World number-two truck maker Volvo AB produced an unexpected fall in second-quarter profit on weakness in its key U.S. market and forecast more slippage there, sending its shares down 7 percent.

Volvo said pretax profit fell to 5.97 billion crowns ($898 million) from 6.46 billion a year ago. That compared with a mean forecast of 6.62 billion in a Reuters poll of 14 analysts.

I think the market was underestimating the integration costs and the production difficulties they have had, as well as the weak demand in the U.S. market, Danske Equities analyst Henrik Breum said.

Volvo is the second manufacturer in as many days to report a weak U.S. market for heavy trucks. U.S. number-two Paccar Inc.on Tuesday saw its share fall more than 4 percent after cutting its forecast for North America.

Shares in Volvo were down 7.2 percent to 132.50 crowns by 1020 GMT, underperforming a 1.5 percent loss in the DJ Stoxx automotive index.

Besides contending with miserable U.S. demand, Volvo earnings were stung by unfavourable exchange rates to the tune of 700 million crowns while lingering problems rejigging production to new truck models in North America shaved off another 300 million, CEO Leif Johansson told a news conference.

Truck maker Nissan Diesel, purchased by Volvo earlier this year, also underperformed.

Nissan Diesel came in with a quarter that was basically weaker than we had expected. This was mainly driven by the market in Japan, Johansson said.

Earnings were hit by 275 million crowns of charges related to the acquisition of Nissan Diesel and Ingersoll-Rand's division for road construction equipment. These charges were likely to run at around 200 million per quarter, Volvo said.

Revenues at Volvo, which sells trucks, buses, construction equipment and a range of engines, rose to 71.45 billion crowns from 65.47 billion a year earlier, roughly in line with the 71.52 billion seen by analysts.

Demand is extremely strong in Europe and Asia and weaker in North America. That is no surprise, but it does put pressure on the organization, another analyst said.

Many firms have been able to handle a very high capacity utilization and not just shown figures of orders rising 30-40 percent, but also managed to lift sales 20-25 percent, he said.

Volvo's European truck sales rose 11 percent in the quarter.


While demand has remained strong in Europe, the market for heavy-duty trucks has contracted sharply in the United States after a buying spree came to a jarring halt at the turn of the year. Customers had been buying ahead of new clean-air rules for truck engines that came into effect then.

Volvo said truck order bookings, bolstered by the consolidation of Nissan Diesel as of the second quarter, rose 74 percent year-on-year as orders in Europe, its biggest market, rose 68 percent to offset a 20 percent decline in North America.

The Sweden-based firm, which sells heavy-duty trucks under the Renault and Mack brands as well as its own name, said it saw the North American truck market contracting about 40 percent to between 200,000 and 220,000 units this year.

Paccar, the maker of Kenworth and Peterbilt trucks, trimmed its forecast range of the market in the United States and Canada by 10,000 units to between 180,000 and 210,000 vehicles in 2007.

Volvo, the world's second biggest truck maker after Germany's DaimlerChrysler, stood by its forecast of a healthy European truck market of 330,000 units this year.

Johansson said order bookings in North America were stabilizing and improving going into the third quarter while in Europe, the overall market could well come in higher than Volvo's forecast in light of the strong demand.