UPDATE 2-Daimler warns 2019 profits to halve as problems deepen

German luxury carmaker Daimler issued the latest in a procession of profit warnings on Wednesday, hit by costs related to the industry's diesel emissions scandal, heavy investment in electric vehicles and production problems. The maker of Mercedes-Benz cars said earnings before interest and tax (EBIT) for last year were expected to approximately halve to 5.6 billion euros ($6.2 billion) from 11.1 billion euros a year earlier.

It added that the figure did not include an estimated 1.0-1.5 billion euros of costs for ongoing government and court proceedings related to an industry scandal over whether carmakers tried to cover up pollution from diesel engines. Analysts had previously been forecasting 2019 EBIT of about 6.8 billion euros, according to Refinitiv Eikon data.

The profit warning is the third since Ola Kaellenius took over from long-standing Daimler CEO Dieter Zetsche in May and the fifth in around 19 months. German carmakers, among global leaders in diesel technology, have been caught in the crosshairs of courts and regulators after Volkswagen admitted in 2015 to using engine control devices to cheat U.S. diesel emission tests.

Daimler's diesel pollution levels are being investigated by prosecutors in Stuttgart, Germany, where it is headquartered, as well as by the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB). Earlier this month, investors sued Daimler for $1 billion in Germany, accusing it of concealing the use of emissions cheating software. Daimler denies wrongdoing.

The company's shares, which have fallen about 10% over the last year, were down 1.5% to 45.695 euros at 1010 GMT. As well as tighter emissions rules, automakers are grappling with slowing demand and costly new technologies such as electric and self-driving cars.

Daimler said it expected the return on sales at its Mercedes-Benz division to slump to 4% in 2019 from 7.8% in 2018, and the figure to drop to 6.1% from 7.2% at its trucks unit. Juergen Pieper, the car analyst at brokerage Metzler, said Mercedes' 4% margin was the weakest among German carmakers.

"Daimler is not getting its problems under control fast enough. The company is in the midst of a major crisis", he said. Others saw scope for optimism.

"Daimler looks likely to benefit from the strong momentum of upcoming product launches from 2020 onwards, which should help achieve incremental cost savings and pricing power improvement versus peers", JP Morgan said in a note to a client, adding its recommendation for the stock remained "overweight". Daimler said its profit forecast included 300 million euros of one-off costs for a review of its vans product portfolio and another 300 million for the realignment of its Your Now mobility services business.

The weak earnings came despite robust sales. The group sold 2.34 million Mercedes-Benz passenger cars in 2019 for a ninth consecutive year of record sales, putting it in pole position to retain the title of the biggest-selling premium car brand.

Given the challenges facing the industry, Daimler's cost-cutting program announced in November may soon be followed by more, said NordLB analyst Frank Schwope. "Perhaps it is time for closer cooperation or even a merger between Daimler and BMW, although there are still various individual sensitivities that stand in the way of this," he said.

Daimler is set to announce detailed full-year earnings on Feb. 11. ($1 = 0.9029 euros) 

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