An Update on PMMI’s Mexico Packaging

and Processing Market Research

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Webinar Presentation

May 5, 2016

Events and Services at EXPO PACK Mexico

• Brunch: Packaging Operations and End User Panel

Wednesday, May 18 from 10:30 AM—12:30 PM

EXPO BANCOMER, Room B4

• EXPO PACK Mexico Agent Directory

• Complimentary Services available at PMMI’s Pavilion (Booth #2000):

• PMMI Member Happy Hour (daily from 5-7pm)

• Export counseling and market information

• Interpreters (on-site only)

• Private meeting rooms

• Internet stations

• Business Lounge Area

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MEXICO’S PACKAGING MACHIENRY

MARKET 2016-2017 OPPORTUNITIES AND TRENDS

Luis Doménech M.Managing Director

Market Intelligence Latin America, S.C.

www.mila.mx

May, 2016

Introduction

• Historical high packaging machinery imports in 2015 = US$678.1 million.

• U.S. recovered the leading supplier position after 12 years ranking in 2nd

or 3rd place.

• Imports from Germany and Italy saw declines in value and share.

• Spain and ROW, distant from the leading suppliers but slowly continue wining share.

• The Mexican economy has mixed indicators. While the overall GDP shows moderate growth and inflation is its lowest historical values, The Mexican peso has suffered a 33% devaluation since January 2014.

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Introduction

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200

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2015201420132012201120102009200820072006200520042003

USA Italy Germany Spain Rest of World

Packaging Machinery Imports 2003-2015

Source: MILA with information from the Secretariat of Economy, 2016

Introduction

• PMMI commissioned an update to the 2015 market

research report on Mexico’s packaging machinery market

• 32 Interviews with end users who have purchasing plans.

• Interviews with PM distributors, associations, PROMEXICO, etc.

• Trade statistics analysis.

• Comparison with previous research reports.

• Key goals:

• Identify what led to the 15% increase in PM imports in 2015.

• Identify reasons behind U.S. return to the leading supplier position.

• Identify market trends and customer preferences. Are those

shifting?

• What can PMMI members expect from the Mexican market under

uncertain economic conditions?

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Challenge…..

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Agenda

Macro Environment

Mexico’s Packaging Machinery Market Size, Trends and Shares

Future Outlook

Recommendations / Strategies for Success

Macro Environment

• 123 million people, neighbors to the U.S.

• Open Economy - free trade with: • 46 countries – Recently signed Trans-Pacific Partnership (TPP).

• One billion customers and 60% of global GDP.

• Most packaging machinery imports come from free-trade countries, thus do not pay import duties.

• Structural Reforms • Key reforms: energy, telecommunications, fiscal, financial, education and political.

• Faster growing and more competitive country. Lower energy (power and fuels) and telecommunications costs.

• Wider foreign direct investment attraction

• Jobs creation.

• Favorable Demographics• Working age population will outpace the number of dependents in coming years.

• 37% of the population younger than 20 y.o. = 45 million people

• 56% of the population younger than 30 y.o. = 69 million people.

• Migration from rural to urban areas. 2015 estimates = 20% rura vs 80% urban.

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Slightly higher GDP growth for 2016….

Mexico, GDP QoQ growth rate 1Q13-4Q15

Mexico, Inflation rate, May 2013 – Dec 2015

Slightly higher

GDP growth

expectations

SCHP 2.6 – 3.6%

Banxico 2.0 – 2.5%

IMF 2.6%

Source: INEGI & BANXICO, May 2016

Despite of the peso depreciation in front

of the US$, the inflation index has

maintained lowest historical values.

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Source: Secretariat of Economy, 2016.

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10

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Billio

n U

S$

FDI 2006-2015

Mexico attractive for FDI…

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Index (2003=100)

Source: BANXICO and INEGI, May, 2016

Mediocre consumer confidence…

Seasonally Adjusted

Cycle - Trend

Customer Confidence Index 2011-1Q2016

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Retail stores continue with strong sales growth…

Source: ANTAD, Press Release, April 2016

ANTAD, Monthly Total General Sales 2013 – 1Q16

(YoY nominal growth %)Same Stores %

Total Stores %

2012 2013 2014 2015 1Q16*

Same Stores 0.1 0.9 6.7 7.9

Total Stores 5.1 5.2 10.3 11.0

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Jan 11 June 11 Jan 12 June 12 Jan 13 June 13 Jan 14 June 14 Jan 15 June 15 Jan 16 may-16

MXN/EUR

MXN/USD

Macro Environment

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Source: Mila with data from Mexico’s Central Bank, 2016

36%

9%

Exchange Rate Comparison 2011-1Q16

Political Environment

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President Peña Approval/ Disapproval Index

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Apr 13 jul-13 Dec 13 Apr 14 Aug 14 Dec 14 mar-15 jul-15 Dec 15 Apr 16

Citizens

Leaders

Presidents’ job qualification from 0 to 10

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Let’s take a break…..

GDP growth

Low inflation 2.13%

Increasing FDI

Strong internal demand

Young population

Formal jobs growth

Stable consumer

confidence.

↓ 33% Currency devaluation

in 24 months.

↓ Presidential approval.

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DRIVERS INHIBITORS

NEUTRAL

Need more data…..

• 2.13% inflation = lowest since this indicator is tracked. • Telecom reform

• Local telephony cost = - 4.2%

• Cellular telephony cost = - 6.8%

• National long distance cost= -100%

• International long distance - 40.7%

• Telecom reform

• Energy Reform

• Electric power cost = - 3.7%

• Industrial electric power - 6.4%

• Natural gas - 10.9%

• 30 new private players enter the O&G sector.

• No new Taxes and no tax increases for 2016

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Need a lot more data….

• 2015 imports = US$395.2 billion, 1% lower vs 2014

• 2015 exports = US$380.7 billion, 4% lower vs 2014

• Negative trade balance of 14.5 billion.

• Mexico produced 3.5 million vehicles in 2015, up 5.5%.

• Vehicle exports increased 4.4% to reach 2.6 million units.

• According to a KPMG report, Top management perspectives 2016 where 812 business leaders were interviewed, 48% have seen their company profitability improve in the last years, 37% maintained similar levels and 15% had lower profitability.

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Need a lot more data….

• The oil industry…....

• Everyone talks about oil prices!!

Oil in the Mexican economy

• Traditionally oil income has been a large contributor to Mexico’s public finances.

• Despite of industry diversification (automotive, aerospace, mining, food, beverage, etc), oil still represented 1/3 of the public budget in 2014.

• Oil prices decline is only part of the problem, PEMEX’s production has been declining for a decade, passing from 3.5 million barrels per day in 2005 to 2.2 mbpd in 2015.

• Lack of refining capacity and lack of investments in natural gas extraction and pipelines has translated into increasing gasoline and gas imports.

• Nowadays Mexico is a net importer of petroleum products.

• Petroleum products trade deficit in 1Q16 equals US$9 billion!

Oil in the Mexican economy

Mexico’s Petroleum Products Trade Balance 1993-2015

Oil in the Mexican economy

• 2015 Public deficit = US$35.14 billion = 3.5% of GDP

• Mexico’s external debt has increased to US$160 billion (30% in

the last 3 years), and internal debt has increased 45% to reach

the equivalent of US$265 billion.

• Mexico’s reserves declined in US$22 billion in 2015 from

US$198 billion in January 2015 to US$176 billion in January

2016.

• PEMEX’s losses in 2015 = US$28.8 billion.

• The Mexican Government had to inject US$4.2 billion into

PEMEX so it could partially meet its obligations with suppliers.

• Nowadays, instead of being the governments’ cash cow, the oil

industry represents an additional cost.

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Summarizing…..

GDP growth

Low inflation 2.13%

Increasing FDI

Strong internal demand

Young population

Formal jobs growth

Strong industrial activity

No Tax increases

Stable consumer confidence.

↓ 33% Currency devaluation in 24 months.

↓ Presidential approval.

↓ Strong fiscal deficit

↓ Increasing public debt

↓ Lower reserves

↓ Insufficient budget cuts

↓ Negative petroleum trade balance.

↓ Increasing country risk

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DRIVERS INHIBITORS

NEUTRAL

Recipe for an economic crisis!

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Agenda

Macro Environment

Mexico’s Packaging Machinery Market Size, Trends and Shares

Future Outlook

Recommendations / Strategies for Success

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Market Size

• 2015 estimate market value = US$810 million = historical high.

• 2015 value 8% higher than 2014. Imports were 15% higher.

• Five-year average growth rate (CAGR) 7.2% per year.

• Approximately 80% of the market is supplied by imported machinery. 2015 imports = US$ 678 million.

• Tariffs have been lowered or eliminated for most packaging machinery regardless of their origin. Few types of machinery from non FTA countries still pay 5-15% import duties.

• USA, Italy and Germany (in that order) remain the largest suppliers with 71% share.

• Top 30 importers represent 49% of the total imports.

• A single importer (Compañía Cervecera de Coahuila) imported 18% of the total 2015 value.

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Market Size & Trends

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0

100

200

300

400

500

600

700

2015201420132012201120102009200820072006200520042003

USA Italy Germany Spain Rest of World

Packaging Machinery Imports 2003-2015

Source: MILA with information from the Secretariat of Economy, 2016

Market Size & Trends

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Source: MILA with information from Customs, 2016

Importer US$ 2014 US$2015 Change % COMPAÑIA CERVECERA DE COAHUILA, S.A. DE C.V. 34,771,329 120,229,549 246%NESTLE MEXICO SA DE CV 10,983,295 26,469,440 141%KRAFT FOODS DE MEXICO SA DE CV 7,615,490 24,992,619 228%PROCTER & GAMBLE MANUFACTURA S DE RL DE CV 26,128,714 22,181,370 -15%SABRITAS S DE RL DE CV 5,320,088 19,950,880 275%TETRA PAK SA DE CV 16,254,224 17,233,857 6%TETRA PAK RDC MEXICO S.A. DE C.V. 10,383,968 17,233,857 66%HERSMEX S. DE R.L DE C.V. 5,526,341 10,184,864 84%BRITISH AMERICAN TOBACCO MEXICO SA DE CV 9,321,943 9,483,466 2%TRANSPORTADORA OCCIDENTAL SA DE CV 8,258,575 8,466,868 3%LABORATORIOS PISA SA CV 5,818,988 8,074,105 39%COMERCIALIZADORA DE LACTEOS Y DERIVADOS, S.A. DE C.V. 4,858,333 6,861,405 41%KRONES MEX SA DE CV 7,859,075 6,537,992 -17%SERVICIOS CORPORATIVOS PHILIP MORRIS S DE RL DE CV 3,650,227 6,301,334 73%COMPA&IA CERVECERA DE ZACATECAS SA DE CV 3,098,721 5,974,143 93%MULTIVAC MEXICOSA DE CV 9,171,277 5,970,814 -35%CIA CERVECERA DEL TROPICO SA DE CV 16,128,334 4,880,349 -70%BIMBO SA DE CV 7,592,765 4,371,063 -42%MANANTIALES PE&AFIEL SA DE CV 7,194,030 3,923,361 -45%QUALAMEXSA DE CV 3,020,300 3,568,593 18%

Compañía Cervecera de Coahuila

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Grupo Modelo has two different owners…

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• Constellation brands is increasing the capacity of Cía

Cervecera de Coahuila from 10 million hectoliters to 25

million hectoliters by mid 2017 and will continue

expanding to reach 27.5 by 2018.

• Also increasing capacity of a glass bottles production

plant.

• Total investment in Coahuila of US$2.5 billion.

• The company also announced in early 2016 the

construction of a 10 million hectoliter state-of-the-art new

plant in Mexicali with the ability to scale to 20 million

hectoliters. The first 5 are scheduled to be in operation by

early 2019.

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Constellation Brands Investments

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Cia Cervecera de Chihuahua PM Imports

2015

Origin Value

United States of America 91,526,639

Germany 10,928,483

Italy 10,014,763

France 5,242,898

Netherlands 1,215,558

Canada 772,800

China 521,818

Other 6,805

Almost all machinery sourced trough CIH

INTERNATIONAL S.a.r.l., a Constellation Brands

Subsidiary in Luxembourg established in 2013.

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Cia Cervecera de Chihuahua Investments

• Excluding Cía Cervecera de Chuhuahua, packaging

machinery imports growth was 1% in 2015. = US$557

million vs US$552 million in 2014.

• The U.S. still captured the first place in ranking with 27%

share, followed by Italy with 22% share and Germany with

18%.

• The food sector was the largest investor in packaging

machinery, followed by the beverage sector. Distant from

those the personal care industry had an increase in

investments compared to 2014 and the pharmaceutical

sector remained with moderate investments.

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Rest of the Market

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Market Trends – Demand Drivers

• Industrial production index improving.

• Companies moving forward with investment plans for:

a) Increasing capacity

b) New plants

c) Product differentiation

• Low interest rates.

• Mexico attracting investments from European companies

targeting the domestic and NAFTA markets.

• Highly competitive manufacturing costs.

• Favourable demographics and growing middle class.

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Market Trends – Demand Inhibitors

• Depreciation of the Mexican Peso in front of the U.S. Dollar = imported machinery more expensive in peso terms, but finished products are more competitive in the international arena.

• Euro loosing value to of the US Dollar makes European machinery more price competitive.

• As most of their domestic markets are slow, European manufacturers are aggressively pursuing sales in Latin America.

• Due to industry consolidation and demand from large multinational companies, large volume machinery is finding greater demand (U.S. machinery well suited for large-scale production in the food and beverage sectors).

• Mexican food and beverage companies continue increasing investments in the U.S. to serve the Latin community.

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2015-2016 Forecast

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Source: MILA, 2016

400

500

600

700

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2017/f2016/f2015201420132012201120102009

Packaging Machinery Imports Forecasts 2016-2017(in million USS)

Most likely Optimistic Pesimistic

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Market Shares

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Source: MILA with data from Secretariat of Economy, 2015

35%

20%

16%

4%

25%

2015 PM Import Shares

USA Italy Germany Spain Rest of world

27%

22%

18%

5%

28%

2015 PM Import Shares w/o CCC

USA Italy Germany Spain Rest of world

2015 Packaging Machinery Importers• The top 200 packaging machinery importers accounted for 81% of the total

2015 import value.

• Among the top 200 importers, 31% of the import value was imported by beverage companies, Food companies accounted 25%, Personal Care and Pharma 8% and 28% of imports were imported by packaging machinery companies or other

Import value range

No of

companies

121 million 1

30-20 million 3

19-10 million 6

10-5 million 12

5-3 million 20

3-1 million 79

999-500 thousand 95

499-300 thousand 106

299-100 thousand 295

100-50 thousand 235

50-20 thousand 409

Source: MILA with data from Aduanas (Mexican customs), 2016

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Agenda

Macro Environment

Mexico’s Packaging Machinery Market Size, Trends and Shares

Future Outlook

Recommendations / Strategies for Success

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PM Future Outlook

• Among 32 companies interviewed, 28 plan to continue

with their investment plans, 3 are awaiting for exchange

rate improvement to place PM orders and 1 cancelled its

planned investments.

• There is optimism in the industry, fueled by strong

domestic demand and increasing exports due to

exchange rate.

• “Despite of our Government, we continue growing”

• Large multinationals continue investing in Mexico.

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PM Future Outlook

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Company Million US$ Location Description

Diageo 400 Jalisco - TequilaDC, distilling and bottling facility

and wwtp

Constellation Brands2,000

3,500

Chihuahua

Mexicali

Increase capacity from 10 to 27

million hectoliters in Chihuahua,

new plant in Mexicali

Arca Continental 405 Various Plant expansions and acquisitions

Leoni / Envases

Universales 120 Yucatán Can production facility

Grupo Modelo 300 Yucatán Beer plant in yucatán

Ball Corporation 320 Nuevo León Can production facility

Heineken 2,000 Chihuahua New Plant in Chihuahua

Takeda 80 TBD Expansion

Investment Announcements in 2015/2016

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Previous Investments continue…

Company Investment Announcement (US$) Period/ Concept

Coca-Cola 8.2 billion 2014-2020

Pepsico 4.99 billion 2014-2018

Nestlé 1 billion 2 new plants + expansion

Mondeléz Int. 600 million New plant

Heineken 500 million New plant

Kekén 300 million New plant

Mars 200 million New plant + expansion

Kellogg’s 50 million Plant expansion 2015-

2017

• Mexico has strengthened its position in the global food market attracting

investments from both, large multinational players and medium sized

companies entering the North American market.

Still positive perspectives…..

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2018?

Why are international food/ beverage

companies so interested in Mexico?• Domestic market of over 120 million people.

• Young population.

• Migration from rural to urban areas.

• Increasing number of woman working.

• Positive GDP and inflation figures.

• Export opportunities to supply the U.S. market with low logistical costs – Mexico supplies 12% of U.S. food imports, and share is increasing fast.

• Free trade agreements allow importing raw materials and exporting finished products without import duties.

• Low manufacturing costs.

• Food manufacturing net operation profits significantly higher than comparable economies.

• Well-developed retail sector with multiple store formats.

• Mexican dietary habits.

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Opportunities and Challenges

• Strong investment plans from multinationals.

• Mexican companies increasingly investing in the U.S. and Europe, increasing number of Mexican global players.

• South American companies expanding to Mexico.

• Energy efficiency and sustainable practices.

• Peso devaluation makes imported machinery more expensive in peso terms.

• US$ priced machinery becoming less price-competitive than European machinery.

• Asian machinery expected to loose share due to bad experiences among some industry players.

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Agenda

Macro Environment

Mexico’s Packaging Machinery Market Size, Trends and Shares

Future Outlook

Recommendations / Strategies for Success

Doing business in Mexico

• Local presence is highly appreciated and becoming a

must.

• Post-sale service is a need, lacking means loosing the

sale.

• Face-to-face negotiations have better results.

• Personal relations are very valuable.

• Price references and information is essential.

• Preference for local trade shows.

• Market with demanding consumers.

• Flexibility is key.

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Strategies for Success

• No NAFTA advantage.

• Service, flexibility and reliability more important than price.

• Local service is a key competitive advantage.

• Credit options and payment schedules can be strong decision makingpoints. Credits in local currency are preferred.

• Save margin for negotiation.

• Equipment service packages and local spare parts are a must.

• Invest in developing relationships.

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Strategies for Success

• The number of companies willing to purchase from suppliers

without a formal presence in Mexico is fast disappearing.

• Invest in marketing – videos, promotional materials, web

page in multiple languages.

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QUESTIONS?

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Upcoming…

• FISPAL Technologia (June 14-17; São Paulo, Brazil)• Updated Brazil Packaging Machinery Competitive Report

• Webinar

• PMMI Pavilion

• Brazil Market Strategy Luncheon

• ProPak Asia (June 15-18; Bangkok, Thailand)• NEW: Thailand Packaging Machinery Market Assessment: An Analysis of

Market Opportunities for Packaging Machinery Manufacturers

• Webinar

• PMMI Pavilion

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Contact us:

See you in México!

Luis Doménech

Managing Director

Market Intelligence Latin America, S.C.

domenech@mila.mx

+(52155) 5432-9768

www.mila.mx

Paige Jarvi

Global Marketing Assistant

PMMI

paige@pmmi.org

+571.287.6814

www.pmmi.org

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