By Niklas Pollard and Johannes Hellstrom
STOCKHOLM (Reuters) - Sweden's Volvo (ST:VOLVb) said on Wednesday that a stretched supply chain and extra costs to meet strong demand for its trucks dented margins in the second quarter, even as it reported a rise in profits and order intake.
Shares in Volvo, which competes with Germany's Daimler (DE:DAIGn) and Volkswagen (DE:VOWG_p), have risen nearly 40 percent this year on robust demand and better margins following a 10-billion-crown cost-cutting drive.
Adjusted operating profit rose to 8.54 billion Swedish crowns ($1.03 billion) from 6.13 billion, just pipping the 8.48 billion forecast of analysts polled by Reuters.
But the operating margin in its trucks headline business, which accounts for nearly two thirds of group sales, narrowed to 9.6 percent from 10 percent, weighing on Volvo shares, which were down 5.7 percent by 1030 GMT.
Order intake of trucks under brands such as Volvo, Mack and Renault (PA:RENA) shot up 22 percent in the second quarter, beating the 12 percent increase forecast by analysts.
Chief Executive Martin Lundstedt said the extra costs for overtime and express transport had mostly hit its European truck manufacturing and that supplies of components for powertrains - the engine and axle - had been very stretched.
He declined to give any figures for the extra costs.
"It will cause a number of challenges also during the third quarter, but I think we should see it as something coming with a good situation in demand and primarily then in the European production system," he said on a conference call.
In Europe, a strengthening economy has spurred investment by fleet operators which had restrained spending during the eurozone crisis, while in North America demand is picking up as inventories fall and average fleet ages rise.
"If you want to point to weaknesses, results in Trucks are softer than expected, above all in terms of the margins," Handelsbanken Capital Markets analyst Hampus Engellau said. "The real positive is that order intake is so strong."
Sweden's biggest company by revenue raised its 2017 sales outlook for the North American heavy truck market to 225,000 trucks from 215,000 and kept its guidance for robust industry-wide sales of 300,000 trucks in Europe.
Volvo is the first of Europe's major truck makers to release second-quarter results. Daimler and Volkswagen, as well as Iveco trucks maker CNH Industrial (MI:CNHI) and U.S. company Paccar Inc (O:PCAR), whose brands include Peterbilt and Kenworth, all report next week.
Volvo is on track to record its highest annual level of profitability since the 1999 sale of its car business, now owned by China's Zhejiang Geely Holding Group [GEELY.UL].
Gothenburg-based Volvo reported an adjusted operating margin of 9.7 percent in the second quarter, up from 7.8 percent a year ago, in line with analysts' expectations and helped by a jump in profitability at the group's construction equipment arm.
A recovery in demand in China has helped bolster order intake and profits at Volvo Construction Equipment after several weak years and the company raised its market outlook in the world's second-biggest economy for a second straight quarter.