Fitch Affirms Con-way Inc.'s IDR at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Con-way Inc. (CNW) at 'BBB-'. In addition, Fitch has affirmed the senior unsecured revolving credit facility and senior unsecured notes ratings at 'BBB-'. The Rating Outlook is Stable. Approximately $725 million of outstanding debt is covered by these ratings. A full rating list follows at the end of this release.

Key Rating Drivers:

CNW's ratings continue to reflect the company's leading market position within the less-than-truckload (LTL) segment, strong financial flexibility and credit metrics, and conservative management style. CNW Freight (CNW's LTL business) accounts for approximately 61% of revenues. The LTL business is highly competitive and capital intensive. Competition in the LTL business is characterized by fewer participants than in the truckload business. Capital intensity required to build and maintain an LTL network presents additional barriers to entry. In addition to CNW Freight, CNW also operates a truckload business (CNW Truckload - 11% of revenues) and a logistics company (Menlo Worldwide Logistics [MWL] - 27% of revenues) which helps to diversify CNW's dependence on the LTL business.

Full year 2013 results came in below Fitch's expectations as the company experienced challenging operating conditions during the year. CNW's increased strategic focus around pricing, rather than tonnage, contributed to lower volumes at CNW Freight. The more specific price increases negatively affected revenues in the early part of the year, however, Fitch expects long term profitability will benefit from the initiatives. The growth in local accounts compared to national accounts will also provide similar benefits and short term results. Local accounts can support tonnage levels and tend to be more profitable.

Lane-based pricing and linehaul optimization initiatives will be key drivers for potential growth within the LTL business. CNW's operating ratio has been flat recently and underperformed certain competitors. Despite this, CNW has made progress on the pricing and routing initiatives by continuously adding technology and shedding unprofitable customers and routes.

Fitch expects full year 2014 free cash flow (FCF) (after gross capital expenditures and common dividends) to be pressured by higher cash taxes and capital spending. FCF could be negative in 2014, but CNW is expected to maintain sufficient financial flexibility to fund its business needs, given continued uncertainty in the macroeconomic environment. Beyond 2014, Fitch anticipates CNW's FCF performance will return to normalized levels in the $25 million-$75 million range.

CNW continues to carry a significant cash balance which could increase the risk that the company could engage in shareholder-friendly activities. However, Fitch believes that the company has sufficient flexibility to fund modest shareholder distributions and maintain credit metrics consistent with its investment grade ratings. Any large or debt-funded program would be reviewed for a possible rating action, however.

Fitch's key rating concerns continue to center around the macroeconomic environment and capital intensity of the CNW Freight and CNW Truckload segments. CNW has historically shown the ability to reduce costs in a weak operating environment by decreasing capex and leasing additional trucks if necessary. Future pension contributions will be largely voluntary providing additional levers for cash preservation. Furthermore, Fitch believes CNW will continue to manage its balance sheet and financial strategy conservatively to maintain flexibility in the case of an unexpected economic downturn.

MWL and CNW Truckload continue to be strategically important. Each segment has had its respective struggles in the recent past, however, CNW's focus on operational efficiencies through all its businesses has allowed each to realize synergies with each other. For example, relying less on purchased transportation and more on internal resources improves operating margins and cash flows.

CNW continues to maintain a strong liquidity profile with a total cash balance of $485 million as of year-end 2013 and $215.7 million available under its revolving credit facility. The company has no significant debt maturities until 2018 when the principal balance of its $425 million in 7.25% senior notes come due. Lease-adjusted leverage of 3.0x was flat when compared to year-end 2012 but improved when compared to the 3.3x recorded at year-end 2011.

Rating Sensitivities:

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Adjusted leverage (adjusted debt/EBITDAR) being maintained in the 2.0x-2.5x range for an extended period;

--Maintaining operating ratio in the low 90s;

--Consecutive trend for greater positive FCF (>$100 million).

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Adjusted leverage (adjusted debt/EBITDAR) above 3.5x for an extended period;

--Operating ratio in the high 90s;

--Consecutive trend of material negative FCF (>$75 million).

--Sizeable shareholder capital deployment plans;

--Large debt funded acquisition shifting financial strategies.

Fitch affirms CNW's ratings as follows:

Con-way Inc.

--IDR at 'BBB-';

--Senior unsecured revolving credit facility at 'BBB-';

--Senior unsecured notes at 'BBB-'

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822460

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Contacts

Fitch Ratings
Primary Analyst
Stephen Brown, +1-312-368-3139
Senior Director
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Chad Walker, +1-312-368-2056
Associate Director
or
Committee Chairperson
Craig Fraser, +1-212-908-0310
Managing Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stephen Brown, +1-312-368-3139
Senior Director
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Chad Walker, +1-312-368-2056
Associate Director
or
Committee Chairperson
Craig Fraser, +1-212-908-0310
Managing Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com