Canadian National Railway 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 CEO 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.

Revenues hit $2.35bn

Revenues 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 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.

"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.

Company forecasts 'full 10 per cent growth'

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 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.

"We continue to believe that CN will outperform the industry in terms of carload 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.

Rival CP raising quarterly dividend

CN's Canadian rival Canadian Pacific Railway Ltd. 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.

The New York hedge fund has said replacing CP CEO Fred Green with 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.