World number two truck maker Volvo AB rolled out proof of surging market demand on Wednesday and reassured investors worried about cost pressures with forecast-beating profit margins.

The highly cyclical heavy-duty truck market has picked up strongly in recent quarters, with growth spreading out of emerging markets in Asia and Latin America to more mature markets on both sides of the North Atlantic.

Volvo, the second-biggest truck maker after Germany's Daimler AG , said orders for its trucks rose 40 percent and raised its 2011 market outlook for both Europe and North America to between 230,000 and 240,000 units from 220,000.

Demand for trucks continued to improve across the board, said Chief Executive Leif Johansson, who is set to step down later this year after more than a decade at the helm.

Higher volumes and gradually improved productivity in the industrial system contributed to the improved profitability.

Coming out of the worst market decline in decades, truck makers face the task of catering to rapidly improving demand that has strained component suppliers, while rising prices for many raw materials have added to cost pressures.

Volvo and its domestic rival Scania AB , due to report later on Wednesday, also have to contend with a strong Swedish crown, leaving investors closely eyeing profitability at the groups.


Gothenburg-based Volvo, which makes heavy-duty trucks under the Renault, Mack, UD Trucks and Eicher brands, said its operating margin rose to 9.1 percent from a year-ago 4.8 percent, well above the 7.7 percent seen by analysts.

All in all, a solid report by Volvo where profitability in trucks was the main positive surprise in earnings, analysts at brokerage ABG Sundal Collier wrote in a research note. They repeated a buy rating and said they planned to lift estimates by about 5 percent.

Volvo's operating earnings rose to 6.5 billion crowns ($1.1 billion) from 2.8 billion a year ago, beating a mean forecast of 5.5 billion seen in a Reuters poll of analysts.

Adding to worries over parts shortages, the earthquake in Japan in March caused serious disruption to the automotive supply chain and also temporarily halted production at Volvo's Japanese UD Trucks business.

The truck maker said a number of its suppliers in Japan were facing difficulties and it expected considerable disturbances in production at UD Trucks during the second quarter, but repeated it saw limited impact elsewhere.

Volvo is the first of Europe's top truck makers to unveil first-quarter earnings. Germany's Daimler and MAN SE are both due to present results on Friday.

(Editing by David Holmes)

($1=6.102 Swedish Crown)