CN anticipates 'banner year' after Q1 profit surges 16 per cent to $775 million

MONTREAL – Canadian National Railway boosted its earnings guidance in anticipation of “a banner year” in 2012 after beating analyst forecasts with first-quarter profits that surged 16 per cent.

“The first quarter was solid. The second quarter is starting off on a very solid footing,” president and CEO Claude Mongeau said Monday during a conference call.

The Montreal-based railway reported after markets closed that it 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.

“Our results are lining up to help us deliver a very strong year. If the economy stays with us, 2012 should be a banner year,” he told analysts.

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 (TSX:CNR) 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.

Helped by a mild winter and an extra day of operations in the quarter, revenues increased 13 per cent to a first-quarter record of $2.35 billion. That’s 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 six per cent while carloadings increased five per cent.

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

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 and beating the old first quarter record from 2006.

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.

With such a strong first quarter, Mongeau tried to temper analyst expectations that results would far surpass its 2012 guidance.

“We are not worried about anything. We see the economy continuing to unfold positively,” he insisted.

“We’re here to continue to deliver solid results. If we’re all too conservative and do better that’s a good story.”

The better first-quarter revenues 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.

Revenues 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 two per cent.

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

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

CN’s Canadian rival Canadian Pacific Railway Ltd. (TSX:CP) said Monday its it 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 chief executive Fred Green with former CN CEO Hunter Harrison will help the railway get up to speed with its peers.

But CN foresees the arrival of 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 their business to CN.

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

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.

On the Toronto Stock Exchange, its shares closed down 74 cents at $79.39 in Monday trading.