OREANDA-NEWS. CN (TSX: CNR) (NYSE: CNI) today reported its financial and operating results for the second quarter and six-month period ended June 30, 2014.

Second-quarter 2014 financial highlights

Net income was CAD 847 million, or CAD 1.03 per diluted share, compared with net income of CAD 717 million, or CAD 0.84 per diluted share, for the year-earlier quarter. The Q2-2013 results included a net gain of CAD 13 million (CAD 0.01 per diluted share) resulting from a gain on a non-monetary transaction with another railway that was partly offset by the effect of the enactment of higher provincial corporate income tax rates.

Excluding the Q2-2013 net gain, Q2-2014 diluted EPS of CAD 1.03 increased 24 per cent over last year's adjusted diluted EPS of CAD 0.83. (1)

Operating income for the second-quarter of 2014 increased 21 per cent to CAD 1,258 million.

Second-quarter 2014 revenues increased 17 per cent to CAD 3,116 million, revenue ton-miles grew by 14 per cent, and carloadings increased 11 per cent.

CN's operating ratio for Q2-2014 improved by 1.3 points to 59.6 per cent from 60.9 per cent for the year-earlier quarter.

Free cash flow for the first half of 2014 was CAD 1,270 million, compared with CAD 788 million for the year-earlier first half. (1)

Claude Mongeau, president and chief executive officer, said: “CN recovered swiftly from the first-quarter winter weather challenges - just as our customers would expect us to do - thanks to solid execution by our dedicated team of railroaders. CN delivered record volumes in the quarter by bringing its key supply chains back into sync and taking advantage of continued strength in several of our core markets. This solid operational recovery underscores our ability to accommodate growth at low incremental cost and to drive very strong financial results.”

CN's Western Canada grain hopper car movements were particularly strong during the second quarter, up nearly 70 per cent from the year-earlier period. The Company expects such hopper car movements for the crop-year ending July 31, 2014, to be a new record and close to 25 per cent higher than average crop-year movements.

Mongeau said: “We are pleased that the Canadian grain supply chain CN serves is now back in sync. Our wait-list of customer grain car orders represents only about one week of shipments from the Prairies, and grain vessel line-ups at all ports are back to normal.”

Revised 2014 financial outlook (1) (2)

CN's strong second-quarter results and continued growth opportunities in intermodal, bulk and merchandise markets have prompted a positive revision to the Company's 2014 financial outlook. Under its revised 2014 outlook, CN now expects to:

Deliver solid double-digit EPS growth in 2014 over adjusted diluted 2013 EPS of CAD 3.06, compared with its earlier forecast of aiming for double-digit 2014 EPS growth, and

Generate free cash flow in the range of CAD 1.8 billion to CAD 2 billion, compared with the earlier free cash flow projection of CAD 1.6 billion to CAD 1.7 billion for 2014. (1)

Mongeau said: “The continuing success of our agenda of Operational and Service Excellence positions CN well to achieve this improved financial outlook for the year.”

Foreign currency impact on results

Although CN reports its earnings in Canadian dollars, a large portion of its revenues and expenses is denominated in U.S. dollars. As such, the Company's results are affected by exchange-rate fluctuations. On a constant currency basis that excludes the impact of fluctuations in foreign currency exchange rates, CN's second-quarter 2014 net income would have been lower by CAD 28 million, or CAD 0.03 per diluted share. (1)

Second-quarter 2014 revenues, traffic volumes and expenses

Revenues for the second quarter of 2014 increased by 17 per cent to CAD 3,116 million. Revenues increased for grain and fertilizers (35 per cent), metals and minerals (20 per cent), intermodal (17 per cent), petroleum and chemicals (17 per cent) automotive (15 per cent), forest products (nine per cent), and coal (five per cent).

The increase in revenues was mainly attributable to higher freight volumes due to a record Canadian grain crop, strong energy markets and market share gains, particularly in intermodal; the positive translation impact of the weaker Canadian dollar on U.S.-dollar-denominated revenues; and freight rate increases.

Revenues in the second quarter of 2014 also benefited from increased volumes as the Company recovered from winter weather-related challenges that delayed shipments in the first quarter of 2014.

Carloadings for the second quarter rose 11 per cent to 1,463 thousand.

Revenue ton-miles, measuring the relative weight and distance of rail freight transported by CN, increased by 14 per cent over the year-earlier quarter. Rail freight revenue per revenue ton-mile, a measurement of yield defined as revenue earned on the movement of a ton of freight over one mile, increased by four per cent over the year-earlier period, driven by the positive translation impact of the weaker Canadian dollar and freight rate increases, partly offset by an increase in the average length of haul.

Operating expenses for the quarter increased by 14 per cent to CAD 1,858 million. That was mainly attributable to the negative translation impact of a weaker Canadian dollar on U.S.-dollar-denominated expenses, higher fuel costs, increased labor and fringe benefits expense and increased purchased services and material expense.