(adds CEO, analyst comments, background, share price)
By Jan Strupczewski
STOCKHOLM, Oct 24 (Reuters) - Sweden's AB Volvo , the world's second biggest trucks maker, reported higher than expected third quarter pre-tax profit on Thursday, but said orders in the United States fell, depressing its share price.
Further pressure came from investor concern about Volvo's exposure to asbestos lawsuits after Chief Executive Leif Johansson said it had several hundred cases filed against it. Volvo, like other manufacturers, had used asbestos in isolation materials in older truck models.
Johansson said the number of such claims had risen slightly, but that the average compensation level was low at several hundred thousand Swedish crowns.
"Our experience tells us that we have made ample reserves for this type of claim," Johansson told a news conference, but would not disclose how big the provisions were.
Worries about growing costs of asbestos lawsuits in the United States helped send shares of Swedish-Swiss engineering group ABB into a 60 percent free-fall on Monday, increasing investor sensitivity to the issue.
Volvo, which sells trucks in North America under its own and the Mack brand names, said the order backlog dropped 12 and 39 percent for the companies respectively in the third quarter as a result of a new, stricter environmental law in the U.S.
But the same law strongly raised Volvo's truck sales in the quarter as buyers rushed to make purchases before the new law came into effect in October. This boosted Volvo's pre-tax profit above relatively conservative market forecasts, analysts said.
After initial gains of 2.9 percent on a rising Stockholm market on news of the higher profit, Volvo shares fell to trade 2.1 percent lower at 137 crowns by 1310 GMT. Since the start of the year Volvo has underperformed the DJ Stoxx auto index by about 5.6 percent.
"Investors are focusing on to what extent the strong truck performance in the third quarter has been at the expense of the first two quarters of next year," said John Lawson, analyst at Schroder Salomon Smith Barney. "And if you mention the asbestos word..."
Like other truck manufacturers, Volvo's sales are under pressure from the slow world economy and weak equity markets, which are curtailing business invesments.
The world's biggest truck maker DaimlerChrysler on Wednesday reported a better than expected profit, but disappointed investors by only a modest rise in its outlook.
TRUCK UNIT PERFORMS
Volvo had a pre-tax profit of 584 million crowns ($62.21 million) in the July-September period, rebounding from a 1.9 billion loss in 2001, and beating consensus of 508 million crowns.
"Most important is the increased contribution from the truck operations where we now see clear effects of synergies," Johansson said.
At the start of 2001 Volvo bought the truck division of France's Renault and U.S. truck maker Mack and grouped all three brands in one unit, Global Trucks.
Early this year it reorganised the truck business again to allow each of its three brands to operate independently while keeping joint product planning, purchasing and development.
Volvo's sales in the quarter inched up to 41.5 billion crowns from 41.1 billion a year earlier, below consensus of 44 billion. Truck sales rose two percent in Western Europe, a market that accounts for half of the company's sales, and six percent in North America, which generates 30 percent of sales.
Johansson said demand for its new truck models in Western Europe was strong. "Both brands gained market share and showed improved profitability," he said.
Volvo said it expected the whole market for heavy trucks in Western Europe to fall 10 percent this year to 215,000 units but increased deliveries in the second half of the year would likely boost its market share, which was 27.3 percent in August.
In North America the number of trucks sold this year was likely to edge marginally higher to 172,000 units, but Volvo said the new U.S. environmental law created uncertainty about near-term demand. Volvo's market share in North America through August fell to 21.6 percent from 24.5 percent a year earlier.
Sales of the bus division plunged 28 percent in the third quarter as demand for buses in the main European market, Germany, dropped by one third and uncertainty in the tourism industry in the United States and Canada slashed demand there.
Sales of Volvo's marine and industrial engine unit eased in the third quarter because of a weak world economy and sales of Volvo Aero, the division which makes airplane engines, also fell as passenger traffic in the United States and Europe continued to decline.
Volvo's construction equipment unit also reported weaker sales in the quarter.
(Additional reporting by Peter Andersson in Stockholm)