Nestle , the world's biggest food group, pared its full-year outlook on Wednesday after missing forecasts with first-half organic sales growth of 3.5 percent, knocking its shares lower.

Analysts polled by Reuters had on average forecast that organic sales growth, which strips out currency effects and acquisitions, would increase to 3.9 percent after 3.8 percent in the first quarter.

The maker of Nescafe coffee, KitKat chocolate bars and Maggi soup dropped its target for 2009 organic sales growth at least approaching 5 percent, saying only that it expects volume-driven organic growth to accelerate in the second half.

Chief Financial Officer Jim Singh said consensus forecasts for the full-year -- with organic growth seen at 4.3 percent, according to a recent Reuters poll of analysts -- were a good interpretation of Nestle's guidance.

After just 0.5 percent of organic growth came from volume in the first half, he said volume should drive growth more than pricing in the second half, adding Nestle had cut prices in the last quarter and did not see any significant price rises ahead.

We are seeing a recovery from a tough period between November and March. We expect this trend of improvement to continue in the second half, Singh told analysts.

Nestle had already said in June that it expected performance to be weighted toward the second half, but few analysts had expected it to pull back from the approaching 5 percent target.

Nestle shares were down 3.2 percent at 42.70 Swiss francs at 5:47 a.m. EDT, dragging on the DJ Stoxx European food and beverage index <.SX3P>, which was down 1.3 percent.

Headline is that top line is a bit disappointing, certainly relative to Unilever, but EBIT margin is better, and net income is better, Deutsche Bank analysts wrote in a note.

Second-quarter results at both Unilever Plc/NV , the world's third-biggest food and consumer goods group, and French food group Danone beat forecasts. Unilever reported volume growth of 2 percent, and Danone said price cuts helped volumes rise 2.7 percent.

Nestle shares are trading at about 14 times 2010 earnings, about the same as Danone and at a premium to Unilever's 13.2.


While they were disappointed by sales, analysts welcomed Nestle's 30 basis point improvement in its margin on earnings before interest and tax (EBIT) to 14.1 percent and a forecast-beating net profit of 5.1 billion francs.

Nestle reiterated it expected an improvement in the EBIT margin at constant currencies for the full year.

Sales fell 1.5 percent to 52.3 billion francs, against an average forecast of 52.7 billion, as Nestle took a 4.3 percent hit from currency effects, largely due to the strong Swiss franc, which had also hurt sales in the first quarter.

Helvea analyst Andreas von Arx said the strong profitability was similar to peers, but Nestle suffered from weak sales in Europe, and pet food and ice cream were also disappointing.

On a positive note, water and nutrition show clear signs of improvement in the second quarter, he said in a client note.

Nestle's bottled water division, behind brands like Perrier, remained the weakest, with volumes down 3.7 percent, but its margin increased by 110 basis points due to cost cuts, and Singh said it was gaining market share in the U.S. and Western Europe, even if those markets were shrinking.

Environmental concerns and the recession has hit the whole bottled water business, with Danone also seeing weakness there.

Nestle's nutrition business saw volumes fall 2.4 percent, but it said all divisions improved from the first quarter, with infant nutrition doing better in Europe and the U.S.

Singh said he expected more improvement in the second half.

Nestle's fastest growing brand, Nespresso, the premium portioned coffee, saw organic growth over 25 percent, it said.

Singh said input costs had risen 3 percent in the first half, and he reiterated a forecast for a full-year rise of about 2 percent, with agricultural materials more or less flat, but significant increases from other raw materials such as meat, vegetables, vitamins and packaging, particularly tin plate.

Flush with cash after selling part of its stake in U.S. eyecare firm Alcon , Nestle reiterated it would complete a 25 billion franc share buyback program by the end of 2010.

Roddy Child-Villiers, head of investor relations, said Nestle had no acquisition plans at present, saying there is nothing available at the right price.

U.S.-based food and consumer products group Sara Lee reports its fourth quarter and year results to June at 1130 GMT.

(Additional reporting by Rupert Pretterklieber, editing by Will Waterman)