Debt Policy at Ust Inc.

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1. UST: profile and risks The U.S. smokeless tobacco industry generated revenue of $2 billion in 1998 with moist smokeless tobacco contributing for 50% of the total. UST was the leading company in moist smokeless tobacco industry with a control of about 77% of the market. Moist smokeless tobacco was the fastest growing segment in tobacco industry with an annual growth rate of 3.7% compared to the annual decline of 2% in cigarettes volume in the period from 1980 to 2000. Main factors that contributed to this trend are the increased smoking bans and consumers’ perception of moist smokeless tobacco as less risky than cigarettes for health. In 1997-1998 UST was one of the most profitable US companies with a five-year return on capital of 92.1% that was about 20% higher than the 2nd ranked firm. Financial figures for the 11-year period from 1988 to 1998 show a continuous increase in sales, earnings and cash flow with CAGR of 9%, 11% and 12% respectively (HBR 2001). To have a deeper insight in UST business risks and assessment, SWOT analysis (McGee et al. 2010) is provided below. 1167872 4 Despite the leading position and the good business results, SWOT shows several sources of potential risks for UST. The company is losing market share against new price-value competitors because of slow innovation and late product introduction and extensions. Historically, UST relied on his leading market position boosting earnings with annual prices increases. But in the meanwhile smaller competitors started to quickly erode market share with prices cut. In 1997, instead of cutting prices, UST reacted to the growth of this value players with the introduction of premiumRed Seal but it was late considering that other brands were already successful in this segment. Moreover, UST is over dependent on smokeless tobacco business that contributed in 1998 for about 97% of

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