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Executives

Ed Bison – Bisno Communications

Michael J. Hoffman – President, Chief Executive Officer & Director

Walter S. Sobon – Chief Financial Officer & Executive Vice President

Analysts

Bruce Klein – Credit Suisse

[Carlos Sen – Sentios Capital]

Matthew [Klabel] – Silver Point Capital

David Ross – Citi

Oliver [Corlette] – [RW Pressbridge]

Aaron Rickles – Oppenheimer

Richard [Almey] – [Canel Capital]

Constar International, Inc. (CSTR) Q4 2007 Earnings Call March 31, 2008 9:00 AM ET

Operator

Good day everyone and welcome to the Constar International, Inc. 2007 fourth quarter and year end conference call. Your lines have been placed into a listen only mode until the question and answer session. Please be advised that this conference is being recorded. I would now like to turn the conference over to Mr. Ed Bisno. Mr. Bisno you may now begin.

Ed

Good morning everyone and welcome to Constar International’s fourth quarter and 2007 year end conference call. This includes a live broadcast over the Internet that can be accessed at the company’s website www.Constar.net. A copy of today’s release is also available there. Now, for some housekeeping matters; before management begins the formal remarks we would like to remind you that earnings guidance and other information to be discussed in this call consists of forward-looking statements within the meaning of the Federal Securities law. These forward-looking statements involve a number of risks and uncertainties and other factors which may cause the actual results to be materially different from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the company to differ from expectations include the company’s relationship with its largest customers, the impact of self manufacturing on the company’s business, the impact of price changes, the company’s ability to secure our new business and to expand sales of custom products, improve the operating performance of its European business and achieve cost savings under its best cost producer program and the impact of the foregoing factors on the company’s financial position. Other important factors are discussed under the caption risk factors in the company’s Form 10K annual report for the year ended December 31, 2007 and in subsequent filings with the Securities & Exchange Commission made prior to, on or after today.

The company does not intend to review, revise or update any particular forward-looking statement in light of future events. Lastly, in review of regulations adopted by the SEC, Constar does not intend to provide non-GAAP financial measures beyond those already contained in this morning’s release. A reconciliation of such non-GAAP financial measures to GAAP measures is also provided on the company’s website in the investor relations section.

With us on the call this morning are Michael Hoffman, President and CEO and Walter Sobon, Executive Vice President & Chief Financial Officer. Once management has concluded their formal remarks we’ll then open the call up to questions. Now, I’d like to turn the call over to Mike Hoffman.

Michael J. Hoffman

Good morning everyone and thank you for joining us this morning for our 2007 fourth quarter and yearend earnings call. This morning I will provide an update on our performance in the fourth quarter, update you on recent events and provide insight in to what to expect for 2008. Then, I’ll turn it over to Walter who will provide more detail on the financials and guidance for the year. Following that, we’ll open it up for questions.

Let me start with the fourth quarter. While we achieved our revised EBTIDA guidance for the quarter and the year, conventional volume in the quarter was weak. This was mainly due to continued softening of carbonated soft drinks and the trend of customers blowing their own water bottles. Water bottle demand continues to decline but it is important to note that in 2008 water bottles represent less than 10% of our total US bottle revenue and at some of the lowest margin rates. Highlights of the quarter include one, custom growth was up 24% due to growth under existing contracts and the benefit of newly signed contracts. This provides us with good momentum leading into 2008. Two, in the quarter we made significant capital expenditures to support the custom growth which is backed by these new and existing supply contracts with our customer. Three, in spite of the increased capital spending we ended the year with strong liquidity. At year end we had only $400,000 drawn on our revolver positioning us well to execute our 2008 plan.

As stated on our third quarter conference call we expected much improved performance in 2008 due to positive contractual pricing and strong custom unit volume growth. For the year we are forecasting a 30% increase in our custom volume and the majority is with products using our industry leading oxygen barrier technologies. To date we are on track with this growth and as stated on our last call the volumes ramp up in the first quarter and for the first couple of months while capacity is brought on stream we are servicing some of the new volume from remote locations resulting in additional freight cost. Combined with the seasonality of some of these new products, the majority of the profit improvement will materialize in the second and third quarters of the year. Based on this volume and some further decline of conventional volume, our custom revenue in 2008 is projected to be 37% of our total US PT revenue.

Other updates of interest, first in regards to the Pepsi conventional supply agreement renewal, we are still productively engaged in negotiations with Pepsi to renew this supply agreement. Both parties are determined to reach an agreement and expect to conclude these negotiations by the end of the second quarter. Secondly, on the technology front in January of this year the FDA granted expanded application of our DiamondClear technology for use in all food and beverage products. This has enabled us to convert several currently supplied packages to this great new technology and obviously it allows us to initiate shelf live and qualification studies on all new products. We are very excited to have this additional technology in our arsenal of world leading oxygen barrier products. DiamondClear is also being offered for sale as a raw material for use by PET package companies and select markets internationally. Combining our barrier technologies with our improved functional heat set technologies and plastic closure partnerships, we provide total package solutions to customers that are looking to convert from glass and other materials to PET.

Lastly, we are very pleased to have been awarded the prestigious AmeriStar 3M Sustainable Package Award for 2007 with our partner ConAgra. The package recognized was the 46-ounce Hunt’s Ketchup bottle using Constar’s DiamondClear technology. This award was granted based on the bottle’s energy efficiency, recyclability and effective use of eco-friendly raw materials. DiamondClear is superior to most barrier technologies for being environmentally friendly.

In summary, we managed working capital effectively in 2007 to maintain strong liquidity in spite of industry challenges and investment to support new business. We also further enhanced our technology position with the commercialization of our new DiamondClear technology which is driving significant growth in our custom business. Combined with pricing improvements we are forecasting significantly improved financial performance in 2008.

With that, I’ll now turn it over to Walter.

Walter S. Sobon

Good morning. First of all, we began 2008 with a solid liquidity position of $59 million which included cash on the balance sheet of $4.3 million and virtually no borrowings under the revolver. The amount of letters of credit was $7 million at December 31, 2007. LCs are used to support the purchase of certain imported products from time-to-time and account for fluctuations in the amount of LCs.

As Mike has indicated, we’re excited about the return to robust growth in our custom business that is built on the strength of our technology. Now, to the 2007 results, fourth quarter 2007 consolidated sales were $202.8 million compared to $207.8 million in the fourth quarter of 2006. In the US fourth quarter net sales were $159.5 million compared to $163.8 million in the fourth quarter of 2006. This decrease in sales was driven by product mix and price partially offset by positive PET growth of about 1% after eliminating plastic closures and extrusion blow molding unit sales. Total unit volume in the US increased slightly over the fourth quarter of 2006. Custom unit growth increased by almost 24% compared to the fourth quarter of 2006. Conventional unit volume declined 3.9% as compared to the fourth quarter of 2006 due to the continued movement of water bottlers, that self manufacturing and the consumers shifting their preferences from carbonated soft drink to teas and alternative beverages. In Europe net sales of $40.3 million in the fourth quarter of 2007 were approximately equal to 2006 net sales and reflect the 7.1% unit increase and favorable foreign currency changes that were essentially offset by product mix.

Consolidated gross profit excluding depreciation expense decreased $3.9 million to $14.8 million in the fourth quarter of 2007 as compared to the fourth quarter of 2006. Gross profit as the percentage of net sales decreased to 7.3% in the fourth quarter from 9% in the fourth quarter of last year. This decrease was driven by the impact of pricing, about $1.7 million negative, higher energy rates about $1.2 million negative and non-cash inventory adjustments of about $2.3 million offset in part by strong custom growth. Selling and administrative and research and technology expenses of $9.1 million in the fourth quarter 2007 decreased by $100,000 from the fourth quarter of 2006 primarily due to a decrease in compensation and legal expenses. We had an operating loss of $2.3 million in the fourth quarter of 2007 compared to income of $1.4 million in the fourth quarter of 2006. This decrease was driven by the operating results previously discussed.

Interest expense of $10 million in 2007’s fourth quarter decreased by approximately $200,000 driven primarily by lower interest rates in the fourth quarter of 2007. Other expenses were $1.7 million in the fourth quarter of 2007 compared to income of $1.3 million in the fourth quarter of 2006. That’s a change of $3 million which was primarily related to the impact of foreign currency on the translation of intercompany balances in both periods. Net loss was $14.1 million in the fourth quarter of 2007 or $1.14 per basic and diluted share compared to a net loss of $7.2 million or $0.59 loss per basic and diluted share in the fourth quarter of 2006. Free cash flow was positive by $6.5 million in the fourth quarter of 2007 as compared to free cash flow of $1.9 million in the fourth quarter of 2006. This improvement in free cash flow was driven by a reduction in working capital during the quarter and slightly lower capital expenditures in the fourth quarter of 2007. Credit agreement EBITDA during the quarter was $9.5 million compared to $11.1 million in the fourth quarter of 2006 due to lower pricing, higher energy costs and other items previously disclosed that were offset by custom unit growth.

Now, for full year consolidated results. Sales declined by $45 million or slightly under 5% to $881.6 million from $927 million in 2006. In the US net sales decreased $61 million to $689.1 million from $750.2 million in 2006. This decrease was driven by a decrease in total unit volume and negative pricing of approximately $15 million when compared to 2006. In Europe net sales increased $15.7 million to $192.5 million in 2007 from $176.8 million in 2006. This increase was primarily due to a strengthening of the British pound and euro against the US dollar and a 5.7% increase in unit volume. Gross profit excluding depreciation expense decreased $17.6 million to $80.5 million for 2007 from $98.1 million in 2006. Gross profit as a percentage of net sales in 2007 decreased to 9.1% from 10.6% in the same period last year. This decrease reflects the impact of the previously discussed $15 million in price concessions and lower overall unit volumes of approximately 1% offset in part by lower manufacturing costs.

Selling and administrative and research and technology expenses were $32.6 million in 2007 compared to $35.2 million last year. This decreased primarily results from decreases in legal and audit fees as well as lower incentive compensation expense. Operating income was $15.1 million in 2007 compared to $28.9 million in 2006. This decrease in operating income primarily relates to pricing impact earlier discussed. Interest expense decreased $200,000 to $41 million in 2007 due to lower average borrowings during 2007 which were partially offset by higher interest rates during the first nine months of the year.

In 2007 the company reported other expenses of $600,000 compared to other income of $2.8 million in 2006. The primary driver of the change was foreign currency translation of intracompany balances. Net loss in 2007 was $26.3 million or $2.14 per basic and diluted share compared to a net loss of $10.3 million or $0.84 per basic and diluted share in 2006. Cash flow, free cash flow approximated to previous guidance, it was -$15.3 million in 2007 compared to positive cash flow of $21.7 in 2006. The decrease in free cash flow was driven by lower EBTIDA results, cash restructuring charges, increased capital spending and higher inventory levels at year end to support growth in 2008. Credit agreement EBITDA in 2007 decreased by 16.7% to $55.2 million from $66.3 million in 2006 and was within our latest range of guidance. This decrease was primarily due to the impact of price concessions, offset in part by lower manufacturing costs and decreases in legal and audit fees. In 2007 credit agreement EBITDA adjustments were $11.4 million which included $4 million of restructuring charges, $2.3 million of non-cash inventory adjustments, $1.3 million of foreign currency translation adjustments, $600,000 of non-cash compensation adjustments. In 2006 adjustments were $3.2 million which included $1.6 million of restructuring charges.

This concludes the review of the numbers. Now, I want to cover two additional points. The first relates to our filing of our 2007 10K which we will file with the SEC on its due date which is today. The 2007 and 2006 financial statements that are attached to this release and that will be filed with the SEC were fairly stated in all material respects in accordance with US generally accepted accounting principles. Reflected in the financial statements are the correction of errors that the company discovered through its closing process and review of transactions going back to 2003 and prior years. We decided to make the restatement even though these adjustments were in material to EBTIDA. These adjustments were non-cash and had a full year impact of increasing full year 2006 EBITDA by less than $700,000 of which approximately $450,000 related to the fourth quarter of 2006. This is the reason the 2007 10K will include restated financial statements that are again attached to this release. Again note, that these restated 2006 financial statements are correctly stated. Related to this restatement we had a material weakness in internal control surrounding transactions that occurred in 2003 and prior periods. The company has already redesigned its controls and the financial statements that are part of this release are fairly stated and include all adjustments.

Moving on to our liquidity; at December 31st the company had cash of $4.3 million on our balance sheet and essentially no borrowings. Our average borrowings in 2007 were slightly more than 10% of the amount of our facility which was consistent with the guidance we provided a year ago. By comparison average monthly borrowings were less than a third of our revolver in 2006. During 2008 we anticipate that average borrowings would be about a quarter of our total $75 million revolving credit facility. As of March 28th which was last Friday our estimated liquidity is about $66 million. Letters of credit total $5.5 million and borrowings under the revolver were $5 million. Considering the estimated cash on hand we were actually in a net positive position related to the revolver. To put our current liquidity in perspective our estimated liquidity today of almost $66 million is $8 million higher than our liquidity at the end of December, 2005 which was 27 months ago.

As of December 31st days sales in accounts receivable from continuing operations were 28 days or about a half of day higher than in 2006. Inventory days were 34.5 compared to 28.2 days last year because of the anticipation of higher demand and the building of inventory related to the closure of our Salt Lakes City location. Days payable were 57.2 days at December 31, 2007 compared to 54.8 days at the end of 2006. Capital expenditures net of proceeds from the sale of property, plants and equipment were $27.3 million in 2007 compared to $22.6 million in 2006. The higher capital expenditures reflected the timing and the amount of investment related to the growth in the custom business. In summary during the fourth quarter of 2007 we made significant progress by returning to custom unit growth with a 24% unit increase based upon the strength of our technology.

Now, to 2008; we again began the year in solid liquidity position of $59 million and have liquidity of almost $66 million as of Friday. We expect that capital expenditures for 2008 will be in the range of $28 to $32 million principally again to support our custom unit growth. We expect that net pricing will begin to show positive improvements in January, 2008 over 2007 net pricing levels under contracts in place at the beginning of this year. We have net price improvements estimated at approximately $5 to $7 million. We are projecting custom unit growth of approximately 30% in 2008 and overall unit volume equal to 2007. Based upon these factors we expect that EBITDA will be in the range of $64 to $68 million for the full year 2008. We expect that cash flow will be negative during the buildup of working capital during the year to support the seasonal nature of our business. Depending on the several factors including the timing of individual receipts and disbursements and resin movements we expect cash flow to be negative of about $5 million for the full year 2008.

Finally, I’d like to put our $75 million revolving credit facility in context. Our business has seasonal cash requirements because the company’s cash flow varies by month and varies from day-to-day because of the timing of individual receipts and disbursements. However, the company expects to borrow about 25% of the $75 million facility during 2008 on a monthly basis thus giving us reserve capacity under the revolver.

With that David, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for a moment to establish the queue. We’ll take our first question from Bruce Klein with Credit Suisse.

Bruce Klein – Credit Suisse

I didn’t catch the 08 total volumes or what the conventional volume estimate was and what sort of you’re seeing in terms of the CSD market, has there been any shift or change, in 07 has there been much shift in that?

Michael J. Hoffman

Let me start first with the conventional unit volume, the conventional unit volume and I’m focused on the US business with a reduction of just under 10%. Again, that’s primarily the decline in the water volume which is still going in house. But again, I want to restate that in 2007 water unit volume represented just over 17% of our revenue and as I said in my opening comments, it’s now just under 10%. So, we’re getting to a point where some of these are specialty water bottles, they are multi serve water bottles which are not going in house. So, we are very much less dependent on the water revenues as well as the margin coming from that business. The next question as far as other trends, very much the same as what we discussed on the last call. Bruce, the water volume has again pretty much gone in house and we’re down to a very low level and we still anticipate that there could be some more that goes in house but again, at this lower lever the impact on our business is not as significant as what we have seen in the past.

On the CSD side it’s again, the same as we discussed on our last call where we get to where there’s the ability to bring CSD volume in house. Now, that says you have to have the space, that says you have to have the simplicity and the volume, all those factors. It does make sense where you have extraordinary freight costs. So, on a portion of the business it might make sense but you have to have all those factors covered. You have to have that simplicity, you have to have the volume, you have to have space to do it. So, like we discussed last quarter incrementally over time we do anticipate that some of the CSD will go in house but we’re also confident that we’ll be able to take overhead costs out if that were to happen to offset the impact of that.

Bruce Klein – Credit Suisse

And was there a built in conventional volume number in 08 where I think you said you had 30% of custom, did you say flat overall for 08 in terms of overall volumes? I didn’t catch that clearly.

Michael J. Hoffman

Overall volumes that would include Europe and the US, just total units just under 5% and as I said the conventional volume would be down just under 10%. The reason why I separate out the Europe piece is because as we discussed we did lose a major contract that resulted in the restructuring that we discussed in our Holland operation last year.

Bruce Klein – Credit Suisse

Then Walter, maybe – I don’t know you had this $5.5 million other adjustments in the credit agreement and you know the [inaudible] is it possible to provide just a breakdown of the [inaudible] of internal reserves and FX gains and losses so we can break it out of the $5.5 for 4Q07?

Michael J. Hoffman

Actually, what I will do is to follow up with those numbers separately but, as you point out a portion of that will be the non-cash reserve related to [dafill] accounts in addition as well as currency adjustments.

Operator

Next we’ll take [Carlos Sen] with [Sentios Capital].

[Carlos Sen – Sentios Capital]

Looking third quarter to fourth quarter 07 can you give us a sense of the growth rate on the custom side of the business?

Michael J. Hoffman

This would be the fourth quarter of 07 compared to the third quarter of 07 growth rates compared to the prior year?

[Carlos Sen – Sentios Capital]

No. Just if we’re looking sequentially between third and fourth what was the growth rate there?

Michael J. Hoffman

I don’t have that number readily handy, why don’t we continue to take questions and we’ll give that up. I don’t know if that is particularly relevant because of the seasonality of some of the custom business, especially the isotonics but we can certainly give you that number. The reason why year-on-year the fourth quarter is up so significantly is because of newly signed contracts and some of the growth that we are seeing in some of the more growth related projects.

[Carlos Sen – Sentios Capital]

Okay.

Walter S. Sobon

Just to refresh your memory the custom unit business in the third quarter of 2007 was slightly down versus the prior year while the fourth quarter is up by almost 24%.

[Carlos Sen – Sentios Capital]

Okay. No, I recall that. Taking a step back obviously the product mix has moved in your favor towards a better pricing and margins yet, if you look kind of throughout the balance of the year the margins have come down a little bit. Can you help us understand what exactly is going on there?

Walter S. Sobon

Well, as we discussed in the opening comments there was significant price compression during 2007, around $15 million. We did see energy increases as Walter spoke in his comments, $1.2 million was the negative impact of energy increases just in the fourth quarter alone. Those two items as well as the reduction of the conventional volumes, the water going in house and the CSD, just we’re seeing market trends that are decreasing or the reason for the decline in margin. However, as we go into 2008 we’re showing you some of the reverse of that, the net unit volume in the US is increasing, the net contractual price for the first time in history in Constar is going up instead of going down and the custom unit volume growth which was essentially flat during the year is going up 30%. So, those would be the explanations.

Operator

(Operator Instructions) Matthew [Klabel] with Silver Point Capital.

Matthew [Klabel] – Silver Point Capital

One quick question on your EBITDA guidance for 2008, is the $64 to $68 million, is that a credit agreement EBITDA or is that the actual EBTIDA number?

Walter S. Sobon

It would be credit agreement EBITDA.

Matthew [Klabel] – Silver Point Capital

Could you give us a sense of the credit agreement adjustments that you expect to see in 08?

Walter S. Sobon

At this point we don’t anticipate a significant credit agreement adjustments in 2008.

Matthew [Klabel] – Silver Point Capital

Could you give us a sense of your expectation as to production costs and SG&A costs in 08? Should we just annualize Q407 or do you except a reduction there?

Michael J. Hoffman

We’re not forecasting those numbers specifically. We’ve never really given guidance but I would continually guide you towards a 4% number on total SG&A including R&D expense to net sales. That’s where we’ve traditionally fallen. That’s the best I can do for you for 2008. We’ve been fairly consistent, we would expect to be consistent going forward.

Operator

Next we’ll go to David Ross with Citi.

David Ross – Citi

The new custom business that you guys are speaking of, can you give us a little detail as far as what products that involve?

Michael J. Hoffman

They really fall in two categories beverage and food and what we’re seeing and what we mentioned previously is we have converted several food customers to what was the OXBAR technology and now several of those have converted to the DiamondClear technology, one of those being ketchup where we made significant headway. Then on the beverage side we’ve made progress in several areas most significantly in the vitamin water area but also in other hot filled beverage areas, isotonics flavored waters that are hot filled. Because, there’s a difference between flavored water that is hot filled and cold filled. So, those are the main categories food and beverage and I gave you a couple of examples there. We do look at these in a couple of different categories as we forecast our growth and mature businesses, declining businesses and businesses that are growing and we have a good portion of the growth in 2008 is coming from mature businesses where we look at the trend overtime and they’re very stable business. And, some of it is also coming from growth businesses but we really forecasted that at the fourth quarter rates including seasonality. So we didn’t factor much growth beyond what we actually achieved in the fourth quarter 2007 again factoring in the seasonality.

David Ross – Citi

It sounds like this is a little bit more an expansion of an existing relationships rather than kind of brand new business? Then I guess the second part to that question.

Michael J. Hoffman

Well let me correct you there, that is not true. Contracts signed in 2007, supply contracts signed in 2007 are part of this and new contracts that we signed in fourth quarter and that we’re completing as we speak right now are also part of that. But, the majority is coming from existing contracts.

David Ross – Citi

And how long are the new contracts? Are these one year or are they multiyear agreements?

Michael J. Hoffman

Traditionally, these contracts are three to five years. These contracts that we’ve signed because we are making capital investments are in that range three to five years.

Operator

Next is Oliver [Corlette] with [RW Pressbridge].

Oliver [Corlette] – [RW Pressbridge]

While we’re on the subject of custom I guess as I understood it you have four custom contracts right now. Do you have anything in prospects in terms of new custom business that you’re negotiating right now?

Michael J. Hoffman

First, we haven’t given the number of custom contracts we have. It certainly far exceeds the number that you stated. We’re always negotiating new supply contracts. Yes, absolutely especially with the commercialization of DiamondClear and the expanded use we were able to get through the FDA, there are a lot of trials, there’s a lot of sampling going on, so we do have quite a bit in our queue the development and as well as for bidding on taking on that business. So yes, there’s quite a few that we’re negotiating going forward.

Oliver [Corlette] – [RW Pressbridge]

And what exactly is the scope of that expanded FDA usage? Initially it was just for the ketchup, is that what it was? Then, it went into other uses?

Michael J. Hoffman

That’s correct. It was carved out as specific food products, tomato based products and now on January 14th or 15th I believe we received the FDA food contact notification approval to proceed with all food and beverages.

Oliver [Corlette] – [RW Pressbridge]

Alright. So, that’s pretty broad clearance then.

Michael J. Hoffman

It’s fantastic yes, very positive.

Oliver [Corlette] – [RW Pressbridge]

Great. As far as the price concessions – on the remote location delivery issue can you give us some idea kind of what sort of magnitude or what kind of effect that has? Is that only on the custom business?

Michael J. Hoffman

It’s on the new business and yes, it’s custom business that we’ll be supplying out of territory. It will have a meaningful freight impact on the first quarter. All very cash positive still in spite of that and we will eliminate those out of territory routes by mid April. So, it will have an impact, I can’t give you a number off the top of my head but again, we’ll have all capacity installed, we’re anticipating having it and that will be eliminated mid April.

Oliver [Corlette] – [RW Pressbridge]

Okay. Was there some kind of delay there? Because, you were having that problem on the last conference call as I recall.

Michael J. Hoffman

No, there’s not a delay. In fact, on the last conference call I was specifically citing the out of territory freight that we would incur in the first quarter. There was not a significant amount in the fourth quarter. We did build inventory, significant inventories and where we have capacity on local assets to counter that but, as that inventory depleted and we were ramping up for local customers in the first quarter we are shipping out of territory. So, it’s primarily a first quarter issue. We did invest in new capacity, adapting existing capacity in the fourth quarter, late third quarter, fourth quarter to eliminate this as quickly as possible in again, mid April.

Oliver [Corlette] – [RW Pressbridge]

Okay. On the price concession thing, my recollection is that you’re expecting $7 to $8 million initially in sort of bouncing back into 2008. Is there some reason by you’re saying $5 to $7 versus that?

Walter S. Sobon

I think – at least I know for third quarter, I don’t even know if we talked about it on the second quarter conference call. On a third quarter earnings call we said $7 million. Now, we’re saying $5 to $7 million. We are in the process of signing certain renewal contracts and we’re just factoring everything in.

Oliver [Corlette] – [RW Pressbridge]

Okay. One thing I don’t quite understand about the price concession thing is you give these number out as if they’re relatively firm. Is this something that can change? Can it change within the term of a contract? Or, is this only on new contracts that these price concession negotiations happen?

Michael J. Hoffman

First of all, when we state contractual pricing those are contracts that are already signed. So, your question can they change within a contract – we do have in certain of our contracts what are called competitive pricing clauses so that if a competitor were to submit pricing to a customer on one of our accounts some of those contracts would require that we meet that competitor’s price and could result in a price decrease. So, that’s one way under a particular contract that pricing can be reset. Now, we have spent a lot of time and energy in eliminating those clauses in contracts as we renew them and as we have new but they do still exist in some.

Oliver [Corlette] – [RW Pressbridge]

Right. But, the $5 to $7 you’re talking about now is it possible that could change through the year based on what you just said?

Michael J. Hoffman

Yes. We haven’t seen a lot of competitive activity in the last year to two years but that is possible. We also can have contractual price increases just based on pass through of energy costs, freight costs, so on and so forth.

Oliver [Corlette] – [RW Pressbridge]

Speaking of which, could you just run over quickly what’s going on in the PET market in Q4 and so far this year?

Michael J. Hoffman

Yes. We did see a bit of an increase in resin pricing in the fourth quarter primarily driven by rising prices in the petrochemical markets. We have seen flat pricing through the first quarter and as is typical in the PET business there is, as capacity tightens both raw material capacity and PET resin capacities tighten we do see second quarter push for price increases. I anticipate that will be the same this year in the second quarter. But, we do see softening, significant softening in the back half of the year for a couple of reasons. We do see raw materials especially the ethylene glycol piece coming down significantly and there will be a tremendous excess of capacity in PET resin in the back half of the year.

Oliver [Corlette] – [RW Pressbridge]

There’s some big capacity coming on stream in the second half?

Michael J. Hoffman

There has been. Most of the additional capacity actually came on last year throughout the year and that capacity far exceeds demand, it exceeded demand in the back half of last year and it will exceed demand all of this year.

Walter S. Sobon

Before we go on to the next question I wanted to answer Bruce’s question related to the credit agreement EBTIDA adjustments in the fourth quarter and I’ll give you a quick summary of them. $1.8 million about is related to a non-cash reserve for spare parts. About $1.6 million is related to non-cash translation, foreign currency translation adjustments. About $800,000 relates to a non-cash provision for bad debt and about $500,000 relates to non-cash inventory related allowances. We can go on to the next question now.

Operator

Next we have Aaron Rickles with Oppenheimer.

Aaron Rickles – Oppenheimer

Can you just spend a few minutes on the custom? Can you remind us what percent of the sales was custom in the fourth quarter?

Walter S. Sobon

On a revenue basis I don’t have that number handy.

Aaron Rickles – Oppenheimer

I guess it will be in the K when you file that.

Walter S. Sobon

It’s in the area of the low 20s on a consolidated standpoint and a higher volume of the US business.

Aaron Rickles – Oppenheimer

Okay. Then, talking about the 30% volume growth guidance and that is something you had talked about on the last conference call as well and I think there was a little bit of a distinction between business that was actually booked and business that you had expected to be booked. Is the 30% guidance, is that all on hard contract right now? Or, are you still waiting to get some of those signed?

Michael J. Hoffman

Substantially all of it is under contract.

Aaron Rickles – Oppenheimer

Okay. Then, are there are other contracts that you’re working on where potentially we could see more?

Michael J. Hoffman

Again, we continue to work on new contracts, we continue to work on new volume awards. It should be noted that because the industry is typically held on three to five year contracts, these opportunities to take over new business happen at that rate. So, as we negotiate contracts now, usually any significant volume orders is usually negotiated six months to a year in advance.

Aaron Rickles – Oppenheimer

Okay, good.

Michael J. Hoffman

At the same time, we’re also negotiating our own renewals of contracts on an ongoing basis. Just to put that additional point of clarity.

Aaron Rickles – Oppenheimer

That’s great. Shifting to the conventional business, I think it’s a little confusing, I think you said 10% conventional volume declines for 2008. And, does that compare to like the 3.9% volume declines that you reported in the fourth quarter? Is that the same number we’re talking about?

Michael J. Hoffman

That’s a apples-to-apples comparison, yes.

Aaron Rickles – Oppenheimer

So maybe you could help us understand what’s driving sort of that increase in volume decline in that business?

Michael J. Hoffman

Yeah, okay. The primary cause of the decrease is coming from the water volume that we maintain. That’s the number I gave that said PET unit volume, water as a percent of our PET unit volume in the US was over 17% in 2007 and less than 10% in 2008. So, that’s a significant piece of it. Then, we do have a decline in CSD that we project just because there’s the trend to alternative beverage so we factor in an automatic decline in CSD volume. And we did lose a customer in the south Midwest in 2007 compared to 2008. So, those three factors are driving that change in conventional volume.

Aaron Rickles – Oppenheimer

That’s totally clear, I appreciate that. The cap ex guidance that you talked about it that – I mean, I just remember on the last conference call you talked about cap ex and then sort of potential incremental or additional cap ex based on growth that you weren’t necessarily going to talk about in the guidance. Would you say that the 28 to 32 range is the real cash that you’ll spend? Or, is that what you’ll spend but you might spend more than that?

Walter S. Sobon

Actually, the $28 to $32 million in the expected cash impact of capital expenditures in 2008. Before we go to the next question, just to clarify the percentage of custom business of total revenue we said that that number was in the low 20s. The exact number for the full year 2007 was 22%.

Operator

Next we have Richard [Almey] with [Canel Capital].

Richard [Almey] – [Canel Capital]

I’m calling with reference to your 11% debentures, it’s a new [older] coming in and I don’t know if you could possibly just sort of outline in general terms how the actual servicing of the interest of these bonds is going to occur for the next couple of years and eventually the refinancing given the capital markets?

Walter S. Sobon

First of all, as we indicated in the cash flow guidance for 2008 we expect that cash flow for the full year 2008 would be about $5 million negative. That actually includes in there cash interest payments of about between $41, maybe a little bit more than that, million dollars of interest during 2008. So, the company will service its interest including the interest on the 11% subordinated debt through its operations. The 11% notes are due in 2012 although we recognize that the current financial markets are at the best challenging, we believe based upon the company’s continued performance that certainly windows of opportunity would become available to us to refinance before 2012.

Richard [Almey] – [Canel Capital]

Do you currently have any sort of financial advisor engaged by the firm to possibly address that before 2012.

Walter S. Sobon

No. That being said, we have ongoing relationships with the banks that are a party to our revolving credit facility and we’re in touch with the capital markets but, we have nobody engaged.

Richard [Almey] – [Canel Capital]

Would it make sense possibly for you given the outlook for the business to convert some of that debt to equity at a price?

Walter S. Sobon

In terms of looking at the company’s capital structure on a continuous basis the company looks at the opportunities that the capital markets present from time-to-time. I think to speculate on this call as to what the company could or could not do, what the state of the capital markets could or could not be certainly at this point we don’t think it would be a meaningful discussion.

Richard [Almey] – [Canel Capital]

Okay. Just to help me from getting in there, are there any of the covenants of these particular debentures that are currently in violation? Or, are you current with everything?

Walter S. Sobon

First of all let’s cover financial covenants. The company has no current financial covenants to be in compliance with so certainly we’re not in violation of any financial covenants.

Operator

That concludes today’s question and answer session. I will now turn the call back over to Mr. Hoffman for any additional comments or closing statements.

Michael J. Hoffman

I would just like to thank everyone for their participation and interest in Constar. We look forward to updating you on our progress on the first quarter conference call. Thank you.

Operator

That concludes today’s conference. Thank you for participating and have a wonderful day.

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Source: Constar International Inc. Q4 2007 Earnings Call Transcript
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