Good afternoon everyone, my name is Dan Salmon I am the Equity Research Analyst responsible for advertising and marketing services at BMO Capital Markets, which is…. …the US investment bank of BMO Financial Group, otherwise known as the Bank of Montreal…. ….and I work out of our New York office
As a bit of background to start, I find it is easiest to think about my job as one that involves wearing two hats The first hat involves analyzing the entire advertising and marketing services industry. That requires me to watch trends in all types of different business models, from television advertising, to direct mail to ad technology… …and it also requires me to look at those trends on a global basis and gauge which countries are seeing more investment from brands and which are seeing less. Where I’m really lucky at BMO is that I get to be responsible for the entire pool…. ….whereas at a lot of other investment banks, there’s still a division between the “traditional media” analyst and the “internet” analyst
The second hat I wear….involves analyzing different public companies, forecasting their earnings and ultimately determining the fair market value of the company’s stock… … if that stock trades in the open market for less than the value I determine, then the stock gets a BUY rating… … .if that stock trades in the open market for more than the value I determine, then the stock gets a SELL rating. That’s basically how it works. My universe of stocks, as it’s called, basically breaks down into three smaller groups… The first is the ad agencies, including both established holding companies like WPP and Omnicom, as well as up-and-comers like SapientNitro… The second group I call the data and direct marketers…. … and this includes companies like companies like Acxiom, as well as Alliance Data Systems, which owns Epsilon and is a powerhouse in loyalty marketing. And the third group is definitely the most recognizable, and that’s the advertising-supported internet companies… That group includes Google, Facebook and Yahoo! and also LinkedIn.
So that’s enough about me…. ….let’s get to the presentation and start by putting some numbers around the entire advertising and marketing services industry….
… the global advertising and marketing services industry totals around $1 trillion in spending each year, or around 2% of global GDP Now it’s important to remember that marketing industry forecasts are notoriously tricky to track, so I’d emphasize that there is a healthy dose of art to go with this science. The first and largest bucket of spending is, of course, advertising…everything from television to radio to online display ads…. … .and together this makes up around 50% of all marketing budgets The second bucket is marketing services….things like direct mail, sponsorships and public relations….together, this spending makes up around a third of global marketing spending. The third bucket is ad agency fees and business process outsourcing for marketing, which combines to account for around 10% of marketing budgets. The fourth bucket is data and intelligence spending, which is around 4% of total marketing spending, and today is largely made up of what we’ve traditionally called “market research”…. … .however there is a lot of change going on in this bucket and we’ll get to that shortly. And then finally, despite all of the hype around ad technology, it still only makes up around 1% of total marketing spending, and that includes both enterprise marketing management software….. … .as well as the newer, display ad technologies like demand-side platforms that have risen to prominence in recent years. Of this $1 trillion dollars, today around 25% of it is used to direct marketing spending that reaches consumers on internet protocol, or IP-connected devices, which of course, includes the internet, but also things like mobile, connected TVs, etc.
…and finally, it’s also important to remember that there is probably close to $400 billion of trade promotion spending each year. This is the money that consumer packaged goods makers pay retailers directly for things like price subsidies and better shelf placement in order to drive sales… …and I view this as money as being very much in competition with advertising and marketing budgets at these major brands. And finally, while I don’t include data on it, the final piece of marketing budgets is the in-house costs at the brand, like the Chief Marketing Officer’s salary.
And so that is our mosaic of the various pieces of marketing spending and of course our focus here today is on the data-driven, IP marketing portion of these budgets that are slowly but surely gaining share. On this slide, we list a few major industry drivers of IP marketing spending and… We split them up into two groups The first address the changes in communications systems and consumer behavior…. …and this includes things like the growth of IP communications networks and general connectivity of consumers…. ….and also the massive proliferation of devices on which we consume content and advertising messages. And then the second group of drivers are a bit more thematic in nature, and that includes things like social, mobile and loyalty marketing.
And it’s only fair to outline the constraints of this growth… ….which include things like marketers’ internal organizational inertia… …and the one that I think tends to be top of mind for most people in the industry, which is the potential for privacy litigation. One way I like to frame the privacy conversation is by remembering that it will be a constant discussion for likely several decades to come. As context for this, consider that today the average age in the US Congress is about 58 years old. And so if we assume that remains relatively constant, then it will take until the early 2030s until the majority of Congress people are “digital natives”…. …that is, born roughly after 1980 and the generation that have grown up with digital technologies.
So let’s jump to slide 7…
We have a summary of all the business models we profile in the report, split into three separate eras, so to speak
We have a summary of all the business models we profile in the report, split into three separate eras, so to speak
And then there is the rapid growth of earned and owned media A good example of earned media is brand’s social network page, which they can set up free and user can like it or follow it or what have you Owned media would be something like a branded mobile app, which again, can be distributed for free to smartphone users Take all of these things together and the massive growth of cheap or free ad impressions could very well keep pressure on advertising pricing for years to come.
I’ll stick the first one here and that is the idea that advertising pricing may very well be in long-term secular decline This is driven by the massive growth in supply of paid advertising impressions online. Consider that in an hour of watching television you see around 25 commercials…toss in some product placement and it’s safe to say that viewers are served around 35-40 marketing impressions per hour Now consider the online world, where a single web page can have dozens of banner and text ads on it. Spend an hour surfing the internet and you could see literally hundreds of paid ads
“Big Data” is the primary reason we’re all here today
….the next group of best positioned companies are the ad agencies. So let’s go back to this idea of paid, earned and owned media. We have an example here of two different brands with a hypothetical $100 million budget Brand #1 spends all of its money on paid media, in this case, we assume it’s all primetime TV For paid media campaigns, the agency normally earns around 10% of the total budget for planning, creating and executing the campaign. So the agency working for Brand #1 earns $10 million of the budget, while $90 million goes to media companies to buy the ad space. Now consider brand #2, which is using a combination of paid, earned and owned media. They still have the majority of their budget committed to primetime TV, but their also doing some social and mobile marketing as well. Talk out the rest…
Another benefit to agencies from the increased use of data and targeting in advertising is the increasing use of performance-based pricing. Now to be clear, the vast majority of agency billings are still very much done on a “time and materials” basis…. ….but we’re beginning to see more incentive-based relationships developing, particularly in media buying. Leading the way in this regard is the world’s 4 th largest holding company, Interpublic Group, and its Mediabrands unit.
And finally, the last way successful agencies are winning share from their peers today, is by better integrating the marketing and commerce experience. If you think of the pre-internet era, marketing and commerce were generally two very different experiences. We were marketed to on our couch watching TV or in our cars while commuting and listening to the radio…. … .while commerce was done in bricks and mortar retailers on the weekend a lot of the time. But in the online world, going from a marketing experience to a commerce experience can be only a click away from each other. And some of the smaller, more innovative ad agencies are helping their clients with this. So for example, SapientNitro has helped Coca Cola redesign their vending machines with touchscreens on the front of them. And Crispin, Porter and Bogusky not only helped Domino’s redesign their pizza recipe, but also helped them rebuild their e-commerce platform and create great user tools like the Pizza Tracker mobile app.
The next best positioned company is Google
which includes: DoubleClick Digital Marketing Manager: upgraded ad server DoubleClick Ad Manager: new DSP replacing Invite Media DoubleClick Search: SEM technology across all major search engines Google Analytics: reaching enterprise level capabilities
…and finally, the last set of best positioned companies are the brands themselves. With the rapid growth of things like social networks and smartphone apps, marketers have the opportunity to put their brand in front of consumers for free like never before. Now they will still need to pay an agency or software-as-a-service provider to build and maintain these presences for them, but there’s a huge opportunity to save money on paid advertising So we think the brands themselves are big winners in the IP marketing world
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Why CMOs Need a Digital Marketing HubOMMA Data and Targeting ConferenceLos Angeles, CaliforniaJuly 25 2012Dan SalmonEquity Research AnalystBMO Capital Markets Refer to pages 16-19 for Important Disclosures, including Analyst’s Certification.(212) 885-4029 For Important Disclosures on the stocks discussed in this report, please go email@example.com http://research-us.bmocm.com/Company_Disclosure_Public.asp
Intro: Two Hats to Equity Research 1. Industry analysis • At BMO, we make no distinction between “traditional/offline” and “emerging/digital” advertising • Other firms: one “media” analyst, one “internet” analyst 2. Public company analysis • Advise institutional investors on stock investing in the advertising and marketing industry 2
Companies Under Coverage Agencies Data & Direct Marketing Internet Marketing 3
Why CMOs Need a Digital Marketing Hub First we need some context… 4
And Don’t Forget Trade Promotion…. Agency/Mkt Agency/Mkt Trade promotion BPO fees BPO fees 32% 12% 8% Software/Tech 2% Data- Software/Tech Intelligence 1% 5% Advertising 47% Data-Intelligence 4% Advertising 32% Marketing Services Marketing 34% Services 23% U.S. marketing spending ex. trade promotion U.S. marketing spending including trade promotion Source: GroupM, DMA/Winterberry Group/Acxiom/Teradata, IDC, Advertising Age and DemandTec• ….and there are also brand’s in-house costs as well (e.g. CMO and staff’s salaries) 6
Industry Drivers: Data Is Vital to All of Them• Changes in communications infrastructure and consumer behavior: • Penetration of IP Networks and Capacity Expansion • IP Device Adoption and Narrowing Adoption Curves • Multi-Channel Marketing and More Holistic Consumer View• Secular Themes: • Social • Mobile • Local • Loyalty • Software-as-a-Service (SaaS)• All of them are infused with data 7
Industry Constraints: Learning How To Work With Data • Incumbents Defense of Legacy Business Models • Marketers’ Organizational Inertia • Fragmentation and Lack of Standardization • Intellectual Property Litigation • Privacy Regulation Always Waiting in the Wings • 2033: When Digital Natives Will Be The Majority of US Congress 8
CMO Desk of the Future: The Digital Marketing Hub 9
The Digital Marketing Hub: Plug-and-Play ModulesSoftware Era: • Database Marketing/CRM Pre 1995 • Enterprise Marketing Management (EMM) Software • Email Service Providers (ESP) • Ad Serving • Ad Operations Web 1.0 Era: • Ad Networks (Affiliate Marketing, Online Lead Generation) 1995-2005 • Search Engine Optimization (SEO) • Search Engine Marketing (SEM) • Marketing Analytics (Web, Social, Third Party) • Ad Exchanges Web 2.0 Era: • Demand-Side Platforms (DSP) and Agency Trading Desks (ATD) 2005-Present • Sell-Side Platforms (SSP) and Private Exchanges • Data Management Platforms (DMP) • Creative Optimization 10
Why CMOs Need a Digital Marketing Hub What are the new data- driven realities of advertising and marketing? 11
Data Changes Old Truisms: The Law of “Time Spent?”• Does % of time spent with media vs. % of ad spend even matter anymore? 40% 35% Time Spent With Media Share of Advertising Spending 30% 25% 20% 15% 10% 5% 0% TV Radio Newspapers Magazines Internet 12
Data Changes Old Truisms: Consider Search…• In an IP world, isn’t it all about intent? 30% 25% 20% 15% 28.2% 10% Time Spent With Google Search Google Search Share of Online Advertising 5% 1.8% 0% 13
… And The Rise of Transaction Data• Moving further down the funnel and leveraging transaction data Top of Funnel: “Interest” Middle of Funnel: “Intent” Tip of Funnel: “Transactions” 14
The Rise of Earned and Owned MediaEarned = Consumers Generate Impressions Paid vs. Owned vs. Earned• Established: Word-of-Mouth and Public Relations Paid Media• New: Free Social Brand Pages Advertising Owned Media (e.g. 30-second e.g. branded TV spot, online website, mobile banner ad) + app, digital MarketingOwned = Brand Owns Impressions Services (e.g. display inside Walmart store direct mail,• Established: YourBrand.com sponsorships)• Today: Mobile Apps Earned Media e.g. word-of- mouth, public relations, sharingSocial Networks = Word-of-Mouth at Scale “Likes”Also: Word-of-Mouth in Data form Source: BMO Capital Markets. 15
Is Paid Media (aka Advertising) Pricing in Secular Decline? ~$850B of Paid media budgets · growing inline with global GDP Growing ~4% per year (hopefully…) Ad Pricing Old: Paid media impressions = Growing faster = in Long-· "analog dollars to digital dimes" than 4% per year Term +New: Free earned/owned + Growing MUCH faster Secular · media impressions than 4% per year Decline 16
Is Paid Media (aka Advertising) Pricing in Secular Decline?• Real world evidence from the Buyside 1. Proctor & Gamble • $1 billion of marketing savings by 2015 • But the same number of impressions/share of voice 2. General Motors • Cut $10 million of Facebook Paid media/advertising spending • Maintained all Brand Pages on Facebook • Reportedly asked for 20% cuts at TV Upfront• Real world evidence from the Sellside 1. Google Cost-per-Click Down ~15% This Year 2. Yahoo! Seeing Pricing Softness Despite Higher Sell-Through 3. Facebook eCPM up only 1% in 1Q12 17
Why CMOs Need a Digital Marketing Hub Which companies are poised to succeed? 18
Managers of Brand’s 1st Party Data & 3rd Party Data Chefs Data/Intelligence CAGR only +1% % of CMOs Reporting Under Preparedness • From “market research”… • ….to “real-time data” Data explosion 71% Social media 68% • Sea change in 3rd Party Data Growth of channel and device choices 65% Shifting consumer demographics 63% Financial constraints 59% Decreasing brand loyalty 57%The Bigger Revolution is in 1st Party Data Growth market opportunities 56% ROI accountability 56% • Brands harnessing their own assets Customer collaboration and influence 56% • Who is helping them with this? Privacy considerations 55% Global outsourcing 54% • Agencies Regulatory considerations 50% • Database Marketers Corporate transparency 47% 0% 10% 20% 30% 40% 50% 60% 70% • New Entrants Source: From Stretched to Strengthened, Insights from the Global IBM CMO Study, September 2011 19
The Rise of the Data Management Platform (DMP) • New players popularized the term: e.g. BlueKai, Exelate, etc. • Established players re-positioning • e.g. Acxiom the “data management platform” • Scalable & higher margins • Beginning to test new products with clients Low Margin: Low Margin: High Margin: Build Product/Platform Once, Sell Multiple Human Services Commoditized Strategy/ 1st Party 3rd Party Analytics & Creative Distribution Data Hosting Data Product Insights Acxiom focus is on the middle three Source: BMO Capital Markets. 20
Earned and Owned Media Managers• Ad Agencies: Capitalizing on the Growth of Earned and Owned Media • Also: new “SaaS” models like Buddy Media for automation Paid Media Brand #1 Brand #2 Media/Platform owner Agency Primetime TV 100 80 % to media/platform owner 90% 90% 100% % to agency 10% 10% 10 19 Mobile Display Ads 0 5 % to media/platform owner na 90% 80% % to agency na 10% Social Display Ads 0 5 % to media/platform owner na 90% % to agency na 10% 60% Owned Media Mobile Apps 0 5 90 % to media/platform owner na 0% 40% 81 % to agency na 100% Earned Media Free Social Presence 0 5 20% % to media/platform owner na 0% % to agency na 100% Total budget to: 0% Media/Platform owner 90 81 Agency 10 19 Brand #1 (all paid media) Brand #2 (mix of paid, owned, earned) TOTAL BUDGET 100 100 Source: BMO Capital Markets 21
Agencies: Growth of Performance-Based Pricing Agency takes lower fee in return for greater share in campaign success• Adds higher risk/reward opportunity for agency models• Trend accelerating as data powers more marketing campaigns•• Interpublic Group leading adoption of performance-based pricing • >50% of Mediabrands clients’ contracts have some performance- based pricing• Helped to reach peer-level margins• CPG and tech success; retail a laggard Source: Interpublic analyst day. 22
Agencies: Merging Commerce + Marketing • SapientNitro • Interactive vending machines for Coca-Cola • Migration of Target.com to proprietary platform (Amazon previously managed) • Crispin, Porter + Bogusky (MDC Partners) • Rebuilt Domino’s e-commerce platformSource: Company websites 23
Google: YouTube = Social + Online Video Inventory• Built on Paid Media, But Also a Vital Earned Media Outlet….• Consensus view: Google is aimless in Social, no one uses Google+ • Reality: Along with Facebook, YouTube is the starting point for all social campaigns• And they have the ad inventory that brands want: • Brand advertisers are moving online, but banner ads are limited in “story-telling” • Instead, they want online video advertising Internet Usage by Category Online Video Ad Growth 2010-2016 40 43.6% Social Networking Online video spending Search/Navigation 35 % yoy growth Retail 11.9 30 Instant Messages 10.2 Email 25 Other content 24.9% 8.8 7.4 20 17.8% 16.8% 6.2 16.2% 15 5.0 19.6% 10 3.5 5 0 2010 2011 2012 2013 2014 2015 2016 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Source: MAGNAGLOBAL Source: comScore 24
Google: Dominant Display Ad Technology Stack• Built on Paid Media, But Also an Enormous Ad Technology Services Provider ….• DoubleClick serves around half of the web’s non-Facebook display ads • Not a big revenue generator, but a massive advantage in data used for targeting• June 5th: Google launched the end-to-end DoubleClick Digital Marketing suite Google Display Ad Technology Stack Advertiser Tools Marketplaces Publisher Tools Source: BMO Capital Markets. 25
The Biggest Winners of All? Brands• Gain efficiencies through earned and Top 100 US National Advertisers owned media Rank 1 Advertiser Procter & Gamble Rank Advertiser 35 General Mills Rank Advertiser 68 Campbell Soup 2 AT&T 36 Viacom 69 Citigroup• Agencies, developers and software tools 3 General Motors 37 Microsoft 70 Amazon 4 38 71 used to create and maintain 5 Verizon Comm. American Express 39 Merck Sony 72 Subway Walgreen 6 Pfizer 40 Nike 73 Hyundai 7 Walmart 41 Capital One Financial 74 Discover Financial 8 Time Warner 42 Nissan Motor 75 Wendys/Arbys 9 Johnson & Johnson 43 Eli Lilly 76 Reckitt Benckiser 10 LOreal 44 SABMiller 77 Fortune Brands 11 Walt Disney 45 Deutsche Telekom 78 Hershey 12 JPMorgan Chase 46 Yum Brands 79 Limited Brands 13 Ford Motor 47 Lowes 80 Abbott Laboratories 14 Comcast 48 AstraZeneca 81 DirecTV 15 Sears Holdings 49 Home Depot 82 SC Johnson 16 Toyota 50 Coca-Cola 83 Volkswagen 17 Bank of America 51 Progressive 84 Safeway 18 Target 52 Kellogg 85 Daimler 19 Macys 53 Estee Lauder 86 Apple 20 Sprint Nextel 54 Samsung Electronics 87 Coty 21 Unilever 55 LVMH 88 IBM 22 Anheuser-Busch InBev 56 Best Buy 89 Apollo Group 23 Berkshire Hathaway 57 State Farm 90 Gap 24 News Corp. 58 Bristol-Myers Squibb 91 Kia Motors 25 J.C. Penney 59 Mars 92 Dish Network 26 McDonalds 60 Wells Fargo 93 Clorox 27 Fiat/Chrysler 61 Time Warner Cable 94 Hewlett-Packard 28 U.S. Government 62 Visa 95 CVS Caremark 29 Honda Motor 63 Diageo 96 Dr Pepper Snapple 30 Nestle 64 Bayer 97 Burger King 31 Kohls 65 Allstate 98 Dell 32 Kraft Foods 66 Kroger 99 Frys Electronics 33 PepsiCo 67 Novartis 100 Colgate-Palmolive 34 GlaxoSmithKline Source: Advertising Age, data for 2010 26
Why CMOs Need a Digital Marketing Hub Thank you 27
DisclosuresImportant DisclosuresAnalysts CertificationI, Daniel Salmon, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part ofmy compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes theoverall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients,performance of recommendations, accuracy of earnings estimates, and service to clients.Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Ltd. are not registered as research analysts with FINRA. These analysts may not be associatedpersons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.Company Specific DisclosuresFor Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx.Distribution of Ratings (March 31, 2012)Rating BMOCM US BMOCM US BMOCM US BMOCM BMOCM StarmineCategory BMO Rating Universe* IB Clients** IB Clients*** Universe**** IB Clients***** UniverseBuy Outperform 37.2 % 12.1 % 52.1 % 39.2 % 48.3 % 54.6 %Hold Market Perform 60.0 % 7.0 % 47.9 % 57.6 % 51.0 % 40.1 %Sell Underperform 2.4 % 0.0 % 0.0 % 3.2 % 0.7 % 5.3 %* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage within ratings category.*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage of Investment Banking clients.**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as percentage of Investment Banking clients. 28
DisclosuresRatings and Sector KeyWe use the following ratings system definitions:OP = Outperform - Forecast to outperform the market;Mkt = Market Perform - Forecast to perform roughly in line with the market;Und = Underperform - Forecast to underperform the market;(S) = speculative investment;NR = No rating at this time;R = Restricted – Dissemination of research is currently restricted.Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as appropriate for each company. BMOCapital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth, value, income, quantitative; and USlarge, US small) have replaced the Top Pick rating.Other Important DisclosuresFor Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspxor write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place,Toronto, Ontario, M5X 1H3.Prior BMO Capital Markets Ratings Systemshttp://researchglobal.bmocapitalmarkets.com/documents/2009/prior_rating_systems.pdfDissemination of ResearchOur research publications are available via our web site www.bmocm.com/research. Institutional clients may also receive our research via FIRST CALL, FIRSTCALL Research Direct, Reuters, Bloomberg, FactSet, Capital IQ, and TheMarkets.com. All of our research is made widely available at the same time to all BMO CapitalMarkets client groups entitled to our research. Additional dissemination may occur via email or regular mail. Please contact your investment advisor or institutionalsalesperson for more information.Conflict StatementA general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest inconnection with investment research which is available at http://researchglobal.bmocapitalmarkets.com/Public/Conflict_Statement_Public.aspx. 29
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