(Adds details from conference call)
By Jane Barrett
MILAN, July 29 (Reuters) - Italy's struggling Fiat group cut its 2002 targets on Monday as shrinking car sales weighed on second-quarter results and confirmed how much work lies ahead in a sweeping recovery plan.
Fiat warned its auto unit may not meet its target of ending 2002 in line with last year's hefty operating loss and forecast the group would make a full-year loss in line with the first half, down from a breakeven target set in May.
In a statement, Fiat reported a first-half operating loss of 426 million euros ($418 million), of which 127 million were notched up in the second quarter, slightly more than the 105 million euro loss forecast in a Reuters poll last week.
"The outlook statement might be giving some concern but I don't think it should be viewed as a negative outlook. It is better to have a realistic statement out there," said John Lawson, an analyst at SSSB in London.
Fiat's core but loss-making auto unit suffered a 19 percent slump in car sales in the second quarter and posted an operating loss of 394 million euros, better than its first-quarter loss of 429 million euros as Fiat kicked its restructuring into gear.
Fiat Auto's second-half loss would be "significantly lower" than in the first half, Fiat said but Chief Financial Officer Damien Clermont warned it would be tough to make its targets.
"It will be difficult, in view of the second-quarter result, to meet the full-year operating profit target stated in (May)," Clermont told analysts on a conference call.
Fiat had previously expected the operating loss at the auto arm this year to be around 2001's level of 549 million euros.
However, Fiat said it was sticking to its objective of posting a profit by 2004 for the auto unit.
"There are no compelling reasons to change our objectives," Fiat Chairman and co-Chief Executive Paolo Fresco said on the call. He gave no more specific estimates, saying "We do not want to give estimates in such a market."
Car sales have been falling in Fiat's key home market and in Western Europe this year but Fiat has suffered more than most, giving up market share to competitors like PSA Peugeot-Citroen.
Fiat's loss contrasted with better than expected profits at other European carmakers, including Renault and PSA which last week raised margin forecasts after strong first-half results.
SHARES HIT
Fiat shares, which hit 10-year lows last week, closed up 5.2 percent but lagged a seven percent rise in the DJ Stoxx index of European auto stocks which Fiat has underperformed by about 33 percent this year.
"I think the stock fell in recognition of the fact that there has not been a dramatic improvement and there is a realisation that this will be very drawn out," said Nicholas Hirth, auto analyst at Morgan Stanley in London.
Fiat has launched a sweeping restructuring including layoffs and asset sales to cut debt as agreed with creditor banks which on Friday signed a three billion-euro emergency financing plan.
Fiat said it "strongly intended to respect the targets... through operating cash flow and, where appropriate, by more non-strategic asset sales."
In May, Fiat listed 11 assets that could be sold but has instead banged out deals to sell a stake in sports car maker Ferrari, which pulled the group into pre-tax profit in the second quarter, and part of its majority stake in energy holding Italenergia, which should feed through in the third quarter.
Fresco told analysts Fiat was sticking to its strategy of disposing of businesses which don't provide long-term value.
"The point is that now we have gained time to do it on our own schedule...We are not going to be involved in a fire sale of assets at any price," he said.
CAR WOES
Fiat Auto's deep losses have fuelled speculation Fiat will take up a "put" option to sell its 80 percent stake in the company to General Motors Corp. , which bought the other 20 percent in 2000 and is in car-parts joint ventures with Fiat.
"The likelihood is that we will continue to (get stronger) in the context of a deepened cooperation with General Motors," said Fresco in the conference call, clarifying a statement that Fiat would "aggressively pursue the turnaround of Fiat Auto with a view to becoming a stronger member of the GM federation."
Fresco said there were many ways to strengthen relations with GM which might or might not involve the put option.
"The bottom line is we want to become stronger and being stronger is improving our operating results using the GM cooperation," he said, adding he was keeping options open.
Fiat said the auto unit should show concrete results of the recovery plan in the second half but warned it would probably have to offer price cuts in line with aggressive incentives that it expected competitors to launch.
Fiat was helped by a stronger performance in some other businesses including airplane engines and tractor-making and a 671 million-euro capital gain from selling a 34 percent stake in Ferrari to a group of banks led by Milan's Mediobanca .
But the group remained in the red on a net basis with a loss of 34 million euros.
Fiat's net debt -- which it has pledged to cut to 3 billion euros by the time it approves 2002 results, probably in March next year -- was 5.8 billion euros at the end of June, down from 6.6 billion euros in March. (additional reporting by Stefano Rebaudo and William Schomberg in Milan and Madeline Chambers in Frankfurt)