Wrapping Machinery 141

Wrapping Machinery 141 WRAPPING MACHINERY Definition: Machinery using a web of roll film or other material to wrap and seal a product as well as to bundle a combination of several products. Segmented by: Wrapping/Flowrapping, Overwrapping, Bundling Machinery for Non-Shrink Film or Material; and Wrapping/Flowrapping, Overwrapping, Bundling Machinery for Shrink Film. Note: The horizontal machines designed for shrink film exclude accompanying separate shrink tunnels, but include the shrink tunnel only if furnished as part of an integral automatic shrink wrapping machinery unit. ANOTHER POSITIVE YEAR FOR WRAPPING MACHINERY In the aggregate, U.S. shipments of wrapping machinery increased +7.8 percent in 2005 to an estimated $221 million. But as witnessed in previous years, the growth was based on the combination of mixed results between the two principal sub-categories, with shipments of shrink-film wrapping machinery up sharply and those of non-shrink-film machinery down - albeit just slightly. As in 2004, virtually all of the growth was generated by shipments to U.S. domestic market customers, while exports fell for a second straight year after having soared by nearly +55 percent in 2003. The order backlog at year-end (12/31/05) was relatively high, standing at $72 million, which was equivalent to nearly 33 percent of the year's total billings up from $55 million at the end of 2004. 11- AND 8-YEAR GROWTH TRENDS 3.8% Share of Total Industry $ Volume The historical trend data for this category of machinery are presented in two charts, the reason being that a change was made to the composition of the category eight years ago. Previous to that, the category had included horizontal form/fill/seal pouch machines, which, for the most part, are used for quite different applications than wrappers are. Although the change caused an interruption in the series of data for nonshrink film machinery shipments, the benefits to the future results should more than compensate. Past shipments of machinery for non-shrink film in the current format (which now excludes f/f/s pouch machines) as well as the total category are therefore unavailable; however, prior data specifically for shrink- film wrappers remain intact. Therefore, Figure 80 presents an 11-year historical comparison of shrink-film wrapping machinery shipment growth, and Figure 80A, which follows, provides a corresponding eight-year comparison, inasmuch as only eight years of data are available for non-shrink film machinery. The two machinery sub-categories will eventually be merged into an historical base. The comparative bar/line chart of Figure 80 shows that for most of the past 11 years a directional correlation has existed between shipment growth of machinery for shrink film wrapping applications and for the total packaging machinery industry as a whole. But as the chart illustrates, shipments of shrink film wrapping machinery were up by a sizable double-digit rate in 2005 while total packaging machinery shipment growth grew at a slightly lower rate than in the prior year. Nevertheless, the distinct linkage derives from the essential nature of shrink-wrap as a packaging medium in today's market and to its impact on packaging growth as a whole. The corresponding historical tracking of non-shrink film wrapper shipments (Figure 80A) reveals that after falling in three consecutive years from 2000 through 2002, the volume rebounded in 2003 with a solid increase of + 7.7 percent and an additional +6.3 percent in 2004. While shipments

142 2006 Packaging Machinery Shipments & Outlook Study FIGURE 80 ANNUAL GROWTH OF U.S. SHRINK-FILM WRAPPING MACHINERY SHIPMENTS COMPARED WITH TOTAL U.S. PACKAGING MACHINERY SHIPMENT GROWTH 1995-2005 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% % Change -12% -14% -16% -18% -20% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 NOTE: Chart covers only shrink film wrappers U.S. Wrapping Machinery for Shrink Film Total U.S. Packaging Machinery Shipments declined marginally (-0.8%) in 2005, the directional correlation with total packaging machinery movements remained largely intact. An analysis of the factors that contributed to the outcome for both sub-categories of TABLE 49 Average And Median Dollar Values Of 2005 Horizontal Wrapping Machinery Shipments (Shipments Per Manufacturer Based On Survey Data) 2005 Shipments Machinery Average Median Total Wrapping Machinery 4.451 2.902 Wrapping Machinery for Non-Shrink Film 3.167 1.550 WrappingMachinery for Shrink Film 4.133 1.410 US$ Millions machinery is provided in the discussion of factors behind the shipment results later on. BASIS FOR THE DATA - THE SURVEY'S RESULTS AND SUPPORTING RESEARCH Shipment data and estimates for 43 companies identified as manufacturers of wrapping machinery (as defined) formed the basis for the dollar-value projections; however, tabulation of complete questionnaire data was based on input from 36 companies. A summary of the survey's composition appears in Table 51 at the end of this discussion. The value of shipments attributed to the 43 manufacturers totaled $199 million, of which the participating PMMI members represented $160.2 million. While the increase-decrease data of Figure 81, which compare the number of companies reporting higher shipments versus those reporting declines, clearly support the growth scenario for total wrapping machinery shipments and for shrink-film machinery shipments, the positive breadth shown for the non-shrink-film sub-

Wrapping Machinery 143 FIGURE 80A ANNUAL GROWTH OF U.S. NON-SHRINK-FILM WRAPPING, FLOWRAPPING MACHINERY SHIPMENTS COMPARED WITH TOTAL U.S. PACKAGING MACHINERY SHIPMENT GROWTH 1998-2005 30% 25% 20% 15% U.S. Wrapping Machinery for Non- Shrink Film Total U.S. Packaging Machinery Shipments 10% 5% % Change 0% 1998 1999 2000 2001 2002 2003 2004 2005-5% -10% category tends to mask the slightly negative (-0.8%) result that occurred. In total, the increase-decrease data ranged from a reported low of -100 percent (decline to $0 shipments) to a high of +300 percent (increase), the latter posted by a company whose 2004 shipments were slightly less than $500 thousand. The arithmetic mean of the data was + 31.1 percent and the median was centered at +8.3 percent growth. Table 49 provides the average and median shipments for the machinery category's manufacturers both in total and by sub-category. Total shipments per manufacturer averaged $4.451 million in 2005 down from $5.011 in 2004 and $5.572 million in 2003. Also, the median at $2.902 million was down from $3.695 million in 2004. SHIPMENTS BY TYPE OF MACHINERY As indicated in Table 50, U.S. shipments of wrapping machinery for non-shrink film, including flowrapping, banding, overwrapping, bundling, sleeving, stretch, and all other related types, edged lower by $1 million or -0.8 percent in 2005 to an estimated $118 million. The quantity of units shipped also slipped by a fractional percentage to 876 from 881 in 2004. The average price per unit sold in 2005 was $134,703, down from $135,074 in 2004 and $161,850 in 2003, reflecting recent effects of increased price competition. Exports were also off slightly (from $22 million in 2004 to $21 million in 2005). It is worth noting that prior to 2005, exports were on a positive streak after growing to $22 million in 2003 and 2004, after having doubled to $16 million in 2002 from $8 million in 2001. Shipments to domestic customers were unchanged at $97 million. By contrast, shipments of wrapping machinery for shrink film applications extended their recent rebound from a turbulent 3-year period of negative returns, which included a free-fall decline of -18 percent in 2001 and a -7.9 percent downturn in 2003. As the table indicates, shipments were up by a solid +19.8

144 2006 Packaging Machinery Shipments & Outlook Study FIGURE 81 PERCENT OF COMPANIES REPORTING AN INCREASE, DECREASE, AND NO CHANGE IN WRAPPING MACHINERY SHIPMENTS 2005 VERSUS 2004 61% TOTAL Horizontal Wrapping Machinery 14% 25% % Reporting Increase Machinery for Non- Shrink Film 12% 38% 50% % Reporting Decrease % Reporting No Change Machinery for Shrink Film 14% 14% 72% 0% 20% 40% 60% 80% 100% percent in 2005 to an estimated $103 million following a +4.9 percent increase in 2004. As in 2004, the 2005 growth was based entirely on a pick-up in shipments to U.S. domestic customers, which surged by +24.4 percent to an estimated $97 million; exports, on the other hand, fell back to $6 million from $8 million in the prior year. And also in continuation of a recently established trend, the quantity of machines shipped rose to 1,573 units from 1,116 units in 2004 and 973 in 2002, again reflecting the impact of a larger proportion of lower-priced machines sold during the year. In fact, the average price has been on a declining trend, having fallen to $65,480 in 2005 from $77,061 in 2004, $84,275 in 2003 and $104,216 in 2002. The trend is clearly emblematic of the industry's ongoing response to shifts in market requirements as well as of their increased focus on smaller niche application areas. But as manufacturers' comments indicate, it has also been derived from the effects that intensified price competition have had on the industry's pricing structure. TRENDS, FACTORS AND DEVELOPMENTS AFFECTING THE MARKET The following factors listed in estimated order of importance collectively influenced the results reported for the category as a whole. Positive Trends, Factors and Developments A. Continued strength of U.S. domestic market demand in general As indicated earlier, virtually all of the growth registered in 2005 was generated by a further increase in shipments to the U.S. domestic market. The improvement resulted in large part from strong fundamentals of the U.S. economy, which in turn encouraged end-users to invest in new equipment based on sustained market confidence. "General economic improvement in 2005." "Customers have more capital available and we've seen higher quote activity."

Wrapping Machinery 145 TABLE 50 U.S. 2005 Wrapping Machinery Shipments, Exports, And Order Backlog By Type Of Machinery PERCENT CHANGE TOTAL Industry In $ Shipments Unit U.S. Order BACKLOG 2005 Shipments 2005 Vs. 2004 Shipments EXPORTS 12/31/05 Machinery ($ Millions) (%) (#) ($ Millions) ($ Millions) Wrapping, Flowrapping, Banding, Overwrapping, and Bundling Machinery for Non-Shrink Film 118-0.8 876 21 31 Wrapping, Flowrapping, Banding, Overwrapping, and Bundling for Shrink Film 103 +19.8 1,573 6 41 Total Category 221 +7.8 2,449 27 72 B. Further impact of technological innovation in wrapping machinery As in prior years, technological innovation and advances in wrapping machinery were again responsible for creating new unit demand both for expansion of capacity and for replacement of existing machinery to gain advantages of the new technology. Foremost, the broader use of servos represented one of the more important positive changes, particularly owing to the multiplicity of axes in flowrapping machine operation. Other advances include: more use of robotics, unified control platforms, faster automatic feed, advanced sensors both monitoring and regulating machinery speeds more accurately, and placement of sealing mechanisms closer to the product to save film, among others. C. Broader reach of demand across more diversified market base While the preponderance of market demand for wrapping machinery remained heavily concentrated among the food and beverage industries as it traditional has, the composition of 2005 shipments included larger shares attributed to other market segments particularly pharmaceutical/medical products, consumer and commercial durables, paper and other non-durables, and printers/converters and all other. D. Positive results from targeting niche-market customers and applications In a steady, albeit selective shift away from traditional "middle-of-the-road" models, an increasing proportion of manufacturers revamped their lines by offering economy models targeting smaller customers, better price/performance value, larger, more automated machines for larger customers, and improved value for mid-size customers. Based on respondents' comments, the diversification was active at both ends of the spectrum. "We sold more high dollar machines as opposed to budget machines in 2005." E. Increased demand for customized wrapping machinery Just as relevant as the trend toward niche market concentration, an increasing number of machinery manufacturers reported an increase in requests for customized machinery, which typically commands premium pricing. F. Ongoing changes in package wrapping requirements The growing incidence of end-users changing packaging either to wrapping (from another packaging mode) or to a different type of wrapping configuration or method contributed to machinery demand in 2005. The effect that superstores and dollar stores have exerted on the kinds and sizes of packages endusers must provide has represented one of the more significant factors behind the trend. They have been especially influential with respect to the need for executing faster changeovers.

146 2006 Packaging Machinery Shipments & Outlook Study G. The symbiotic relationship between servo technology and improved films Demand for new machines equipped with sophisticated servo controls (which provide greater dwell time for film and the extension of heat transfer over a longer period) have benefited from the fact that now more film parameters are adaptable to wrapping machinery applications. The improved films with wider ranges of gauge thickness, innovative coatings with aroma barriers, multiplayer co-extrusions for reverse printing offering high clarity and gloss, among others attributes are now being run through wrappers at higher rates of feet per minute. H. Further gains by shrink wrapping as a packaging method I. Continuing increase in the packaging of singleserve food products as well as multi-packing J. Continued rise in the number of products multi-wrapped and bundled as a proportion of total packaging Negative Trends, Factors and Developments A. Reduced exports of both shrink film and nonshrink film wrappers B. Further industry consolidation The base of potential customers for machinery was further eroded by the additional move toward consolidation in essentially all key markets. C. Intensified price competition D. Further market penetration by imports "Competition from foreign over wrapping machines hurt us in 2005." E. Continued movement of consumer product operations outside of the U.S. F. Sales of used and rebuilt wrapping machinery at the expense of new-unit business WRAPPING MACHINERY SHIPMENTS BY TYPE OF CUSTOMER In 2005, approximately 69 percent of the industry's wrapping machinery shipments resulted from sales to end-users directly (or through manufacturers' representatives). Though up slightly from 65 percent in 2004, there has nevertheless been a decided trend toward sales away from OEMs and through dealers. The shift is reflected in a manufacturer-direct rate of 66 percent in 2003, 71 percent in 2002 and 78 percent in 2001. Of the balance in 2005, 29 percent involved sales through dealers and two percent went to other machinery manufacturers. Although not necessarily a general rule, the majority of non-shrink film machinery shipments result from direct sales to end-users, and a large proportion of shrink film machinery business is channeled through distributors. WRAPPING MACHINERY SHIPMENTS BY END-USE MARKET SEGMENT The pie chart of Figure 82 provides an approximate percentage breakdown of 2005 wrapping machinery shipments by end-use market segment. An additional chart (Figure 83), which traces the most recent sevenyear history of the principal segments' individual shares, provides further insight into market trends affecting annual machinery shipments. While the food, beverage and paper and soft goods segments have traditionally stood out as being responsible for the largest shares of annual dollar volume, the most recent tally reveals a trend toward greater diversity in the end-use segment mix as reflected in increased shares among some of the smaller segments. An important development of recent years, however, has been a reduction in volume derived from the paper and soft goods market. Although its share rose slightly to 11 percent from 10 percent in 2004, the prior years have witnessed a steady slide to 19 percent in 2003 from 20 percent in 2002 and 36 percent in 2001. The trend largely reflects the industry's efforts at scaling back and consolidating operations in the U.S. WRAPPING MACHINERY FORECASTS U.S. shipments of wrapping machinery are forecast to grow at a cumulative annual rate of 1.9 percent over the next three-year period, from an estimated $221 million in 2005 to $234 million by 2008 (in constant 2005

Wrapping Machinery 147 FIGURE 82 U.S. 2005 WRAPPING MACHINERY SHIPMENTS BY MARKET SEGMENT (Percent of Total Dollar Value) Printers, Converters and All Other 13% Food Products 43% Pharmaceuticals 7% Consumer & Commercial Durables 7% Paper and Other Non- Durables 11% Chemicals 3% Hardware/Auto/ Industrial 2% Personal Care Products 2% Beverages 12% 60% FIGURE 83 HISTORICAL TREND OF MARKET SEGMENT BREAKDOWN FOR U.S. HORIZONTAL WRAPPING MACHINERY 1999-2005 (As a Percentage of Total Dollar Shipments) Percentage of Total Shipments 50% 40% 30% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 Food Products Beverages Personal Care Products Hardware/Auto/Industrial Chemicals Paper and Other Non-Durables Consumer and Commercial Durables Pharmaceutical/Medical Printers/Converters/All Other

148 2006 Packaging Machinery Shipments & Outlook Study dollars.) The outlook is predicated on the following points: (Please refer back to the discussion of trends and developments for elaboration on certain of the forecast points.) The Case for Growth A. Sustained (albeit uneven) U.S. economic growth through the period Please refer to "Macroeconomic Assumptions" in the Executive Summary. B. Increase in export demand via a weaker U.S. Dollar and improved global economic strength C. Larger proportion of shipments involving fullyautomated, continuous motion wrapping machinery D. Further advances in technology particularly with use of servos continuing to create machinery demand E. Steady rate of new product and SKU introductions suitable for wrapping F. Continued high level of machinery replacement activity G. Favorable impact of superstore and dollar stores' special requirements continuing to stimulate end-users' needs for machinery H. Further rise in the packaging of single-serve food products as well as on multi-packing I. Additional business created by customized wrapping and niche market machinery applications Potential Growth Limiting Factors A. More intense geopolitical destabilization B. Lower than expected strength of the U.S. economy C. Stronger than figured competition from machinery imports FIGURE 84 FORECAST OF U.S. HORIZONTAL WRAPPING MACHINERY SHIPMENTS 2006-2008 (Constant 2005 Dollars) 240 234 230 225 $ Millions 220 221 220 210 200 2005 2006 2007 2008

Wrapping Machinery 149 D. More intensive outsourcing of manufacturing operations outside the U.S. E. An acceleration of industry consolidation F. Greater competition from rebuilt machinery G. Evolutionary shifts to other kinds of machinery, e.g., pouches, blisters, cartons, etc. SURVEY PARTICIPATION AND COMPANY SECONDARY RESEARCH Table 51 summarizes the participation and methodology of data collection for the survey phase of the study. TABLE 51 Survey Participation And Company Secondary Research (Horizontal Wrapping Machinery Manufacturers) Status Number of Companies PMMI Members Completed The Questionnaire 36 Company Shipment Estimates Developed Through Secondary Research 7 Total Companies 43