Europe's second biggest car maker, Peugeot Citroen, said its recovery had started, reporting an operating profit margin of 2.7 percent in the first half of 2007 up from 2.4 percent a year ago.

It said the improvement was due to higher sales prices, cost cuts and purchasing gains. Market share also improved, and the margin figure beat an average analysts' forecast of 2.5 percent.

Peugeot said it expected at margin for the second half of 2007 of at least 2 percent, up from 1.6 percent last year.

In 2006, PSA cut performance targets several times.

A company spokesman said the second half was traditionally weaker than the first, due to slow sales months in July, August and December, and the second-half margin was usually 0.85 points below that of the first.

The two major challenges for the second half of the year are to continue to succesfully launch new models and to accelerate the drive to greater competitiveness, chief executive Christian Streiff said in a statement.

Peugeot Citroen said its revenue rose 5.9 percent to 30.818 billion euros ($42.57 billion) led by higher vehicle sales which boosted its market share to 14.2 percent of the European market against 14.0 percent a year ago.

PSA, which trails European number one Volkswagen, said recurring operating income rose 21.9 percent to 842 million euros, due to higher prices and productivity gains.

New chief executive Streiff has drawn up a recovery plan based on cost cuts, quality improvements and 41 new models in the period until 2010 in a plan called Cap 2010.

(These are) the beginnings of a recovery, with an increase in operating margin led by the Automobile Division, lower costs, faster improvements in quality and the succesful launch of new models, PSA said.

RAW MATERIALS, EURO

The impact of higher raw materials was 192 million euros and changes in exchange rates such as the high euro shaved 36 million from the operating income but there were 271 million in purchasing gains and 86 million in productivity gains.

Streiff is expected to set financial targets in September for the next few years. The firm has already announced 4,800 job cuts in France this year. It took 120 million euros in restructuring charges for the job reductions.

Recent new models include the Peugeot 308 compact car, 207 small car and 4007 four-by-four model. Citroen launched the C4 Picasso multi-purpose vehicle and the C-Crosser four-by-four.

PSA shares have reached all-time highs recently as industry analysts have upgraded their estimates to take account of Streiff's expected recovery moves. On Tuesday it set a high of 67.35 euros after a 30 percent rise this year.

PSA trades at 18.8 times expected 2007 earnings per share, only less than Daimler and 11.8 times those of 2008 which puts it ahead of Renault and Fiat.

Morgan Stanley expects PSA to target an operating margin of at least 6 percent by 2010 -- the same margin that cross town rival Renault is aming for in 2009. Renault will publish its first half results later on Wednesday.

PSA results include those of the main automobile division, the Banque PSA Finance financing arm, the Gefco distribution and logistics subsidiary and the Faurecia car parts group in which it holds a 71 percent stake.

The Peugeot family has a 30.22 percent equity stake in PSA and holds 45.15 percent of the voting rights.

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