German automotive supplier Continental AG cut its 2008 profitability outlook and said it could omit a dividend for this year as it steeled itself for a tough market next year.

"Our customers have cut their production in the fourth quarter much more than had been expected. In total, 1.5 million fewer vehicles than planned will be built this quarter in the U.S. and Europe alone," the company said on Wednesday.

Continental, which is being acquired by ball bearings group Schaeffler, said it saw a full-year EBIT margin of 7.5 percent to 8.0 percent as attainable for 2008, compared with a previous outlook of about 8.5 percent.

In expectation of a "drastic" drop in car sales next year, especially in western Europe and North America, Continental said it could take a goodwill impairment of up to 1 billion euros ($1.29 billion) in its Automotive Group this year.

With the economy heading into year two of a recession, automakers expect U.S. sales to be even worse in 2009 than in 2008. In Continental's home market, automotive association VDA has said it expected new registrations of passenger cars in Germany to drop to about 2.9 million in 2009 from 3.1 million predicted for this year.

Shares of Continental were up 0.4 percent at 37.36 euros at 1609 GMT, having dipped as much as 1.7 percent. The German blue-chip DAX index was up 0.2 percent.

In light of the bleak industry outlook, Continental said it would focus on cutting debt and reining in spending to have a sufficient cash buffer if times get tougher.

Skipping the dividend payment for this year could bolster the company's cash reserves by about 338 million euros ($437.1 million), based on the 2.00 euro-per-share dividend paid for last year, Chief Financial Officer Alan Hippe said.

Hippe said Continental had well over 3 billion euros in liquidity and expected substantial free cash flow for 2008 on the back of strong business at the rubber division.

"We assume that free cash flow will remain in the three-digit millions range despite the very difficult market environment predicted for 2009," Hippe said.

Continental earlier this year started measures to cut costs to offset the impact of an industry downturn. Now the company has negotiated with customers to cut costs even more.

It said it had "stretched or restructured" planned expenditures and expected investment costs for 2009 to be about 500 million euros lower than planned. Research and development costs would be 200 million euros lower.

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