positioning versus a LaCroix, for example, in the marketplace? Please choose the first one if you're going to choose one.
+
+Question_5:
+
+          My question is about e-commerce. I mean, your competitor in the last earnings laid down the size of the opportunity for -- of e-commerce and the way they were investing ahead of the curve in people and big data, saying that they had a larger market share in e-commerce than elsewhere. Could you please tell us, I mean, how you are doing as to that channel, your objectives and how you plan to get there?
+
+Question_6:
+
+          I have a question about Latin America. And James, if you could just maybe give us a little bit of an update on -- it's been a drag to organic sales growth in unit case volume or I guess you'd say it's been a drag on unit case volume. A lot of that is Brazil, Venezuela, I guess, the Central America business unit as well.
+Can you kind of give us a description of, a, how far away from -- are we from maybe the environment bottoming; second, maybe just some of the actions that Coke has taken to sort of adjust to the environment? Just trying to get a sense of how far away we are from being at a -- maybe a clean base where you can start to grow again.
+
+Question_7:
+
+          James, can you give us your perspective around your performance in some of the non-sparkling category clusters? If you look at the quarter, I think the growth actually softened across all of your segments there. Why do you think we aren't really seeing stronger growth, setting aside what you're doing in China? And then I think you talked about maybe increasing investment behind some of your bigger brands. So -- and then maybe you can elaborate on your strategy in the investment, whether that will be funded by shifting investment from sparkling to these brands or the total portfolio you're really looking to further increase investments.
+
+Question_8:
+
+          Just wanted to ask a bit about, in North America, to stick with the conversation around price/mix, so it just jumped out at me that sparkling price/mix is up 3%, but total for North America was 2%. So what was the drag there? Was it price? Was it mix? Was it category performance? And then in particular, if the answer, since I get one question, is that it was something in water and particularly with smartwater, are there plans in place for reaccelerating that business?
+
+Question_9:
+
+          So James, just sticking with the topic of North America, but my question relates to your expectations with respect to competitive activity. And I guess I ask you in the context that your key competitor had probably one of the most difficult quarters they've had in a long time in North America beverages, and they've discussed ramping investment in key categories to address some of these market share losses, which will include carbonated soft drinks and sports drinks.
+So can you talk about -- you've talked a lot about your strategy, which has been helpful. Can you talk about your expectations with respect to competitive -- the competitive environment in the near to intermediate term and your ability to flex up spending to respond, if necessary, within your guidance?
+
+Question_10:
+
+          James, if you can expand on the comment about better execution of the refranchised bottlers in North America. And how -- so how was the performance gap of the refranchised territories against BIG in terms of volumes and pricing and as it relates to better execution at the trade? Or would you say the [flat 50] volumes, I guess, negative before has been mostly driven by innovation by Coke Zero Sugar, smaller packs? So basically, I wanted to ask you if the 3% is coming -- performance that you had is coming from better execution or just better mix.
+
+Question_11:
+
+          Question on reinvestment. And when the company started the program of savings and reinvestment, emerging markets returning negative or, in some cases, were already negative, they probably didn't get as much investment as they otherwise would have. As we're seeing some signs of emerging markets improving, is it safe to assume that we'll see investments accelerate there? And then can you just expand on what you've learned from the activity you've undertaken in developed markets and then, finally, where those funds, if my assumption that increased investment is coming, will come from?
+
+Question_12:
+
+          My one question, James, is refranchising related and how much runway you think you face for sustained improvement in price/mix in Western Europe where you're a little more into the exercise of refranchising and also China and Africa where refranchising has begun or will soon begin. Simply, the price/mix opportunity in front of you in those markets.
+
+Question_13:
+
+          James, can you just talk a little bit more about Mexico? I think you alluded both to the weather, and then you did a little bit of a slowdown in the category. Any way to quantify what the hurricanes or anything had impact on the quarter and then if there's any lingering impact? And then -- and just kind of touching on the slowdown you said for the quarter.
+
+Question_14:
+
+          James, talking about the leadership change in CCR, can you talk about what Jim Dinkins' key priorities would be? And then as this leadership transition happens here, do you see that as an opportunity to maybe reorient the organization to develop new muscles as you transition the portfolio?
+
+Question_15:
+
+          Great. James, in the beginning, you talked about increasing desire of consumers for variety that'll help drive innovation and many new brands, new competitors. I think that's mostly a comment about the U.S., but I'm wondering if you could take that comment and those trends and talk about how that is playing out in the rest of the world and whether that is something that, if you've seen it sort of first in the U.S., you can kind of get ahead of it and take advantage of perhaps learnings in the U.S. to perhaps capture more of those opportunities in other countries.
+
+Question_16:
+
+          Oh, yes. Can you hear me?
+
+Question_17:
+
+          Okay, sorry. I'll try again. Yes. So just related to CCBA, you're saying that you're now expecting completion in 2018. I'm pretty sure that this time last year, you were expecting it in the second half of 2017. I'm just wondering what on earth is taking so long, mindful that, for example, Coke Icecek dropped out of that process, I think, as long ago as March. Are we left concluding that the business that is up for sale is not in a state where anybody wants to buy it?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/41_answers.txt

@@ -0,0 +1,77 @@
+Answer_1:
+
+    Obviously, this year -- 2013 will be peak capital investment in Canada, about $1.5 billion. Next year, going forward, CapEx -- for the US, we'd expect something similar, perhaps growing a little bit, to $2.5 billion, something in that range; Canada dropping to somewhere -- still opening a fair number of stores -- $0.5 billion, perhaps a bit more than that.  So we would expect free cash flow to expand, especially in light of Canada operations becoming accretive. As far as what we would intend to do with that, we said first, by 2017, assuming we get to $8.00 a share, we'd expect the dividend to be at $3.00 a share or more.  So we'd expect to continue to increase the dividend at a rate approximately 20% on a compound basis over the next several years. And with the constraint of living within our current strong investment grade credit ratings, we'd expect to deploy the remainder of our excess cash flow as share repurchase. 
+
+Answer_2:
+
+    Yes. I think that's right, Mark. When we look back on where we're at right now with Canada, we feel really good about where we're at and our projections for returns in Canada. If we look back a year ago, or even two years ago when we signed the deal, the projected EBITDA for this quarter -- for this year, excuse me, is essentially right on where we thought it would be. The dilution is a bit higher even than we expected, perhaps a year ago; and all of that is attributable to independent capital investment decisions we've made, whether that's investing in three distribution centers to build them and own them ourselves, or the 40 store expansions that I mentioned that we worked through over the past year. So most of the increase, from our vantage point, is attributable to incremental depreciation and amortization. And of course, those capital investments were separate economic decisions and we expect to see economic benefit to that P&L through time.  But the sequencing is that the depreciation and amortization shows up first. 
+
+Answer_3:
+
+    Yes. The property development team did an outstanding job working with some very good partners, our landlords in Canada.  And the vast majority of the percent rent clauses, which of course never impacted Zellers, have been negotiated away. Percent rent is not a meaningful issue for us going forward. 
+
+Answer_4:
+
+    I think what I would say, Greg, is right now as we look at the retail business and model that, we've always modeled that independently of the Credit business, given the different leverage characteristics, as you noted. We think the Retail business right now is probably pretty close to the top end. There may be a little bit of room.  But we think it's near about where the leverage which will support our current credit rating is at. 
+
+Answer_5:
+
+    Correct. For 2013, that's correct. 
+
+Answer_6:
+
+    Sure. The increase in REDcard sales is a mix of both, Greg. Certainly, the new accounts are creating a significant amount of that lift, with the amount of accounts.  And you can see the increased penetration resulting from new accounts. But we have also seen an increase in lift, particularly over the first several quarters that the REDcard was out, in existing accounts. 
+The other thing I would mention, the big driver here of the increase in sales, as has been the case, the big driver in increase in the whole program, has been the debit card. And I think from our assumptions, perhaps two or three years ago when we were talking to you to you to now, the debit card is the one that has really surprised us. The credit card has probably grown pretty much with what we thought.  But the debit card -- we're doing three accounts to one debit to credit now.  And that has been the one -- the product that has been incredibly attractive to consumers who just don't want another credit card.  And that's really what has driven the significant increase in our REDcard sales. 
+
+
+    The other thing that I would add, Greg, is all of our guest segments love the REDcard somewhat equally, whether you are a VIP, which we would say somebody that visits us a lot and spends a lot, all  the way through our enthusiast convenience users least engaged.  All of those segments, once they get the REDcard, move toward visiting Target more often and spending more.  So this is not just isolated in one group of demographics. It's very well dispersed and balanced.  And we think that's a very positive attribute that, that many guest segments love the REDcard. 
+
+Answer_7:
+
+    The actual assumption for the US business was about a 3% comp through time.  And some years will be a little bit above that, some years a little bit below that.  But we think 3% comp is about the right level for our business. If you look back at our business over a really, really long period of time, back when we were running 5% comps, a couple hundred basis points of that were coming from new stores as they annualized,  and we would ran about a 3% comp in our base business.  And over the last couple of years, since 2010 -- last year a little bit lower, 2011 right on.  We feel like that's the right neighborhood for where we can run the business. 
+
+Answer_8:
+
+    Well, typically in the US, we open stores in three cycles. Due to the number of stores we have in Canada, we're taking an approach that we're going to open five cycles this year.  So think April, May, and every couple of months beyond that, we're going to open somewhere between 20 and 28 stores a cycle. We haven't defined all of that yet.  But we're going to start in the greater Toronto area.  Then we're going to move to Western Canada.  Then we'll densify.  Then we'll  go East, and then we'll densify again.  So we've got a good plan that is centered around our supply chain investments and the readiness of our distribute centers, and we just think it makes sense to spread out those kinds of openings over more cycles than we typically would do in the US. 
+
+
+    Your other question was -- 
+
+Answer_9:
+
+    No. We're not holding back at all. We're not capital constrained, and we're pursuing every project that we can find that's going to generate the right kind of returns.  So I would tell you that the real estate -- commercial real estate market is pretty much status quo and hasn't changed all that much over the last couple of years. There are pockets of opportunities, and we're anxious to either co-develop or develop on our own or be a partner in any development where we believe that it's the right demographics and we can generate the right kind of returns.  So we're not holding back at all, it's just the environment is still a little cautious and a lot slower than we'd like it to be.  And hopefully, things will change over the next couple of years. 
+
+
+    Thank you. 
+
+Answer_10:
+
+    The revenue number, I would tell you, continues to move around even here, for the reasons Gregg just outlined. We continue to -- the store opening schedules continue to move around.  We've only really set in place in concrete the first two. The rest of them, still moving around a little bit.  So we're hesitant to provide pretty specific guidance. But what I would tell you is, the expectation is that these stores will open and grow and have a very similar annualization process to what we see in the US. So I think that's probably the most important assumption, and then the revenue will move around based on what stores we get open when. 
+
+Answer_11:
+
+    I think you hit on it. It'll be a little bit longer. We're not talking about five years or anything like that.  But 2.5, three years, something like that, our current modeling would say, we'll get it back in, something like that.  So a bit more than two years. 
+
+Answer_12:
+
+    Bob, I would say that we actually think we performed quite well on Black Friday. We saw the barbell intensify, as Gregg mentioned, between those early sales in Black Friday and then the lull and then coming back strong at the end of the holiday.  For us, it was more about pretty weak seasonal businesses.  The weather, as you know, was warm.  And our seasonal businesses, which normally kick in, in early November, didn't.  And then, with all of the, we think, economic turmoil and the elections and fiscal cliff and all of that, that it created that lull in between Black Friday and Christmas.  So we've talked about planning conservatively for this past year, and we will again for next year, for the fourth quarter.  And we think that the opportunity to pick up sales are really the other three quarters.  And in particular, the second and third quarter this year.  
+We continue to manage our business.  Our goal is to maintain or grow gross margins within categories.  As you know, it was a very competitive year this year.  And what we dropped was mainly reflecting the ongoing impact of 5% Rewards and PFresh, combined with a little higher clearance in some of our seasonal categories.  But all in all, I think the team did a great job of managing our inventory.  We did come out very clean.  Our inventory headed into the first quarter was exactly where it was last year, on a per store basis.  So we feel great about that.  
+
+
+    The other thing I would add is, you have to take a look at the mix of our business, too.  And there was industry softness in Electronics and Toys, which are really important to us.  There was not any must-have, really super-hot new products that really drove consumers into the stores.  And as others have reported, the Toy business was a little softer than expected.  And same was true in Electronics, as we were post-peak in terms of the digital cycles and video game business, in particular, were softer.  And that's a huge business for us.  
+So just the cyclical nature of some of these businesses, in addition to what Kathee said, cause comps to be a little bit softer than we expected.  But we are not bashful about being hyper-competitve, and we want to be really super competitive every year as we head into the holiday season.  But we also want to have a balanced approach in making sure that it's not all about market share. We want to gain market share, but do so profitably, and trying to find that right mix.  And that's the approach we'll continue to take. Okay? 
+
+
+    Thanks, Bob. We have time for one more question. 
+
+Answer_13:
+
+    We're competitive day in and day out.  We have always maintained the position that we're going to be competitive in the marketplace.  And so it's a position that we've taken.  And as we continue to learn more and as more business migrates to the online channels, we're going to continue to sharpen up our online prices in that channel, as well, and be competitive with those competitors that are most meaningful in that channel.  So there will be some sharpening up there; but I would tell you, we offer fantastic value, day in and day out. Our pricing strategy has not changed.  And as we look across the competitive landscape, we're very, very well-positioned. 
+
+Answer_14:
+
+    Sure. The biggest impact is the impact of share repurchase, as that levers against growing profits, is the short story on that, Dan.  And we're happy to spend a little bit more time with you, if you'd like, discussing that.  But that's the short story. 
+
+
+    Okay.  Well, thank you very much. That concludes Target's fourth quarter 2012 earnings conference call. Thank you all for your participation. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/41_questions.txt

@@ -0,0 +1,57 @@
+Question_1:
+
+    Could you give us a little outlook on what free cash flow is going to look like once Canada is over, on the $1.5 billion of spend, and where do you expect to deploy that? Is it going to be tilted more towards share repurchase, or how do you look at that? 
+
+Question_2:
+
+    Okay. Can you give us a little more color on the Canada dilution of $0.45? I think that's bigger than a lot of people were expecting, and it sounds like a lot of it's related to the capital spending decisions. If you could walk us through that a little bit? 
+
+Question_3:
+
+    Okay. And also, talk about the percent rent clauses in Canada.  I know you got out of some of those. 
+
+Question_4:
+
+    I have a couple questions.   First, John, on the leverage.  Once Credit's gone, we get your debt to EBITDA around 1.7, 1.8. Could you put some context into how high you think that can or should go, given everything in terms of being great credit rating, as you take the dividend out? Should we model 2 as a cap, or how should we think of that? 
+
+Question_5:
+
+    Got it. So the incremental buy back is really the equity from the Credit business? Plus -- 
+
+Question_6:
+
+    And then secondly, maybe a bigger question for Kathee or Gregg, the REDcard growth compared to, say, three years ago has, I think, beaten all of our expectations, certainly mine. It looks like last year it was up over 50%. Could you help us understand a little bit more about that 50% growth in REDcard sales?  How much of it is from new REDcard members?  How much of it is existing members spending more? Anything you can provide there would be helpful. 
+
+Question_7:
+
+    Maybe just first, John, a clarification question on the $8.00 in EPS for 2017.  I think before that was predicated on a 2% or more US annual US store growth. Do you still think that, that's the appropriate number to get to that $7.20 from the US business? 
+
+Question_8:
+
+    Okay. And also on the guidance for this year and thinking about the modeling, sounds like you're opening up a few more waves in Canada than your normal store opening cadence. Just from a modeling perspective, how should we think about some of those store openings this year?  And then as a follow-up to the US, how does the real estate development market feel to you guys out there? 
+
+Question_9:
+
+    How does the US real estate development market feel in the US? Does it feel like it's loosening up a little bit, maybe a few more opportunities, or still you guys are holding back a little bit at this point and looking to be a little bit more prudent in the growth? 
+
+Question_10:
+
+    First question, John, can you give us a sense of what the revenue assumption is that's based into that $0.45 Canada dilution number for this year? 
+
+Question_11:
+
+    Okay. Sure. That's fair enough. 
+And then, I think in the past you guys have said that you'd expect to recapture the Canadian losses that you accrue within two years of turning profitable. So if you sum up the last three years -- well, the last two years plus this year -- it's a little over $1, maybe $1.10. Do you still expect to get that back in earnings from Canada in '14 and '15, or is the D&A going to make that a longer process? 
+
+Question_12:
+
+    Just have a question on the fourth quarter in general. Over the past few years, you guys have really made a nice trade-off between profitability and comps. And this year, it seemed to break down a little bit more than usual, where you've made a decision not to be a Black Friday door buster competitor, but the gross margins were down 60 basis points or so. Can you talk a little bit about what you learned from the traffic being down and gross margins being down, and how you might attack it differently in the fourth quarter this year? 
+
+Question_13:
+
+    On a similar topic of competition, you obviously introduced the Price Match guarantee. It's a step in the right direction.  But given that, that's such a very low portion of the total transactions,  do you think you need to do more on just everyday price and staying more competitive than perhaps you even are today? 
+
+Question_14:
+
+    Okay. Just one more, if I could.  Can you just walk us through the path to $0.10 dilution getting to neutral over a few years, what causes that to happen on the Credit Card sale? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/42_answers.txt

@@ -0,0 +1,138 @@
+Answer_1:
+
+    The rate impact of the REDcard, Peter?
+
+
+    Yes, the combination of that with the store Remodel program, very consistent with what we've seen over the past several quarters, somewhere between 25 to 30 basis points of impact.
+
+Answer_2:
+
+    Yes, I think your view of Q4 is right. I think in particular, this Q4 will be particularly difficult, given the fifty-third week and the way the calendar shifts this year, you'll recall we're going to lose six business days between Thanksgiving and Christmas this year, which will make the comp feel much more difficult than it otherwise might. I think over the longer term, we continue to think a 3% comp is about the right place to be. If you look, again, at our Company over 15 years or 20 years, if you net out the contribution of new-store annualization, we essentially ran a pretty consistently a 3% comp over time through good times and tougher times. So we think in an economic environment that might just be a little bit better than today, doesn't have to improve drastically but a little better than today, we think a 3% comp makes sense.
+
+Answer_3:
+
+    I think you'll continue to see D&A grow throughout this year as we continue to put significant assets into service. And we'll provide a little bit more color, I think, as we get later into the year and have a little bit more clarity about sales margin and the entire P&L, we'll provide a little more clarity about the entire P&L for Canada.
+
+Answer_4:
+
+    Actually, Sean, I'm not quite clear on your question. Units per transaction in the first quarter were up year over year. Help me with that again.
+
+Answer_5:
+
+    No, selling price per unit was down 60 basis points.
+
+
+    That was mix related.
+
+
+    Right. Entirely mix. But units were up consistently for some of the reasons you described.
+
+Answer_6:
+
+    Both the stores with the matching of competitors' physical ads and the online match has been fairly stable and has not grown materially over the last quarter. So it still represents a very small portion of our transaction. That's because our everyday price and our promotional prices are so strong, there is generally not much of a gap, if any. So we continue to watch our competitive prices on a day-in and day-out basis and move where we have to be competitive in the marketplace. And so we expect over time this not to change all that much.
+
+Answer_7:
+
+    Yes, I think first I'd start with how we think about this longer term. And we think about, from a longer term perspective, sales through all of our channels, regardless of the channel, need to generate a return, and a return on investment that's similar to what we see in our current US store base. What we see today is, honestly, we're learning a lot about that channel and a lot of this depends on how we're going to ultimately settle on the supply chain that our guest wants to interact with us. How much is ship from store, how much is ship to store. That will have a significant impact ultimately on the EBITDA margin rates of that particular channel. But I think once again, depending on where those EBITDA margin rates land, sales or capital will move around and we feel very confident that we'll get back to a return that makes sense. Having said all that, I think as it relates to the rates embedded within that channel, we feel very comfortable that ultimately we'll get back and operate at that 10% EBITDA rate that we've set as part of our long-range plan.
+
+
+    Thank you.
+
+Answer_8:
+
+    You know, we did see better results in areas that had more normal weather, so that would primarily be the West Coast and they were toughest in those seasonal categories where we saw weather off the most, and that would be primarily in the Midwest. So we did see quite a swing between the different geographies.
+
+Answer_9:
+
+    Yes, like we said, the teams did a very good job of responding to the sale shortfall, retiming receipts and making cancellations. We're going to know a heck of a lot more in the next 30 days as we see what happens and how the sales of these categories play out before we have to take mark-downs in the 4th of July. And if we get really good weather and we have good sell-throughs, then we're going to be right back on plan. If things stay damp and cool for an extended period of time there might be some risk. We don't expect to see a significant risk, whatsoever. We're talking about things on the edges right now.
+
+
+    Matt, the other thing I'd add is it's a little bit hard to see with the inventory on the balance sheet. The inventory per store in the US is essentially flat to last year. All of the inventory build year over year is attributable to Canada. So we feel really good about where the inventory positions are in aggregate.
+
+Answer_10:
+
+    Yes, you're right, first of all, that the vast majority of that is multi-channel technology and we've said a little bit of missed timing here. We expect to offset that on the year with expense savings and improvements we're making in our business, but the investment coming a little bit ahead of that. To your second point, I think that's absolutely right. It's interesting. We said this last year, when our sales accelerate or decelerate rapidly from our expectations, we tend to see our SG&A lag both directions. It doesn't climb as fast when sales go up like last year, and doesn't come down quite as quickly when we see sales decelerate. As we adapt to wherever sales are going to be, you'll see our SG&A settle in at a more appropriate level.
+
+Answer_11:
+
+    Yes, I would say out of the blocks, 38% was a little higher than we expected because the mix was a little bit better than we expected out of the blocks. Whether it's in Canada or the US, clearly when we open a new store we get a higher gross margin rate, but the mix was even higher than the higher that we expected. So we do expect that to settle down and be slightly higher than what it is in the US, because we expect the mix to be a little bit better than it is here in the US.
+
+Answer_12:
+
+    I wouldn't call it hoopla. I would just say that the guests were very, very excited and we experienced tremendous surges in sales. And it's just very, very early to draw any conclusions. And we really wanted to deliver a great experience and so to a certain extent we went in with staffing levels to make sure that we were taking care of the guest, both at the front end and we had the right team members there for the supply chain and we had the right teams on the sales floor. So we know that over time and in a run state in addition, we have to work hard at making sure that we get our productivity levels where the business models dictates them to be. And we know our gross margins will settle in and we've got to become more productive and run the business. Over time our consumables share will grow.
+That's the hardest trip to change with the guest and so we're going to continue to focus on those frequency-oriented categories so that we can not only get the good mix that we're getting, but we want to now start driving more trip frequency into the store. We didn't want to come out of the blocks by hitting those categories too hard because we wanted to make sure that we led with our strength. And we wanted to make sure that all the supply chains and the operational disciplines were in place. We feel very confident now that they are. We're ready to start making those kinds of adjustments in merchandising and supply chain and in store operations to start refining the model.
+
+Answer_13:
+
+    I use that sometimes here, too. (laughter)
+
+Answer_14:
+
+    I think the one thing I'd remind you is, we only had a half a quarter's worth of profit sharing with TD. Next quarter we'll have a full quarter's worth of profit sharing with TD.
+
+Answer_15:
+
+    No, no, no. That's net of our operating expenses as well.
+
+Answer_16:
+
+    We can take it offline and walk through that in detail, Colin.
+
+Answer_17:
+
+    Yes, no question. What we're seeing, I think we talked about this a little bit three or four or five weeks ago when we were together. You'll see the ramp-up in our expense initiatives throughout the year and through next year, actually. Many of them are a little bit longer lead times to pull out expense, all the easy stuff we've done long, long time ago. So we do expect through time, SG&A will come down and manage to a level that is more appropriate.
+
+Answer_18:
+
+    I'll take the first part. I think the traffic -- this was a disappointing quarter for us. We had very, very strong traffic last year. There was pluses and minuses throughout 2012 and we expect traffic trends to get stronger as the year goes on.
+And we have all of our initiatives designed to, not only deepen the relationship, but build frequency. So we'll perhaps be a little bit more aggressive on price. You have to look at the competitive environment, it was a little bit more aggressive than it had been in the past where there was more emphasis on price, and that, I think, impacted it a little bit. Overall, we really expect to be able to generate traffic levels that are flattish, give or take, over normalized periods of time.
+
+
+    Bob, the other thing I'd add, I don't think we need to run traffic numbers like we did last year in first quarter to generate that 3% comp. I think if you look over the past several years, about 0.5 points of traffic combined with ticket gets us to a 3% comp. That's about the formula that we feel really good about.
+
+
+    The only other thing that I would add is, this time of year our seasonal categories can be a big traffic driver for Target, and clearly they weren't in the quarter and they were last year. So all of the things you mentioned, 5%, PFresh, help us all year long but during key seasonal categories, key seasonal time frames, we need those categories to drive traffic as well.
+
+Answer_19:
+
+    Our conversion has been improving over the past year, Deb, and we were up slightly in this quarter as well. So we're really pleased with the improvements that we've made on this site but I'll tell you, we still feel we have a long way to go with conversion. And we are very committed to continuing to work on our navigation and our search function and the basic functionality of our site to continue to make big improvements there.
+
+
+    I think the other thing I'd add, Deb, is we have a little bit of a mix headwind which is positive from our perspective. Mobile, in general has a much lower conversion rate than the site, and our mobile is growing much, much faster than the site. We think that's good because we think that's where things are going and it also shows that she is spending a lot of time with us on the mobile applications we have. But conversion's just naturally lower there, and so creates a little bit of a mix number as we look at the aggregate.
+
+
+    If you look at conversion on our site, it's up to last year. If you look at conversion on mobile, it's up to last year. But because of the big growth in mobile, to John's point, conversion comes down slightly in aggregate.
+
+Answer_20:
+
+    I think we've said a couple times the Affordable Care Act, the changes for us will be relatively -- well, they won't be relatively -- they will not be material externally. We're still continuing to work through all the regulations and what we will exactly do, but it won't be material changes to what we're doing today, or financially from a financial perspective.
+
+Answer_21:
+
+    We feel good about where we are. We've been working on this for a long time and we continue to deploy resources to get better and better at that. So this is just a long-term initiative that we have to continue to focus on, whether it's in Food, whether it's demographics, whether it is ethnic groups, we've just got to continue to get better at our localization efforts. We think we've made good progress there and we are going to continue to focus on it.
+
+Answer_22:
+
+    I would just say, Deb, I think it's a little early to learn from Canada and bring that back to the US. I will tell you, though, we learned a lot from the City Targets that we applied to Canada. As you know, those stores are in dense urban areas and so are our Canada stores. We took a lot of that learning and the testing that we did last year and applied that to what we're doing in Canada. Throughout this year of course, we'll be reading the Canada results and bringing that back to the US. But the same teams work on localization for both countries.
+
+
+    Thank you. We have time for one more question.
+
+Answer_23:
+
+    When we look at the stack comps, we feel a lot better about it, since you're just looking at this quarter, both were positive if we look on a stacked basis. Going forward, our compare in second quarter is not nearly as difficult as our first quarter, so we would expect our comps to improve and over time we want that two-year stack to improve. We're not happy with flat or up slightly. We want to make sure that we're making progress there. It was, on a two-year basis, better.
+
+
+    I think I'd just add a little color to that. Apparel, for instance, the two-year stack is around a 2%. Running that consistently through time, we'd feel really good about running 2%s in Apparel. As Kathee said, Home is positive. That's a big improvement from where Home has been over the past several years. On a two-year basis we feel good about both those businesses.
+
+Answer_24:
+
+    Yes, you know, that's difficult to parce out. The example I would give you is exactly what Gregg said, where we started with the stores staffed very heavily. We know through time we have to refine that model, is that one-time expense or operating expense. Certainly the expenses related to hiring team members early and training them at the next cycle of stores we'll open up, that is all one-time and will drift away. What I'd tell you is, through time we expect ultimately well down the road to get to SG&A rates that make sense and productivities that are very similar to the US. So as I said before, as we get a little bit more clarity, right now expense dominates the P&L in Canada. And was we get more clarity on sales, margin, operations later in the year, we'll provide a lot more color about how we expect those stores to operate.
+
+Answer_25:
+
+    This is something that we are always looking at and adjusting. But, I guess I would tell you I don't feel like we've gone too far. Our inventory as John mentioned, our average inventory per store is flat to last year. It's actually up a bit in Apparel given the softer sales in the first quarter. So we're always looking at that. We look as much at out-of-stocks as we do in-stocks, in trying to improve those stores. It's a constant focus for us and we can always improve, but I feel pretty good about where we are right now in terms of in-stock.
+
+
+    Okay. Thank you. That concludes Target's first quarter 2013 earnings conference call. Thank you all for your participation.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/42_questions.txt

@@ -0,0 +1,100 @@
+Question_1:
+
+    Great. Thanks, guys. Just a couple questions. On the US gross margin performance, can you give us a sense of maybe what that REDcard impact was in the quarter?
+
+Question_2:
+
+    Okay. That's helpful. And then a longer-term question. You said for the year you're now thinking 2% to 2.5%. I assume that's still has a pretty modest view for comping in the fourth quarter. A, is that correct? And then secondly, when you think out beyond, do you guys think that maybe 2% to 3% is the longer-term comp profile for the business? Or do you think it could still be north of 3%, when you think of a more normalized environment, on an annual basis? Thanks.
+
+Question_3:
+
+    Okay, that's helpful. One last housekeeping. On the Canadian D&A, what do you think the run rate is for that, once you get out -- you've opened a bunch of the stores, once you get towards the end of the year, what kind of run rates were you thinking about for Canadian D&A? Thank you.
+
+Question_4:
+
+    Thanks for taking the questions. In terms of dissecting the comp in Q1, transaction trends as you mentioned were relatively stable on a two-year basis and did improve from Q4. But the units per transaction were down 50 basis points, and I think that's the first time since '09. Just wondering what would explain that decline, given the increase in the Remodel program from Q1 last year.
+
+Question_5:
+
+    Oh, I thought they were down 60 basis points. Maybe I'm missing something here.
+
+Question_6:
+
+    Okay. Got it. And then, Gregg, you'd touched briefly on the price matching, curious if you are seeing the number of requests for the price match change at all. And has there been any competitive response to that in the marketplace?
+
+Question_7:
+
+    Okay. Great. And then lastly on Digital, you're obviously seeing some nice traction, nice growth outside of the seasonal categories. Can you talk about the impact on margin for that sale today? Is it dilutive or is it accretive to the margin? What do you think that can -- how are you planning that over time?
+
+Question_8:
+
+    Thanks for taking my questions. First, I'm wondering if you can comment on sales in geographic areas that have more neutral weather like Florida. Were the transactions and the comps positive in those markets?
+
+Question_9:
+
+    In terms of the second-quarter guidance, do we assume that there's some incremental mark-down risk in seasonal categories? You did mention that within categories the rate improvement would be a little softer in the second quarter than the first quarter. So just wondering what the mark-down risk is in the seasonal categories.
+
+Question_10:
+
+    That's very helpful. Lastly, if we look at your operating expenses in the US Retail segment, growth, dollar growth, accelerated a little bit versus last few quarters. I'm assuming a lot of that is technology investments. But given the more moderated view of comps for the full year, could we see the dollar growth potentially come back down a little bit?
+
+Question_11:
+
+    Good morning, thank you. First question on Canada, understand that the gross margin rate of 38% is not the long run rate. But where do you think that settles out? And was the 38% above where you expected even adjusting for the mix that you saw?
+
+Question_12:
+
+    Of course. As the consumables business ramps up it mixes down. From a productivity perspective, can you tell anything yet on these first stores that are open, in terms of opening expectations relative to what you had thought? Or was it just too much hoopla that you can't discern anything yet?
+
+Question_13:
+
+    Okay, that's helpful. By the way, hoopla's a technical term we use here on Wall Street. (laughter)
+
+Question_14:
+
+    Secondly, on the credit, I actually thought the contribution, $105 million, while you explained it was low, seemed to me it was higher than I would have expected, especially given the bad debt reserve release last year. Is there anything there that reflects the $105 million profit share?
+
+Question_15:
+
+    So the $105 million was really a $210 million quarterly run rate?
+
+Question_16:
+
+    All right. I'll follow up offline with you on that, John.
+
+Question_17:
+
+    Finally, coming back to SG&A, the dollars were up I think $233 million. If I ex-out the credit difference of $36 million, the vendor allowance of $13 million, the technology spend, it still looks like the growth was pretty healthy. John, I know you mentioned that there's a lag in terms of how quickly you can get after that if sales are disappointing. Would you also expect some of the expense things you're doing on a longer term basis to impact that? I guess my question is, can we see better performance out of that line? Because sounds like 2Q guidance doesn't get us there.
+
+Question_18:
+
+    I guess the question that I have for you is a two-fold. It revolves around traffic. When you look at the initiatives that you have in place, REDcard and PFresh and you consider -- I understand the seasonal piece Q1 this year versus last year. But when you think conceptually traffic was down in the fourth quarter and that was down again in the first quarter, how do you get us comfortable with, essentially, the efficiency and the effectiveness of these initiatives over the longer-term period? The second question that I have is when you -- the lower comp assumption for this year, can you maybe just break down the traffic component in that new 2% to 2.5% expectation?
+
+Question_19:
+
+    Thank you so much. Appreciate all the color. Lot of conversation regarding mobile and digital traffic. Can you also talk about what conversion was like during the quarter?
+
+Question_20:
+
+    All right. Then a broader question. Can you talk about how you're positioning yourself in terms of taking advantage of the Affordable Care Act?
+
+Question_21:
+
+    Okay. And then I think Gregg touched on segmentation, how you're looking to match local taste and preferences. Where are you? I know there was a lot of work done in Canada, but where are you domestically in terms of that?
+
+Question_22:
+
+    Was there anything that you learned from Canada that you could go back and apply to the US? Or is it exactly what you expected and you're just continuing on the path?
+
+Question_23:
+
+    Good morning. Couple questions. First on the top line, in the Home and Apparel categories can you talk about the stacked comps that you had in the first quarter? And broadly how that has trended, those categories have trended over time, the past few quarters?
+
+Question_24:
+
+    That's great. Also, thinking about the EPS pressure from Canada, can you talk about how much of the expenses in the first quarter are one-time in nature, pre-opens and so forth? And as you think about the guide for the second quarter, a similar question, how much of that expense pressure is actually something that goes away in future quarters?
+
+Question_25:
+
+    And then one final one. In terms of being in the stores, it seems like at times you're actually too thin on inventory in some of the discretionary categories, whether that's Home or Apparel. What's the internal discussion around balancing rate versus balancing sales? And do you think that you've leaned too far towards the rate side? Thanks.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/43_answers.txt

@@ -0,0 +1,77 @@
+Answer_1:
+
+    I think on the sequentially, yes it improved month to month within the quarter. None of the quarters were negative, which compared to first quarter was significant progress. July was notably the strongest, but a portion of that certainly was attributable to that back-to-school week moving in from August last year.  So we did see it strengthening, but I wouldn't want to overplay that, certainly a portion of it is attributable to the calendar. Geography wise, we have not seen anything meaningfully different in aggregate across the quarter. In any one week or day there's differences, depending on when back-to-school starts in various portions of the country, but nothing meaningful across the country. 
+
+Answer_2:
+
+    Well I would say, this is Gregg, in the US, we continue to offer hot pricing. There isn't going to be a meaningful change in our strategy, because day in and day out we have unbeatable prices when you take a look at our -- the fact that our prices are competitive, the price match policy both online and in store, and our REDcards performance day in and day out. We have a very strong value proposition. And then our circular pricing is even more aggressive than that, and we take market leading positions. 
+In Canada, we know that we have an opportunity to break those shopping habits and we've got to focus on driving need-based trips.  So, there in particular we will sharpen up our pricing, and make sure that we are taking a more of a market leader position. Our REDcard penetration is still very, very small there, and we expect that to grow over time.  But it's more in Canada that we're going to make sure that our prices get more noticed than they have been up to this point. 
+Part of that was a conscience plan on our part to make sure that we really won in Home and Apparel, and we feel real good about where we are in those two businesses today, so we're proud of that fact.  Now we have to just turn on the gas a little bit on the other side of the equation to make sure that we're getting the Canadian guests to understand what great values we offer on frequency categories and break some of those well-established habits. 
+
+Answer_3:
+
+    So, I'm not entirely clear where you're going. Is it that why are we confident about the $0.80, or what will we see happen here as we go forward, Sean? 
+
+Answer_4:
+
+    So on 2014, I think it's very early here, and we've given you our best view.  I think when you step back we've been operating 60 some stores for on average about 2.5 months, and so we're giving you our best information here for 2013.  And clearly sales are a little bit short of where we need to work through some of the inventory and optimizing the business and optimizing our expense structure. 
+I think as we look forward getting another 56 stores open, getting through a holiday will certainly provide a lot more information about where we expect to be.  But in 2014, I think we expect to see meaningful improvement in the profitability of Canada. We'll cycle past all of the start up expenses, we'll have our inventories more in line with sales patterns that we now have some information on. Our expense structure will be optimized to the sales level and we'll start to grow sales.  So I think we'll see meaningful improvement in 2014, but I would say probably from this perspective today, unlikely that we'll see profitability on the full year.  And we'll be back to provide a little bit more information on what that looks like, and the cadence throughout the quarters, again, as we get a little bit more information this year, get the stores open, get new markets and get through a holiday season most importantly. 
+
+Answer_5:
+
+    Yes, I think parsing that all out is difficult. I would say that the second one, incremental marketing and advertising is not material to the total move from where we were to where we are today. I think the biggest driver of the change in profitability or dilution this year comes from, we had a set of sales expectations as we entered in the market, and we also, given all of the excitement that we saw building over two years, we protected on the upside from an expense standpoint and from an inventory standpoint, and the sales have been somewhat disappointing.  And so we need to work through those inventories. There's some clearance activity, there was some excess inventory this quarter, as well, that we work through. And we need to right size the entire expense structure for what -- for the sales numbers that are currently -- that we're operating at.  So, I think that's the vast majority of it. 
+I don't think we see, I know we don't see going forward a change in the overall our view of what the margin rates were going to be, EBITDA or EBIT rates were going to be in Canada over the long term. We feel very good about gross margin, and frankly, we expect gross margin will deteriorate a little bit as we begin to drive these frequency categories. You don't see that in this quarters' results, because there was a fair bit of clearance and excess inventory that we moved through, but we expect margin rates will come down as we grow sales in those frequency categories. But net, net that'll be good for the business and start to apply leverage against the fixed expenses that we've built for the Business. 
+
+Answer_6:
+
+    You're right, Greg. Traffic was our issue, and I do think that somewhat that is the way it is right now. We're seeing a lot of trip consolidation across all guests. I think the part that I'm pleased about is that when you look at our basket, we are seeing that they're buying more units from Target, as well as increased selling price, and they are trading up into higher price point product, so that's great. I think as we move forward the thing that we're focused on and driving traffic is really making sure that as they're consolidating and they're doing more in one store, that we're offering that compelling value. And Gregg talked a lot about all of those components, but that we make sure that that continues to be rock solid.  As well as the innovative product, and I mentioned a lot of those that we have coming like Phillip and Haggar and in our seasonal categories we've got a lot of new stuff coming, so that's key. 
+And then, I guess, the third thing that I would add is just making sure that our in-store experience remains outstanding. Because we want them to be pleased when they come, and continue to consolidate their trip and to do more at Target.  So we have great service every day, but in addition to that, some of the new things that we're doing with flexible fulfillment, like buy online, pick up in store, I think will be fantastic in the back half.  And then we're also looking at really upping the in-store experience in key categories like Beauty and the test that I described in Baby.  So it's a combination of those three things.  
+
+Answer_7:
+
+    The inventory overhang is a function of the shortfall primarily in some of the seasonal categories.  So, think of -- even though Apparel and Home was strong, the variability by store, and the fact that some of our seasonal categories, like Lawn and Patio didn't perform at the level that we were expecting.  So, it was not in the basic categories or the non-discretionaries, primarily in a subset of the discretionary categories.  But it's one of those things where it's more obvious, because it's such a large number of stores. 
+But it's the same kind of fine tuning that we go through every time we open a new store here in the United States, and they have experienced for years and years. There is always a tremendous amount of fine tuning and getting the right match of sales volatility, variability, assortment, and aligning that with inventory. What we're seeing in Canada is there's such a big critical mass that it stands out, and it's far more obvious. But it's no different than what we've experienced here. 
+
+Answer_8:
+
+    Yes, I think that we're seeing larger basket in many different areas they're shopping, as I said doing more in one store so shopping around the store.  In terms of the selling price, we're seeing strength in trading up to higher price points in back-to-school. We're seeing strength, for example, in home with threshold, where they're buying that better product versus opening price point product.  And then we're also seeing some softer sales in our one spot at the front of the store, which is very seasonal and impulsive product, so that combination I think is driving that selling price. 
+
+Answer_9:
+
+    Well we don't have a number that we can share on that. We have, as you know, been testing it with team members, and I think the key for us is just the convenience for guests to be able to buy it online. But then they want to pick it up in store. Sometimes they don't want it delivered and sitting on their doorstep, but oftentimes they want to be able to get other things in the store either that go along with that core item or just the rest of their list.  So, we think it will be very interesting to our guests. It certainly has been with our team members, but we haven't quantified the sales number yet. 
+
+
+    Yes, I would just say this is -- we're in a learning environment right now. We'll be able to give you a lot more specifics after we get through the holiday season.  And for us to try and quantify at this stage would be, it would be a shot in the dark.  So we really don't want to speculate how our guests are going to use that and -- but we'll be back to you at the end of the holiday and we'll give you a lot more color around the adoption, the acceptance rates by our guest. 
+
+Answer_10:
+
+    There is not really a meaningful difference in terms of the rate of spend first half, second half. We didn't overspend or under spend in the first half to shift dollars to the second half. We've always felt that the allocation of resources by quarter, by half has been pretty appropriate, and our spend is going to be similar in those kinds of percentages. What we have seen is, we've ramped up our spend in the digital channel. It's a less expensive channel that gives us different guests and broader reach, and we become far more efficient in the use of our marketing dollars.  So, I think we're getting the same or more bang for our buck for essentially the same investments that we've made in the past. 
+
+Answer_11:
+
+    Yes, we're excited to have Metro as partner to run our pharmacies in the Quebecian Province in the eastern part of Canada. We think they are a great partner. They run a terrific business, and we're thrilled to have them as our partner. 
+
+Answer_12:
+
+    We're doing a lot with both e-mail and text.  But I would tell you, Deb that we're in the beginning of that journey. We think there's a lot more that we can do, but we're doing things with personalization in terms of seasonal and timing, but also product categories that resonate with our guests and we're seeing great results. We've upped particularly e-mail a lot this year, and it's really paying off. And so we're on a journey, and we think that there's a lot of head room there, and we will go after that in a big way. 
+
+Answer_13:
+
+    I don't think that we'll be adding a lot of planogram versions. I think we're still tweaking what's on those planograms. But we've -- we understand that, and we've got many different versions throughout Canada for all of their differences across geography and their guests.  But I think what Gregg was talking about was, number one, getting the buy right by store in all of those categories, and then some of the seasonal categories were softer.  So making sure that we get that buy right going forward, that has less to do with the planogram itself.  And then in addition to that, as we're driving more trips with our frequency categories, that's the side that's been weaker, we think that traffic will also help sales throughout the store, because the guests clearly likes our differentiated merchandise on the Apparel and Home side.  So it's a combination, but it's more about the buy than it is about planograms. 
+
+
+    The other thing I'd add, Jason, if you step back to where we were three months ago the gross margin rate was a little bit above 38%.  And the two things we said at that time, I think, are still appropriate. One, it's going to be noisy here early by quarter because it's just naturally that way as we're opening up stores.  But two, don't expect us to operate at that high a level. While the mix was very favorable, we hadn't gone through any seasonal clearance.  And so seasonal clearance is going to naturally bring that rate down. 
+This quarter a little bit more than we would have expected, but there again I said we're working through some excess inventory given our sales levels.  So we expect through time that the gross margin rate will normalize at a reasonable level that ultimately will allow us to deliver EBITDA margin rates let's say 12% in Canada like we've talked about all along. 
+
+Answer_14:
+
+    I would think of it as this way. In our Business in any point in time there are investments that we have to make to continue to get better at what we do, whether it's a service or supply chain or technology investment or investments in the guest experience. And so this is --  we're calling attention to this.  But these are investments that we're going to make in the business because we want to provide a great experience, which means our expense optimization efforts, as they have in the past, have to more than offset these kinds of investments.  
+So, we look at it all-in holistically and we're saying hey we got to get leaner and meaner in certain parts of the organization, and become more efficient, and we demonstrated that last quarter. We were very, very rock solid in our expense and our productivity and that affords us the ability to -- and the capacity to get more aggressive and do some of these kinds of things, and invest in transforming the Business to the future. 
+
+Answer_15:
+
+    Jason, we said at the beginning of the year the investments in multi-channel and everything we were doing would be $0.20 to $0.25 of incremental dilution or incremental expense in our Business.  And we said at that time that through our expense optimization efforts we expected to offset virtually all of that in the year. We do that in a variety of ways. The stores have continuously over a long period of years looked for ways to increase productivity faster than wage rate and faster than sales, so lowering our expense rate.  And we think there's opportunities to continue to apply technology to improve productivity in our stores.  But what Gregg was talking about, our expense optimization efforts are across the entire organization, headquarters, distribution, supply chain. Everywhere we operate, we are looking for ways to take expense out so that we can afford to invest in the Business. 
+
+
+    Great. Well that concludes Target's second-quarter 2013 earnings conference call. Thank you all for your participation. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/43_questions.txt

@@ -0,0 +1,60 @@
+Question_1:
+
+    First question on the comp, John, I think you mentioned that it did get steadily better throughout the quarter. Any additional color you could give us there?   And then on -- were there any regional differences that you could potentially isolate in terms of where some of the transaction weakness was in the quarter? 
+
+Question_2:
+
+    Okay, got it.  And then you talked about some lower advertised prices in the circular, is this really just in Canada or is it also in the US, and is that some of the gross margin pressure that you're thinking about in the second half as you've done a very nice job in terms of a rate improvement in between categories over the last four or five quarters here? 
+
+Question_3:
+
+    Okay and then real quick, on the dilution in Canada, obviously up quite a bit here in 2013 from the initial expectation. Any way or ability to paint us a picture, I know you still remain confident in that five-year outlook on the progression towards that $0.80 in 2017? Thank you. 
+
+Question_4:
+
+    Yes, so the question is is there an ability to say that the Canadian business will be -- you believe the Canadian business may be accretive in 2014. 
+
+Question_5:
+
+    I wanted to follow up on Canada and then touch on the US. Just to make sure I've got that right, or maybe ask it a different way, John, if you look at the incremental Canadian dilution this year, how much of it is related to those items of clearance?  How much of it would be related to, if you will, start up costs or advertising?  How much of it do you think is just a different margin structure in the business to drive that frequency in trips? 
+
+Question_6:
+
+    Okay, great.  And then second, turning to the US, Kathee it was helpful to go through all the initiatives you have, and it seems like the issue that is bigger than anything is traffic staying negative versus what you guys would have probably hoped or expected a year or two ago. If we think about the traffic side of it more specifically, what in the back half do you think is going to help stabilize and improve that traffic trend, or is it just the way it is now, that this trip consolidation and that's the way the consumer is, and if we're getting comp it needs to be with more items and top line? 
+
+Question_7:
+
+    A quick follow up on Canada and then a couple on the US business, as well. Could you talk to the inventory overhang in Canada, the clearance that you spoke to, is that primarily also on frequency items, or is that more a discretionary product? 
+
+Question_8:
+
+    Okay, great.  And then in terms of the average transaction size, could you elaborate on which categories are benefiting from the larger basket and the trade up that you alluded to? 
+
+Question_9:
+
+    Okay, great.  And then lastly, if we look at some of the omni channel and multi-channel initiatives that are launching in the back half, is there any way to quantify the potential impact or potentially in your survey work you could talk to how much demand there is for these products, specifically on Click and Collect or Buy Online, Pick Up in Store? I know that's half of the volume in some cases for some of your competitors' Online businesses. Could you talk to how big you think that could be for you in the back half?  Thank you. 
+
+Question_10:
+
+    If you think about the spending in the first half of the year versus the back half of the year on marketing, and why the competitive environment, can you help us think about how that spending might take place in the back half versus the first half of the year? 
+
+Question_11:
+
+    Okay and with regards to Canada, can you elaborate a little bit on the announcement this week with regards to the metro partnership in Canada? 
+
+Question_12:
+
+    Okay, and then lastly, it seems like you have a unique opportunity with the REDcard to tailor communications between Canada and the US. You have almost 20% of your customer base. Can you talk about through e-mail and text what you're doing in terms of personalization? 
+
+Question_13:
+
+    I wanted to ask about Canada's gross margin again. I know there's been a few questions already. But if you did better on more of those discretionary items, and I guess there was some shortfalls store by store, in terms of certain seasonal items coming through. Is this -- how is this, I guess, affecting maybe some of your plans? Are you adding more planograms? Is that going to add to the SG&A cost to service all these stores, if it's just different demand for different products? And just reflecting how diverse Canada actually is, or is it just weather effects, and what have you learned from that process? 
+
+Question_14:
+
+    Okay, and then I wanted to ask on the US side about the efforts to increase service, omni channel, flexible fulfillment, and all those things, obviously that costs a lot to implement and the way I see it, and you can correct me if I'm wrong, you're very centralized already.  So, should we think about this is just necessary to keep sales growing? And maybe it comes in at a lower margin or are there areas that you could offset that impact? 
+
+Question_15:
+
+    Could you maybe elaborate on that? I know that you talked a bit about that there's the compensation accrual and that that helped, but then you also mentioned that you were better on payrolls. Is that something where you think there's more room to go in terms of the in-store labor, or is that something where you really wouldn't want to push too hard on because of the potential implications on revenue?  And if that's the case, where else could the savings be, if it's not the store? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/44_answers.txt

@@ -0,0 +1,119 @@
+Answer_1:
+
+    I will start, Greg. 
+I think a couple things. One, I think first of all, the stress on low-income consumers is certainly playing a role. We've seen all year long. The payroll tax increase has been a portion of that, for sure. I think we get to cycle past that in January, and we will get better information about what that looks like going forward. 
+But beyond that, and the things that we actually control, as you said, we continue to see meaningful growth in REDcard. That continues to drive 50% lifts in sales, all of that driven by traffic. Kansas City is above 25% penetration now. So it continues to grow hundreds of basis points a year. 
+Then beyond that, I think it's all about our multi-channel initiatives, and everything we are doing there. And as I said, we are starting to see strong digital sales growth. That, combined with the flex fulfillment activities that we are implementing now, piloting a little later this year, and we'll begin to roll out next year -- we think all of that put together will continue to drive meaningful traffic increases. 
+
+
+    The only thing that I would add, Greg -- this is Kathee -- is just that, as guests are consolidating their trips and they're coming less frequently, it's really important for us to get them to shop around the store and to buy more. And you do see in our basket that we have been able to accomplish that for the past several quarters as well. So we will stay focused on how do we ensure that we get more of their wallet when they do come. 
+
+Answer_2:
+
+    Yes, they do.  They get total credit for anything that is bought online, picked up in-store, or things that are in store where there is an extended aisle sale.  So we are incenting this. Actually, we have a parallel environment where both teams -- both our dot-com team and our store teams -- get credit for growing the business in a collaborative way. 
+
+
+    There is no penalties, or there is no internal conflict at all as it relates to who is going to get that credit for the sale. We are double crediting everybody from an internal standpoint, and then we take it out at the enterprise level to make sure that it all washes through on a consolidated basis. 
+
+Answer_3:
+
+    If it's shipped to your home from the store, yes. 
+
+Answer_4:
+
+    Most of what is driving it up for the fourth quarter will be those hot categories like electronics that are most popular in the holiday season. And there is a lot of newness there that drive up the average selling price. Think of iPads; think of all the new video game consoles and games, which Target does very well with. And we are really excited about that business for the holiday season. I would anticipate it will continue into the fourth quarter. 
+
+
+    Think of it more as a change in the mix of what we are selling at this time of year versus trading up within category. 
+
+Answer_5:
+
+    First, I would tell you it is pretty early. I think we've got about six months in with Cartwheel; but as we mentioned, very excited.  We've got over 3 million users right now that are very engaged. I think it is helping trips. I also think it's really helping basket, because they are using Cartwheel in the store on their mobile device, looking for deals on things that they want to buy and they are adding more to their basket. 
+It is still really early to see trends, but we are very excited about it, and are talking about it more and more. We are going to be using Cartwheel as one of our vehicles to help drive value this holiday season. And hopefully more and more people will hear about it and sign up for it. But we think this is a big success story for us that we can continue to grow. 
+
+Answer_6:
+
+    There is always hope, Sean. We are highly confident (laughter) it is going to be successful. 
+Your inventory question -- we talked a lot last time about, given the sales shortfall and the fact that we planned inventories to protect on the upside; given all the excitement, there's a pretty large inventory overhang. As the teams have worked hard over the past 90 days assessing the best way to handle that -- and it depends on the various categories about the best way to handle that -- we have clearly seen some markdowns come through. We're taking advantage of that, actually, to drive value messaging in Canada and get across how sharp our prices are. 
+And then we are also assessing what of the inventory do we think we're going to sell ultimately below cost or end up salvaging because there's just flat out too much of it. And that is the inventory reserves that we assess at the end of the third quarter. We do that every quarter anyway as a matter of course, and we will do that again at the end of the fourth quarter. But that was a large piece of what happened at the end of the third quarter. 
+I think as far as lumpiness of inventories -- as you would expect it's the long-lead categories where we tend to be lumpy.  The stuff that turns quicker or that is domestically sourced we can obviously shut down receipts much quicker. But stuff that is long-lead -- and we will see this continue actually a little bit into spring -- and here think about categories like bikes, where those are a long-lead items, and it just -- we can't get out of the receipts once we have made commitments. Those are the type of items that will take us a little bit longer to clear through. 
+I think on signs of hope -- we wouldn't call it hope -- but on signs of our execution starting to improve, we are seeing -- and I think this is consistent with what Gregg said -- as we start to get sales histories, we can start to replenish stores more accurately, balance our inventories, and meet guest need when they need that. We are starting to see success there. As we look at our current results, we're pretty much hitting our current forecast, but we are seeing much stronger results in the cycles that have been open longer. Cycle one, cycle two, cycle three have actually begun to exceed our expectations a bit. 
+We're a little bit hopeful -- not hopeful; we are optimistic that we are seeing the right trend with those cycles improving. And we believe we will continue to see that as we get more age behind the cycle four and cycle five stores. 
+
+Answer_7:
+
+    I think our efforts on expense optimization continue to be very successful. The teams are very engaged across the Company and continuing to look for new ideas of ways that we can reduce expense. And I think part of this is about lowering our center of gravity that you are referring to. 
+But a big part of it, too, is reinvesting that in other parts of the business. You have really seen that this year. We had significant incremental investments in technology, supply chain. That will happen again next year, particularly around technology and flexible fulfillment. We will make SG&A investments, and expense optimization really allows us to offset that. I think leverage probably hasn't changed a whole lot -- somewhere between that 1% and 2% range -- but it gives us a lot of capacity to invest in the business as we continue to grow our multi-channel capabilities. 
+
+Answer_8:
+
+    We agree with the last part of that comment, and we have continued to say it's very early here, and we are going to see it move around again in the fourth quarter, given we see the surge in holiday sales. I don't have the exact weighted average on the store timing, Matt, but John Hulbert will get that to you -- we can get that to you today. 
+
+Answer_9:
+
+    Matt, I would say it's strong overall. Certainly that varies by category, but there are a lot of great trends in our business in electronics. I mentioned a couple that we are excited about for Black Friday and going into Cyber Monday and the rest of the holiday season. 
+Things like Beats by Dr. Dre -- the whole headphone category had been fantastic, and that's a lead item. Speaker systems like Sonos have been fantastic. So there are many different categories that are performing well. Some are little bit softer, like cameras, but in total, a really strong business in electronics right now. 
+
+Answer_10:
+
+    Hi Chris, this is Gregg. 
+ Over the long term our expectations haven't changed at all. What we're experiencing now, and as John talked about it, it is those long lead time businesses that are mark-down sensitive, particularly home and apparel, that we have to exit and it is costly to do so. 
+Remember, the first cycle stores did not open until April, and the second cycle followed shortly after that. And that was only a handful number of stores. By the time we really got a good clear indication in terms of where the sales were going to level out for this year, in our long-cycle businesses -- and think six, seven, eight months -- these receipts were already planned and in production and on the way. 
+It's really the lump of inventory that we've got to work through, and once we do that, we are very confident that we are going to be back in the mid-30%s like we talked about in terms of the overall gross margin, because the mix continues to be strong, and we are very pleased with that. We don't see any signs of that abating. 
+It might come down a little bit as we get more aggressive in terms of building that trip frequency. And we will start those efforts in earnest when we turn the corner in 2014. But on an absolute basis, we are really pleased with where we are in home and apparel, and we've got to get through this next quarter and the early part of the beginnings of 2014 until we really get that sales history developed by item, by store and eliminate some of the huge variability that we have in the supply chain so that we can get a more even balance between receipt flow and what we are selling. And at that point in time, we fully believe that we are going to be back to where our initial expectations were from a gross margin standpoint. 
+
+Answer_11:
+
+    These are against the new, most recent level-setting expectations that we shared that at the Analyst Day that said they are not where they were when we originally planned the business, but now that we have had enough experience, we see where they were and we established and rebooted, essentially, our expectations for Canada. 
+So against that new, most current forecast, what we are seeing is encouraging signs out of those earlier-cycle stores. They are exceeding these newer, revised forecasts more than the later-cycle stores because they have had a chance to operate on their own. They are six months into it now. The inventories are flowing better; in-stock levels have improved; the guest is getting used to our stores; they are converting from more of a browser to a shopper. It is still very early, but we like what we see in some of those early-cycle stores. And so at this stage we are just encouraged by the fact that they're performing better against most revised, revised forecast. 
+
+Answer_12:
+
+    I don't know that number off the top of my head. It is definitely higher than our typical market share, but we can get back to you with that number. 
+
+
+    Yes, it's much higher than our aggregate store or electronics market shares. 
+
+
+    We will get back to you on that one. 
+
+Answer_13:
+
+    That's a lot of questions. 
+On the third quarter, I think clearly Halloween moving into the quarter benefited. I would remind you that we also said at the end of last quarter, our back-to-school week moved out of the quarter into second quarter. That benefited second quarter. Net/net, probably a wash, maybe 10 plus/minus --10, 20 basis points, I don't really know --  but net/net a wash. 
+WIC -- any time there is a decrease like that, there is an impact. But for us, grocery, food is about 20% of our business roughly; and it's a very different kind of trip for us than most grocers. So certainly there is an impact. But for us, meaningfully, that is just not -- again, this is a small impact relative to what we might see at other retailers who sell significantly more food as a percentage of their business than we do. 
+And then electronics -- what was the question in electronics? I'm sorry. 
+
+Answer_14:
+
+    We don't necessarily talk about categories and how big they are. But with two new console releases and all the games that will go with them -- as you know it has been a declining category for several years, given the maturity. It's been over seven years since we had a new console. So having two in the same year is very meaningful for the category. It is also very meaningful for electronics in the store. So we think its going to be one of the biggest gifts gifting categories of the year, and we will certainly benefit from that. 
+
+
+    And then on fuel, there is no question that in a time when, particularly lower income consumers have very constrained budgets, having to spend less on fuel, it helps in some way. For us, I will tell you, through time we have looked at this many ways and it's really hard to quantify fuel price moves in our sales. There are times when fuel prices are going up in a good economy, and that is good for everybody, which is different than today. It's hard to quantify, but overall, lower fuel prices is definitely good for consumers. It just puts more money in their pocket. 
+
+Answer_15:
+
+    Apparel, I think, was -- most of what we have is own brand product and exclusive designer partnerships that we do.  So that is the bulk of our business. Certainly we do a lot of basics with branded manufacturers -- Haynes for example. 
+But our comp in apparel was down slightly. It was much stronger online. So we are seeing some shifting happening there. We are pleased with the new releases that we have had. Phillip Lim was probably our best designer launch ever -- very clean sell-throughs, both in stores and online. Our launch of our holiday product is off to a good start, while it is still early. 
+We're feeling pretty good about apparel overall.  I would say that the softest part of apparel has been in kids. And we are working on ways to make sure that we can drive that business and have the right price/value relationship for our guests to help drive better market share gains. But the rest I feel pretty confident in. 
+
+Answer_16:
+
+    The 50 basis points is about right. And I would say about half of that was due to the ongoing pressure we have seen for several years now related to REDcard and the store remodel program. 
+The other half, like we talked a little bit about, was really related to markdowns we took, given the Halloween sell-through that we saw. And we saw sales soften up, like we said, in the middle of the quarter, given everything that was going on with consumer confidence and in Washington. We saw sales soften up a bit, and really just some promotional markdowns to sell through our Halloween inventory. I think as we think about fourth quarter, as we talked about, it's going to be very promotional; there's no doubt about that. But the primary driver of our performance versus last year is, last year we took significant clearance markdowns last year, and that's what you'll see be the primary variance year over year in our gross margin rate. 
+
+Answer_17:
+
+    Yes. 
+
+
+    Absolutely. 
+
+Answer_18:
+
+    We haven't disclosed the drag from start-up expenses all year long. So we haven't really talked about that a whole lot. As it relates to price investment and markdowns, I think it is all -- we view that as all one big bucket, really; and it's really the total value message we are able to give to the guests in Canada right now. As I said, we have a little bit of excess inventory. We will take advantage of that.  To be sure, we are giving a great value message. 
+But beyond that, as we look at our pricing in Canada on like items, we are right on where we want to be. We are locally competitive and right on the price leaders in Canada. So we feel really good about our pricing in Canada on like-for-like items. 
+
+
+    Great.  That concludes Target's third-quarter 2013 earnings conference call. Thank you all for your participation. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/44_questions.txt

@@ -0,0 +1,85 @@
+Question_1:
+
+    I wanted to start right with REDcard and traffic. That's a trend this year that has gotten locked in at this down 1% to 1 1/2%, and you gave some goals a few weeks ago where comps would be 2% or better over the next few years. How do you get to the 2% over time if traffic is still down 1% to 1 1/2%? What initiatives with REDcard or anything else do you have to really get that traffic stabilized? 
+
+Question_2:
+
+    A direct follow-up to that. I know that with all the multi-channel initiatives -- and you outlined them all in the call -- how have you changed how store managers and associates are incentivized so that they give the level of service to the online guest that is coming to pick up in-store?  Do they get credit for that? Or how should we look for that to be changing going forward? 
+
+Question_3:
+
+    Is that true if I have it shipped to my home? 
+
+Question_4:
+
+    Kathee, just on the average ticket side -- Greg was talking about transactions, but just to get to the ticket -- there has sequentially been a pretty nice acceleration in AUR throughout the year, and you talked a little bit in the third quarter, electronics impacting that with the UPT being down. 
+As you plan the business into the fourth quarter, would you still expect your AUR to be up 3% and UPT to be down? Or how should we think about the dynamics that's driving average ticket? And also that points to, if AUR is up -- which points people are maybe buying up, you are moving them up -- how do you square that with the consumer that is constrained? 
+
+Question_5:
+
+    Got it. 
+And my question related to this, Kathee -- and it gets back to the trip issue. With what you have seen with Cartwheel, what trips is that group -- you've seen an extra trip, and how do you really jump on that at a faster rate to drive trips the way you did with REDcard? 
+
+Question_6:
+
+    Great, thanks. I have a couple-part question here on Canada. I think most of them are related. 
+John, I think you talked about the gross margin being impacted by some inventory issues in Canada late in the quarter. Can you just give us a little bit more color there on what happened there? 
+And then maybe also outline where are some of the pockets of excess inventory that you are looking to move through? And then, secondly, are there any signs of hope in the business, or glimmers of hope that you can point to, whether it's by region or category, that are going better than expected at this point in that market? 
+
+Question_7:
+
+    That is helpful, thank you. 
+And then just secondly on the, in terms of expense optimization in the US business, looks you guys did a great job of controlling that there in Q3 -- maybe even below what you would expect moving forward. Do you feel like you're in the right position now there? What type of comp do you feel like you need right now to leverage that SG&A moving forward, maybe in Q4? And then the first half of 2014? Thank you. 
+
+Question_8:
+
+    Good morning. My first question relates to Canada. 
+What kind of insight can you give us into the average number of stores opened over the course of the quarter as it relates to timing of openings? Just to give us the ability to measure an accurate sales productivity number.  We have (inaudible) to try to get sales per store and sales per foot, but the growth is moving so quickly on such a small base that it is very easy for those numbers to get distorted. 
+
+Question_9:
+
+    That would be very helpful. 
+ Second question I would ask relates to the electronics business. Clearly, the video cycle is here and is very prominent, and I know that mobile is still a relatively new business for you. If you look at the legacy consumer electronics businesses, and you mentioned tablets -- I know you had a fairly high profile promotion recently, and TV, and other businesses that have less industry-wide going on year on year. What has your experience been in those categories? Or what was it for the third quarter and what's your sense of the promotional environment here in Q4? 
+
+Question_10:
+
+    Thanks, good morning. 
+Wanted to follow up on the Canadian and gross margin, and just your thoughts about how that proceeds going forward. I think originally you had talked about the Canadian gross margin being above the US. I always interpret that as maybe a couple hundred basis points above the US rate. But you have these competing factors right now where the markdown pressure is a negative, but the mix factor is a positive. 
+As you look into the crystal ball, how do think -- how might -- are your gross margin expectations shifting, based on those two competing factors over what the long-term opportunity could be, relative to the your original expectations? 
+
+Question_11:
+
+    And then you mentioned that some of the early-cycle stores were starting to exceed your expectations a bit. I had a really interesting chart at the Analyst Day that talked about where the expected ramp in the stores initially versus where it is sitting now. 
+Could you just reference for us what you mean by exceeding your expectations a bit? Is that versus your original expectation on first-year sales versus what you rethought? 
+
+Question_12:
+
+    And then one quick last one -- can you share with us what your share in the gaming category is in the US? 
+
+Question_13:
+
+    Can I ask about the comps?  I just want to get your thoughts on a few of these items, if you would quantify them. So one is how much of the shift from the timing of the calendar between Q3 and Q4  in your reporting benefited the current quarter that was reported and pulled forward from Q4? 
+And then get your thoughts about, if you think there's any impact on comps from SNAP, whether that is directly in your food sales or your general merchandise sales? If you'd quantify what kind of uplift you expect from video games? And also one thing that didn't come up yet -- but lower fuel prices, how you're thinking about that? 
+
+Question_14:
+
+    I guess the video game cycle itself. What kind of comp uplift you would expect just from that?  And the last part of that was about fuel prices coming down -- if you see that as a benefit for yourselves or not? 
+
+Question_15:
+
+    If I can ask one more about comp trends.  The apparel part of the business -- it sounds like the branded stuff is going well for you. Can you talk about your private label trends in apparel?  Is that maybe where some of the weakness is? What you're doing to try to turn that around? 
+
+Question_16:
+
+    Good morning. 
+Just looking at the US business from a gross margin standpoint. If we exclude the vendor agreements accounting shift, I think gross margins would have been down about 50 basis points year over year. Can you prioritize, or rank for us the impact from markdowns versus category rate pressures and other factors? And just how we should think about that going into the fourth quarter, given the promotional intensity? 
+
+Question_17:
+
+    Okay, so improved performance on gross margin in 4Q versus 3Q experience? 
+
+Question_18:
+
+    Got it. 
+And then lastly, on Canada, you mentioned that there was a lot of markdowns in inventory.  Is some of the gross margin hit also related to price investments being made in certain categories? If you can just give us an update on that, along with a reminder, John, on what the drag was from start-up expenses in Canada this year. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/45_answers.txt

@@ -0,0 +1,102 @@
+Answer_1:
+
+    Sean, I think a lot of the things that I talked about today with product as well as with in-store experience and our mobile experience, those are really the key things for us to help drive people to shop at Target beyond the food you talked about and, of course, the REDcard.
+
+Answer_2:
+
+    Yes, in stocks have been rock solid for quite some time, and in terms of product, I would tell you that we're always making adjustments to what we carry in stores. We learn what's selling and what trends are picking up steam, things like organics and better for you products, so that's a never-ending thing that we work on.
+
+Answer_3:
+
+    We are expanding the assortment right now. I don't have a date for you in terms of when we will get our whole assortment up online, and right now we're focusing on the most popular items and categories, so we recently added pets for example. And we will just continue to expand as we learn more and more about that program.
+
+Answer_4:
+
+    Sure, inventory up about 10% year-over-year, and you could roughly think about that split about equally between Canada and the US. Canada obviously, we're just in a different place than we were a year ago. We built inventories all year as we opened stores.
+I would tell you in Canada we feel much, much better. We feel very good about the progress we made in the fourth quarter clearing excess inventory. The average inventory per store in Canada from the beginning of the quarter to the end of the quarter went down about 30%, so we still have some lingering issues in Q1 with some long receipts but feel very good about the inventory there.
+In the US, I would tell you the merchant team did an outstanding job reacting to the change in sales, and our inventories are in excellent shape. This is the time of year where in February, we are changing lots of things in the store, and frankly depending on where you snap the line for year-end relative to our receipts, we see inventory move around a little bit. If you go back over the past couple of years, our inventory per store in the US is up about 3% versus two years ago, so this is really more timing than anything else, and we feel very good about the inventory position.
+
+Answer_5:
+
+    Well, we should go offline and review where you are, where you think we are versus our credit rating and where we think we are versus our credit rating. We've actually run pretty close to our credit rating not just last year, which was even higher, but for the past several years.
+So our view is that we think we can do -- given our plans between $1 billion and $2 billion. We need to see our business results improve over the next couple of quarters.
+We're starting to see that in February as we eluded to, and then also gave little bit of a view into what the potential costs are that may be coming our way as a result of the breach. But given all of that, we still think somewhere between $1 billion to $2 billion beginning in the back half of the year for the year makes sense.
+
+Answer_6:
+
+    As we said, it's not estimable at this time. What the potential cost of the breach is and given where we are in the process, it'd be inappropriate for me to speculate.
+
+Answer_7:
+
+    Just to be clear, that was insurance receivable, so we haven't actually received payment, but we feel pretty -- we feel very likely to receive payment for a portion of the expenses we incurred in the fourth quarter. What we can say about insurance right now is at this point we think there's $44 million of insurance that we will receive, and to the extent that number changes, we will be back to you to provide more information.
+
+Answer_8:
+
+    Yes, in traffic your view of what happened post the breach is pretty accurate, and we have seen traffic continue to improve and firm up, and definitely throughout February we've seen traffic firm up. And as we said, sales have improved, and a big part of that has been traffic. On the REDcard, what we've seen is -- and Kathee talked about this a little bit.
+In our core guests, REDcard guests, they've continued to shop with us. And we've seen very strong, very strong sales from that. REDcard penetration continues to grow meaningfully, hundreds of basis points year-over-year, and to the extent we're not growing where we used to, that's driven by new accounts, so the guests who have REDcards continue to shop our stores.
+
+Answer_9:
+
+    As has been the case over the past couple the of years, the penetration growth comes from new accounts.
+
+Answer_10:
+
+    Great question, Matt, and it's -- analyzing weather isn't a perfect science. I would tell you when we see in the Midwest and the Northeast, when we've seen these weather patterns go across the country, the spread is significant between the two, but ultimately as that passes, we see them restabilize and everything come back to normal.
+But the difference while it is going on is pretty dramatic. It's in single digits difference, but it would be high single digits.
+
+Answer_11:
+
+    We're always working on inventory accuracy, and that is a combination of how we use our systems as well as the processes in store. And so it's been less of an issue to date as we get into some of the additional categories, things like beauty where there's a lot of SKUs -- excuse me, we've got to make sure that the accuracy is there.
+I will tell you apparel, while we've had good results there, it's a little bit harder. Partly accuracy, but partly being able to find the exact size when it's not in a [planagrammed] environment, so there are a few challenges for us to figure out, but overall I would tell you that our guest response has been very positive in the survey comments that they have back to us, they really love the service.
+So, yes, we will keep working on accuracy to make sure we can fulfill as many orders as possible, but so far we're very pleased.
+
+Answer_12:
+
+    First, the comparison to last year we have to be a little bit careful. There's a 53rd week in there. That's a relatively low volume week which creates a little bit of distortion year-over-year.
+But I think as I said, we continue to work very hard on store productivity ensuring that we're driving great guest experience and in stocks, but also improving our productivity, and then all of the expense optimization efforts continue to go on, and some portion of that will fall to the bottom line. Some portion of that goes to gross margin, and some portion of that gets reinvested in the business as we invest in multi channel technologies supply chain. But I think flat to up slightly is probably about the best way to think about it.
+
+
+    Thank you.
+
+Answer_13:
+
+    We didn't give a number, but I will tell you it was very positive above the industry and slightly above 20%.
+
+
+    Like the rest of the business, it was impacted by the breach as well.
+
+Answer_14:
+
+    It's -- from our perspective, we've got to up our game on all fronts. It starts with delivering great content, great in stocks. Our team is more engaged than ever from a service standpoint both on the sales floor and at the lanes, and we're going to deliver as Kathee said just some eye popping, irresistible deals.
+So we're going to really up the ante as it makes a statement on our unbeatable pricing proposition which we have. We've price matched the competition, and we run our circulars, and with our 5% REDcards rewards program, our value proposition is unbeatable. We're just going to call greater attention to that, and selectively we're going to go out and be more aggressive in that regard, so it's the combination of all of those elements.
+
+Answer_15:
+
+    Sure, mix in Canada continues to be stronger in apparel and home, and we expect that to moderate through time. We ultimately think the mix there will be stronger than what we see in the US, but a lot like our high volume stores in the US, our urban stores in the US, we see a higher mix of home and apparel sales. That will moderate through time because we want to drive the frequency categories.
+That's what we're working on the team in Canada. Ultimately as they're successful in driving conversion, commodities, groceries, food, all those categories, we will see that mix moderate.
+I think we'll see margin, we expect to see some volatility. Q1 for instance, the margin rate won't be at 30%, but it will be significantly improved from the 4.4% we recorded in the fourth quarter. So we will make progress, and you should expect to see that throughout the year, and of course back in fourth quarter next year we will be down a little bit from that 30% as is typical in our US business given that time of year.
+
+
+    Okay. We have time for one more question, please.
+
+Answer_16:
+
+    Chris, we don't break out promotions individually. It was a big time of year, and the number was relatively large, but in the big scheme of the fourth quarter, I would tell you it's not material.
+
+Answer_17:
+
+    There's $200 million that we recorded in 2014, we will annualize on that. Or 2013, excuse me. We'll annualize on that next year, and the savings came from all over the corporation.
+There were savings in gross margin around transportation expenses. That will grow again in 2014. There were savings -- really it's hard to pin it down. It was literally across the entire organization where we looked at things.
+We looked at how we sourced product and aligning our non-retail product that we sourced and services and making that look more like we do in merchandising, and we saw significant savings there from our sourcing. There's more to do there, and we will see that grow in 2014 as well. As Gregg said, it was literally across the entire organization where we were focused on stopping things that we didn't need to do, and if we did need to do them, improving productivity.
+
+Answer_18:
+
+    The chip technology makes it such that using the account numbers without the card becomes very much more difficult, and so the desire to obtain those card numbers goes down significantly. What we've seen in other countries that have adopted chip technology is fraud rates go down dramatically for in-store transactions, and I think in the UK or Europe, I can't remember exactly, down like 60% once chip technology was enabled. So the desire for those account numbers becomes less desirable.
+
+Answer_19:
+
+    Chris, we're in the middle of an investigation, and we can't talk about the specifics. We continue to learn. There will be learnings that come out of that investigation, and from those learnings, we will take action, and that's about what we can say today.
+
+
+    Okay. Well, that concludes Targets fourth quarter 2013 earnings conference call. Thank you all for your participation.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/45_questions.txt

@@ -0,0 +1,80 @@
+Question_1:
+
+    Good morning and thanks for taking the question. I guess on the same store sales trends for February being down in that 0% to 2% range, probably a little bit better than people expected. I guess just over time, Target's been on an aggressive campaign to drive frequency with REDcard and remodeling more stores towards food, but given that PFresh is maturing here and the credit breach could curb some of the willingness to sign up for REDcards and online taking a bigger portion of the overall retail landscape, how should we think about some of the bigger picture initiatives to drive same-store sales trends in 2014 and beyond?
+
+Question_2:
+
+    On the food aspect of things, how are you on the in stocks in that particular category, and are you happy with the product that you have out there on the shelves today?
+
+Question_3:
+
+    Okay. Great, and then just one last thing you mentioned, the online and the flexible fulfillment. I think that all of those can now be viewed online which is great for the consumer, but is it going to be possible for all of those products for buying online and picking up in store?
+
+Question_4:
+
+    Thanks a lot and good morning. I've got two questions, and the first relates to inventory. I know you cleared a lot of inventory in Canada.
+Your year-on-year numbers still across the corporation or across the enterprise is still up quite substantially relative to sales. If you could comment on sort of the composition of that inventory and your thought process for its impact on margin going forward?
+
+Question_5:
+
+    That's very helpful. Thank you. And then my follow-up relates to capital allocation and specifically the buyback.
+I know that you alluded to the Company's desire to maintain its current credit rating and that you spoke about resuming buybacks as the year progressed presuming that you were on plan. I just want to talk about what your thought process is for contingencies and that based on the numbers we've looked at, it seems like you're a long way from coming close to the edge on your current credit rating.
+So what would it take for you not to do that $1 billion to $2 billion? It seems like that should be well within your financial capacity even if frankly the numbers are a bit light of your current guide?
+
+Question_6:
+
+    And just finally, I know you're not going to quantify the cost of the breach, but it sound like in thinking about the capacity to buy back stock, you have a sense somewhere internally a sense of that number that would enable you to pursue that course.
+
+Question_7:
+
+    Hi, thanks. I have a couple questions, just a quick follow-up on the breach costs. You showed a net -- you got some insurance payments from the breach cost that you had?
+Is that a -- should we expect that -- or do you have any insurance for these potential costs, whatever they may be, or is that sort of a one off in the quarter? And then I have a follow up.
+
+Question_8:
+
+    Okay. Great. Bigger picture on REDcard and traffic, I mean if traffic was down 5.5% in the quarter, presumably post the breach it was down, pick a number like 7% or 8%. Is it fair to say that traffic has recovered back to what it was in January and February or where we are now, and how is REDcard seasoning, those people who have had it for three or four years, how are those people behaving following the breach? Thanks.
+
+Question_9:
+
+    It's more of the penetration growth from new people signing up or from people that signed up shopping more?
+
+Question_10:
+
+    Good morning. Thanks for taking my questions. I'm just wondering if you could provide a little more color on the comp spread that you're seeing between states that have been severely impacted by weather and some of your warmer weather states.
+
+Question_11:
+
+    Okay. Thanks. And then secondly, as you gave some great detail on your investments in digital and eCommerce this year. As you enable click and collect and fulfillment from store, are there any significant investments you need to make in terms of inventory accuracy in the store, and could you just give us maybe a bit of color on how that's running in terms of being able to pick up in store?
+
+Question_12:
+
+    Okay. And then lastly, your SG&A per foot in the US was down pretty substantially in the fourth quarter versus the last few years. How should we think about SG&A per foot on a full-year basis for 2014 in the US? Should it -- is that a number that you can keep relatively flat, or is there just some inherent inflation in there that we should expect?
+
+Question_13:
+
+    Good morning. I just had a couple questions, first on -- did you give a number on the online business in terms of the increase that you had in the fourth quarter?
+
+Question_14:
+
+    Okay. Okay. And then when you look at the full year, you gave a lot of details, in terms of like the sales recovery that you have, what are the key factors that give you the comfort and confidence in the recovery over this year as you plan the earnings and sales trajectory?
+
+Question_15:
+
+    And then on the gross margin outlook for Canada, can you just talk about the mix assumptions in there and sort of the ramp from where you finished fourth quarter to get to that 30% number for the year?
+
+Question_16:
+
+    Thanks and good morning. A couple random questions. So could you perhaps break out how much was the explicit impact of the 10% off deal that you did after the breach and right ahead of Christmas?
+
+Question_17:
+
+    Okay. And then on the cost savings side, I guess how much of the $1 billion is done so far, and what have been the big drivers this year that have taken those costs out?
+
+Question_18:
+
+    And one last one, if you had chip technology in your stores this past year, how would the breach outcomes have changed? Would it have stopped the actual theft of the credit card data, or would it have stopped the personal information disclosure?
+
+Question_19:
+
+    But didn't the breach actually come from systems internally, not necessarily coming from the card readers?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/46_answers.txt

@@ -0,0 +1,89 @@
+Answer_1:
+
+    Matt, all I can tell you is what we're focused on going forward, and Kathee and I and the whole leadership team have been talking to the team for the past couple of weeks about our focus on driving the Business forward. And we have three key objectives: drive sales and traffic in the US; accelerate our operational improvement in Canada, and ultimately our business performance; and then third, accelerate our transformation and get to be a leading omnichannel retailer in the US. And that's where we have the teams focused.
+
+Answer_2:
+
+    Matt, as you know, when sales get out of -- when sales aren't on expectation, and inventories get a little heavy, they get lumpy. So, there's areas where we're a little bit heavier than we would like; there's areas where we are a little bit lighter than we would like. And we're working to, I'd say, balance all of the inventories. And a lot of it, frankly, will be dependent on: Do we meet our sales objectives? In the first quarter, a little bit light, but not materially so. And if we continue to hit our sales objectives, I think we will see our inventories smooth out over the course of the year and be in a manageable position for the remainder of the year.
+I don't know if there's anything you'd add, Kathee?
+
+
+    The thing that I would add, Matt, is we're working on making sure that our forecasts are accurate. And then, as we buy into them, that we've got chase and cancel plans built in, so that we're able to react in-season versus what we've done this past year without any history and having to react at the end of the season to clear more. So, we are still lumpy; we still have product to clear, but we're getting our arms around that forecast, and I think that will help us as we move through the year.
+
+Answer_3:
+
+    Sure, on the first question of the CEO search, certainly that's under the Board's purview, and I would tell you, rather than focused on time, they are focused on getting the right individual to lead the Company, as I said, to become an omnichannel retailer. So, that's their focus; and the time will take as long as is appropriate to get the right person.
+On the second one, on share repurchase, and specifically related to the potential breach liabilities, getting visibility to that in the second half a year, there's a process that is agreed to with the networks. They get some information from their forensics investigator, and then they go through a process to evaluate incremental fraud where we may have potential liability. And then they come back to us after a period of time. And as we've looked at that historically, we've seen that that's taken several months, and that's why we get to the third quarter. We don't have, frankly, Bob, a lot of visibility to that, but as I said, as we looked at other incidents, that's what we've seen in the past for timing of when some of those potential liabilities may become more clear.
+
+Answer_4:
+
+    Sure, I will talk maybe a little bit about where we are today, and Kathee can talk about what we're doing to drive growth there. The sales in our business, somewhere between 2% and 3% digital channel originated -- probably in the 2.5% range right now.
+REDcards: Given the free shipping online, we have a lot of our REDcard guests shopping online. And I think, we talked in the past, Greg, we have a very high penetration of online orders that we free ship because of that REDcard. We think it's absolutely the right incentive or part of that loyalty package for REDcard, but it drives a very high penetration
+And, Kathee, you can talk about where we're going.
+
+
+    In terms of growth, Greg, mobile is where we're really focused, and about two-thirds of our traffic right now comes from mobile. So, we're really pleased with the results that we've seen there, not only in traffic but also conversion. We did improve conversion, both on the site and on mobile, and in total. And you know that mobile conversion is lower than site conversion. So, that headwind from the mix is there, but we still improved overall conversion. So, we're happy with that.
+There's also a lot of new things that we're doing. Certainly there's product introductions; I talked about the furniture a few minutes ago. There's always new stuff that we're adding on the site. We're expanding. We've got almost all store product online now set up online; lots to be sold online. But now we're adding out in other areas where we should have a much larger selection, and we think online is the place to do that; things like apparel, home, beauty.
+In addition to that, there's a lot of services that we are adding that are doing really well. We've talked about buy online, pick up in store; subscriptions has been really successful for us. We started last Fall with about 150 SKUs, and those items -- our online sales were about 15% in subscriptions, with no marketing, just beta on the site.
+So, we've now got about 1,500 items; and by June, we will have 5,000 items that will be available for subscriptions. And when guests purchase those items, they will be able to get a 5% discount for signing up for subscriptions. So, a lot of product and a lot of services that go with that, to drive our growth.
+
+Answer_5:
+
+    Yes, if you mean for an annual number, getting to an annual positive traffic number, very difficult. We're working hard on increasing traffic for each of the quarters, and I think our benchmark is: Are we seeing continued improvement in traffic as we go sequentially? But for the full year, even if we just pick a number, ran a 1% comp, I don't think we will see positive traffic for the year.
+
+Answer_6:
+
+    I don't think there's a target level of investment. I think, first, from a CapEx standpoint, our approach has been: We're going to invest in all the investments the business needs to grow profitably and generate appropriate returns. The length of time over which those returns occur -- we have a very long lead time as we think about capital investment. Stores have a very long return cycle, so we're used to making investments that pay back over a long period of time.
+From an expense standpoint, I think there probably the biggest investment and where you will see us accelerate is in speed, and doing more testing and learning. And that's not just digital, but also in our store -- just getting more activities out into the Business that we're testing, we're modifying, and adjusting and improving on. And if it doesn't work, pull it back and retreat from that and learn from the testing.
+I think the best example of that is Cartwheel. We put that out in beta; we knew there were things about the app that we didn't particularly like. Our guests let us know what they didn't like about the app. The team iterated and iterated, and one year later, and really not with much marketing until more recently, we have 7 million users, and the app has evolved as our guests have provided us feedback.
+And as Kathee talked about, a lot of the merchandising initiatives in baby and in apparel and in toys and in electronics, that's the same approach we take, and get it out in the stores, modify it, test it somewhere else and modify it, and then we will move to scale. So, those are the investments we will see in expense, and I don't think that is limited by some false number of expense dollars we have to allocate toward it. It will be driven by the appropriateness of what we're testing.
+
+
+    The thing that I would add to that, Matt, the reason for getting more out, historically we've tended to work on our newness until we felt we got it to an almost complete level and then we would put it into pilot. The point now, and John's point about Cartwheel and some of the in-store things that we're doing, we want to get it in front of our guest very quickly, get their reaction to it so that we're fine tuning it much more quickly and then able to move out -- to roll out at a much faster pace with a product and a service that we know our guests will love.
+
+Answer_7:
+
+    Yes, as we said, we continued to see improvement across the Business into April, as the guest data improved and our sales performance improved. And the early cycle stores continue to be the best. And it's, again, almost in order down the sheet: cycle one, cycle two, cycle three, cycle four, cycle five.
+So, the earliest stores, the longer they have been open, they perform the better. But the good thing is: All cycles on an upward path. We're not where we need to be, and we're not where we need to be versus our expectations, but it's good to start to see some progress.
+
+
+    I think the key to each of those cycles and improving them is getting this history under our belt, and now we can forecast more accurately as we move forward. And as John said, we're very committed to accelerating our performance in Canada, and we think that it will continue to go by cycle as it has this past year.
+
+Answer_8:
+
+    I will take the second one, and then Kathee can answer the first. On sales tax, we definitely see an impact when Amazon collects sales tax, and particularly in states that have much higher sales taxes to begin with, where essentially the price differential is much more meaningful. So, we've definitely seen that impact as we've watched them collect sales taxes across the country.
+And, Kathee, you can talk about the rest.
+
+
+    In terms of our online business, the part that I'm very encouraged about is that, as comScore reports when we look at traffic on our site versus the top seven retailers, we led by far. And obviously, Amazon has a lot of traffic, but it was flat in the quarter, and ours was up considerably. So, I'm pleased with that the changes that we're making to the site with the user experience and the added product that we're adding is driving that guest behavior and that we're seeing the traffic.
+Clearly, Amazon is doing very well, and they have, in the consumables category, a lot of business. We are now ramping that up, starting with the more style-related consumable business. If you think beauty, for example, you will see us pushing forward there faster versus grocery, which we're doing dry grocery now, but we're not working on refrigerated and frozen at this point.
+
+Answer_9:
+
+    At this point, I don't think we're ready to commit to what that will do from a financial perspective. Our main focus right now is what will most resonate with our guest; getting pilots out in beta so that we can learn and experience from them. Ultimately, we have to work to be profitable on all of those. But our main goal right now is sales driven and understanding guest behavior so that we can then tailor the assortment to suit them and be profitable at it.
+I will tell you I've been really pleased with some of these new initiatives and how rapidly our guest is responding to them. Store pick-up is the biggest because it's now rolled out. But ship from store, which was really a Minneapolis team member test so far, we're going to be expanding that in June and make that guest-facing, having that $10 rush delivery in Boston, Minneapolis and Miami. And based on our team member response and the feedback that they gave us, I think that this will also resonate with our guests. So I'm really excited to see where that goes.
+And then, later in the year, we're going to be adding standard shipping from 135 stores in about 38 markets, and that will allow faster delivery, not the express that I just talked about, but 1- to 2-day delivery, and as well as provide access to the store assortment that you can't get right now on Target.com. So, lots of good things happening. Not yet ready to say what it means in terms of our sales or our profit.
+
+
+    I think Kathee's exactly right. Not ready to give a lot of guidance on sales profit and how it will all work out. But I would tell you, broadly, regardless of where the profit margin rates end up, pushing incremental sales across our existing assets will be a very good thing for return on invested capital, and we're very excited about that.
+And with that, I think we have time for one more question.
+
+Answer_10:
+
+    Well, I think the point is that we want to accelerate newness and innovation in this interim period here. We've talked about: interim doesn't mean idle. We are approaching our Business with as much passion and focus on improving results as we always have.
+And in terms of this structure, I think, as John mentioned, focusing on our top three priorities and having this merchant team really focused on the US, improving US performance, and leveraging deep, functional expertise to be able to speed up that innovation and newness. So, for example, putting all of our style business together, both merchandising and design all under Trish Adams; having our essentials and hardlines business all under Jose Barra. Having all inventory and all operations under Keri Jones, and then our omnichannel efforts all under Casey Carl, are really important to be able to leverage that expertise and move very quickly in improving our results.
+
+Answer_11:
+
+    I will just tell you that the Board has been very supportive on these changes. We've talked at length about getting the right people in the right chair to be able to drive our performance, and we're really pleased with this structure and the people that we have leading these teams.
+
+Answer_12:
+
+    As we've been focusing on irresistible deals for our guests, we've invested in both sides. I gave you the example of the Coke ad that we ran in, I think it was in March, but we've also done broad categories on the want side like the ultimate Spring break sale or our baby sales. We're looking at really needs and wants, and how do we invest in both sides to be able to delight our guests, and we've had great success in both categories.
+
+
+    Thank you.
+
+
+    Thanks. Well, that concludes our first-quarter 2014 conference call. Thank you all for your participation.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/46_questions.txt

@@ -0,0 +1,50 @@
+Question_1:
+
+    Two questions: The first one I want to ask -- it's sort of a governance-related question, so answer it as you can. You talked about some of the Company's initiatives, and in your case strategic direction in areas where you felt perhaps the Company had fallen short. Were any of these areas themes where perhaps Gregg and the Board, or Gregg and the rest of the management team had a difference of opinion such that your focus on them today would be different from what the Firm's focus on it had been under his leadership?
+
+Question_2:
+
+    That's very helpful, thank you. And then my second question -- just a quick one on Canada. If you could try to help us frame the magnitude of inventory sort of left in the pipeline that you need to clear, maybe how much of a factor that was in the gross in Q1 and whether you're cleaned up at this stage?
+
+Question_3:
+
+    Just two questions: I guess first, in terms of the search for a new CEO, is there a reasonable time frame that you think it can be resolved? And then the second question is: On the share repurchase, you gave a lot of detail on it. In terms of the second-half confidence level, do you think that you will have better visibility, and what gives you that visibility around the costs of the breach in that third quarter? I'd like to better understand that situation.
+
+Question_4:
+
+    Hi, thanks. I had a couple questions. John and Kathee, it sounds like growing that digital is a key focus right now, and driving that faster. Could you help us understand where we start from, like, what percentage of your sales, or maybe some of the cross-shopping between REDcard members and how much they shop online, or maybe how those people season after they have had a REDcard a few years. And anything you have on that, I think, would be helpful.
+
+Question_5:
+
+    That's great. If I could follow up on the guidance, it sounds like it's really margin investment in Canada that has taken the guidance down, if I've summarized that right. You left the comp the same in the US. If we get back to that 0% to plus 2%, do you expect traffic to be positive at all, as part of that guidance, or do you think it could still be negative through the year?
+
+Question_6:
+
+    Thanks so much, good morning. I'm just wondering, on the digital transformation that you talked about, is there a target level of investment from both a P&L and a CapEx standpoint?
+
+Question_7:
+
+    Okay, great. And secondly, can you talk to the early cycle stores versus the later cycle stores in Canada -- anything you can share on the difference between the financial metrics and the various cohorts? Thanks.
+
+Question_8:
+
+    Two questions: First, on online and I guess specifically Amazon, it seems to continue to infringe on Target's everyday business, and increasingly the consumable category, so I guess the question is two-fold. Do you feel like that you're making good progress here on slowing the bleed of sales? And then secondly, have you seen any impact from the recent changes in your trends in markets where Amazon is now being forced to collect some sales tax online?
+
+Question_9:
+
+    Understood, that's helpful.
+And then, I guess the second question on the logistics side of the Organization, sounds like you're having good success with the ship from store test, and then buy online and pick up in store at 10% of the sales seems to be going relatively well. Can you talk about any of the longer-term P&L benefits from these initiatives, both maybe from a top-line and a margin perspective?
+
+Question_10:
+
+    Thanks for taking the question, guys. A couple of quick things: I guess I was curious as to, Kathee, the change in the organizational structure under you in merchandising, and what really prompted this now versus six months ago or next month or waiting for a formal hire of a CEO in place?
+
+Question_11:
+
+    Got it, thanks, that makes a lot of sense.
+If I could follow up with that, was this something that Gregg was reluctant to doing? And did that have anything to do with the timing?
+
+Question_12:
+
+    Got it, thank you. And then, just the one last thing I wanted to ask, and I apologize if I missed it in the discussion today, but as far as the price investments go, are they more in the consumable side, the discretionary side? Where are there areas you think you need to I guess make an investment?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/47_answers.txt

@@ -0,0 +1,92 @@
+Answer_1:
+
+          Wayne, let me start by answering your first question. My focus, right now, is to really understand the business in both the US and Canada. And I'm spending a lot of time with John and Kathee and the team to understand the guest perspective on Target, how we improve our traffic, how we enhance our performance in Canada, and how we continue to build out -- and rapidly build out -- our omnichannel capabilities. So I'm very focused on making sure that we're going to make progress against those key three initiatives, as I continue to look at the broader and longer term strategic options. So my focus is really understanding the business today and strategy before we have any discussions around organization modifications, going forward. 
+
+
+          And then Wayne, in terms of the unit per transaction, most of that was driven by higher dollar items that we were selling -- things in electronics and in entertainment. So you see the healthy selling price, as you mentioned, but fewer units. The other portion of that, I would say, is that we are seeing really good momentum in our trade-up strategies. So we are selling, in some cases fewer units, but higher price points in other categories across the Company. But it's predominantly electronics and entertainment. 
+
+Answer_2:
+
+          Yes, David, there's no doubt that with e-commerce being as immature as it is, there is some pressure on gross margin. We are committed to going where our guests go, and they want to be able to shop online. And we are going to make sure that we've got all the right products for them, both online and in our stores. That does give us a little headwind on the gross margin. But as you pointed out, all of the newness that we're bringing in -- the things that our guests love most about Target -- that helps to offset it. So we don't have a number to share with you today, but we are very focused on driving sales, going where the guest is, and offering them those products that delight them. 
+
+Answer_3:
+
+          On the gross margin rate, I think Kathee said it really well. We're going to go where the guest is and meet them -- provide the product they want, where they want it, when they want it, and how they want it. But there's a lot of tools in our tool kit to manage gross margin rate. There's certainly the product that Kathee talked about -- emphasizing the style categories with newness and differentiation. Beyond that, there's the flexible fulfillment options, where we lower shipping expense by moving the product closer to our guest. And also, ultimately, balancing inventories better across the entire network and reducing mark downs that we incur today. 
+So there are lots of puts and takes. And like Kathee said, we don't have it all sorted out today. We'll provide more information as we do. But I think there are lots of puts and takes, as we think about gross margin rate more broadly. 
+On the store hourly payroll -- first, on the extended hours, the investment there was immaterial to the quarter. Again, that was about half the stores adding one hour of operations. So not significant investment there. But with Tina Schiel, our Head of Stores, we continually talk about ensuring that we're striking the right balance between productivity in those stores and we have great guest service results. What we see today, our guest survey scores are as high as they've ever been, and the team continues to drive really strong expense control. So we feel good about where we are today. But we constantly evaluate that. 
+
+Answer_4:
+
+          Matthew, as I mentioned earlier, I spent time just last week with the Canadian team. And I'm certainly aware that the expansion has been challenging. And from a Target standpoint, we've disappointed many of our Canadian guests. Kathee's already referenced the fact that we're conducting an in-depth evaluation of our Canadian business. That began several months ago. And we're certainly looking to make material improvements in that business. 
+Right now, short term, the focus is on improving in-stock conditions, our pricing, and assortment and really ensuring that we've got plans in place to improve our performance in the holiday upcoming. So you can expect me to be spending quite a bit of time with the Canadian team, along with Kathee, to make sure we understand the opportunities; we understand the challenges that we have to address; and we're focused on improving in-stocks, our value position, and assortment as we go forward. So I'm going to spend, clearly, the balance of the year working very closely with that team to make sure we've got plans in place to improve performance as we go into the holiday season. 
+
+Answer_5:
+
+          We did add it to the chain all at the same time. We don't have any markets that are more mature. We did do a little testing with team members in Minneapolis before we rolled out. But basically, we rolled it all around November 1 of last year to all stores. And we have been very pleased with the results from buy online, pick up in store. And about 14% of our digital sales today are being picked up in store. 
+And then when they go to store to pick up those orders, we're seeing about 20% of those guests shop in the store to pick up additional items. And there's a very healthy basket with that, as well. So still early, but very promising. We think it saves guests time, it saves them money, and it allows them to consolidate their shopping. 
+
+Answer_6:
+
+          Yes. Sure. You're right. It was -- the goal for expense optimization -- about $650 million incremental to last year, which gets us to $850 million total. Of the $650 million this year -- just rough numbers -- about $200 million of that was on the gross margin line, coming out of cost of goods. More of that back-weighted than front-weighted. We're probably about a little bit more than a third of the way through that. Probably a little bit more than that -- maybe half the way through that. So there was definitely some benefit in the quarter from expense optimization. That was also true in the first quarter. Both quarters have benefited. But later in the year, we'll see more benefit as we continue to grow those savings. 
+
+Answer_7:
+
+          Yes. It builds as the year goes on. We're annualizing on the, roughly, $200 million we saved last year. That was primarily SG&A. There's probably a little bit more good news in SG&A right now, but that will continue to build, as well, as we go throughout the year. 
+
+
+          Thank you. Good to be back, Greg. 
+
+Answer_8:
+
+          Greg, I'm going to quickly immerse myself in the details of the business, both here in the US and Canada. And John and Kathee and the leadership team have already spent hours with me walking through a lot of the strategic work that they've been doing over the last 90 days. As I said earlier, during my very first week, I visited the Canadian market to spend time with that team, and I want to be a good student of the business. But clearly, we have to have a sense of urgency here and a sense of pace. And while I want to study the business and, certainly, listen and learn from our team, no one is happy with our current performance. 
+And our focus, right now, is to make sure we've got plans in place in the short term to improve traffic. We've got plans in place to improve our performance in Canada. And we've got to continue to move faster, from a digital and mobile standpoint, to meet the needs of our guests. So you can expect a clear sense of urgency. But I, certainly, want to make sure I give myself the time to listen, learn, understand the business, both from our team's standpoint but also from the eyes of the Target guest. And you can expect me to dive in very quickly to understand the business, to look for the opportunities, and to work with the leadership team to develop very focused priorities, as we go forward into 2015 and beyond. 
+
+
+          Thank you, Greg. 
+
+Answer_9:
+
+          Yes, Matt. I think it's more about product and the newness that we have on the floor for back-to-school, back-to-college. We've seen both of those start off really strong. Even in their peak weeks, those stores are doing better the week after their peak. So we're seeing it stronger in the peak and then get even stronger after that. So I think it's really product related and newness. Certainly, we've had promotions. Most of them are devoted to those core categories like apparel, some of the back-to-college items. But the guest, right now, is more focused on the occasion than they are on the promotion. So that is very encouraging to us, and I think it's product-driven. 
+
+
+          Matt, if I could, just early days -- but the current performance on back-to-school and the way Kathee and the team have put back-to-school together at Target has been very impressive to me. And I think it's a great example of getting the product right, the right balance of newness and innovation, great advertising communication that really captures the guest's attention, and very strong in-store and online execution. So I think that's one of the great examples that we're going to continue to build from, as we go forward. I think Kathee and the entire team have brought back-to-school to life -- back-to-college to life -- with the right products, the right newness and innovation, great advertising communication to support it, and then very strong in-store and online execution. 
+
+Answer_10:
+
+          UPT down 8% in Canada, Matt. I think a lot of that -- what I would tell you is, a lot of noise going on in the Canada comp, overall. So much of the surge last year, we saw very different types of transactions than we saw once we moved past that, as we opened stores. We saw that in each cycle. Very different behavior for those -- I don't know -- four to six weeks when we had the surge period. And then, as the business settled down and got into a more normal state, we saw more routine transaction counts and baskets. What I would tell you is, we're going to continue to see this. It's going to be noisy in Q3. And really, it won't be until we get to Q4, when we've cycled past all the opening cycles -- all the densification -- that we get a real read on what's going on, on a comparable basis from the business year-over-year. 
+
+
+          Thanks. 
+
+
+          Thank you. 
+
+Answer_11:
+
+          Thanks, Matt. 
+
+Answer_12:
+
+          Well, haven't thought about it in terms of innings, Matt. But I'll tell you, we are excited about what we have coming for the fall season. I highlighted a lot of things that are coming in September and October. But then moving on to the fourth quarter, which we won't be specific about today, but we're excited about what that brings as well. We have about 85,000 items in our assortment, and we'll have 35,000 new items this fall season. So I do feel pretty optimistic about the content, the quality, the trend, the presentation. But, clearly, in spring, I think you'll see that will be a full cycle out. And we'll have much more to come, as we turn the corner into the spring season. 
+
+
+          Matt, thank you. Operator, I think we've got time for one last question. 
+
+Answer_13:
+
+          Yes. The guest that shops Target online is absolutely our best guest. They shop both online and in stores. It's really all about what's convenient for them, and sometimes it's just easier to knock an item off your list by buying it on your mobile device. Sometimes you want to purchase it online but pick it up in store to do the rest. But this is absolutely our best guest and one we will not cede. We will go after being a seamless, omnichannel retailer with confidence, knowing that it's the best thing for our guest and best thing for our business. And I do think that, when you think about the lapsed guests, they're basically back. 
+So traffic changes are more about consolidated trips and trips shifting online. So it's an important part for us to own, which is why you see all of the efforts in our omnichannel capabilities and strategies  -- with subscriptions and with personalization and with ship from store and buy online, pick up in store. There's a lot of things that we're putting effort into that will help drive that momentum. 
+
+
+          Right. 
+
+
+          Simeon, thank you for the question. 
+That concludes our Target second-quarter 2014 earnings conference call. I thank all of you for your participation today. 
+
+
+
+
+
+
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/47_questions.txt

@@ -0,0 +1,53 @@
+Question_1:
+
+          Good morning, Brian and everyone. Brian, I had a question for you and then one for Kathee. When you arrived, the role of President was left open. I was curious whether or not you anticipate filling that role and any organizational structures that you might contemplate to speed the Company to getting to market. 
+And then Kathee, if you could just peel back the onion around why the UPT was down 1.7%. You made good progress on transactions, but you took a step back in UPT. And I'm just wondering why and what you expect for those metrics into the third and fourth quarter. Thank you. 
+
+Question_2:
+
+          Thank you very much. I just wanted to step back a little bit and look -- you talked about even gross margins for this year to 29% to 30% range. It's a pretty wide range.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 And as you think about a world -- an e-commerce world -- and how things are changing fairly rapidly out there, I'm just trying to get a sense if you think, over time, that the gross margins are within that range -- lower end of that range. And sort of how you're thinking about that competitive landscape. I mean, you talked a lot about a lot of new merchandising initiatives and stuff, which can help offset some of that. But at the same time, as every Company that we've seen get more focused and driven around e-commerce, seems to see their gross margins lower by the nature of what that business is. So I'd love to hear a little about your thought process there. Thank you. 
+
+Question_3:
+
+          I guess, just as a follow-up to that -- if the guest does go more rapidly towards dot-com, are you willing to accept lower gross margins to do that? And then, I guess, a related question to that, too -- you talked about opening stores for greater hours. Is there an SG&A investment, as well, that would be related to e-commerce -- aside from just the build out of e-commerce -- that you think that you need to add to the stores -- once again, as this world is shifting? Thank you very much. 
+
+Question_4:
+
+          Thanks a lot. Good morning. Brian, I'd like to start out by asking you for your long-term perspective of threshold for Canada, as relates to time and financial performance. Obviously, that business today is performing at a materially lower level than was originally conceived when it was opened and presumably well, well  below its cost of capital. What would you want to see over time, to keep that business running? And what kind of time frame do you have in mind for seeing material improvement in that business? 
+
+Question_5:
+
+          Thanks for that. Just a quick follow-up on the US business. In the markets where buy online, pick up in store is more mature, how additive do you find that is, either to online sales or to the business overall? I know for some retailers, it can be as much as 30% or 40% of the overall online sales numbers. Where you have the most track record behind you, if you will, what's your sense of how additive that can be? 
+
+Question_6:
+
+          Thanks. John, I wanted to follow up of bit on the gross margin -- down 100 BPs in the quarter. If I remember correctly, you had a goal for $600 million of cost reductions this year, roughly a third of it in cost of goods sold. Could you give us an update as to where we are on that and how much that may have helped the quarter, in terms of US margin? 
+
+Question_7:
+
+          The same with the SG&A? Out of that $650 million, it's more back end? 
+
+Question_8:
+
+          For your opening comments, how long do you think it will take for you to get to understand the business and the customers and actually come up with a plan? Is that something we should expect by year end or early next year? Can you give us any time horizon on that? 
+
+Question_9:
+
+          Thanks a lot, and good morning. I was wanting to get some more detail on the improved performance in July and August. And I'm wondering if you have a sense, from your guest surveys, how much of that change is driven by price investments, efforts to improve the presentation, or maybe a change in the broader environment? 
+
+Question_10:
+
+          That's very helpful. And then one housekeeping follow-up if I may. Your Canada comp transactions were only down about 2%, which, frankly, was a little bit surprising against the grand opening halo. I'm wondering why UPT was down so much. I think it was down over 8%. 
+
+Question_11:
+
+          Hi, yes. Good morning, and welcome, Brian. Kathee, my question is actually -- 
+
+Question_12:
+
+          Kathee, my question is actually for you. You talk a lot about product and freshness and newness. And I was just wondering -- as you look to the fall merchandise plan, how far can you push freshness and newness into that plan? What inning would you say that represents, overall, relative to what you consider to be more optimal level? And when can we realistically expect you to reach that more optimal level? Thank you. 
+
+Question_13:
+
+          Thanks. Good morning, and welcome, Brian. Quick one for Kathee. We talked in New York, about a month ago, about traffic trips and that 9 out of 10 were still intact from the customer. But you had lost 1 out of 10. And that, maybe, e-commerce was the angle of you to get that back. My question is, how confident -- I don't know if you have any early indications from your own data -- that when that customer does shop online with you, that either they're not going to visit the store less, or that they'll not maintain the same level of purchasing? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/48_answers.txt

@@ -0,0 +1,110 @@
+Answer_1:
+
+          Yes, I think a couple things. Certainly there would likely be some benefits if we continue to see fuel prices come down. But we haven't reached the threshold where fuel surcharges begin to come out of our contracts. 
+And I think importantly, given the great work the team has done to manage some of the port issues out west, we're working around that and moving some freight further, expediting some freight, flying some freight, and I think net-net, that will probably be more of a drag than any fuel savings we will see. 
+
+Answer_2:
+
+          Yes, Sean, this is Kathee. It's predominantly a mix story for us. So we have higher ticket items like all the Apple products, including the launch of the iPhone 6 in the quarter. We've got video game consoles that are higher. 
+We have a lot of trade-up strategies both in essentials, like you talked about, like in grocery with organics, but also in areas like skin care, which I described a little bit earlier. So this is really a mix story. 
+
+Answer_3:
+
+          Correct, correct. 
+
+Answer_4:
+
+          Hi, Matt. Yes, I think the expense savings, I would tell you we've talked about the expense optimization efforts all year. Been very focused on that and has been across the entire enterprise. And we've seen good news in SG&A and also in cost of goods. 
+The couple of areas I would point out, the store's performance has been outstanding, driving productivity increases while still continuing to remain very strong guest service scores. Frankly, our guest service scores historically, so we've seen great performance there. 
+And then it's really many other areas. There's been great work done in marketing around the circular, there's been great work done in our transportation and how we optimize our network of transportation. So really across the enterprise. 
+I think importantly to your question about going forward, we believe there continues to be significant opportunity for us to continue to take expense out and so for the foreseeable future, we would expect to continue to see expenses very well controlled and to lever expenses at really relatively modest increases in sales. 
+
+
+          Matt, it's Brian. And to build on John's point and as I discussed in my prepared comments, as we move forward, we recognize that we're going to continue to need to focus on expense management to fuel the investments we're going to make to drive continued growth across our store base and our digital platform. 
+So as we come back to you in the spring and we talk more specifically about our strategy, you should expect us to continue to talk about cost optimization efforts and how we'll use those efforts to reinvest in the fuel that's going to drive our growth. 
+
+Answer_5:
+
+          Yes, it's not accretive. I will tell you, we do ship even prior to the holiday free shipping, we do free ship a lot more than perhaps you would think and certainly more than some of our competitors, given REDcard and the fact that ships free all year around. 
+So we have seen -- we know it's the number one frustration with our guests and the number one reason for abandoned carts. And so it was important for us this holiday season to be able to take that friction away and we have seen a meaningful move in orders and conversion because of it. So we are very pleased with the results so far. 
+
+
+          Matt, the only thing I'd add, while not accretive, the other thing I would add is not material either to our results in the fourth quarter. 
+
+Answer_6:
+
+          Oliver, I think as we go forward, and as Kathee and the team really elevate our focus around those signature categories, categories like baby and kids, wellness and style, you should expect to see additional focus in-store. You should see additional innovation, partnerships, but really ensuring that we're leading with trend. We're anticipating what our guest is looking for in those categories, and those are categories that Target becomes famous for. 
+And we're certainly going to double down our efforts in those categories because our guest has asked us to. They're categories that are very important to our guests. They're synonymous with the Target experience the guest is expecting. And you'll see signs of that as we move into 2015 and beyond. 
+Certainly, some of the work that Kathee and her team have done in preparation for the fourth quarter are already bringing our efforts to light in apparel. Some of the things that we've done in home, the partnerships that Kathee talked about in her prepared comments, our continued focus on baby and kids. And we know how important toys are during the holiday season. So we're already making progress in those spaces. 
+But I also want to make sure it's really clear that does not mean we're walking away from other categories in our stores. They just play a different role in our future strategy. And they'll continue to be areas where we're going to look to improve our execution and performance. 
+But from a prioritization standpoint, we think those signature categories that we've talked about are key to the guest. The guest has told us those are critically important to them. And Kathee and her team are working rapidly to ensure that we continue to build our position, enhance our assortment, and bring great newness and innovation to those key categories. 
+
+
+          So couple things that I would add to that that you will already see in stores right now.  Brian talked about those four areas, baby, kids, wellness and style. So in baby, about 200 stores have a new presentation where we've invested in labor in the stores to help guests create registry and gift givers find the perfect gifts. We've added mannequins and things that help the presentation. 
+I also shared today that the registry that we have redone completely, the whole experience, from the in-store hardware to the software that we use and how that helps guests create registries much easier, we're already seeing the benefit of that. 
+Wellness, we've talked a lot about Made to Matter, better-for-you products, and you see that already this year. And then in style, to touch on that for a minute, we now have about 650 stores that have our new presentation in apparel, including mannequins. So already some progress and we will continue to push forward in those areas and you'll see more and more as the months and year goes on. 
+
+
+          However, the final point I'd add as we think about style, certainly apparel and home are critically important in that space, but so is beauty. And as John and Kathee have referenced, beauty was one of our standout categories in the third quarter, and we expect continued strong performance as we exit the year. 
+
+Answer_7:
+
+          Oliver I think we're making progress across a number of different areas. Certainly, we talked about omnichannel and really making sure that we are a significant player in this space. And we're seeing very strong performance, up over 30% in the third quarter. John talked about the fact that we expect that performance to accelerate in Q4. 
+We clearly took away the pain point of shipping by announcing free ship in the fourth quarter. And we think that's another way for us to declare we are significantly committed to this space. We're seeing a great response to Cartwheel, 11 million users to date. And we're going to use that to make sure that we use digital as the front door to connect to the Target brand going forward. 
+We've talked about some of the progress that's being made in merchandising and we've got 35,000 new items in stores for the holiday. And we're going to continue to test and partner as we continue to make sure we're bringing the right solutions to our guests. If you haven't seen some of the holiday creative, I think it's some of the best Target's delivered in years. 
+And I'm getting e-mails and comments from guests and friends and people I know every day talking about their reaction to the holiday creative and how the creative campaign, it's uniquely Target. And we're certainly upping our game both in-store.  But we're also going to spend significantly more in digital this year, to touch our guests no matter how they're connecting with the brand. 
+In-store, we've made significant progress in a very short period of time, going from testing ship from store to now we're in 38 markets, 136 stores, where our stores are acting like flexible fulfillment centers. You can shop there, you can pick up there. But they're also shipping to, directly to our guests and allows us to cover 90% of our marketplace in a very short period of time. Takes the pain away from that last mile. 
+So I think you're going to continue to see us make these points. And that's a sneak peek of Target in the future. And I think that is creating positive energy in the organization. 
+Kathee and I are hearing really positive things from our vendors. Our organization knows we've got to be more -- we've got to show more agility. We've got to be responsive. We've got to make sure we're externally focused and following the guest. But I think you're seeing some of those things take shape today. 
+
+Answer_8:
+
+          Wayne, we haven't modeled exactly what that will be yet.  But I would tell you, I think that it will be moving up for a couple of reasons. So you heard Brian talk about those areas that we're going to focus on and really being famous for them and delighting our guests. And when we are at our best, we offer both Expect More, Pay Less together in all of these categories.  
+And that means a really thoughtful balance of good, better, best, having clear features and benefits as we move up that ladder, allowing guests to be able to buy whatever's important to them. But importantly, offering really good trade-up opportunities. 
+So you're seeing some of that right now in some categories.  But I think as we move forward and we become famous, again, for some of these categories, there will be a lot of trade-up opportunity. So I would say overall, seeing it moving up. 
+
+
+          And then Wayne, your second question, inventory, I think the one thing I'd say, if you look at our number this quarter, 6% to 7% all the US, really only about a third of this do we view as temporary. The vast majority of that was receipt timing. But that third, we expect to stay around. We started that in second quarter this year. 
+We'll cycle it again next year in second quarter, somewhere around a 2% to 3% increase for the first half of next year.  But offsetting that ultimately, as we start to get back to positive comp sales, we should see faster turn. That should ultimately lead to better payables leverage. So not a meaningful impact overall once we get past fourth quarter here on our working capital. 
+
+Answer_9:
+
+          On margin, it's definitely dilutive, Greg, if for no other reason than the shipping expense. And I think as it continues to grow, that will put margin pressure on the P&L. And we've talked a little bit about this. There are lots of puts and takes in gross margin as we think about it going forward that we're working through today. 
+As that business grows, it will be margin dilutive. But as we increase penetration of ship from store and pick up in store, that significantly not only improves our guest experience, but significantly improves the P&L. 
+We're also balancing how we look at pricing right now and balancing inventories across the network as we ship from store. So some of those are up, some of those are down. And we're working through right now where ultimately gross margin will land. 
+
+Answer_10:
+
+          Greg, we're assessing that right now as we think about 2015 and beyond. But you should expect us to be investing in the capabilities to continue to build out our digital experience.  To continue to enhance our in-store experience.  To make sure we have the analytical tools to properly manage expenses and margin even more surgically going forward. 
+And I talked about -- while certainly in the early stages, we're going to continue to look at smaller formats and how we use smaller formats to penetrate urban markets, allow our guest the chance to interact with the Target brand both in-store, but also continue to build out the opportunity for them to purchase online. 
+So we're in the early stages of assessing our long-term capital needs, but you should expect us to be investing in the right capabilities and tools to provide long-term shareholder value and allow us to continue to fuel our growth and enhance both margins and continue to manage operating expenses effectively. 
+
+Answer_11:
+
+          Greg, we think -- at least Brian said I think with the caveat that we're working through this right now, we think we're probably in about the right range right now. The spend may move around a little bit. I think the one wild card is the point Brian made about small formats. 
+But I would note that obviously the investment there is significantly below what a prototypical Target would look like.  So it would take a lot of those to meaningfully move our CapEx number. Like we've talked about, something for the US in that $2 billion, $2.5 billion range still makes sense, but we're doing the work right now. 
+
+Answer_12:
+
+          Yes, most of it is marketing moved around. And the magnitude, if you think about us beating by somewhere in the neighborhood of $0.09, it was a little bit less than half the beat.  So somewhere in that $30 million to $40 million moved between the quarters. 
+
+Answer_13:
+
+          Well, I wouldn't want to get into that level of detail. Clearly, last year pre breach was stronger than post breach, and we took that into account as we thought about the calendarization of the plan. And right now we're running ahead of that and we feel good about where we're at, not only relative to the plan, but on an absolute basis is what I'd say. But there is a lot of business left to be done before we get to the end of January. 
+
+Answer_14:
+
+          Yes and let's drop back and make sure we clarify our point on the food category. We have no intentions today to streamline those categories, but Kathee and the team are certainly stepping back and listening to the guest, really understanding what the Target guest is looking for in food. From an assortment standpoint, from a newness standpoint, we talked about the fact that as we go forward, you should expect to see more natural and organic offerings. 
+We've seen a terrific response from the guest as something that we call Made to Matter, a collection of items that are on trend for our Target guest, feature a number of exclusive items that Target from manufacturers that are in the organic and natural space, that can bring great innovation, gluten-free, on-trend products to our guests. And we certainly recognize that we have an opportunity to connect with the guest in a different way when it comes to food. 
+But you shouldn't expect us to deemphasize those categories. That's not the point. We're not streamlining our food offering, but we are stepping back and really listening to the guest, making sure we curate on their behalf the right items that are uniquely Target, that meet the needs of our guests in the food categories. 
+So a lot more to come as we talk about this in the first quarter, but to make sure we're really clear, we're not streamlining food. We're not deemphasizing food. We're not walking away from food. But we certainly want to make sure we put our mark on the food category with items that are uniquely Target, that are right for our guests, that are on trend.  And you should certainly expect to see more natural, organic offerings in that space because the Target guest has asked for them. 
+
+Answer_15:
+
+          We would certainly expect to see that. And Kathee talked about some of the changes we're seeing in mix. And certainly when we talk about natural organic and when we talk about some of these unique items, they tend to have a higher average unit rank. 
+So you should expect to see some mix changes, but importantly, food is an important part of our future. We're not going to deemphasize the category. We're not looking to take away space. We want it to be more impactful, more on trend, and we want to fill it with items that the Target guest is looking for. 
+
+Answer_16:
+
+          That concludes Target's third-quarter 2014 earnings conference call. Thank you all for your participation. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/48_questions.txt

@@ -0,0 +1,68 @@
+Question_1:
+
+          John, you mentioned there has been a lot of talk about gas prices and the potential positive benefits on the consumer. But curious if you could speak to the potential benefit you may receive on the P&L from a distribution standpoint and if those are savings that are there, how would you guys look to use those additional distribution savings between flowing through to earnings and potentially reinvesting to drive traffic? 
+
+Question_2:
+
+          Okay. So and then the second question on the overall basket, the UPT continues to be -- to decline and actually looks like it decelerated a little bit on a two-year basis. Wondering if you could give us a little bit more color around that particular dynamic, either at the store level perspective, given the higher food concentration, I would be expecting that to improve, but maybe this is being offset by online.  And I guess the follow up would be, how do you improve that dynamic moving forward? Thanks. 
+
+Question_3:
+
+          Okay. So it's less about the shift between online and store at this point in time? 
+
+Question_4:
+
+          Good morning and congrats on improved US results. My first question is on expenses in the US. They basically have been running flat on a dollar basis this year, down a little bit per foot. I'm wondering if you can get into a little more detail on what's driving the cost savings?  
+And then in terms of the outlook, is this a line that you think you can run flat to up in dollars, up slightly in dollars over the next year or so, or should we expect it to grow a little faster than that? 
+
+Question_5:
+
+          Okay, that's great. And then secondly on www.target.com, I wanted to ask a question about the free shipping program. Does the incremental volume offset the incremental shipping expense? Is it profit accretive? And do you think the customers that are utilizing this offer are high lifetime value customers? 
+
+Question_6:
+
+          Thank you and congrats. Regarding the great idea regarding signature categories and where you're focusing there, how would you help us prioritize which categories have the most opportunities in terms of lead time and revenue mix and timing of impact? And is the extrapolation there that traffic will be the biggest comp upside driver as you do focus on these categories? Thanks. 
+
+Question_7:
+
+          Thank you. And as a follow up and it's related, there seems to be a lot of energized agility, Brian, regarding thinking about what Target stands for from a bigger picture perspective. What are some of the initial thoughts on where you see that opportunity as you work to further differentiate and innovate yourself? 
+
+Question_8:
+
+          Kathee, I had a question, this is maybe a little bit longer term and it plays into the context of how you evolve the Company.  And that is related to where you see AUR trending, because you're talking about more emphasis in kids and baby, which typically is lower ticket and maybe pulling back on promotions in electronics because that's not a core. I'm wondering where you think your AUR might land over the next few years in light of the 2% to 3% growth you've been experiencing under the existing strategy. 
+And then if you could talk about -- John, if you could talk about the growth in inventory next year and its impact on working capital, as you think about being better in stock on the ad merchandise and the like. Thank you. 
+
+Question_9:
+
+          I have two questions that are a little bit lengthy. John, if we start off on dot-com, which if my algebra is right it's around 2.5% of sales in the quarter, what does that do to the margin going forward? 
+I know you mentioned it's immaterial for the fourth quarter, but tell us what it did in the third quarter and how we should think about it. It's probably dilutive of some effect and whether it's more in gross margin or SG&A. And then I had a follow up. 
+
+Question_10:
+
+          And then the follow up, and maybe Brian you in your comments, you talked about making sure in the five key operating principles, that invest to build capabilities.  I love your perspective on this year CapEx is down a lot and we're running I guess a little over $2 billion is the run rate. What do you think is the CapEx need going forward to invest in what Target really needs to do to be the best it can be? 
+
+Question_11:
+
+          Would that mean CapEx would be above D&A at some point in the future or do you think you can stay below that? 
+
+Question_12:
+
+          I know there's a lot of big picture questions to discuss, but actually I have two quantitative ones related to the quarter. First of all, John, can you talk about the expense, the magnitude of the expense dollars that shifted from the third quarter to the fourth and talk about perhaps functionally speaking what they're related to? 
+
+Question_13:
+
+          Got it, thanks for that. And then secondly, you talked about running ahead of the fourth quarter plan. As we think about the cadence of that plan, obviously you had a tough January, as did many retailers particularly given the breach. 
+So when you say running ahead, is that running ahead of the 2% number as we speak or running ahead of a plan that's maybe a bit more nuanced than that as we think about where we are in the progression of the quarter and your compares a year ago? 
+
+Question_14:
+
+          Thanks a lot for taking my question, it's on the food category.  And recognizing you're not going to deemphasize it, you're just going to streamline it, how are you thinking about the return profile of that space within the store? And then could there be any differences amongst how space is allocated, could that area get less over time? 
+
+Question_15:
+
+          Okay, that's very helpful. And you think you can manage the return profile on that space to certainly meet the hurdle [rates] that you expect from it? 
+
+Question_16:
+
+          Okay, that's very helpful and good luck with the rest of the holiday. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/49_answers.txt

@@ -0,0 +1,121 @@
+Answer_1:
+
+          Sure, I'll start, and I'm sure Kathee will jump in.  But I think overall, what you observed is there's strictly some savings relative to last year with the clearance activity that went on.  But I think much more important to that is, you saw the acceleration of the signature categories; home, apparel, style, kids.  
+Many of those with margin rates well in excess of our average margin rate.  And I think for the first time, Kathee and I couldn't even remember the last time where both home and apparel out-comped the Company.  So we saw a very strong mix in the quarter, delivered by the product in the stores. 
+
+
+          Yes, so on top of the mix, I would also say that regular priced sell-through was very high.  So less on clearance or mark down, and more at full retail which also contributed. 
+
+Answer_2:
+
+          We don't disclose the average wage for our team members.  What I would tell you is, the store's team has always been appointed differentiation for Target.  And we've always prided ourselves, and believe we have the best team in retail.  So very focused on ensuring we have competitive wages and that we're developing our team members. 
+We're all the time assessing the marketplace to determine competitive wages and making adjustments, and we feel very confident that we'll be paying the teams appropriately.  I think importantly, if you look at our team leaders, 60% of them came from team members. 
+So development is a really big part of what we offer to our team as they progress.  Overall as we look at some of the announcements that have been made and the marketplace and the minimum wage legislation that's been [enacted], really hasn't changed our view of the quarter or the year really at all.  And won't be material changes to us. 
+
+
+          I just want to build on that.  I'm sure we're going to receive this question again next week.  But to John's point, and our goal is to make sure we have the very best team in retail.  
+And we're going to continue to invest in their development.  And make sure that from a marketplace standpoint, we're very competitive with the wages we provide.  So I've been very pleased to learn that over 60% of our team leaders actually started as part-time hourly employees. 
+That development is critically important.  It allows us to attract terrific team members.  And as John stated, we do not expect to see any material change next year. 
+
+Answer_3:
+
+          Well it's certainly going to be an area that we'll highlight next week.  And I think you've captured it really, really well.  Our focus right now throughout the organization is to reduce complexity, simplify the way we work, the way we operate each and every day, continue to empower our team members to make the right decisions that are going to impact the business. 
+We want to create an organization that's much more agile, that moves with much increased pace as we go forward.  And we deliver the right innovation and product that our guest is looking for.  So it is a significant area of focus for us. 
+We're going to talk about it in great detail.  But we think it's going to be a very important part of our strategy going forward.  It's going to fuel the key growth priorities that we've been talking about, and we'll go through in great detail next week. 
+But our goal is to make sure we eliminate complexity at Target, we simplify our operating model.  We empower our team members.  And create an environment where we're agile, we're taking advantage of marketplace opportunities, and we're bringing products and services to market that respond to the needs of our guest. 
+
+Answer_4:
+
+          Actually, the return rates were higher than our expectation, but they were essentially right on last year.  We had seen some improvement throughout most of the year, and they basically just returned to last year.  
+So not a material change.  Just a little bit different than our expectation for the last couple weeks. 
+
+Answer_5:
+
+          Scott, while there's certainly a number of critically important metrics as we look at the business going forward.  I can tell you that the entire leadership team has prioritized, one, increasing traffic to our stores, and two, visits to our site.  Those are critically important as we go forward.  
+So we're going to do that by executing many of the priorities that we outlined today.  We certainly want to make sure we're building the right digital, and importantly mobile capabilities, that drive greater visits to our site and build greater engagement with our guests.  Not only when they're shopping at home, but also when they're shopping inside of our stores.  
+And Cartwheel is a great example of how we've used digital to drive greater engagement.  I am really pleased, and Kathee highlighted the fact that our signature categories drove our growth in the fourth quarter.  And it's critically important that while we're in the early stages, we're already seeing the guests react well to our focus on style, on baby, and kids, and importantly wellness.  
+And the fact that healthcare and beauty and home and apparel outpaced our overall performance in the fourth quarter, is a sign that we're connecting with the guest.  And we're certainly driving more of the traffic because of these great new offerings in store. 
+So our focus on elevating signature categories, we think brings our guest back to Target more often.  They're going to be coming back in to see what's new.  And Kathee and her team have a great lineup in 2015 of new exciting products, coupled with an improvement in our in-store experience and merchandising. 
+So those elements are critically important.  We think localization allows us to build a more meaningful relationship with the guest, which will result in more traffic and more visits.  And certainly as we expand our smaller formats.  Both City Target and Target Express, it's a way for us to engage the guest in these urban settings that are critically important.  
+So all of those are focused on making sure we build greater engagement.  But the metrics that are going to be important for us is to ensure it results in more traffic, like it did in the fourth quarter, and more visits to our site.  So we're pleased with Q4.  
+Lots of work in front of us.  But I felt very good, as did the entire leadership team, that our comp increase of 3.8% in the fourth quarter was primarily driven by traffic.  And our industry-leading growth in digital was certainly going to be fueled by more visits and better conversion from our site. 
+
+Answer_6:
+
+          Scott, I think you already know the answer to that, and we're going to talk about this specifically next week.  Food is very important to our guests.  And they've confirmed that with us as we've gone back and researched the food category through the eyes of the guest recently. 
+We all know food trips drive traffic.  And we want to make sure we compliment our signature categories with guests that are coming to us for the great food products we can curate.  We recognize we have a lot of work to do in food. 
+And Kathee and I were recently out in the market together.  We spent several days visiting our stores, looking at competitive food retailers, as we begin to build our reinvention plans for food.  But as Kathee will talk about next week, we recognize we need to make changes to our assortment. 
+Made to Matter and some of the changes we're making right now in our assortment that deliver more organic, natural, gluten-free items critically important to the guest.  And we also recognize we have to change the in-store experience, and really make sure our food and grocery merchandising compliments the great experience we create at Target.  So a critically important area of opportunity. 
+We won't get there overnight.  It will be a multi-year transition.  But food is going to play a very important role in complimenting our other signature categories, and making sure we drive traffic to our stores and to our site. 
+
+
+          Scott, thanks.  Hopefully we'll see you next week. 
+
+Answer_7:
+
+          Matt, we'll certainly go through much more of this next week.  I think if you were to look at the changes we made from a marketing standpoint in the fourth quarter, the big change would have been a significant increase in our digital support of our brands.  So as we continue to make sure we're connecting with our guests, we're connecting with them the way they're looking to connect with the Target brand, digital is going to play an increasingly important role. 
+And we were very pleased with our overall marketing in the fourth quarter.  We had some outstanding creative on air.  It received very positive response from the guest, and we complimented that with a very strong digital campaign.  
+So I felt and the team felt very good about the progress we made from a marketing standpoint in the fourth quarter.  We had creative that broke through the clutter, connected with our guest, drove traffic to our stores.  We complimented that with really impactful digital and online communication, and tied that back in with great in-store marketing.  
+So you'll see more of that as we go forward into 2015.  And we'll take you through a lot more of the investments and the plans we have when we see you next week. 
+
+Answer_8:
+
+          Sean, we're going to talk about food in much more depth next week.  But fresh is a very important part of food.  Not only traffic and number of trips for our guests, but just in terms of what's important to them, in terms of wellness.  
+Fresh food plays a very important part.  And as Brian said, we've got a lot of work to do here.  So both in Super Target as well as in P Fresh format.  And it centers around our assortment, how fresh the product is, and ways that we can improve upon that, the presentation, showing abundance in that great product.  
+So we have a lot of work to do.  But critically important to us because our guest has said they want to be able to eat better both natural and organic. We see it in our results today.  And we know that there's much, much more opportunity. 
+
+Answer_9:
+
+          Sure.  Lots of variability across categories, as is always the case.  We saw some inflation in food. We saw a lot of deflation in electronics, like we always do.  But if you look across the entirety of our business, essentially flat to last year.  So no net impact to the business from inflation in aggregate, but as I said, lots of variability within that. 
+
+Answer_10:
+
+          Michael, let me start, and I'll let Kathee and John jump in.  I think you've certainly identified some of the big levers. And I think as we sit here today, we recognize that the consumer confidence has certainly improved.  Lower gas prices, certainly helping the industry overall.  We did have some favorable overlaps certainly as we overlapped the breach. 
+But I also think we made significant strides from a merchandising standpoint, from a marketing standpoint, and we continue to deliver great execution and service inside the stores.  And when you look at the two year stacks, we had a very challenging November, a very strong November from 2013 that we overlapped and saw growth.  That to me was a sign that not only was the consumer healthier, but they were choosing to spend their dollars in Target stores. 
+And they came back in December, as Kathee alluded to.  We had a very strong close to the holiday season.  But importantly, we felt really good about traffic and our performance in January, particularly in the last two weeks of the quarter. 
+So a combination of we certainly did have some issues from last year that we are overlapping.  The consumer, we do believe is healthier.  And we're pleased that they're spending in our stores, both in our stores and online. 
+But I also think we made significant strides from a merchandising standpoint.  We had terrific marketing, and a great digital connection with our guest.  We were able to leverage both an improved in-store experience, the convenience of shopping online and picking up in store. 
+And we had industry-leading online sales, and we leveraged our stores to help make sure that we fulfilled the needs of our guest.  So I think the combination of all those elements added up to a very solid quarter. 
+
+
+          The only thing that I would add to that is just that a lot of that focus came in our signature categories, which is why you saw our growth there in particular.  So major investment in product, both quality as well as aesthetic, and number of SKUs, newness that we brought to the market. 
+The marketing reinforced that, and that was very well received by our guest.  And then coupled with presentation, both online with enhancements in our app and our desktop site.  And the presentation in our store, driven by focus on signature categories really helped drive our growth. 
+
+Answer_11:
+
+          I think we continued to see gift card redemption.  We intentionally -- we had a significant gift card promotion on Black Friday that was very successful.  We saw all of those come back in January. I think that helped.  
+And we saw continued strength in the product in home and apparel.  Very strong sales in home and apparel, and I think that was an element of it as well.  And I think that it's a combination of both. 
+
+
+          And our wellness business is healthy.  As we turn the corner in to the new year, we saw that continue.  
+So the trade up that we had seen during Christmas, we saw continue into January.  Which is just guest choice for products in our discretionary categories.  So I think lots of things drove it. 
+
+
+          Michael, I think, well summarized.  I would put four elements on the list.  John talked about gift cards, I think that was very important. And we certainly saw our guest come back to Target with gift cards after the holidays in through January.  Our focus on wellness, certainly well received by the guest.  We had great newness in our stores to start the new year. 
+And our store teams did a terrific job of recovering of the holidays.  And we offered our guest a very strong in-store shopping experience.  So a lot of the basics. 
+But our gift card plans were well executed.  We saw the guest come back in January.  Our focus on wellness, that important signature category. Well received.  We brought newness into the stores to start the year.  And our store teams did a traffic job of recovering after a very busy Christmas holiday season. 
+
+
+          Thank you.  I think we've got time for one more question today. 
+
+Answer_12:
+
+          Health and beauty were both very strong.  So in the health categories, that spread across many categories.  I talked about Made to Matter. I talked about better for you product in food.  But it was also in our health business and our style business.  Both beauty was strong, as well as in apparel it was driven really by kids and by babies.  
+And in home, it was domestics and seasonal product.   And then in kids, we had incredible season in toys with a double-digit comp.  We really were pleased with the overall holiday. 
+
+
+          As we mentioned earlier in the call, wellness, home, apparel all comped in excess of the 3.8% we reported in the quarter.  So strength across all those categories. 
+And in order to win in the fourth quarter, you have to win in toys.  Well, our team won in toys, and showing a double-digit comp was critically important.  So we felt very good about the early progress in those signature categories, and we'll build off of that momentum as we go in to 2015. 
+
+Answer_13:
+
+          I think Brian hit on it earlier.  We're continuing to drive for positive traffic.  I think positive in the store and growing digital online, and that's part of our guidance. 
+
+Answer_14:
+
+          Yes, I think like we said, it was a little bit of deleveraging.  There was some marketing expense we talked about in November, moved from November into -- or from Q3 in to Q4.  As Brian said, we made some investments in marketing. The other elements were ongoing all year.  We had some technology.  
+And then the thing that really drove a lot of it relative to the other quarters was incentive expense.  We clearly out delivered our expectations, and that will be reflected in our incentive expense. 
+
+
+          Thanks for joining us today.  That's going to conclude our fourth-quarter 2014 earnings conference call.  We appreciate everyone's participation today, and we really look forward to seeing you next week in New York City.  So thank you again. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/49_questions.txt

@@ -0,0 +1,60 @@
+Question_1:
+
+          Thanks, good morning.  It's Simeon Gutman.  First question on gross margin for John or for Brian.  It was quite solid in the fourth quarter.  Last year, you had a little pressure but not nearly as much as I guess we all expected given some of the discounting.  So can you talk about what drove the expansion year-over-year in this year's fourth quarter? 
+
+Question_2:
+
+          Okay, and just one follow up.  I'm sure this will get addressed next week, but can you just tell us what the average wage for full-time associates and/or part-time associates are at Target? 
+
+Question_3:
+
+          Thanks for taking my question.  I want to follow up on that last comment around wages.  Brian, could you just provide some context around how much opportunity you think there is to reduce complexity and improve efficiency in case you needed to respond to wages or you wanted to respond? 
+
+Question_4:
+
+          Thanks.  And then just a quick followup on the higher online return rates.  Do you think that's primarily a function of the free shipping offer?  Is it more prevalent in certain categories?  And is it related at all to error rates? 
+
+Question_5:
+
+          Hey, guys.  Thanks for taking my questions.  The first thing I wanted to poke at was frequency.  Brian, you mentioned that you were real pleased with the frequency going up in the quarter. 
+Is that a focus for the Company to drive frequency to the stores?  And maybe as a preview, how do you get it done? 
+
+Question_6:
+
+          That's perfect.  And I just had one quick follow up.  I have a ton of questions, but I'm just going to do one quick followup to what you said, Brian. 
+You didn't mention, although Kathee did, she mentioned food.  How do you think of food in context to traffic?  And then I'll yield.  Thank you. 
+
+Question_7:
+
+          Thanks a lot, and good morning.  If you could frame some of the marketing and technology spending in the fourth quarter, just let us know what that was directed towards.  And I know you're holding back to some degree on 2015 guidance, but were some of those initiatives that you would expect to persist through the upcoming year? 
+
+Question_8:
+
+          Hello, guys.  Good morning.  I just wanted to follow up on the food question, and then specifically inside of the fresh component of the business.  This was supposed to be a big part of driving transactions to the store over the long-term.  
+Could you just maybe give us a little bit on where Target is with its fresh offering today?  How is it evolving, and are you happy with the performance of the sales and margins on this segment of the business? 
+
+Question_9:
+
+          Okay.  And then maybe as a follow up here.  Just on the inflation front, can you just give us an idea of how inflation trended maybe across the store in the quarter, and your expectations in the near and medium term?  Thank you. 
+
+Question_10:
+
+          Good morning.  Thanks a lot for taking my question.  As you look back at the fourth quarter, can you dimension what you think the -- how the performance was driven by your own initiatives, the easy comparison versus last year, and just an improving macro environment due in part to the lower fuel prices?  If there's any way you could potentially quantify that, I think it would be really helpful. 
+
+Question_11:
+
+          That's helpful.  The follow-up question I had is, are there any particular call outs you can offer about the strength in the last two weeks of the quarter?  It just strikes us as interesting, and we're curious about what drove that strength.  Thank you. 
+
+Question_12:
+
+          That's great.  Thanks.  I had a couple follow-ups. 
+It would be great to know -- you said the signature categories did well.  Do you have the actual numbers, like which ones were better by category for food and wellness, et cetera? 
+
+Question_13:
+
+          And maybe a follow-up on that momentum and seeing the traffic get back to up 3%.  When you look out to your first quarter, that 2% expectation, do you expect traffic to be half of that comp or positive in the first quarter?  Or what's built into your expectation? 
+
+Question_14:
+
+          Great.  And then, John, maybe a quick follow-up on SG&A.  It looked like -- and I could be backing the math out wrong here, but SG&A dollars in the fourth quarter accelerated to maybe 4% or 5% growth.  Was there anything that caused that in particular? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/4_answers.txt

@@ -0,0 +1,337 @@
+Answer_1:
+
+    I think it may be a little bit the DC shutdown, but in reality, it's a complex thing. It's a Board level issue and we want a fair and reasonable settlement, if we can. And that's all we can really say about it. 
+
+
+    It involves multiple agencies, so you can imagine the complexity. 
+
+Answer_2:
+
+    No, John. Unfortunately, we did as much as we can, give you as much clarity as we can, but we aren't going to be able to break that down for you. 
+
+Answer_3:
+
+    Yes, so John, the way to think about it, very candidly, is that we didn't expect when we estimated that -- remember it's a very difficult thing to estimate, there's significant uncertainty in terms of the estimate, significant judgment. And when we made those judgments in the second quarter, we didn't anticipate the environment being as volatile and escalating to the point that it has now. So as we have taken our reserves, and the reserves reflect today, so it reflects the current environment and the situation in fact that we're in, and we've now taken that into consideration as we look forward with our reasonably possible range. That's why it hasn't gone down anywhere near dollar to dollar, obviously. 
+
+Answer_4:
+
+    All we can say, John, is that we reserve for what's equitable, based on the facts and circumstances specific to each individual exposure, and the overall environment. 
+
+
+    It's a tough environment, John. We're just trying to reflect that. 
+
+Answer_5:
+
+    So just two things, John, and I think in the Barclays presentation there was a slide that showed that of the increase in our outlook, there was a chunk of it that related to non-core prep litigation, so it certainly isn't entirely to do with our investment in cost and control, much of which we are funding through efficiencies. Having said that, there is an incremental cost. It is in part permanent, and it's going to be reflected in our run rate, but there was a good, I think $500 million is my recollection of other expenses including non-corporate litigation, which as you know, we don't adjust out. 
+
+Answer_6:
+
+    Yes, so the longer term target was a $325 million quarterly run rate, but that's over the longer term. What we said about 2013 and are on track to deliver is that we would exit the year with about $600 million of expenses in the fourth quarter. 
+
+
+    Which we still expect. 
+
+
+    Yes. Which is expected. So if you look at the third quarter run rate adjusted, it's about $650 million, down from just over $700 million in the second quarter, so that trend is moving in the right direction. 
+
+Answer_7:
+
+    So first of all, we're going to get there when we get there, but obviously, this Company is very sound, plenty of capital. We want to pass CCAR, but when you talk about capital plans, it's going to be subject to several things. One is the stock price, subject to passing CCAR with flying colors, which is really the stress test of CCAR, and also subject to wanting to meet our own targets for capital. So we've already said we want to get probably something North of 10% Basel III Tier 1 capital, et cetera and when we know all those numbers, do our budgets, we'll put the proper CCAR plan in place. 
+
+Answer_8:
+
+    I was pointing out mainly, Glenn, because I think if you go back several quarters over a year ago, standardized for us was lower than advanced by a reasonable spread, and clearly, when the common [store] amendment is applicable, which is not for a period of time, we would be looking at the lower of those two ratios. Right now, it's higher than the advanced approach, by a little more than 10 basis points. 
+
+
+    We should put out when we do CCAR next year, effectively, it's not the same for every quarter, but effectively, it will be based on Basel III, which is a former volatile number because RWA moves around under stress under Basel III, as opposed under Basel I. 
+
+Answer_9:
+
+    Yes. 
+
+Answer_10:
+
+    Yes, so SLR, which I think you're referring to is 4.7%, remember that would go up by 50 basis points if you just subtracted the cash we hold at central banks. So until final rules come out I wouldn't overreact to it. Obviously SLR, it causes you to optimize differently, and a lot of products which are very high user capital under SLR, think of those as deposits, repo, and any of the short-term and low margin, revolvers et cetera. 
+So it will make you optimize differently, but I think in reality the way we look at it is, we'll be able to adjust to it, we'll probably be able to do it by client. We're going to get to the ratio we need to get to, and we want to do it without disrupting all of our clients. So we will be able to give you more detail when we know the final roles. 
+
+
+    And remember, Glenn, there is still the possibility there will be changes made to reflect I think the FIN41, which you're talking about, which I think would be positive for the repo market. 
+
+Answer_11:
+
+    So on NII, Glenn? 
+
+Answer_12:
+
+    So yes, I mean, growth has flattened out in terms of interest earning assets, you seen that obviously take place over the last couple of quarters, and so our guidance is reflecting the fact that we have seen things stabilize, both NIM and NII, and that further near term that's what we're expecting. 
+
+Answer_13:
+
+    Listen, it's your job to forecast the future. We do think that it's very good businesses, and like I said, it's underlying growth, but obviously it could be swamped in the short run by markets and events, et cetera. We'll provide a lot more in Investor Day, and give you much more insight. 
+
+Answer_14:
+
+    So, I think there's two major things. First of all, the pre trade and post trade rules are in place, and basically they didn't have that much of effect on the business. And now you have the steps in place, and from talking to folks on the trading floor, volumes seem to be down a little bit, but not because of the steps. 
+The steps are basically accepting data at this point. They are not effectively making mortgage yet, so you haven't seen a huge effect of it. And I think over time, it still remains to be seen. 
+
+Answer_15:
+
+    Yes, because we'll meet the new targets and retain the capital, and eventually, we are actually already pushing down to the business. We're sorting to push down to the business units SLR, all the capital, all the stuff. Eventually, I mean LCR, eventually we'll put down SLR, and that will affect pricing and stuff. 
+What we don't want to do is do a lot of anticipation, but if revolvers stay at SLR at 100% drawn, the cost will go up.   I'm not sure they will go up immediately but they will go up over time so we'll be able to get there. We just don't want to do stupid things in anticipation of rules, which we don't know what they are yet. 
+
+
+    Betsy, our businesses are thinking through all of the implications. When the rules come out, we'll be able to act, but think about it as a measured approach. We don't want to overreact. We want to see how things play out, and at the margin, there will be changes to products and pricing but we'll be very measured. 
+
+
+    So cash at central banks doesn't have to hold capital against, that's 50 basis points. If you took revolvers down to what we say is a normal draw, like even a stress draw of 20% which is what we saw in the crisis, there will be another 50 basis points, so we just want to be a little measured in how we deal with this. 
+
+Answer_16:
+
+    No, Betsy, this is really just the basic underlying run rate, which is about $650 million. Which does include some severance obviously, given actions taken to adjust capacity in the business, together with the $200 million item, which relates to foreclosure, it's nothing else. 
+
+Answer_17:
+
+    No, not anything of any significance. We have done some, but nothing major. 
+
+Answer_18:
+
+    We would love to reduce the uncertainty around this for ourselves and for you, but it's very hard to do. So the way I'd look at it is it will probably be elevated for the next year or two, not like we just went through, but it will necessarily be lumpy. So it might be as we settle, as we negotiate, as  we figure out -- remember there are multiple agencies involved in every case now, so you saw in the CIO that we paid four, maybe eventually five penalties, which we really did not expect. So we just have to deal with it and deal with the reality that it is. It will abate over time, and the underlying power of the Company you can see, so-- 
+
+
+    I wish I could give you a better answer, but one day, it won't be a big number. 
+
+Answer_19:
+
+    Well, I think you have to look at first of all, the big ones are really Board-level type of discussions and we -- our preference is always to resolve it. It is very hard to fight with your regulators or the Federal Government, but we want them to be fair and reasonable. We have shareholders, and those shareholders, by the way, I remind people, it's not me. It's veterans or retirees and mothers and we're trying to do the right thing. It's very hard. We've got the top people involved inside and outside the Company, and hopefully over time, we will make this a much smaller issue. 
+
+Answer_20:
+
+    Well it does, but again, we think we've maintained pretty good margins and pretty good capital, and we have different ways to optimize. And not all of the things we're simplifying were very profitable, and so remember, let's just focus on other things and the other things we're doing pretty well. Like almost every single business, we're up in share. And remember, the reason you go up in share is because you're doing a good job for clients. They vote with their feet, which means you're satisfying them. 
+So we're comfortable we'll be able to adjust to the new world and still have great businesses, and again, you haven't seen all of the repricing that might take place, you haven't seen the reactions and change in business strategies, and some things may move to the shadow banking world, which is fine. We'll figure it out. Like I mentioned, the needs of our clients, consumer, small business, middle market, large corporate, are not going away. They have to be served and satisfied somewhere. 
+
+Answer_21:
+
+    We've said 30% to 35%, and remember we do it pretty consistently after capital, and looking at value created, stuff like that so that hasn't changed, just came down a little this quarter. 
+
+Answer_22:
+
+    We said there were modest loss last year (multiple speakers)  and they were about breakeven this quarter, and it's getting very small. 
+
+Answer_23:
+
+    Erica, two things. One is, if you just look at the firm wide leverage ratio for a second that 4.7%, obviously that maybe changes when the final rules are issued, but just take that as a base. We're only 30 basis points from the minimum and while we're targeting to go higher than that, clearly 30 basis points is not a great distance for us to cover. 
+And then I'd just reiterate what Jamie said, which is when we look at our 2014 CCAR, it will take into account a balanced set of facts and circumstances, so obviously both the quantitative and qualitative nature of the results of the stress test, but also our desire to want to get to capital levels that we've expressed, together with maintaining flexibility to do appropriate dividends and repurchases. So all those things together will be considered in the capital plan. 
+
+Answer_24:
+
+    So three things, just to clarify. Currently our standardized ratio is higher than advanced, albeit not by very wide margin, so just to clarify that point. Just generically, the advanced approach RWA sensitivity to a stress environment would be more impacted than a standardized approach, but remember, that's a 2014, that's a future issue for us. 
+The 2014 CCAR, as we understand the instructions, we will be looking at an additional test on top of the 5% Basel I, that will have a Basel I risk weighted assets for the denominator for the first four quarters, and Basel III standardized for the second four quarters. So it's a 2014 CCAR, the advanced approach isn't one of the critical tests, although it will likely be in the future. But in theory and in reality, that will reduce more dramatically on the stress than the other measure. 
+
+Answer_25:
+
+    It was relatively flat, Mike, in the low 30s, between 30% and 31%. 
+
+Answer_26:
+
+    So it's consistent with what we said at Investor Day, in terms of the remaining jobs turning out of the branch networking consumer, as we implement new technology and new operating models, and new branch formats. 
+
+Answer_27:
+
+    Well, I guess we're making huge progress on it, but it's not going to stop for years. It's permanent. 
+
+Answer_28:
+
+    So Mike, just what it's worth on page 2, very small in the footnote, we talk about that estimate of about 80% of MBS deal losses related to heritage investments. 
+
+
+    That's losses. 
+
+Answer_29:
+
+    Yes. 
+
+Answer_30:
+
+    When you saw mortgage putback, are you talking about the GSE putback? 
+
+Answer_31:
+
+    I think have you to get that from other analysts who actually have published numbers like that. 
+
+Answer_32:
+
+    I think -- obviously, that's true, Mike, so because this is very painful for the Company, and so Bear Sterns we did do quickly. We didn't anticipate that we would be paying anything for prior losses for Bear Sterns. I tell people, even the Bear Sterns number, I think it was $80 billion of bonds were made good which would have failed that day, had they gone bankrupt. 
+And we did ask, we weren't completely stupid. We did ask the SEC for and only the SEC for would they please agree not to take enforcement actions against JPMorgan against things that happened at Bear, which of course they couldn't do outright, but they did say they would take into consideration the circumstances in which the transaction took place. 
+And in WaMu, we don't believe we're responsible by contract. But that does not mean that people can't come after you. So that was a little bit of a lesson learned too. 
+
+Answer_33:
+
+    We're going to do what's in the best interest of our shareholders, all things considered, it's a Board level decision. And it needs to be fair, reasonable, taking consideration all of the facts and have some possible -- we would like to get it done, and if we can't, that's the Board will make that decision. It's not a good choice either way. 
+
+Answer_34:
+
+    Mike, the factor there was candidly that you were all trying to do this, you had most, or at least a large number of analysts that published research papers trying to recreate settlements and reserves three times, and for this one time only, we felt like it was helpful and transparent and constructive to show you the magnitude of reserves after these actions. So that you can have that context when you think about the future. 
+
+Answer_35:
+
+    Yes, so first of all just to give context to that 6% to 7% down quarter over quarter, there is a portion of our expense base related to mortgage that's truly variable, so as production levels go down, we pay less compensation on the loans, and as a result, that's what you're seeing in this quarter. With respect to then rightsizing the expense base for the opportunity in the market, we have taken actions, as you have are aware in the third quarter, to start to do that; however, once you go beyond the truly variable costs, those actions take some four, or cases six months to truly get to the run rate. 
+So while we would expect to see that start to come to fruition in the fourth quarter, not completely in the quarter, more as a run rate matter. And then there is a portion of costs that are more fixed, in terms of our ability to be able to participate, whether it's real estate technology and a core infrastructure. We are obviously also taking a look at that, but we are in this business, and so there will be an element of fixed costs into obviously next year. 
+But you should expect that we're still seeing, absent lots go down slightly into the fourth quarter, so you should expect revenues will maybe be down, but expenses will also be down, for that net slight negative pretax margin that we've guided you to. That's still what we expect. 
+
+Answer_36:
+
+    Let me brag on our commercial bank and investment bank bankers And they've opened up branches I want to say Jacksonville, Sacramento, Nashville, so we're actually in more places in the commercial bank. Obviously, we've been building in the WaMu footprint in Florida and California, they've been doing an exceptional job. 
+And more importantly a high quality job, like we're really happy with the quality of the business we're booking. And our Investment Bankers you see the numbers in equity and debt and we didn't mention all of the deals that we are involved in but Verizon, and Sprint, and Nokia, there's good pipelines and good traffic. You know that can change tomorrow, but the fact is, we are satisfying our clients and we're thrilled with the business we're generating. 
+
+Answer_37:
+
+    So we don't expect or believe there should be any repercussions, but ultimately that's the regulators' decision so we resubmitted CCAR in September. We're still waiting for feedback. We get feedback in early December. We will do a good, thoughtful and appropriate job of thinking through our capital asks as we do the 2014 CCAR, so those will be the things that we do. 
+
+
+    And we're doing very little stock buyback right now. 
+
+Answer_38:
+
+    Yes, Volker, more detail on SLR, more detail on how much long term debt, I think we have almost 20% of available resources today. And then you could look at things very basic and simple and say okay, well if the cost is a little bit higher and pricing stays the same and capital is higher, returns a little bit lower, that's true. But that doesn't take into consideration things we don't know which is repricing, competitor strategies, and our ability to optimize by client, by state, by region, by product 
+So all those things, we just give you a better idea. We're very comfortable we've got a very good business, but we'll give you a better idea of what we think it means by business. For example, we're going to allocate more capital and operating capital to the businesses, we'll ask them to optimize on SLR, and without damaging the client franchise, but we just will give you more detail. That's all. 
+
+Answer_39:
+
+    No, I think that a lot of people mentioned that they think it was inappropriate to apply capital to that, but the regulators will decide, whatever it is, we will be able to adjust to and conform to the rules. I would just point out that some of these things can move that number quite a bit and there's a reason why you shouldn't overreact to it and just take the time and do it right. We know the final rules, we will conform. 
+
+
+    We conform very quickly, so it's just why would you conform very quickly and disrupt clients? So just think of it that way. We're trying to do the right thing to the client base and the Company. 
+
+
+    We don't want to restrict, we could go out tomorrow and say we aren't going to make anymore revolvers, and we will be there very quickly. We just don't want to do that. It's not a rational way to run a business. 
+
+Answer_40:
+
+    Right. 
+
+Answer_41:
+
+    We are going to meet our targets through the run-off portfolio, which will cause a couple of things. Part of the CRM was a synthetic credit portfolio, which is, I'll say, 1/10 of the size it was a year ago and I don't remember the exact numbers, and we're still going to be optimizing across other products. There's certain things in mortgages that use up a lot of capital, et cetera. So we have more to go in optimizing RWA. 
+
+Answer_42:
+
+    No, no, that one, but they had a small correlation book in the IB, this was a synthetic credit portfolio moved over to the IB, and eventually it will probably be put together. 
+
+
+    And much smaller. 
+
+Answer_43:
+
+    Yes. 
+
+
+    Yes, we've received instructions and that does feature. 
+
+Answer_44:
+
+    And it wouldn't be the first time we modeled such an event as part of our stress testing. 
+
+Answer_45:
+
+    No. I think you should take that, I mean obviously it's very painful for me personally, because I agree with you, I don't like losing money obviously for my shareholders, and we put up, and Marianne has been very clear. These are very tough numbers to estimate, it's a heightened environment, multiple agencies are involved in often the same thing. We're just trying to improve and get better and move on. Remember, these reserves relate to things that took place over multiple years, so it isn't a one year event, and we still didn't lose money during the crisis. 
+
+Answer_46:
+
+    So I'm not expecting that the details and results will necessarily become public. Remember, it wasn't a quantitative issue per se. It was a qualitative issue, so what the regulators are looking for is our response to their recommendations and substantial progress in that. 
+I do think that it obviously would be public what their response has been to that, some time in December, and we'll work out exactly when that would be. So I would expect you to understand whether our plan has been accepted or otherwise at some point in December. And we're already working on the 2014 CCAR submission. Obviously that submission in early January, which means it's will be Board approval in December and that is starting. 
+All of the work, and Jamie talked about it, he talked about 500 people, thousands of people involved, models, documentation, covenants, controls, all of that work that we did for the resubmission is fully being leveraged for our ongoing CCAR processes, and we're building on it. So this for us will continue to become better over time, and 2014 will be another step in that process. 
+
+Answer_47:
+
+    Really most significantly, the other thing that we just talked about, which is in addition to all of the other minimum levels that we've been testing against, we have new tests under Basel III, albeit a test that recognizes savings in the capital numerator, and also a slightly different denominator through time, with different minimum levels of 4% in 2014, and 4.5% in 2015. So that's the other real big framework change. 
+
+Answer_48:
+
+    So we obviously can't comment on any sort of discussions or status of any specifics on litigation. Yes, you're right, the framework is probably an estimate. Also you should obviously assume that we didn't or couldn't estimate, all of these events were not probable at the time. But today, our reserves are appropriate for the current environment, and the information that we're allowed. 
+
+Answer_49:
+
+    We're estimating some penalties, given the environment we would expect that some of the expenses would come with penalty nature, and you can obviously do the math from the front page. 
+
+
+    But they are estimates and they include a range of matters not limited to mortgage. 
+
+Answer_50:
+
+    Actually, it's a great question. There is a fronting in that number of just shy of $2 billion, $1.7 billion that will ultimately be syndicated in the short-term, so I would adjust that out when you're looking at the quarter over quarter numbers. Other than that, it's relatively flat and steady performance in core middle market and strength in real estate. 
+
+Answer_51:
+
+    We can't comment. 
+
+
+    We've already said all we can say about that. 
+
+Answer_52:
+
+    It's going well but we're still, I think they are still building the systems to actually do it, and come with the products and services that we think can do a better job both for the merchants and for customers. 
+
+
+    But we're in active-- 
+
+
+    We're still working on that. That's not going to happen overnight. We just think it could be a very good thing over time. 
+
+Answer_53:
+
+    Yes, we will try to. 
+
+
+    We will. 
+
+Answer_54:
+
+    Essentially has flattened out at this point, yes. 
+
+
+    And we've begun to reinvest, we're looking at the overall portfolio, we're doing some rotation, and that process has started. 
+
+
+    Remember,  rates did go up almost 100 basis points. 
+
+Answer_55:
+
+    So just at a macro level, talking at the firm-wide level for a second, we've said that we're looking at running the firm at a Basel III Tier 1 common ratio between 10% to 10.5%, which would imply, in any case Tier 1 capital minimums will be 11% ultimately, so we'll be at 11%-plus  from Tier 1 capital and we talked about leverage running at 5.5% over time as well. And if you think about 11%-plus Tier 1 capital, 10% to 10.5% Basel III common and a 5.5% supplementary leverage ratio given the ratio of our risk weighted assets to our balance sheet, they actually co-exist quite happily. So it is going to be a multi-variance of finding constraints, but at those levels, they exist quite nicely. 
+Obviously the devil is in the detail when you push down into the businesses, client by client, product by product, and that work will go on, and as we do that work, as Jamie's talked about, we expect to be able to optimize, which will include some repricing and some restructuring of products. But at a macro level, they will co-exist relatively well. 
+
+
+    I always add to that CCAR will be in our opinion another binding constraint over time. 
+
+
+    Very good point. 
+
+Answer_56:
+
+    We don't know those rules yet, but presumably it's going to be equity plus preferred plus unsecured senior debt, and subordinated debt. And I think our number is at 20% of risk weighted assets there, so we're in a pretty good place but we'll see what the final rules are. 
+
+Answer_57:
+
+    So with PCI-- 
+
+
+    I have to go because I have a meeting I have to go to, but appreciate the time with us, and Marianne can answer the remaining questions. 
+
+
+    So the way to think about the PCI reserve release its the first one we've taken, and it reflects obviously improved home prices and lower severities, but it's divided by model, so if all other things from here are equal, then we are what we are. Obviously, if there are significant changes, probably primarily in home prices, but also in delinquencies, and you might see some more reserve releases. These are likely to be more periodic and lumpy, because obviously, we will be refreshing our loan loss reserves, or our life of loan forecasts over time. It's possible that you may see them in multiple quarters but that's not what we're expecting. 
+
+Answer_58:
+
+    No there's no cause and effect there, obviously. 
+
+
+    Well there's no cause and effect there. Full stop.  
+
+Answer_59:
+
+    Well I can certainly talk for JPMorgan, where as soon as we understand rules, we start to push them down into the organization, so that the people who are transacting at the products and the client level can make the best and most appropriate decisions to maximize returns and meet hurdles, and all of those sorts of good things. And you're right. Over the last several years, we have seen capital and liquidity increase dramatically. 
+Meanwhile we are still delivering a core underlying performance in that mid-teens return on tangible common equity. So we're still competing effectively, which leads me to believe that others are doing the same thing, and that's being reflected in the competitive nature of the environment. I think it's obviously going to continue some, as we and others have set ourselves even higher targets for capital, and then obviously new rules including the SLR, but I also do think these things work through the system through time pretty quickly, given the nature of the business. 
+
+Answer_60:
+
+    So our LCR ratio last quarter was 118%. This quarter, we haven't disclosed it, but it's not far off that same level. and the increase in cash is not necessarily because we're trying to do anything from a liquidity perspective, but it also reflects inflows from clients, both operating bills, and importantly non-core non-operating deposits that we then place with the central banks. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/4_questions.txt

@@ -0,0 +1,240 @@
+Question_1:
+
+    Just on the legal front, not sure exactly what you can say, I'll give it a shot here. Does the lack of a settlement so far with the government reflect the DC shutdown, or more the fact that you're still negotiating, or a combination of both, any comment there? 
+
+Question_2:
+
+    Okay, and in terms of the $9 billion provision this quarter, can you give us any sense of how much that reflects revised estimates of government penalties and fines, as opposed to refined estimates for damage claims from private parties and things like that? 
+
+Question_3:
+
+    Can you give one more shot, Marianne explaining how the range of possible loss doesn't go down more after such a big provision? 
+
+Question_4:
+
+    Okay, and one more thing on this, does the settlement, negotiations, and things that you're doing does that affect how you project losses on other aspects of legal that you were not negotiating in the last couple weeks? So you've upped the projection of what you might face on other stuff? 
+
+Question_5:
+
+    Okay, on the expense front, I guess Jamie just said that the things you've added in the control and compliance area are permanent, and that drove up the expense outlook on adjusted basis, Marianne of $59.5 billion to $60 billion, so this is this the go-forward run rate? The $60 billion adjusted expenses, what would be the opportunities to bring that down over time, is there any areas where that is still environmentally elevated? 
+
+Question_6:
+
+    Okay, and then also in there would be the default servicing, which is still elevated. Can you remind us what the longer term target and how that could come down? 
+
+Question_7:
+
+    Okay, and then the last thing for me is just wondering, Jamie Dimon, did the internal control issues this year and some of the headliners at regulators, does that affect your mindset as you go into CCAR and think about how you'll think about capital return next year? 
+
+Question_8:
+
+    Just a quick follow-up on the CCAR. You had mentioned the difference, well you didn't say the exact difference between advanced and standardized, but I wonder if you could shed light on the spread between the two. And I'm just curious, does it play a bigger role in the process this year, or you were just pointing it out? 
+
+Question_9:
+
+    Okay, but I mean that spread is a lot tighter, so it's less concerning so it's good. 
+
+Question_10:
+
+    Okay, curious, we don't have all of the answers on how the whole leverage focus is going to shake out but it seems I'm putting a little words in your mouth, but it seems to be working its way through a little bit. I think your book's down 15% or so year on year, and it's less than 10% of the overall balance sheet. But is that a correct way to think about it,  that focus is going to start impacting the repo market? And I'm just curious if you could talk about for your book, what is balance sheet financing versus real customer financing? 
+
+Question_11:
+
+    Okay, understood, shifting gears just a quickie. So the guidance is for flat net interest income dollars, and the loan growth was 1% or 2%, quarter on quarter and year on year, but the underlying business, as you mentioned are a lot better. Just curious, it seems like conservative guidance, but curious on what is behind it. 
+
+Question_12:
+
+    Correct. In terms of NII dollars being flat. 
+
+Question_13:
+
+    Okay, maybe a last one. In a world that doesn't have a lot of loan growth, has very low interest rates and Capital Markets have been far from ideal to your point, your businesses, underlying business or operating goods. And extra charge, you're earning at that $6 run rate that people are hoping you could get to.  I guess the question is, do you have more confidence than you did last year in terms of that $24 billion over the cycle, because you're at that run rate now with not ideal conditions. 
+
+Question_14:
+
+    A couple questions. One on, just another question on FIC. We've talked in the past about clearing and clearing requirements, and prior quarters we just had very few trades coming in under the new rules. Could you give us a sense as to how customer behavior has been, and how that's impacted your FIC line this quarter? 
+
+Question_15:
+
+    And then on SLR, did I hear you correctly that  you aren't going to make any changes to how you're providing credit to clients, until you find out what the final rule is? There's no major changes on how you're approaching the market? 
+
+Question_16:
+
+    Okay, and then second thing on mortgage, in the mortgage servicing, relatively high charges, the foreclosure piece in there, but just wondering if there's anything else going on in the servicing expenses? 
+
+Question_17:
+
+    Okay, and portfolio sale coming up at all in that? 
+
+Question_18:
+
+    And then just lastly, just another question on the litigation on the page 2. I think the Street understands the reason for taking the $9 billion charge, and I see here you've got the two comments on page 2 which highlight that unpredictable, hard to forecast. But I guess what some folks are wondering is, should we be putting into the model just higher run rate of litigation expenses going forward, I think over the past couple years its been $300 million to $500 million normalized quarter, $1 billion to $2 billion, on a top and up quarter. Is that $1 billion to $2 billion the new normal until we get through this whole thing or--? 
+
+Question_19:
+
+    So Jamie, as you think about all of the litigation stuff that you've got, can you give us a sense as to how much you're currently in discussions to negotiate? I mean, to give us a sense of how far along you think you are? 
+
+Question_20:
+
+    Just looking at slide 15, I think it's very helpful in terms of laying out some of the things that you're targeting to reduce in the left hand side. I guess as we step back to the picture and we think about a couple hundred million of revenue you gave up on the left side, some expense pick up in the middle, and then we factor in the higher capital requirements, the higher liquidity, are you confident that both the long-term earnings impact won't be that meaningful, and that you don't need to adjust the model that much? And I think that's most people's view but the nickels and times, I think there's some concern that it does start to add up as well. 
+
+Question_21:
+
+    Just separately the compensation rate within the investment bank coming down this quarter, despite pretty good revenue trends overall, any additional color on that? I think you've been targeting 35% longer term, and we're maybe 31% or so. 
+
+Question_22:
+
+    Lastly could you just share what the CIO losses were a year ago? I'm not sure if you disclosed that before? 
+
+Question_23:
+
+    My first question is on the new leverage proposals.  I think we're hearing loud and clear that you're not going to do anything rash in terms of how you run your businesses, but given that we're still in proposal form in the US and also with Basel, can JPMorgan accelerate capital return in next year's CCAR, even with these proposals fluid on the leverage side? 
+
+Question_24:
+
+    And my second follow-up question is on the advanced versus standardized approach, as it relates to the CCAR. You've told us that the standardized ratio is clearly lower, but as you run your models under stress, what is more punitive for your bank? Is it coming into a stress scenario with a lower starting point on standardized, or is it the RWA inflation, when you stressed the advanced? 
+
+Question_25:
+
+    Three small questions and one larger one. First, what was the loan utilization on the wholesale side for the quarter versus last quarter? 
+
+Question_26:
+
+    And as far as the headcount reduction, you said in CCB you're taking up 15,000 jobs this year and 11,000 in mortgage? Where are the rest of the jobs coming out from, and how are you able to do that? 
+
+Question_27:
+
+    Okay, and as it relates to slide 15, the repositioning of the business, what inning are you in for that derisking and the control agenda? It seems like the derisking might be earlier innings, and the control agenda the later stages but you tell me. 
+
+Question_28:
+
+    Okay, and then the larger question relates to the legal issue. How much of the investor losses for the mortgage putback and the mortgage securities relate to Bear? I know there's been a lot of numbers in the press, but we haven't heard those numbers from you. 
+
+Question_29:
+
+    Okay, 80% of the losses? 
+
+Question_30:
+
+    And what's the dollar amount of losses on the mortgage putback side? 
+
+Question_31:
+
+    Well what's the total dollar amount of all of the losses we're talking about the potential settlement? That must be public somewhere, for mortgage putback in aggregate, the mortgage securities, what are the dollar amounts of the original, what's the original principal amount, and what's the investor loss? Just the dollar amounts if you can break that down. 
+
+Question_32:
+
+    So I guess one question, it's 80% of the losses are from the deals, would you have done the deals differently? Did you not read the fine print? Did you not have some additional protection that you might have had? I know it was short notice for these transactions. On the other hand as you look back now maybe you wish you did something differently? 
+
+Question_33:
+
+    Can you talk more about the trade-off? Nobody is forcing you to sell off. If you really think this is a bad deal, then you obviously wouldn't do it so what's the trade-off of not settling versus settling? 
+
+Question_34:
+
+    And your decision to disclose the legal reserve, as we go back and asking all the other banks, what's your legal reserve, JPMorgan disclosed it, why don't you? What were the factors that led you to do that? 
+
+Question_35:
+
+    Just a couple of quick follow-up questions. First of all Marianne, in the expenses related to mortgage production, those were down about 6% quarter over quarter. Do you have a sense as to if the trajectory of those costs are going to come down faster over the next couple of quarters? Several banks have discussed that in terms of trying to reduce the expenses, at the same time production revenues are also coming down. 
+
+Question_36:
+
+    That's helpful and then just a question on pipelines. You mentioned that the pipeline in commercial banking was healthy. Just curious as to whether or not that is largely due to transactions that have been held up because of uncertainty in the economy on the part of your borrowers, or is that also being helped by more business being booked by your bankers? And also if you have a comment on the investment banking pipeline at this point, realizing it's early in the quarter, that would be helpful too. 
+
+Question_37:
+
+    Okay, and then just Jamie maybe a question on the buyback. At this point it doesn't sound like you have any concerns about the litigation expenses in this quarter being an issue for the CCAR submission, or future buyback trends, is that what I heard? 
+
+Question_38:
+
+    You mentioned in passing that at the Investor Day in February, you think that there will be a lot more of the rules in place that you'll be able to discuss the impact of.  I was wondering the specific ones that you think will be available by then, Volker for example, is it your understanding that you'll have a good understanding by then? 
+
+Question_39:
+
+    Fair enough. One thing that you alluded to a couple of times this morning is the idea of the SLR being maybe 50 basis points higher, if you didn't have to carry capital, or count into the leverage exposure. You were deposits with central banks. Since you mentioned it a couple times, does that mean that you actually have a reasonably high degree of comfort that there will be an exemption for that? 
+
+Question_40:
+
+    Sure, that's completely fair. At this year's Investor Day, you identified in the investment bank a $65 billion run-off portfolio that you gave some targets of reduction for, at year-end. 
+
+Question_41:
+
+    I've also noticed that in your Pillar 3 disclosures you've got a very high CRM, which I have to assume is associated with correlation book stuff, which I guess that run-off portfolio is. Can you give us a sense for whether that's right, and where you are with that run-off portfolio? 
+
+Question_42:
+
+    And that was a separate synthetic credit portfolio than what you moved over from CIO, or is that a part of it? 
+
+Question_43:
+
+    We heard recently from some people in the industry that there's the expectation of a counterparty, a major counterparty default as part of the CCAR stress test this year. Do you have any sense for whether, are you hearing that that's going to be part of it? 
+
+Question_44:
+
+    It's a rational idiosyncratic event that people should be prepared for. Remember, we did go through that with Lehman. 
+
+Question_45:
+
+    Got it. Final question. So it's always been very important to you, Jamie, that you had a record of not losing money in a quarter, through the whole credit bubble and disaster. And yet this quarter, because of the size of the litigation reserve, you did. Not a large amount of money, but you actually had a net operating loss. Do we take that as a signal of the certainty and the timing of the size of the settlement? 
+
+Question_46:
+
+    Marianne, you'd mentioned the CCAR resubmission. When that comes out, will that be made public, and what will we be able to get from that, and how will that impact your submission going forward? 
+
+Question_47:
+
+    Great, and as far as other changes that you're aware of, you had mentioned the counterparty failure, are there any other large items that would be a change in the way, or in addition to the way they're approaching the submissions this year? 
+
+Question_48:
+
+    Got it, and related to taking the charges in this period, given what was the actual information that changed? In other words, the accounting rules tend to require a certain standard to recognize that, and if you haven't reached that agreement yet, what actually did change that required the recognition of that in Q3? 
+
+Question_49:
+
+    Did you say at the outset that the $9 billion wasn't fully taxed because of a portion related to penalties? That would imply like roughly about a third of it, does that make sense? 
+
+Question_50:
+
+    Can you talk about the commercial loan balances? I noticed that the period-end balance had a nice increase from the third quarter, but your averages were almost flat. Is there a pick up in lending activity in the month of September? 
+
+Question_51:
+
+    Okay, and I know the litigation questions are sensitive, so I don't know if you can answer this or not. The discussions that are going on, that we're reading about in the paper with the US government, is it more of a factor of the dollar amount that's holding it up, or is it more terms and conditions? 
+
+Question_52:
+
+    Okay, that's fair. Another question is, you at your Investor Day talked about the Visa partnerships that you were just announced, could you give us some more color on how that's going, with the merchant acquiring and the payment business? 
+
+Question_53:
+
+    I assume you'll give us a good update at the Investor Day in February? 
+
+Question_54:
+
+    Coming back to the asset yields, you talked about the deposit margins improving quarter to quarter, earlier in your call. Are we at a point where the asset yields in the securities portfolio have bottomed? Are you replacing securities with equal yields or higher? 
+
+Question_55:
+
+    Right. Finally, on a go forward basis once we get over all these issues that everybody is confronting today in the banking industry, with the regulatory and maybe the interest rate environment, what's going to be the capital ratio that's going to constrain your growth? Is it going to be the SLR ratio, the Tier 1 common? What's the one you think will be the real achilles heel? 
+
+Question_56:
+
+    Correct. Coming back to the capital, on the orderly liquidation authority, as we all know there are certain buckets of capital that have to be maintained. Do you have any clarity yet that the excess over the 9.5% under the Tier 1 common portion, will that be applicable to other buckets, so you don't have to raise as much in preferred or senior debt? 
+
+Question_57:
+
+    Most things have been covered but I'm looking at the loan loss reserve releases from the PCI portfolio, assuming credit gets better, that theory continues as well. How should we think of that going forward? Is that going to be something lumpy from time to time? Is it going to be more gradual, like it would be in a normal loan portfolio? 
+
+Question_58:
+
+    A few questions on the investment bank, and you touched on the comp expense earlier. It's obviously very low as a percent of revenues, excluding DDA, I think it's 27% So given revenues are down, your bonus accrual must be way down. And my question becomes is that just coincidence that it happens in a quarter where you take $9 billion of regulatory litigation costs, or is there a cause and effect there? 
+
+Question_59:
+
+    Perfect. And then my second question, you've talked a lot during this conference call about pushing things out to clients when you have more clarity on your leverage ratio, and I guess -- the rules and what not. I guess just broader, as you think back not the leverage ratio but all the Basel III rules we've faced and all the changes in higher capital requirements and whatnot. Are you surprised at how slowly some of those price increases have been pushed down, and how slowly capacity has left the industry, or do you think it's about right, or do you think we'll see more of that going forward? Maybe you can just make broad comments there. 
+
+Question_60:
+
+    One quick follow-up on your liquidity holdings here. Your excess liquidity pool looked like it increased almost $85 billion sequentially to $538 billion. Just want to know what's driving that, if there's anything you're worried about or thinking about, because I thought your LCR ratio last quarter was above 100%. And if you could just give us your updated LCR ratio, that would be great, thanks. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/50_answers.txt

@@ -0,0 +1,157 @@
+Answer_1:
+
+          Oliver, good morning, and thanks for joining us today. As we think about the balance of the year, I would ask you to think about three important variables and you saw those come to life in the first quarter. We're clearly focused on driving traffic to our stores and we expect that to be a very important driver of our growth over the balance of the year. But you're also seeing the benefit of our focus on signature categories and the higher ticket that that generates.
+But importantly the third element is the increasingly important contribution we're seeing from our digital and online businesses. So as we go forward, we're going to continue to make sure we're seeing growth in traffic, growth in our signature categories that leads to that gross margin rate improvement we saw in first quarter and the higher ticket, but importantly, the ongoing contribution of our online channel.
+
+Answer_2:
+
+          Oliver, you heard Kathee talk about some of the key initiatives that came to life in the first quarter and you're going to continue to see us build off of that over the balance of the year. We've completely rebuilt our app. We're focused on improving our subscription and registry.
+We're leveraging our stores to shift to our guests. So we're going to continue to build on those initiatives as we go forward and continue to make sure that we're making the investments both in technology but importantly in the supply chain that brings that online business to light for our guests.
+
+
+          And, Oliver, if we can go back for a minute to your question on thinking about price versus innovation and how do we balance those. I would just say that we start from the guest, looking at what it is that they expect from any given product category and then how do we build the very best product? Which is, depending on what it is, could be a combination of both price and innovation or more heavily leaning on one or the other, depending on what we're talking about.
+But very much guest focused to make sure that we're offering them the content that's going to inspire them and resonate. So there's not one size fits all. It's really guest-focused driven by each category.
+
+Answer_3:
+
+          Oliver, thank you, appreciate it.
+
+Answer_4:
+
+          Let me start with the gross margin and the focus for not only the quarter but for many years to come. And we've been very clear about the importance of focusing in on our signature categories. We believe that's our path to differentiating the brand. So you should continue to expect us to focus on building our style categories. And Kathee and her team are making great progress in apparel and home and beauty. And you saw the comps that those categories produced in the first quarter.
+We'll continue to focus on baby and kids and accelerate our focus on wellness. So we believe those categories both in store, but importantly as we demonstrated in Q1 online, where a significant portion of our growth in the digital channel was driven by apparel and home. So that is a very favorable impact to mix, both in store and importantly as we improve and accelerate our online performance.
+
+
+          The other thing I'd add, Matt, is more tactically between Q2 and Q3, that's really last year where you saw us transition from focusing on significant promotions that were primarily hard lines or some of our lower margin categories' focus to the business, back to back-to-school and then into the holiday season.
+So as we think about the way Q2 looks versus Q3, where that promotional impact was real in Q2 but it was also we had a significant mix impact because of where we focused those promotions. Little bit less of that as we go into Q3 and Q4. So the delta between last year's margin and this year's margin will change meaningfully. And as Kathee said, we continue to invest in price and quality across all of our brands.
+
+Answer_5:
+
+          I think, Matt, I would answer it broadly and say that what we see across all guests is when they become engaged in the digital channel, we see incremental growth in that channel and, importantly, incremental growth in the stores. So their total engagement with us is very incremental, we pick up incremental sales and importantly incremental profitability in both channels.
+
+Answer_6:
+
+          Yes, I would say that, Scott, it's pretty early in our transformation to say that we see momentum in that measure as it pertains to food. I will tell you a lot of our growth in transactions is driven by new guests and that's driven more in the signature categories that we have been talking about. Now we believe that we have an opportunity to drive traffic in food and that's why we're in the midst of putting a lot of tests out in front of our guests, both product and presentation, to get that business on track and to make sure that we've got a really compelling point of view for our guests. And then we will measure that over time to make sure that we're making progress. But today I would say it's more driven by the signature categories that we've highlighted.
+
+Answer_7:
+
+          Scott, it's certainly something that we're going to continue to monitor and measure over time. It's still very early for us, but that is a measure that we're clearly looking at. We absolutely want to make sure we're building loyalty. We want to build engagement and traffic.
+We believe our focus on signature categories brings guests back to Target looking for what's new, what's exciting. And we also want to make sure we complement that with an improved food assortment because we know food is critically important to building engagement and driving overall traffic.
+
+Answer_8:
+
+          I think as we would measure that and as we look at the guest feedback that we get, Scott, I would say store execution is very high. Guests are very satisfied with the number of people that we have, their ability to help them. I would say that we have an opportunity on the in-stock side and we've been working on that collectively, stores and merchandising, as we worked through the port situation and getting those back in stock. But also just our everyday basics.
+And it's one of the reasons why our inventory is elevated, as we've talked about, is that we have been making investments, particularly in essentials category to make sure that we can raise our inventory levels appropriate to be in-stock in those categories. So I think that's where we have the most opportunity right now.
+
+
+          And, Scott, that's reflected in the key initiatives we've been talking about. As we think about changes we're making in experience to elevate apparel with mannequins, to restructure our home layouts, to begin to make changes in electronics. We want to make sure we provide the guest with a great in-store experience particularly in those signature categories.
+But as Kathee just noted, we also need to make sure we're focused on the basics every day. And we need to make sure we've got very high in-stock conditions, particularly in those key consumable categories. So for us, execution at store level is critically important. We believe we have the best team in retail and our focus now is on elevating the experience in those key signature areas of our store and ensuring that we're improving the in-stock conditions for basic essentials.
+
+Answer_9:
+
+          Thanks, Scott. Appreciate the support.
+
+Answer_10:
+
+          Yes, so this is something that we aim to do all the time and of course right now we're comping against some pretty weak numbers post breach last year, so certainly that's part of it. As we focus on signature categories, I do think that's getting more new guests back into the brands and in a variety of different areas because signature categories cover so much from beauty to home, et cetera, to the different style categories.
+And I think the way that we're doing it is really what Brian was just talking about, presentations that are really compelling with product that's very inspirational. And inviting them into the store through our marketing, which resonates with them. And then when they get to the store or online, being able to convert them to a purchase. So it's all of those things that I think are moving the needle.
+
+Answer_11:
+
+          No, we've seen this coming for a little bit now. Third quarter was the start of it, continued into fourth quarter and now again in our first quarter. But I think as we're improving quality, as we're stepping up our assortments to be more aspirational, we're seeing the guest really resonate with that product and move. And that's broad across virtually all of our categories. So not just in one segment of our business but really all of them.
+So I think it's driven by the guest perhaps having a bit more money in their pocket. I think it's the quality that we've put in, they're recognizing those benefits and they're wanting to be able to trade up.
+
+
+          Robbie, the one point I'd emphasize so that we're really clear, this isn't an either/or, it's an and. So we want to make sure we're delivering exceptional value every day on those core essentials and continuing to bring great quality, newness, innovation and value to our guests as they look for these more aspirational items. So it's not a shift in strategy and it's not a either/or, it's an and.
+And we've got to make sure that both elements of our strategy include a focus on core essentials and more experiential offerings. And when we bring those together, that is the Target brand promise and experience. That's where we bring expect more, pay less to life. So both of those elements are starting to work together and I think you're seeing the guests respond very positively to it.
+
+
+          Thank you.
+
+Answer_12:
+
+          Let me start with the regional performance trends, and we didn't see any correlation between what you just referred to, changes in the oil and gas industry, and an influence on our comps. Obviously, like everyone else, and this happens every single year, weather did impact regional performance. We had some challenging days in the Northeast. We faced the same ice storms that others did in the Southeast and in the Texas market.
+But overall, we saw very consistent comp performance across signature categories. The growth Kathee talked about was strong across the country in apparel and beauty and home. And we've seen very consistent performance trends and responses from our guests across the country.
+
+
+          And to the minimum-wage question, no, we haven't seen those types of impacts either.
+
+Answer_13:
+
+          It's a great question, Robbie, and we're sorting through that. We wanted to get through annualizing past all of last year with the breach and the impact there. We're really pleased that we saw 110 basis points of penetration growth. We're seeing new accounts grow again, roughly split equally between credit and debit.
+I think as we learn a little bit more here as we get through this year, we'll figure out where we want to go. We still are very energized by REDcard as a product offering. I think the opportunity for us is to tie that into a more holistic loyalty offering for our guests. We're testing some of that now out East, and you'll see us, as the year goes on, continue to test that, take those learnings and apply it more broadly to loyalty for our guests.
+
+
+          Thank you.
+
+Answer_14:
+
+          Yes, I think -- yes, you're right and all of that increase is really incentive expense offset by, again, some productivity improvements. I think as the year progresses, we'll continue to see improvements in SG&A.
+As we said throughout the year, as the year progresses, we'll continue to start to see the savings that we committed to, the $2 billion, $500 million of savings this year, about half in COGS, half in SG&A. In SG&A that will be offset somewhat by investments in technology.
+So we should continue getting past the noise; as the year progresses we'll continue to see leverage probably similar to what you saw in Q1 as we get into Q3 and Q4.
+
+Answer_15:
+
+          Greg, in some ways you've answered the question for me. And we've been very clear in the fact that we're going to make $1 billion investment in technology and supply chain to enhance those capabilities, to improve our capabilities, to make sure we're partnering up technology with the ability to provide the product effectively through our supply chain.
+So the Lilly event, while a sensational event for the brand, and we're really proud that we were able to create a Black Friday-type event in the month of April with hundreds and thousands of our guests lining up waiting for that product. But online, we know we had some missteps and we're doing a deep dive, we're looking at root causes, and it's going to provide important learning for us as we get ready for the traffic we expect to generate during the holiday season.
+But we are very committed to putting our capital behind improving technology capabilities and the supply chain requirements necessary to continue to grow that business at the accelerated rates we're delivering right now.
+
+Answer_16:
+
+          Well, this afternoon would be nice, but we are actively tearing apart the learning and clearly want to make sure that we have the diagnostics in place as soon as possible. And we're making the necessary adjustments and investments to enhance our overall digital experience. So this afternoon would not be soon enough and the team has an incredible sense of urgency to ensure that we have the right capabilities so that we're constantly meeting the needs of the guests.
+
+
+          And, Greg, I would just add that we're never done with that. So certainly we're learning from the Lilly event and we will put that into play as soon as possible. But as we're growing at the rate that we are and we're introducing new code all the time, we are never done. So this is an ongoing effort probably until the end of time.
+
+Answer_17:
+
+          Yes, so Made to Matter has been a fantastic program for us, Peter, as you know. We went from about 15 vendors last year and we increased that to about 30, 31 vendors this year, and we're seeing about 25% lift in sales. So the guest is really loving the product that we're offering.
+It's in a variety of categories. There's certainly food products, but there's beauty products, there's OTC, there's baby. All of them, though, are really driven by simpler, better-for-you product, whether that's in food with cleaner labels and organic, or whether that's in baby, where it's cotton and more natural materials.
+But really great results and we marketed it most recently in the past month in what we call the rear seasonal area of our store where we brought all the products together for the first time and had really fantastic results. There was a marketing campaign that went along with that that really resonated with the guests and then the in-store presence helped make it easy for them to find when they came to the stores.
+
+
+          Peter, I think the great part of the program is it's just another point of validation that when we understand what the guest is looking for and we deliver the right curated assortment, they respond really well. You know that we have over 25 million guests visit our stores every week. We know that 98% of our guests purchase natural or organic products. Thus we need to make sure we offer them the products and the selection they're looking for.
+It doesn't mean that conventional products don't play a very important role going forward, but our guest has voted. We understand the guest better than ever before. And Kathee and her team are doing a sensational job of curating the right assortment and bringing the guests what they're looking for when they shop at Target.
+
+Answer_18:
+
+          I think that's a pretty good number. We're still evaluating the program. We launched the new vendors this spring, so we're still analyzing those results. But to Brian's point, the guests will guide that work. The important part about Made to Matter is that while these brands might be carried elsewhere, we have exclusive product with meaningful innovation within the program within Target, and that's what's really resonating with the guests.
+They recognize those brands are at Target and they love to buy them. But they come looking for those new exclusive, really innovative products. So I think keeping the number at a reasonable amount so that we're sure that we can drive that right innovation, it's very much a partnership with us and these suppliers, so I think we're in the hunt with the right number.
+
+Answer_19:
+
+          Peter, Kathee and I have been talking about this for several months now. We're using 2015 to test and learn. Kathee's talked about key categories within food that we really think Target should stand for and we're looking very closely at how we evolve assortment and how we merchandise those categories going forward. But this is not about how fast we make the changes. We want to make sure we really have a chance to test, learn, get the feedback from the guest, iterate.
+So then as we move into 2016 and beyond, we move forward with confidence. And with the confidence that the guest has guided us through the changes we're going to make. So we're clearly focused on it. The team is making very good progress. But we're in that test and learn and validate environment right now and you should expect to see much more unfold as we get into 2016.
+
+
+          The thing that I would add is, as we're going through the testing, as Brian mentioned, we're testing many different things, whether that's assortment changes that we're making, presentation changes that we're making, supply chain changes. Part of our testing is to try to isolate those tests so that we can get a good read. So there's not going to be one place that you can go to look at what does the new food innovation look like. We've got it all over the place.
+And the other thing that I would add is you know that we just hired Anne Dament to run the Senior Vice President of Grocery and we're very excited about that. She's been on board now for about a month and brings us 19 years of experience in grocery and CPG. So she certainly is learning and onboarding into Target and bringing a wealth of knowledge from grocery, which will also impact what we put forth in terms of tests for the rest of the year.
+But I think you can look to 2016, as we learn and prove out what's working with the guests, what's resonating, we will start rolling those in 2016, but don't expect a big bang on January 1. To Brian's point, this is really about getting it right and delighting the guest, not moving fast.
+
+Answer_20:
+
+          So certainly shipping expense went up when we moved to $25, but I would tell you not a material impact on the quarter. And net, net, as we've said, as that brings more guests online, they shop our store and so a net positive, as far as we're concerned, across the lifetime value of those guests.
+I don't have the actual number of REDcard holders that use free shipping on the site, but I can tell you the penetration of free shipping due to REDcard on the site is very, very high. In general we have a very high percentage of our shipping that goes out free from the site.
+We talked about this last year when we shipped to free -- switched to free shipping during the holiday season, and I think that is why, going back to what Brian said, the supply chain investments we make are incredibly important for our guests because they provide speed to market from their perspective. But they're incredibly important for us because they improve the economics of our online business meaningfully.
+
+Answer_21:
+
+          A lot of that depends on the categories. I think the good part about licenses at Target is that our guests respond to them very broadly, so it isn't just a toy or a video game. For us, there's apparel involved, there's back-to-school products like backpacks and notebooks. So they have a pretty healthy margin mix, just given the breadth of category, and most of them fall into our signature categories. So we're very excited about the lineup of licenses and the fact that they start this summer and really go all fall.
+
+
+          Okay, we have time for one more question.
+
+Answer_22:
+
+          It was mix is what came in better and I think we see that in two ways. First of all, there's just the mix of selling those products. And then when we see strength in home and apparel, of course our sell-throughs go up and so we have less markdowns. And so the positive benefits of mix go on and on.
+
+
+          I'd only add, Christopher, that again, we saw that mix benefit both in store and online, so the combination of those two channels working together clearly impacts and improves gross margin rate.
+
+Answer_23:
+
+          That is certainly core to our strategy as we go forward. And I think what you saw, what we saw in Q1, very solid performance. Kathee and her team did a terrific job of curating the right products, particularly in those signature categories for our guest. Despite some of the port challenges, our supply chain teams did an outstanding job of making sure we had inventory in place for the guests.
+I was very pleased with our marketing program, and if you haven't seen the Target style campaign or some of the things we just did for Avengers, it's spectacular advertising and the guest is responding to it. And our store teams just did a phenomenal job throughout the quarter, despite port challenges and weather challenges of providing the guest with a good experience. And it added up to really solid results in Q1.
+So we hope that continues. We're confident it's going to continue throughout the year. But we feel good about the progress, we know we've got a lot of work in front of us. But that combination of strong in-store and online growth in the first quarter gives us a lot of confidence that we're heading in the right direction.
+So, Operator, that concludes our call today. I thank everybody for their participation and we look forward to talking to you next quarter. Thanks.
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/50_questions.txt

@@ -0,0 +1,93 @@
+Question_1:
+
+          Hi, congratulations on really solid results. We're very pleased to hear about all of the progress. Regarding the comp in the back half, should we think about traffic as the main opportunity or would you feel like ticket will also be an opportunity? And as we think about gross margin and your product assortment, how are you balancing the idea of investing in price versus the innovation that you're conducting in your signature categories?
+
+Question_2:
+
+          Brian, you've been very agile with strategic decisions around the online and digital business. As we look forward to back-to-school and holiday, are there any key pointers in terms of the strategies you're undertaking, particularly as mobile and shipping continue to be hot topics?
+
+Question_3:
+
+          Thank you, congrats. And that was very clear on Lilly Pulitzer, congrats on that as well. Best regards.
+
+Question_4:
+
+          Good morning, and I'll add my congrats as well. My first question is on gross margin. Does the gross margin guidance assume a continued mix shift to the signature categories that you enjoyed this quarter? And is the formula for Q2 in terms of price and quality investments what we should be thinking going forward, i.e., you were down about [100] last year and you recapture about half according to your guidance, does that seem like a reasonable formula for Q3 as well?
+
+Question_5:
+
+          That's very helpful. If I could ask one follow-up on the eCommerce business. I'd love to get your insights, perhaps using REDcard data, in terms of how much digital growth do you think at this point is incremental, i.e., are these new customers or infrequent customers? Thanks.
+
+Question_6:
+
+          Wanted to get into a topic of traffic. I think traffic was up second quarter in a row that it's been up. I was wondering if you could maybe dig a little deeper into that? Someone in the grocery space talks about loyal households and it seems to me when you think about Target, you guys want to build frequency and you want to build these loyal households. How are you thinking about that? Do you measure that? Is that measure improving? Some of our research suggests some of the early things you guys are doing should be building this number, but I wanted to get your take on it.
+
+Question_7:
+
+          That was actually where I was going, not just food, just on the idea that I think your heavy users are up 25, 30 visits a year. Are you seeing increase in those types of loyal households? It seems to me that might be a key driver here as we go forward to get that frequency up.
+
+Question_8:
+
+          Perfect; and I had one other one. We obviously are in the stores quite a bit and I wanted to get your take, some of the pushback that we hear from investors is on the store level execution, staffing levels, in-stock position. I think people wish you maybe just could be a little bit better. And I was wondering what you think of that and are there initiatives to improve some of those measures? And where do you think you are, what inning do you think you are in on these areas?
+
+Question_9:
+
+          Perfect, our focus group of women was really pleased, so keep up the great work. Thanks.
+
+Question_10:
+
+          I think maybe for Kathee, the comment you just made to Scott Mushkin about a lot of the growth in transactions being driven by new guests, can you give us a little more insight to that? Is that a shift in traffic away from frequency and towards new guests and how significant is that and is there -- how are you doing it? Is it -- are there some new marketing approaches you're taking to get people into the stores to alert them about the signature categories, et cetera? Some color on that would be great.
+
+Question_11:
+
+          Kathee, can you comment more on the propensity to trade up for the guest? Is it -- is there something changing there or was that just easy comparisons?
+
+Question_12:
+
+          I guess a regional question, in terms of the comp on a regional basis in the first quarter, did you see any differences in your sales trends in states that are potentially a little more dependent on oil and gas? And then the follow-up there is can you also address any negative or potentially positive impact on the organization you see in areas that are increasing the minimum wage?
+
+Question_13:
+
+          Okay. And then secondly it looks like REDcard, nice pickup, looks like on a sequential basis and year over year. Can you talk about where Management expectation is now on this particular product and where we think this could potentially go over the next two or three years here? Thanks.
+
+Question_14:
+
+          A couple questions. I wanted to make sure I understood the SG&A progression a little bit better. I think, John, in the guidance you said we would delever 20 to 30 bps in the second quarter, which if I take your comp guide suggests it'll be up around 5% in dollar terms. Is that -- are we thinking about that right? And what's the real run rate once you get through some of these other timing issues and the breaches on SG&A dollars?
+
+Question_15:
+
+          Okay; got that. And then, Brian, I think in your prepared discussion, you've mentioned some disappointment on digital execution, particularly around the Lilly launch. Could you give us a little more detail on what's being done to address those issues in terms of how the website actually works or supply chain? Will you ultimately invest more in fulfillment center capacity or just some actual actions to try and address that? Thanks.
+
+Question_16:
+
+          When do you think you'll know the things you need to get done for holiday? Is that something you'll know now or was it something we'll learn in the fall?
+
+Question_17:
+
+          Hi, guys, couple questions. First on Made to Matter. Can you give us how many brands have been designated with that, what categories you're seeing being most impactful so far and what you're doing from a marketing standpoint to support them?
+
+Question_18:
+
+          And that's helpful. Do you think, is 30 to 31 a good number that you guys think you'll stick with? Do you think you'll add additional vendors to that program over the next 12 months or rotate out some and keep the number at 30, 31?
+
+Question_19:
+
+          Okay, that's how we've definitely seen it in the stores as well. Quick one on the food repositioning. What should we -- in terms of the cadence this year in terms of testing things, what should we be looking at? Is there going to be space allocation changes, is it going to be just new brands?
+And once you do decide what you're going to do, is it going to be an early 2016 rollout, something that could impact a lot of that year or is it something that would happen later in 2016? Thank you.
+
+Question_20:
+
+          I had a couple questions. On the gross margin line, did shipping expense at all impact you with the move to $25? And how many REDcard holders are utilizing their cards for free shipping, so how do we think about that as eCommerce continues to grow?
+
+Question_21:
+
+          And then -- thanks, and the second question I have is there's a lot of license initiatives that are coming over the next several quarters. When you think about the year-over-year impact on the business overall, are those gross margins accretive in terms of what they're trying to do or would they be lower margin? And how should we think about that as it relates to the mix and the gross margin overall?
+
+Question_22:
+
+          So two quick ones. You originally guided the first-quarter gross margin up 40% to 50%, so was curious what came in better versus your expectations? Is it mix or was it the level of promotions lapping the level of promotions year over year? And then I have a follow-up.
+
+Question_23:
+
+          Understood. And so the outlook, and you mentioned this going forward, the outlook in the second quarter is predicated on recapturing both of those and then going on further in the year. It's really expectation that the signature categories out-comp more in the essential side?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/51_answers.txt

@@ -0,0 +1,123 @@
+Answer_1:
+
+          Overall, I think we're making really good progress against our key strategic initiatives that we've been talking about for a year now. The change we announced this week is to make sure that we elevate our focus on execution and really ensuring operational excellence throughout the organization. And that's why I'm so excited about John stepping into this new role to make sure that we complement the focus we've placed upon creating strategic clarity with a recommitment to operational execution.
+And I think the combination of those two elements is critical to continuing to drive traffic, make sure we delight the guests, see an improvement in our net promoter scores, and make sure that both in-store and online, we're continuing to see an acceleration in traffic and visits to our site.
+So I think we're making very good progress right now. I think that is showing up in the results we delivered this quarter. But we're not satisfied. And we know we've got more work to do to ensure that we do meet the needs of the guests every time they shop. And critically important in meeting those needs is to make sure that we provide a great in-store experience and dramatically improve our in-stock conditions, particularly about core essentials.
+So I think very good progress. I think this is an excellent quarter where the entire team performed well. But we know we've got more work to do, and we've got to make sure both in-store and online, we deliver a consistently great experience for the guest.
+
+Answer_2:
+
+          So on the comp guidance, we don't break out traffic and ticket. But I would tell you just from a business perspective, we are very focused on driving traffic over time. Ultimately, we have to bring people into our stores. We need to bring people to the site, onto mobile devices. And so that's a key driver for us for our sales as we continue to move forward.
+Related to the supply chain, there's -- the team has done a great job responding to the needs of the organization over time to develop more flexible ways to meet the needs of our guests and really fulfill on-demand shopping. I think we're just at a point now where we need to step back and build broader capabilities across the entirety of the supply chain as we continue to expand the way we want to serve our guests.
+So there is not one particular area of the Company or one particular part of the business that we are completely focused on. [Absent], I would tell you, as I said, and you heard from Brian, in stocks are a key priority. And then specifically, being sure day to day in every store we're in stock on essentials. That's a key priority for our guests. We hear it from them.
+It's a key focus for the team, and we have teams working on improving those in stocks across our essential categories today. And that will be a focus as we go forward.
+
+
+          Oliver, I can build on that because as we talk about improving our focus on operational and executional initiatives, I go back to some conversations we've had in the past. I absolutely believe we have the best team in retail. Our store operations -- Tina and her team do a sensational job.
+But one of the things that John will be focused on is ensuring we simplify the work. And we make it much easier for them to execute each day and take care of the guest. So we want to complement a very strong store leadership team that does a sensational job each and every day, executing store by store, by simplifying some of the work, by making sure that we push work upstream, and allow them to focus even more on the store experience and the service we provide our guest.
+
+
+          Thank you.
+
+Answer_3:
+
+          Matt, I would tell you that the improvements we are seeing is really driven by mix. And as we've talked about, we've invested heavily in ensuring we're on trend; we're bringing great quality to the guest; we're accentuating our position in key categories. We were really pleased during the quarter to see how well be connected with sub cats like swim. We've seen really strong performance in ready-to-wear, and most recently, a very positive response to the changes we've made in denim.
+So the improvements we are seeing in those categories are really driven by great quality, following the trend curves, bringing great style, and fashion to our guest. And it has not been driven by a reliance on pricing.
+
+Answer_4:
+
+          No. Matt, we're in a place where we have, we believe, just great, great assets across the supply chain. Great distribution centers, great upstream distribution centers, food distribution centers, fulfillment centers, and, of course, the stores.
+I think we've said over the past couple of years, our focus of our investment has been supply chain and technology in support of becoming an on-demand company. That will continue to be the case. We're going to continue to invest in technology and supply chain. But the physical asset side, we feel really, really good about.
+
+Answer_5:
+
+          It is. And it would be. And we are seeing a very positive start to back-to-school and back-to-college.
+
+
+          Thanks, Matt.
+
+Answer_6:
+
+          Morning.
+
+Answer_7:
+
+          Sure. Let me start with localization. And as I said, during the last couple of calls, this is still a very nascent effort for us. We're in one market, a handful of stores in Chicago. But we've really been focusing on a handful of areas where we recognize we need to change our assortment, change our presentation, be more relevant, and really recognize the needs and the demographics of these local markets.
+So there's a handful of categories I might lift up. One, craft beer. And really making sure that in a category like craft beer, we have locally relevant items. And we recognize that even in a market like Chicago, those need to be tailored neighborhood by neighborhood.
+So we've looked at specialty foods; we've looked at categories like craft beer. We've looked at categories like patio and grills. And recognizing that in the suburbs of Chicago, we can offer, and should have in store, large patio sets, five-burner grills.
+But for our stores located in more of the urban neighborhoods, of Chicago, we need bistro tables. And we need two-burner grills, because those guests are living in condos and apartments. They've got small patios, and we need to make sure we tailor our assortment and our presentation to recognize their needs and to make sure we're mode locally relevant.
+So we're certainly spending a lot of time looking at food. And as we think about the food reinvention, a lot of this is going to be driven by making sure we have locally relevant brands, those hometown favorites. And also in broader categories, like patio and furniture, making sure that we're matching up our assortment in-store with the needs of that local guest.
+So a lot of additional work for us to do, but we're really pleased with the progress. And I talked about a 1 to 2 point lift versus the test and control stores. That is a very important measure for us to continue to evaluate. And working with John and our merch team, we'll be looking to rapidly rollout the learning from Chicago into other relevant markets.
+From a digital standpoint, David, obviously, we continue to see really positive responses in some of our efforts like Cartwheel. And Cartwheel has now been downloaded over 18 million times. And every time I'm in stores, I run into guests that have their smartphone in their hand and they are looking for their offers from cartwheel.
+But we also recognize that Target is a brand that's talked about in social media, every day, thousands of times every day. So if you were to visit our headquarters here in Minneapolis, just down the hall from my office, we have what we call guest central.
+It's our guest command center where we're monitoring what people are talking about, what they are blogging about, how Target's being referenced in the news. And we're making sure we're very engaged with those bloggers and making sure that we are in the discussion. So it's a very important part of how we think about the brand and making sure that we incorporate social into our overall brand development initiatives.
+
+
+          Thank you, David.
+
+Answer_8:
+
+          Well, I think it starts, Scott, with the reaction we've seen from the guests to some of the changes we've made in signature categories. When I think about, in today's marketplace, apparel growing at 4% to 5%; the changes we've seen and the reaction we've seen from the guests to our home offering; the fact that within kids, toys growing this quarter at 12%.
+And while, again, still in the early stages, the reaction to some of the changes we are making in our food assortment; the reaction the guest is taking to Made to Matter; our wellness initiatives, gives me a tremendous amount of confidence that as we continue to bring great design, fashion, quality, and excitement to our signature categories, and combine that with the opportunity to reinvent food, to bring the right assortment that meets the needs of our guests. That to me is the magic to unlock sustainable sales growth at Target and make sure we're driving traffic to our stores, more visits to our site.
+And it gets back fundamentally, Scott, I believe we win. And we'll continue to grow by combining a great story experience, the convenience of allowing our guests to order online and pick up in our stores whenever they want, and also being able to ship directly to their homes and using our stores as flexible fulfillment centers to make sure that response is a quick one.
+So I'm very optimistic about the future. I think you are starting to see that embedded in the results, and the results in signature categories is very encouraging for us. We're getting great feedback from the guests.
+As I think about the third quarter, we expect Plaid to be a really exciting initiative, and the buzz that we are seeing already is really positive. So we've got work to do on food. But when we reinvent food and get the assortment right there and improve the presentation, I think that gives us all great confidence that we're going to continue to drive traffic to our stores. And that's going to convert to really solid and sustainable comps.
+
+Answer_9:
+
+          I think we can all drive ourselves crazy doing two-year, three-year, five-year stacks whatever you want. But in this case, I do think the two-year stack is important. We've continued to see our two-year stacks improve. If you do last year's Q4 against the previous Q4, the average there is about -- or the number there is about a [1/3]. So we expect to cycle path that this Q4.
+And we've seen putting our -- putting the applied guidance -- you guys can do a rough number around that. Putting that against last year's comp will be in acceleration of our two-year stack. And so we feel good about that. And I think to the points Brian just made, part of it is we need to continue to grow.
+We feel confident we're going to continue to grow and comp against whatever it is we delivered in the prior year, and we feel good about doing that. We feel great about our fourth-quarter plans. We're cognizant that that's an intensely competitive time of year. We'll be very promotional. We're not going to get beat on promotions, and we'll be in the game. And we feel really good about what we'll offer the guests in Q4.
+
+
+          Yes. And Scott, obviously, we'll update our guidance for the fourth quarter at a later date. But trust me, we are spending a tremendous amount of time evaluating our plans week by week in the fourth quarter. I spent time just yesterday with our team, going through our fourth-quarter plans, our merchandising plans, our marketing plans, how we're going to approach the key holiday periods.
+And, to me, it's all about making sure we've got the right content. We've got to have great product. We certainly know we need to make sure we're winning from a promotional standpoint. But then we've got to make sure we surround the guest with a great experience and really iconic marketing. And I think we're going to combine a great in-store with an online experience and be very competitive and well-prepared for the fourth quarter.
+
+Answer_10:
+
+          Thanks, Scott.
+
+Answer_11:
+
+          So Matt, I'm not going to go through the details of our plans. We'll kind of maintain that powder for the fourth quarter. But we are certainly looking at newness in electronics. We're looking at categories where we think we are uniquely positioned to win.
+So working very closely with our suppliers, to ensure that we have the right newness, that we're ready with the right presentation. I think there's a lot of exciting things in the pipeline. We certainly think, as we continue to focus on wellness, that wearable technology is a space where we can and will win.
+But we also recognize right now that many of those categories are waiting for new innovation. And we're working closely with our key suppliers to make sure that we are going to be bringing that innovation to the guest and featuring it throughout the fourth quarter.
+
+Answer_12:
+
+          I'll take the second one first, and then let Brian comment on the growth. I think on our supply chain for the digital channel, we actually have six dedicated fulfillment centers.
+And we think the combination of fulfillment centers with our existing regional distribution centers, and along with the stores, gives us all the capability we need. And then you'll see us continue to grow the store channel, our regional distribution channel, all three of those channels, as ways to fulfill, depending on the product and how quickly the guest wants it.
+
+
+          Yes. And Peter, I'll step back and just talk about some of the fundamentals. We've got to continue to make sure we build awareness. We've got to make sure that as our guest engages with us digitally, we make it really easy. We make it easy to find product, an easy checkout experience.
+We believe that Available-to-Promise, which will roll out this fall, will give our guest the confidence that they know where the product is and when it will arrive for them. Either in a store for them to pick up or being available directly to their home.
+So we are focused on making sure that we provide, not only a great in-store, but a great digital experience. And we've got to make sure that we continue to make our site easy to work with. And more and more that's the mobile interchange that we've got to make sure is easy for our guest to find product and check out.
+We want to give them the confidence that when they order, they know it's available to promise. And we're going to have it there for them when they need it. And to the point John made, we don't need to be building upstream DCs. We're going to continue to convert more of our stores and as we go into the fourth quarter, close to 450. That will act as flexible fulfillment centers to make sure that we can quickly and efficiently get product to the guest. So those fundamentals are critically important as we think about driving industry-leading growth.
+
+Answer_13:
+
+          Yes. So we're right on track with savings. We've got programs identified to deliver the entirety of the [$2 billion], the $1.5 billion in SG&A, plus the cost of goods savings. So we feel really good about that. We're on track for our commitment this year as well.
+One of the things we talked about when we first announced this, and we've talked about it in a great detail in the Company, is the stores are already productive. And if we're going to take hours out of the store, it will be because we eliminate work, or to the point Brian made earlier, move work upstream into the distribution centers. And so we're not focused on taking hours out of the store.
+We are focused on taking work out and we haven't -- we're in the process of working through that. That's a little bit longer lead process than some of the other things we've done. But we are very focused on, essentially, freeing up those hours in the store. And then we'll decide, do we need them for improved guest service or how we'll utilize them.
+But in fact, there's a couple areas where we have invested hours back into the store. As we put in the whole merchandising sets and as we put in manikins, we've realized the need for dedicated store team members who can merchandise those displays and make them look great all the time. So that's an area where we've invested back into the store.
+
+
+          Thanks.
+
+
+          All right, we have time for one more question this morning.
+
+Answer_14:
+
+          Yes. Good questions. On the credit side, the benefit, it was up, but not meaningful. And it was less than, I'd say, less than half a penny of improvement versus last year. So very, very small. We are pleased it was up given that the, as we said, payment rates continue to go up. And so we're seeing the portfolio continue to shrink. So clearly, a portion of where the gas dollars are going, at least from our perspective.
+SG&A through time, we'd expect to lever SG&A, go up, over the long term here, go up modestly, slower than sales growth. I think we've said we're going to continue to take expense out. But we also said that the majority of that expense will likely get reinvested. So I wouldn't count on big reductions in our SG&A over time. There will be places where we have to add back expense to meet the needs of our guests I just talked about in the stores. So modestly slower than sales growth over the long term would be what I'd say.
+
+
+          Well, great. Thank you. And for all of you, that concludes our second-quarter earnings conference call. And I really appreciate you joining us today, so thank you.
+
+
+
+
+
+
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/51_questions.txt

@@ -0,0 +1,65 @@
+Question_1:
+
+          Hi. Congratulations on a really solid quarter and all the traffic. Brian, as you've been so successful in this journey, as traffic has come back to the stores, just a bigger-picture question. How do you think your priorities have dynamically changed throughout the year?
+And where would you say Target is in terms of customers coming back to the store versus increasing customer spend? And, John, I just had a question related to the comp guidance as well.
+
+Question_2:
+
+          Thanks, Brian. And John, I just had a question on the comp guidance, would you expect this to be pretty broken out between traffic or ticket? Or do think it's going to be more traffic led?
+And as you do embark on the opportunity and supply chain, what are you highlighting as the lower hanging fruit in terms of timing? And I was just curious about the categories that you see the most opportunity for when you think about further advancing your supply chain?
+
+Question_3:
+
+          Thanks for taking my questions. John, congrats on your new role. And Kathy, it's nice to have you back in the retail sector. First, I was wondering to what extent you are using price to drive the 3x growth in signature categories. Can you comment on what the growth in gross profit dollars for those categories has been like?
+
+Question_4:
+
+          Okay. That's helpful. And then, secondly, your comments regarding the supply chain being stretched, I realize that the analysis is just starting or in the early days. But do you believe that there is a significant reinvestment required in the supply chain in terms of either DCs or [FCs] or something else?
+
+Question_5:
+
+          Okay. That's great news, and then if I could just sneak one more in. The early back-to-school strength and the marketing shift, is that fully embedded into the Q3 comp guide?
+
+Question_6:
+
+          Hi. Good morning.
+
+Question_7:
+
+          Wondering if you could give us a few more examples, concrete examples, of how your driving that localization success in Chicago, categories or items? And separately, if you could talk a little bit about digital approach outside of your own platform?
+So we've seen it and we've heard from you what you're doing and that's exciting and driving growth. But we've seen a little bit of your outreach to bloggers and how you're working with them. If you could talk about the full view of how you are thinking about digital outside of the Target headquarters, that would be helpful as well. Thank you.
+
+Question_8:
+
+          Hey, guys. Welcome, Kathy, and congratulations, John. Looking forward to working with you guys in your new capacity as we move forward. The stock, obviously, was up a lot. Earlier today it's kind of rolled over, and I think it's the sales line that people may be a little concerned about, the 1% to 2% guidance to the third quarter.
+But I would also look out over time -- SG&A saves obviously taper down. And so as you look out to 2016 and 2017, getting the sales line moving is going to be more important here. I know, Brian, you pointed to some things like the signature categories, but I was wondering what else gives you confidence?
+We actually have a lot of confidence because our focus groups are saying to us that people are really responding to what you guys are doing? But in your words what gives you the confidence we can see sales trend higher overtime?
+
+Question_9:
+
+          All right. That's perfect. And then maybe just -- I hate to be the short-term focus, but it's a question I get all the time. As we look at the fourth quarter, we are going to be going over a pretty significant comp from last year. How should we think about that?
+I mean, a lot of people look at stacks. Do you guys look at stacks? How do you think we should start framing the fourth quarter, maybe in a thought there?
+
+Question_10:
+
+          Perfect, guys. I'll yield. Those were great answers. I appreciate it.
+
+Question_11:
+
+          Hi. Yes. Congratulations both John and Kathy on the new roles. I was just wondering if we could focus just -- I know we've talked a lot about the signature categories. You've talked a lot about supply chain, but can we focus on -- and you've also talked about food -- can you focus a little bit on electronics? Continued weakness there.
+Clearly the industry itself is a little bit challenged, but a lot of consumer interest in new products in that category, especially as we go into the holiday season, this upcoming holiday season you're talking about the fourth quarter. Maybe dive a little bit into what you're doing there in that specific category to try to gain market share in what is a challenged category. Thank you.
+
+Question_12:
+
+          Hey, guys. Two quick ones. First, on the digital side, obviously impressive growth, 30%. I think the longer-term plan is closer to 40%. So curious, two things. One, what gets that channel growing faster the next couple of years?
+And related to that, a number of large retailers out there are opening up a dedicated eCommerce fulfillment centers. I don't believe you guys have those. Is that something that makes sense for Target as you think out over the next few years?
+
+Question_13:
+
+          Okay. That's helpful. And sorry, my bad, on that DC question, but thank you for that. And then quickly over to SG&A, I think you guys have outlined $1.5 billion over the next couple of years in savings, $500 million maybe coming this year. Where are you trending towards those savings? How are those savings kind of corporate versus in-store? I'm just curious how store level payroll dollars compare today versus, let's say, a year ago?
+
+Question_14:
+
+          Hi, thanks. Made it in again. Kathy, welcome. John, I can't let you get promoted without hitting you with the finance questions. So how much did credit help? You said credit, I think, was a benefit in the core of the profit share. How much did that help in the quarter?
+And linked to that, how should we think about SG&A dollar growth? It sounds like third quarter will be up [1 point to 2 points] with the comp. But it was flat in the second quarter. What's the normal run rate there now?
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/52_answers.txt

@@ -0,0 +1,109 @@
+Answer_1:
+
+          Well, Matt, I would tell you, we're feeling really good about the trends we're seeing, the reaction we're getting from the guests, certainly the growth in traffic for us is really encouraging. So we're seeing more Target guests come back to our stores and visit our sites. 
+And they're continuing to respond very positively to the work we've done in signature categories. So sitting here today, we're very confident about our position. 
+We think we're connecting with the consumer and our guest, and I feel fantastic about the plans we have in place for the fourth quarter. So while obviously still cautious, as we sit here early in November, we feel very good about the way the consumer and the guest is responding to our brand. And I feel as if we're really well-positioned for the fourth quarter. 
+
+Answer_2:
+
+          Let me talk about the owned brand investments we're making and then let Cathy talk through the Rx implications. As we've consistently talked about throughout the last year and year-and-a-half now, we think one of the things that differentiates Target is the value, the quality, the innovation we bring to our own brands. 
+So we're clearly looking to make sure we bring more value to our own brands. I talked about the number of handcrafted items we're going to have for the fourth quarter. 
+And we're being very surgical with those investments, but we're seeing a great reaction from the guest as we elevate the value we offer in our own brands. So we'll be very surgical, very selective, but we're certainly seeing a great return for the investments we're making. 
+
+
+          And Matt, good morning, this is Cathy. With regards to the pharmacy reimbursement pressure, as we said when we announced the transaction with CVS, that we lack scale and we knew that we were going to continue to see pressure here over time. 
+So what we're seeing in this quarter is in the range of 15 to 20 basis points of pressure in the quarter. And -- which is why we're excited to be partnering with CVS, because they'll be able to help with that scale. 
+
+Answer_3:
+
+          Right now we're still very focused on testing localization in Chicago. We are very pleased with the results. 
+And certainly a lot of localization is taking place in our food and beverage offerings. We're seeing the guests respond to that, and we're going to take the learning from Chicago and apply it to the 25 stores we're remodeling in Los Angeles. 
+So we'll continue to expand the learning, take it from Chicago to LA, but I am very pleased with the progress we're making. And we're partnering with John and the store and supply chain teams to make sure over time we can scale the learning from Chicago and Los Angeles to multiple markets around the country. 
+
+Answer_4:
+
+          We are consistently seeing those kinds of returns. 
+
+Answer_5:
+
+          I think the most important measure to look at is what's happening with online growth overall. And just in the last 24 months -- or 24 hours we saw the October e-commerce growth rates in the US, and it was up about 8.6%. 
+The outlook that NRF has for e-commerce growth in the fourth quarter is somewhere between 6% and 8%. So while our 20% growth rate is not in line with our expectations, it's still dramatically outperforming the industry. 
+And I think the most important measure we're looking at is the fact that over 80% of our guests start their shopping journey online, either at home on their desktop or with a mobile device. And that digitally influenced guest is coming into our stores more often. 
+So as we've talked about our strategy, our strategy is to make sure we allow our guests to shop anywhere anytime they want with Target. And what we're seeing right now is they're voting with their feet to spend more time in our stores. 
+They're downloading our Cartwheel app: 20 million downloads so far to date. So I think we're seeing an overall slowdown in digital growth across retail. 
+And we're really pleased that we continue to outpace the industry -- dramatically outpace the industry, but our digital efforts are driving more traffic into our stores and helping us grow our overall comps. So while there's been a slowdown broadly across the sector, we continue to outpace the industry, and that's our fundamental goal. 
+
+
+          Thank you. 
+
+Answer_6:
+
+          I think we're making some very good strides starting in apparel. And while 3% in Q3 was slightly less than the growth rate we saw in the second quarter, compared to many of our peers we recognize that we're continuing to build traffic and growth in an important apparel category. 
+So the work we've done with mannequins, with changing the in-store experience, clearly paying off. One of the changes that we've announced recently is the addition of 1,400 visual merchandiser's to make sure we combine the changes we're making with mannequins, and fixtures, and layouts with experts in store that can maintain that great in-store merchandising experience. 
+So that's a new venture for us, we're standing it up for the holidays, we expect that to continue to strengthen the in-store experience, and we know with our signature categories we're still at the very, very early stages of standing up our wellness position. But we feel like we're in an excellent position with baby and kids, feel very good about our performance in the third quarter with kids apparel. 
+Certainly toys has been a highlight throughout the year, and we feel as if we're well-positioned coming off of second and third quarter comps in toys that were up 12%. The reaction we've seen from the guests to our Star Wars assortment, where we've captured an industry-leading position and expect to be a destination during the holidays. 
+So while we still have much more work to do, we feel very good about the progress we're making in signature categories. And I think the addition of visual merchandiser's in store will help us maintain our merchandising appeal throughout the holidays. 
+
+Answer_7:
+
+          Scott, I'm glad you asked the question. I do think one of our highlights in Q3 was the improved performance in food. We've actually seen food comp acceleration throughout the year. 
+And while we haven't made major changes with fixtures and in-store decor, we've been very focused on assortment changes and bringing more natural, organic, local items into many of our categories. And we're seeing the guests react very favorably. 
+So, to me it's getting the basics right. And before we start making fixture changes and decor changes, it has to start with the right assortment and making sure we have the items, the brands, our guest is looking for when they shop food at Target. 
+So the acceleration you're seeing right now is driven by section by section getting the assortment right, bringing more appealing items to our guests, adding more natural, organic, gluten-free items that are on trend to those categories. We made some significant changes in yogurt in the third quarter and saw very, very positive responses; high single-digit growth rates in those categories. 
+So while we are not shouting about it, we're making steady progress in food. We'll learn a lot more in 25 stores in Los Angeles where you will see some changes in fixtures and decor. And as we learn, we'll continue to grow. 
+So I think we do have significant upside, but Scott, this is about making sure we get it right, and we're going to take a slow, steady approach, solid, consistent results every quarter. And continue to deliver what the guest is looking for from an assortment experience standpoint when they shop food at Target. 
+
+Answer_8:
+
+          Yes. Scott, we've looked at this very carefully. I know we've talked about it a number of times. We feel very confident that the CapEx budgets we've had in place will be very adequate over time to make the changes we need to make from a technology standpoint, a supply-chain standpoint, continue to refresh our stores, and maintain our focus on maintenance investments. 
+So sitting here, Cathy and I have spent a lot of time recently, obviously John's been a great steward of our CapEx spending. And we feel very comfortable that our current spending levels will allow us to modernize the organization, enhance technology, improve supply chain, and make sure along the way we're continuing to enhance the in-store experience and match that up with a great online experience for our guests. 
+
+
+          I would offer just real quickly to add to that, because we have pressure tested this one ourselves a lot, we have not -- Target has not under-invested over the years. And I think that bodes well with the state of where you find our stores as well as our technology and supply chain investments we need. So I feel very good about where we are, and with that level of investment we've been pretty consistent. 
+
+Answer_9:
+
+          So I'll jump in and take that. I think from a tracking perspective, what we said, your point, $1.5 billion of SG&A, $0.5 billion of margin, and we would deliver in 2015 about $0.5 billion of that. 
+We're running a little bit ahead of that pace. And both in the cost of goods and in the SG&A space, both are running perhaps a little bit ahead of what we envisioned going into the year. So we feel really good about that. 
+I think stepping back and tying this back to Scott's question, the other thing we said at the time was we're taking $2 billion out of the P&L but we didn't expect EBITDA margin expansion. And our view was that we would need this to fuel the investments, exactly some of the expense investments that perhaps Scott was referring to, and this would provide the capacity to do that. 
+And that is in fact what we've seen. We've seen great expense discipline across the corporation, but where we needed to invest, we have had the capacity to do that. 
+
+Answer_10:
+
+          We will take out $600 million this year. And then part of next year's will be annualization of that, and part of it will be incremental. 
+
+Answer_11:
+
+          We don't see any material change in the marketplace. Again, we've talked a lot in the past about making sure we're investing to have the best retail team. 
+And we look at this very surgically year after year, market by market, we think we're in a great position and we think we're hiring terrific talent. And we're excited that we've got a great team in place as we get ready for the holidays. 
+
+Answer_12:
+
+          Greg, this is Cathy. I'll take the first part of it. To answer your question, yes, we expect it to be essentially flat and it will be pretty much offset. 
+We'll have pluses and minuses, so the savings we're getting we will continue to reinvest as we had planned. John will answer the 40% digital shipment. 
+
+
+          Sure, Greg. 40% this quarter, and it will peak a little bit higher than that actually, typically running in more in the 20% to 25% range. But as we peak, this is a great way for us to utilize our store assets. 
+The labor model, what happens here is actually it's quite efficient because we have dedicated teams in those stores who do the picking, do the packing, I mean we're just able to utilize them more efficiently. And so while there is more store labor that we are using, the offset clearly comes in our shipping expense, because we're much closer to the guest we are shipping to and they aren't on the same P&L line, but it's an outstanding trait for us. 
+
+
+          Greg, I think it's important as you tie out the math on the ship from store. Last year at this time we had just over 120 stores where we were shipping from store. As we sit here today, we're up to 462. So we've expanded the base. 
+We're going to leverage and sweat the assets I think much more effectively. But importantly, that enhanced base allows us to deliver to our guests in a much shorter timeframe. So we would expect that to grow during the holidays. 
+We've certainly ramped up for it. And we think that's going to provide a much better shopping experience and allow us to deliver product to our guests in a much shorter period of time. 
+
+Answer_13:
+
+          I'll answer briefly and then anyone can chime in. We're really not seeing an impact on it, in our product cost or in -- obviously in our margins. So it's really been kind of a non-event for us. 
+
+
+          Remember, Greg, with many of those items, those are long lead time items. So we'll certainly be watching that over time, but as we sit here today many of those orders and POs were placed many, many months ago. 
+So we'll continue to monitor that over time, but we certainly like our position with our own brands as we enter the holidays, and that's an important way that we differentiate. Operator, it looks like we've got time for one more call. 
+
+Answer_14:
+
+          Bob, first on the A&A side, again, we think the guest is responding really well to some of the changes we've made with our own brand assortment. And the investments that we talked about today we've been consistently talking about for over a year now. 
+Making sure that we're reinvesting in quality and innovation, in style, making sure that we deliver that expect more pay less brand promise. So the guest is reacting really, really well to that. 
+And we're going to continue to make sure that we deliver great value in our own brands. So it shouldn't be a new phenomenon. It's something that we've been very clear and transparent about. 
+And we think it's paying off with increased traffic and growth in those core signature categories. So looks like we've run out of time for today. 
+I do appreciate everyone calling in. And that will conclude our third-quarter earnings call. So thanks, everyone, for joining us. 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/52_questions.txt

@@ -0,0 +1,67 @@
+Question_1:
+
+          First, Brian, I'm hoping that we can get a little bit of the pulse of the consumer from you. Clearly there's been some weather impact in September and October. 
+But we're hearing negative comments about November from a number of retailers, so it feels like there's something else happening either from a macro or maybe a competitive standpoint. I'd love to get your sense for what you're hearing from your customers, your guests. 
+
+Question_2:
+
+          That's great to hear. Shifting gears to gross margins, I'm wondering if you can call out the impact of the reimbursement pressure in healthcare and any sense for the total impact or run rate impact following the closure of your deal with CVS, how that could help you next year? 
+And then secondly on gross margin, you did call out in the press release private brand investments. And I'm wondering if you could dimensionalize the potential size of that over the next few years? Thanks. 
+
+Question_3:
+
+          Wonder if you could give us any extra color or update on the localization work in Chicago? 
+
+Question_4:
+
+          So last time you had updated us I think you said 100 to 200 basis point comp lift. Does the very pleased mean we're continuing to see that? 
+
+Question_5:
+
+          Got it. And then quick on the dot-com side of the business, there was some deceleration, still good growth in that line. Can you talk about any other metrics that help us understand the shift? 
+Is it time spent on the site, capabilities? What is driving the difference in the growth rate? And it sounds like a growth rate you're comfortable with for next quarter. 
+
+Question_6:
+
+          It's encouraging to hear that a lot of the investments, especially in the signature categories, are panning out well for you. In your merchandising strategy specifically, where do you think you still have the most work to do, and what can we expect year over year when we see those categories for holiday? 
+
+Question_7:
+
+          I wanted to get back into the food discussion, if we could. I think you're testing stuff in Chicago, you're going to roll that into LA. 
+Brian, maybe a lot of people don't notice, maybe they do, but you had a good experience back when you were at Safeway and then onto Sam's. I think you talked about 200 basis points you're initially seeing, but what can we expect out of the Company? 
+I think Safeway saw more than that as they brought in some refurbishments. And when can we expect to see more from Target as far as refreshing the decor and maybe doing a fuller roll out? 
+And is 200 basis points a good expectation? It seems to me it could actually be higher than that as you refine your lift, but wanted to get some more details there. 
+
+Question_8:
+
+          Obviously key, and I think Cathy said you're measuring -- one of the big things you look at is frequency, and this is obviously core to that. So we look forward to seeing more. 
+But my follow-up question is on the investment side. We get it a lot, whether it be e-commerce, whether it be on the food and the logistics. Can you talk us through why there won't be a massive ramp up in investment as we go out the next couple years and that you have enough money in the CapEx and the SG&A to handle what the Company needs to do? 
+
+Question_9:
+
+          I'd like to ask a two-part question. The first relates to the cost cutting initiatives that you discussed at your analyst meeting earlier in the year. 
+You spoke about $1.5 billion of SG&A and $0.5 billion on cost of goods over two years. If you could talk about the run rate that you're at now against those goals? 
+I guess another twist on Scott's question, the degree to which you've had investments insight that would offset some of those. I think that was also part of the plan that you set forth. 
+
+Question_10:
+
+          If I could ask a quick follow-up, when you talk about $0.5 billion this year, is that delivered -- I noticed it's not been delivered to the bottom line because there are some offsets, but is that annualized run rate achieved or is that actual cost cuts that would have come out on the gross basis against your cost base offset by some of the investments? 
+
+Question_11:
+
+          And then a very quick follow up, on wages, obviously Walmart made an incremental announcement since your last call. Any sense as to whether this issue is brewing up organically in the field, as you think about hiring and you think about intrinsic wage pressure in the marketplace and how you're thinking about that relative to your plan? 
+
+Question_12:
+
+          I guess my two questions are a bit of a follow up. One on the last one, if you look at the fourth-quarter guidance, if I'm getting this right SG&A dollars are flattish. 
+And is that basically that cost out with the reinvestment going in? And then the nature of that question is really, John, you mentioned 40% of digital you thought would be ship from store in the fourth quarter. What has it been running and what does that do to the labor model? 
+
+Question_13:
+
+          That's helpful. If I could follow up, I think earlier you talked about private label penetration a little bit. Could you talk about how the stronger dollar or falling raw material costs or lower fuel costs could be impacting gross margin today differently than you would have thought a few quarters ago? 
+
+Question_14:
+
+          Just two quick questions. First one is on the apparel performance, you talked a little bit about margin pressure in private label and exclusive. Was that new to the third quarter, and how do you see that playing out in the fourth quarter? 
+Then the second question that I have is, on the e-commerce business, can you give us an update on the subscription offerings and how that's going from a fulfillment perspective as well? 
+

exam/part2_problems2n3/Problem_2_3_Sample_QandA/53_answers.txt

@@ -0,0 +1,70 @@
+Answer_1:
+
+          We can now. 
+
+Answer_2:
+
+          Well, it's still very early and we'll be tracking this carefully over the next few months. John Mulligan was actually down in the Charlotte market just a few weeks ago, where we've  rebranded some of the very first CVS pharmacies inside of Target.  So John, why don't I let you share some of your impressions? 
+
+
+          Yes, I think overall, I don't think the rebranding will be a significant disruption for the store or the technology changes that are going to go on. As we walk the store, it looked fantastic.  The CVS brand looks great. I think they've done a great job, between our team and theirs, tying it into the total Target store environment. When we did this, we spoke a lot about the tools that CVS would bring, not only to our guests, but to our teams. The teams were certainly excited about the tools that CVS is bringing to them to help them do their job, so that they can focus more fully on guest service.  So we're very excited about that.  And we're excited to see, like Brian said, as we go along later in the year, we'll see more marketing to talk about the relationship of the two companies and also see the reaction of our guests as those capabilities are made more front and center for them, as well. 
+
+
+          I'd only add, we've been working for months and months now with our colleagues at CVS to make sure this is a very smooth transition.  And the plans we have in place will minimize the impact on the guest.  So we're very excited about what this brings to Target, what it brings to our guests, and to our shareholders, and expect it to be a very seamless transition over the next six months. 
+
+
+          Thank you. 
+
+Answer_3:
+
+          Why don't I start by talking about the promotional environment?  And we approach every year recognizing that the fourth quarter, this holiday season, is a very important time of the year for us, and it's going to be a very promotional environment.  And as we sit here today, we really believe our playbook that we rolled out during the holiday drove traffic to our stores, drove traffic to our site, allowed us to accelerate our comp performance.  And remember, we were comping a very strong Q4 from 2014.  So we felt very good about the effectiveness of our promotions. They were broad, they were very simple, and they worked both in store and online.  So we feel great about the performance during the holiday, where our signature categories performed well. We've worked with Nielsen and NPD to look at market share performance and clearly recognize that we gained market share as a by-product of our playbook in the fourth quarter.  So feel very good about our approach.  
+But to your question about the future, we're always stepping back and analyzing promotional effectiveness, looking back at our playbook.  And as we plan for next year, we'll continue to enhance and refine and make sure that we have very broad, very simple and very effective offers that continue to drive traffic and profitably grow our sales. John, do you want to talk about the impact of in-stocks? 
+
+
+          Yes, I think we certainly can analyze, triangulate around the sales impact of in-stocks, but that would be providing you very rough estimates. What I think is much more important when you talk about essential categories, ultimately this is about the guests trusting that you will have the merchandise they want when they come in our stores. If a new mom takes her baby out in 10-degree weather for diapers and formula, you better have diapers and formula in your store.  And so really, it's about the trust that they have in the Target brand to always deliver wherever and whenever they want.  And over time, there is no doubt in our minds that will drive sales growth for the long term. 
+
+
+          Thank you, Michael. 
+
+Answer_4:
+
+          Good morning. 
+
+Answer_5:
+
+          I'll start out, and then I'll let Cathy and John also build on it.  But as we talked about last year, we've  had a very clear multi-year plan. We targeted over $2 billion of savings.  And in 2015, we've made very good progress against that plan. We're on or ahead of all of the key metrics that we're tracking and we expect that to continue as we go forward. 
+So John and Cathy are working across the organization to make sure that those initiatives stay in place.  And as John continues to build his team and we bring people like [Anu] Gupta on board to focus on operational excellence, we expect to find even greater opportunities for further improvement.  So I think we're well positioned today. I feel very good about the progress we've made to drive productivity across the organization, and you should expect that to continue in 2016 and beyond. 
+
+
+          I'll just add on a little bit. With regards to our performance with SG&A, the beauty of what we're seeing with the plan we laid out last year is we're delivering upon it, but we're also recognizing how we can reinvest back in the business on the priorities that matter to our guests.  And so if you think about our investment in visual merchandise leaders, that's a great example. 1,400 stores now have someone who is an expert at helping to showcase the categories that matter most to our guests.  And so we're seeing ability, as we save on one line, we can invest in other areas in our business.  
+And you had asked about wage pressure. I'm going to just put a plug in. We believe in having the best team in retail.  And that has always been a differentiator for Target, and we believe more today than ever that is going to be a differentiator is our wonderful team member engagement with our guests every single day, any way they interact with them.  So we're going to be competitive in wage. We always assess it market by market, because we believe in fielding that best team in retail. 
+
+Answer_6:
+
+          Yes.  So Greg, thank you. First off, I'm going to put a plug in to say we look forward to seeing you next week, because we'll obviously unpack a little bit more of it then.  But with regards to the share repurchase comment, in our guidance we did assume a consistent level of share repurchases, like we've been talking. However, we're also ending the year with a pretty heavy cash position, because we closed the transaction late in December.  And so you'll see us provide additional color into that.  But suffice it to say, it will be at the level of this year or higher, and we've included that in our EPS guidance of $5.20 to $5.40. 
+
+Answer_7:
+
+          Yes, so as we've said, it obviously was an impact on sales, but very little on the aggregate EBITDA line,  which is what we've said longer term. 
+
+Answer_8:
+
+          Yes. 
+
+
+          Thanks, Greg. 
+
+Answer_9:
+
+          Sean, as we think about our performance in the fourth quarter, it played out pretty much as expected. We know the fourth quarter is going to be very promotional, very competitive. We certainly saw the guests respond very positively to our offers and that drove great traffic. It allowed us to build market share in our signature categories, and I think it positioned us well for 2016.  So as we sit here, there's a lot of variables that go into building our plans for a quarter like the fourth quarter, but we're very pleased with the way our plans drove traffic to our stores, visits to our  site, allowed us to accelerate comps on top of a very strong quarter last year.  And we saw very broad increases across many of our signature categories, as we reported.  So I think our plans were in line with our expectation for the quarter. 
+
+Answer_10:
+
+          Sean, again, a number of puts and takes as we look at the impact of changes in currency and cost of goods, but it's all baked into our outlook for next year.  And I think we approach 2016 with a lot of confidence that we've got great plans in place, terrific momentum.  And as you'll see next week at the conference, the team's done a terrific job in building some exciting new brands that we'll showcase next week and we're already seeing some really positive responses from our guests to our new Kids line, Pillow Fort.  So we're excited about 2016 and we look forward to seeing you next week. With that, Operator, we've got time for one last call today. 
+
+Answer_11:
+
+          We're going to spend a lot more time unpacking this next week, but we recognize that today, our Target guests interfaces with the brand in a number of different ways. Sometimes they are in our stores, sometimes they're shopping online. We certainly heard many times, because of some of the proprietary items that we offered during the fourth quarter, they were shopping online, but as John referenced, quickly coming to our stores to pick up those items.  So we felt really good about the way the guests responded to our offers during the fourth quarter.  And a great combination of in-store traffic, more guests than ever before clicking and collecting items in our store, and then the fact that we were able to leverage our stores, this year over 460, where we were shipping from stores to our guests' homes, that overall package came together really effectively throughout the holiday.  So we feel as if we had a winning strategy in the holidays. It drove great comps on top of a very strong performance last year.  
+And you and many of the others that are on the call have asked me repeatedly throughout 2015, would we be able to comp the 3.8% increase in 2014? Well, hopefully, we answered that question. We answered it with strong momentum, and we were able to see both strong performance in our stores and we delivered industry leading performance online.  So we feel really good about the way we're exiting Q4 and well positioned for 2016 and beyond.  
+So we're looking forward to seeing all of you next week in New York and thanks for your patience this morning. I know we started a few minutes late, but hopefully it was worth your time, and we look forward to seeing you again next Wednesday.  So thank you. 
+