VELIZY, France - Europe's second-biggest carmaker PSA Peugeot Citroen on Thursday raised its full-year outlook and unveiled a plan to lift earnings via productivity improvemenmts, costs cuts and more sales in emerging markets.

The company said it wanted the 3.3 billion-euro ($4.95 billion) initiative to substantially narrow the profitability gap with better-performing rivals like Volkswagen, Honda, Hyundai, Daimler and Fiat by 2012.

The priority is to get our house in order, Chief Executive Philippe Varin told investors.

PSA shares powered ahead early in the session to a 13-month high but fell back to trade at 23.87 euros, up just 0.4 percent by 1704 GMT.

The European car market foundered late last year as the credit crisis hit consumer confidence and undercut demand. Manufacturers including PSA slashed production in an attempt to limit the build-up of costly stocks of unsold vehicles.

We are confident a substantial part of our profitability gap should be closed in the next three years, said Varin, who was appointed CEO in June.

The company said half of the profit boost would come from manufacturing productivity improvements and cost cuts, 30 percent would come from boosting market share in Europe, while the remaining 15 percent would come from stepping up sales in Russia, China and Latin America.

A large part of its planned market share improvement would come from increasing sales to businesses, Varin said.

Varin said the group hoped to achieve its target in a progressive, linear fashion and did not rule out making acquisitions.

The company showed off a raft of new models including the iOn -- an electric car for Europe based on partner Mitsubishi's (7211.T) iMiev. Citroen is launching the same car as C-Zero.
The group will offer its Berlingo and Partner light commercial vehicles in electric versions from January next year and Varin said the group was targeting 20 percent market share in electric and hybrid vehicles by 2020.

The group also unveiled the DS3, DS4 and DS5 models that Citroen hopes will tap into a desire for premium touches on smaller vehicles.

The first car in the DS range -- which shares its name but little else with the iconic car Citroen produced from the 1950s to the 1970s -- will be available next year.

BETTER OUTLOOK

Earlier on Thursday the group increased its full-year outlook on the back of an improvement in the auto market and the success of models such as the C4 Picasso.

PSA said it now expected recurring operating income for the second half to be at break-even while full-year free cash flow was expected to be positive.

In July, the group forecast cash flow to be negative in the second half and saw a full-year operating loss of 1-2 billion euros ($1.50 billion).

According to Thomson Reuters I/B/E/S the average expectation for Peugeot's full-year operating result is a loss of 1.146 billion euros after it posted a first-half loss of 1.33 billion.

The net loss is seen at 1.37 billion against a reported first-half figure of 962 million.

Analyst Adam Jonas at Morgan Stanley said that PSA had the most conservative second half guidance of any European (carmaker) this year.

The carmaker will boost output in the fourth quarter by 30 percent compared with the same period last year and 17 percent compared with the third quarter, it said.

French carmakers expect strong sales in the final months of 2009 as drivers flock to take advantage of government scrapping schemes before year-end, contributing to uncertainty about 2010, executives told the Reuters auto summit last month.

Japan's Nissan Motor Co Ltd this month raised its forecast for the fiscal year to next March to an operating profit from a loss. Toyota Motor Corp 7203.1 halved its annual loss forecast after a surprise second quarter profit. ($1=.6668 Euro) (Reporting by Marcel Michelson; Editing by David Cowell)

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