* H1 recurring op profit 1.702 bln euros, down 8.7% l-f-l
* Q2 group sales down 5.7% l-f-l, waters down 28%
* H2 margin to stay under pressure, shares down 5% (Recasts with CEO and CFO comments, shares)
By Dominique Vidalon
PARIS, July 30 (Reuters) - Shrinking bottled water sales during COVID-19 lockdowns drove down Danone's quarterly sales, and the company warned costs linked to the pandemic would weigh on its profit margin for the rest of the year.
The consumer giant, owner of Evian and Badoit water, posted a 5.7% drop in second-quarter sales, worse than analysts expectations of a 3.3% decline, as a fall in out-of-home consumption cut the sales of its bottled water division by 28%.
The group's operating profit margin slipped to 14% of sales in the first half 2020 against 14.7% for the corresponding period a year ago.
Finance chief Cecile Cabanis said that Danone expected to incur the same COVID-19-related costs in the second half and that its profit margin would probably be close to that of the first half.
However Chairman and CEO Emmanuel Faber said he was confident the second quarter, which saw the pandemic spread to more regions such as Latin America and Africa, would be its "most challenging quarter of the year", predicting a sequential improvement in overall sales growth for the rest of 2020.
"The worst is behind us in terms of topline growth," he said.
Danone, the global market leader in yoghurt, said first-half recurring operating income reached 1.702 billion euros ($2.00 billion), a like-for-like decline of 8.7%, following extra costs of 115 million euros to ensure business continuity and employee safety during the pandemic.
But much uncertainty remained, as the second half was seeing a gradual reopening after government-imposed lockdowns, but also some reversal amid fears of a second wave of infections, Faber said.
The pandemic was also resulting in "polarized topline dynamics" with some consumers trading up as their focus was a healthy diet while others were more concerned about buying affordable products and Danone had to adapt to that, he added.
Faber's strategy has centered on diversifying the group's portfolio into fast-growing product areas featuring probiotics, protein and plant-based ingredients to mitigate slower growth in dairy. In 2017 Danone bought U.S. organic food producer WhiteWave in a $12.5 billion deal to boost growth and bring the company more into line with healthier eating trends.
Cabanis said she was confident the group would emerge stronger from the current crisis and saw no reason not to reiterate Danone's mid-term guidance of 3-5% annual like-for-like sales growth.
Weaker second-quarter sales reflected some de-stocking after stockpiling in Europe and North America made at the end of the first quarter because of government-imposed lockdowns as well as the full effect of the closure of restaurants and cafes.
Overall, out-of-home channels, which usually account for around 45% of water sales in the quarter, fell almost 50%, the company said.
$1 = 0.8508 euros Reporting by Dominique Vidalon; Editing by Barbara Lewis and Pravin Char