UPDATE 1-Continental says on track with strong H1

(Adds details, implied Q2 figures, share price, background)

By Michael Steen

FRANKFURT, July 31 (Reuters) - German tyre and car parts maker Continental AG posted better than expected first-half core earnings on Wednesday, confirming its restructuring had put it on the right track and sending its stock higher.

Continental said its first-half earnings before interest, tax and amortisation (EBITA) rose 70 percent to 347 million euros ($340 million) while sales were up 2.9 percent at 5.659 billion euros. A Reuters poll of 10 analysts had forecast EBITA of 301 million euros on sales of 5.682 billion euros.

The figures for the first six months of the year implied a second quarter EBITA of 199 million euros, above expectations of about 154 million euros, and sales of 2.948 billion euros, roughly in line with analysts' forecasts.

The company has been closing unprofitable tyre plants around the globe in a bid to shift out of low margin activities and benefit more from high-end electronics systems which are less susceptible to pricing pressure from carmakers.

The firm said its first-half growth was largely driven by the consolidation of automotive systems unit Conti Temic, in which it bought a remaining 40 percent stake from carmaker DaimlerChrysler in April.

Shares in Continental were trading up 5.23 percent at 17.72 euros by 0950 GMT, compared to a 1.15 percent rise in the DJ Stoxx European auto sector. The stock has gained 14 percent this year, outperforming the index by 17 percent.

Continental also said it had cut its debt in the first half by 540 million euros to 2.681 billion euros and reiterated its profit outlook for the year, saying it expected a slight rise in 2002 sales and a significant improvement in profit.

It said its automotive systems unit increased sales, while the tyre and Conti Tech units saw sales shrink.

Rival French tyre maker Michelin posted better than expected first-half results on Tuesday and raised its operating margin targets for the year, sending its shares higher.

Michelin had a first-half operating margin of 7.3 percent and raised its 2002 target to 7.0 to 7.4 percent. Continental, by contrast, said its return on sales in the first half was 6.1 percent.

The sector has been boosted by robust first-half results from most European carmakers, except Italy's Fiat , who have performed better than forecast in the second quarter against the backdrop of weak global car markets and shrinking demand.