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[Bera]

Jan 31 2:22am ET

By Brad Dorfman

CHICAGO (Reuters) - Household products maker Procter & Gamble Co. says its fiscal second-quarter profit rose 4 percent before unusual charges, beating Wall Street's forecast, as price increases, tax gains and the divestiture of its Clearasil business offset higher costs for raw materials.

The Cincinnati maker of Tide laundry detergent, Crest toothpaste and a host of other products lowered its revenue forecast for the full fiscal year as a result of competitive pricing, but said higher than expected cost cuts made it comfortable with the high end of analysts' earnings estimates.

"I think the stock should do fairly well," said Sanford Bernstein consumer products analyst Jim Gingrich, "because obviously folks were concerned that they (P&G) were going to guide down (earnings estimates) for the back half of the year and maybe even miss this quarter."

P&G shares were up $4.25, or 6.36 percent, at $71.10 Tuesday on the New York Stock Exchange. In the past year the stock, a component of the Dow Jones industrial average, has underperformed that index by about 30 percent, hammered by repeated earnings warnings that eventually led to the replacement of the company's chief executive.

P&G said earnings for the quarter ended Dec. 31 were $1.31 billion, or 93 cents per diluted share, up from $1.26 billion, or 88 cents a share, a year earlier. The results for both years exclude restructuring charges.

Analysts polled by First Call/Thomson Financial had on average expected earnings of 92 cents a share.

COST SAVINGS

"...We delivered what we said we would, but it isn't good enough and it has to be better," P&G Chief Executive Alan Lafley said in a conference call with analysts.

Procter & Gamble has reaped cost savings from a plan that began in 1999 and includes the elimination of 15,000 jobs over several years.

The company has set up a team to look at ways to further cut overhead costs, including outsourcing and using the Internet to make operations more efficient, Lafley said. P&G is also trying to improve operations in its paper, juice and snacks businesses, which are not meeting expectations, he said.

In the food and beverage segment, which includes Pringles potato chips and Sunny Delight drinks, earnings fell 9 percent due to lower volume. The paper segment posted 1 percent growth in earnings as pricing and cost controls countered currency factors and higher raw material prices.

Overall, second-quarter revenue fell 4 percent to $10.18 billion from $10.59 billion a year earlier as the weak euro cut into sales. Unit volume fell 2 percent from record levels a year ago.

In recent months, P&G has raised prices on its products to try to cope with rising costs. Most of those price boosts have been matched by competitors, but some were not, causing P&G to lose market share in those areas.

The company has already rolled back half of a 9 percent price increase for Bounty paper towels. And on Tuesday, it said it will cut prices on Tampax and Always tampons and other products.

That competition caused the company to lower its sales growth forecast for the year to between 2 percent and 4 percent, excluding foreign exchange factors, from the 4 percent to 6 percent range. It expects unit volume to be about flat for the year.

THIRD-QUARTER GUIDANCE

P&G said it expects third-quarter earnings of 72 to 74 cents a share before unusual items. The First Call analysts' consensus forecast is 73 cents. In the year-earlier period, the company earned 64 cents a share.

It said it sees unit volume for the quarter as flat to down 2 percent, with sales growth in the low single digits, excluding the impact of foreign exchange.

Analysts have forecast core earnings per share for P&G of $3.10 to $3.17 for the full fiscal year, up from $2.95 in the previous year. The company reiterated that it was comfortable with the high end of this range of estimates.

The forecast comes a week after Kimberly-Clark Corp. , which competes against P&G in the diaper and tissue business, said it expects to meet or beat sales and earnings objectives in 2001. Those forecasts could be a sign that the household products sector is rebounding, although analysts say each of the companies has its own specific issues.

"I think the outlook in this particular industry ... has probably solidified a little bit," said Simon Burton, senior consumer staples analyst at Banc of America Capital Management.

  
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