Results of U.S. Architectural Coatings Industry Research Report Which Compared Business Trends in 4Q

Each month, North Coast Research surveys a large sample of paint retailers throughout the U.S. 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 1.6% in 4Q14 vs. 4Q13
According to industry participants, average sales volumes increased 1.6% in 4Q14 compared to 4Q13.  This compares to record volume growth in our index of 2.6% in 2Q14 (which benefitted from the roll-out of Valspar brand paint at Ace Hardware) and 1.2% in 3Q14.  Weather conditions improved across the country as the paint season entered its busy season in 2Q14 and the industry saw paint sales accelerate which tempered off slightly in 3Q14 but actually picked-up again slightly in 4Q14 or at least on a year-over-year basis.  Paint volumes continue to progress in a positive direction dating all the way back to the inception of our coatings survey in early 2013.  We are encouraged with the positive underlying trends that have persisted through 4Q14 as paint volumes continue to grow.  Overall, 53% of respondents witnessed an increase in paint volumes vs. only 18% that saw paint volumes decline, which averaged out to 1.6% year-over-year volume growth with a net increase of 35%.

Price of Paint from Suppliers — 4Q14 Paint Prices Largely Flat as Prior Increases Have Anniversaried
50% of contacts noted that the price of paint from suppliers was flat in 4Q14 vs. 4Q13 as our paint price index only rose 0.7% which compares to average increases of 1.5%-2.0% in 2013 and in-line with our paint price indexes of 0.8%, 1.0%, and 0.8% in 3Q14, 2Q14, and 1Q14, respectively.  Bottom line, we believe that price increases from when coatings manufacturers were trying to recover rising raws have anniversaried so we believe price increases are more tactical and less pronounced with 2H14 marking the first time the majority of contacts reported flattish pricing.  Overall, 42% of respondents witnessed an increase in pricing vs. only 9% that saw pricing decline, which averaged out to a 0.7% increase in year-over-year price with a net increase of 33% as the majority of contacts (50%) reported flat year-over-year pricing in 4Q14.

Raw Materials — TiO2 Remains Benign and Crude Oil Prices Showing Pressure on Oil-Based Raw Materials
Titanium dioxide (TiO2) prices have been stable to slightly declining in recent months following sharp declines in early 2013.  Also, propylene – which is largely tied to fluctuations in crude oil pricing – has dropped significantly this week.  Based on conversations with coatings raw material distributors, very few raws have seen declines thus far due to the decline in oil prices; however, contacts believe raws will come down in 2015 (maybe as soon as 1Q15) which could lead to meaningful price/raw benefits for manufacturers as paint pricing tends to be sticky.  We view the current price/raws relationship as a slight positive for paint manufacturers and believe the relationship has the potential to become increasingly favorable in 2015 as oil-based raws see more meaningful declines in price.

3-Month Outlook — Outlook Favorable Despite Arrival of Winter Months and Seasonally Slower Demand
Our proprietary Coatings 3-Month Outlook Index reached 0.36 in 4Q14 which compares to a reading of 0.57 both year-over-year and sequentially.  Due to the upcoming winter season, outlooks at this time of the year tend to come in lower as contacts generally compare their current volume performance to the expected volume performance over the next 3 months which are considered the slowest months of the year.  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).