May 11 (Bloomberg) -- Volvo AB, the world's second-largest truckmaker, raised its 2007 European sales forecast after first- quarter eastern European deliveries surged. The shares gained the most in nearly 7 1/2 years.

First-quarter net income fell a less-than-expected 5.8 percent to 3.75 billion kronor ($550 million), or 1.85 kronor a share, from 3.98 billion kronor, or 1.96 kronor, a year earlier, the Gothenburg, Sweden-based company said today. Profit beat the 3.37 billion-kronor median estimate of seven analysts surveyed by Bloomberg.

Chief Executive Officer Leif Johansson increased his forecast for European heavy-truck market growth this year to 330,000 vehicles from 300,000 as first-quarter eastern European sales more than doubled. The increase helped offset a steep decline in North American sales that led to the profit decline.

``The truck boom in Europe is leading to a really sound pricing environment,'' said Michael Raab, an analyst with Sal Oppenheim in Frankfurt who has a ``reduce'' rating on the shares. ``The downturn in the U.S. seems to have been less detrimental to earnings than initially anticipated.''

The shares rose 13 kronor, or 10.7 percent, to 134.75 kronor, the biggest gain since Dec. 23, 1998. The stock has climbed 43 percent so far this year.

Volvo's North American truck sales in the first quarter declined 49 percent to 9,024 vehicles, while orders, an indicator of future sales, plummeted 80 percent to 5,273 vehicles. That contrasts with the booming eastern European and Russian markets.

European Sales

Volvo's first-quarter truck division revenue in Europe rose 11 percent to 25 billion kronor as eastern European sales more than doubled to 3,618 vehicles. Staffan Jufors, the truck division chief, said this could be ``another record year'' for his division. Truckmakers sold a record 294,997 vehicles in Europe last year.

``This is definitely a positive surprise,'' said Henrik Breum, an analyst with Danske Bank in Copenhagen who has a ``buy'' rating on the shares. ``They have been able to partially offset the expected drop in North American sales, which is a clear indication of their ability to raise the underlying margins in their truck business.''

Johansson, who last month announced plans to spend 935 million kronor to build a Russian plant, said in an interview he expects to sell the entire production capacity of 15,000 vehicles in Russia and the former Soviet states.

`Structural Change'

``I think we are actually seeing a structural change in the greater European market,'' he said in an interview, reiterating that demand will remain strong in eastern Europe in the years to comes.

Volvo's first-quarter revenue fell 3 percent to 61 billion kronor because of the U.S. decline. Operating profit, or earnings before interest and tax, fell 2 percent to 5.33 billion kronor. The operating margin, or operating profit as a percentage of sales, was unchanged at 8.7 percent.

The U.S. market for heavy trucks over 16 tons declined 22 percent in the first quarter as customers reduced purchases following the Jan. 1 introduction of stricter emissions standards, raising prices.

Volvo, which also makes Renault and Mack brand trucks, said today that ``the need for renewal is low'' in the U.S. The company said it laid off more than 1,000 workers in the U.S. due to the steep drop.

Increasing Production

In Europe, Volvo boosted capacity 5 percent in the first quarter and will further increase production in the second quarter to meet the rising demand, the truckmaker said.

``Our order book today is in the range of six to nine months,'' Jufors said. ``That is three to six months longer than in would be under normal circumstances.''

Bellevue, Washington-based Paccar Inc., the world's third- largest truckmaker, said last month first-quarter profit gained 7 percent to $365.6 million as a 25 percent gain in European sales, thanks to its DAF truck unit, more than offset the U.S. decline.

Munich-based MAN AG and Soedertaelje, Sweden-based Scania AB, neither of which sells trucks in the U.S., have reported first-quarter profit gains as eastern European and Russian sales boom.

Volvo, flush with cash from rising European sales, has been spending money on acquisitions. The truckmaker announced in February a friendly bid to buy Nissan Diesel Motor Co. Volvo said a month later that it would spend 7.4 billion kronor to raise its Nissan Diesel stake to 96 percent from 19 percent.

Nissan Diesel

Nissan Diesel today said that fiscal 2006 net income fell 31 percent to 20.1 billion yen ($174 million), the second straight annual decline, as sales dropped 3.4 percent.

``We have just started on the integration,'' Johansson said. ``It will be a couple of years out before it's complete.''

Nissan Diesel today also named Satoru Takeuchi, a senior managing director, as the company's new president beginning in June, replacing Iwao Nakamura, 64, who will become a company adviser. Takeuchi, 61, will also join the Volvo group's executive committee.

Volvo's construction equipment division earlier this year agreed to buy Ingersoll Rand Co.'s road building-equipment unit for $1.3 billion in cash to become the world's third-largest maker of construction equipment and compete with Caterpillar Inc. and Komatsu Ltd., the world's two-largest makers of heavy equipment.

Construction Equipment

The construction-equipment division, Volvo's second-largest unit after trucks, increased first-quarter revenue 13 percent to 11 billion kronor. The division's operating profit climbed 8 percent to 946 million kronor.

Tony Helsham, the construction-equipment unit's chief, said in an interview that the most difficult part of the integration process will be the changeover in the U.S. dealer network in places where the company now has more than one outlet.

``It will take 12 to 24 months to conclude the North American dealer integration,'' he said.

Volvo, which also makes buses, marine engines and parts for the aerospace industry, restated first-quarter figures because of a change in financial accounting procedures and a stock split earlier this year.

To contact the reporter on this story: Chad Thomas in Stockholm at cthomas16@bloomberg.net.

Last Updated: May 11, 2007 12:31 EDT