Architectural Coatings Industry Research Report Comparing Business Trends in 2Q14 vs. 2Q13

Each month, Northcoast Research surveys 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, the company views 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 2.6% in 2Q14 vs. 2Q13
According to industry participants, average sales volumes accelerated 2.6% thus far in 2Q14 compared to 2Q13 as weather conditions improved across the country and Ace Hardware volumes accelerated due to positive feedback from the Valspar roll-out.  This compares to volume growth of 1.8% in 1Q14 where our contacts experienced modest general growth which was partially offset by harsh winter conditions.  The 2.6% volume increase in 2Q14 represents the strongest growth we have seen since the inception of our survey so we view the pick-up in year-over-year paint volumes as an encouraging data point for the architectural coatings industry.  Overall, 69% of respondents witnessed an increase in volumes vs. only 19% that saw volumes decline, which averaged out to 2.6% volume growth with a net increase of 50%.

Price of Paint from Suppliers — 2Q14 Paint Prices Up Slightly vs. 2Q13
53% of contacts noted a year-over-year increase in the cost of a gallon of paint from suppliers in 2Q14 as our paint price index increased 1%.  This compares to year-over-year increases in our index in the range of 1.5%-2.0% throughout 2013 and is largely in-line with our paint price index of 0.8% in 1Q14.  Price increases were announced in the paint store channel in 1Q14; however, this survey is reflective of the retail distributor channel and given that the times when coatings manufacturers were trying to recover rising raw materials costs have anniversaried, we believe the year-over-year increases in price are becoming less pronounced.  Overall, 53% of respondents witnessed an increase in pricing vs. only 11% that saw pricing decline, which averaged out to a 1% increase in price with a net increase of 42%.

Raw Materials — TiO2 Remains Largely Benign
Titanium dioxide (TiO2) prices have been stabilizing in recent months after witnessing sharp declines in 2013 and propylene has come down considerably since the beginning of 2014.  Overall, we anticipate raw materials to remain largely benign over the near-term with the potential for TiO2 to increase sometime in 2H14, although no price increase announcements have been issued by TiO2 producers to date – and even then it is still skeptical due to the previous price hike attempts which were ultimately unsuccessful.  As a result, we believe that the price/raw relationship from paint manufacturers will remain favorable during the near-term.

3-Month Outlook — Outlook Robust Due to Great Start to the Busy Paint Season
Our proprietary Architectural Coatings Outlook Index reached 0.78 during 2Q14 which compares to a reading of 0.92 during 1Q14.  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.  Therefore, we view the 0.78 reading in 2Q14 as a positive as our outlook index remains at elevated levels.  We find this encouraging given that the busy paint season got off to a robust start once weather improved and contacts are optimistic and believe that the upcoming months will continue to experience positive year-over-year growth.  The vast majority (64%) of contacts share a positive (42%) or very positive (22%) 3-month outlook, 30% believe that current trends will remain the same and the remaining 6% share a negative outlook.