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Canadian National Railway: Late Crop Harvest And Low Consumer Confidence To Delay Peak Shipping Season

THE CANADIAN PRESS -- TORONTO - Canadian National Railway Co. expects its fall shipping peak to be delayed this year due to a late crop harvest and lower consumer confidence, which has its shipping services clients seeking to avoid big inventories.

Canada's largest freight hauler (TSX:CNR) said Monday results from its crops division may be flat during the third quarter as what is typically its busiest shipping period partially shifts to the fourth quarter.

Chief marketing officer J.J. Ruest warned Canadian crops are expected to be delayed. Reports indicate the United States will produce 10 per cent more corn than average, but slightly fewer soy beans, the company said.

Shipping clients are concerned about consumer spending, Ruest told a conference call with analysts.

"The fall peak will be later this year, as reflected by the weaker consumer confidence index and the recent trend in inventory to sales ratio. Nobody wants to gamble on big inventories this fall it seems," he said after the company reported higher second-quarter profits.

Ruest said the company foresees positive results from its fertilizer, lumber and sulphur segments. But coal, which generally benefits from strong export markets, was a laggard in the second quarter. Although demand for coal is strong, miners have been hit by rain and floods.

CN said it expects to experience strong offshore demand for wood pulp.

"We continue to see strength in offshore demand for lumber and pulp as well as significant expansion of woodpellet production coming online in British Columbia," Ruest said.

Ruest also noted CN is seeing positive data around auto shipping. But high inventory levels have cast uncertainty over shipments of pickup trucks.

CN said it will soon take possession of 1,400 domestic containers for its merchandise business unit, helping it gain a better export-import balance.

Earlier Monday, CN reported higher net profits on higher revenues and improved traffic to and from West Coast ports.

Canada's said it earned $538 million or $1.18 a diluted share in the three months ended June 30. That was up from $534 million or $1.13 a year earlier.

Revenues at Montreal-based CN rose eight per cent to $2.26 billion from just under $2.1 billion.

Meanwhile, carloads increased four per cent and revenue ton-miles -- a measure of railway profitability -- rose five per cent.

The company said its stronger second-quarter performance was due to higher freight volumes, and stronger operational execution.

The latest results included a net deferred income tax expense of $40 million resulting from the enactment of state corporate income tax rate changes and other legislated state tax revisions in the United States, where CN has major operations.

Excluding the tax expense, adjusted diluted earnings per share for the quarter rose to $1.26 from $1.13 -- slightly above analyst expectations of $1.25 per share, according to a poll by Thomson Reuters.

In its earnings release, CN noted its operating ratio, a measure of operating efficiency, was 61.3 per cent -- in line with the operating ratio of 61.2 per cent for the second-quarter of 2010.

All of CN's commodity groups posted revenue gains during the quarter. Intermodal -- CN's largest revenue segment -- was a bright spot, benefiting from higher import volumes at the ports of Vancouver and Prince Rupert, B.C., and increased domestic retail shipments.

Total intermodal volumes rose 10 per cent and intermodal revenues increased 14 per cent.

Although flooding throughout North America caused substantial railroad disruptions during the second quarter, CN beat its peers with higher average train speeds and reduced time in terminals.

CN had the highest volume growth in the industry during the quarter. Overall carloads were up 4.4 per cent from a year ago, while total volumes increased 5.4 per cent.

The improvement was driven by stronger volumes in metals, intermodal and agricultural products, up 10.8 per cent, 9.1 per cent and 7.8 per cent respectively.

Agricultural products volumes posted the biggest recovery from a year ago, driven by U.S. railroads. Canadian industry volumes were almost flat, increasing by 1.6 per cent.

Coal volumes decreased by 3.7 per cent overall, with CN volumes falling by 14.7 per cent, partly caused by production and supply chain issues.

In April, CN boosted its earnings guidance for 2011 after the railway had a solid start to the year amid an expected improvement in the North American economy.

The railway plans to devote $1 billion to improving track infrastructure in 2011 while focusing about $700 million on business expansion and new equipment.

CN 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 which was privatized in the mid-1990s, employs more than 22,000 workers.

CN reported its results after markets closed. On Monday the railway's shares closed at $75.24, up 32 cents.

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