* H1 operating profit up 8.1 percent, beats forecast
* Q2 dairy volumes rises 2.7 percent as cuts prices
* Danone reiterates 2009 sales, margin, EPS targets
* Still no plans for major acquisitions - CFO * Shares dip 2.6 percent
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By James Regan
PARIS, July 24 (Reuters) - A revival in dairy sales helped drive Danone to forecast-beating results, but raised questions as to how long the firm can sustain the price cuts that helped its key division bounce back.
The French food group also benefited from resilient demand for baby food through the economic crisis, but the rate of the revenue climb at that division and at medical nutrition -- its two fastest-growing businesses- - slowed in the second quarter.
First-half operating profit increased 8.1 percent like-for-like to 1.206 billion euros, compared with the average of forecasts from nine analysts polled by Reuters of 1.187 billion euros, and up from 1.177 billion a year earlier.
The firm also reiterated guidance for the full year.
Dairy contributed 642 million euros to profits, up from 604 million a year ago, as price cuts ranging from 5 to 30 percent helped volumes rise 2.7 percent in the second quarter and reverse five consecutive quarters of declines.
"Volumes were significantly better than we had expected and indicate that some of Danone's pricing actions and A&P (advertising and promotion) investments are beginning to pay off," Bernstein Research analyst Andrew Wood said. "Finally, it appears that the worst is over for dairy volumes."
Danone raised prices around 10 percent last year, but has since made reductions, supported by a decrease in milk and packaging costs, as the economic downturn has crimped customers' budgets.
But there may be a limit to how long Danone can maintain this level of pricing, Citi analysts wrote in a note.
While "benign dairy costs will continue to facilitate further price investment through the second half of 2009, looking forward to 2010, in our mind, it is only a question of when and not if there is a material rebound in Danone's dairy costs," the analysts said.
Danone shares were down 2.6 percent at 36.64 euros by 1039 GMT, against a 0.4 percent firmer French benchmark CAC 40 index.
More exposed to dairy than Swiss rival Nestle, Danone stock has fallen almost 10 percent this year, while Nestle has gained 2 percent. The DJ Stoxx food and beverage index is up 8.7 percent.
Danone, which traditionally traded at a premium to rivals, trades at 15.1 times estimated full-year earnings, compared with a multiple of 14.8 for Nestle.
FOCUS ON BLOCKBUSTERS
Danone, whose top brands include Activia yoghurt and Actimel probiotic drinking yoghurt, makes 57 percent of sales in dairy.
"The priority remains the blockbusters," Chief Financial Officer Pierre-Andre Terisse told analysts. "If we were to choose competition on price only, we would be dead at the end of the day."
Danone has seen demand at its bottled waters division, which includes Evian, decline, while baby food and medical nutrition have achieved significant growth.
However, like-for-like sales growth in baby food slowed to 7.4 percent in the second quarter from 10.5 percent in the first, held back by Russia, Eastern Europe and China, Danone said. Medical nutrition saw growth slow to 8.8 percent from 10.8 percent, though volumes rose 9.2 percent.
Danone raised 3 billion euros in a rights issue last month to cut debt, buy smaller rivals hurt by the financial crisis and enable it to grow through the economic downturn.
A 15.6 percent rise in free cash flow to 636 million euros in the first half, along with the rights issue, helped cut net debt to 6.98 billion euros as of June 30 from 11.06 billion on Dec. 31, including put options granted to minority shareholders.
Danone also confirmed its full-year group targets on Friday.
"Our scenario for 2009 remains that current consumption patterns in our key emerging and developed markets will continue over the balance of the year, with no significant improvement or dramatic breakdown," Danone said.
Nestle, the world's biggest food group, on June 29 stuck to its target for 2009 organic sales growth "at least approaching 5 percent" and an increase in operating margin..
(Editing by Marcel Michelson, John Stonestreet)