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Contractor Survey

The Paint Contractor Survey is a result of reaching out to a large sample of paint contractors across the country to gain insight into the architectural coatings industry to allow us to analyze current and prospective business conditions. The results are largely representative of the paint store channel as that is where the vast majority of contractors buy their paint. Paint stores represent roughly 50% of the U.S. architectural paint industry while home centers (35%) and independent dealers (15%) make up the rest.

Of the three architectural paint channels (paint store, big box, and independent dealer) this survey focuses on the paint store channel by using contractor results as a proxy given that the vast majority of contractor purchases are through paint stores. We look at paint contractor trends concerning year over year (YoY) sales, bidding activity, outlooks, hiring activity and the current pricing environment.

● Sales for paint contractors were up mid-single-digits thus far in 1stQ18. A net 42% of contacts noted sales growth in the period, as 63% reported higher sales and 21% reported lower. On average, contractors are experiencing 4.4% sales growth. This growth is slightly below levels seen the past few quarters, which we believe is, at least in part, due to adverse weather seen in 1Q18 vs the prior few years.

● In the current quarter, a net 71% of contractors noted having a positive outlook and a net 37% of contacts described bidding activity as stronger YoY, which both point towards a favorable outlook. Several of our contacts with positive outlooks cited improved bidding activity as driving their positive expectations.

● When describing paint purchase prices YoY, 75% of respondents noted pricing as being higher compared to the prior year while no one indicated prices as being lower. The remaining 25% described pricing as flat from the prior year. On average, contacts indicate pricing is up 3.6% YoY in 1stQ18 which is the highest YoY pricing growth since the inception of the survey..

Background on Survey Respondents

The majority of respondents (~83%) have sales between $0-$5 million. The remaining 17% of responses are from large paint contractors with over $5 million in sales. We believe this is consistent with the makeup of the industry. In addition, the responses skew more towards non-residential (commercial/industrial), but there is a healthy mix of residential and nonresidential exposure in our survey.

Contractors were able to select as many suppliers as they choose so the responses add up to more than 100%. Sherwin-Williams is utilized by a majority of our survey respondents (85%) followed by Benjamin Moore (56%) and PPG Paints (44%).

Growth Remains Solid in 1Q18

The cumulative responses to the question of how contacts’ sales thus far in 1stQ18 compare to the same time period last year show that growth has continued at a solid pace to end the year.

63% of contractors experienced a higher level of sales YoY

15% described their sales as “Flat”, and the remaining

21% experienced a YoY sales decline so far in the period.

These metrics produce a net increase (percent of contacts who experienced higher sales in the period minus the percent of contacts who experienced lower) of 42%. Sales grew an average of 4.4% thus far in 1stQ18.

Contractors that Plan to Grow Headcount Remains at High Levels

We asked contractors to provide expectations for employment levels of their respective firms over the next 6 months, which we view as a gauge of the health of the market

60% (most) respondents plan to grow their headcount

37% are planning to maintain their headcount, while

2% plan to decrease

This leaves a net 58% of respondents who plan to grow their headcount. Similar to our contacts cumulative responses for bidding activity and outlooks, this is a solid sign for the industry.

Bidding Activity Improves Sequentially

When asked to compare bidding activity on a YoY basis, contractors’ responses show that activity improved sequentially in 1stQ18, but is below 1stQ16 and 1stQ17 levels. In our 4thQ17 survey, a net 31% of contacts noted higher bidding activity YoY. In the current quarter, a net

37% of contacts described bidding as stronger YoY, indicating activity has improved vs 4thQ17.

Several of our contacts with positive outlooks cited improved bidding activity as driving their positive expectations.

Pricing Moves to Highest Level Since Inception of our Survey in 1Q18

To get a gauge for the pricing environment surrounding the paint contractors, we asked a few questions related to said topic. As a reminder 2017 price increases looked like this: PPG had a price increase that took effect January 1st in the US & Canada for 5% with similar increases throughout pockets of Europe. In addition, SHW had a price increase take effect December 1st 2016 of 5%. Other manufacturers also had similar increases including Benjamin Moore, Dunn Edwards, Kelly-Moore, O’Leary, Miller Paint, etc.

Currently, manufacturers have price increases outstanding that took effect in 4thQ17/1stQ18 in the MSD % range with all major manufacturers having an increase outstanding. When describing paint purchase prices YoY,

75% of contractors noted pricing as being higher compared to the prior year, while no contacts cited prices as being lower.

25% described pricing as flat from the prior year.

On average, professionals indicate pricing is up 3.6% YoY in 1stQ18, which is a bump up from our 4thQ17 survey which showed average prices up 3.1% due to certain manufacturer prices taking effect in January. Paint and coatings companies are still trying to recover margins lost to raw material inflation.

Conclusion

Overall, sales trends showed decent growth in 1stQ18 with average sales up 4%. Furthermore, we remain confident that the architectural paint market is poised to realize further price increases in 2018 to help offset persistently strong raw material inflation. However, we do not expect price to offset raws until 3rdQ18. We continue to rate PPG, SHW and RPM Buy.

Recent stock prices:

Symbol          Price       Target Price             Rating

PPG        $113.22            $128.00             B

RPM         $48.60              $58.00             B

SHW       $405.33            $435.00             B

Rating Legend: B=Buy, N=Neutral, S=Sell

Source:

Northcoast Research U.S. Architectural Paint Contractor Survey

This information is from the 1stQ18 edition of the Northcoast Research Paint Contractor Report and only represents excerpts edited by PPT.


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