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Ultimate Tyre sees limits to retread market but bullish on business

Published:Friday | October 19, 2012 | 12:00 AM
Jamaica Ultimate Tyre Company's team (from left) General Manager Kenry Jackson, Factory Manager Noel Pinnock and Chairman Dennis Chung, inside the company's plant at Maxfield Avenue, Kingston.
Sylvester Harvey at the skiving section of Ultimate Tyre Company's factory on Maxfield Avenue, Kingston, where imperfections are removed from the tyres. - photos by Gladstone Taylor/Photographer

Avia Collinder, Business Writer

Last year, more than 10,000 new retreads rolled off the line at Jamaica Ultimate Tyre Company Limited (JUTCL).

It set a new production record at the company and drove profits higher.

JUTCL rolled out 10,643 tyres for fiscal year ended March 2012, up almost 10 per cent from 9,960 the previous year. The company also made J$30.6 million in pretax profit, 90 per cent of which it linked to the retreads.

Ultimate Tyre is in the business of performing surgery on old worn-out commercial tyres to make them roadworthy again.

Its other revenue streams come from new tyre sales and tyre repairs as well as vehicle servicing, including alignment and balancing, front-end inspection and truck and car wash.

Net profit amounted to J$20 million. Its tax bill amounted to almost J$11 million. Ultimate Tyre says it plans to pump back the profit into a capital development programme as it pushes for more growth through expansion.

That JUTCL appears to have turned around is notable for a company that was previously heavily exposed to its loss-making parent, Jamaica Urban Transit Company (JUTC), and was tied to the bus company's fate.

Five years ago, the Government liberated Ultimate Tyre from the management control of JUTC and recruited outside talent to run the operation. The man in charge is Kenry Jackson, who answers to a government-appointed board.

Today, instead of 65 per cent of its business being tied to JUTC as it was in 2007, Ultimate Tyre's exposure is down to 35 per cent, according to Jackson.

The result is a strong turnout from monthly losses of J$1m to monthly operating profit of J$2.5m, says chairman Dennis Chung.

Ultimate Tyre has gone from relying on government subsidies and fretting over late payments from the JUTC, to establishing its own quality controls and dominating the retread market with average sales above J$200 million annually.

The company reported turnover of J$212m last year, which Chung says represents about 80 per cent of the retread market.

"We are operating better than international standards," general manager Jackson boasts, noting that the company is a member of Tyre Industry Association of North America (TIANA).

The remainder of JUTCL's commercial tyre revenue is obtained from trucking-reliant industries such as bauxite, sugar and cement, as well as the baking industry and wharf operations.

Pick-up centre

Ultimate Tyre operates a pick-up and delivery centre for clients in Manchester and another will soon be opened for the eastern parishes, including Portland.

Tyres are retreaded at the company's Maxfield Avenue, Kingston plant. It handles tyre sizes ranging from 225/60/16 for SUVs and 315/80r/22.5 for buses - the first number refers to tyre width, the second to height, and third the rim size.

The process of retreading involves buffing, repairing and/or preparation, replacing old treads with new, vulcanising to mould the new treads and bonding in a vacuum rubber case, which can take up to four hours. The finished tyre is inspected while hot.

The directors of Ultimate Tyre are bullish for growth - notwithstanding a softening of and declines in the sectors that it taps for business - with revenue projected at J$235m for the year ending March 2013, which would amount to year-on-year growth of 11 per cent.

Factory manager Noel Pinnock says there is an entire tourist vehicle and truck market in the western end of the island just waiting to be tapped.

Chung cautions, however, that the retread market might be nearing saturation and that the board is instead looking for opportunities for vertical integration to increase income, but not whether he was looking upstream or downstream.

"We are looking at products which are related but which are not really in the same market. We cannot say more at this time. We have recognised our limitation and we have to look vertically to expand," the chairman said.

The company was negatively impacted by several increases in the price of rubber last year, but recorded pre-tax profits which were 3.7 per cent above the J$29.5-million performance in 2010-2011.

In 2013, the company is looking to expand into the SUV market; expand its stock retread market - that is, increase the tyre sizes it services; make productive use of waste material; and explore alternative energy sources for the operation.

Ultimate Tyre was originally known as High Mileage Retreads Limited but was rebranded after its purchase by JUTC in 2001. The company's plant is in need of retrofitting, but Chung says that all machinery upgrades will have to be financed from cash flow and that no debt-financed initiatives are under consideration.

Pinnock told the Financial Gleaner that a full monorail system, which costs in the ballpark of US$45,000, would enhance production as would the replacement of ageing machinery that need to be modernised. These, the factory manager said, could bump up production by 80 per cent.

He notes that changes to plant have been made as cash flow allows and there is no set timeline to make the changes needed.

Said Chung: "Every investment must have a payback period. We do not borrow money, we do everything from cash. I do not believe in upgrading for upgrading sake. If it does not have value added, it's a 'no-no'. It must pay back for itself."

Meanwhile, the management "makes do". Chung said, for example, that the roofing is engineered to let in natural sunlight into storage and factory areas, so that the use of electricity is minimised in the daytime.

Ultimate Tyre made material purchases of J$103.6m, booked utility and worker-related costs of J$19.29m.

Raw material source

Brazil is its primary source of raw materials, according to Jackson.

Chung notes that because the company has been so prompt in paying its taxes - amounting to J$10.8 million in the last year - and because it no longer receives a government subsidy and is prompt in turning in financial reports each year, Ultimate Tyre has been granted significant operational leeway by the Government.

It is allowed to pay back 10 per cent of profit to workers in an incentive programme which this year will be J$3.6 million for the staff of 34, with the payment formula skewed towards those who earn less, according to Jackson.

The general manager states that the initiative has significantly reduced production, cut worker attrition to zero and also reduced theft to nil.

Liabilities which were discovered on takeover included the tendency by the JUTC to make late payments, which affected cash flow and profitablility, but an expansion of its client base has reduced that exposure.

Ultimate Tyre has since extended its services to other Government agencies, as well as private companies.

Challenges to its growth programme include the cost of oil and rubber, which affects the pricing of retreads, a shortage of retreadable casings on the world market, and an increase in supply of new cheap tyres from India and China.

Collections from JUTC remains problematic - the bus company is persistently in the red, losing J$2-3 billion per year notwithstanding a government subsidy of about half-billion dollars, as well as tax waivers and additional capital support.

The JUTC, which is itself run by Metropolitan Management Transport Holdings, currently owns about 370 Volvo and Mercedes-Benz buses and in 2011 transported 55 million passengers.

The cost of new commercial tyres makes retreading an attractive alternative, according to Chung, who says savings can rise as high as 30-40 per cent.

JUTC buses operate on six tyres but only the front two are new. The other four are retreads, said Jackson, the general manager.

A used tyre can be retread up to three times, according to Jackson, who says the 315 bus tyre used by JUTC costs about J$18,200 to retread.

Comparatively, a new bus tyre costs about J$33,000-J$35,000 plus tax and as much as J$60,000 for premium brands, he said.

"There are average savings of J$12,000 per tyre per retread. We are saving the country foreign exchange to purchase new tyres. A retreaded tyre also saves the environment as it represents one less tyre in our landfills," Chung added.