UPDATE 2-Schneider first-half sales disappoint on weak utilities

Wed Jul 30, 2014 7:18am EDT

* H1 sales up 3.2 pct to 11.7 bln eur (Rtrs poll 12.1 bln)

* Q2 organic sales down 1.1 pct on weak utilities demand

* Sees lower forex hit of 100-200 mln eur on H2 sales

* Shares fall 3 pct (Adds shares, Rexel's poor performance, context, analyst comment)

By Natalie Huet

PARIS, July 30 (Reuters) - French electrical equipment maker Schneider Electric SE posted first-half results that missed expectations on Wednesday, hit by unfavourable exchange rates and weak demand among European utilities.

Its shares fell more than 3 percent.

Schneider, the world's biggest maker of low-and-medium voltage equipment and a bellwether of European industry, makes products that help carry electricity to buildings as well as automation systems for the car and water treatment industries.

Its results, along with those of French peer Rexel SA which cut its 2014 guidance after a poor first half, illustrate the global economy's patchy recovery - encouraging trends in the U.S. construction sector, a mixed but resilient picture in emerging markets and signs of improvement in Europe, excluding the depressed utilities sector.

Like rivals such as Siemens AG of Germany, ABB AB of Switzerland and France's Legrand SA, Schneider has seen sales weighed down in Europe in recent years as austerity measures depressed construction markets and capital spending.

The group has been cutting costs and shifting more production to emerging markets as it complains that a strong euro is hurting revenue and profitability. Schneider makes three quarters of its sales in foreign currencies and 40 percent in emerging markets, where currencies have been most volatile.

Revenue in the second quarter fell 1.1 percent on an organic or like-for-like basis and slumped 8.9 percent at its infrastructure division, hit by low demand from European utilities as they clean up their balance sheets and delay spending.

"We all know utilities are having a dismal time. But we did not expect that the sales decline in infrastructure would be that dramatic," said Barclays analyst James Stettler, who has an "overweight" recommendation on the stock.

Together with delayed investment in Africa, southeast Asia and destocking in Russia, the weakness from utilities offset a boost to earnings from the integration of Invensys, a British industrial automation specialist Schneider bought last year for 3.4 billion pounds ($5.8 billion).

SALES GROWTH

However, Schneider posted organic sales growth for products used in buildings and industry, two early-cycle businesses that account for two-thirds of group revenue.

Schneider shares, which had risen earlier this month to a record 72.22 euros, were down 3.1 percent at 65.29 euros by 0939 GMT, while Rexel shares were down 3.7 percent, the two biggest losers at that time in the STOXX Europe 600 sector index for industrial goods and services.

Schneider's first-half sales reached 11.7 billion euros, against an average expectation of 12.1 billion among analysts polled by Reuters. Adverse exchange rates cut 5.5 percentage points or 339 million euros off sales growth in the period, Schneider said.

It said it saw improvements in some currencies, mainly the dollar, Chinese yuan, Russian rouble and British pound and thus expected the currency impact to be lower in the second half, reducing revenue by between 100 million euros and 200 million.

Asia-Pacific, Schneider's top source of revenue with 29 percent of sales in the quarter, remained a key driver, with business up 3 percent. The company also said it had posted "high single digit growth" in China.

In western Europe, Spain and Germany showed slight growth, while the French construction market remained weak.

Adjusted earnings before interest, tax and amortisation (EBITA) increased 0.1 percent to 1.5 billion euros ($2 billion) in the first half. Schneider stuck to its full-year sales and margin targets, said it would continue to focus on organic or self-generated growth and planned to buy back about 6 million shares in the second half.

Schneider had signalled in February that it was shifting its focus to making its existing business more efficient, after a decade-long acquisition spree that involved the group buying more than 100 companies and tripling in size.

With the Invensys deal, Schneider's net debt has doubled since December and stands at 6.55 billion euros. Management said it would look at possible divestments of non-core assets but had not set detailed targets for a portfolio review. (1 US dollar = 0.7458 euro) (1 US dollar = 0.5901 British pound) (Editing by Andrew Callus and David Holmes)