DMLRY Mercedes Benz Group AG (PK)

By William Boston 

BERLIN -- Shares of Daimler AG fell almost 5% on Monday after the maker of Mercedes-Benz luxury cars issued a profit warning late Sunday related to a government recall of vehicles suspected of manipulating diesel emissions.

Daimler said it would take a one-time charge against earnings in the second quarter totaling hundreds of millions of euros related to ongoing diesel investigations and other unspecified issues.

The move marks the company's third profit warning in a year and is the first obstacle that the company's newly minted chief executive, Ola Källenius, will have to resolve to combat a creeping erosion of investor confidence.

"Daimler needs to execute better," said Arndt Ellinghorst, an auto analyst with brokerage Evercore ISI. "At some stage when one-time items become the norm, credibility suffers."

The hit to quarterly earnings forced Daimler to lower its full-year earnings outlook on cars and vans because of an expected increase in expenses relating to what it defined as ongoing governmental proceedings and measures regarding Mercedes-Benz diesel vehicles.

The German Transport Ministry said Saturday that it ordered a recall of thousands of Daimler vehicles it suspected of using software to manipulate diesel emissions.

Daimler denied rigging its diesel engines and said Monday it plans to file an objection with the Federal Motor Transport Authority, or KBA.

Daimler said the recall affects about 42,000 Mercedes-Benz vehicles sold in Europe. The vehicles are three models of the GLK 220 CDI 4MATIC, a compact luxury SUV, with Euro 5 emissions that were produced from June 2012 through June 2015.

The KBA believes that a coolant thermostat that is activated during normal driving to protect engine parts in an illegal defeat device, according to a person familiar with the matter. The function exists in older diesel vehicles that don't use catalytic converters with selective catalytic reduction, which reduces nitrogen oxides to nitrogen and water, rendering the emissions harmless.

Daimler first notified the KBA about this function in May last year, this person said. KBA ordered Daimler in a letter received on Friday to recall vehicles to fix the software.

Daimler says the function is legal and denies it is a defeat device, or software that suppresses emissions controls, which must be registered with regulatory agencies.

"In Daimler's opinion, the functionality in question is admissible. Therefore, the company will file an objection against the order," a company spokesman said in an emailed response.

After receiving the KBA's notification on Friday, Daimler issued the profit warning on Sunday, saying it would take a "high three-digit million" euro hit in the second quarter, and that it now expects 2019 earnings before interest and taxes to be in line with the previous year. Daimler had been predicting "slight growth" in earnings.

The diesel-emissions crisis continues to reverberate nearly four years after Volkswagen AG was exposed by U.S. authorities for installing illegal software on diesel engines to make them appear less polluting on emissions tests.

Germany's Bild am Sonntag first reported the recall on Saturday.

Daimler was forced to recall around 690,000 vehicles last year on similar allegations, and as a result suffered delays in certifying vehicles under the European Union's new emissions testing regime, causing a bottleneck in production. Overall the company has recalled and fixed around three million vehicles related to emissions irregularities.

Analysts at Barclay Capital warned that there could be further ramifications for Daimler and urged the company's CEO, Mr. Källenius, to get to the bottom of the matter.

"Clearly both the near term operational challenges and possible question around Daimler's corporate culture are issues that must be addressed with urgency by Daimler's new CEO," they wrote in a note to clients on Monday.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

June 24, 2019 08:53 ET (12:53 GMT)

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