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P&G Profit Up, but Higher Costs Pressure Outlook

Procter & Gambleposted higher quarterly profit Tuesday as price increases and cost controls more than offset soaring costs for oil and other commodities.

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But the company, which makes a wide-array of consumer products from Pampers diapers to Olay skin-care products, also said it expects commodity costs to rise by $3 billion in the fiscal year begun July 1, cutting gross margins, and leading to a forecast for earnings that could be below the average Wall Street estimate.

P&G shares gained over 2 percent in early trading.

"If you're raising prices to recover commodity and energy costs, and you're raising prices by the exact amount of your cost increases, then your gross margin and operating margins will decline," said Chief Financial Officer Clayton Daley, in an interview on CNBC. "It's just a function of the math, because we really don't feel in this environment we could raise prices by more than the amount of our commodity and energy increases." (For the full discussion, see the attached video.)

The rising cost of oil has pushed prices for energy, resin, and other materials needed to make the company's products.

"It's just a tough environment and they are, in the next fiscal year, going to feel the brunt in the recent run up in oil and commodity cost," SunTrust Robinson Humphrey analyst William Chappell said. Chappell has a "neutral" rating on the company.

The world's largest consumer products maker said profit in the fiscal fourth quarter ended June 30 rose to $3.02 billion, or 92 cents a share, from $2.27 billion, or 67 cents a share, a year earlier.

Excluding benefits from the adjustment of tax reserves, earnings were 80 cents a share. On that basis, analysts' average forecast was 78 cents a share, according to Reuters Estimates.

Sales rose 10 percent to $21.27 billion, topping analysts' average forecast of $21.04 billion, helped by sales in emerging markets, price increases and the impact of the weaker dollar, which boosts the value of sales in countries outside the United States.

Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, rose 5 percent.

"Sales (in the latest quarter were) on target, earnings per share a couple of pennies on top of our estimate range, cash flow quite good, pretty balanced growth across the business units," Daley said.

Like most consumer products companies, P&G has raised prices and cut costs to cope with rising costs.

Analysts have been watching closely for signs that those price increases will drive consumers to trade down to lower-priced items.

Chappell said P&G's results so far and its forecast for 2009 do not indicate that the company is seeing that trade-down.

The company forecast fiscal 2009 earnings of $3.80 to $3.87 a share, excluding a 50-cents-a-share gain from the sale of the Folgers coffee business and 12-cents-a-share in increased restructuring costs.

Analysts' average forecast is $3.86.

P&G shares traded at $65.83 in premarket electronic trading. P&G shares closed at $65.82 Monday on the New York Stock Exchange. The stock is down 10 percent this year, compared with a 15 percent drop for the Dow Jones industrial average, which includes P&G as a component.

-Andrew Fisher, of CNBC.com, contributed to this article.