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April 27, 2018 11:30 AM, EDT

Daimler Upbeat on Profit Outlook as Luxury Cars Offset Spending

The Daimler AG Mercedes-Benz logo is seen on the grille of the Concept EQA electric vehicle during the 2018 North American International Auto Show in Detroit. (Andrew Harrer/Bloomberg News)

Daimler AG struck an upbeat tone, calling for “slightly” higher 2018 earnings, as sales growth of its higher-priced Mercedes-Benz luxury cars such as the S-Class coupe helps offset record spending to develop electric vehicles.

The forecast shows the strategy of pushing powerful and lucrative gas-guzzlers to finance the electric car revolution is paying off. The return-on-sales in the Mercedes unit rose slightly to 9%, even as spending on new technology jumped 9.5% during the first quarter. Two months ago, Daimler guided for flat profit this year, though a recent accounting adjustment lowered the year-ago comparable.

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“We are sustainably continuing along our profitable growth course,” CEO Dieter Zetsche of the Stuttgart, Germany-based company said in a statement April 27. “We aim to continue building on this and will systematically implement our strategy” to boost sales while adapting to industrywide technology shifts.

Mercedes, the world’s best-selling luxury-car brand, posted its best quarterly sales ever, with deliveries of the GLC crossover increasing 33% and the revised flagship S-Class posting a 29% gain. Zetsche predicted in February that investment costs and currency shifts would hold back profit by as much as 2 billion euros ($2.4 billion) this year.

Daimler is developing a line of 10 fully battery-powered models under the EQ sub-brand to go on sale within five years, as well as hybrid variants of Mercedes’s existing vehicle range. Spending on new technology and models during the first three months of the year rose to 2.3 billion euros. The company is also initiating a corporate overhaul, a task potentially complicated by Chinese automotive billionaire Li Shufu’s purchase of a 9.7% stake early this year to become Daimler’s largest shareholder.

Daimler rose as much as 1.4% to 65.96 euros, paring its loss for the year to 6.9%. The shares were up 0.9% to 65.60 euros at 3:50 p.m. in Frankfurt trading.

1Q Highlights

• 1Q EBIT (earnings before interest and taxes) fell 12% to EU3.34 billion; analysts estimated EU3.41 billion.

• Mercedes-Benz Cars, including Smart brand, 1Q margin 9% vs 8.9% year ago.

• Trucks unit 1Q margin 7.5% vs 8.3% year-ago, when it was lifted by a one-off real estate sale.

Offsetting some of the positive momentum is a consumer backlash among diesel buyers in Europe. The technology’s struggles since Volkswagen AG’s cheating on diesel emissions in 2015 have intensified as German buyers worry about potential driving bans in cities. The resulting drop in expected used-car prices prompted Daimler to take a charge of 100 million euros on the value of its lease book, Chief Financial Officer Bodo Uebber said on a conference call with reporters.