Daimler Bears Cost of Hardball Diesel-Allegations Response

(Bloomberg) --

Daimler AG’s hard-nosed strategy to fight off diesel-cheating allegations is proving to be costly.

More than four years after German rival Volkswagen AG admitted to rigging emissions tests, the maker of Mercedes-Benz cars denies it too used illegal defeat devices. Regulators and consumers aren’t convinced, and the expense of defending the allegations is mounting.

Daimler said Wednesday that it will set aside between 1.1 billion euros ($1.2 billion) and 1.5 billion euros in legal and government costs, in addition to struggles that halved 2019 profits and pushed results below expectations.

The company has had to recall at least 774,000 diesel cars in Germany, after insisting for years its engines comply with emission rules. The costs squeezed returns at the main Mercedes-Benz car unit and drove the smaller vans division to a significant loss.

Daimler’s third profit warning in less than 9 months offers a fresh reminder that the woes embroiling the world’s best-selling luxury-car maker and biggest truck manufacturer are largely rooted in homegrown problems, rather than broader industry headwinds. While trade tensions, tariffs and a general automotive slowdown have hurt results, the legal costs are rising and production hiccups affected key sport-utility vehicles last year.

“What’s truly remarkable is the fact that Chief Executive Officer Ola Kaellenius hasn’t taken more action with respect to his divisional leadership teams,” Evercore ISI analyst Arndt Ellinghorst said in a note. “Broadly speaking, the same people are in charge.”

Daimler shares were down 1.5% as of 1:46 p.m. in Frankfurt.

Read more: Daimler Investors Seek $1 Billion Over Diesel Disclosure

Group earnings before interest and taxes fell to 5.6 billion euros for the year, the German manufacturer said in a statement. Profit at Mercedes-Benz cars roughly halved to 3.7 billion euros, as the operating return on sales eroded to 4% from 7.8% in the previous year. The Stuttgart-based manufacturer retained its luxury-car lead over BMW AG, but margins slumped below the level of French mass-market manufacturer PSA Group.

The van unit swung to a 2.4 billion-euro loss from 300 million euros in profit the prior year. The division has been hard-hit by the diesel-engine recalls, and costs for culling production of the Mercedes-Benz X-Class pickup truck in South America added to the pain.

The company may reduce its dividend by more than half to 1.60 euros per share this year, said Tom Narayan, an analyst at RBC Europe. “We do not believe Daimler faces a liquidity risk even with increased one-time provisions,” he said in a note.

Kallenius has embarked on a major restructuring since taking over as CEO last May. The company plans to shed more than 10,000 jobs worldwide to save about 1.4 billion euros in personnel costs alone.

It hasn’t specified the overall cost-savings targeted, and has stated a labor deal remains in place that rules out forced layoffs among its domestic German workforce.

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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