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(The following article by Francois Shalom was posted on the Montreal Gazette website on July 21.)

MONTREAL — E. Hunter Harrison called Canadian National Railway’s second quarter “a knockout quarter” yesterday, setting records or near-records in revenues, operating ratio and free cash flow.

“It set records in almost any of the metrics you’d care to measure,” said the president and CEO of the Montreal-based railway in a teleconference call with analysts.

“It exceeded even my expectations.”

The freight carrier had record profits of $326 million for the three months ended June 30, or diluted earnings of $1.13 per share, up, respectively, 34 per cent and 35 per cent over last year. Revenues grew to $1.67 billion from $1.46 billion.

The $587 million in free cash flow, another record, far exceeded the $350 million for the period last year.

Operating income also jumped 32 per cent, to $575 million.

But the piece de resistance was the operating ratio, said analysts, which dropped 4.6 per cent to 65.5 per cent.

The operating ratio measures the percentage of revenues it takes to operate and maintain a railway – the lower the figure, the better.

Analysts shared Harrison’s enthusiasm, although John Barnes of Credit Suisse First Boston in New York said that the consistent outperformance of CN in relation to the six other North American class-one railways means its stellar results have become almost routine.

“Clean quarters are what you come to expect consistently from these guys,” said Barnes, who called the results “a bit better than expected.”

He added that CN’s practice of “precision scheduling” is what makes it “best in class.”

“It’s a scheduled system which, believe it or not, the others don’t use. If CN has 10 cars or 100 cars that are scheduled to leave at, say, one o’clock, that train leaves at one o’clock.”

Other transporters will wait until they get a critical mass of freight that reduces the costs of sending that train to its destination.

But the problem for the others in the last quarter was the opposite of “congestion,” which means the rail operator doesn’t have enough crews and equipment to respond to demand – a problem CN avoided, and can continue to avoid, said Harrison. The railroad has leased 40 locomotives to other operators who will pay CN heavy fines if they don’t return them to CN immediately upon demand.

CN has settled most labour disputes in the U.S. but has yet to sign with four remaining bargaining units in Canada. But, Harrison said, “I think I can say we’re relatively close to a settlement.”

He credited CN’s cost-cutting initiatives and a solid economic recovery, “led by the comeback in grain.”

CN also acquired two smaller carriers, a railroad owned by Great Lakes Transportation LLC in May and BC Rail last week. GLT contributed $58 million to revenues in the quarter.

Claude Mongeau, CN’s executive vice-president and chief financial officer, said that despite more traffic, “the incremental costs” – the added costs of managing that additional traffic – were kept low.

“You’re forcing more volume through a fixed-cost system,” Barnes said.

Mongeau added: “This shows what this company can do with normal grain (shipments) and a normal economy.”

Barnes agreed the recovering economy played a part in CN’s stellar numbers.

“I’ll take that any day of the week.”

Harrison said he was “extremely bullish on the second half of the year – precision railroading works.”

Mongeau said earnings per share should grow between 15 per cent and 16 per cent for the next six months – assuming a Canadian dollar valued at 75 or 76 cents U.S., and oil prices remaining at about $40 a barrel.

James Foote, executive vice-president for sales and marketing, said that CN benefitted from volume hikes across the board – metals, forestry products and others, although down in automotive products. This last sector was up 3 per cent in new cars and 16 per cent in car-parts, but was offset by “the very significant movement of military vehicles” in the second quarter of 2003.

Foote said that part of CN’s formula is to charge “fair prices,” which increased between one per cent and two per cent, although that rate is about to climb to “two or three per cent.”

Investors jumped on the bandwagon yesterday, boosting CN stock by $2.70, or nearly 5 per cent, in Toronto. Shares closed at $58.70 in heavy trading.