World number two truck maker Volvo posted a deeper than expected second-quarter loss on Tuesday and stood by its forecast that the economic downturn would see its main markets shrivel this year.

But the drain of cash from the group slowed considerably in the quarter compared with the previous three months while the Swedish vehicles maker said it had managed to cut inventories further as it adjusted to the plunging demand.

Sales and EBIT were clearly worse than expected. On the other hand cash flow was in line with what I had expected and I think that market expectations were for a much more negative cash flow, Handelsbanken analyst Hampus Engellau said.

Volvo skidded to an operating loss of 6.9 billion crowns ($886 million), down from a 7.2 billion profit a year ago, to come in below the 4.7 billion loss seen in a Reuters poll of analysts.

I think these are poor results, Erik Penser analyst Kenneth Toll Johansson said, adding that rising debt levels at the group were weakening its balance sheet. Speculation and questions about a new share issue will follow.

Deep recessions across Volvo's main markets have dampened demand, leaving truck makers racing to cut production capacity, while the global financial crisis has left potential truck buyers starved of money to fund purchases.

Volvo, which manufactures heavy-duty trucks under the Renault, Mack, Nissan Diesel and Eicher brands, as well as its own name, said order bookings in the quarter tumbled 51 percent, with a fall of 59 percent in its key European market.

In terms of market outlook, we maintain our assessment that the total European market for heavy trucks will be at least halved in 2009 compared with 2008 and that the North American market will decline by 30-40 percent, the company said.

We see that the decline in demand has started to level off and that the markets have stabilised, even though it is still difficult to predict the rest of the year.


Volvo Chief Executive Leif Johansson said in a statement that the group had another difficult quarter ahead in terms of earnings due to lower productions rates and extended plant closures for vacations in order to cut inventories further.

Until we have our inventories and costs in balance with market demand, we will continue to have low absorption of our costs, which negatively affects profitability, he said.

Volvo, which has slashed thousands of jobs to bring down costs in the face of the downturn, said its cash flow was negative to the tune of 2.9 billion crowns in the quarter compared with a negative 15.7 billion in the first quarter.

But Volvo's net financial debt in its industrial business had risen by 5.8 billion crowns in the three months to the end of June, totaling 51.1 billion crowns.

Volvo is the first of Europe's top truck makers to unveil second quarter results, with domestic rival Scania due later this week while Germany's Daimler and MAN are later this month.

Scania, with a smaller fixed cost base than its larger Swedish competitor, is expected to have eked out an operating profit of 536 million crowns in the quarter.

($1=7.790 Swedish crowns)

(Additional reporting by Johannes Hellstrom; Editing by Dan Lalor and Mike Nesbit)