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Price war and raw materials dent Peugeot's 2005 profit

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PARIS (AP) _ PSA Peugeot Citroen reported a 37 per cent drop in 2005 net profit as fierce price competition and weaker car sales in Europe, higher raw material prices and an unfavorable product mix ate into profitability.

The 2005 full-year net profit of 1.03 billion euros ($1.23 billion US), compared to 1.65 billion euros a year earlier, came in below the 1.17 billion euros ($1.4 billion) expected by analysts. The company did not break out results for its fourth quarter.

Operating profit for Europe's second-largest automotive group sagged to 1.94 billion euros ($2.32 billion) in 2005 from 2.48 billion euros a year earlier. The operating margin _ operating profit as a share of revenue _ fell to 3.4 per cent from 4.4 per cent, in line with the company's own guidance.

Group revenue was virtually flat at 56.27 billion euros ($67.37 billion), compared to 56.11 billion euros a year before.

Peugeot Citroen shares fell 2.8 per cent to 47.81 euros ($57.24) in Paris trading.

Profitability sagged at Peugeot Citroen's automobile division, which accounted for 80 per cent of total revenue. The division's operating margin fell to two per cent from 3.3 per cent, reflecting a sharp deterioration in the second half of the year as the price war in Europe intensified.

Peugeot Citroen said higher raw material prices trimmed 340 million euros ($407 million) from operating profit, and estimated the cost of complying with stiffer European emissions and safety standards at 97 million euros ($116 million).

Peugeot Citroen said that despite these headwinds it managed to reduce its production costs by 614 million euros ($735 million), in line with the trend of recent years.

Looking ahead, Peugeot Citroen said raw material prices and compliance with safety and environmental standards will continue to weigh on profitability in the first half of 2006. It forecast that operating margin will be in line with the second half of 2005 _ when it was just under three per cent _ before improving in the second half of 2006.

Peugeot Citroen said demand for automobiles in Europe is likely to remain flat in 2006, and said it doesn't see any respite from the fierce competition.

But it said the launch of new models like the new Peugeot 207 subcompact, due in April, should put the group ``back on the marketing offensive'' and allow a return to unit sales growth in Europe. Sales outside Europe should continue to grow at a fast pace, it added.

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Price war and raw materials dent Peugeot's 2005 profit
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