EFTA01840639.pdf

UBS Global Equity Research Americas UBS Investment Research Aerospace UBS Business Jet Survey Sector Comment Stable Overall, North America Improving 2 February 2012 • Index at 41, unchanged from \ovember waves ccrruinvestmentresearch Our latest Business Jet Market Index came in at 41, in line with our prior survey from November as an uptick in small cabin offset slight declines in midlarge. Our straight up measure of absolute business conditions declined 2% to 4.0. Overall, it appears the market has held relatively stable despite continued economic David E. Strauss uncertainty. Analyst Pane strausstguts can • North America customer interest improving .1-212-713 6185 While weak pricing and high levels of inventory remain a drag on the market, our Darryl Genovesi survey continues to indicate that customer interest is improving and participants Analyst are optimistic looking out. Our overall customer interest score increased 3% to 55 Offs., genovesigute corn this time with North America (59), Asia (58) and Latin America (52) reflecting .1-212-713 4016 incremental improvement, partially offset by declining interest in the Middle East Ryan Thackston (44) and Europe (31). Our participants indicated bonus depreciation did not Associate Analyst meaningfully impact year end activity. ryan Macaston@ubs corn .1412413 3321 • See positive ilsk-rewards for bizjet stocks While our survey of industry professionals and other key bizjet market indicators have held stable, we believe North America bizjet is improving off the bottom, driven by replacement demand postponed during the downturn. We see positive risk-rewards with the stocks that we think still incorporate little for business jets at current levels including Buy-rated COLJGD/TXT. Chart 1: UBS Business Jet Market Index Chart 2: Overall Business Conditions Score 100 10 200 iu ; 50 - 0 1 11./IrnMr nanglkIna nt :44 4; fl $7 .' 7 a' UBS Business Jet Market Index —' Rel Pte (RHS) ingagtg.tgl 7.73 3. .7 ' Simple average B8BGOTTX3 Mock price performance index 'static. to SSP 500 Sawa: UBS Business Jet Survey Source. UBS Business Jet Survey This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 18. UBS does and seeks to do business with companies covered in its research reports. As a result investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. EFTA_R1_00225638 EFTA01840639 UN Business Jet Survey 2 February 2012 Business Jet Market Survey Our UBS Business Jet Market Survey is designed to provide timely market data supplied directly by industry professionals. We regularly survey a group of US domestic and international broker/dealers, manufacturers, fractional providers, financiers and others, from whom we recently received 161 responses. Investment Conclusion Our latest Business Jet Market Index came in at 41, in line with our prior survey from November as an uptick in small cabin offset slight declines in mid/large. Our index measures the change in respondent's views from our prior survey and is not meant to be an absolute measure of business conditions. Our straight up measure of absolute business conditions declined 2% to 4.0. Overall, it appears the market has held relatively stable despite continued economic uncertainty. While weak pricing and high levels of inventory remain a drag on the market, our survey continues to indicate that customer interest is improving and participants arc optimistic looking out. Our 12-month outlook score increased 11% to 66, above the 50 mark, indicating an incrementally more positive outlook. Our customer interest score increased 3% this time to 55, indicating that customer interest was stronger relative to our prior survey. Our willingness score moved 9% higher to 44, although still below 50 indicating continued declines in participants' willingness to take on additional inventory. Improvements in our interest, outlook and willingness scores were offset by declines in inventory and pricing. Our overall inventory score declined 19% to IS. and remains well below 50 reflecting continued oversupply, while our pricing score declined 17% to 33, indicating continued pricing declines. Our young inventory score, not a component of our index, moved 7% lower this time to 40, still indicative of oversupply of high-quality young used aircraft. Our financing score, also not a component of our index, remained above 50. reflecting continued improvement in financing availability. Table 1: UBS Business Jet Survey Results and Comparison to Prior Survey Component Better Same Worse Score Last Time Change Customer Interest 29% 52% 19% 55 53 3% Pnang 3% 60% 37% 33 40 -17% 12 Month Outlook 41% 51% 8% 66 60 11% Inventory Levels 3% 24% 73% 15 19 .19% Willingness 16% 56% 28% 44 41 9% Composite Index 16% 49% 35% 41 41 011/ Young Inventory 17% 47% 36% 40 43 .7% Financing 18% 70% 12% 53 53 0% Business Conditions Na DA Na 4.0 4.1 -2% Source: UBS Bus:less Jet Survey jE,S 2 EFTA_R1_00225639 EFTA01840640 UN Business Jet Survey 2 February 2012 UBS Business Jet Market index Our UBS Business Jet Market Index is a proprietary index designed to measure the total "value" of the responses to our survey questions. We have weights each factor in our index based on our perception of its overall importance to the condition of the new business jet market. Our index is scored on a scale of zero to 100, with 51-100 representing incrementally strengthening market conditions, 50 incrementally stable, and 0-49 incrementally weakening market conditions. Our January Business Jet Market Index came in at 41, in line with our prior survey in November. Chart 3: UBS Business Jet Market Index 100 m t7D S ":' GS sn tinz „s a, > 7. I • co 34 50 Q• .i ; g 41 %ISCG i nt; (.2:R 0 e00000000 0 ------ " 4 44i -1 1 4t"r O 4 " 2 1 ; 1791 4-21- 2-,,L k 1 1 z 1 12" ii ta l l nIA41 1 81A Source: UBS Buaiess Jet Sway Market Segment indices By market segment, our large cabin index declined 3% to 42 (from 43) and midsize declined 2% to 41 (from 42), while small cabin increased 2% to 40 (from 39). Chart 4: Market Segment Indices. by Cabin Class g IDz t I 1 1 0 0 on 0 0 0 N 2 (4, —Survey index Small • klidsde -s- large Son: UBS Busiless Jet &rley 3 EFTA_R1_00225640 EFTA01840641 MS Business Jet Survey 2 Febrility 2012 Survey Participant Profile Of the 161 market professionals who responded to our survey, a majority (60%) are broker/dealers. Brokers/dealers are involved in the purchase and sale of both new (direct from manufacturer) and used aircraft, often purchasing on spec. Chart 5: Business Jet Market Survey - Participant Role Oner 14% Manuthatter 9% Financier Dealer(Broker 17% 60% No Other mcludes appraisers. trammel provides. management. char. 180 and MRO serval providers. Son. UBS Business Jet Survey The majority of our participants are located in North America (74%) with an additional 21% in Europe. Chart 6: Business Jet Market Survey • Participant Location Lain America Asia a Pacific 2% Middle East & Africa 1% 2% Europe 21% MA Mina 74% Son: UBS Business Jel Survey jE,S 4 EFTA_R1_00225641 EFTA01840642 UN Business at Suntey 2 February2012 While the majority of ow survey participants arc located in the U.S., most transact a significant proportion of their business with foreign customers. Chart 7: Proportion of Business Transacted Outside the US MI None 9% 9% More ten 75% Less tan 25% 17% 31% 16% 25-50% 18% Son: UBS Beefless Jet Survey Respondents varied fairly uniformly in average transaction size with the majority in the S5-20 million range. Chart 8: Business Jet Market Survey - Average Transaction Size 53061+ 7% $0-5M 520-30IA l 11% -il 28% 510-2061 26% 55-1011 28% Source: UBS Business Jet Surrey J665 EFTA_R1_00225642 EFTA01840643 UBS Business Jot Surrey 2 Fettuary 2012 Survey Results Overall Business Conditions In the first question, we asked, "On a scale of zero to 10, how would you characterize overall business conditions after factoring typical seasonality (0 = the worst ever, 5 = normal, 10 = the best ever)?" Note that while our Business Jet Market Index (discussed earlier) indicates incremental change from the prior period, this question is meant to measure the absolute level of business conditions. We received 156 responses (five participants did not tespund to this question) with scores ranging from zero to eight. Chart 9: Indication of Overall Business Conditions, January 2012 35% 30% 27% 25% S 20% to rr 15% 10% 6% 7% 5% 1% 0% 0% 0% 0 1 2 3 4 5 6 7 8 9 10 Business Corttors Rank Son: UBS Bustness Jet Survey Overall, our average business conditions score came in at 4.0, 2% lower from our prior survey in November. Chart 10: Overall Business Conditions 10 °num. —avia"leMa !cm,- m-co ' fl e4 ' m M.40 . ma6MMm Mcsic !aavM• .6(4 nMMM 5 O a mr-co4Nr-m ei .... 4 !orrie4 c‘i 0 ItiVM1IPIM'si29it91 11rT $I4"'"" ------" lag-aPlIg-alAgalltil4s1,Alk4331Mg4klalitiltSgA444,W Source: UBS Buse:less Jet Survey J&S 6 EFTA_R1_00225643 EFTA01840644 MS Business Jet Survey 2 Feteuary 2012 Customer Interest In the next question, we asked, "Since our last survey in November, the level of customer interest improved, stayed the same or deteriorated?" Of the 161 responses (all participants responded to this question), 29% indicated that customer interest had improved, while 19% indicated that customer interest had deteriorated. The remaining 52% indicated that customer interest had stayed the same. This result is stronger than our prior survey, in which 27% indicated that customer interest had improved, 20% indicated customer interest had deteriorated and 53% indicated that customer interest had stayed the same. Chart 11: Indication of Customer Interest, January 2012 Detnorated 19% Improved 7 29% Stayed Me same 52% Source: UBS Business Jet Survey Our customer interest score increased 3% to 55, above the 50 mark indicating incremental improvement. Chart 12: UBS Business Jet Survey Score - Customer Interest 100 Customer Interest Score 53211-7. S8 82 22 2 50 rFi w, 0 3 2)4ggragggngi°44agn 4aggiOngar48i4244844 Some: UM Menses Jet Survey jE,S 7 EFTA_R1_00225644 EFTA01840645 UN Business at Survey 2 February 2012 Customer Interest by Region Our survey indicates that customer interest levels vary by region with North America (59). Asia (58) and Latin America (52) reflecting incremental improvement, while customer interest in the Middle East (44) and Europe (31) appears to be falling oft Chart 13: Customer Interest Score by Region Relative to Prior Survey in November 100 80 60 40 20 0 North America Europe Lain America Made East Asia ■ Proof Survey ■ Current Survey Source: UBS Busness Jet Survey Customer Interest by Cabin Class In the next question. our participants were asked to indicate the class of aircraft in which they were seeing the most interest from potential buyers. Respondents were asked to choose from Large Cabin, Midsize Cabin or Small Cabin. Of the 118 responses (43 participants did not respond to this question). 72% indicated they were seeing the strongest interest in large cabin aircraft, with 14% indicating midsize and 14% indicating small cabin. Compared to our prior survey, this reflects slightly higher interest in the small cabin class relative to midsize. Chart 14: Cabin Class with Most Buyer Interest, January 2012 ilithl2e Cabin 14% \ till Large Cabin 72% Source: UBS Business Jet Survey JE.S EFTA_R1_00225645 EFTA01840646 UN Business Jet Survey 2 Fettuary 2012 Pricing In the next question, we asked, "Since our last survey in November, overall pricing levels increased, stayed the same, or decreased?" Of the 153 responses (eight participants did not respond to this question), 3% indicated that pricing levels had increased, while 37% indicated that pricing levels had decreased. The remaining 60% indicated that pricing levels had stayed the same. These results are weaker than our prior survey in November in which 8% indicated that pricing levels had increased, 28% indicated that pricing levels had decreased, and the remaining 64% indicated that pricing levels had stayed the same. Chart 15: Indication of Pricing, January 2012 3 Increased 3% Decreased 37% stayed die same 60% Source: UBS Business Jet Survey Our pricing score came in at 33, 17% lower from our prior survey in November. Chart16: UBS Business Jet Survey Score • Pricing 100 o leg gm is m `2$ 2 AS Q 50 A Rra r._CO O. 0 0 00000..... re4 44II414BtIBVBIBrapalpt °44 4 / 1 91$1 1e . tA,.. . 44t _. 4 "—fl 2 6 gc' -1 6.-4 6 1 61 2" r 4 26 —'`‘ XIM mt-X4 2r-Z8S-2t-Lq, 2 2 Son: UBS Business Jet Survey UBS9 EFTA_R1_00225646 EFTA01840647 MS Business JM Survey 2 February 2012 Pricing by Cabin Class In the next question, our participants were asked to indicate the cabin class of aircraft in which they were seeing the strongest pricing. Respondents were asked to choose from Large Cabin, Midsize Cabin or Small Cabin. Of the 122 responses (39 participants did not respond to this question). 89% indicated they were seeing the strongest pricing in large cabin aircraft, with 7% indicating midsize and 4% indicating small cabin. Compared to our prior survey, this reflects slightly stronger pricing in midsize relative to small. Chart 17: Cabin Class with Strongest Pricing, January 2012 Small Cabin 4% Midsize Cabin 7% Large Cabin 89% Source: LISS Business Jet Surrey Bonus Depreciation Impact In the next question, we asked, -On a scale of zero to 10, how much did bonus depreciation positively impact your business in late 2011 (0 - no impact, 10 - very positive impact)?" We received 142 responses (19 participants did not respond to this question) with an average score of 2. Chart 18: Impact on Business from Bonus Depreciation, January 2012 60% 56% 50% 40% 30% 20% 6% 6%. 7% 7% 6% 5% 10% 2% 2% 1% 1% 0% „as 0 1 2 3 4 5 6 7 8 9 10 Source: UBS Busaness Jet Surrey BS 10 EFTA_R1_00225647 EFTA01840648 UBS Business Jot Surrey 2 Fettuary 2012 12-Month Outlook In the next question, we asked, "Over the next 12 months, do you expect overall business conditions to improve, stay the same or deteriorate?" Of the 158 responses (three participants did not respond to this question), 41% expect business conditions to improve, while 8% expect business conditions to deteriorate. The remaining 51% expect business conditions to stay the same over the next 12 months. These results are stronger than our prior survey in which 34% expected business conditions to improve, 14% expected business conditions to deteriorate and 52% expected business conditions to stay the same. Chart 19: 12-Month Forward Outlook for Business Conditions, January 2012 De'erforale 8% Improve 41% Slay tie same / NO 51% Sane: UBS Business Jet Survey Our I2•month outlook score came in at 66 this time, 11% higher than in our prior survey, indicating that on average our survey participants expect business conditions to improve over the next 12 months. Chart 20: UBS Business Jet Survey Score • 12-Month Outlook 100 0 In as 0 0 4444 14”*444ritig9191IT/11;;;;::: 11 $ h'-'5 X8AVE4g3,ngl_.14',A -4,,J,A4 0, 72 -.A4, 22 ja2,52 a Source: UBS Bus:less Jet Survey U8511 EFTA_R1_00225648 EFTA01840649 UN Business Jot Sunray 2 February 2012 Overall Inventory Levels In the next question, we asked, "How would you characterize current inventory levels?" In this question, we targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "high", "average", or "low." Of the 125 responses (36 participants did not respond to this question), 3% believe inventory levels arc low, while 73% believe inventory levels arc high. The remaining 24% believe inventory to be at average levels. These results are weaker than our prior survey in November in which 6% believed inventory levels were low, 73% believed inventory levels were high and the remaining 24% believed inventory to be at average levels. Chart 21: Indication of Inventory Levels, January 2012 Low 3% Average 24% 140 73% Source. UBS Busaness Jet Stymy Our inventory score came in at 15 this time. 19% lower from our prior survey in November. and continues to reflect very high overall inventory levels. Chart 22: UBS Business Jet Survey Score - Inventory Levels s s t2 S c vfrrf: S8SM s S 0 50 Ax e Cy ,r oreu'ror 4o ^wr WW COm 0 Ii 4 agil 4gF 4 204 5,3g 4cqgt..$ 4 fl ag34 44qg24 4 48 P41 .484 4e Scarp). UBS Business Jet Survey UBS 12 EFTA_R1_00225649 EFTA01840650 UN Business Jet Survey 2 February 2012 Young Inventory Levels In the next question, we asked, "How would you characterize current inventory levels of relatively young used aircraft?" In this question, we targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "high", "average", or "low." Of the 124 responses (37 participants did not respond to this question), 17% believe young inventory levels arc low. 36% believe young inventory levels arc high, and the remaining 47% believe young inventories to be at average levels. These results arc weaker than in our prior survey in which 20% believed young inventory levels were low, 33% believed young inventory levels were high and 47% believed young inventories to he at average levels. Chart 23: Indication of Young Inventory Levels. January 2012 Low 17% S Average 47% Source: US$ Fluenen Jet Survey Our young inventory score at 40 continues to reflect oversupply of high-quality, young used aircraft. Chart 24: UBS Business Jet Survey Score • Young Used Inventory Levels 100 91 86 90 83 91 90 86 77 e 64 47 36 35 40 43 40 50 v 32 32 25 2o2o 22 23 23 25 12 14 ›- 6 4 4 4 8 0 9 2 9999 444 4$$ 4 $$$ * 4 $ $ " " —————— " a•nt5, z u- zo-22 n, z— fr -A<gagtsk1;8 2 2 2 1 4 Son: UBS Busiless Jet Survey UB5 13 EFTA_R1_00225650 EFTA01840651 MS Business Jet Sunny 2 February 2012 Willingness to Increase Inventories In the next question, we asked, "Over the next month, will you be more or less willing to increase your inventory?" In this question, we again targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "more willing". "same", or "less willing." Of the 87 responses (74 participants Jid not respond to this question), 16% indicated they would be more willing to take on inventory, while 28% indicated they would be less willing to take on inventory. The remaining 56% indicated no change in their willingness to take on inventory. These results arc better than our prior survey, in which 19% indicated they would be more willing to take on inventory, 37% indicated they would be less willing and 44% indicated no change in their willingness to take on inventory. Chart 25: Willingness to Increase Inventory Levels, January 2012 More wiping less wiling 16% 28% Source: UBS Sunless Jet Surrey Our willingness score increased 9% to 44 this time, although still below 50 indicating that participants are less willing to take on new inventory compared to our prior survey in November. Chart 26: UBS Business Jet Survey Score - Willingness to Increase Inventory Levels 100 M S,..1,3g 3 M :AS two MS c, St; s2e Ge-a .DM • 'P'? 50 0 v-mirz -, 2m veltsvospatpIottvoAistssAtptsrlas4 vansz -r22 z -• s -• z -ru- zo - 2s' rams ram rt Son: UBS Business Jet Survey UBS 14 EFTA_R1_00225651 EFTA01840652 UN Business Jet Sunny 2 February 2012 Customer Financing In the next question. WC asked, - Since our last survey in November, has the availability of customer financing improved, stayed the same, or deteriorated?" Of the 152 responses (nine participants did not respond to this question), 18% indicated that customer financing conditions had improved, while 12% indicated that financing conditions had deteriorated. The remaining 70% indicated that financing conditions had stayed the same. These results are roughly in line with our prior survey in November. Chart 27: Financing Conditions, January 2012 Deismoraled Improved 12% r 18% Stayed he same 10% Son: UBS Business Jet Survey Our financing score came in at 53 this time, in line with our previous survey and above the 50 mark indicating incremental improvement. Chart 28: UBS Business Jet Survey Score — Financing 100 - 5" 50 - -a LL 1 011111111MM $1 8 8 Source UBS Busesess Jet Surrey US$ 15 EFTA_R1_00225652 EFTA01840653 t■S Business Jet Survey 2 Fettuary 2012 Commentary The following arc selected comments from business jet professionals. Overall Business Conditions ■ A cautious market but trending up. ■ Trading conditions remain difficult, but interest remains good at all levels. ■ Do not anticipate any sort of recovery until 2013. ■ Year end activity was somewhat bolstered by bonus depreciation and some pent up demand. ■ Activity levels improved in November. December and January. ■ Finally seeing some interest in midsize/large cabin segment, but small cabin segment has been slow. ■ Lots of activity in 4Q related to bonus depreciation on new aircraft side. • The worst isn't over. ■ Slowly getting better. ■ Much more activity in last 30 days. ■ Improving market, especially on long range and ultra-long range. ■ Business is pent-up, but remains slow. ■ Activity slowly getting better, but still more sellers than buyers. ■ The momentum is definitely positive for 2012 following a very good 2011. Aircraft Values / Pricing ■ With bonus deprecation gone, the temporary increase in the (after tax) gap between new and late model used is gone. This may lead to strengthening in late model used prices. ■ Near new aircraft still commanding top dollar, while anything older than two years is weaker and seems to have potential to weaken. ■ Prices of large cabin jets are extremely high, but they are not selling as well as they have in the past. ■ After firming during summer 2011, prices took another dip in Q3 and Q4 with a slug of new inventory on the market. • Now entering typically slower Q1 with about average activity for season. Customer Interest ■ Seeing improving interest for newer aircraft. ■ Entry level, light and large cabin aircraft markets are active: midsize and super-midsize remain inactive. UBS 16 EFTA_R1_00225653 EFTA01840654 MS Mamas at Survey 2 February 2012 ■ We're still bumping along the bottom, though late, low-time, large-cabin aircraft remain desirable. ■ New, heavy aircraft models are still strong. ■ Mid-market pricing still very weak as manufacturers continue to give away planes. ■ There has been a notable drop in customer purchase intentions. ■ We have seen incredibly high customer interest since Q4, which seems to be continuing on into this year. ■ We have as many sales on the go at the moment as we had back in the good times, but each sale is hard work and prices are very low. US Market ■ US market showing decent levels of interest, driven by need to get on with aircraft replacement; bonus depreciation is helping. • Seeing a dramatic improvement in U.S. buyers' interests in both new and used aircraft. ■ US buyers are out there, but are looking to acquire aircraft at dealer pricing. International • Western Europe showing very weak levels of buying activity. ■ Emerging market activity continues to be relatively strong. ■ The international venues remain selectively active. ■ BRIC countries still showing strong demand. Financing ■ Although most activity is cash, we have found some interest in financing and even some financing for 25 to 30 year old aircraft. ■ Each bank seems to be offering different finance options, which is opening the doors for some much needed money. ■ Still no real foreign financing. ■ No financing for older aircraft. ■ Continued weak loan demand. ■ Deals taking a considerable amount of time to close, but closing. U6517 EFTA_R1_00225654 EFTA01840655 UN Business Jet Survey 2 February 2012 • Statement of Risk The business jet market is cyclical in nature, largely driven by the general economic environment. Business jet manufacturers' earnings and cash flow are dependent on end-user demand, availability of customer financing, program execution and inventory management. Our estimates, ratings and price targets for General Dynamics, Textron and Rockwell Collins arc subject to additional risks including poor program execution and government funding related to their defense and security businesses. Additionally, Textron faces liquidity risks related to it its asset based lending businesses. ■ Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS. and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS 18 EFTA_R1_00225655 EFTA01840656 UBS Business Jet Survey 2 Febnary 2012 Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past: past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverages IB Services= Buy Buy 57% 36% Neutral Hold/Neutral 37% 35% Sell Sell 7% 17% UBS Short-Tenn Rating Rating Category Coverage' is services Buy Buy less than 1% 0% Sell Sell less than 1% 12% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (18) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Shod-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 December 2011. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Tenn Rating Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS 19 EFTA_R1_00225656 EFTA01840657 UBS Business hi Survey 2 February 2012 KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock% price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities h