Debt Policy at Ust Inc.
Debt policy at UST inc. Case
To: UST Board of Directors
From: UST Financial analysis team
Date: 18 January 2011
Subject: Future debt policy at UST and recapitalization option
1. Analysis of UST business current and future environment
UST operates in the smokeless Tobacco industry, a market with 2 B$ of revenues, which grew at a CAGR of 3.7% over the past 17 years, but more recently experienced a decrease in growth rate, dropping to 2.9% in 1997 and 1.2% in 1998. In this market, UST has a very dominant yet decreasing market position, with an actual market share of 77.2% in 1998 falling from 86.2% in 1991. Since the market has been growing faster than the firm’s decline in market share, net sales of UST have been growing from 898.4 M$ in 1991 to 1,423.2 M$ in 1998, a CAGR of 6.8%. Consumers of smokeless tobacco are largely male (98%) with an increasing share of college-educated workers (30%).
It would seem that UST is very successful at its operations given that it is the most profitable firm in the USA in terms of return on equity (“RoE”), return on assets (“RoA”) and gross profit margin (“GM”). Actual (1998) RoE is at 103.4%, RoA at 53.8%, GM at 80.1%, EBITDA at 55.2% and net margin at 32.9%, all those five metrics are up from 1993 respectively at 71.0%; 41.6%; 77.5%; 53.9% and 31.7%. Those five KPIs reflect the strong financial performance of UST by reflecting that both each dollars of assets and equity provide significant return while operational margin (GM), EBITDA and net margin show the ability to keep a very high portion of every dollar of sales. This also comes from the low elasticity of tobacco product which allows UST to increase price, while cost are constant, and lose less revenues from forgotten consumers than the gain from the increase in price. Also, those five KPIs are way above all competitors, both in Tobacco Product Manufacturers and in Tobacco Leaf Merchants. Moreover, two other operational KPIs would be market share in the
To: UST Board of Directors
From: UST Financial analysis team
Date: 18 January 2011
Subject: Future debt policy at UST and recapitalization option
1. Analysis of UST business current and future environment
UST operates in the smokeless Tobacco industry, a market with 2 B$ of revenues, which grew at a CAGR of 3.7% over the past 17 years, but more recently experienced a decrease in growth rate, dropping to 2.9% in 1997 and 1.2% in 1998. In this market, UST has a very dominant yet decreasing market position, with an actual market share of 77.2% in 1998 falling from 86.2% in 1991. Since the market has been growing faster than the firm’s decline in market share, net sales of UST have been growing from 898.4 M$ in 1991 to 1,423.2 M$ in 1998, a CAGR of 6.8%. Consumers of smokeless tobacco are largely male (98%) with an increasing share of college-educated workers (30%).
It would seem that UST is very successful at its operations given that it is the most profitable firm in the USA in terms of return on equity (“RoE”), return on assets (“RoA”) and gross profit margin (“GM”). Actual (1998) RoE is at 103.4%, RoA at 53.8%, GM at 80.1%, EBITDA at 55.2% and net margin at 32.9%, all those five metrics are up from 1993 respectively at 71.0%; 41.6%; 77.5%; 53.9% and 31.7%. Those five KPIs reflect the strong financial performance of UST by reflecting that both each dollars of assets and equity provide significant return while operational margin (GM), EBITDA and net margin show the ability to keep a very high portion of every dollar of sales. This also comes from the low elasticity of tobacco product which allows UST to increase price, while cost are constant, and lose less revenues from forgotten consumers than the gain from the increase in price. Also, those five KPIs are way above all competitors, both in Tobacco Product Manufacturers and in Tobacco Leaf Merchants. Moreover, two other operational KPIs would be market share in the