Inside The Buy-side® 2Q15

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INSIDE THE BUY-SIDE® SECOND QUARTER | ISSUE DATE: APRIL 8, 2015

In a volatile quarter of trading, marked by expectations for interest rate hikes and declining corporate earnings, further exacerbated by a rapidly strengthening dollar, U.S. stocks turned in a mixed performance. As the first quarter ended, the NASDAQ finished up 3.5%, the S&P 500 added just 0.4% and the DJIA closed down 0.3%.

1Q15 Market Performance Russell 2000 NASDAQ S&P 500 DJIA

Investment Style

Inside The Buy-Side ®

All three major indices posted losses for March, though the more heavily domestic-weighted Russell 2000 bucked the trend, adding 0.8% for the month and 3.9% for the quarter.

Still, it is worth remembering 1Q14, when the DJIA also posted a small decline (0.7%) and the S&P and NASDAQ saw marginal gains, yet equities returned a good year regardless.

In our ongoing effort to track changes in institutional investor sentiment and expectations, as well as provide insights heading into earnings season, we surveyed 80 investors globally across multiple industry segments and investment Participating institutions manage just over $2.0 styles.1 trillion in total assets.

On March 18, the Fed appeared to move closer to its first rate hike since 2006, removing the word “patient” from its statement and reiterating its view that job market conditions had improved. The statement did not rule out a June rate increase and provided flexibility depending on the results of future economic data.

The first quarter also saw the ECB launch its “massive” bondbuying program, the beginning of a €1.1 trillion ($1.2 trillion) stimulus effort to revive Europe’s economy and allay deflationary fears. Europe’s QE policy seemed to have the expected effect on the region’s equity markets, with most of Europe’s major indices posting strong gains for the quarter.

This quarter’s survey can largely be characterized by continued caution, a two-quarter trend. Investor sentiment appears to be somewhat calibrated to a choppy 1Q15 earnings season though the magnitude of the strong dollar on multinationals’ performance is a significant unknown.

1

3.9% 3.5% 0.4% (0.3%)

GARP | 26% Hedge Fund | 26% Value | 24% Growth | 18% Other | 6%

Geography

N. America | 53% Europe | 25% Asia/Pacific | 18% Latin America | 4%

Sector Generalist | 78% Multi | 10% Industrials | 3% Energy | 3% Financials | 3% Cons. Disc. | 1% Materials | 1% Technology | 1%

Timeframe: March 11 - 31, 2015 1

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Key Trends •

For the second consecutive quarter, broad-based investor sentiment continues to trend more bearish

•

Management tone continues to soften; 59% describe executives as cautiously optimistic versus 56% last quarter, while those reporting a more negative tenor rose to 24% from 21%

•

As earnings season kicks off, contributors are bracing for a choppy 1Q15; 45% expect results to be worse than consensus compared with 30% last quarter while just 28% expect companies to report better than consensus, also down from the previous survey

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Fewer participants, 58% compared with 70% last quarter, consider equity market valuations sustainable

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46% expect the Fed’s initial rate increase to occur in 3Q15, while 20% are targeting 4Q15

•

Investors remain confident on the U.S. over the next 12 months; Eurozone and India are showing improved sentiment

Corbin Perception assists public companies with systematically understanding and positively influencing critical institutional investor sentiment. We provide senior level executives and IR professionals with company-specific quantitative and qualitative feedback from investors and analysts and then draw upon our firm’s considerable expertise to guide management teams in shaping those perceptions and maximizing valuation. Our clients range from highly sophisticated mega-caps to microcaps worldwide across diverse industries. Our quarterly investor research report, Inside The Buyside®, which tracks changes in global institutional investor sentiment, is covered by news affiliates worldwide and featured regularly on CNBC’s Squawk on the Street.

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Surveyed investors assert that organic growth and margin expansion are the most important performance differentiators

CorbinPerception.com info@corbinperception.com (860) 321-7309

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Reinvestment remains investors’ leading choice for use of excess free cash, though “smart” M&A now supersedes both dividends and share repurchase

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Majority of respondents across all regions describe themselves as either cautiously optimistic or neutral

to bearish

Inside The Buy-Side ®

Corbin Perception: Proven Methodology, Proven Results

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80% expect weak oil and other low commodity prices to be a significant anti-inflationary force in the global economy; 47% expect crude oil to rise somewhat from its price at the time of survey (~$60) by year-end

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Investment professionals remain bullish on technology, consumer discretionary and healthcare sectors and bearish on energy, utilities and materials

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IR Best Practice: Earnings calls are one of the most important investor communication channels; 90% are in favor of posting call transcripts on IR website

Follow us @CorbinResearch

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Equity Markets End Mixed In A Quarter Of Choppy Trading U.S. equities travelled a rocky road to close out 1Q15 on a mixed note. Besides central bank maneuvers, investors focused on oil and the strengthening U.S. dollar, as crude prices continued to slide following a mid-quarter rally..

Survey participants continue to cite Fed policy as the leading market driver followed by economic growth and corporate earnings, which topped the list in 3Q15, when bullishness, as captured by our survey, was at an all-time high. As well, share buybacks and the dearth of alternative investments offering strong returns also served to prop up equity markets.

What Is The Primary Driver Of The Continued U.S. Equity Market Rally?

60%

The Fed

52%

Economic Growth

43%

Corporate Profits Share Repurchase

40%

Lack of Alt. Investments Inflows: Fixed Income Inflows: Foreign Investors Corporate Restructurings

33% 19% 17% 10%

Inside The Buy-Side 速

Earnings Outlook Soft On Oil & FX Headwinds While 92% of surveyed investors described fourth quarter earnings as in line or better than expectations, the outlook for 1Q15 is decidedly downbeat despite earnings estimates that have already been pared back considerably. Notably, 45% of respondents expect first quarter results to be worse than consensus estimates, up sharply from 30% last quarter.

Interestingly, heading into 4Q14, 30% of investors expected results to be worse than consensus while only 8% of contributors maintain that view post-results.

Continuing, those forecasting results to be in line with or better than expectations declined to 55% from 70% and 76% the previous two quarters, respectively.

Regionally, 50% of North America-based investors expect worse than results in the first quarter, citing currency headwinds and, to a lesser extent, the hit taken by the oil patch from falling crude prices and the tough winter experienced in the Northeast U.S. Meanwhile, a shift has occurred amid Asia/Pacific contributors who are seemingly more optimistic than last quarter when they exhibited the most downbeat sentiment of surveyed regions. Specifically, 62% expect earnings to be in line with or better than expectations compared to 18% last quarter. As well, just 38% predict worse than results, down from 53% last quarter.

European contributors are also slightly more upbeat, with fewer expecting worse than consensus results (31% versus 40%) and slightly more believing results will come in better than expectations (50% versus 40%). Among other things,

What Was Your Opinion Of 4Q14 Earnings Results?

Better Than

44%

In Line Worse Than

48% 8%

What Are Your Expectations For 1Q15 Earnings Results?

Better Than

28%

In Line

27%

Worse Than

45%

1Q Earnings Expectations By Region

38%

31% 31%

30%

50%

20%

25%

25%

Better Than

In Line

Worse Than

Europe

Asia/Pacific

N. America

50%

3

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they cite lower oil prices, “easing deleveraging pressures”, and “increased corporate investment.”

“The dollar has been rapidly rising so far this year, putting many export-dependent companies in a difficult situation and forcing analysts to lower their forecasts of companies’ earnings.” Index, Generalist Generalist | North America “Top-line growth continues to come in below expectations and I do not expect this to change as macro data continues to surprise on the downside.” Private Equity, Generalist | Asia/Pacific

“We expect U.S. numbers will be worse than expected due to a slowdown and weather. EU numbers will probably be better due to a pickup in activity.” Hedge Fund, Generalist |

How Concerned Are You Regarding The Impact Of Currency On U.S. Corporate Cash/EPS And Equity Valuations?

46%

49%

32%

30%

2Q15

2H15

14%

18%

21%

22%

33%

38%

Not At All

44%

53%

2016

Beyond 2016

Moderately

Very

Europe

Inside The Buy-Side ®

Currency Risks Unlike last quarter, when investor concerns about the impact of currency risk on U.S. corporate earnings and valuations increased steadily the farther out they looked, respondents are now focused on the second quarter and second half of 2015, with concerns fading as easier comps emerge in 2016 and beyond.

Moreover, 46% of those surveyed contend that current equity valuations only moderately reflect current and future currency risks while just one respondent maintains those risks are fully reflected in valuations.

Market Sentiment: Continued Caution Investor sentiment is notably consistent with the prior quarter after experiencing a sudden bearish shift in our 4Q report.2 Outright bears remain an endangered species, while the cautiously optimistic herd increased modestly. The number of respondents describing themselves as cautiously optimistic rose to 45% from 39% last quarter, citing continued growth in the U.S. economy, low oil prices and the relative value of equities compared to fixed income options, especially when rising dividends and ongoing share buybacks are factored in.

How Would You Describe Your Current Sentiment?

21% Bullish

9% 9% 56%

Cautiously Optimistic

39% 45% 6%

Neutral

15% 9% 15%

Neutral to Bearish

Bearish

33% 33% 2% 4% 4% 4Q14

1Q15

2Q15

Meanwhile, the percentage holding a neutral to bearish outlook held steady at 33% quarter-over-quarter. They cite 2

Survey timeframe: September 9 – 30, 2014 4

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high valuations relative to concerns that earnings will not meet expectations along with a strengthening U.S. dollar and subdued global growth, especially in China.

Interestingly, among European investors, 63% of whom consider themselves cautiously optimistic, none explicitly cites the ECB’s QE program as a reason for their outlook.

How Would You Describe Management Tone?

38% Bullish

“Market valuations look high relative to the trajectory of earnings growth and overall global macro-economic and political backdrop.” Growth, Generalist | Asia/Pacific

Bearish

4% 7% 3%

Less Negative

8% 2% 3% 8% 21% 24%

4Q14

1Q15

2Q15

On What Performance Measures Are You Most Focused?

Generalist | North America America

Inside The Buy-Side ®

56% 59%

More Negative

“Those market events that almost always occur several months before the bull market peak of the broad averages like the Dow and S&P 500 have not yet occurred; therefore the market top is still at least several months away.” Core Value,

Management Tone Trending More Cautious

In North America, investors assert senior managers across industries are guiding to moderate expectations on concerns about the strengthening dollar, which is approaching 2002 highs. Meanwhile, Asia-based respondents, 46% of whom report a cautiously optimistic tone from management, indicate the focus is on a lack of evidence that growth is picking up. Moreover, investors globally note management tone from companies in, or related to, the oil industry is simply negative.

42%

Cautiously Optimistic

“I'm not neutral to bearish regarding the economy; I'm more constructive there. I am neutral to bearish regarding the stock market, as I believe valuations are elevated compared with forward earnings and cash flow prospects. I'm also starting to worry about margins.” Growth, Generalist | North America

Continuing a trend seen over the previous two quarters, management tone is perceived as less positive. Specifically, the number of respondents reporting a bullish outlook from executives has declined from 38% two quarters ago to 14% last quarter and now to just 11%, while the number of investors citing a more negative tone has risen from 8% to 21% to 24% over the same period. Irrespective of region, most investors, including 73% of North America contributors, describe executive outlooks as cautiously optimistic.

14% 11%

44%

Organic Growth

68%

Margins

54% 68%

Consistent Cash Flow

62% 67% 54% 53%

Return Metrics

38% 49%

Top-line Growth

36% 35%

Bottom-line Growth Balance Sheet Flexibility 1Q15

32% 29% 2Q15

Bulls vs. Bears Trend Analysis 50% 40% 30% 20%

“The prior quarter’s commentary was generally very optimistic, overly optimistic to an extent, certain tailwinds and arguable one-offs have brought commentary back down to reality but it remains overall optimistic.” Core Value, Generalist | Europe

10% 0%

Bulls

Bears 5

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“There are cautious expectations that the macro will pick up, which would allow conditions to improve.” Growth, Generalist

Do You See The Following Improving, Staying The Same Or Worsening This Quarter?

| Asia/Pacific Improving

“Management sentiment seems marginally less negative, implying the environment has gotten a little better.” GARP, Generalist | North America

Staying the Same

Worsening

Organic Growth 45% 43%

4Q14 12%

Investors Back To Focusing On Growth And Margins 1Q15

For the first time in a year, surveyed investors did not select consistent cash flow as the single most important performance characteristic but rather indicate margins and organic growth are slightly more in focus. Balance sheet flexibility and bottom-line growth again are the lowest-rated.

“Understanding of how management intends to generate capital and what they think the best use of that capital is important to me.” VC/PE, Generalist | Asia/Pacific Asia/Pacific “Balance sheet, cash flow, revenue and EPS growth…I want to know what drives the changes in those metrics.” Growth,

33% 27%

2Q15

57%

4Q14

33% 10% 44% 42%

1Q15 14%

Inside The Buy-Side ®

27% 21%

2Q15

52%

Performance Metrics Channel Check: Check: Expectations For EPS Erosion High

Free Cash Flow 29%

4Q14

Our quarterly channel check on performance metrics reveals that sentiment, which had been trending downward for the last two quarters, is now decidedly negative, especially among North America investors.

The percentage of respondents expecting these metrics to worsen rose across the board for the second straight quarter, with EPS performance garnering an especially pessimistic outlook due to the strong dollar and muted organic growth. Moreover, the number of respondents expecting improvement was down as well for all three metrics.

Facing Headwinds, Sustainable

Fewer

See

Valuations

36% 35% 18%

1Q15

34% 48%

2Q15

10% 36% 54%

Are Markets Sustainable At Current Levels?

As

The percentage of investors who view current equity valuations as sustainable declined for the second straight quarter, to 58% from 70%. North America investors remain the most confident, as 63% maintain valuations are sustainable, compared to 54% of Asia/Pacific respondents and 43% of European investors.

40%

EPS Growth

Generalist | North America

“All are important, they reflect the ability to succeed and survive.” Core Value, Generalist | North America

53%

23% 24%

70%

1Q15

30%

58%

2Q15

42% Yes

No

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Survey results also reveal that contributors who favor share repurchases are evenly split on whether current market valuations are sustainable.

What Best Describes Your Cash Position QuarterQuarter-overover-Quarter?

Held Steady | 39%

“Earnings growth will be solid and modest P/E expansion will happen after the market digests tapering fears a bit more.” GARP, Generalist | North America

Increased | 39% Decreased | 14%

“Rising rates will cause a re-rating to valuation models.

While earnings growth will go a little way to counter the effect, the downward interest rate effect will have far greater pull over the medium- to long-term.” Core Value, Generalist | Europe

No Cash Held | 8%

How Are You Viewing The Recent Pullback?

Inside The Buy-Side ®

Lending credence to the recent market sell-off, 39%, report that their cash holdings increased quarter-over-quarter.

Meanwhile, just 14% report cash holdings decreased. Still, 37% indicate that they have seen the pullback as a “buying opportunity”. Drilling down, 71% of Asia/Pacific investors who said valuations are sustainable describe the recent market pullback as a buying opportunity, compared to 50% of Europe investors and 41% of North America investors.

Investment Sector Trends3 Surveyed investment professionals are most bullish on technology stocks this quarter given their earnings growth and reasonable valuations. In particular, investors favor software, internet-related and services companies.

Healthcare, the favorite last quarter, still garners preference from the buy side, with investors nearly equally favoring biotech, pharma and med-tech.

Holding Steady | 44%

Buying | 37%

Concerned & Selling | 19%

On What Sectors Are You Most Bullish/Bearish?

67%

Technology Healthcare

21% 58% 17% 63%

Cons. Discr.

40% 52%

Industrials

Continuing, investors maintain their bearish stance towards energy and commodities, utilities and materials, metals in particular. Still, while investors remain downbeat on the oil & gas sector, sentiment has begun to shift as this quarter’s survey saw only a 28% bearish stance versus 42% last quarter.

Bulls “Technology and parts of industrials look reasonably attractive to us. We like things with economic exposure because everyone seems to hate that right now.” GARP,

43% 31%

Cons. Stpls.

Telecom

17% 10% 22% 21%

REIT

20% 35%

Utilities

22%

Energy Materials

Total may exceed 100% due to mixed views within sector categories

48% 33%

Financials

Generalist | North America

3

29%

52% 17% 52% Bullish

Bearish 7

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“Bio and pharma have had a wonderful rise so they are not cheap but it is innovation and we will pay for innovation.

When there is a new drug or breakthrough, investors will pay for that. I also like anything to do with recycling, waste disposal and water.” Core Core Growth, Generalist | Europe “Slow and steady, or less-cyclical industrials, is There is still too much risk in financials but they higher. Oil and gas could be lower for longer. technology and hated deeper-cyclicals should

overpriced. could trade Consumer, do better.”

2H16

Rate Hike Update: The Inevitable Draws Near As the Fed continues to signal the onset of rate hikes, investors now largely predict the initial increase will come in the third or fourth quarter of 2015. Notably, just 7% of those surveyed now expect a hike in 2Q15, down from 40% who said as much last quarter. As well, 21% still believe the Fed may hold off until sometime in 2016, compared with 22% who held that view previously.

Notably, 75% of all surveyed respondents across all constituencies, up from 67% last quarter, expect the Fed to be less aggressive in the magnitude of near-term rate hikes due to the combination of a weakening non-U.S. global economy, lower oil and commodity prices and the stronger dollar.

28% 46% 10%

4Q15

Bears

“Those sectors that are exposed to thematic headwinds from the slowdown in China in regard to oversupply vs. demand and reliant on consumer, particularly high expenditure items, are likely to struggle.” Yield, Generalist | Asia/Pacific Asia/Pacific

7%

3Q15

1H16

“I am bearish on defense type stocks, REITs, utilities and parts of healthcare.” GARP, Generalist | North America

40%

2Q15

Growth, Generalist | North America

“Clean-tech will be hobbled by low energy prices. Staples are overpriced. REITs and utilities will unwind with rising interest rates. Medical device growth is slow. Agriculture and metals will underperform with a rising U.S. dollar and slow emerging markets.” Growth, Generalist | North America

Inside The Buy-Side ®

When Do You Anticipate The Fed Will Announce Its First Rate Hike?

Beyond 2016

20% 16% 14% 6% 7% 0% 6% 1Q15

2Q15

How Will Equity Markets React To The Fed's Likely Change In Interest Rate Policy?

Short-term Correction/ Medium- to Long-term Positive Short-term Neutral/Continued Bull Market

56% 52% 8% 8% 22%

Neutral; Already Priced In Short-term Negative, Conversion to Bear Market Other

1Q15

23% 12% 15% 2% 2% 2Q15

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Around The World: Europe And And India Seeing Improved Sentiment U.S.

74%

U.S.

Optimism about the U.S. relative to the rest of the world remains strong but the level of bullish sentiment has declined significantly from last quarter, to 48% from 74%; largely a factor of other regions coming into play, namely Eurozone and India. While worries about the strengthening dollar and its effect on big U.S. exporters curbed sentiment somewhat, the U.S. consumer, still benefitting from lower oil prices, remains a potent economic force.

Eurozone India SE Asia Japan China

Europe Despite numerous deeply rooted Eurozone structural issues, Europe’s economy and the weak euro are no longer rated as “leading” concerns.

While worries about economic stagnation remains, they are far below levels seen in recent surveys; still, concerns about deflation hold steady.

Meanwhile, apprehension over Europe’s fragile banking system and currency risk surged.

Inside The Buy-Side ®

Looking Out 12 Months, On Which Region Are You Most Bullish?

Canada LatAm

48% 6% 22% NA 15% 6% 7% >1% 4% 11% 2% 3% 2% >1% 0% 1Q15

2Q15

What Are Your Leading Concerns Regarding Europe?

India Positive sentiment on India has emerged, likely the result of investors getting a better read on Prime Minister Narendra Modi since his election victory in May 2014. Modi and his BJP Party are viewed as more pro-business, with a greater focus on economic development than recent Indian governments.

79%

Economic Stagnation

67% 47%

Lack of Gov. Cohesion

46% 44%

Deflation

46% 23%

Fragile Banking System

Latin America Similar to last quarter, Latin America economies illicit the most bearish responses, as investors continue to worry about poor economic policymaking and the ongoing pressure on commodity prices. Mexico and Columbia are seen more favorably in an otherwise challenged environment.

Geopolitical And And Growth Concerns Abound

39% 44%

Geopolitical Risk in E. Europe Currency Risk

38% 17% 33% 21%

Anti-business Political Climate

29% 1Q15

Top Concerns

Prior Quarter

Current Quarter

EU stagnation/Deflation Latin America economy China slowdown Geopolitical tensions

Latin America economy China slowdown Russian aggressiveness ISIS

2Q15

9

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Though the crisis in Ukraine has faded from the headlines, Russian military aggression remains a leading source of apprehension for investors, as does ISIS and other terrorrelated threats.

Meanwhile, the vast majority of surveyed financial professionals, or 80%, expect continued weak oil and other commodity prices to be a significant anti-inflationary force in the global economy, while 61% believe they represent a deflationary threat in some of the world’s weaker economies.

What Is Your Preferred Use Of Excess Free Cash?

87% 91% 89% 91%

Reinvestment

69% 86% 64% 78%

M&A

Moreover, few expect it to curtail U.S. economic growth no matter the impact to energy companies.

Reinvestment Remains Top Preference

89% 84% 73%

Dividend Growth 50%

For the third straight quarter, survey respondents rank reinvestment highest as their preferred method for deploying excess free cash. Meanwhile, M&A is favored over both dividends and share repurchases for the first time since 4Q14.

68% 70% 53% 59%

Share Repurchase

60% 58% 49% 41%

Inside The Buy-Side ÂŽ

IR Best Practice: Earnings Call Debt Reduction

The earnings call is one of the most important communication channels companies can leverage beyond the routine disclosure of financial results. Indeed, it provides the opportunity to reiterate longer-term strategy and proactively address key questions and concerns.

3Q14

4Q14

1Q15

2Q15

Notably, 90% of respondents are in favor of companies posting the earnings call transcript on their IR website.

Most Important Elements of the Call Surveyed respondents assert that the most important elements of the earnings call are concise and to-the-point management commentary along with a well-managed Q&A session that allows for a robust discussion about financial results and business drivers.

Continuing, beyond the financial results, investors are most interested in hearing management discuss the long-term strategy as well as their outlook for the business and the industry. In addition, earnings call content should include discussion of the business drivers and the challenges for the company and its individual reporting segments.

Finally, the performance metrics investors are most interested in hearing management discuss are drivers of organic growth 10

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and margin expansion, as well as cash flow sources and uses.

Before:

• Regularly reach out to key constituents ahead of earnings calls to inquire about pertinent issues, concerns or questions they may have; prep management –

Use feedback to develop the press release, slide materials, management commentary and Q&A document

− Any contentious issues should be addressed in prepared remarks to control narrative; the remainder should be tackled in Q&A which will reinforce management’s willingness to be open and transparent with investors

Inside The Buy-Side ®

− Schedule a review session, including mock Q&A, with senior management to ensure they are on track to convey a crisp, consistent message when responding to questions

During:

Worst Practices “The goal is to assess current results in light of long-term strategic initiatives. Too much emphasis on short-term is misplaced.”

Hedge Fund, Generalist | North America

“Manipulating guarantee a discussing the revenues and

the expected number to positive surprise.

Not year-over-year change in earnings.” Hedge Fund,

Generalist | North America

“Reading

the

press

release.” GARP,

Generalist | North America

“Extremely long prepared remarks that focus too much on the numbers. Put those in the press release.” GARP, Generalist | North America

“A worst practice is defensiveness. Also, cutting off Q&A time early because management wants to get off the phone.”

Growth, Generalist | North America

• Address growth drivers, milestones/achievements, market backdrop and then link it to long-term strategy; summarize key takeaways at end of call

• Include concise review of financials with color limited to year-over-year drivers and metrics that deviate from expectations and/or that are noteworthy; reiterate capital allocation plans, outlook and shareholder value creation

• Limit questions to one initial inquiry and one follow-up per participant to help maintain pace; specify this process in opening remarks

“Management not knowing the numbers.”

GARP, Materials | North America

“Management being unable or unwilling to answer questions directly.

Poor explanation of comparable period results.” GARP, Generalist | North America “No Q&A from the buy side or individual investors and changing disclosure formats to hide negative data.” Hedge Fund, Generalist | North America

After:

• Hold one-on-one discussions with shareholders and analysts; welcome questions, determine areas of concern and ensure key messages resonated

• Email earnings conference call transcripts or website link to all relevant investment community contacts; ensure management remarks, figures and facts have been correctly transcribed

• Post edited quarterly earnings call transcripts on website 11