Architectural Coatings Sales — Volumes Largely Flat in 4Q15 vs. 4Q14
According to industry participants, average volumes are largely flat (-0.1%) thus far in 4Q15 compared to 4Q14. This represents a sequential moderation from our 3Q15 results of 1.4% growth and compares to volume growth of 1.6% in 4Q14. The moderation in the current quarter is a bit concerning to see, however it is worth noting that a majority of contacts are experiencing growth in the quarter. Breaking it down, 50% of contacts cited experiencing volume growth in the period, 18% are experiencing flat volumes and 32% reported a y/y volume decline. The volume index falling into flattish territory is a direct result of outliers whom reported significant volume declines. In addition, the fourth quarter is a very seasonally slow period for paint stores.
Price of Paint from Suppliers — 4Q15 Paint Prices Remain Positively Skewed
39% of contacts noted paint prices were higher in 4Q15 vs. 4Q14 as our paint price index rose 0.7% compared to average increases of ~1.0% over the past year. Our research suggests 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 meaningful uptick in contacts were notified of a price increase from manufacturers to take place in 2015, however we do not expect prices to increase in 2016 as raw materials have continued to decline and only 11% of contacts indicated they have been notified of a price increase. Overall, 39% of respondents witnessed an uptick in pricing vs. only 11% that saw pricing decline, averaging out to a 0.72% increase in year-over-year pricing with a net increase of 29%.
Raw Materials — Raw Materials Can’t Seem to Find a Bottom
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. Propylene, of which many coatings based raws are derived, has continued to decline and is averaging about $0.29/lb in 4Q15, compared to $0.345/lb in 3Q15 and $0.41/lb in 2Q15. The current 4Q15 average of $0.29/lb is down 58% from the average in 4Q14 of $0.69/lb. Additionally, TiO2 started to drop in 4Q14 and has seen further declines throughout 2015 and is likely down 15%+ year-over-year. Unfortunately, we have not seen the level of raw material benefits we were anticipating throughout 2015 as most of the major coatings players indicated the raw material basket was down low-single digits in 1H15. With that said, we believe this will improve in 2H15 and are currently modeling for mid-single digit raw material declines for the balance of the year, and also expect benefits in 2016 as lower raw material costs anniversary. Therefore, we continue to expect the price/raw story to have legs for several quarters still.
3-Month Outlook — Outlooks Solid as Head into 2016
Our proprietary Coatings 3-Month Outlook Index came in at 0.61 in 4Q15, which is an uptick from the 0.51 reading seen in 3Q15. Working backwards, our Outlook Index came in at 0.84 in our 2Q15 survey results, 0.81 in 1Q15 and 0.36 in 4Q14. 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 this outlook reading as encouraging for industry revenues heading into 2016.