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 CNW's unsecured revolving credit facility and senior unsecured notes ratings at 'BBB-'. The Rating Outlook is Stable.

The ratings apply to a $325 million unsecured revolving credit facility and $725 million in senior unsecured notes. A full rating list follows at the end of this release.

KEY RATING DRIVERS

Con-way's (CNW) ratings continue to reflect the company's strong market position in the less-than-truckload (LTL) sector and its significant financial flexibility. CNW Freight (CNW's LTL business) accounts for about 60% of CNW's consolidated revenues. The LTL trucking sector is highly competitive and capital intensive, with ongoing investments needed in rolling stock and facilities. However, the investment needed to compete in the LTL sector means it is much less fragmented than the truckload sector, and the capital needed to build and maintain an LTL network creates significant barriers to entry. In addition to CNW Freight, CNW also operates a truckload operation (CNW Truckload - about 10% of consolidated revenues) and a third-party logistics business (Menlo Worldwide Logistics [MWL] - 28% of consolidated revenues) which helps to broaden CNW's overall transportation offerings.

Fitch's key rating concerns continue to include CNW's sensitivity to the macroeconomic environment and the capital intensity of the CNW Freight and CNW Truckload segments. CNW Freight, in particular, has relatively high fixed costs, as do all LTL carriers, which can make reducing costs in a downturn difficult. However, CNW's substantial liquidity position provides it with more financial flexibility than some of its weaker competitors. Another concern is stepped up activity by the Teamsters union in an attempt to organize several of CNW Freight's local operations. CNW Freight has experienced union representation elections at less than 10 of its nearly 300 service centers. Thus far, most of those locations that have voted have opted against representation, but the union has succeeded in a few locations. A tight labor market for drivers is also a concern, and CNW revised its pay rates at CNW Freight in the latter half of 2014 to improve driver retention. This has reduced driver turnover, but it has also resulted some additional expense pressure. Tight capacity in the LTL market may allow the company to offset some of this with price increases, as it did in 2014, when it successfully put through two general rate increases without any meaningful loss of business.

In the third quarter of 2014, CNW announced a capital deployment plan designed to strengthen its balance sheet and return cash to shareholders. In the period after the last recession, CNW generally maintained a cash balance in excess of $400 million, while also keeping around $200 million in availability on its revolver. Part of the rationale for the higher cash balance was to provide extra liquidity to support capital expenditures following the period of reduced spending during the recession. The company held onto the extra liquidity while it worked on several initiatives to bring its operating ratio (OR) back down to historical levels. With much of that work completed or on track for completion, the company has decided to operate with a lower, but still relatively high, level of cash liquidity.

As part of the capital deployment plan, CNW made a discretionary $142 million contribution to further de-risk its frozen qualified pension plans in 2014. The company also announced an increase in its dividend, increasing the total payout by about $11 million on an annual basis, and it announced an open-ended $150 million share repurchase program. Although the increase in shareholder-friendly actions is a concern, Fitch believes the company will be judicious with its share repurchases. Fitch also expects the company to maintain a strong cash balance above $300 million over the longer term, which will continue to provide the company with significant financial flexibility. Fitch notes that the discretionary pension contributions were partly responsible for the company's negative FCF in 2014, but the effect should be a FCF tailwind for the company in 2015, as total contributions to the company's qualified plans are expected to decline by about $112 million.

The lane-based pricing and linehaul optimization initiatives that CNW Freight has been implementing over the past two years appear to be gaining traction and resulting in the desired decline in CNW Freight's OR. The substantial changes to the company's LTL network and pricing strategies created some initial headwinds in 2013, but CNW Freight ended 2014 with an OR of 94.2, which represented material progress from 2012 and 2013, when the OR was 95.8 in both years. Looking ahead, Fitch expects CNW Freight will continue to see modestly positive movement in its OR. The fact that the OR declined on a year-over-year basis in each quarter of 2014, especially given the adverse winter weather conditions experienced early in the year, bodes well for the company's continued performance on its optimization initiatives.

FCF was ($91) million in 2014, weighed down by $142 million in discretionary pension contributions, $66 million in working capital usage and a $13 million increase in capital spending. Fitch expects FCF to remain under some pressure in 2015 from a further increase in capital spending, higher dividend payments and increased employee compensation. However, significantly reduced pension contributions should be a meaningful offset, and overall, Fitch expects FCF to be breakeven to modestly positive in 2015. Beyond 2015, Fitch expects FCF to grow at a higher rate as the company gains traction on its various margin enhancement initiatives and as pension contributions remain low by historical standards.

CNW's credit metrics continue to be characterized by strong liquidity and moderate leverage. At year-end 2014, the company's liquidity totaled $659 million and included $441 million in cash, cash equivalents and marketable securities, augmented by $218 million of availability on the company's primary revolver (after accounting for $107 million in letters of credit). CNW has no significant debt maturities until 2018 when its $425 million in senior unsecured notes comes due. CNW's revolving credit facility also matures in 2018. Lease adjusted leverage (Lease-adjusted debt/Fitch-calculated EBITDAR) was 2.9x at year-end 2014 versus 3.0x at year-end 2013, and Fitch expects it could continue declining modestly over the intermediate term on increased EBITDAR.

Fitch believes MWL and CNW Truckload are strategically important to CNW's overall business, and as the company continues to work on various revenue and expense optimization initiatives, there may be more opportunities to cross-leverage the company's three businesses. Although each segment faces its own set of challenges, CNW's focus on operational efficiencies through all its businesses has allowed each to realize synergies with the others. This could also lead to further margin enhancement for the consolidated business going forward.

KEY RATING ASSUMPTIONS

--U.S. GDP growth of 3.1% in 2015 and 3% in 2016;

--CNW's consolidated revenue grows modestly over the next several years, led by the benefits of general rate increases at CNW Freight and CNW Truckload, while MWL benefits from expanding services to existing customers and focused sales generation;

--Sustainable margin gains are expected over the intermediate term as network optimization, LTL operating initiatives and lower driver turnover lead to efficiency benefits;

--CNW continues with its $150 million share repurchase program over the next several years;

--FCF strengthens despite somewhat higher capital spending related to ongoing fleet replenishment and growth in MWL's warehouse-management business.

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;

--An ability to consistently produce positive FCF above $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;

--A prolonged period of significantly negative FCF (excluding discretionary pension contributions);

--Sizeable shareholder capital deployment plans that lead to higher leverage or reduce cash below $200 million;

--A large debt funded acquisition that results in changing financial policies.

Fitch affirms CNW's ratings as follows:

--IDR at 'BBB-';

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

--Senior unsecured notes rating at 'BBB-'.

The Rating Outlook for CNW 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' (May 28, 2014);

--'Con-way Inc. - Ratings Navigator' (Dec. 4, 2014).

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=749393

Con-way Inc. - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=819908

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980931

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Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Judi M. Rossetti
Senior Director
+1-312-368-2077
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Judi M. Rossetti
Senior Director
+1-312-368-2077
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com