Results of U.S. Architectural Coatings Industry Research Report Which Compared Business Trends in 1Q

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 1.1% in 1Q15 vs. 1Q14
According to industry participants, average sales volumes increased 1.1% in 1Q15 compared to 1Q14.  This compares to volume growth of 1.6% in 4Q14, 1.2% in 3Q14, and record volume growth of 2.6% in 2Q14.  Although still positive, we note that volumes grew at the slowest rate in 1Q15 since the inception of our survey, indicating slight slowdowns during the period primarily due to weather.  We continue to expect the full-year 2015 to play out similar to our initial expectations, although we now expect some 1Q15 demand to be deferred into later periods.  Overall, 51% of respondents witnessed an increase in paint volumes vs. only 20% that saw volumes decline, averaging out to 1.1% year-over-year volume growth with a net increase of 31%.

Price of Paint from Suppliers — 1Q15 Paint Prices Trend Slightly Higher
51% of contacts noted an uptick in the price of paint in 1Q15 vs. 1Q14 as our paint price index rose 1.1% compared to average increases of 0.5%-1.0% in 2014.  Our research suggests that a little bit of price is sticking in the U.S. architectural paint industry but only in the independent dealer channel and likely in the low-single digit range.  We do not believe the paint store or home center channels are seeing price increases at this time.  Recall that we picked up potential price increases in the results from our 4Q14 survey where we observed a meaningful uptick in contacts that have been notified of a price increase from paint manufacturers to take place in 2015.  The majority of contacts believed these attempts would be successful and we believe that data we have discovered in 1Q15 suggests that some degree of pricing did in fact stick in the marketplace.  Overall, 51% of respondents witnessed an uptick in pricing vs. only 6% that saw pricing decline, averaging out to a 1.1% increase in year-over-year pricing with a net increase of 45%.

Raw Materials — Continued Raw Material Declines Suggest Increasingly Encouraging Price/Raws
Based on our research, we believe oil-based raw materials and titanium dioxide (TiO2) have seen meaningful declines thus far through 1Q15.  To simplify, we be-

lieve the raw material basket for coatings can be broken down into 30% oil derived raws, 20% TiO2, and 50% other.  Certain oil-based raws, such as solvents are down at least 25%-30% whereas other polymer-based raws are down at least 5%-10%.  TiO2 started to see declines in 4Q14 after several quarters of remaining flat and our research suggests pricing has slipped further in 2015 to the tune of another 8%-10%.  Assuming the “other” category will see flat to slightly higher pricing, we believe raw materials will decline mid-single digits in 2015 which is more pronounced when compared to our initial though which forecasted low-single digit declines.

3-Month Outlook — Outlook at Strong Levels as Contacts Expect Pent-Up Demand and Busy Paint Season
Our proprietary Coatings 3-Month Outlook Index reached 0.80 in 4Q14 which compares to a reading of 0.36 vs. 4Q1and a reading of 0.92 vs. 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).  We were not surprised to see a strong outlook level in our 1Q15 survey and view the 0.80 reading as in-line with our initial expectations; however, we believe outlooks are strong as the majority of contacts anticipate an acceleration in demand and are excited for what appears to be a busy 2015.