SKF AB, the world's largest bearings maker, said second-quarter profit climbed to a record, driven by demand from the mining and energy industries in Europe and Asia.

Net income rose 8.8 percent to 1.34 billion kronor ($224 million), or 2.94 kronor a share, SKF said in a statement. Analysts predicted profit of 1.25 billion kronor. Sales gained 7.4 percent to 16.07 billion kronor, beating estimates.

SKF, a bellwether for its client base that spans energy and consumer appliances, boosted production last quarter for the first time in a year. The Swedish company plans to expand a factory in its home town of Gothenburg making large bearings for miners and power turbines. Chief Executive Officer Tom Johnstone forecast demand will advance this quarter, with ``significantly higher'' sales in Asia and Latin America.

``Cash flow was strong and the main risk to the numbers -- that raw material costs would hit margins -- failed to materialize,'' Ben Maslen, a London-based Merrill Lynch analyst with a ``neutral'' rating on the stock, said in a note to clients. ``The outlook for the third quarter remains solid.''

SKF added 2.5 kronor, or 2.7 percent, to 94 kronor in Stockholm, making it the best performer in the OMX Stockholm 30 Index, which fell 1.4 percent.

Margin Squeeze

Other growth markets included agriculture, fluid power, industrial gearboxes and construction equipment. Today's earnings should help ease investor concerns that demand is slumping at the same time raw-material costs are rising, Kaupthing analyst Joakim Hoglund said in a note today.

SKF and other capital goods suppliers face margin pressure from both rising input prices and slowing demand in markets such as automotives and consumer appliances. Sandvik AB, the world's largest maker of metal-cutting tools, and Atlas Copco AB, the No. 1 maker of air compressors, also report quarterly earnings this week.

"SKF is a good trendsetter in terms of its earnings, especially for companies like Atlas Copco and Sandvik that are dependent on the European market, and it sounds as if things are going to be slightly better during this quarter,'' said Mats Liss, an analyst at Swedbank with a ``buy'' rating on SKF.

The automotive division accounted for one-third of business last year. SKF supplies bearings and seals to Fiat SpA and Renault SA, together with its Nissan and Samsung affiliates.

"We expect the North American automotive business to be weak also in the third quarter,'' Johnstone said in a telephone interview. ``In the European market it's clear that June new car sales figures were much lower than we've been seeing earlier, and we expect that to have an effect.''

Mexican Plant

Johnstone is accelerating the transfer of a plant in Glasgow, Kentucky, to Mexico in response to falling U.S. auto demand. There are no plans to move other production lines, he said.

The company gets less than 10 percent of sales from the U.S. car and truck market, where dealers are booking losses to keep stocks moving. There's an increased risk of a slowdown in Europe, JPMorgan analyst Nico Dil and colleagues said in a note yesterday.

Heavy trucks in Europe and motorcycles and mopeds in Asia lifted the division's sales. Overall automotive demand will be little changed in the third quarter, SKF said.

Another third of sales comes from industrial customers, including Siemens AG and Electrolux AB, who use bearings in washing machines and generator turbines. The industrial division now generates close to half the company's profits as its customers order large bearings and custom work where margins are wider.

The services unit, which monitors and maintains customer machinery, passed the auto division in sales last quarter.

SKF is targeting the growth markets of wind power and mining. The slowdown in European industrial production is still limited to the U.K. and Spain, Johnstone said in the interview.

Third Quarter

``Demand in the third quarter is expected to be higher in Europe, slightly lower in North America, and significantly higher in both Asia and Latin America,'' the company said.

Johnstone aims to get 6 to 8 percent sales growth in local currencies this year, and a 12 percent operating margin. The company's market share is about 19 percent and it competes with Germany's Schaeffler Group, and Canton, Ohio-based Timken Co.

SKF has increased prices as much as 10 percent this year to compensate for scrap steel costs that have almost doubled on economic growth in China and emerging markets, Johnstone said today, repeating earlier statements.

The margin for the quarter narrowed to 13.3 percent compared with 13.5 percent last year as scrap steel prices doubled in some markets. Margins in the industrial division widened to 13.7 percent from 13.3 percent in the quarter.

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