Debt Policy of Ust

Debt Policy of UST

Business Analysis

UST is a well-recognized premium-segment brand with a market leadership position (77.2% market share). Since it is the oldest brand and new ones are not allowed to freely advertise because of regulations, UST is able to charge high premium on its products. Operationally, UST is performing better than all its competitors (ROIC 140.6% compared to industry mean of 12.6%). Recently it is facing competition from low cost competitors that are threatening for market share.

UST is a leading producer of moist smokeless tobacco products (87.5% of net sales), and wine (10.4% of net sales). In 1998, it had a 77.2% market share in the tobacco industry. According to the USDA, the moist smokeless tobacco product segments is the fastest growing within the tobacco industry, with a volume increase of 3.7% in the past 17 years, but has been decreasing in the recent years, reaching 1.2% in 1998 (AC Nielson).

UST’s revenues have grown at a 5% CAGR for the past 5 years (1994-1998), with a decreasing trend starting in 1994, and reaching 1.5% in sales growth in 1998. Nevertheless, the company has been making consistent profits, with a 5-year average EBIT margin of 53.3%, Net Margin of 32.7%, with a 92.1% Return on Capital.

In the smokeless tobacco business, UST operates mainly in the Premium product segment (76.6% market share) and most recently in the Price Value product segment (0.6% market share) since 1997. The newly introduced price value Red Seal brand only represented 1% of 1998 sales for the company.

Risks for UST:

1. Market Risk: The Premium segment is a shrinking market with a -1.5% 7-year CAGR.
2. Competition Risk: UST only has 1 brand to compete in the growing Price Value market segment (40.5% 7-year CAGR). Competitors had already gained 10.2% market share vs. UST’s 0.6% market share by 1998.
3. High litigation fear for tobacco industry.

Financial Analysis

Exhibit 1: Financial leverage analysis