Jan. 29 (Bloomberg) -- SKF AB, the world’s largest maker of bearings, reported a 25 percent drop in profit and said it will “significantly” lower production to counter falling demand and bloated inventories.

A decline in sales volumes will accelerate in the first three months of the year from the prior quarter, the Gothenburg, Sweden-based company said in a statement. Revenue advanced 8.2 percent to 16.3 billion kronor ($2.03 billion), helped by exchange rates, the company said.

SKF, which already said it intends to dismiss 2,500 employees, plans to stem rising inventories by reducing output to outpace slumping demand. The former parent of Volvo AB traditionally makes about third of its sales from its automotive division. The company is increasing output reductions this quarter and may accelerate a shift of production to emerging markets, Chief Executive Officer Tom Johnstone said.

“We’ll see the full effect of braking on industrial production as well as automotive in the first quarter,” Johnstone said in a telephone interview. The company expects first-quarter production to decline more than 13 percent from the prior quarter, he said.

SKF declined 6.1 percent in Stockholm trading to 69.75 kronor. The benchmark OMX Stockholm 30 Index lost 3.6 percent.

Profit Falls

Net income fell to 797 million kronor, or 1.75 kronor a share, from 1.06 billion kronor, or 2.33 kronor, a year earlier, the company said. Analysts surveyed by Bloomberg predicted a profit of 585 million kronor on sales of 15.5 billion kronor. The profit total includes write-downs and other one-time costs of about 340 million kronor, the company said.

“The general industrial area -- machine tools, textiles, small industrial gearboxes -- eased off significantly in the fourth quarter,” Johnstone said on a call with analysts. The company expects demand to fall this quarter in all areas except aerospace, railways and energy, he said.

SKF’s bearings and seals are ordered by manufacturers on a continuous basis for use in products from skateboards to cranes, which means the company’s sales closely track the output of those products. Johnstone, a 53-year-old Scotsman, forecast European car production falling by more than 30 percent in the first three months of the year, and cited predictions of a 42 percent drop in North American carmaking.

Growth Markets

The company may speed up the transfer of plants towards growth markets to reduce its vulnerability to currency swings and help sales, Johnstone said. “We’ve been bringing production from Germany out to India, Brazil, Ukraine. We’re looking at whether rather than do a three- or four-year program, maybe we can do it a little bit quicker in this period of lower demand.”

SKF targets inventories equal to 18 percent of sales, Johnstone said on the conference call. The level increased to 24 percent of annual sales in 2008, compared with 19.8 percent a year earlier, the company said in the statement.

Favorable exchange rates boosted fourth-quarter operating profit by about 230 million kronor, SKF said. The company said it lowered deliveries by 13 percent in the fourth quarter, less than the 15 percent forecast it made last year. Manufacturing volumes were somewhat lower than shipped volumes, the company said.

“The start of the year’s been difficult to judge, and we’re looking to see what additional steps we will take in which businesses,” Johnstone said in the interview. “And we will complete that during the first quarter.”

Full-year net income fell 0.5 percent to 4.74 billion kronor. Sales for 2008 increased 8.2 percent to 63.4 billion kronor.

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

Last Updated: January 29, 2009 11:38 EST