Qualceram is turning its fortunes around, writes Arthur Beesley, Senior Business Correspondent

It's been a big week for John O'Loughlin, head of the bathroom group Qualceram Shires. After a period in the doldrums - the group lost €5.14 million last year - Qualceram has come back into the black with first-half operating profits of €2.2 million. The group has also struck a deal to acquire the freehold interest to all of its property in Arklow.

The combination of the trading turnaround and the strong possibility of windfall profits from the sale and redevelopment of the 11-acre South Quay site in Arklow was enough to lift the group's shares towards a level of €1.50 last night from €1.28 at the end of last week.

But happy as O'Loughlin clearly is with the group's improving fortunes, he says much remains to be done at Qualceram. "We regard our performance as only satisfactory. Our ambitions are greater than that," he says.

He is keen to dispel any suggestion that Qualceram will ultimately cease production in Ireland following its move from South Quay. O'Loughlin is certainly an ardent outsourcer - Qualceram buys material in China, Poland, Italy, Turkey and Thailand - but he believes the group would be unwise to stop manufacturing altogether at home.

Given the ceaseless downward pressure on prices from international mass market manufacturers, Qualceram has placed itself at the upper end of the market. The promise of luxury designs and superior service cannot be met without in-house manufacturing talent and expertise, he says. Flexibility is all in a business in which in-vogue styles change as rapidly as high fashion, so the intellectual property end of Qualceram's business will stay at home. "We're committed to Arklow because Arklow is the right place to be, not for other reasons," he says.

In keeping with that, the group is examining three sites in the region of the Co Wicklow town which have access to the national gas grid. Its decision to stay in Arklow means it can also use the new deep sea port there, which will be ready for use within the next 12 months. Freight costs to Britain from this location are very advantageous, he says.

The deal to buy out its 900-year lease from the Arklow town commissioners is subject to the approval of Minister for Transport Martin Cullen, who has political responsibility for ports. While O'Loughlin says there are precedents in Arklow for the transaction, he would not divulge the price.

Like other groups such as Greencore, who are set to exploit their property holdings, Qualceram now stands to cash in on an attractive site at Arklow harbour. O'Loughlin says the group's intention is to dispose of the site, which is zoned for hotel, recreational and residential use.

O'Loughlin strongly implies that Qualceram was in quite a strong position in talks with the harbour commissioners that continued for some weeks. The alternative to buying out the freehold was to build "high bay" warehousing for Qualceram on a site which is already known to contribute to traffic congestion in Arklow's town centre.

If that suggests the harbour commissioners were in a relatively weak negotiating position, O'Loughlin maintains the outcome is a win-win one. Qualceram will incur significant relocation costs, he says.

The group's "significant offer" for the freehold brings the group full circle from its small-time beginnings in 1987, when O'Loughlin and colleagues Tom Byrne and John Byrne (they are unrelated) took control of the defunct Armitage Shanks plant on the site. "We got it for a knock-down price but for us at the time it was a significant amount of money."

Still, it was a brave move. Qualceram had only 17 staff at the very beginning, but occupied a huge plant. At the time, one wag suggested that the start-up was the only employer in the country with enough space indoors for staff to park their cars.

With the economy in full-blown recession, it's safe to say that Qualceram wasn't originally involved in the designer end of the business. But the firm immediately set about developing new technology for the business. In spite of the poorly economy, the company had revenues of £1 million in its first year and a profit margin of 10 per cent.

After rebuffing a takeover attempt by Polypipe in 1996, O'Loughlin and his colleagues floated the business in 1997. The initial public offering enabled him to take out some money from the business, but he was not for quitting altogether.

Nor is he now. In a prosperous economy of house-proud home-owners, Qualceram sells bathroom suites as symbols of affluence, style and the comfortable life. The house-building frenzy provides a ready market for the group, but O'Loughlin sees more potential in the refurbishment market as homeowners upgrade their properties. In this respect, the bathroom business is akin to the garden and kitchen improvement markets.

There's big money to be made. If you want to watch plasma-screen TV from the bubble bath, Qualceram can meet your needs. The group has five brands: Qualceram, Shires, Selecta, Trent, and Shaws of Darwen. O'Loughlin says he knows a builder who recently spent €130,000 on a new bathroom suite. That's at the really high level of expenditure, but O'Loughlin says it's not unusual to see people spend up to €50,000 on a bathroom.

If that suggests bathrooms are in the same league as the Aga oven - a status symbol of sorts in large homes - he says Qualceram is not quite there yet in terms of market penetration. In a given year, the group might sell up to 375,000 suites. There's plenty scope for growth, he says.

But how did Qualceram, Ireland's biggest bathroom supplier, manage to lose money last year in the middle of a construction boom? O'Loughlin is quick to blame poor conditions in the British market, where Qualceram acquired Shires in 2000.

Annual construction of more than 80,000 new houses in Ireland was enough to stimulate demand here, but he says the British market was in the doldrums with a total of only 183,000 new units coming on stream. That was hardly ideal, given that Qualceram relies on Britain for half its turnover.

With energy costs on the rise, O'Loughlin has been keen to reduce costs by outsourcing. Four years ago, he says, up to 95 per cent of company revenues were derived from manufacturing. Thanks to foreign supply arrangements, direct manufacturing now accounts for but one-third of sales.

But while new outsourcing arrangements helped to stabilise gross margin - which rose to 32 per cent from 29 per cent in the first in first half - O'Loughlin noted this week that further increases in energy and raw materials costs "have somewhat mitigated the benefits achieved through outsourcing".

Nevertheless, he is determined not to cut out the manufacturing function. If that leaves Qualceram among the last remaining manufacturing groups in Ireland, O'Loughlin says the group would not be able to deliver its "superior service" without that. Technology and technology expertise are crucial to the drive to create compelling new bathroom designs. Logistics are also important, he says. "It's not always about being the cheapest. There's no point having a cheap product if you can't get it to the customer."

O'Loughlin may rank among the longest-serving chiefs in Irish business, but he is not preparing to move on yet. Qualceram will concentrate on organic growth and development, he says.