PARIS PSA Peugeot Citroen (PEUP.PA) said it will consume less cash than expected in 2013, as spending cuts and a year-old alliance with General Motors (GM.N) begin to pay off.
The struggling automaker vowed to reduce cash burn "at least by half" from last year's 3 billion euros ($4 billion), undercutting its earlier 1.5 billion goal before restructuring.
Peugeot shares surged more than 10 percent to their highest in more than a year on the upgraded outlook, as the company said cost-cutting had helped contain losses in the first half.
The turnaround plan is "going more quickly than expected", Chief Financial Officer Jean-Baptiste de Chatillon said as he unveiled the results. "But we've still got a lot of work to do."
As if to underline the remaining challenges, German rival Volkswagen (VOWG_p.DE) published higher-than-expected quarterly operating profit of 3.44 billion euros.
Peugeot, a distant European second to VW by sales, is the worst casualty of the region's five-year auto slump. After a 5 billion euro net loss in 2012, the Paris-based carmaker gave up more ground in the first half, posting a 13.3 percent decline in European sales - twice the market contraction.
Chief Executive Philippe Varin is fighting back with spending cuts, joint vehicle programs with GM and the elimination of 11,200 jobs over two years.
"The GM alliance is in the execution phase with the first purchasing savings (achieved) in the first half," Varin told analysts.
Peugeot's operating loss widened to 65 million euros from 51 million before one-off gains and charges, on a 3.8 percent revenue decline to 27.71 billion. But it reined in cash consumption to 51 million euros from 449 million a year earlier.
Capital expenditure and research and development were slashed by 764 million euros to 1.23 billion.
The spending squeeze is helping Peugeot's short-term profitability but hurting the product pipeline that will drive future earnings. By comparison, VW's research and development budget for the half was 7.4 billion euros.
The German group's profit gain, announced late on Tuesday, began to show the payback from an estimated $70 billion investment in a new modular vehicle architecture used by group brands from no-frills Skoda to premium Audi.
Peugeot "needs a partner to reach critical scale and share technologies," Varin said in a newspaper interview published on Wednesday. "It's an indispensible condition for developing our brands with globally attractive cars."
Varin noted deepening cooperation with 7 percent shareholder GM and a "very good dynamic" with Chinese partner Dongfeng (0489.HK). Sources told Reuters last month that the founding Peugeot family had offered to give up control in a capital increase cementing closer ties with GM or Dongfeng.
While no capital increase is being prepared, Varin said "the question may one day arise of how to finance future growth".
Chinese sales surged 33 percent to 278,000 vehicles in the first half, Peugeot said, contributing to a 100 million euro dividend from the Dongfeng venture.
Cash flow - which came to 203 million euros before restructuring - was helped by such dividends and other gains that will not be repeated in the second half. The net loss narrowed to 428 million euros from 818 million.
The carmaker's shares were 7.7 percent higher at 9.70 euros by 1258 GMT, as hedge funds bought up the heavily shorted stock to cover negative bets on Peugeot's fate.
The results announcement came a day after Peugeot won EU clearance for a 7 billion euro state-backed debt rescue granted last year to its Banque PSA car loans arm.
Varin declined to answer questions about talks with Banco Santander (SAN.MC). The two companies are discussing a finance venture that could replace the guarantee and bring Peugeot more freedom from government interference, people with knowledge of the matter said last week.
Peugeot did confirm it would seek concessions on pay and working time when French union talks resume in September.
The company, already closing its Aulnay plant near Paris and downsizing another in Rennes, will likely to need further cuts to increase capacity utilization, Varin added.
"We're not relying on a very significant improvement in the European market ... We have done in the past some shrinking of capacities on some sites ... So we know how to do it," he said.
The auto division fared slightly better in January-June as a series of model launches helped trim the operating loss 29 percent to 510 million euros, despite a 7.5 percent revenue slide. Group net debt rose to 3.32 billion euros at June 30 from 3.15 billion six months earlier. ($1 = 0.7547 euros)
(Additional reporting by Gilles Guillaume and Blaise Robinson; Editing by Christian Plumb and David Holmes)