(Adds details, quotes from conference call)
By Rebecca Harrison
PARIS, April 24 (Reuters) - Europe's second-biggest carmaker PSA Peugeot Citroen posted a three percent rise in first-quarter sales on Thursday, defying a weak European car market thanks to hit models at its Citroen brand.
The Paris-based firm also said that while it faced tough challenges including the effect of a strong euro, it was sticking to a target of matching or slightly lifting last year's operating margin of five percent in its key car unit in 2003.
PSA said in a statement that sales in the first three months of the year climbed to 13.841 billion euros compared to 13.439 billion in the same period last year.
Sales at its core carmaking business rose 3.1 percent to 11.222 billion euros, while worldwide unit sales edged 1.7 percent higher to 823,800 vehicles.
"The volume figures show we are in line with our (sales) guidance for 2003," Chief Financial Officer Yann Delabriere told analysts in a conference call. "We have to face ... challenges, but we don't want to change our guidance," he said when asked about the group's margin target for its autos division.
He added that nailing a target of 3.0-3.1 billion euros in group operating profit in 2003 would be easier since other parts of the business, including its Faurecia car parts unit, would help bolster profits from carmaking.
PSA's smaller Citroen brand, whose bubble-shaped C3 has been a hit with motorists, drove gains, selling 15.9 percent more new vehicles, while sales of Peugeot vehicles slid 7.3 percent.
PSA stock, seen as a safe bet by investors thanks to tough cost cutting and steady sales, has outperformed the DJ Stoxx European autos index by 11 percent so far this year. The stock closed down 2.2 percent at 40.79 euros ahead of the release of the sales figures.
NEW MODELS WOW MOTORISTS
Delabriere said the C3 and the Peugeot 307 remained the firm's star models, while the new Citroen C8 model and Peugeot 807 would clinch sales targets set for the year.
PSA said that in its key western European market, where demand slipped 2.6 percent in the period, the firm increased new car registrations by 2.5 percent, swelling its market share to 16.4 percent from 15.5 percent at the end of March last year.
PSA, hailed by analysts as Europe's leanest carmaker, posted sturdy profits in 2002 and has said it aims to keep sales rising this year, despite a welter of new models from rivals Renault and Volkswagen .
The company is confident of selling 3.35 million cars worldwide this year, up from 3.276 million in 2002, and hopes to sell four million vehicles in 2006.
Other carmakers have not been faring as well.
Industry giant DaimlerChrysler , the first European carmaker to give quarterly numbers, kicked auto stocks lower on Thursday with a warning that group revenues would fall and net profit may not rise in 2003, despite forecast-topping first-quarter profits.
Europe's biggest carmaker Volkswagen piled on the gloom, bracing shareholders for a large drop in first-quarter profit.
PSA said weaker demand in Latin America depressed sales there, but this was offset by buoyant demand in China and central and eastern Europe, meaning sales of new vehicles outside western Europe rose 2.9 percent.
Delabriere said the strength of the euro against other currencies, particularly sterling, was a "challenge" for the firm, adding that a negative geographical mix -- meaning the bulk of unit sales are shifting to less profitable countries -- and higher raw material prices were also a risk for margins.
While some carmakers are slashing price to lure reticent consumers, PSA said it had raised the average cost of its cars and while it expected a price war to continue this year, this would not have an impact on the group's performance.
Chairman Jean-Martin Folz has said he reckons sales in western Europe will slip around two percent in 2003 as conflict in Iraq and shaky economies mean motorists are loath to shell out on big items like cars.