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2Q18 Earnings Primer Industrial Sentiment Survey July 13, 2018 CORBINADVISORS.COM

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Inside The Buy-sideÂŽ Industrial Sentiment Survey

Issue Date: July 13, 2018

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.1

Market Performance* 2Q18

YTD

(0.5%)

(2.0%)

NASDAQ

6.3%

8.1%

Scope: 26 investors and analysts globally; buy-side firms manage $1.0 trillion in assets and have $111 billion invested in Industrials

S&P 500

2.9%

1.7%

(3.7%)

(5.6%)

8.6%

7.0%

Timeframe: Jun. 5 – 25, 2018

* As of Jun. 29, 2018

Role

Dow Jones

S&P Industrial Russell 2000

Sector Focus

Region

9% 26%

36% 64%

Buy Side

1

Sell Side

The Industrial Sentiment Survey was first published in June 2015

13%

74%

Industrials

Generalist

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78%

N. America

Europe

Asia

2


Word Cloud: Frequency of Occurrence

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Key Findings: Upbeat Industrial Executive Tone Keeps Investor Expectations High for Continued Strong Company Performance #1

Record-level Perceived Management Tone Gives Investors Confidence in Ability to Offset Headwinds

 64% describe management tone as outright Bullish, significantly above the previous record of 40% in 4Q17  95% expect earnings to meet or beat consensus with 65% predicting sequential improvement  Investor confidence in Revenue expansion reaches all-time high, with 2018 Organic Growth expectations remaining at 5.0%+  Despite ~50% expecting input costs and FX volatility to worsen over the next six months, fewer expect these headwinds to

have a significant negative impact on growth momentum  Nearly 60% expect Operating Margins to improve this quarter, up from only 33% in 1Q18, as over 75% of investors express

confidence in companies’ ability to offset cost inflation and tariff impacts through pricing actions  Views on when the Industrial cycle will peak push out to 2020+

#2

Anticipated Oil & Gas Price Improvement Seen as Near-term Upside Driver for Industrials with Energy Exposure though Majority of Investors Remain Neutral and/or Negative over the Longer-term

 80% anticipate Oil & Gas markets to improve over the next six months, an increase of 25% sequentially  While 65% express Positive near-term sentiment toward Industrials with energy exposure, an aggregate 82% are Neutral

or Negative over the long-term  The vast majority, 87%, report being comfortable with Industrials having up to 20% energy exposure as a % of total sales

#3

Massive Shifts in Sector Sentiment Identified as Investment Rotation Nearly Doubles QoQ

 Nearly 35% report Rotating within Industrials, more than double that of 1Q18; 38% are Holding  Defense sees the highest level of bullish sentiment; 87% expect the sector to Grow Faster than GDP – a near-record for

the highest sub-sector sentiment level ever recorded  Non-Resi Construction bulls double QoQ while Commercial Aerospace and Metals & Mining remain among top picks  Auto is again the biggest laggard while bears rush into Water, nearly quadrupling to 41% from only 11% last quarter CORBINADVISORS.COM

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Global Growth Drives Continued Expectations for Strong Performance while Pricing Actions are Expected to Largely Offset Rising Input Costs Expectations Regarding 2Q18 Earnings Performance Relative to Consensus

Global Growth Price Increases Sep '17

52% 54% 50% 50%

Dec '17

46% 45% 35%

39%

Mar '18 Jun '18

13% 7% Better Than

65%

Expect Sequential Earnings Growth

In Line

95%

vs. 60% Last Quarter

4%

5%

Worse Than

Expect In Line to Better Than Consensus Results vs. 96% Last Quarter

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Investor Confidence in Revenue Growth Accelerates to All-time High and Operating Margin Concerns Ease KPI Trends – Expectations EPS Growth

Revenue 83%

88% 75%

74%

65%

66%

20% 17%

15% 12%

15%

Staying the Same

67%

15%

10% 0%

Improving

77%

19%

29% 19%

19% 7% 4% 4%

0% Improving

Worsening

Cash Flow

Staying the Same

Worsening

Operating Margins

74% 54% 46%

46%

42%

38% 19%

Improving

58%

56%

50%

Staying the Same

31% 12%

33%

50%

42% 33%

31% 19%

7% 8% 4% Improving

Worsening

Sep '17

Dec '17

Mar '18

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Staying the Same

25% 11%

11%

Worsening

Jun '18 6


Commentary on Earnings Expectations Vs. Consensus Better Than – 50%

In Line – 45%

“Macro stronger than expected.” Buy Side, Industrials, N. America

“Industrial markets continue to recover and pricing realization expected.” Buy Side, Industrials, N. America

“Non-resi spending.” Buy Side, Industrials, N. America

“PMI momentum.” Sell Side, Industrials, N. America

“Revenue growth and price increases.” Buy Side,

Worse Than – 5%

Generalist, N. America

“Lower taxes, better global growth, good price/cost mix and ability to get price increases passed on to customers.” Buy Side, Generalist, N. America

“Slowdown in growth rates.” Buy Side, Industrials, Europe

“Improving economy.” Buy Side, Generalist, N. America “Price increases taking effect to offset raw material cost inflation.” Sell Side, Industrials, N. America “Better handle on price/cost.” Sell Side, Industrials, N. America

“Have to emphasize that there are some sectors that are going to be hurt by trade wars.” Sell Side, Industrials, N. America

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Topics of Interest for 2Q18 Earnings Calls

1

Price/Cost Dynamics, Impact on Margins

2

Demand Environment

3

Capex Plans

48% Expect 3.0% 2018 U.S. GDP Buy Side

Sell Side

“Materials costs, inflation and western European

“Contingency plans for extreme weather events driven by climate change.” Industrials, N. America

demand.” Industrials, N. America “How are they positioning their companies to grow above end markets?” Industrials, N. America

“AI.” Industrials, N. America

“Ability to get pricing and mid-term (2-3 years) market expectations.” Industrials, N. America

Asia

“Rising commodity prices and pricing pressure.” Industrials,

“Margins and pricing.” Industrials, N. America “Price/cost, organic growth, regional views of globe, industries of strength, signs of weakness, capex plans and appetite for M&A.” Generalist, N. America “Capital allocation (M&A, share repurchase) - REMAIN DISCIPLINED!” Generalist, N. America

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Perception of Management Tone the Most Positive Since Survey Inception; While Still Upbeat, Investor Sentiment Slightly More Cautious

Investor Sentiment

83%

22%

Management Tone

76% 24%

92%

96% 39%

Bullish 64%

Neutral to Bullish Neutral 61%

52%

Neutral to Bearish Bearish 57% 28%

8% 17% Mar '18

16% Jun '18

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4%

4% 4%

Mar '18

Jun '18

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Positive Industrial Trends Identified by Respondents

1

Strong Global Demand

2

Increased Capex

Buy Side

3

Aging Infrastructure

Sell Side

“Synchronized global growth and confidence.” Industrials, N. America

“Strong demand and cost recovery with higher air fares.” Industrials, N. America

“Improving end markets and capex rebound underappreciated.” Industrials, N. America

“Blockchain, e-commerce, B2B and infrastructure.” Industrials, N. America

“Strong demand, better handle on price/cost and better valuations vs. beginning of the year.” Industrials, N. America “Infrastructure demand and marginal improvement in capex.”

“Increase in capex spending, long-cycle exposure and oil & gas.” Industrials, N. America

Industrials, N. America

“Volume growth, sustained demand and low per capita consumption.”

“Global growth, inflation and mid-point of cycle.” Industrials, N. America

Industrials, Asia

“5G, autonomous driving and AI.” Industrials, N. America

“Good management and capex.” Industrials, N. America “Aging infrastructure, movement toward themes like 3D printing, internet of things, more automation and consumables to support heavy industries, such as mining and oil & gas extraction.” Generalist, N. America

“Renewed capital spending, deregulation and increasing business confidence.” Industrials, Europe

Placing Greater Emphasis on Companies that 61% Are Are More Prepared to Address Digital Disruption

“Accelerating organic growth, M&A and capital allocation improving.” Industrials, Europe

“Stronger organic growth, more efficient cost structure and M&A.” Industrials, Europe CORBINADVISORS.COM

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Sector Rotation in Play; Companies with Meaningful Organic Growth and Strong Balance Sheets Should Outperform Industrial Equity Valuation Classification

Expectations for 2018 Organic Growth

58%

21%

21%

Under

Fairly

25% 18%

13%13% 0%

4%

0%

<3.0%

Over

3.0%

4%

3.5%

4.0%

31%

1.5x

2.0x

2.5x

5.0%

>5.0%

Jun '18

13%

3.0x

8% Net Buyer

33% 19% 17%

13% 4% Net Seller

Dec '17 CORBINADVISORS.COM

38% 31%

25%

7% 1.0x

4.5%

42%

39% 17%

4%

How Would You Describe Your Current Investment Activity?

42%

21%

18% 0%

Mar '18

Ideal Net Debt-to-EBITDA Ratio

39% 31% 31%

Holding Mar '18

Rotating

Jun '18 11


Investors Still Believe We Are Mid or Mid-to-Late in the Industrial Cycle; Peak Earnings Expectations Pushed Out to 2020+ Where Are We in the Industrial Cycle? 52% 44% 28% 31% 8% 0%

4%

Early

8%

4%

36%

44%

12% 13%

8%

Early-toMid

Mid Dec '17

Mid-toLate

Mar '18

8%

Late

Jun '18

When Do You Think Industrial Earnings Will Peak?

40%

46%

42%

32%

12%

32%

12%

20%

16% 8%

8%

0% 0% Already Peaked

32%

0% 2H18

2019 Dec '17

Mar '18

2020

After 2020

Jun '18

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Despite Headline-driven Volatility, Concerns Lessen amid Confidence in Management Concern Levels on Positive Growth Momentum Trade Wars

Mar '18

16% 17%

Jun '18

32%

Mar '18 9%

67%

28%

No Concern

60%

Rising Input Costs

Jun '18

40%

Moderate

High

Express High Concern about Tariffs

Jun '18

45%

20% No Concern

8%

64%

52%

No Concern

76%

40% Moderate

High

Are Somewhat to Very Confident in Companiesâ&#x20AC;&#x2122; Ability to Largely Offset Cost Inflation and/or Tariff Impacts through Pricing Actions

Rising Interest Rates

Volatile FX

Mar '18

27%

36%

44%

19%

Jun '18

36% Moderate

Mar '18

High

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23%

41%

36%

36%

48%

16%

No Concern

Moderate

High

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Top Concerns – Unaided

1

Trade Wars

2

3

Inflation

Cycle Peak

Buy Side

Sell Side

“Cycle and trade war.” Industrials, N. America

“Tariffs, debt and rates.” Industrials, N. America

“Inflationary costs and timing of cycle peak.” Industrials, N. America

“Trade wars, higher interest rates and focus on specific businesses.” Industrials, N. America

“Rising inflation and Western Europe GDP growth.” Industrials, N. America

“Trade wars, inflation and cycle slowing.” Industrials, N. America

“Democrat comeback, war with North Korea and breakdown of Europe.” Industrials, N. America

“Trade wars and interest rates.” Industrials, N. America

“Lack of experience in the Treasury and Fed and an unpredictable president, inflation triggering an interest rate overshoot that chokes off growth and excessive wage growth leading to inflation due to tight labor markets.” Generalist, N. America

“Rising commodity prices and pricing pressure.” Industrials, Asia

“Trade wars and inflation.” Generalist, N. America “Valuation, labor inflation and trade war.” Generalist, N. America “Trade relations, commodity prices and interest rates.” Generalist, N. America

“Macro shock, price/cost and trade.” Industrials, Europe “Valuation, inflation and trade war.” Industrials, Europe “Cost inflation, lead indicators rolling and valuation.” Industrials, Europe CORBINADVISORS.COM

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Around the World: Southeast Asia and India See Increased Enthusiasm, While Eurozone, Brazil and U.S. Views Soften Global Economy Expectations over the Next Six Months

India

54%

38%

8%

+3 pts

+2 pts U.S.

50%

42%

8%

-6 pts

-9 pts Southeast Asia

50%

50%

-5 pts

+12 pts Brazil

39%

48%

13%

-1 pt

-13 pts Eurozone

29%

46%

25%

+21 pts

-19 pts LatinAm (ex-Brazil)

26%

65%

9%

+2 pts China

-20 pts 25%

50%

25%

+6 pts

+1 pt Mexico

25%

54%

21%

+25 pts Japan

-8 pts

8%

92%

-1 pt

(From 1Q18 worsening, -9 pts) Improving

Staying The Same CORBINADVISORS.COM

Worsening 15


Investors Tap into Oil & Gas Markets with Enthusiasmâ&#x20AC;¦For Now Expectations over the Next Six Months

Oil & Gas Markets

80%

20%

+25 pts

Worsening, -4 pts

Global Capex

68%

28%

4%

-9 pts

+4 pts

Non-Resi Const.

46%

50%

4%

+23 pts Housing/Resi. Const.

UNCH 24%

56%

20%

+7 pts

+1 pt Global PMI

12%

60%

28%

-15 pts Company Input Costs

12%

-13 pts 36%

52%

-15 pts

-2 pts FX Headwinds

8%

46%

46%

-12 pts

+21 pts Improving

Staying The Same CORBINADVISORS.COM

Worsening 16


While Companies with Energy Exposure Should Benefit Near Term, Respondents Question Longer-term Rationale and Favor Limited Exposure How Would You Classify Your Stance toward Industrials with Exposure to Energy?

Short-term Stance Positive “Higher oil, other energy projects.” Buy Side, Industrials, N. America

4%

14%

“Crude price increase.” Buy Side, Generalist, N. America

31%

“Higher average oil.” Sell Side, Industrials, N. America 68%

“Higher capex as rig counts go up.” Sell Side, Industrials, N. America

65%

Neutral “I am more positive than before on energy because the stocks have not performed as well previously.” Industrials, Europe

18% Short-term Stance

Long-term Stance

Long-term Stance Positive

Neutral

Negative

Positive “We will have another tight supply/demand situation.” Buy Side,

What Threshold (%) Are You Comfortable with an Industrials' Portfolio Exposure to Energy?

Industrials, N. America

“A lot of demand from developing countries.” Sell Side, Industrials, N. America

48%

Neutral 22%

“When the global economy slows, these two sectors feel the pain more than defensive sectors.” Buy Side, Generalist, N. America

17% 4%

10%

15%

20%

30%

9%

“Oil/gas prices in structural decline (renewables, energy efficiency, technology).” Buy Side, Generalist, N. America

35% CORBINADVISORS.COM

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Significant Shifts in Sentiment Identified: Non-Resi Sees Sharp Increase in Bulls and Commensurate Decrease in Bears While Water Sees Some Choppiness

Predicted to Grow Faster than GDP

Predicted to Grow Slower than GDP 89% 87%

Defense 68% 67%

Commercial Aerospace

52% 61%

Resi. Const.

Ind. Equip. & Comp.

52% 61%

Machinery

42% 26%

Non-Resi Const.

Transportation

55%

Ind. Equip. & Comp.

52% 44% 48%

Chemicals

Building Products

44% 45%

Materials Mar '18

11% 41% 34% 32%

Agriculture

Machinery

Transportation

52%

Water

55% 64%

Metals & Mining

63%

Automotive

Non-resi Const.

Jun '18

21% 30% 10% 17% 5% 15% 0% 13% 10% 13% 32% 13% Mar '18

Defense Maintains Stronghold, While Non-Resi Builds Positive Sentiment

Jun '18

Auto Remains the Laggard for Sixth Consecutive Quarter; Bears Find Water

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Industrial Sentiment Survey July 2018  
Industrial Sentiment Survey July 2018