World number two truck maker Volvo posted a smaller-than-expected rise in fourth-quarter earnings on Friday, hit by problems as output was ramped up to meet a strong rise in demand.

The highly cyclical demand for heavy-duty trucks has picked up rapidly, leading Volvo to raise its forecast for demand on both sides of the Atlantic, but also leaving truck makers with the task of smoothly raising output from rock-bottom levels.

Gothenburg-based Volvo, which also manufactures buses, construction equipment and engines, said temporary production problems at sub-contractors and in its own operations had cropped up as output was raised to cater to stronger markets.

We expect productivity to gradually improve when we and our suppliers have stabilized production at the higher level, the company said.

Sweden's Volvo posted operating earnings of 5.52 billion Swedish crowns ($856 million) compared to a year-ago loss of 2.32 billion crowns to come in below a mean forecast for a profit of 5.99 billion seen in a Reuters poll of analysts.

Volvo said fourth-quarter earnings were also hit to the tune of about 600 million crowns by higher costs for raw materials and components compared to a year ago, while currency shaved off another 700 million compared to the preceding quarter.

Just as we saw with the Swedish engineering companies, we had a weaker development of margins than the consensus was looking for, Nordea analyst Johan Trocme said.

They will get a lot of questions today about why the Trucks unit did not show a better margin, and on what impact we may see this year from raw materials and currencies.

RAISED FORECAST

Volvo, the second-biggest truck maker after Germany's Daimler , said order bookings of its trucks surged 63 percent year-on-year in the fourth quarter and said it expected a further market recovery this year.

Volvo, which makes heavy-duty trucks under the Renault, Mack, UD Trucks and Eicher brands, raised its forecast for 2011 truck markets in Europe and North America to about 220,000 units from 200,000, implying double-digit growth in both markets.

However, the market forecasts, especially for North America where demand has shot up in recent months, are conservative compared to those of many analysts.

While demand looks set to be buoyant, prospects for further improvement of margins is less obvious as truck makers turn on the taps for new investment, which were closed as the global financial crisis triggered the worst fall in demand in decades.

Rival Scania's fourth-quarter earnings earlier this week tempered expectations of steady climb in margins which along with a forecast of unchanged demand going into this year sent European truck maker stocks sharply lower.

Prices on raw materials such as metals and plastics have also climbed on the back of the economic recovery while shortages of some components have also begun to crop up as capacity at suppliers.

Volvo, like rival Scania, has also to contend with the sting of stronger Swedish currency which earlier this week hit a decade-high against the euro and is seen strengthening further.

(Editing by Mike Nesbit)

($1=6.445 Swedish Crown)

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