* Pretax 312 million SEK vs f'cast 181 million
* Sees adjusted demand relatively unchanged in Q3 from Q2
* Q3 sales volume fall seen slightly less than in H1
* CEO says sees Q3 as one the of the year's toughest quarters
* Shares up 2.8 percent, outperform Swedish blue-chips
(Adds CEO comments, updates share price)
By Niklas Pollard and Johannes Hellstrom
STOCKHOLM, July 15 (Reuters) - SKF AB, the world's largest bearings maker, posted a smaller-than-expected drop in second-quarter pretax profit on Wednesday, helped by cost cuts, and said it expects demand to stabilise.
The company, seen as a bellwether for the manufacturing sector with its bearings used in a wide range of products from dishwashers to passenger jets, said demand was showing signs of pulling out of the nose-dive triggered by the financial crisis.
"While the decline in demand was dramatic compared to last year, the sequential trend for the group shows signs of levelling off," the company said.
SKF shares rose 2.8 percent by 1018 GMT to outperform a 1.7 percent gain in Stockholm's blue-chip index.
Chief Executive Tom Johnstone told a conference call SKF, which saw sales volumes drop 30.8 percent in the second quarter, was still operating in a difficult environment and he expected a tough third quarter.
"Even if volumes in sales will not be down as much as the first half year-on-year, it will be a very tough quarter, probably one of our toughest this year, due to the added effect of both our and our customers' holiday period," he said.
Johnstone said the summer holidays would limit cost savings in terms of short-time working, which saved the company about 250 million crowns in the second quarter.
He added he expected both cashflow and price mix to remain positive in the third quarter, but not to the extent of the April to June period.
The Swedish manufacturer reported a pretax profit of 312 million crowns ($39.7 million) in the quarter versus an average forecast of 181 million in a Reuters poll of 17 analysts.
STRONG RESULT
The worldwide economic downturn triggered by the financial crisis has pummelled Swedish engineering companies, sending manufacturers such as SKF scrambling to slash costs and jobs.
"They delivered a strong result in the quarter compared to expectations," said Johan Trocme, analyst at Nordea. "What is likely to be well received, also broadly for the whole sector, is the comments of ... tendencies of a levelling out in demand.
"In the midst of all this darkness for engineering companies this is probably a relief," Trocme added.
SKF, which has already cut thousands of jobs, forecast the decline in its sales volumes would be slightly less in the third quarter than in the first six months but said it would keep producing less than it sold to run down inventories.
While manufacturers continue to languish amid weak demand, signs that the recession may be bottoming out have emerged with European consumer and business sentiment coming off lows hit around the turn of the year.
The improved mood has only lately translated into anything like a recovery for the region's industrial sector, which this week saw output rising in the euro zone in May for the first time since August 2008.
"I see the (SKF) outlook as positive," analyst Magnus Axen at brokerage Evli said. "I think he is verifying the market's view of a weaker Europe, unchanged U.S. and better emerging markets."
Sales at SKF fell to 14.2 billion crowns in the quarter from 16.1 billion in the corresponding period of last year, undershooting the 14.8 billion analysts had forecast.
But SKF said it was already benefiting from cost cuts which would yield annual savings of about 800 million crowns from the middle of next year. (Additional reporting by Victoria Klesty; Editing by David Holmes) ($1=7.855 Swedish Crown)