Coatings World - July 2015

Results of U.S. Architectural Coatings Industry Research Report Which Compared Business Trends in 2Q15 vs. 2Q14

Each month, Northcoast Research survey a large sample of paint retailers throughout the United States to get a sense for current business trends. Please note that of the three primary architectural coatings channels (paint stores, home centers, and retail distributors), this survey is primarily reflective of the distributor channel which tends to see volume growth less than the industry; therefore, we view the results as a directional indicator more so than absolute industry volumes. For inquiries regarding this report please contact Kevin Hocevar at 216-468-6924 or kevin. hocevar@northcoastresearch.com.

Architectural Coatings Sales — Volumes Up 2.8% in 2Q15
vs. 2Q14

According to industry participants, average volumes increased 2.8% in 2Q15 compared to 2Q14. This represents the strongest volume growth we have seen since beginning our survey and compares to volume growth of 1.1% in 1Q15, 1.6% in 4Q14, and 1.2% in 3Q14. We had previously anticipated strong underlying demand in 2015 but harsh winter weather likely deferred projects into 2Q15 which we believe is a major benefit being realized. We are encouraged with the positive trends that have persisted through 2Q15 as paint volumes continue to growth on a year-over-year comparison and we expect 2015 to be solid year and perhaps even better than initially expected. Overall, 71% of respondents witnessed an increase in paint volumes vs. only 14% that saw volumes decline, averaging out to 2.8% year-over-year volume growth and a net increase of 57%.

Price of Paint from Suppliers — 2Q15 Paint Prices Remain
Positively Skewed

49% of contacts noted an uptick in the price of paint in 2Q15 vs.

2Q14 as our paint price index rose 1.0% compared to average
increases of 0.5%-1.0% over the past year. Our research sug-
gests that a little bit of price is sticking in the industry but only in
the independent dealer channel which is small in size and likely
in the low-single digit range. We currently do not believe the
store or big-box channels are realizing pricing; however, given
the raw material declines, we view the overall price/raws for
coatings manufacturers as favorable. We believe that we picked
up potential price increases in our 4Q14 survey where a mean-
ingful uptick in contacts were notified of a price increase from
manufacturers to take place in 2015. The majority or contacts
believed these attempts would be successful and we believe the
data we have discovered thus far in 2015 suggests that some de-
gree of pricing did in fact stick in the marketplace. Overall, 49%
of respondents witnessed an uptick in pricing vs. only 9% that
saw pricing decline, averaging out to a 1.0% increase in year-
over-year pricing with a net increase of 40%.

Raw Materials — Raw Materials Remain at Low Levels but
May Have Bottomed Out

We continue to believe coatings manufacturers are poised to benefit from favorable price/raws in 2015 due to the drop in titanium dioxide (TiO2) and raw materials derived from crude oil. With that said, this story is widely known and although some raws have continued to come down since 1Q15, there is already chatter about raws rising as oil prices have bounced off the bottom and are currently at 6-month highs. The good news is that propylene has continued its downward trend. Additionally, TiO2 started to drop in 4Q14, accelerated that decline in 1Q15 and remained soft in 2Q15. However, the bad news is that oil prices have trended higher throughout the year which is likely to drive oil based raws higher at some point which could mitigate the upside to price/raws in future quarters.

3-Month Outlook — Outlook at Strong Levels as Contacts
Expect Busy Paint Season to Continue

Our proprietary Coatings 3-Month Outlook Index reached 0.84 in 2Q15 which compares to a reading of 0.80 sequentially (vs. 1Q15) and a reading of 0.78 year-over-year (vs. 2Q14). Please note that the highest possible reading is +2 (indicating all contacts have a “very positive” outlook) and the lowest possible reading is -2 (indicating all contacts have a “very negative” outlook). Note that our index reading of 0.84 marks the highest outlook index for a second quarter which we find encouraging as no contacts indicated a negative or very negative outlook. Ultimately, current outlooks remain at encouraging levels which bodes well for industry revenues.