Price war and rising costs take their toll of Telegraph profits

MATHEW HORSMAN

Sharply higher newsprint prices and a debilitating circulation price war pushed first-half pre-tax profits at Conrad Black's Telegraph group down to pounds 21.5m from pounds 30.3m.

Operating profits at the core Telegraph titles were just pounds 5.6m, compared to pounds 14.7m last time, but the group figures were boosted by a one-off gain of pounds 7.5m on the sale of a stake in Carlton Communications, and another pounds 8.4m from associated companies Southam Inc. of Canada and Fairfax of Australia.

The Telegraph group also booked costs of pounds 600,000 as its share of fees paid on the aborted attempt by Mr Black's Hollinger Inc. to buy out the Telegraph's minority shareholders earlier this year. The company's independent directors rejected Mr Black's indicated offer of about 460-70p, holding out for at least 500p. Shares slumped yesterday by 20p to close at just 393p.

Stephen Grabiner, managing director, said the second half would see improvements, as an abatement in the price war and changes in distribution arrangements kick in. He warned however that the latest 30 per cent newsprint price hike, announced in July, would temper full year prospects .

Analysts said that operating profits from the core titles were lower than expected, while the income from associated company Fairfax in Australia were disappointing.

David Forster, analyst at Smith New Court, said: "The key problems seem to be the results from Fairfax, and the voucher scheme for weekend sales." Under the coupon scheme, readers could buy the Saturday, Sunday and Monday newspapers for as little as 90p, less than the full cover price of the Sunday edition alone. The scheme will be withdrawn in September, Mr Grabiner said, and a new magazine will be introduced with the Sunday title.

Most City analysts chopped pounds 2m off their estimates for the full year, calling for pre-tax profits of about pounds 41m in 1995 and perhaps pounds 50m next year.

But most remained confident that there would be some improvements in the second half, and certainly by next year. "If they can push through further price increases, prospects will improve," Derek Terrington, analyst at Kleinwort Benson, said.

Mr Grabiner blamed lower advertising revenues in Australia for the lower contribution from Fairfax. "This is a very well-run company, and we can learn a lot from them," he said.

Despite the fall in profits, the Telegraph would not make any cuts to editorial spending. "The core of our business is the product," Mr Grabiner said. "We are in the business of selling a brand, and editorial resources are directly related to that brand."

He forecast an end to the newsprint crisis, and expected that, because of long-term supply agreements, newsprint costs at the Telegraph titles would only rise by about 20 per cent in the second half. before starting to drift downward.

He also said the group would attempt two separate price increases of 5p for the Daily Telegraph, to 40p and 45p, within the next 12 to 18 months.

The price war, launched by Rupert Murdoch's News International last year, saw the price of the Times drop to 20p, leading to a sharp increase in circulation. Both the Daily Telegraph and the Independent responded with their own price cuts. Last month, News International raised the price of the Times to 25p, signalling an abatement in the price war.