By William Boston 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 20, 2018).

BERLIN -- Daimler AG on Friday warned of "significantly lower" earnings for the full year and said profit had dropped 27% in the three months to Sept. 30, sending shares to a five-year low and dragging down other automotive stocks.

The profit warning, the second in four months, comes as the German car maker's Mercedes-Benz unit and its domestic rivals face a backlash against diesel-powered vehicles. In Germany, the government is pushing manufacturers to retrofit older diesel vehicles to improve emissions or to offer steep incentives to consumers who trade-in older diesel-powered cars.

In addition, Daimler said that in the wake of an unrelated ruling by the European Court of Justice, it could also have to retrofit some vehicles that use a refrigerant that has been banned by the European Union. Germany didn't require Mercedes to scrap the refrigerant, which the court ruled was in violation of European law.

Daimler said it installed the banned R134a refrigerant on 130,000 vehicles that were sold in 2013 and may now have to retrofit them.

As a result of these issues and separate deterioration of some businesses, such as Mercedes-Benz Vans, Daimler said earnings before interest and taxes had fallen sharply to EUR2.49 billion ($2.86 billion) in the third quarter, down from EUR3.41 billion in the prior-year period.

Daimler shares dropped 7% to EUR48.77 on the news, the lowest level since July 2013, before regaining some of the losses, closing down 2% at EUR51.39.

The decline was driven by a 35% drop in pretax earnings at Mercedes-Benz Cars, the company's biggest business. Mercedes' earnings before interest and taxes fell to EUR1.37 billion in the three months to the end of September from EUR2.1 billion the year before.

Mercedes-Benz Vans suffered delays in delivering vans to customers during the third quarter as a result of a backlog certifying cars for sale under new emissions testing rules that took effect in September. This caused profit to decline to EUR93 million from EUR214 million a year earlier.

Beginning in September all new cars for sale in Europe have to comply with the new World-wide Harmonized Light Vehicle Test Procedure, or WLTP, an update of standardized metrics used in testing car emissions for greenhouse gas and other toxic tailpipe emissions.

To comply with the new test, auto makers had to recertify every vehicle they currently had on sale, which led to additional costs and delays in getting new cars to dealers, resulting in lower sales.

In September, new-car sales in the European Union fell 23.5% to 1.09 million vehicles from a year earlier.

Given the spate of regulatory changes hitting the industry -- from new emissions rules to more European cities banning older diesel vehicles from urban traffic -- analysts said they weren't surprised by Daimler's profit warning.

They said the profit decline was caused by one-off charges of between EUR300 million and EUR350 million and not by an erosion of Daimler's business.

Philippe Houchois, an automotive analyst at Jefferies International, a brokerage, said it was "mildly reassuring" that the figures suggested that underlying profit at Mercedes-Benz Cars was broadly in line with consensus forecasts.

Daimler nevertheless lowered its outlook for Mercedes-Benz Cars and Mercedes-Benz Vans. As a result, it said it now expected 2018 earnings to be "significantly" instead of "slightly" below the prior-year level.

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

(END) Dow Jones Newswires

October 20, 2018 02:47 ET (06:47 GMT)