Major PET container maker Constar International Inc. is closing two large U.S. plants in a restructuring plan aimed at hiking profitability.
The moves come after a disappointing first half of the year. After being spun off in November by Philadelphia-based Crown Cork & Seal Co. Inc. into a separate, publicly traded company, Constar has had difficulty meeting initial expectations, according to several analysts following the company.
``The problem is, Constar agreed to [terrible] pricing and terms with their customers,'' said Tim Burns, a packaging analyst with Solon, Ohio-based Cranial Capital Inc. ``Prior to the [initial public offering by Crown Cork], they did that to lock up business.''
Constar, also based in Philadelphia, will close blow molding plants in Reserve, La., and Birmingham, Ala., cutting 115 employees by the end of the year.
Equipment will be shifted to other Constar facilities, where work space is being reconfigured to increase efficiency, the company said. Constar will move five PET injection blow molding lines and five extrusion blow molding lines from the two plants, said a source close to Constar.
An estimated 12 Constar plants will remain in the United States after the closures, according to a recent Securities and Exchange Commission filing.
The Birmingham facility is the larger of the two sites and includes two blow molding plants totaling 184,723 square feet and a separate warehouse. The Louisiana plant has about 187,500 square feet, according to Constar's 2002 annual report.
The company expects to improve earnings before interest, taxes, depreciation and amortization by $5 million to $7 million annually, starting next year, from the plant closings. The company expects to record EBITDA of $57.5 million to $62.5 million in 2003, down from $87.9 million in 2002.
Constar is investing in equipment. The company disclosed that it will spend about $8 million to move equipment in the last two quarters of 2003, while at the same time spending between $48 million and $52 million this year on capital expenditures, including maintenance of current equipment.
The company reported a loss of $5.8 million for the first half of 2003.
Meantime, the company also has hired two investment banking firms, New York-based Citigroup Inc. and Deutsche Bank AG, to investigate financing alternatives for the future. Those could include securing new loan covenants to ensure that the company is not in violation of its current agreements, according to several sources.
The company is one of North America's largest makers of conventional PET bottles, for both soft drinks and water bottles, and it is attempting to increase its share of the custom PET bottle market, where price is not as large a factor.
Constar faces continued pricing pressures from large soft-drink makers, including major customer PepsiCo Inc., coupled with lower volumes for its conventional PET bottle business, said Ghansham Panjabi, an equity analyst who covers packaging for New York-based Lehman Bros.
Too many PET bottle makers are chasing a smaller customer base, leading to excess capacity, Panjabi said. Industry consolidation would solve those ills, as it has in the metal-can industry, he said.
``My guess is that they have to consolidate to get true pricing power,'' he said, ``or they'll continue to be bullied by the end markets. The rules of the game have changed.''
Constar's stock, traded on Nasdaq, declined by less than 1 percent Sept. 4, when the news was announced. The stock closed at $5.81 a share. When the company first was spun off in November, the stock traded at $12 a share.
The company was tied for sixth place in Plastics News' 2002 ranking of North American blow molders, and recorded sales of $704.3 million last year. Constar officials were unavailable for comment.