RBC on Darden

7/27/2019 RBC on Darden

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E Q U I T Y R E S E A R C H

RBC Capital Markets, LLC

David Palmer (Analyst)(212) [email protected]

Eric Gonzalez (Associate)(212) [email protected]

Jack Kindregan, CFA(Associate)(212) 618-7716

[email protected]

Sector PerformNYSE: DRI; USD 44.92

Price Target USD 50.00

WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

DownsideScenario

35.00

17%

CurrentPrice

44.92

PriceTarget

50.00

16%

UpsideScenario

62.00

43%

*Implied Total Returns

Key StatisticsShares O/S (MM): 132.6

Dividend: 2.20

Float (MM): 121.0

Debt to Cap: 58%

Market Cap (MM): 5,9

Yield: 4.9

Tr. 12 ROE: 22.00

3-Yr. Est. EPS Growth:

RBC EstimatesFY May 2013A 2014A 2015E 201

Revenue 5,921.0 6,285.7 6,689.8 6,785

EPS, Ops Diluted 1.80 1.71 2.23 2.

P/E 25.0x 26.3x 20.1x 18.

Revenue Q1 Q2 Q3 Q

2014 1,531.5A 1,485.6A 1,618.5A 1,650.

2015 1,617.2E 1,558.8E 1,676.7E 1,837.

2016 1,647.5E 1,613.1E 1,733.0E 1,764.EPS, Ops Diluted

2014 0.32A 0.10A 0.70A 0.59

2015 0.37E 0.27E 0.82E 0.7

2016 0.54E 0.30E 0.88E 0.7Revenue: *Restated from FY13 to exclude Red Lobster from continuingoperationsAll values in USD unless otherwise noted.

July 29, 2014

Darden Restaurants, Inc.

Darden offers an olive branch

Our view: We believe the proposed changes likely mean that current

sales trends remain troubled. However, an end to this battle could help

accelerate the CEO search and minimize distraction inside the company.

Key points:Darden announces leadership succession plan and proposed board

changes: Darden restaurants announced that Chairman and CEO Clarence

Otis is stepping down. Mr. Otis will continue to serve as CEO until

the earlier of his successor or 12/31/14. In addition, the company has

announced the separation of the roles of Chairman and CEO and has

chosen to nominate 9 of 12 director candidates for election, ensuring that

at least three of the nominees proposed by Starboard Value would beelected at the September meeting of shareholders.

Implications of proposed changes: We believe that Darden's proposals

likely mean that: 1) current sales trends remain troubled—something that

should come to light during next quarter earnings, which is ahead of the

shareholder meeting; 2) an end to this battle could help accelerate the

CEO search and minimize distraction inside the company; 3) Starboard's

suggestions are more likely to be implemented at Darden. These include

cost cutting, the sale of real estate, and a breakup of the company.

Analyzing a Darden breakup; sum of the parts analysis suggests SRG is

richly valued: With the changes to management and the board, a Darden

breakup scenario may be back on the table, particularly if Starboard'sboard nominees are brought inside the circle of trust. However, after

assigning peer-like multiples to Olive Garden and LongHorn of ~10x CY15E

EBITDA, our sum of the parts analysis (see page 3) suggests that the

Specialty Restaurant Group (SRG) is richly valued at Darden's current stock

price. SRG's implied valuation is 13x CY15E EBITDA, a large premium to

the 11x average of peer growth-oriented casual dining chains.

Tax-efficient sale of real estate may be difficult to achieve, in our view:

While there is a possibility that Darden could find a tax-efficient buyer for

its remaining real estate holdings, we do not see this as a likely scenario.

We believe Darden has previously executed a search of potential buyers

without success. A more traditional sale of real estate assets would likely

trigger both tax costs and debt modification costs.

Do these announcements foreshadow current trends? While SSS growth

at Olive Garden improved to flat during the first three weeks of FY15,

we have little reason to believe that Olive Garden has sustained this

improvement. Despite significantly easier YOY comparisons, current

trends in the casual dining industry remain in the low-single-digit negative

range through the first half of Darden's F1Q. Over time, we believe an Olive

Garden turn can occur slowly with a shift to digital/targeted marketing,

reinvestment in food value, and more effective reimaging.

Priced as of prior trading day's market close, EST (unless otherwise noted)For Required Conflicts Disclosures, see Page 6.



Target/Upside/Downside Scenarios

Exhibit 1: Darden Restaurants, Inc.

30m

20m

10m

M A M J J A S O N

2012

D J F M A M J J A S O N

2013

D J F M A M J

2014

J

UPSIDE 62.00

TARGET50.00

CURRENT44.92

DOWNSIDE35.00

Jul 2015

60

55

50

45

40

35

30

125 Weeks 06MAR12 - 28JUL14

DRI Rel. S&P 500 COMPOSITE MA 40 weeks

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/ base caseOur price target of $50 is based on two methods: 1) DCF

analysis, which yields a $50 value based on a terminal growth

rate of 1.5% and a weighted average cost of capital of 7.7%;

and 2) comparable peer analysis, which takes into account

Darden’s earnings growth and dividend yield. Our FY15 and

FY16 EPS estimates are $2.23 (-30% Y/Y) and $2.47 (+11% Y/Y).

Our one-year $50 price target equates to ~20x our FY16 EPS

estimate.

Upside scenario

In our upside case, we assume ~2% FY15 SSS growth

for Darden, which implies modest industry improvement.

We also assume profitable growth within the specialtyrestaurant group. We assume Darden reduces overhead,

better leverages its scale, and finds more creative ways to

reach its core consumer. Our upside case also assumes Darden

can successfully execute a mobile-payment or customer-

loyalty program in the coming years. Our upside valuation of

$62 equates to 22x our upside case FY15 EPS estimate of $2.89

(+13% Y/Y), implying a dividend yield of 3.5%.

Downside scenario

In our downside case, we assume that Darden’s large chains

continue to underperform an industry that itself continues

to decelerate. We assume FY15 flat blended SSS growth.

Our downside case assumes industry SSS growth remains inthe low-single-digit negative range. Our $35 downside case

valuation equates to 17x our downside case FY16 EPS estimate

of $2.00 (flat Y/Y), implying a dividend yield of ~6%.

Investment summaryWe see only modest upside in Darden's stock. While there is

reason to expect modest near-term sales improvement, we

see a more significant sales and earnings turn in late FY15 at

the earliest. Fixing value perceptions in a low-growth industry

likely will be a multi-year project. While we do not see a "silver

bullet", we do believe Darden has long-term opportunities in

overhead, productivity, and media efficiency.

On the path to efficiency, but execution questions

remain: We believe Darden intends to pursue strategic

initiatives aimed at optimizing restaurant-level cost structure,

particularly at Olive Garden, and maximizing overall return

on invested capital. That said, many questions remain as to

how the company will deliver on its stated targets of low- to

mid-teens operating growth for the "remain-co." Moreover,

industry trends remain a concern and could continue to weighon the value of both companies.

Darden's inefficiencies could turn into higher returns and

cash flow over time. Darden may have opportunities to drive

efficiencies in operating margins and free cash flow to boost

ROIC, which was 12pp below Brinker in FY13. We believe

Darden to be an under-earner relative to its peers and see

room for the company to reduce its overhead. In addition,

capital expenditures do not seem to be generating sufficient

incremental returns. Furthermore, Darden's TV advertising is

seemingly generating questionable returns as Millennials turn

away from live television viewing.

Risks to our investment thesis: Potential risks include but not

limited to: 1) slowing economic activity; 2) food safety, quality,

and value; 3) food and labor inflation; and 4) competitor menu

and marketing moves.


July 29, 2014 David Palmer (212) 905-5998; [email protected] 2



Exhibit 2: DRI sum of the parts analysis

CY14e

EBITDA

Implied

Multiple

Current

Enterprise

Value

CY15e

EBITDA

Target

Multiple

Target

Enterprise

Value

SRG 165 13.5x 2,228 182 13.0x 2,360

OG+LH 477 10.5x 4,987 577 9.6x 5,553

Total Company 642 11.2x 7,215 759 10.4x 7,912

minus: Net Debt 1384 1,384

Market Value 5,831 6,528

Diluted Shares 131 131

Valuation $44.66 $50.00

Source: Company documents; RBC Capital Markets estimates

Exhibit 3: DRI peer analysis

DRI BLMN EAT DIN Average CAKE TXRH BJRI IRG CHUY Average

Price $45.0 $20.1 $45.5 $77.9 $43.3 $25.0 $34.96 $12.49 $28.49

Market Cap 5,955 2,532 2,955 1,495 2,164 1,747 995 326 468

+Net Debt 2,573 1,206 748 1,274 4 -48.7 -31 131 1

EV 8,528 3,737 3,704 2,770 2,169 1,698 964 457 469

CY14e EBITDA 642 466 436 268 247 193 85 46 30

EV/EBITDA 13.3x 8.0x 8.5x 10.3x 9.0x 8.8x 8.8x 11.3x 9.9x 15.8x 10.9x

CY14e EPS $1.93 $1.22 $2.86 $4.39 $2.22 $1.29 $0.77 $0.35 $0.81

P/E 23.3x 16.4x 15.9x 17.8x 16.7x 19.5x 19.5x 45.5x 35.9x 35.4x 31.1x

Mature Casual Dining High Growth Casual Dining






ValuationOur price target of $50 is based on two methods: 1) DCF analysis, which yields a $50 value

based on a terminal growth rate of 1.5% and a weighted average cost of capital of 7.7%; and

2) comparable peer analysis, which takes into account Darden’s earnings growth and dividendyield. Our FY15 and FY16 EPS estimates are $2.23 (-30% Y/Y) and $2.47 (+11% Y/Y). Our one-

year $50 price target equates to ~20x our FY16 EPS estimate.

Price target impedimentsSlowing economic activity: Restaurant meal occasions are highly discretionary in nature.

Thus, Darden’s customers may be influenced by various macroeconomic factors (domestic

and international), including employment, gas prices, personal savings, discretionary income,

housing, consumer confidence, etc.

Food safety and quality: Darden spends a significant portion of its marketing budget on

national TV advertising promoting the company’s food quality and menu offerings. As such,

any challenge to the perception of quality might cause immeasurable harm to the company’s

reputation and value.

Food and labor inflation: While Darden typically will lock in its food costs three to six

months forward, a rapid increase in the price of key commodities would affect its future

earnings growth. Similarly, wage increases—whether from statutory minimum wage increases

or voluntary—would affect store-level profitability.

Competitor menu and marketing moves: Darden’s advertised price points on key menu items

is one of the company’s key differentiators. Significant promotional pricing by casual dining

competitors could lead to traffic declines.

Company description

Darden Restaurants is the largest full-service restaurant company, generating more than $6.6billion in sales during its latest fiscal year. The company operates over 1,500 casual and fine

dining restaurants across seven distinct brands. Darden’s largest brands are Olive Garden (60%

of revenue) and LongHorn Steakhouse (22% of revenue). The company’s Specialty Restaurant

Group (21% of revenue) comprises the remaining five brands: Capital Grille, Seasons 52,

Bahama Breeze, Eddie V’s, and Yard House. Darden owns and operates its entire restaurant

base in North America and licenses a small number of restaurants in select international

markets.





Darden Restaurants $1.80 $1.71 $0.37 $0.27 $0.82 $0.77 $2.23 $0.54 $0.30 $0.88 $0.75 $2.47

Income Statement $1.80 $1.71 $0.37 $0.27 $0.82 $0.77 $2.23 $0.54 $0.30 $0.88 $0.75 $2.47

David Palmer $1.80 $1.71 $0.37 $0.27 $0.82 $0.77 $2.23 $0.54 $0.30 $0.88 $0.75 $2.47

RBC Capital Markets

Group Columns for Annual I/S Post-Stock Options Post-Stock Options

Scenario: Base Case Full Year Full Year 2015E Full Year 2016E Full Year

(in millions, except per share data) 2013 2014 1Q15E 2Q15E 3Q15E 4Q15E 2015 1Q16E 2Q16E 3Q16E 4Q16E 2016

2013 2014 Aug -14 Nov-14 Feb-15 May-15 2015E Aug -15 Nov-15 Feb-16 May-16 2016E

Olive Garden 3,685.0 3,642.0 935.5 883.9 931.0 999.8 3,750.2 946.3 892.6 937.9 933.9 3,710.7

Growth 2.9% -1.2% 1.9% 1.7% 0.2% 8.0% 3.0% 1.2% 1.0% 0.7% -6.6% -1.1%

LongHorn 1,231.0 1,384.0 352.7 343.8 384.2 425.1 1,505.9 369.4 360.0 402.7 414.9 1,547.0

Growth 10.3% 12.4% 8.5% 7.4% 5.8% 13.1% 8.8% 4.7% 4.7% 4.8% -2.4% 2.7%

Other 1,005.0 1,241.1 329.0 331.1 361.5 412.2 1,433.7 358.8 360.5 392.8 415.3 1,527.3

Growth 58.8% 23.5% 16.7% 13.8% 13.0% 18.4% 15.5% 9.0% 8.9% 8.7% 0.8% 6.5%

Sales 5,921.0 6,285.7 1,617.2 1,558.8 1,676.7 1,837.1 6,689.8 1,674.5 1,613.1 1,733.3 1,764.1 6,785.0

Growth -26.0% 6.2% 5.6% 4.9% 3.6% 11.3% 6.4% 3.5% 3.5% 3.4% -4.0% 1.4%

Cost of sales:

Food and beverage 1,743.5 1,892.1 480.3 469.8 503.8 563.8 2,017.7 498.2 486.2 520.8 541.4 2,046.5

Chg per dollar revenue -3% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

YOY Change -29% 9% 6% 5% 4% 12% 7% 4% 3% 3% -4% 1%

% of company revenue 29.4% 30.1% 29.7% 30.1% 30.0% 30.7% 30.2% 29.8% 30.1% 30.0% 30.7% 30.2%

YOY change in cost of sales margin (132) bp 66 bp 5 bp 5 bp 5 bp 5 bp 6 bp 5 bp 0 bp 0 bp 0 bp 0 bp

Restaurant labor 1,892.7 2,017.5 517.3 513.3 529.5 587.0 2,147.2 535.2 530.5 546.6 562.4 2,174.7

Chg per company unit 2% 4% 1% 1% 1% 9% 3% 1% 1% 1% -6% -1%

Change -24% 7% 5% 4% 4% 12% 6% 3% 3% 3% -4% 1%


YOY change in expense margin 69 bp 13 bp (10) bp (16) bp 14 bp 10 bp (0) bp (3) bp (4) bp (5) bp (7) bp (5) bp

Restaurant expenses 980.4 1,080.8 276.4 270.8 273.9 308.7 1,129.9 287.4 281.2 284.1 295.8 1,148.5

Chg per company unit 11% 7% 1% 0% -2% 6% 1% 1% 1% 1% -6% -1%

Change -18% 10% 5% 3% 1% 8% 5% 4% 4% 4% -4% 2%


YOY change in expense margin 155 bp 64 bp (5) bp (26) bp (43) bp (46) bp (31) bp 7 bp 6 bp 6 bp (4) bp 4 bp

Total cost of sales $4,616.6 $4,990.4 $1,274.1 $1,253.9 $1,307.2 $1,459.5 $5,294.7 $1,320.7 $1,297.9 $1,351.5 $1,399.5 $5,369.7

78.0% 79.4%

Gross Profi t $1,304.4 $1,295.3 $343.1 $304.9 $369.5 $377.5 $1,395.0 $353.7 $315.2 $381.8 $364.5 $1,415.3

Gross Margin 22.0% 20.6% 21.2% 19.6% 22.0% 20.6% 20.9% 21.1% 19.5% 22.0% 20.7% 20.9%

YOY change in gross margin (92) bp (142) bp 10 bp 37 bp 24 bp 30 bp 25 bp (9) bp (2) bp (1) bp 11 bp 1 bp

Selling, General and Administrative 626.3 612.2 175.9 172.8 147.0 157.5 653.2 177.1 175.6 152.0 151.2 656.0

% of sales 10.6% 9.7% 10.9% 11.1% 8.8% 8.6% 9.8% 10.6% 10.9% 8.8% 8.6% 9.7%

YOY Change -16% -2% 6% 5% 4% 13% 7% 1% 2% 3% -4% 0%

YOY change in G&A % of sales 124 bp (84) bp (0) bp 0 bp 0 bp 15 bp 3 bp (30) bp (20) bp 0 bp 0 bp (10) bp

Depreciation a nd a mortization 278.3 304.3 79.2 77.2 82.2 90.0 328.6 82.0 79.8 86.7 87.9 336.4

% of sales 4.7% 4.8% 4.9% 5.0% 4.9% 4.9% 4.9% 4.9% 5.0% 5.0% 5.0% 5.0%

YOY Change -20% 9% 7% 2% 8% 15% 8% 4% 3% 5% -2% 2% YOY change in D&A % of sales 34 bp 14 bp 6 bp (13) bp 19 bp 15 bp 7 bp 0 bp 0 bp 10 bp 8 bp 5 bp

Total operating costs and expenses $5,521.2 $5,906.9 $1,529.3 $1,503.9 $1,536.4 $1,707.0 $6,276.6 $1,579.9 $1,553.3 $1,590.2 $1,638.6 $6,362.1

Operating Earnings $399.8 $378.8 $88.0 $54.9 $140.3 $130.0 $413.2 $94.5 $59.7 $143.2 $125.4 $422.9

YOY Change -46.0% -5.3% 6.5% 22.3% 4.3% 11.3% 9.1% 7.5% 8.8% 2.0% -3.5% 2.3%

EBIT Margin 6.8% 6.0% 5.4% 3.5% 8.4% 7.1% 6.2% 5.6% 3.7% 8.3% 7.1% 6.2%

Interest expense 125.9 134.4 32.9 16.7 19.4 20.4 89.5 17.3 17.4 19.6 20.7 75.1

Implied interest rate 5.5% 5.2% 5.1% 4.8% 5.2% 5.5% 4.5% 5.1% 4.8% 5.2% 5.5% 5.2%

Other Expense $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Pre-tax Income $273.9 $244.4 $55.0 $38.2 $120.9 $109.6 $323.7 $77.2 $42.3 $123.6 $104.7 $347.8

Taxes 36.7 16.0 6.6 4.6 14.5 13.2 38.8 9.7 5.3 15.4 13.1 43.5

Tax Rate 13.4% 6.6% 12.0% 12.0% 12.0% 12.0% 12.0% 12.5% 12.5% 12.5% 12.5% 12.5%

Net Income $237.2 $228.4 $48.4 $33.6 $106.4 $96.5 $284.9 $67.6 $37.0 $108.1 $91.6 $304.3

Extraordinary (0.10) - - -

EPS (Post Stock Options) $1.80 $1.71 $0.37 $0.27 $0.82 $0.77 $2.23 $0.54 $0.30 $0.88 $0.75 $2.47

Growth -49.8% -4.9% 16.3% 159.4% 16.7% 31.0% 30.2% 47.1% 11.6% 7.6% -3.5% 10.8%

Calendar EPS Post-Stock Options $1.7 $1.93 $1.9 $2.44 $2.44 $2.47

Growth -43.4% 15.4% 15.4% 26.2% 26.2% 1.5%

Diluted Shares Out 131.6 133.1 130.8 125.1 130.3 124.6 127.7 124.1 123.6 123.1 122.6 123.3

YOY Change -1.0% 1.1% -1.4% -5.8% -2.3% -6.9% -4.0% -5.2% -1.2% -5.6% -1.6% -3.4%

4.58%

Dividends per share $2.05 $2.20 $0.55 $0.55 $0.55 $0.55 $2.20 $0.61 $0.61 $0.61 $0.61 $2.42

Growth 14.5% 7.3% 0.0% 0.0% 0.0% 0.0% 0.0% 10.0% 10.0% 10.0% 10.0% 10.0%

EBITDA 793.9 683.2 167.2 132.1 222.5 220.0 741.8 176.6 139.6 229.8 213.3 759.3

LTM EBITDA 793.9 683.2 662.0 641.6 621.1 741.8 741.8 751.2 758.7 766.1 759.3 759.3

YOY Change -27.1% -13.9% -11.2% -13.4% -8.4% 121.6% 8.6% 5.6% 5.7% 3.3% -3.1% 2.4%

EBITDA Margin 13.4% 10.9% 10.3% 8.5% 13.3% 12.0% 11.1% 10.5% 8.7% 13.3% 12.1% 11.2%

YOY change margin (bps) -20 -254 -196 -179 -174 596 22 21 18 -1 11 10






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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including

total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated

by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,

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RBC Capital Markets, LLC makes a market in the securities of Darden Restaurants, Inc..

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Ratings

Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months

with a favorable risk-reward ratio.

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Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects

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the meanings are not the same because our ratings are determined on a relative basis (as described below).

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RBC Capital Markets, Equity Research

As of 30-Jun-2014

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 845 53.24 299 35.38

HOLD [Sector Perform] 658 41.46 159 24.16

SELL [Underperform] 84 5.29 10 11.90



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company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity

as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rated a long-term

'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings,

nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes any obligation, to

maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and

have not been tailored to individual investor circumstances and objectives, and investors should make their own independent

decisions regarding any Short-Term Trade Ideas discussed therein.

Analyst certification

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of

the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or

indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services

LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied

warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties

of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,

punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC

Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney

Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty,

express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All

opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and

are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment

advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of

persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent

investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy

any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital

Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other

investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be

eligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/

or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicable

industry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is

not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not

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any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information

contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents:

This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which accepts

responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in

a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should

contact and place orders with RBC Capital Markets, LLC.To Canadian Residents:

This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in

Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and

that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC

Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.

To U.K. Residents:

This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial

Conduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for general

distribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of

RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.

To Persons Receiving This Advice in Australia:

This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared

for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on





this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition

or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product

and consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section

761G of the Corporations Act.

To Hong Kong Residents:

This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets (Hong

Kong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institution under

the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation,

or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC

Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong Kong

Branch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).

To Singapore Residents:

This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities granted

offshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and does

not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before

purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative

of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada

(Asia) Limited.

To Japanese Residents:

Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial

instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

.® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.

Copyright © RBC Capital Markets, LLC 2014 - Member SIPC

Copyright © RBC Dominion Securities Inc. 2014 - Member CIPF

Copyright © RBC Europe Limited 2014

Copyright © Royal Bank of Canada 2014

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