U.S. Focus List. Sector weightings: U.S. Focus List vs. the S&P 500. U.S. Focus List S&P 500

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1 RBC Dominion Securities Inc. U.S. Focus List August 8, 2018 Quarterly Report What s inside 4 Portfolio positions 5 Apple Inc. Attractive entry point provides an opportunity to benefit from AAPL s long-term potential 5 Netflix, Inc. Temporary break in the breakneck pace 7 Portfolio companies 13 Portfolio companies risks 15 Methodology The U.S. Focus List returned 8.35% for the quarter ending July 31, outperforming the S&P 500 by roughly 147 basis points. The outperformance was largely driven by stock selection, offsetting the negative contribution from sector allocations. The strong return was driven by the Technology, Consumer Staples, and Industrials sectors, while Health Care and Consumer Discretionary detracted from performance. Alphabet (GOOG) and MasterCard (MA) were the largest contributors to the Portfolio s showing, driven by robust earnings and investments in new businesses and markets that potentially set both companies up for further Portfolio Advisory Group Equities Same script, different quarter Outperformance was driven by contributions from across the Portfolio years of growth and profits, in our view. YUM! Brands (YUM) was the biggest laggard for the quarter given weakerthan-expected comps due to supply issues at KFC and slower sales in Pizza Hut s international business. While we expect YUM to address these matters, we removed it from the Portfolio given its premium valuation relative to peers and lack of near-term catalysts. Still positive, with a dose of caution We are a few weeks into the June quarter reporting season and early indications are that it is shaping up well. Companies are mostly delivering robust numbers on strong demand for products and services despite the headwinds of weaker international growth, trade disputes, and For an overview of the Portfolio, please click here. Click here for authors contact information. All values in U.S. dollars and priced as of July 31, 2018, market close, unless otherwise noted. Disseminated: Aug 8, :15ET Produced: Aug 8, :48ET For required disclosures, see page 16. NOT FOR DISTRIBUTION IN THE U.S. Sector weightings: U.S. Focus List vs. the S&P 500 U.S. Focus List S&P 500 Financials, 20.0% Information Tech., 20.0% Health Care, 20.0% Industrials, 10.0% Consumer Discr., 10.0% Consumer Staples, 10.0% Energy, 5.0% Materials, 5.0% Telecom Srvcs., 0.0% Utilities, 0.0% Real Estate, 0.0% Source - RBC Dominion Securities, Bloomberg; data as of 7/31/18 Information Tech., 25.6% Health Care, 14.5% Financials, 14.1% Consumer Discr., 12.7% Industrials, 9.9% Consumer Staples, 6.9% Energy, 6.2% Utilities, 2.9% Real Estate, 2.8% Materials, 2.6% Telecom Srvcs., 1.9%

2 2 U.S. Focus List a stronger U.S. dollar. Corporations are flush with cash and we expect to see a return of capital to shareholders through dividend increases and share buybacks over the course of the year, as well as a return to acquisition-driven growth. While the indicators we track are generally pointing to positive sentiment, we temper our enthusiasm somewhat due to the flattening yield curve in the U.S. Our concern is that the recent flattening took place despite robust economic growth and inflation growing above the Fed s long-term target. We stress that a mere flattening of the curve does not automatically signal an imminent recession. Indeed, in the late 1990s, the curve was very flat for five years though there was no recession during that period. In fact, the U.S. economy grew by more than 4% annualized, while the stock market delivered healthy returns. What is more concerning, however, is the risk of a yield curve inversion. And while this has yet to occur, over the past half-century an inverted curve has predicted all U.S. recessions, though typically with a lead time of about 6 24 months. We believe the Portfolio is positioned well for escalating trade tensions given its lack of exposure to the Agricultural, Automotive, and Heavy Machinery sectors. Another concern is the upcoming midterm elections in November. Should the U.S. House of Representatives or Senate switch to Democrat control, we believe markets could potentially sell off on fears that the Democrats may raise roadblocks to President Trump s pro-business/anti-regulatory agenda. We assign a low probability for Congress to switch control, but this is still a risk (albeit transitory) for investors to monitor nevertheless. While worrisome, tariffs and tensions between the U.S. and its major trading partners have so far only had a relatively modest impact on the U.S. economy. Most U.S. manufacturers are shrugging off these fears given the strong global demand for their products. Instead, management teams are more troubled by the increase in the prices of raw materials, labor, and transportation. We believe the Portfolio is positioned well for escalating trade tensions given its lack of exposure to the Agricultural, Automotive, and Heavy Machinery sectors, which would be hit hard by a prolonged trade conflict with China. RBC Capital Markets estimates that a fullblown trade war between the U.S. and China would be manageable, with annual GDP growth in the U.S. slowing by 0.5%. Despite these concerns we continue to stay the course with regards to our investment approach. We aim to invest in high-quality businesses operated by strong management teams growing at above-average industry rates with catalysts on the horizon. While the current forward price-to-earnings multiple for the S&P 500 is not expensive at roughly 16x, given the later stages of the current cycle, many of these quality companies are trading towards their higher end relative to historical valuation metrics, which forces us to be patient in finding a good entry point. Focus List changes We made several changes to the Focus List during the three months ending July 31. On June 8, we removed our 5% position in Yum! Brands (YUM) and replaced it with 2.5% positions in Netflix (NFLX) and Walt Disney (DIS), thereby keeping our weight unchanged within Consumer Discretionary. Our strategy to add NFLX and DIS reflected a barbell approach to investing in media. Netflix is well positioned to benefit from the shift towards streaming video as cord-cutting intensifies, a trend which has negatively impacted traditional media players. Walt Disney, arguably the best content provider within traditional media, is currently pivoting towards a directto-consumer streaming model to stem subscriber losses. Furthermore, the pending acquisition of Fox assets provides additional content and scale advantages which we believe are not reflected in the stock s valuation.

3 3 U.S. Focus List During the quarter we added NFLX, DIS, and CVS, and removed YUM and UNP. On July 9, we made a sector call by raising our positioning in Health Care to Overweight from Market Weight with the introduction of a 5% weight in CVS Health (CVS). At the same time, we reduced our weight in Industrials to Market Weight with the removal of Union Pacific (UNP). The rails are early cyclicals, and given the later stage of the current bull market we decided to reduce our exposure to Industrials and increase the defensive characteristics of the Portfolio. CVS is a vertically integrated drugstore chain that is well equipped, in our view, to compete against Amazon in the drug supply channel. CVS is in the process of acquiring Aetna, which should enhance CVS s capability to provide high-quality health care at lower costs.. In the table on the next page, A stands for actual earnings, E stands for estimated earnings based on FactSet Consensus estimates. Dividend yield is calculated based on the most recent distribution (not the most recent declaration). The U.S. Focus List portfolio does not reflect the returns from actual investments; actual client account returns may differ. Prices utilized are closing prices one full trading session following additions to or removals from the U.S. Focus List portfolio. Information on removed stocks is available upon request. The U.S. Focus List portfolio is provided as an informational resource and is not intended to be the primary basis for any investment decision. Investors are advised to consider investment objectives, risks, and fees before investing. Investors should also note that commissions, advisory program fees, interest charges, or other expenses will reduce overall return on an investment. Principal value and investment returns will fluctuate; when liquidated, an investor s investment value may be worth more or less than the initial investment amount. Past performance is no guarantee of future results and should not be viewed as an indicator of future results.

4 4 U.S. Focus List Price 52-wk Calendar year EPS P/E Dividend Market Symbol Company name 7/31/18 range 2017A 2018E 2019E 2018E 2019E yield cap (B) Consumer Discretionary AMZN Amazon.com, Inc. $1, $4.56 $16.74 $ x 73.1x 0.00% $ NFLX Netflix Inc.* $ $1.25 $2.70 $ x 78.3x 0.00% $ DIS The Walt Disney Co.* $ $6.05 $7.21 $ x 14.8x 1.47% $ Consumer Staples COST Costco Wholesale Corporation $ $6.25 $7.21 $ x 27.9x 1.03% $97.37 KHC Kraft Heinz Company $ $3.55 $3.72 $ x 16.6x 3.88% $78.62 Energy EOG EOG Resources, Inc. $ $1.12 $5.42 $ x 17.9x 0.72% $70.90 Financials BRK.B Berkshire Hathaway Inc. Class B $ $5.86 $9.07 $ x 21.1x 0.00% $ JPM JPMorgan Chase & Co. $ $6.87 $9.16 $ x 11.8x 1.91% $ PNC PNC Financial Services Group, Inc. $ $8.50 $10.73 $ x 12.5x 2.62% $67.34 USB U.S. Bancorp $ $3.42 $4.07 $ x 12.1x 2.27% $86.19 Health Care CVS CVS Health Corporation $ $5.90 $6.97 $ x 8.8x 3.08% $65.97 JNJ Johnson & Johnson $ $7.30 $8.14 $ x 15.3x 2.73% $ TMO Thermo Fisher Scientific Inc. $ $9.49 $10.98 $ x 19.1x 0.29% $93.98 UNH UnitedHealth Group Incorporated $ $10.07 $12.70 $ x 17.9x 1.40% $ Industrials MMM 3M Company* $ $9.17 $10.33 $ x 18.5x 2.62% $ HON Honeywell International Inc. $ $7.11 $8.13 $ x 17.4x 1.92% $ RTN Raytheon Company* $ $7.54 $9.95 $ x 16.9x 1.77% $55.85 Information Technology GOOG Alphabet Inc. Class C $1, $35.90 $40.76 $ x 25.3x 0.00% $ AAPL Apple Inc. $ $9.84 $12.15 $ x 15.0x 1.40% $1, FB Facebook, Inc. Class A* $ $6.16 $7.13 $ x 21.7x 0.00% $ MA Mastercard Incorporated Class A $ $4.58 $6.42 $ x 26.9x 0.50% $ MSFT Microsoft Corporation* $ $3.60 $4.07 $ x 23.6x 1.55% $ Materials DWDP DowDuPont Inc. $ $3.40 $4.21 $ x 13.6x 2.27% $ CASH 0.00% * DIS, FB, MMM, MSFT, NFLX, and RTN are half positions (2.5%). Dividend yield is calculated based on the most recent distribution (not the most recent declaration). Source - FactSet, and our national research correspondents. For full disclosures see the bottom of page 3. Average market cap $282.80

5 5 U.S. Focus List Portfolio movers Apple Inc. (AAPL) Attractive entry point provides an opportunity to benefit from AAPL s longterm potential For the three-month period ending July 31, AAPL was up 15%, driven by strong iphone sales, acceleration in the services segment, and momentum from buybacks. We believe Apple will eventually transform from a device company to a services company. Services, which include the App Store and icloud, are an increasingly important part of the AAPL story and a key driver of gross margin, accounting for around 13% of revenues. From a near-term perspective, we believe Apple will eventually transform from a device company to a services company, and we expect services to become an approximately $50B business by We continue to like Apple as a total return story, as the company continues to return cash to shareholders through dividend increases and share buybacks. As of June 2018, Apple repurchased about $21B of stock, of which $10B was under the nowcompleted $210B program and the remainder under the $100B buyback program announced in May Earlier this year, the company increased its dividend by 16% from $0.63 per share to $0.73 and plans to hike the dividend each year going forward. We maintain our view that AAPL s current valuation creates an attractive entry point for investors, particularly in the context of expected earnings growth of 13% y/y based on RBC Capital Markets estimates. Apple services: Revenue breakdown 25% 36% 1% 17% 5% 7% 9% App Store itunes Apple Music icloud Apple Care & service parts Apple Pay & other Licensing & other, RBC Capital Markets estimates Netflix, Inc. (NFLX) Temporary break in the breakneck pace Netflix s Q2 results undershot RBC Capital Markets and consensus expectations. Importantly, subscriber additions (a key driver of stock performance) of 0.67 million in the Domestic segment and 4.5 million in the International segment were materially below consensus expectations of 1.23 million and 5.1 million, respectively. Further, company guidance for new subscribers in Q3 is 0.65 million in the Domestic segment and 4.4 million in the International segment also lagging consensus of 0.95 million and 5.1 million, respectively.

6 6 U.S. Focus List Global broadband households by Netflix market (in millions as of 2016) 101 U.S Pre-2014 expansion (Canada, LatAm, UK, Ireland, Nordics, Netherlands) expansion (France, Germany, Switzerland, Belgium, Luxembourg, Austria, Australia/NZ, Japan, Spain/Portugal, Italy) 2016 expansion (rest of world ex-china) Potential future expansion Source - RBC Capital Markets, Netflix, SNL Kagan The focus on the lower-than-expected subscriber additions was enough to overshadow the healthy pace of Global Streaming revenue growth and operating margin at record highs of 43% y/y and 12%, respectively. That said, RBC Capital Markets argued that Q2 is generally one of the weakest quarters for the company due to softness in new subscribers heading into the summer (the company experienced something similar during Q2 2016). In addition, distractions related to the World Cup and the lack of a mega-release during the quarter also potentially weighed on subscriber additions. We would tend to agree that the Q2 results are a function of seasonal softness, rather than fundamental weakness in the long-term investment thesis for NFLX. We would tend to agree that the Q2 results are a function of seasonal softness, rather than fundamental weakness in the long-term investment thesis. Looking ahead, RBC Capital Markets expects subscriber additions and revenue growth to accelerate in 2018 (to 37% vs. 36% in 2017), while operating margins should continue to expand. Netflix successfully launched several international shows at the beginning of Q3 and has a healthy slate of content for H that we believe should contribute to a recovery in new subscribers and concurrently support earnings and stock performance. We suspect the market, to a certain extent, felt similarly, given that the stock opened 13% lower following the quarterly release, yet closed just 5% lower the same day. We acknowledge that NFLX has pulled back about 16% from its 1-year-high in late June, but would point out that the stock still closed up 8% for the three months ending July 31. We maintain our view that Netflix represents the quintessential play on the secular growth trends of global streaming, cord-cutting, unbundling, and the demand for greater customization from viewers. The company currently has over 130 million paid subscribers globally six times as many as its closest competitor. Yet the ramp for growth is significant with 1 billion cable TV subscribers worldwide (based on RBC Capital Markets estimates). Also, scale matters as the number of users enables content generation, which in turn attracts more subscribers to the platform.

7 7 U.S. Focus List Portfolio companies 3M Company (MMM) 3M has a track record of industry-leading profitability (with best-in-class operating margins), free cash flow conversion, and dividend growth. The company has recently taken a more aggressive stance on M&A. Through 2020, 3M has roughly $24B $29B of available capital for deployment on M&A and share buybacks. 3M has no revenue exposure to energy-related end markets. Instead it benefits from lower commodity prices, given sizeable resin-based input costs. Amazon.com, Inc. (AMZN) Amazon.com is the largest global online retailer, with operations in seven countries and over 270 million customers worldwide. The company accounts for about 20% of U.S. online retail sales, a market in which penetration is rising by 100 basis points each year. Management has gained a strong reputation for its consistency, forward thinking, focus on innovation and customer service, and long-term shareholder orientation. Amazon Web Services and the company s media content are new revenue and margin expansion opportunities, which we believe are underappreciated by the market. MMM seven-year dividends per share $2.20 $2.36 $2.54 $3.42 Source - Bloomberg, Company reports $4.10 $4.44 $ Alphabet Inc. - Class C (GOOG) Alphabet is the world s No. 1 search engine with more than 70% of the global market share in search revenue and roughly 65% of the world s search queries. Competitive advantage is anchored in its cutting-edge technology, specifically its powerful search algorithms that provide a highly satisfied user experience. Numerous business platforms that could represent nearterm multibillion-dollar revenue opportunities include: optimizing local search, enterprise services, and Google Play. AMZN revenue breakdown - FY2017 5% 3%3% Online Stores 10% 61% Retail Third-Party Seller Services 18% Source - Bloomberg, Company reports Apple Inc. (AAPL) Amazon Web Services (AWS) Retail Subscription Services Physical Stores Other Apple is a leading manufacturer of hardware such as smartphones, tablet devices, computers, and portable digital media players. It also sells a variety of related software, services, and accessories. Apple has multiple catalysts to help drive revenue and earnings growth, including a robust hardware cycle. Apple intends to return cash to shareholders through quarterly dividends and share repurchases. GOOG revenue breakdown by segment - FY % 14% Advertising revenues Licensing and other revenues AAPL revenue breakdown - FY % 62% iphone Services & other hardware 11% Mac Other 13% Source - Bloomberg, Company reports Source - FactSet, Company reports

8 8 U.S. Focus List Berkshire Hathaway Inc. - Class B (BRK.B) Berkshire Hathaway operates as a holding company with interests in insurance (GEICO and General Re), reinsurance (Berkshire Hathaway Reinsurance), retail (Precision Castparts, Marmon, Iscar, Lubrizol, Shaw, etc.), energy (MidAmerican and PacifiCorp), and railways (Burlington Northern Santa Fe). The company also owns equity investments and is the largest shareholder of Wells Fargo, Bank of America, Coca-Cola, and American Express. Berkshire Hathaway is a collection of best-in-class businesses that are growing book value faster than the overall markets. The businesses are operated by capable managers. Valuation is attractive relative to the company s history. BRK.B cash levels continue to grow (in millions) 120, ,000 80,000 60,000 40,000 20, Costco Wholesale Corporation (COST) Costco s high level of visibility and predictability in earnings is driven by its membership fee model, which constitutes about 70%+ of operating profit. By maintaining a lower number of SKUs, Costco is able to leverage greater buying power over a select number of goods. This increased scale translates into lower prices for customers, which subsequently builds membership loyalty. COST takes a measured approach to growing its store base, but has a considerable growth runway in international markets. CVS Health Corporation (CVS) CVS Health provides a wide array of health care services, including pharmacy benefit management, retail fulfillment, long-term care pharmacy, home infusion, and other services. The company s business is divided into three main segments: Pharmacy Services, Retail/Long-Term Care, and Corporate. CVS Health is pursuing a strategy of further vertical integration through its announced acquisition of Aetna. The company is at an inflection point in its corporate life cycle as the U.S. health care industry moves away from fee-forservice transaction models and towards more coordinated value-based care delivery. CVS revenue breakdown - FY % Pharmacy Services Segment 62% DowDuPont Inc. (DWDP) Retail/LTC Segment DowDuPont is a holding company formed through the merger of equals between Dow Chemical and DuPont. DowDuPont s opportunities for value creation for shareholders include the raising of its $3B cost savings target. The eventual breakup of the company over the next 18 months into three publicly traded businesses should unlock shareholder value. DowDuPont is a strong cash flow generator which can support capex investments and the dividend. COST warehouses by geography - FY2017 4% 4%2% 1% U.S. 69% Canada 5% Mexico U.K. 13% Japan Korea Taiwan Australia DWDP revenue breakdown - FY2017 6% 6% 28% Packaging & Specialty Plastics 6% Agriculture Ind'l. Intermediates & Infrastructure 8% Performance Materials & Coatings Nutrition & Biosciences Safety & Construction 11% 16% 18% Transportation & Advanced Polymers Electronics & Imaging Some breakdowns in the report may not add to 100% due to rounding.

9 9 U.S. Focus List EOG Resources, Inc. (EOG) EOG Resources is an independent E&P company engaged in the development of oil and natural gas properties. The company has established positions in most emerging, liquid-rich shale plays in the U.S. (Eagle Ford, Bakken, and Permian). Its superior technical abilities have driven consistent annual production growth north of 30% annualized since The company possesses a strong balance sheet and is free cash flow positive. Honeywell International Inc. (HON) Over the years, Honeywell has refocused its portfolio toward a more favorable mix. The focus is geared toward exposure to megatrend catalysts in energy efficiency alongside greater share in higher-growth regions. M&A is its top capex priority. Management has demonstrated a discipline toward valuation of targets. Acquisitions are intended to improve mix, drive margin accretion, and increase long-term earnings resilience and FCF. Recently, management has taken a more favorable view on share buybacks (in the absence of any attractive M&A targets), which could drive further stock upside. EOG 2017 production and proved reserve data HON revenue breakdown - FY2017 Production (M BOE/d) Net proved reserves (MM BOE) United States Trinidad Other international (China, U.K., and Argentina) Total company % 14% 24% 36% Aerospace Home & Building Technologies Performance Materials & Tech Safety and Productivity Solutions Facebook, Inc. - Class A (FB) Facebook is the world s most popular social networking site with over 2 billion users. Through its flagship website, facebook.com, as well as mobile apps and several other tools, Facebook enables users to connect, share, discover, and communicate with each other. The company generates revenues through two channels: advertising (99%) and payments/other (1%). Source - Bloomberg, Company reports Johnson & Johnson (JNJ) Johnson & Johnson is one of the largest and most diversified health care businesses in the world, with over 250 operating companies encompassing a broad range of products across the health care field. The company s worldwide business is divided into three main segments: pharmaceutical (about 47% of sales), medical devices & diagnostics (about 35%), and consumer (about 18%). FB daily active users worldwide (in millions) JNJ revenue breakdown - FY2017 1,500 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q '18 18% 47% Pharmaceutical Medical Devices & Diagnostics Consumer 35%

10 10 U.S. Focus List JPMorgan Chase & Co. (JPM) JPMorgan is a leading global financial services company with assets of $2.1T as of December 2017 and operations in more than 50 countries. The company has a well-diversified business mix that should allow it to remain profitable through most cycles: 45% of revenues from consumer banking, 34% from corporate and investment banking, 13% from asset management, and 8% from commercial banking. Management remains focused on deleveraging its balance sheet, which could lead to more consistent results and stock performance over time. MasterCard Incorporated - Class A (MA) MasterCard may benefit from strong earnings growth as global payment activity continues to shift to electronic methods from cash. The core business carries high barriers to entry and a limited number of competitors while avoiding credit card payment risk. MasterCard s earnings growth (approximately 20% on average over the next two years based on consensus estimates) is leveraged to global economic growth. JPM diverse revenue stream - FY2017 MA revenue breakdown by segment - FY2017 8% 13% 45% Consumer Banking Corporate/Investment Banking Commercial Banking 15% 34% Transaction Processing Fees Domestic Assessments Cross-border Volume Fees Other Revenues 34% Asset Management 23% 28% Source - RBC Capital Markets The Kraft Heinz Company (KHC) 3G Capital, what we view as one of the best management teams globally, is at the helm of the company with a track record of driving down costs, and growing EBITDA and free cash flow. Until recently, we believe the Kraft business was mismanaged with gross margins in the middle of the pack, relative to peers. We expect 3G Capital to drive efficiencies and expand operating margins. Kraft s merger with Heinz has actually strengthened their combined balance sheets, and could pave the way for future M&A (most likely in international markets). Source - Bloomberg, Company reports Microsoft Corporation (MSFT) Microsoft is more focused on margin expansion, shareholder capital returns, and has aggressively pushed forward with a successful cloud strategy. Microsoft is in the midst of a successful transition of its core software offerings from an on-premises purchase model to a subscription-based as-a-service model. Microsoft s Azure cloud offering is one of two major cloudbased workload vendors that has built a credible amount of scale. KHC geographic revenue exposure - FY2017 MSFT annual dividend growth and payout ratio 13% 9% 8% 70% United States Rest of world Europe Canada Fiscal year Annual dividend Y/Y growth Payout ratio FY17 $ % 68% FY16 $ % 49% FY15 $ % 46% FY14 $ % 40% FY13 $ % 34% FY12 $ % 28% FY11 $ % 22% Source - Bloomberg Source - Bloomberg

11 11 U.S. Focus List Netflix, Inc. (NFLX) Netflix is one of the largest global entertainment subscription businesses, with about 130 million streaming subscribers. The company has approximately 6x as many users as its closest global competitor. Netflix operates through three segments: Domestic Streaming, International Streaming, and Domestic DVD. Netflix has multiple catalysts to drive revenues and earnings growth, including continued success in international expansion and the successful rollout of new original content. Raytheon Company (RTN) Raytheon provides investors with exposure to critical defence markets, including missile defence systems and missiles that are both seeing intense investment. Raytheon provides investors with the highest exposure to international sales of the major defence companies. Raytheon invests significant capital in R&D, creating strong technologies in high-demand product categories, including radar, electronic warfare, and cyber. NFLX global streaming memberships (in thousands) RTN integrated defence system revenue exposure - FY , ,000 75,000 24% 2% 22% Integrated Defence Systems Intelligence, Information & Services 50,000 25, % 23% Missile Systems Space & Airborne Systems Forcepoint The PNC Financial Services Group, Inc. (PNC) PNC is engaged in retail banking, corporate and institutional banking, asset management, residential mortgage banking, and global investment servicing. The company has exhibited strong organic growth while controlling expenses in a difficult bank operating environment. RBC Capital Markets believes the company is developing into a top-tier U.S. bank capable of delivering aboveaverage long-term shareholder returns. Thermo Fisher Scientific Inc. (TMO) Thermo Fisher is a leading provider of life science equipment and laboratory analytical tools. Over 60% of the company s sales are in consumable-type products. Thermo has a significant biopharma offering, providing logistics, packaging, bio-repository, storage, and analytical services for clinical trials. Roughly 25% of TMO s sales are exposed to the drug therapy R&D market, an end market that is typically very sticky. PNC revenue breakdown - FY % 42% Retail Banking 7% Corporate & Institutional Banking Asset Management Group Other, including BlackRock 35% TMO adjusted EPS performance $9.49 $8.27 $6.96 $7.39 $4.94 $5.42 $4.16 $3.02 $2.92 $

12 12 U.S. Focus List U.S. Bancorp (USB) The business with subsidiaries represents the fifth-largest U.S. commercial bank holding company, with total assets exceeding $460B. Banking and investment services are offered through 3,000+ offices, primarily in the Midwest and West regions. Management has a stated goal of returning 60% 80% of earnings to shareholders via cash dividends and share buybacks. Our research sources believe the company is gaining market share and is well positioned competitively to benefit from economic expansion and a rising rate environment. USB revenue breakdown - FY % 34% Consumer Banking 15% Payment Services 13% 27% Treasury and Corporate Support Wholesale Banking Wealth Management The Walt Disney Company (DIS) Walt Disney is one of the largest media companies in the world and has grown from a small animation studio to major broadcast and cable TV networks, live motion and animated feature films, flagship theme parks and resorts, and a licensor of premier content globally. The company operates through four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. Disney has made significant strategic investments to deliver its content directly to consumers. The company has multiple catalysts to drive growth, including a potential approval for the acquisition of Fox, successful affiliate renewals, and a step-up in capital deployment. DIS revenue breakdown - FY % 33% 9% Media Networks 43% Theme Parks & Resorts Studio Entertainment Consumer Products & Interactive Media UnitedHealth Group Inc. (UNH) UnitedHealth Group is the largest managed care company operating in the U.S. The company is well diversified across customer type (employer market, individual market, and Medicare & Medicaid market) and business mix (risk, ASO, supplemental, international, and PBM). Health care coverage in the U.S. is largely provided by the managed care industry. The companies integrate the financing and delivery of health care, implement cost controls, and manage utilization. UnitedHealth is a well-operated company with high ROEs, ROICs, and FCF generation. The management team is well regarded for being disciplined and creating long-term shareholder value. UNH medical loss ratios 80.6% 80.8% 80.4% 81.5% 81.2% 81.7% 81.2% 82.1%

13 13 U.S. Focus List Portfolio companies risks 3M: A downward macro inflection would likely have a significant impact on 3M s results given the company s higher exposure to early-cycle products. 3M is exposed to currency fluctuations as it generates 64% of its sales outside the U.S. Alphabet: Downside risks include a potential for a return to heavy capex accompanied by margin pressure; continued competition for engineering talent; and increased regulatory scrutiny. Amazon.com: Risks include an increase in competitive intensity, either from online competitors or online segments of traditional retailers, and operating margin pressure from continued investments in technology. Apple: Risks include, but are not limited to, adverse global economic conditions; currency translation; increased competition; raw material costs; and senior management changes. Berkshire Hathaway: The main risk is the change in senior management with the potential retirements of CEO and Chairman Warren Buffett and Vice Chairman Charlie Munger. Other risks include the sensitivity of the company s businesses from an economic slowdown as well as the drag on returns in a rising market from holding a significant position in cash. Costco: Risks include consumers limiting spending on highermargin, discretionary product categories; a deterioration in membership renewal rates; slowing comps; and high exposure to foreign exchange volatility. CVS: Risks include increased competition in either the core pharmacy or Pharmacy Benefit Management (PBM) segments; an increase in pricing pressure; and customer attrition. DowDuPont: Risks include the cyclical nature of demand of the chemicals business. Commodity chemical margins are volatile, which can impact cash flows. Missed synergy targets could also result in share price underperformance. EOG Resources: Weaker-than-expected commodity prices could cause stock underperformance. If well performance does not meet expectations, this could also cause EOG shares to underperform relative to peers. Facebook: Key risks include decreasing engagement trends, as new competitors could take market share; failure to drive adoption from advertisers; and regulatory actions on privacy concerns. Honeywell International: The potential of a macroeconomic slowdown in the U.S. or Europe poses risks to Honeywell s earnings performance. Accelerating forex headwinds and emerging market weakness could also undermine earnings performance and weigh on stock performance. Johnson & Johnson: Risks include, but are not limited to, competition, foreign currency exposure, litigation, reimbursement, clinical trial risk, a prolonged economic slump, and navigating regulatory landscapes. JPMorgan Chase: Key risks include a U.S. recession, which could lead to an acceleration in nonperforming assets, lower revenues, declines in capital markets and mortgage banking revenues, and lingering expenses associated with litigation. Kraft Heinz: Risks include, but are not limited to, changing consumption patterns, increased promotional activity, and the merger integration. MasterCard: A slowdown in payment volumes and crossborder travel or a pushback from large financial institutions on pricing could impede stock performance. Furthermore, greater regulatory scrutiny, inability to maintain pricing, and a prolonged global recession could cause the stock to underperform. Microsoft: Heavy competition in the enterprise market from the likes of Amazon Web Services is one risk. In addition, the company s commitment to the hardware business has yielded limited profits and its failure to build a smartphone ecosystem could be a long-term competitive disadvantage. Finally, its Windows and Office businesses have been persistently pressured by piracy. Netflix: Risks include an increase in competition, higherthan-expected launch costs associated with international expansion, and the potential for rising content costs. PNC Financial Services Group: PNC s earnings are sensitive to general business conditions. Changes in interest rates, credit risk profile, capital structure, and in overall economic and loan growth conditions represent material risks to the business. Raytheon: Risks include a slower-than-expected ramp up in U.S. defence spending and a slowdown in international spending, particularly in the Middle East as a result of pressure from lower oil prices.

14 14 U.S. Focus List Thermo Fisher Scientific: Risks to the investment thesis include a slowdown in global economic activity, foreign exchange exposure, missed synergy targets, and the fact that the company must constantly invest in R&D to adapt to rapidly changing technologies. U.S. Bancorp: U.S. Bancorp s earnings are sensitive to general business conditions. Changes in interest rates, credit risk profile, capital structure, and in overall economic and loan growth conditions represent material risks to the business. UnitedHealth Group: Risks include any unfavourable legislation that gets implemented, a spike in medical cost trends, mispricing of contracts, and less reimbursements from the government. Walt Disney: Risks include regulatory obstacles and/or increased M&A competition; a slowdown in economic activity; much higher balance sheet leverage; and the potential for significant acceleration in cord-cutting.

15 15 U.S. Focus List Methodology The Investment Committee members listed on the next page of this report select and monitor the companies included in U.S. Focus List. The portfolio is constructed using a combination of top-down sector allocation and bottom-up stock selection. The sector allocation is driven by the US Equity Strategy group at RBC Capital Markets, and designed to structure the portfolio according to expectations of the economic and investment outlook. The portfolio will generally offer exposure to most of the 11 GICS sectors underlying the S&P 500 Index. The bottom-up stock selection is based off a multidisciplined approach that involves fundamental, quantitative, and technical research. Furthermore, a qualitative analysis is undertaken by the Committee, with a particular focus on risk assessment, given the concentrated nature of the portfolio. The portfolio will have positions. Most positions are assigned a 5% weight, though half-positions (i.e., 2.5%) are also possible up to a maximum of 15% of the portfolio (i.e., six positions). The universe of companies available for selection encompasses stocks under fundamental research coverage by RBC Capital Markets and third-party research providers. A minimum rating of Hold, or its equivalent, is necessary for inclusion. There is no minimum market capitalization for stock eligibility, though the portfolio is expected to be broadly large cap in nature. Additions to the portfolio require an average daily reported trading in excess of $10M over the prior five days as a minimum liquidity requirement. Cash can be held in lieu of a stock position short term up to a 5% weighting. Annual portfolio turnover is targeted to be less than 100% in typical market conditions, but potential for higher turnover exists in periods of unusual market volatility. Given the desire to create a portfolio and not a list of companies, equity selection may be influenced by diversification decisions, including industry weightings, relative valuations, and macroeconomic considerations associated with cyclical markets. Implementation of changes to the U.S. Focus List The Investment Committee for the U.S. Focus List will make changes to the portfolio for any of the following reasons: (1) The fundamentals and business outlook of the included company appear to be diminished compared with prior expectations; (2) the Investment Committee deems the current valuation of the shares as above our fundamental valuation and suggests a switch to another company with a more compelling valuation or to cash; (3) a deterioration in a stock s multidisciplined score; (4) a fundamental downgrade or elimination of opinion by our research sources (noted in the prior section) that warrants removal in the estimation of the Investment Committee; and (5) the desire to include a company whose fundamentals are superior to that of a company currently included in the portfolio. Stocks will be monitored on those criteria.

16 16 U.S. Focus List Disclosures and disclaimers U.S. Focus List Investment Committee Tasneem Azim-Khan, CFA, Portfolio Advisor RBC Dominion Securities Inc. Gopa Nair, CFA, Portfolio Advisor RBC Dominion Securities Inc. This report is issued by the Portfolio Advisory Group ( PAG ) which is part of the retail division of RBC Dominion Securities Inc. ( RBC DS ). The PAG provides portfolio advisory services to RBC DS Investment Advisors. Reports published by the PAG may be made available to clients of RBC DS through its Investment Advisors. The PAG relies on a number of different sources when preparing its reports including, without limitation, research reports published by RBC Capital Markets ( RBC CM ). RBC CM is not independent of RBC DS or the PAG. RBC CM is a business name used by Royal Bank of Canada and certain of its affiliates, including RBC DS, in connection with its corporate and investment banking activities. As a result of the relationship between RBC DS, the PAG and RBC CM, there may be conflicts of interest relating to the RBC CM analyst that is responsible for publishing research on a company referred to in a report issued by the PAG. 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. Required Disclosures RBC Capital Markets Distribution of Ratings For purposes of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories Buy, Hold/Neutral, or Sell regardless of a firm s own rating categories. Although RBC Capital Markets ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis. Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of June 30, 2018 Investment Banking Services Provided During Past 12 Months Rating Count Percent Count Percent Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform] Explanation of RBC Capital Markets, LLC Equity Rating System An analyst s sector is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst s view of how that stock will perform over the next 12 months relative to the analyst s sector average. 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. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Restricted (R): RBC policy precludes certain types of communications, including an investment recom mendation, when RBC is acting as an advisor in certain merger or other strategic transactions and in certain other circumstances. Not Rated (NR): The rating, price targets and estimates have been removed due to applicable legal, regulatory or policy constraints which may include when RBC Capital Markets is acting in an advisory capacity involving the company. Risk Rating: The Speculative risk rating reflects a security s lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility. RBC Capital Markets has fundamental research of the following companies: 3M Company (MMM; Outperform; $212.32) Alphabet Inc. (GOOG; Outperform; $1,217.26) Amazon.com, Inc. (AMZN; Outperform; $1,777.44) Apple Inc. (AAPL; Outperform; $190.29) Costco Wholesale Corporation (COST; Outperform; $218.71) CVS Health Corporation (CVS; Outperform; $64.86) DowDuPont Inc. (DWDP; Top Pick; $68.77) EOG Resources, Inc. (EOG; Sector Perform; $128.94) Facebook, Inc. (FB; Outperform; $172.58) Honeywell International Inc. (HON; Sector Perform; $159.65) Johnson & Johnson (JNJ; Outperform; $132.52) JPMorgan Chase & Co. (JPM; Outperform; $114.95) The Kraft Heinz Company (KHC; Outperform; $60.25) MasterCard Inc. (MA; Outperform; $198.00) Microsoft Corporation (MSFT; Outperform; $106.08) Netflix, Inc. (NFLX; Outperform; $337.45) PNC Financial Services Group, Inc. (PNC; Top Pick; $144.83) U.S. Bancorp (USB; Outperform; $53.01) Union Pacific Corporation (UNP; Sector Perform; $149.89) UnitedHealth Group Inc. (UNH; Outperform; $253.22) Walt Disney Company (DIS; Top Pick; $113.56) Yum! Brands, Inc. (YUM; Outperform; $79.29) Our third-party research providers have fundamental research of: Berkshire Hathaway Inc. (BRK.B; Overweight; $197.87) Raytheon Company (RTN; Neutral; $198.03) Thermo Fisher Scientific Inc. (TMO; Overweight; $234.53) RBC Capital Markets analysts have received (or will receive) compensation based in part upon the investment banking revenues of RBC Capital Markets.

17 17 U.S. Focus List Portfolio Advisory Group personnel, including the portfolio advisor or any individuals directly involved in the preparation of the report hold(s) or exercise(s) investment discretion over a long position in the common shares of 3M Company, Alphabet Inc., Amazon. com, Inc., Apple Inc., DowDuPont Inc., Facebook, Inc., Honeywell International Inc., JPMorgan Chase & Co., Inc., MasterCard Inc., U.S. Bancorp, and Walt Disney Co. RBC Capital Markets Conflicts Policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to rbccm.com/global/file pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time. Dissemination of Research & Short Term Ideas RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. Subject to any applicable regulatory considerations, eligible clients may include RBC Capital Markets institutional clients globally, the retail divisions of RBC Dominion Securities Inc. and RBC Capital Markets LLC, and affiliates. RBC Capital Markets equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. RBC Capital Markets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color and commentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or other research reports. A Short-Term Trade Idea reflects the research analyst s directional view regarding the price of the security of a subject company in the coming days or weeks, based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our published research reports reflecting the research analyst s views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject 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. 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