Fitch Ratings-New York – March 07, 2013
Fitch Ratings has affirmed the ratings of Con-way Inc. (NYSE:CNW) as follows:
- Issuer Default Rating (IDR) at ‘BBB-‘
- Senior unsecured credit facility at ‘BBB-‘
- Senior unsecured debt at ‘BBB-‘
The ratings apply to approximately $725 million in senior unsecured debt and a $325 million unsecured revolving credit facility. The Rating Outlook is Stable.
CNW’s ratings reflect its leading market position in the less-than-truckload (LTL) segment of the trucking industry, and its solid liquidity position which is somewhat offset by the capital-intensive, cyclical and intensely competitive nature of the trucking industry. In addition to the LTL business (CNW Freight) which contributes 61% of revenues, CNW also operates a smaller truckload segment (12%) as well as a logistics company (27%) which diversifies its service offerings in the freight transportation sector.
KEY RATING DRIVERS
Despite a challenging second half, CNW Freight generated $144 million of operating income in 2012 which reflects a 20% year-over-year increase. Industry yields have rebounded from the trough as demand in the freight market stabilizes and CNW and other LTL operators now have a more disciplined approach towards capacity and pricing. Although the economic environment softened in the second half of the year, CNW’s LTL yields increased 4.4% year-over-year, and 3.7% excluding fuel-surcharges.
Furthermore, CNW continues to execute on several technology based initiatives as part of its three-year plan to improve CNW Freight’s pricing structure and profitability. CNW’s adoption of SafeStack trailer decking system allows the company to utilize more cubic capacity of trailers driving higher utilization, safety improvements and lower CNW’s cargo claim exposure. CNW also rolled out handheld devices to its drivers which enables a data repository to feed to its business intelligence, line-haul planning systems and costing models and allows the company to make more granular decisions and apply unit cost to each individual shipment.
Most recently, CNW launched a new lane-based pricing initiative and a line- haul optimization program. For many of its national accounts, CNW is now pursuing a more customized approach to price according to lane profitability which is expected to enhance the overall profit potential of the LTL business going forward. However, Fitch believes that further yield improvement will be challenging if the macro environment softens through the course of the year. That said, overall LTL pricing remains 10-15% below pre-crisis peak, lagging other surface transportation sectors, which makes LTL more compelling to customers, especially for modal substitution.
CNW Freight’s operating ratio (OR) was 95.8% in 2012, which reflects a modest 50bp improvement year-over-year as higher labor and benefit costs mitigated CNW’s lean initiatives. Fitch expects margins to remain flat this year but notes that there is room for upside if the company’s new pricing initiatives, increased network efficiency and higher productivity levels outpace macro or cost pressures.
Operating income for CNW’s Truckload segment increased 29% last year to $45 million with an operating ratio of 92.9%. CNW also expects to improve efficiency and profitability of its Truckload segment by investing in software technology that will allow the company to reduce dwell time, and improve route optimization. Continued near-sourcing to Mexico also provides a secular lift to Truckload revenues. Menlo had a challenging year but was still able to grow operating income by 7% (adjusted for one-time items) in 2012. Overall the business is getting more competitive and commoditized, which Fitch expects to put pressure on margins going forward.
Free cash flow (FCF) was modestly negative last year (after net capital expenditure of $302 million and dividends of $22 million) as capital expenditure continues to trend higher than maintenance levels due to necessary fleet replenishment. CNW had significantly cut back on capital expenditure during the downturn, so the fleet upgrades are overdue. Fitch expects CNW’s fleet renewals to improve asset utilization, lower maintenance costs and maintain the company’s premium service levels over time. However, Fitch expects CNW’s elevated capex budget to pressure FCF this year, but it should improve in subsequent years with increased profitability.
CNW continues to maintain a solid liquidity profile with total cash balance of $430 million as of year-end 2012 and $186.5 million available under its revolving credit facility. The company has no significant debt maturities until 2018 when the principal balance of its $425 million of its 7.25% Senior Notes come due. Lease-adjusted leverage of 3.0x was relatively flat when compared to the 3.3x at year-end 2011 but improved when compared to the 4.2x recorded at year-end 2010. CNW’s unfunded pension liability for its frozen DB plans was $ 399.3 million reflecting a 76% funded level. CNW’s expected cash contribution to its DB plans in 2013 is $55 million.
The durability of the U.S. economic recovery and the pricing environment of the LTL segment continue to be the primary near-term risk facing the company’s ratings. Other issues that could negatively affect the ratings or outlook include a large, debt-financed acquisition or an increase in debt to support a share repurchase program, but Fitch believes the likelihood of the company engaging in either of these activities in the near term is remote. Fitch may consider a positive ratings action if CNW’s margins and FCF come in better than expectations.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Craig D. Fraser
Tel: +1 212-908-0549
Additional information is available at ‘www.fitchratings.com‘. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology