FRANKFURT (Reuters) - BMW’s first-quarter operating profit fell 78 percent to 589 million euros, despite higher deliveries of luxury vehicles, as the carmaker felt the effects of higher investment spending and a 1.4 billion euro ($1.6 bln) legal provision.

The European Commission last month told German carmakers they face hefty fines for alleged collusion in the area of emissions filtering technology. BMW denies participating in anti-trust activities and is contesting the allegations.

Adding to the downbeat tone, the company reiterated that it expects group profit before tax to be well below the previous year’s level. It also sees weaker car sales in the first half of 2019 as factories are retooled to produce a new 1-series and 3-series.

BMW’s first-quarter earnings before interest and taxes were below the 666 million euros forecast in an analyst poll. A contribution of 648 million euros from financial services only partially offset a 310 million euros loss before interest and taxes at the automotive division.

BMW also booked a 328 million euro valuation gain from BMW and Daimler’s mobility services business, the carmaker said.

Analysts said BMW’s results were underwhelming, adding that sales of electric and hybrid cars were not stellar. Shares fell 1.6 percent by 1045 GMT.

“As most companies have done, BMW points towards a stronger second half this year. We remain skeptical regarding this optimism as we don’t see much stronger end-markets,” analysts at Evercore ISI said, citing trade tensions and emissions rules as risks.

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The carmaker struck to its full year outlook of an increase in vehicle deliveries, and its goal of aiming for an EBIT margin of between 8 percent and 10 percent.

FILE PHOTO: A BMW logo is displayed at the 89th Geneva International Motor Show in Geneva, Switzerland March 5, 2019. REUTERS/Denis Balibouse/File Photo

Due to the antitrust proceedings, it expects a margin in the automotive segment of between 4.5 percent and 6.5 percent, the carmaker said.

Investments into new technologies and the rising cost of complying with stricter carbon emissions legislation are also likely to have a dampening effect on earnings.

BMW said spending on property plants and equipment jumped 36 percent to 999 million euros in the first quarter as BMW prepares its factories to launch new vehicles like the 3-series and to build next generation electric and hybrid cars.

Rising trade tensions between China and the United States may dampen earnings further and could depress profits by a low triple digit million euros amount, but will not threaten the company’s guidance, BMW’s Chief Financial Officer Nicolas Peter said.

To counter rising costs, BMW said it will cut the available engine and gearbox combinations by 50 percent and seek efficiency savings of more than 12 billion euros by the end of 2022.

Excluding the impact of the legal provision, BMW’s automotive division delivered an operating margin of 5.6 percent in the first quarter. It would have been around 1 percentage point higher if profits from BMW’s China operations were counted.

By contrast the return on sales at Mercedes-Benz passenger cars fell to 6.1 percent, down from 9 percent a year earlier and rival Volkswagen said the return on sales for its passenger cars business will be at the lower end of its 6.5 percent to 7.5 percent margin target this year.

BMW said orders for its X7 sports utility vehicle had exceeded expectations as the carmaker enters the high-end sports utility vehicle segment with its core brand.

BMW said it will contest the European Commission’s allegations that its participation in industry working groups amounted to anti-competitive behavior.