DONGFENG MOTOR GROUP COMPANY LIMITED 
PARIS (Reuters) - PSA Peugeot Citroen (>> PEUGEOT) took a bigger-than-expected step towards recovery on Wednesday, raising a key cash-flow objective after strong China sales and a European upturn helped the French carmaker beat expectations for 2014.
Peugeot pledged to rack up 4.2 billion euros (3.10 billion pounds) in operating cash flow from 2014 to 2017, more than double its earlier 2018 target after the auto division returned to profit on a 1 percent sales gain to 53.6 billion euros.
"We are ahead of our reconstruction plan," Chief Executive Carlos Tavares said in a statement.
The manufacturing division swung to a 63 million euro operating profit from a 1.04 billion loss, with the overall net loss narrowing to 555 million from 2.23 billion. Group operating income also turned positive to the tune of 905 million euros.
Heavily reliant on Europe for sales and production, Paris-based Peugeot survived the region's prolonged slump only after a 3 billion euro share issue, in which the French state and China's Dongfeng (>> Dongfeng Motor Group Co. Ltd) took 14 percent stakes last year.
In response, new boss Tavares pledged to trim the model lineup, cut plant capacity, raise pricing and pare wage and component costs to lift the automotive operating margin to 2 percent in 2018 and 5 percent by 2023.
Peugeot posted 2.18 billion euros of operating free cash flow for 2014 after burning through 426 million a year earlier. That well exceeded the 500 million expected by analysts, according to a consensus published by Exane BNP Paribas.
Dominic O'Brien, an analyst at the brokerage, said the big surprise was the auto division's continued profitability in the seasonally weaker second half of 2014.
"This is a very strong set of free cash flow numbers," O'Brien said. "Pursuing profitability over sales volumes is starting to reap some rewards."
Peugeot shares have risen 32 percent since Jan. 1, buoyed by recovering demand in Europe which still accounts for 60 percent of sales. China also contributed to last year's 4.3 percent rise in global deliveries.
The company also reported progress on several benchmarks. Labour costs fell to 13.4 percent from 14.5 percent, on track for a 12 percent goal. Inventory fell by 1.4 billion euros, already exceeding the 1 billion cut pledged for 2016.
Savings per vehicle reached 730 million euros, outstripping a 600 million euro target, while the utilisation rate in Peugeot's European plants rose to 79 percent from 72 percent.
(Additional reporting by Gilles Guillaume; Editing by Andrew Callus and David Holmes)
By Laurence Frost
