Despite a 1.9% increase in sales in a weaker European market, the PSA Peugeot Citroen group saw operating income plunge 16.1% and net profit fall 11.8% in the first half of 2003, due mainly to the stronger euro.

Consolidated operating margin declined to €1,278 million from €1,524 million the year before, while net income decreased to €869 million from €985 million.

Chairman Jean-Martin Folz noted the negative impact on the automobile division operating margin of the sharp appreciation in the euro, which reduced margin by €292 million, and the decline in the French market, which was much more pronounced than in Europe as a whole. This reduced margin by €58 million.

But Folz said it wasn't all bad news. Peugeot and Citroën made market share gains in Western Europe to an aggregate 15.9% from 15.4%, and sales outside Western Europe rose 5.4% to 362,200 units.

Folz said the group was able to maintain transaction prices overall in a highly competitive environment shaped by the growing use of incentives and made a further gain of €305 million from the ongoing production cost-saving programme.

He said the financial position for the manufacturing and sales companies was stable at €571 million compared with €594 million at December 31, 2002 and noted a strong improvement in results from Banque PSA Finance, Gefco and Faurecia.

PSA Peugeot Citroën consolidated sales rose 1.4% to €27,763 million in the first half. Automobile division sales gained 1.4% to €22,396 million, reflecting the 1.9% increase in unit sales of Peugeot and Citroën cars worldwide.

Banque PSA Finance revenues rose 1.7% from the year-earlier period to €860 million. Total Banque PSA Finance outstandings, including securitised loans, rose 9.8% over the period to €19,500 million.

Gefco recorded first-half sales of €1,405 million, up 5.6% from the year before, and Faurecia sales increased by 5.7% to €5,242 million. Revenues from other businesses declined by 2.6% to €483 million.

Interim consolidated operating margin amounted to €1,278 million, compared to €1,524 million in first-half 2002, and represented 4.6% of sales, compared with 5.6% for the prior-year period.

Automobile division operating margin totalled €835 million, representing 3.7% of sales, down from €1,151 million and 5.2% of sales in first-half 2002.

Banque PSA Finance's operating margin rose 24.5% to €198 million, from €159 million in first-half 2002, and represented 2.1% of average net outstandings compared with 1.8% in the year-earlier period.

Gefco's operating margin increased to €74 million and 5.3% of sales, from €69 million and 5.2% of sales in first-half 2002.

Faurecia's operating margin totalled €161 million and 3.1% of sales, compared with €129 million and 2.6% in the prior-year period.

Earnings from companies at equity rose to €44 million, from €6 million in first-half 2002, reflecting the sustained increase in income from Dongfeng Peugeot Citroën Automobile in China.

Interim net income totalled €869 million, versus €985 million in first-half 2002. Earnings per €1.00 par-value share amounted to €3.54, compared with €3.83 for the first six months of 2002, a limited decline of 7.6% despite an unfavourable economic and currency environment.

Working capital provided by operations of the manufacturing and sales companies amounted to €1,985 million, down 10.6% from first-half 2002, and represented 7.3% of sales.

Capital expenditure, dedicated primarily to new model launches and the group's international expansion, totalled €1,427 million, compared with €1,586 million for the prior-year period and €2,790 million for full-year 2002. In addition to these capital outlays, investments were made in two joint ventures, Dongfeng Peugeot Citroën Automobile (€73 million) and Toyota Peugeot Citroën Automobile (€118 million).

Folz said the end of the first half may point to a slightly less unfavourable environment in the second part of the year. He lowered his forecast for Europe's car market this year, saying it would drop by 3-4%, compared with a 0-2% decline predicted in February. PSA group production will be cut back to adjust output to demand by 57,000 vehicles in the third quarter of 2003 and by 16,000 in the fourth quarter. The production cuts are aimed at helping PSA Peugeot Citroen meet its target of reducing inventories to 1.0 month of production from 1.3 months at the end of June.

There will also be new marketing strategies, notably in Brazil and the United Kingdom, where margins have been eroded by recent currency fluctuations.

The group will also launch the Peugeot 307 CC folding metal top convertible and the Citroën C2, a successor to the Saxo.

PSA Peugeot Citroen is however maintaining its sales target of 3,350,000 units for the year and, barring a further rise in the euro against other currencies, also expects to maintain or improve the automobile division and consolidated operating margins, as a percentage of sales, compared to the first half, increase free cash flow by drawing down inventory and significantly improve the net financial position of the manufacturing and sales companies.

This will enable the group to benefit from a scheduled acceleration of its model introduction cycle in 2004.