Peugeot hits new profit record as stronger pricing prevails

By Laurence Frost and Gilles Guillaume

PARIS (Reuters) - PSA Group reported record profitability at its core manufacturing division in the first half as stronger pricing enabled the maker of Peugeots and Citroens to overcome weaker sales in Europe and China.

Net income rose 3.6 percent to 1.26 billion euros ($1.5 billion) on a 5 percent revenue increase to 29.17 billion, the French carmaker said on Wednesday, beating analysts' expectations and sending PSA shares up more than 5 percent.

Under Chief Executive Carlos Tavares, the company has rebounded from near-bankruptcy and a 2014 bailout to boast an industry-leading profit margin last year following cost cutting, a pared-down lineup and determined efforts to lift prices.

The core automotive operating margin jumped from 6.8 percent to 7.3 percent in the first half, a "new historic high" for the Paris-based carmaker, finance chief Jean-Baptiste de Chatillon said on a conference call with reporters.

"We are now in position to deliver recurrent profitability," Chatillon said. "There are always headwinds, but we're able to withstand them while maintaining a high level of profitability."

Weaker first-half vehicle sales in Europe and a sharper slowdown in China had sparked concerns about the pace of PSA's recovery just as it prepares to acquire Opel from General Motors, in a deal closing later this year.

But the earnings numbers squarely beat analyst expectations of 28.92 billion euros in revenue, 1.3 billion in automotive profit and a 1.06 billion-euro net income, based on the median of nine estimates polled for Reuters.

PSA shares rose as much as 6.1 percent and were trading at 18.93 euros as of 1201 GMT, up 4.6 percent on Tuesday's close.

Tavares is pulling off "a turnaround like no other", Bernstein analyst Max Warburton said, reiterating his "outperform" rating on the stock.

While auto recoveries typically require sharp sales growth, PSA's profit surge has been driven by product mix - essentially pricing and a demand shift to plusher models - and cost cutting, Warburton said. "I have honestly never seen anything like this."

PSA said its market share decline - particularly in Europe - wiped 92 million euros from profit. Higher raw material costs trimmed a further 129 million and currency effects 255 million.

But the product mix added 456 million euros and pricing another 41 million - both helped by a flurry of new model launches. Market growth also contributed 178 million euros.

PSA raised its full-year growth forecast for Europe's auto market to 3 percent from 1 percent and its Latin American and Russian forecasts to 5 percent - from 2 percent and flat, respectively.

($1 = 0.8590 euros)

(Reporting by Laurence Frost and Gilles Guillaume; Editing by Sudip Kar-Gupta and Susan Fenton)