Coatings World - October 2014

Results of U.S. Architectural Coatings Industry Research Report Which Compared Business Trends in 3Q14 vs. 3Q13

Each month, we 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 1.2% in 3Q14 vs. 3Q13

According to industry participants, average sales volumes increased 1.2% thus far in 3Q14 compared to 3Q13. This compares to record volume growth in our index of 2.6% in 2Q14 and 1.8% in 1Q14. Weather conditions improved across the country in 2Q14 and the industry saw paint sales accelerate which have tempered off slightly in 3Q14. We are encouraged with the positive underlying trends in 3Q14 as paint volumes continue to grow on a year-over-year comparison – 3Q14 represents modestly slower year-over-year growth compared to 2Q14, but growth nonetheless. Overall, 63% of respondents witnessed an increase in paint volumes vs. only 21% that saw paint volumes decline, which averaged out to 1.2% year-over-year volume growth with a net increase of 42%.

Price of Paint from Suppliers — 3Q14 Paint Prices Largely Flat as Prior Increases Have Anniversaries

58% of contacts noted that the price of paint from suppliers was flat in 3Q14 vs. 3Q13 as our paint price index only increased 0.8% which compares to average price increases of 1.5%-2.0% in 2013 and in-line with our paint price index of 0.8% and 1.0% in 1Q14 and 2Q14, respectively. Bottom line, we believe that price increases from when coatings manufacturers were trying to recover rising raw material costs have anniversaried; therefore, price increases have been less pronounced with 3Q14 marking the first time the majority of contacts (58%) reported flat year-over-year prices from paint manufacturers. Overall, 33% of respondents witnessed an increase in pricing vs. only 9% that saw pricing decline, which averaged out to a 0.8% increase in year-over-year price with a net increase of 24% as the majority of contacts (58%) reported flat year-over-year pricing in 3Q14.

Raw Materials — TiO2 Remains Benign; Propylene Increases but not Noticeable to Coatings Manufacturers

Titanium dioxide (TiO2) prices have been stabilizing in recent months after witnessing sharp declines in early 2013; however, propylene has increased, which we believe stems from increased demand in North America and a recent plant outage – both tightening supply vs. demand. Despite the small uptick in propylene, we anticipate the overall basket of raws will remain relatively benign over the near-term. Our data and recent conversations with industry contacts suggest that price increases attempted by TiO2 producers in January 2014 (the last time a price increase was attempted) were ultimately unsuccessful and there has been no evident traction for price increases to stick until at least late 2014/early 2015.

3-Month Outlook — Outlook Favorable Despite Busy Paint Season in Rearview Mirror

Our proprietary Coatings 3-Month Outlook Index reached 0.57 in 3Q14 which compares to 0.41 in 3Q13 and 0.78 in 2Q14. Due to the upcoming fall and winter seasons, outlooks at this time of the year tend to come in sequentially; however, our outlook index of 0.57 represents year-over-year improvement compared to 0.41 in 3Q13. 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). We view 0.57 in 3Q14 as a positive as our outlook index remains at elevated levels and has improved year-over-year. 53% of contacts shared a positive (43%) or very positive (10%) 3-month outlook, 41% believe that the current positive trends will remain the same, and the remaining 6% have a negative outlook in 3Q14.