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CN raises outlook as profit surges 16 per cent Add to ...

Canadian National Railway Co. boosted its earnings guidance for the year after beating analyst forecasts with first-quarter profits that surged 16 per cent.

The Montreal-based railway earned $775-million, or $1.75 per share, for the period ended March 31, compared to $1.45 per share in the prior year.

The results and CN’s assumption of continued improvement in economic conditions prompted it to revise its 2012 earnings outlook to 10 per cent adjusted earnings growth.

“While CN benefited from a milder winter and improving economic conditions, our very solid first-quarter results underscore that our strategy is working,” said president and chief executive officer Claude Mongeau.

Excluding a $252-million after-tax gain from the sale of a Toronto rail line, CN earned $1.18 per share, up 31 per cent from 90 cents in the quarter last year.

Canadian National was expected to earn $1.03 per share in the first quarter, up from 90 cents a year earlier, according to analysts polled by Thomson Reuters.

Revenue increased 13 per cent to $2.35-billion, higher than the nearly $2.3-billion forecasted by analysts and $2.08-billion in the prior year.

Revenue ton-miles – a key metric for railway operators – rose 6 per cent while car loadings increased 5 per cent.

Mr. Mongeau said the railway’s team executed well on all key fronts handling solid volume growth at low incremental cost.

“CN’s commitment to operational and service excellence is the core driver of our strategy. It allows us to offer a more valuable transportation product that improves the supply chains we serve and helps our customers compete more effectively in their own markets.”

Operating income increased 23 per cent to $793-million, while the operating ratio was 66.2 per cent, a 2.8-point improvement over the year-earlier quarter.

Free cash flow was $48-million, after paying $450-million in voluntary pension plan contributions.

The company said Monday it now expects to deliver “a full 10 per cent growth” in adjusted diluted EPS this year over the $4.84 per share earned in 2011 despite $100-million in additional pension expenses.

That’s up from its prior guidance for EPS growth “of up to 10 per cent.”

The railway also expects to generate about $950-million in free cash flow, compared to $875-million in its prior forecast.

The higher revenue stemmed from higher freight volumes due in part to continuing improvements in North American and global economies, a milder winter and the company’s performance in several key segments.

Revenue increased for metals and minerals by 31 per cent, coal by 18 per cent and intermodal by 17 per cent. Petroleum and chemicals, automotive and forest products were also up by double digits.

Grain and fertilizer revenues declined 2 per cent.

Operating expenses for the first quarter increased by 8 per cent to $1.55-billion, mainly due to higher fuel costs as well as labour and fringe benefits expense.

However, Mr. Mongeau added that he believes CN will continue to shine against its peers.

“We continue to believe that CN will outperform the industry in terms of car load growth and that it will sustain earnings growth of 10 per cent plus per year in view of its strong management team and the growth prospects that lie ahead,” he said.

CN’s Canadian rival Canadian Pacific Railway Ltd. said Monday it is raising its quarterly dividend to 35 cents from 30 cents ahead of a key shareholder vote.

The railway’s largest shareholder, Pershing Square Capital Management, is seeking to replace the railway’s CEO.

The New York hedge fund has said replacing CP CEO Fred Green with former CN chief Hunter Harrison will help the railway get up to speed with its peers.

But CN foresees the arrival of Mr. Harrison at CP’s helm as increasing opportunities for itself, according to a report by Benoit Poirier of Desjardins Capital Markets.

The railway expects a Harrison-led CP might become more disciplined in terms of prices. But it also believes some CP customers, including potash group Canpotex, will move more of its business to CN.

CN’s first-quarter results come a month after the Quebec government announced that CN was teaming with Caisse de dépôt et placement du Québec on a $5-billion plan to build and operate an 800-kilometre railway line as part of the province’s northern plan.

The project announced in last month’s provincial budget could be operational in 2017. A detailed feasibility plan will be undertaken once agreements are reached with mining companies along the route.

The railway would fund two-thirds of the project, while Canada’s largest pension fund manager would provide the rest.

Up to 200 million tonnes of ore are expected to be shipped between iron ore mines in northern Quebec and the port of Sept-Iles, generating up to $1.3-billion of revenue for CN, according to Mr. Poirier’s report.

CN is a major North American railway with one of the most efficient operations in the industry. It runs the largest rail network in Canada and has the only transcontinental network in North America, servicing ports on the Atlantic, Pacific and Gulf of Mexico coasts.

The railway, a former federal Crown corporation privatized in the mid-1990s, employs more than 22,000 workers.

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