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International Business Daimler warns again on profit, blames diesel and recall costs

Luxury automaker Daimler cut its profit forecast for the fourth time in 13 months on Friday, as it set aside more money to cover a regulatory crackdown on diesel emissions and vehicle recalls related to Takata airbags.

The German company is among a raft of blue-chip firms to issue a profit warning this week, adding to concerns about the severity of an economic slowdown, particularly in China where confidence has been hit by an ongoing trade war.

The maker of Mercedes-Benz cars said it would post a second-quarter operating loss and that 2019 results would be “significantly” lower than last year, compared with its previous forecast for a broadly unchanged performance.

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It also blamed lower-than-predicted growth in automotive markets, as well as slower product ramp-ups that have affected availability this year.

Analysts said deteriorating cash flow would make it hard for Daimler to keep paying a high dividend. Philippe Houchois at Jefferies said Daimler’s dividend would need to be cut to about 50 cents per share, down from /////EURO SYMBOL/////3.25 ($4.77) in 2018.

The warning is the second since Ola Kaellenius took over from long-standing Daimler CEO Dieter Zetsche in May.

“In finance, some call it ‘to throw in the kitchen sink’ ... well Daimler just threw in the dining room table, the fridge and the polished silver,” Evercore ISI analysts wrote in a note.

“Whether this is the final warning for the year remains to be seen.”

Daimler shares fell as much as 4.5 per cent to a six-month low of ////EURO SYMBOL/////44.54 euros ($65.42).

German automakers, 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.

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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).

The pressure to clean up combustion engines has come at a time when the industry has to invest heavily in electric and self-driving vehicles, cope with slowing growth in China, weak markets in Europe and a rise in global trade tensions.

Daimler said it expected to take an extra /////EURO SYMBOL/////1.6-billion ($2.35-billion) hit related to “ongoing governmental and court proceedings and measures relating to Mercedes-Benz diesel vehicles in various regions.” It did not give further details.

It also said provisions related to an extended recall connected to Takata airbags would increase by around /////EURO SYMBOL/////1-billion ($1.47-billion), and a review of its Mercedes-Benz vans product portfolio would hit second-quarter earnings by /////EURO SYMBOL/////500-million ($734-million).

The bankruptcy of Japanese airbag maker Takata has left some car makers having to shoulder the cost of recalls. Ford took a hit of US$775-million in 2018 for Takata-related recalls in North America.

As a result of the extra costs, Daimler forecast a second-quarter loss before interest and taxes of /////EURO SYMBOL/////1.6-billion ($2.35-billion), compared with a /////EURO SYMBOL/////2.6-billion ($3.82-billion) profit in the same period last year.

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Daimler also said its free cash flow for the second quarter would be below the same period last year and that, for the full year, it was no longer be expected to be above that of 2018.

Daimler’s warning came after auto suppliers Johnson Electric Holdings and Sensirion slashed their earnings forecasts on Thursday, blaming a slowdown in car sales and pessimism about the prospects of a Chinese car-sector recovery.

In May, German competitor BMW warned on profits, citing higher than expected investments, while Volkswagen said the return on sales at its passenger cars division would come in at the lower end of its target.

Sales of Mercedes-Benz cars fell 7 per cent in the first quarter in part due to manufacturing bottlenecks for the A-Class compact car in Aguascalientes, Mexico, the Mercedes-Benz Van in Charleston, S.C., and the Mercedes-Benz GLE sport utility vehicle in Tuscaloosa, Ala.

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