Industrial Sentiment Survey July 2017

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IF IT’S CORBIN, IT’S ACTIONABLE

2Q17 Earnings Primer Industrial Sentiment Survey July 20, 2017 CORBINADVISORS.COM

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Inside The Buy-side® Industrial Sentiment Survey

Issue Date: July 20, 2017

For over a decade, we have surveyed global investors and analysts on the equity markets, world economies and business climate. We share our research broadly with corporate executives, investor relations (IR) professionals and the financial community.

Survey scope: 28 investors and analysts globally; buyside firms manage $914B in assets and have $133B invested in Industrials

Market Performance 1

2Q17

YTD

S&P 500

2.6%

8.3%

S&P Industrial

2.3%

9.8%

1

As of 7’12’17

Survey timeframe: Jun. 19 – Jul. 12, 2017

Role

Sector Focus

Region 14%

18% 39% 61% 82%

Buy Side

Sell Side

Industrials

Generalist

CORBIN ADVISORS

86%

N.A.

Europe

2

Word Cloud: Frequency Of Occurrence

CORBIN ADVISORS

3

Investors Expect Strong 2Q17 Earnings Performance; Major Shifts In Sub-sector Views Identified #1

From Spring To Summer: Economic Trends, Elevated Management Tone Drive Expectations For Strong Industrial KPIs

 Following the most upbeat sentiment last quarter since survey inception,1 95% expect 2Q17 industrial earnings to meet or

beat consensus, with 75% expecting sequential improvement  Approximately 80% anticipate continued top- and bottom-line increases, consistent with last quarter’s findings; cash flow

and margins expectations spike to all-time high levels2  Management tone characterized as increasingly positive; those classifying executive messaging as neutral to bullish or

bullish increases to 88% from 84% last quarter  Nearly 60% describe their sentiment toward industrials as neutral to bullish or bullish, a slight increase QoQ

#2

Is It Only Down From Here For Industrials? Most Investors Believe We Are Mid- or Mid-to-Late Cycle

 54% believe we are Mid to Mid-to-Late in the Industrial cycle, with the same number classifying the sector as overvalued, an

increase from 40% last quarter  Only 35% expect U.S. GDP to improve over the next six months, decreasing more than double from last quarter; 53%

expect modest industrial organic growth of 2.0% to 2.5% in 2017  Those expecting the U.S. economy to worsen over the next six months increases to 17% from 13% last quarter with

outsized pessimism expressed toward Oil & Gas; any positive views out of earnings could be an accelerator  Long-cycle products expected to accelerate, while short-cycle products and services increasingly projected to stay the same

#3

D.C. Gridlock Weighs On Sentiment; Deterioration In Hopes For Legislation Success Start To Weigh On Investor Views

 Despite the majority of Trump’s policy proposals perceived to be positive for the U.S. economy, all reforms see significantly

less likelihood of passing in 2017  46% confirm D.C. gridlock is impacting their investment decisions, with 45% noting anticipated tax reform is not currently

priced into valuations  Primary concerns include: 1) D.C. dysfunction; 2) valuations; 3) geopolitical volatility; and 4) oil prices 1 2

Jun. 2015 Since Dec. 2015

CORBIN ADVISORS

4

Coming Off The Most Bullish Earnings Sentiment Since Survey Inception, Near-term Expectations Remain Near Peak Levels

Expectations Regarding 2Q Earnings Performance Relative To Consensus

Jun '16 Sep '16 Dec '16 Mar '17 Jun '17

48% 43%

63% 58% 52% 50% 48% 34%

29% 21% 16%

21% 8%

Better Than

In Line

4% 5%

Worse Than

95% Expect In Line to Better

75% Expect sequential

Than consensus results

improvement

CORBIN ADVISORS

5

Expectations For KPIs At Or Near All-time Highs As Operating Margins and Cash Flow See Significant Improvement Revenue

84%

80% 80%

30%

45%

37%

41% 15%

Improving

35%

25% 22% 10%

5%

Staying the Same

EPS Growth 79%

46%

39%

36% 17%

10%

19%

25%

8%

Worsening

Improving

Cash Flow

8%

Staying the Same

4%

Worsening

Operating Margins 71%

71% 58% 38%

48% 45%

44% 36% 36% 25% 4%

Improving

Staying the Same

23%25%

19% 16%

36% 25%

Improving

Dec '16

31%

39%

8%

4%

Worsening

Sep '16

48%

46%

Mar '17

CORBIN ADVISORS

Staying the Same

4%

Worsening

Jun '17

6

Commentary On Earnings Expectations Vs. Consensus Better Than

In Line

“Short cycle trends continue to improve.” Buy Side,

“Higher industrial activity but expectations are higher.” Buy

Industrials, N.A.

Side, Industrials, N.A.

“CRB commodity index/unemployed ratio means economy is on sure footing, ABI index up for 39 months in a row, Restaurant Productivity Index (RPI) up for 89 months in a row.” Buy Side, Industrials, N.A.

“Better demand across most industrial end markets.” Buy

“Home price appreciation, domestic steel activity improving (due to tariffs), restructuring largely completed by many companies undertaking such, A&D activity ramping, strengthening sentiment from equipment providers and energy didn’t weaken until quarter end.” Buy Side, Industrials, N.A.

Side, Industrials, N.A.

“Expect better top-line but some cautiousness on margins.”

Buy Side, Industrials, N.A.

“Top-line.” Buy Side, Industrials, N.A. “Discussions with end market customers.” Sell Side, Industrials, N.A.

“Lower jet fuel costs, strong demand and higher average ticket prices.” Sell Side, Industrials, N.A.

“Company commentary about improving momentum.

Seems to be led by Europe with many groups saying U.S. currently flat.” Sell Side, Industrials, Europe

“Incremental margins.” Sell Side, Industrials, N.A.

Worse Than

“Resurgence in global capital spending, particularly in N.A.”

“Valuation, PMIs, commodity prices.” Sell Side, Generalist,

Sell Side, Industrials, N.A.

Europe

“There was a lot of uncertainty around what the new administration was going to do and that caused some freezing of plans that should be thawing now.” Sell Side, Industrials, N.A.

CORBIN ADVISORS

7

Perceived Executive Tone Registers Highest Positivity Level Since Survey Inception‌Investor Sentiment Closely Follows Suit

Investor Sentiment

24%

17%

Management Tone 59%

12%

19%

88%

Bullish

32%

42%

Neutral to Bullish Neutral

72%

Neutral to Bearish

69%

Bearish

24%

20% Mar '17

20%

17%

12%

4%

4%

8% 4%

Jun '17

Mar '17

Jun '17

CORBIN ADVISORS

8

Long-cycle Products Expected To Accelerate, While Short-cycle Products And Services Increasingly Are Projected To Stay The Same

Short-cycle Products

30%

4% 7% 7%

5%

Long-cycle Products

5% 29%

15%

10%

Services

5%

14%

30%

29%

33% 30%

4% 35% 55%

40%

75%

35%

72%

71% 52%

57% 52%

63%

62%

55%

50%

45%

35% 11%

20%

14%

Sep '16 Dec '16 Mar '17 Jun '17

Strongly Accelerate

13%

3% Sep '16 Dec '16 Mar '17 Jun '17

Accelerate Somewhat

Remain the Same

CORBIN ADVISORS

14%

4%

10%

Sep '16 Dec '16 Mar '17 Jun '17

Decelerate Somewhat

Strongly Decelerate

9

Industrials Generally Viewed As More Overvalued Than The Overall Market With Slight Uptick In Undervalued Views

Undervalued U.S. Industrials Equity Valuation Classification

“A long view.” Sell Side, Industrials, N.A.

Fairly Valued “Improved organic growth can really move expectations up.”

Dec '16 12%

47%

Mar '17 12%

41%

48%

40%

Buy Side, Industrials, N.A.

“Original expectations for structural tax reform, U.S. infrastructure modernization and increased defense spending have been largely washed out of valuations and surprisingly replaced by private sector return to capital spending to drive organic growth.” Sell Side, Industrials, N.A.

Overvalued Jun '17

17%

29%

54%

“The market in general is fully valued and some of those spaces are the worst.” Buy Side, Generalist, N.A. Under

Fairly

Over

“They've come down recently but quality is still at a premium.”

Buy Side, Industrials, N.A.

CORBIN ADVISORS

10

Most Investors Believe We Are Mid- to Mid-to-Late In The Industrial Cycle Early-to-Mid “After two-plus years of negative organic growth, most industrial economies are still running below mid-cycle.” Buy Side, Industrials, N.A.

Industrial Cycle Views

“Investment cycle for automation is just beginning and driving capex demand.” Sell Side, Industrials, N.A.

Mid

29% 25%

“It’s been a shallow industrial recession, though two years ago, we were probably mid- to late, then we pulled back. For a lot of companies, they were down 5%-10% and now they’re up.” Buy Side,

25%

Industrials, N.A.

17%

Mid-to-Late “When commercial construction is strong and states and municipalities are bullish, you are getting closer to the end.” Buy Side, Industrials, N.A. “Tight capacity utilization rates when you consider the operating of chemical facilities.” Buy Side, Industrials, N.A.

4%

“Although short-cycle trends have improved, I believe that fixed capital investment is later in the cycle.” Buy Side, Industrials, N.A.

Early

Early-toMid

Mid

Mid-toLate

Late

Late “Long bull market; consumer running out of steam.” Sell Side, Industrials, N.A.

“10 years since the start of the last recession and tighter monetary policy.” Sell Side, Industrials, N.A. CORBIN ADVISORS

11

Investing Trends Indicate Some Concern

How Would You Describe Your Recent Activity In Industrials?

54% Sep '16 Dec '16* Mar '17

41% 29% 23% 19%

18% 8%

Jun '17 Net Buyer

38%36%

33%32%

0%

9%

Net Seller

18%

19%20%

Holding

Rotating

Net Buying

Holding

Rotating

“We believe the sector is undervalued relative to others, which is why we've seen plenty of M&A activity over the past year.” Buy Side, Generalist, N.A.

“The market is fairly valued.” Buy

“Rotating out of short-cycle, economically-sensitive names to more stable, self-help companies with better valuations.” Buy Side, Industrials, N.A.

“The best industrial companies are the best companies, period!” Sell Side,

Side, Industrials, N.A.

“The depositors make the asset mix allocation.” Buy Side, Industrials, N.A.

“We are looking for misunderstood world-class industrials that are trading below their all-time highs and at a discount to their historical relative valuation.” Sell Side, Industrials, N.A.

Industrials, N.A.

*Dec ‘16 total does not equal 100% due to 3% “Liquidating” not displayed on chart CORBIN ADVISORS

12

Despite Heightened Revenue Expectations This Quarter, Investors Anticipate Relatively Modest GDP Growth In 2017 For The Economy And Industrials

What Are Your Predictions For 2017 U.S. GDP Growth?

Top Concerns 37%

37%

47% Dysfunction in D.C. 29% Valuations 11%

11%

25% Geopolitical environment

4% 1.5%

2.0%

2.5%

3.0%

Do Not Focus On GDP

14% Oil prices

53% Expect Industrials to achieve between 2.0% and 3.0% organic growth in 2017

CORBIN ADVISORS

13

Commentary On Top Concerns

Buy Side

Sell Side

“1) Dysfunctional Congress & President; 2) Fed withdrawing support for the markets; 3) Low capacity utilization.”

“1) Political gridlock; 2) Oil & Gas retrenchment; 3) Valuations.”

“1) Global economy; 2) Oil prices; 3) North Korea.”

“1) Political ineptitude; 2) Geopolitical issues like terrorism; 3) The USD.”

“1) No activity from Congress.”

“1) Valuation; 2) M&A; 3) Slowing auto sector.”

“1) Valuation; 2) China; 3) Trump.”

“1) Washington; 2) Valuation.”

“1) Black swans; 2) Plummeting hydrocarbon prices; 3) The absence of statesmanship in all branches of government.”

“1) Commodities and impact to capex; 2) U.S. policy inaction; 3) Global political environment.”

“1) U.S. administration; 2) Geopolitical tensions; 3) Peaking consumer confidence and PMIs.”*

“1) Panic from novice investors; 2) Stupid strategy based on academics who never made money; 3) North Korea madness.”

“1) Legislative gridlock; 2) Executive branch irrationality; 3) Global political instability.”

“1) Interest rates; 2) PMIs; 3) Valuations.”

“1) Imported deflation; 2) Yield curve inversion; 3) Geopolitical.”

“1) Oil; 2) Valuations; 3) Inventories.”

“1) Industrial confidence; 2) Valuations.”* “1) Assets in ETFs now exceeds assets in hedge funds; 2) Over-mature equity rally; 3) War in the Middle East.”

* Europe-based CORBIN ADVISORS

14

While Europe Sees Continued Optimism, U.S. And India See Sharp Pullbacks In Bullish Sentiment Expectations For The Following Economies Over The Next Six Months

Eurozone

68%

27%

5%

+12 pts

+1 pt

U.S.

48%

35%

17%

-32 pts

+13 pts

Southeast Asia

45%

55% -8 pts

+3 pts

Brazil

35%

48%

17%

-17pts

China

-3 pts 30%

57%

13%

+14pts

India

-11 pts 32%

63%

5%

-35 pts

Japan

+5 pts 32%

50%

18%

+11pts

LatAm (Ex Brazil)

+14 pts 27%

55%

18%

+2 pts

Mexico

+10 pts

9%

68%

23%

-11 pts

-29 pts

Improving

Staying The Same CORBIN ADVISORS

Worsening 15

Some Outlooks For Macro Drivers See Significant Cracks; Pressure Mounts Against Oil & Gas And Non-Resi Constr.

Expectations Over the Next Six Months

Global Capex

54%

33%

13% +3 pts

-11 pts

Housing/Resi. Const.

43%

43%

14% +9 pts

-2 pts

U.S. GDP

35%

61%

4% 0 pts

-37 pts

Oil & Gas Markets

29%

38%

33% +33 pts

-41 pts

Global

Trade*

29%

54%

17% NA

NA

Non-Resi Const.

26%

65%

9% +9 pts

-29 pts

Global PMI

26%

48%

26% -9 pts

-4 pts

FX Headwinds Company Input Costs Geopolitical

Volatility*

21% +21 pts 12% +2 pts 4%

67%

-4 pts 50%

38% -27 pts

63%

33% NA

NA *New measure

12%

Improving

Staying The Same CORBIN ADVISORS

Worsening 16

Auto Continues To Stall, While Agriculture Sees Least Negative Sentiment In Two Years

Predicted To Grow Faster Than GDP 47%

Machinery

Predicted To Grow Slower Than GDP

65% 74% 65%

Defense

Materials

Resi. Constr.

44% 53%

Non-resi Constr.

Comm. Aero.

53% 53%

Transportation

Ind. Equip. & Comp.

Agriculture

50% 17%

Non-Resi Const.

Resi. Const.

Water

41% 37%

Mar '17

Agriculture

47%

24%

Water

61%

58%

21%

Metals & Mining

58% 56%

Building Products

68% 76%

Automotive

Chemicals

Jun '17

5%

24% 16% 21%

11% 18% 56%

18% 23% 16% 12%

38% 68%

12% Mar '17

Agriculture, Water And Machinery See Biggest Jump In Bullish Sentiment

35%

Jun '17

Auto Sees Most Bearish Sentiment While Agriculture Finally Starts To Germinate

CORBIN ADVISORS

17

Stumped Trump: All Policies See Harsh Expectations From Investors Impactful of the Following on the U.S. Economy Likelihood Of Passage In 2017 U.S. Corporate Tax Cut

90%

5% 5% 32%

58 pts

45%

41 pts

5% 55%

19 pts

4% 41%

35 pts

23%

57 pts

52%

18 pts

10%

28 pts

5%

24 pts

-10 pts Repatriation

77%

23%

-4 pts Infrastructure Expansion Program

76%

19%

-3 pts U.S. Personal Tax Cut

73%

23%

-9 pts Immediate Depreciation Of Capex

56%

36%

8%

-23 pts Large Defense Spend Increase

52%

48%

+4 pts Border Adjustment Tax

48%

23%

29%

-21 pts Interest Non-deductibility

42%

37%

21%

-24 pts Healthcare Bill *

41%

50%

9%

33%

NA Positive

Neutral

Negative

*New measure CORBIN ADVISORS

18

Concerns With Washington Loom Large

Level of Concern Regarding D.C. Dysfunction

46%

Confirm D.C. dysfunction is impacting investment decisions

“Makes longer-term views even more difficult.” Buy Side, Industrials, N.A.

“It is, on the margin, influencing how we position within more economically- and policy-sensitive sectors.” Buy Side, Industrials, N.A.

50%

55%

“Creates uncertainty; every investor's biggest fear.”

Concerned

Sell Side, Industrials, N.A.

Somewhat

“Moderating U.S. bullishness.” Buy Side, Industrials,

Not At All

N.A.

29% 26% 21%

15% General Market

1

Industrials

“Structural tax reform, material increased defense spending, U.S. infrastructure modernization all make sense but must be largely deficit-neutral; because healthcare reform was never fixed but rather the focus was repeal and cut, this is further diminishing real progress on critical legislative reforms; deregulation is gradually occurring through executive orders and is a modest positive.” Sell Side, Industrials, N.A. “Looking for the status quo to stay intact.” Sell Side, Industrials, N.A.

1

Source: Corbin Earnings Primer, published July 13, 2017

CORBIN ADVISORS

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Most Of Anticipated Infrastructure Investment Priced In; Tax Reform Still A Tailwind

Anticipated Infrastructure Investment Currently Priced Into Valuations

Anticipated Tax Reform Currently Priced Into Valuations

73% 45%

25%

27%

20% 10%

0% 0%

Up to 25%

Up to 50%

0%

0%

Up to 75%

100%

CORBIN ADVISORS

0% 0%

Up to 25%

Up to 50%

Up to 75%

100%

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