INDUSTRY OVERVIEW BOB WELLS SENIOR VICE PRESIDENT, CORPORATE COMMUNICATIONS & PUBLIC AFFAIRS
Forward Looking Statement The presentations today will contain certain forward looking statements," as defined under U.S. federal securities laws, with respect to sales, earnings and other matters. These statements can be identified by the use of forward looking terminology such as "believe," "expect," "may," "will," "should," "project," "could," "plan," "goal," "potential," "seek," "intend" or "anticipate" or the negative thereof or comparable terminology. These forward looking statements are based upon management's current expectations, estimates, assumptions and beliefs concerning future events and conditions. Readers are cautioned not to place undue reliance on any forward looking statements. Forward looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company that could cause actual results to differ materially from such statements and from the Company's historical results and experience. These risks, uncertainties and other factors include such things as: general business conditions; the Company's ability to successfully integrate past and future acquisitions into its existing operations, including Valspar, as well as the performance of the businesses acquired; risks inherent in the achievement of anticipated cost synergies resulting from the acquisition of Valspar and the timing thereof; strengths of retail and manufacturing economies and the growth in the coatings industry; changes in the Company's relationships with customers and suppliers; changes in raw material availability and pricing; unusual weather conditions; and other risks, uncertainties and factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. Since it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, the above list should not be considered a complete list. Any forward looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.
Paint & Coatings Industry Global Mix by Category (Based on $) Special Purpose Coatings 20% OEM Coatings 41% Architectural Paints 39% Total Coatings 2016 ~ 9 Billion Gallons ~121 Billion Dollars Source: KNG Research The use of KNG information in this presentation is for illustrative and consistency purposes only; SHW believes its volume data is unreliable.
Paint & Coatings Demand by Region Geographic Split of Global Revenue North America 23% 24% 21% 25% South America 5% 7% 3% 3% Europe 23% 23% 23% 25% ROW ~ 4% Asia Pacific 45% 39% 51% 42% All Coatings Architectural Paints OEM Coatings Special Purpose Coatings Source: KNG Research
Projected Demand by Region 5 Year Growth Rate Estimates North America 3% 3% 2% 2% South America 2% 2% 2% 2% Europe 2% 2% 2% 2% ROW 5% Asia Pacific 6% 7% 5% 5% All Coatings Architectural Paints OEM Coatings Special Purpose Coatings Sources: KNG, ACA and Company Estimates
Paint & Coatings Industry Global Mix by Category (Based on $) 11% 6% 3% 39% Total Coatings 2016 ~9 Billion Gallons ~121 Billion Dollars ARCHITECTURAL GENERAL INDUSTRIAL 2% 4% AUTO OEM WOOD COIL 7% 11% 17% PACKAGING PROTECTIVE & MARINE AUTO REFINISH OTHER Source: KNG Research
Industry Breakdown by Region 2016 Sales ($) Mix by Category North America Coatings Industry Europe Coatings Industry 2% 8% 6% 41% 8% 3% ~1.5 Billion Gallons 3% 11% 17% ~27.8 Billion Dollars 3% Latin America Coatings Industry 2% 8% 2% 5% 62% 1% 8% ARCHITECTURAL GENERAL INDUSTRIAL AUTO OEM WOOD COIL PACKAGING PROTECTIVE & MARINE AUTO REFINISH OTHER 3% 3% 4% 10% 9% 4% 2% 8% 13% 10% 39% 15% Asia Pacific Coatings Industry 35% ~2.1 Billion Gallons ~28.4 Billion Dollars ~583 Million Gallons ~5.5 Billion Dollars 4% 8% 4% 8% 12% 19% ~4.2 Billion Gallons ~53.8 Billion Dollars Source: KNG Research
Top Global Manufacturers Coatings Industry 2016 PPG All Others (>5,000 firms) Global Market Top 10 Suppliers ~55% Masco Source: KNG Research
Top Global Manufacturers Coatings Industry 2016 Architectural Market Top 10 Suppliers ~46% Industrial Market Top 10 Suppliers ~48% Sherwin Williams PPG PPG AkzoNobel All Other AkzoNobel All Other Sherwin Williams Nippon Axalta BASF Asian Paints Masco Nippon DAW Benjamin Kansai Moore Jotun KCC, Koreau Hempel Jotun Kansai Source: KNG Research
North America Paint & Coatings Industry Sales ($) Mix by Category Special Purpose 22% OEM Coatings 37% Architectural Paints 41% North America Paint & Coatings 2016 ~ 1.5 Billion Gallons ~27.8 Billion Dollars Source: KNG Research
North America Paint & Coatings Industry Sales ($) Mix by Category Special Purpose 22% Architectural Paints 41% Comprises ~65% of SHW Direct Sales Reliable Indicator of Demand in Other Coatings Categories OEM Coatings 37% Source: KNG Research
U.S. Paint & Coatings Industry Architectural Paint Gallons (Millions) 850 800 Millions of Gallons 750 700 650 600 550 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ~ 782 Million (+3.3%) Sources: ACA, Company Estimates
Favorable Customer Mix DIY Contractor Shift Will Continue in U.S. & Canada 59% 39% Do It Yourself Contractor 41% 61% Sources: U.S. Commerce Department, Company Estimates
U.S. & Canada Architectural Paints Breakdown by Segment New Non Residential 6% (50M Gal) Residential Repaint (Pro) 28% (217M Gal) Non Residential Repaint 15% (123M Gal) New Residential 12% (90M Gal) DIY 39% (302M Gal) 782 Million Gallons Sources: ACA, Company Estimates
U.S. Paint & Coatings Industry Sustained Household Formation Underpins Housing Demand 120,000 5,000 118,000 4,500 116,000 4,000 114,000 112,000 110,000 108,000 106,000 104,000 1,000 3,500 3,000 2,500 2,000 1,500 102,000 500 100,000 0 Number of Occupied Households Quarterly Y o Y Growth 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Occupied Households Quarterly Y o Y Growth Source: U.S. Census Bureau
U.S. Paint & Coatings Industry Housing Supply not Keeping Pace Housing Surplus/Deficit (thousand) & Homeowner Vacancy Rate Housing Surplus/ Deficit (LHS) Vacancy Rate (RHS) Cumulative Housing Surplus/Deficit (RHS) Housing Surplus/Deficit (thousand) 800 0.03 800 4,000 600 0.025 600 3,000 400 400 2,000 200 0 (200) (400) (600) 0.02 0.015 0.01 0.005 Annual Surplus/Deficit (Thousands) 200 0 (200) (400) (600) 1,000 0 (1,000) (2,000) (3,000) Cumulative Surplus/Deficit (Thousands) (800) 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 YTD 0 (800) 2000 2002 2004 2006 2008 2010 2012 2014 2016 (4,000) Sources: Wells Fargo Securities, U.S. Commerce Department
U.S. Paint & Coatings Industry Shortfall Particularly Acute in Entry Level 10.0 9.0 8.0 Months' Supply of Resale Inventory - 9.3 11% Price Appreciation - right 12% 10% 7.0 6.0 Historical Average 7% 8% 5.0 4.9 6% 4.0 3.0 2.8 3.2 4% 4% 2.0 2% 1.0 0.0 Entry Level First-Time Move Up Second-Time Move Up Luxury Low Tier Mid Tier High Tier 0% Sources: Case Shiller, CoreLogic, Local MLS, Zelman & Associates
U.S. Paint & Coatings Industry New Housing Activity Lags Prior Periods 3,000 Manufactured Housing Shipments 2,500 Multi-Family Completions Single-Family Completions 2,000 1,500 1,000 500 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E Sources: Census Bureau, Zelman & Associates
U.S. Paint & Coatings Industry Inventory For Sale (New & Existing) Below Multi Decade Norms 3.5% 3.0% Seasonally-Adjusted Single-Family New and Existing Home Inventory as Percentage of Households 2.5% 2.0% 1.5% 1.0% 1Q90 3Q90 1Q91 3Q91 1Q92 3Q92 1Q93 3Q93 1Q94 3Q94 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Sources: Census Bureau, NAR, Zelman & Associates
U.S. Paint & Coatings Industry Residential Remodeling Market Remains Strong $425.0 $405.0 Leading Indicator of Remodeling Activity 10% 9% $385.0 8% $365.0 $345.0 $325.0 $305.0 $285.0 $265.0 6.1% 6.0% 5.9% 5.7% $260.9 $264.4 $267.0 $256.6 5.5% $278.8 5.3% $274.7 5.1% 4.8% $278.0 $279.8 5.3% $285.2 6.1% $291.5 6.9% 6.9% 6.6% $304.8 $296.4 $299.0 6.7% $310.9 6.5% 6.0% $315.6 $317.0 6.3% $324.0 7% 6% 5% 4% 3% 2% $245.0 1% $225.0 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3p Q4p Q1p Q2p 2014 2015 2016 2017 2018 0% 4 Quarter Moving Totals (Mils. $) (Revised) 4 Quarter Moving Rate of Change (Revised) Source: Harvard Joint Center for Housing Studies
U.S. Paint & Coatings Industry Residential and Non Residential Fixed Investment as % of GDP Residential Investment 3.8% of GDP in 2Q17 13% Below Historical Average Non Residential Investment 12.6% of GDP in 2Q17 4% Below Historical Average 7.00% 6.50% 6.00% 5.50% 5.00% 15.00% 14.50% 14.00% 13.50% 13.00% 4.50% 12.50% 4.00% 12.00% 3.50% 11.50% 3.00% 11.00% 2.50% 10.50% 2.00% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2017 10.00% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2017 Sources: Wells Fargo Securities, U.S. Commerce Department
U.S. Paint & Coatings Industry Positive Manufacturing & Construction Outlook Manufacturing PMI & Architectural Billings Architectural Billings by Sector 60.0 60.0 55.0 55.0 50.0 50.0 45.0 45.0 40.0 40.0 35.0 35.0 2015 Dec 2016 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2017 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2015 Dec 2016 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2017 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug PMI: US Manufacturing ABI: National Architectural Billing Commercial/ Industrial Billings Institutional Billings Residential Billings Sources: Institute for Supply Management, American Institute of Architects
U.S. Paint & Coatings Industry Moderating Permits and Starts Completions likely to Continue Rising 700 114 178 158 138 163 195 165 198 247 308 355 395 393 400 375 330 263 319 322 375 415 425 267 373 465 465 557 613 625 570 600 Multi-Family Construction - Units in Thousands 500 400 300 200 100 0 Starts Completions Year-End Under Construction 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E Sources: Census Bureau, Zelman & Associates
U.S. Manufacturing Activity Positive Manufacturing Outlook Index PMI New Orders Production Employment Inventories Order Backlog Exports Aug Jul 2017 2017 Change Direction Rate of Change 58.8 56.3 +2.5 Growing Faster 60.3 60.4 0.1 Growing Slower 61.0 60.6 +0.4 Growing Faster 59.9 55.4 +4.7 Growing Faster 55.5 50.0 +5.5 Unchanged From Contracting 57.5 55.0 +2.5 Growing Faster 55.5 57.5 2.0 Growing Slower Source: Institute for Supply Management
Coil Coatings & General Industrial U.S. Appliance Shipments 80,000 100% 90% 60,000 80% 70% Laundry (Dryer, Washers) '000 Units 40,000 60% 50% 40% Food Preservation (Freezers, Refrigerators) Cooking (Cooktops, Microwave Ovens) 20,000 30% 20% Cleanup (Compactors, Dishwaters, Disposers) 10% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0% 2005 2010 2015 Source: AHAM
Industrial Coatings Forecasted U.S. & Canada Activity 4.00% 3.00% 2.00% 1.00% 0.00% 1.00% General Industrial Packaging Industrial Wood Coil Manufacturing 2.00% 2015 2016 2017p Sources: IHS Global Insight, Company Estimates
Automotive Refinish CR/VR Indicators NORTH AMERICA 3,200 U.S. Vehicle Miles Driven Moving 12 Month Total Vehicle Miles Driven (10 Years) 350,000,000 Vehicles In Use Estimated Vehicles In Use 2002 2020 EUROPE ASIA PACIFIC LATIN AMERICA 3,160 300,000,000 Total U.S. Vehicle Miles Driven 3,120 3,080 3,040 3,000 2,960 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 2,920 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: www.fhwa.dot.gov, AAA, IHS Markit
Protective & Marine Coatings Forecasted U.S. & Canada Activity 10.0% 5.0% 0.0% 5.0% 10.0% 15.0% 2015 2016 2017p Bridge & Highway Food & Beverage Marine Oil & Gas Power Generation Rail Steel Fabricator Water & Wastewater Sources: IHS Global Insight, Company Estimates
Oil & Gas Infrastructure Capital Expenditure (in Billions $) 39.9 20.8% 31.6 Shell 17.4% 26.1 15.3% 22.1 42.5 9.4% 38.5 Exxon 19.2% 31.1 37.9% 19.3 2013 2014 2015 2016 Chevron 2013 2014 2015 2016 BP 37.9 6.6% 35.4 16.7% 29.5 38.6% 8.2% 16.9% 24.5 1.6% 22.5 18.7 18.4 18.1 2013 2014 2015 2016 2013 2014 2015 2016 Source: Public Company Reports
Global Economic Indicator: Oil and Gas Global Oil & Gas Rig Count NORTH AMERICA EUROPE 3,000 ASIA PACIFIC LATIN AMERICA 2,500 2,000 1,500 1,000 500 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Number of Rigs 2013 2014 2015 2016 2017 Source: Baker Hughes
Global Confidence Positive Outlook Global Manufacturing Confidence PMI 60.0 58.0 56.0 54.0 52.0 50.0 48.0 46.0 44.0 42.0 40.0 WORLD NORTH AMERICA EUROPE ASIA LATIN AMERICA 105 100 95 Global Consumer Confidence Consumer Outlook 2015 Dec 2016 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2017 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul 2014 2015 2016 2017 Sources: IHS Markit, U.S. Commerce Department