Industrial Sentiment Survey July 2016

INDUSTRIAL SENTIMENT SURVEY 2Q EARNINGS PRIMER JULY 21, 2016

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INDUSTRIAL SENTIMENT SURVEY

ISSUE

DATE: JULY

21, 2016

2Q EARNINGS PRIMER • We survey institutional investors quarterly on topics pertaining to the upcoming earnings season, global economy and market drivers

Inside The Buy-side®

• We share our research broadly with executives, investor relations (IR) professionals and investors

Market Performance 1

2Q16

OneOne-Year

S&P 500

2.0%

1.9%

S&P Industrial

2.0%

2.8%

• Survey scope: 40 analysts and investors globally managing ~$993 billion in assets; 88% sectordedicated

1

As of 6’30’16

• Survey timeframe: June 22 to July 18, 2016 Sector Focus

Region

Role

11%

12% 13%

48%

52% 88% Industrials

Generalist

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76% N. A.

Europe

Asia

Buy Side

Sell Side

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2

Inside The Buy-side®

WORD CLOUD: FREQUENCY OF OCCURRENCE

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3

A BRAVE NEW WORLD: INDUSTRIAL INVESTORS RESIGNED TO LOW GROWTH…AND THINGS ARE LOOKING UP (OR ARE THEY?) Finding #1: Sentiment Improves As Industrial Investors Move Into Acceptance Phase •

Outright bears continue to recede and 58% of investors now characterize their sentiment toward the sector as neutral to bullish, up from 36% in March

•

Views that we are in an industrial recession retreat; from 69% in December to 46% currently

Inside The Buy-side®

Finding #2: 2Q Earnings Largely Predicted To Demonstrate Stability But Several Sectors Remain In A Rut •

50% anticipate earnings to be in line with consensus

•

EPS and FCF expected to improve while views on revenue and margin performance are mixed; nearly 20% anticipate top-line beats, up from 10% in December (a slow crawl)

•

Building Products, Construction (resi/non-resi) and Commercial Aero expected to outperform

•

Metals & Mining, Machinery, Materials and Auto predicted to continue to struggle

Finding #3: Despite Improving Sentiment, Persistent Low Growth Keeps Enthusiasm At Bay •

~80 are forecasting 2% to flat organic growth while global capex spend is largely expected to remain at current levels or worsen

•

Significant degradation in short-cycle products is a prevalent view, though services should see some traction

Finding #4: Investment Inertia Identified Last Quarter Is Replaced By Action •

Holders plunged to 29% from 54% in March, with both net buyers and net sellers increasing

•

More believe industrial valuation multiples will remain flat relative to 2015

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STABILIZATION EVIDENT AS MORE INVESTORS EXPECTING AN IN-LINE QUARTER What Are Your Expectations For 2Q16 Earnings Relative To Consensus?

50% 50% Dec '15 Mar '16

Inside The Buy-side®

Jun '16

56% 35% 34%

31% 13% 15% 16%

Better Than

In Line

Worse

Better Than

In Line

Worse

“Combination of lowered expectations, slightly wearier USD and improved oil price.” Buy Side |

“Less adverse O&G/energy comps and similar for USD.” Sell Side | N.A.

Side | N.A.

N.A.

“Bottom in Materials industrials sector.” Buy Side | N.A.

“Continued weak industrial data.” Buy

Asia

“Expected seasonal uptick seems tepid.” Sell Side | N.A.

“Macro data, management commentary.” Sell Side | N.A.

“Macro data and company comments during 2Q.” Buy Side | N.A.

“Mixed industrial data CYTD.” Buy Side

“Energy/Industrial capex spending appears to be lower than expectations coming into the year and in FY16 guidance.” Sell Side | N.A.

“Global macro & IT sector.” Sell Side |

“Valuations.” Buy Side | N.A. | N.A.

“Weaker comparatives.” Sell Side | Europe www.corbinperception.com

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MORE CONSTRUCTIVE VIEWS ON KPIS – THE TREND IS OUR FRIEND (AT LEAST WHEN THINGS ARE IMPROVING) Revenue

EPS 53%

72% 40% 48%

37% 41%

Inside The Buy-side®

15% 19% 10% Improving

29%

40%

23%

Worsening

Improving

Free Cash Flow 37% 29%

44%46% 40%

Staying the Same

Worsening

Operating Margins 49% 36%

35%

25%23%

20%

40%

16%

18%

Staying the Same

37% 31%31%

25%

36%37% 30%

38% 35%

15%

Improving

Staying the Same

Worsening Dec ‘15

Improving Mar ‘16

Staying the Same

Worsening

Jun ‘16

In Aggregate, 79% Expect Organic Growth To Be Between 2% And Flat In 2016 www.corbinperception.com

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6

THE THAW CONTINUES WITH NEEDLE MOVING TOWARD CAUTIOUS OPTIMISM How Would You Describe Your General Sentiment Toward Industrials?

Bullish Neutral to Bullish Neutral

5% 13%

8%

21%

36%

43%

Inside The Buy-side®

13% 11%

35%

Neutral to Bearish Bearish

58%

18% Dec '15

25%

8%

6%

Mar '16

Jun '16

Bullish “Resetting of growth expectations in 2H15 are over.” Sell Side | N.A. “Market conditions have not improved but macro headwinds are less.” Sell Side | N.A. “Easier comps and easing uncertainty should make 2017 a better year. However, that is what I thought about 2016 and it’s been underwhelming.” Sell Side | N.A. N.A. Bearish “Incrementally cautious views on short-cycle orders – particularly in Energy.” Sell Side | N.A. “Financial engineering.” Sell Side | N.A. N.A. www.corbinperception.com

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WHILE INVESTOR SENTIMENT HAS IMPROVED, INDUSTRIAL VALUATIONS STILL EXPECTED TO REMAIN FLAT YEAR-OVER-YEAR Relative To 2015, What Do You Expect Industrial Valuation Multiples To Do? 42% 35%

40%

31% 23%

Mar '16

29%

Inside The Buy-side®

Jun '16

Expand

Remain Flat

Contract

Expand

Remain Flat

Contract

“Interest rates will remain docile for a long time and USD could weaken, further aiding commodity prices and expanding P/Es.” Sell Side | N.A. N.A.

“I expect it to be flat. I’m not counting on multiple expansion.

Given the market sentiment I don’t see it happening.” Buy Side |

“Industrials had a catch up trade in Q1 which caused multiple expansion; that should reverse now.” Buy Side | N.A.

N.A.

“Multiple expansion thus far has a V-shaped recovery which I don’t suspect reflects flight to quality. Organic growth not substantiating these multiples, in my opinion.” Sell Side | N.A. www.corbinperception.com

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8

WITH DUST SETTLED AND A RALLY TO BOOT, INVESTORS MAKE SOME MOVES How Would You Describe Your Recent Activity In Industrials?

54% Sep '15 Dec '15

24%

23%

Mar '16

8%

15%

17%

24%

Inside The Buy-side®

29%

28%

18%

34%

25%26%

6%

June '16 Net Buyer

32%34%

Net Seller

Holding

Rotating

Net Buyer

Rotating

Holding

“Definitely not liquidating. We are modestly a net buyer.” Buy

“Valuations and expansion of greater volatility.” Buy Side | N.A.

“People are nervous about lack of growth and multiples but equally scared of underperforming. They are being scared into inaction.” Sell

Side | N.A.

“Rising commodity prices and an end to USD strengthening.” Sell Side | N.A. N.A.

”Volumes are down, valuations are full…growth to substantiate trough multiples just not visible.

People are rotating into more visible cyclical/secular tailwinds.” Sell Side | N.A.

Side | N.A.

*June 2016 values do not equal 100% due to 3% “Liquidating” not displayed on chart www.corbinperception.com

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9

WHILE CONVICTION THAT WE ARE IN AN INDUSTRIAL RECESSION CONTINUES TO SUBSIDE… Are We In An Industrial Recession?

69% 56%

46%

Inside The Buy-side®

Yes

Dec '15

Mar '16

Jun '16

“I wouldn’t say a recession; I would say a low-growth environment.” Buy Side | N.A. “Very nominal end market expansion but macro should ease.” Sell Side | N.A. “Not in a recession but close. We should improve for the balance of the year.” Buy Side | N.A. “We are in a cooling off period. We had four years of industrial production going at 55 or 60 level for the Industrials and PMI Index. We have to absorb all that investment and therefore we are in a consolidation phase and not a recession. In a recession, I would see margins collapsing and top-line much more severely hit.” Buy Side | Europe “To clarify, I think industrials were in a recession in 2015. Now comps will ease and we may be flattening without many growth prospects in the near term.” Sell Side | N.A. www.corbinperception.com

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…VIEWS THAT SHORT-CYCLE AND LONG-CYCLE PRODUCTS WILL DECELERATE FOR THE REMAINDER OF THE YEAR SWELL ShortShort-cycle Products 3%

14%

37%

19%

Services

LongLong-cycle Products 8%

3%

34%

45%

10%

15%

39%

Inside The Buy-side®

55%

31% 67% 29%

Mar '16

Jun '16

Accelerate Somewhat

40%

18% Mar '16 Remain the Same

26%

26% Jun '16 Decelerate Somewhat

46%

35%

Mar '16

Jun '16

Strongly Decelerate

•

~Three-quarters expect both short-and long-cycle product orders to remain the same or decelerate

•

Continued strength in services, with 46% expecting acceleration as previous years’ investments are absorbed and consolidated

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11

AROUND THE WORLD: SENTIMENT ON INDIA AND THE U.S. REMAINS STRONG WHILE EUROZONE AND GLOBAL CAPEX BIGGEST ISSUES What Are Your Expectations Looking Out Over The Next 6 Months?

India

56%

U.S.

53%

Mexico

Inside The Buy-side®

LatAm (ex-Brazil) Brazil China

14%

50%

28%

18%

19%

26%

53% 40%

20%

34%

37%

17%

43%

51%

32%

62%

Oil & Gas Markets

38%

52%

FX Headwinds

34%

40%

Non-Resi Const.

30%

Housing/Resi Const.

30%

24%

63%

7%

55%

15%

50%

23%

53% Improving

14%

36%

27%

Global Capex Spending 3%

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19%

43%

32%

Japan

U.S. Consumer Spending

6%

28%

43%

Southeast Asia Eurozone

38%

Staying the Same

44% Worsening Follow us @CorbinResearch

12

SECTOR CALLS LARGELY REMAIN INTACT

Predicted To Grow Faster Than GDP 75% 65%

Inside The Buy-sideÂŽ

Building Products

62% 60%

Resi Construction

Commercial Aero

67% 50% 55% 52%

Non-resi Construction

Water

Mar. '16

52% 50% Jun '16

Sentiment on building products and construction remains strong as cranes, lifts, drills and jackhammers can be seen across the continental U.S. www.corbinperception.com

Predicted To Grow Slower Than GDP 80% 73%

Metals & Mining

64% 66%

Machinery

61% 54%

Materials Transportation (Trucks)

51% 50% 24%

Automotive

50% Mar '16

Jun '16

While bearishness is ebbing, no real change in the outout-ofof-favor end markets of the industrial sector other than Ag which falls off Top 5 as investors feeling better Follow us @CorbinResearch

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