Con-way Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Con-Way Inc. (CNW)

Con-way (NYSE:CNW)

Q4 2013 Earnings Call

February 06, 2014 8:31 am ET

Executives

Patrick J. Fossenier - Vice President of Investor Relations

Douglas W. Stotlar - Chief Executive Officer, President and Director

Stephen L. Bruffett - Chief Financial Officer and Executive Vice President

Gregory Walter Lehmkuhl - Executive Vice President and President of Con-Way Freight Inc

Robert L. Bianco - Executive Vice President and President of Menlo Worldwide LLC

Saul Gonzalez - President and Executive Vice President of Con-Way Inc

Analysts

Allison M. Landry - Crédit Suisse AG, Research Division

William J. Greene - Morgan Stanley, Research Division

Jason H. Seidl - Cowen and Company, LLC, Research Division

Christian Wetherbee - Citigroup Inc, Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Alexander K. Johnson - JP Morgan Chase & Co, Research Division

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Willard P. Milby - BB&T Capital Markets, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Con-way Inc. Fourth Quarter Earnings Review Conference Call. [Operator Instructions] Thank you. Mr. Patrick Fossenier, Vice President of Investor Relations, you may begin your conference.

Patrick J. Fossenier

Thank you, Phyllis. Welcome to the Con-way fourth quarter and full year 2013 conference call for shareholders and the investment community. In a minute, I'll turn it over to Con-way President and CEO, Doug Stotlar.

Before we get into the call, I'd like to offer a few reminders. First, certain statements in this conference, including statements regarding anticipated results of operations and financial condition, constitute forward-looking statements and are subject to a number of risks and uncertainties. Actual results might differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results and other matters to differ materially from those in the forward-looking statements is contained in our forms 10-K and 10-Q and other filings with the SEC.

Second, today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP financial measures are found within the financial tables of our earnings release, which is available on our website at con-way.com.

Also, certain financial and operating statistics of the company can be found in the Investors section of the website. [Operator Instructions]

Now without further ado, I'm pleased to turn it over to Doug Stotlar.

Douglas W. Stotlar

Good morning. On the call today, I'm joined by members of our senior leadership team, including Con-way CFO, Steve Bruffett; Con-way Freight President, Greg Lehmkuhl; Menlo Logistics President, Bob Bianco; and Con-way Truckload President, Saul Gonzalez. Steve will provide some commentary on our financial picture, and Greg, Bob and Saul will participate in the Q&A portion of the call.

As we reported earlier, the fourth quarter had a number of issues which negatively affected operating results, particularly at Con-way Freight and Menlo Worldwide Logistics. The majority of these items were either infrequent in nature or have since been mitigated.

Turning to our financial results for the fourth quarter of 2013, Con-way reported consolidated revenues of $1.36 billion, unchanged from last year's fourth quarter. On an operating income basis, we earned $33.4 million compared to the $37.8 million earned in the fourth quarter a year ago. Diluted earnings per share were $0.20 compared to $0.21 per share in the prior year period. On a non-GAAP basis, earnings per diluted share for the 2013 fourth quarter were $0.23 compared to $0.26 in the prior year. Both periods had tax related adjustments. Looking at the full year for 2013, Con-way reported revenue of $5.47 billion compared to $5.58 billion in 2012. Net income for 2013 was $1.73 per diluted share or $99.2 million compared to $1.85 per diluted share or $104.5 million in 2012. On a non-GAAP basis, 2013's full year earnings came in at $1.66 per diluted share compared to $1.80 per diluted -- per share in 2012.

Moving now to a review of our business segments, I'll start with Con-way Freight, our LTL company. Con-way Freight posted fourth quarter operating income of $23.8 million, a 10.5% increase over the $21.5 million earned in the year-ago period. The higher operating income resulted primarily from revenue growth partially offset by higher expenses for employee benefits and cargo claims. Lower operating efficiencies were also a factor in December mostly due to adverse weather. Revenue was $847 million, a 2.7% increase over last year's revenue of $824.7 million. Higher tonnage levels and improved yield both contributed to the revenue growth. Con-way Freight's operating ratio this period was 97.2 compared to 97.4 in last year's fourth quarter. Revenue per hundredweight or yield increased 0.9% in the quarter compared to the prior year. Excluding fuel surcharge, the increase in yield was 1.5%. When adjusted for length of haul and weight per shipment, the pricing improved -- improvement was approximately 2.2%. Comparing tonnage for the 3 months in the 2013 fourth quarter, year-over-year October tonnage per day was up 0.9%, November was down 0.5%, while December was up 3.3%. Tonnage for the full quarter was up 1%. Thus far this year, tonnage has been impacted by adverse weather that's been much more severe than typical. On a year-over-year basis, January 2014 tonnage was 2.6% below that of January last year. It is still early in the quarter, but absent the frequent weather disruptions, the demand environment seems stable to modestly improving.

On the pricing side, we're also seeing a relatively stable environment. We continue to pursue our lane-based pricing strategies which we launched last year with our 360 largest accounts. In 2014, we are expanding lane-based pricing to an additional $900 million of our revenue base comprised mostly of midsize accounts. Earlier, we noted there were a number of variance items which negatively affected Con-way Freight's fourth quarter results. I'd like to add some context to those. First, I'll talk about worker's comp. Fourth quarter worker's comp expense came in higher than expected with most of the increased expense coming from claims in prior years. While worker's comp claims can have a long tail, we have been proactively working to reduce injuries. 3 years ago, we started a journey to become world-class in safety. During that time, we've reduced our recordable injury rate by more than 50%.

The next item is cargo claims. Fourth quarter cargo claims expense increased from the prior year and was higher than our forecast for the quarter. This area also has received intense focus. We are actively managing our claims exposure, we are making progress and we expect cargo claims expense to normalize as we go forward. One other expense area that was higher than we expected in the quarter was operational costs, which have been impacted significantly by this extended run of severe weather and by a delay in the launch of an enhancement to our line-haul optimization model. Due to the IT complexity of the model, one of 2 enhancements scheduled to go live in December was postponed to January. We've since implemented the second enhancement and we're beginning to see the benefits. It was a challenging quarter for Con-way Freight, but I want to reiterate that the fourth quarter's results were not an accurate measure of the overall progress we've made. 2013 was a productive year in which we implemented several transformative capabilities including line-haul optimization, lane-based pricing, expansion of lean and new onboard technologies for improving safety and fuel efficiency. All of these will enable continuous improvement at our LTL company going forward. These have been complex undertakings, in many cases requiring comprehensive retraining, investments in technology and change in basic processes for how we manage and operate the company. These are more than 1 quarter endeavors and we'd certainly like to see the progress come faster. We are confident that these initiatives will contribute to improved profitability in 2014.

Now we'll move to our Logistics segment. For the 2013 fourth quarter, Menlo Worldwide Logistics, our global logistics and supply-chain management operation, recorded operating income of $2.7 million, a decline from $8.6 million earned in the year-ago period. The lower operating income in the current period was mostly attributed -- attributable to losses from 2 large warehouse management accounts and the write-off of a bad debt from a customer bankruptcy.

Revenue for the quarter was $397.1 million, a decline of 7.9% from prior year revenue of $431.2 million. Lower revenue primarily reflected a decline in transportation management services somewhat offset by an increase in warehouse management services. Net revenue, or revenue minus purchased transportation came in at $190.6 million, a 17.8% increase over the $161.8 million from last year's fourth quarter. The higher net revenue resulted from increased warehouse management business. Menlo also faced some specific challenges in the fourth quarter which affected their results. With respect to the warehousing business, issues with 2 specific accounts, both of which Menlo won in 2013 caused most of the fourth quarter losses. Menlo is working diligently with these 2 customers and has made substantial progress resolving the issues. While it had its challenges in the fourth quarter, overall for the year, Menlo was successful in several areas. New business wins were a record and Menlo started up more new projects in 2013 than in any previous year. Net revenue, the most accurate measure of Menlo's growth, increased nearly 18% in the fourth quarter and was up almost 7% for the year. Our logistics company continues to earn the confidence of its existing customers, many of whom continue to renew their business and have been with Menlo for more than a decade. Menlo has invested in sales and solutions capabilities enabling it to expand successfully into new industry verticals. With last year's surge in start-up expenses largely behind us and despite some IT investment headwinds this year, we expect Menlo to deliver improved results in 2014.

Now I'll review results at our truckload segment. For the 2013 fourth quarter, Con-way Truckload had operating income of $8.9 million compared to $8.5 million last year. Fourth quarter operating income benefited from improved pricing and lower expense for vehicular and worker's compensation claims. Revenue of $155.8 million was essentially flat with last year's fourth quarter revenue of $155.2 million. Fourth quarter revenue included the effects of a 1.2% increase in loaded miles and a 0.8% increase in revenue per loaded mile, excluding fuel surcharge. Empty miles were 10.1% compared to 9.9% in the previous year fourth quarter. The operating ratio, x fuel surcharge, was 92.7 compared to 92.9 in the year-ago period. Con-way Truckload delivered a solid performance in the fourth quarter despite some productivity declines in the latter part of December due to adverse weather. Demand picked up as the quarter progressed which aided asset utilization and network density.

Heading into 2014, despite some productivity issues from the severe winter weather, demand remained consistent through January adding stability to the pricing environment. This also has helped offset some of the increased operating cost from the new hours of service rules. Con-way Truckload continues to benefit from one of the industry's lower -- lowest driver turnover rates and with its disciplined approach to pricing in a firming demand environment, we believe our truckload company is well positioned for 2014.

Now, I'll turn it over to Steve Bruffett for some additional financial perspective.

Stephen L. Bruffett

Thanks, Doug, and good morning, everyone. I'll start with an overview of our 2013 cash flows. For the full year, cash provided by operations was $348 million as compared to $311 million in 2012. Several items contributed to the increase but working capital was the most significant. Net capital expenditures were $275 million, that's consistent with our prior guidance, this compares to $281 million in 2012.

Financing activities consumed $21 million in 2013 as compared to $54 million in the prior year. The main drivers of the lower year-over-year cash consumption were less capital lease payments and higher proceeds from stock option activity. As a result of these cash flow activities, our cash and equivalents balance was $485 million at December 31, 2013, and that compares to $433 million a year earlier.

And while I'm on the balance sheet, there are a couple of items I'd like to point out. The first involves the funded status of our pension plans, which improved significantly in 2013. It's driven by rising interest rates and solid asset returns, and the funded status of our largest plan improved by over $300 million. It was 93% funded at year end as compared to 75% at the end of 2012. In addition, we took steps during 2013 to reduce the volatility of the funded status by shifting our asset mix to a greater percentage of fixed income investments. So while this is still a work in process, we made a big step forward in 2013. The second balance sheet item is that of deferred taxes. Our deferred tax liability increased by $160 million in 2013. This increase was primarily driven by the improvement in the pension funded status as well as the continuing effect of bonus depreciation.

Now I'll devote the remainder of my comments to providing context to 2014. So the first item is our 2014 cash flows. We currently expect to be relatively cash flow neutral as a result of becoming more meaningful cash taxpayers in 2014. Unless Congress extends bonus depreciation, we expect to make more typical federal tax payments for the first time in several years. So compared to 2013, these cash taxes would be an additional use of cash that begins to diminish the deferred tax liability that I referred to earlier.

The next topic is the planned IT investments at Con-way Freight. In aggregate, we expect to incur about $25 million of additional IT costs in 2014 as compared to 2013. This is indeed a large number, yet these investments are the enablers that will drive revenue growth and the operational benefits that we expect to achieve. For further context, 2 large projects represents nearly 60% of the $25 million. They include EOBRs on the tractor fleet and the upgrade of the data and voice networks across the country. The payback periods from these investments are relatively short. With the EOBRs, in conjunction with other onboard technologies, we are experiencing miles per gallon savings and safety benefits right away. And the new data and voice networks will support among other things the next generation of mobile devices that we will utilize to further drive efficiency in all aspects of operations and enhance our revenue management capabilities. The remainder of the $25 million is comprised of several smaller projects such as upgrading our business intelligence platform and the full year effect of investments that were made in 2013. Now, these investments are directed toward proven technologies and they're critical elements of our strategy that are directly tied to margin expansion, decision support and customer satisfaction.

Final topic I'll cover is that of claims which consist of health care, worker's compensation, cargo and vehicular claims expenses. We are and have been actively managing these areas. In health care, we made significant adjustments to plan designs in 2013 and did so again in 2014 in order to mitigate upward cost pressures. In the areas of worker's compensation and vehicular, we implemented safety programs that are lowering incident rates. For cargo claims, Con-way Freight has action plans that are producing the improvements that Doug described earlier. As a result of these efforts, total annual claims cost increased an average of only about 2.5% per year since 2011 which was in line with our plans. So in other words, over the longer course of time, these costs have been reasonably stable. This is especially true when you consider the upward pressure of medical inflation on health care and worker's compensation. However, we do experience greater claims expense volatility from quarter-to-quarter. This is a result of the uneven flow of actual claims activity, especially larger claims, throughout the year. Yet, largely due to the efforts I just outlined, the annual volatility from these items is considerably less.

Transitioning now to the first quarter of 2014. Here are some directional comments on each of our business units. At Con-way Freight, we clearly were impacted in January by more adverse weather than is typical for the month. We estimate that weather had about an $8 million impact on January, which gives you an indication of just how disruptive the frequent weather events have been. And I'm sure many of you have noticed that there's already been further weather disruption in February. Despite the weather, we expect Con-way Freight's operating income to exceed the first quarter of 2013. That was a quarter that was hampered by a variety of issues and the degree to which we expect year-over-year improvement will be influenced by a number of factors, including the weather from the remainder of the first quarter. As noted, the frequency of weather disruption so far this year has made it difficult to assess the LTL operating environment. However, our sense is that the underlying fundamentals of the sector remain reasonably good.

At Menlo, Doug has already noted that the expected improvement at a couple of large complex accounts will manifest itself. And as a result of this and other factors, we are currently expecting Menlo's operating income to improve sequentially from the challenging fourth quarter, yet likely be below the $6.5 million earned in the first quarter of 2013.

At Con-way Truckload, we currently expect first quarter 2014 operating income to be slightly below that of the 2013 fourth -- first quarter, which was $10 million. This is mostly due to weather impacts as the truckload environment has shown recent signs of incremental improvement.

So moving now to the full year of 2014, here are some additional inputs for your modeling purposes. Consolidated depreciation expense is expected to be approximately $250 million as compared to $231 million in 2013. The year-over-year increase is largely driven by the higher cost of tractors. We currently expect our full year tax rate to be 40%. This is higher than recent years, largely due to the expected expiration of certain tax credits. This could change depending on the outcome of budget discussions underway at the federal level and we'll update you on our expected tax rate on subsequent calls.

Next, our full year diluted share count should be about 57.8 million shares. And lastly, we expect our 2014 net capital expenditures to be approximately $285 million, similar to our investment levels over the past couple of years.

So with that, I'll turn it back over to Doug.

Douglas W. Stotlar

Thanks, Steve. While the fourth quarter certainly did not meet our expectations, we do not believe that these results were an accurate measure of our overall progress. We have made major investments in our business and with several new capabilities now in place, our mission is straightforward. We are narrowing the scope of new initiatives. Our focus is on execution using the enhanced data and decision-support tools we now have in place to make accurate decisions and then executing standard work processes at all levels. In 2014, we'll get a full year of benefits from all the investments made to date. This focus on execution, standardized work and disciplined cost control is what will make the difference this year.

With that, operator, we'll open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Allison Landry.

Allison M. Landry - Crédit Suisse AG, Research Division

As it relates to the LTL division, I know you gave some comments regarding operating income in the first quarter, but from a full year perspective, do you -- I mean, is it possible for us to see 100 basis points or more of margin expansion for the full year? Or is this sort of becoming a longer-term target at this point? And I guess sort of along the same lines, is the sort of low 90s OR that you've talked about in the past couple of years still something that's on the near-term horizon?

Stephen L. Bruffett

Allison, this is Steve. Regarding that level of specificity in terms of our margin improvement objectives, I mean, clearly we expect to continue to improve margins. The pace at which we do so probably won't happen in a straight line as we've evidenced over the past several quarters. But we are making steady progress and we expect to continue to make that steady progress. As you know, it's a complex business, that of LTL. And I think the important thing to note is what Doug just wrapped up on, which is the foundational work that's been put in place across the last 18 months or so, it's been a lot of heavy lifting and a lot of big complex projects. Many of which were going on at the same time. Now that, that is in place, we feel like we've cleared the deck a bit for our -- the benefit of those efforts and -- to begin flowing through in a more tangible way to our bottom line. And so that's, I think, is the key message as we approach 2014.

Allison M. Landry - Crédit Suisse AG, Research Division

Okay. And just one follow-up question on the yields x fuel. Would you expect some of the mix trends that you've seen to persist, like increased weight per shipment and shorter length of haul? And then in terms of the base rate, should we think about pricing returning to sort of that 3% level or stay closer to the 2% that you cited sort of x the mix items in 2014?

Gregory Walter Lehmkuhl

This is Greg, I'll take that one. The length of haul and weight per shipment, it's very difficult for us to predict which way that will go. In general, weight per shipment in the industry and at Con-way Freight are going up. On the yield side, the pricing environment remains very stable. We're not focused on any particular yield number. We're focused on each account in each lane getting profitable, given how it fits in our network. So that said, we think it will continue to be stable.

Operator

Your next question comes from the line of Bill Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Doug or Steve, can I ask you to comment a little bit on some of the items that affected the fourth quarter? You mentioned weather for the first quarter, but can you help us think about what is repeatable? So what should we be baking into the forward expectations whether worker's comp or cargo claims? How much of those kind of keep going in next year? And how much of that is really onetime to the fourth quarter and won't repeat? I don't know how to think about what an organic number should be for, let's say, freight in fourth quarter?

Stephen L. Bruffett

There were a variety -- this is Steve again. The variety of items in the fourth quarter as noted. And sure, we'll continue to have cargo claims expense as we go forward but do we think it will be as high as it was in the fourth quarter? No, we don't believe so based on our near-term indications of delivery exceptions which tends to be a good leading indicator. We think that, that is on a favorable trend. So that should not be as disruptive going forward as those trends stabilize. Worker's compensation has some, what we call, lumpiness to it as we move through time. There was -- I would characterize an abnormal amount of adverse development on prior year's claims that happened in the fourth quarter. I can't guarantee that won't happen again, but it is quite infrequent that something like that has happened, especially in my 5-plus years in the company. It was unusual. So those trends would suggest to me that we're not likely to incur that degree of impact in a given quarter in the near future with those items. Weather, of course, has been more severe in the first quarter than it was in the fourth. So that one will definitely be in play as we move forward. The operational disruption that we briefly mentioned from the implementation of one of our new linehaul models, don't expect that to repeat because we have in place now that particular -- those algorithms are up and functioning now. So that should not repeat itself. So, like we were trying to say, the majority so well over half of the items that negatively impacted our fourth quarter, we do not expect to repeat. Weather is the notable exception.

William J. Greene - Morgan Stanley, Research Division

And how do you think about overall inflation in the business so like not necessarily any single line item, but in total, is it kind of in a 3% range? Or is it kind of trending higher than that?

Stephen L. Bruffett

I think 2.5% is a fair number on aggregate cost in the LTL business.

Operator

Your next question comes from the line of Jason Seidl with Cowen and Company.

Jason H. Seidl - Cowen and Company, LLC, Research Division

If I look out to 2015, is there anything that could sort of jump up and bite us? I mean, we have some contracts at Menlo, we had some other stuff we had to do here for freight that impacted, sort of, I guess the pace of the recovery, if you will, for 2014. Is there anything on the horizon that we should be worried about in '15?

Douglas W. Stotlar

Jason, it's not evident to me that there's anything sitting on the horizon that is an iceberg. Menlo certainly has digested -- has done a lot of digesting this year particularly with the 2 really large complex accounts that they brought onboard. And as we indicated in the prepared remarks, is working very closely with those customers and has mitigated most of the issues with those accounts at this point in time and so we expect improvement there. And, again they digested a large number of accounts, many of which we didn't have any issues with at all. And so we certainly expect Menlo's results to improve going forward and we don't see any icebergs on the horizon there.

On the freight side, again, we've narrowed the focus. We're really, really focused on execution, using these new decision-support tools we put in place, our new sophisticated -- more sophisticated pricing models, expanding the scope of those accounts that fall within the new more sophisticated pricing models as well as just executing against the standard work that we put in place as a result of our lean initiatives. And so really it's about harvesting the improvements in the business as a result of putting these new capabilities in place. And that's where our focus is for 2014 and we've really narrowed our focus. So short of some type of economic type disruption, it feels pretty good right now as far as, as we view 2014, certainly with the exception of the wrath that mother nature has been blessing us with.

Jason H. Seidl - Cowen and Company, LLC, Research Division

On my follow-up question, I think you guys used the term relatively stable, relatively good environment on the LTL front. That sounds like that is a minor step down from what we've heard in the past from you and some other carriers. Is that more so that it's just the weather sort of mucking things up here to really get more aggressive than that or has the pricing environment tempered somewhat?

Douglas W. Stotlar

No, I would say definitely the weather is a huge issue. This is the worst winter we've experienced since 1908, but outside of that, I don't think we're taking any step down from the demand and the pricing environment. It's very stable.

Stephen L. Bruffett

Yes. That was not an intended tone or message. I think it's more steady as she goes to slightly improved.

Operator

Your next question comes from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

When you look back to 2013 in the Freight division there was about $20 million or so of sort of onetime-ish like items between the first quarter and the fourth quarter. Without, sort of, talking about orders of magnitude, if you were to think about that normalized and excluding the weather impacts in the first quarter, is it fair to assume that there's the ability to grow margins on top of that? I guess, I'm just trying to get a rough sense of, maybe, what the business is capable on an organic basis when you look at 2014?

Gregory Walter Lehmkuhl

So just reflecting on '13. Obviously, this is a very tough first quarter of '13, where we started the year in an $18 million hole year-over-year. We said we'd expand margins enough at Freight to increase operating income year-over-year. And while we did that, with only a 10% increase in Q4 versus our 50% estimate, we're not very pleased with those results. And so we were disappointed with the quarter but going forward, while we're tempered about Q1 due to weather, we're pretty optimistic about our ability to grow operating income this year. This is the third -- like Doug talked about, '14 is the third year of our 3-year plan at Freight and it's about extracting the value from the investments and the work that we've already done. At Freight it's about executing week-by-week, month-by-month, quarter-by-quarter, to ensure that we do deliver better results this year. I think of it kind of like a football team that's been rebuilding. The last couple of years we were recruiting the players, designing the plays, training, training, training. And this year is about running the plays that we know are successful. And so while I know you've heard about most of these plays, I can provide a little more color on what we think is different this year than last. First of all, the profit momentum from our top 360 accounts where we use lane-based pricing from '13 is there going into '14. And our results on our biggest initiative last year actually exceeded our profit expectations or their impact to profit and those expectations were very small. And so this year, we'll run that same play again on those top 360 accounts and expand that process to an additional $900 million of contractual revenue. That and we have a new sales leadership team in place and we expect to shift the focus on growth as particularly in the second half as this team gets up to speed. We've launched -- since our last quarter we've launched 2 additional phases of our line-haul optimization technology and we have high confidence that we'll hit our efficiency targets again this year. Doug talked about -- and Steve, both talked about our fuel economy targets through a combination of EOBRs, equipment aerodynamics and engine improvements. We expect to get about 4% year-over-year in fuel economy. We're also -- we haven't talked about this much, but we're attacking our structural unit cost by changing our mix of lower cost dock versus highly compensated drivers to perform our dock functions. And finally, as Doug talked about, we're taking a hard look at all aspects of our cost structure and all discretionary expenses now and through '14. So again '14 isn't about rolling out a bunch of new initiatives, it's about focusing on the proven initiatives that we've already implemented and executing every single day to drive more profit improvement this year.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's very helpful. I appreciate the color. And, I guess, the follow-up would just be on, sort of, the growth in the national versus the local business. In previous quarters, you've given us relative growth rates of those 2 individual pieces of the Freight business. Can you give us a rough sense of how that turned out in 2014 -- excuse me, in the fourth quarter?

Gregory Walter Lehmkuhl

Yes, sure. So for the full year, our tonnage was effectively flat, but we did improve mix. For the full year, our national tonnage was down 3% and we grew local 7.7. And so when we look at '14, we expect to continue the local business growth and with the new sales leadership team in place, we think we'll get some good growth on the 3PL side too, because of all the work that we've done recently in linehaul and pricing we're much better positioned than we've been to surgically add tonnage to the network and 3PLs are an excellent way to do that. And the team we put in place has deep backgrounds and great relationships in this segment and we think a little growth will not only provide solid incremental margins, but when surgically layered into the network it's going to help support our efficiency targets for the year as well.

Operator

Your next question comes from the line of Anthony Gallo with Wells Fargo.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

You've had a lot of changes take place within Menlo, could you maybe provide some color on, first, when we think Menlo margins should normalize when you're finished with some of the digestion issues? And then how does the business mix of what you've added compared to maybe what Menlo looked like a couple of years ago, but rather from a gross versus net revenue basis and then overall profitability? That will be helpful.

Robert L. Bianco

Okay. This is Bob. So going forward we expect to see our margins improve in 2014. We have had, over the last couple of years, seen a large amount of warehousing type business in our sales pipeline and the projects that we won in that pipeline and onboarded. And from our standpoint, usually warehousing type projects have a lower margin than transportation and management accounts. So that does have an effect from a mix standpoint on our margins. This year, though, we're looking at our pipeline and we're seeing the trend is more positive. We're seeing a lot more transportation management projects in our sales pipeline, which is encouraging. And we've been successful in bringing some of those onboard. So it's kind of difficult to project because we do play in 2 types of service solutions, and we can't control what's coming to us, so but in the end, we should see overall margin expansion at Menlo.

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

That's helpful. And then back to the original question, when do you think they'll normalize when you're through with the digestion issues? Is that a 2Q event or you think it takes longer?

Robert L. Bianco

They'll normalize throughout the year. We're pretty much through most of the digestion of the large amount of business that we took on in the second half of 2013. So as the year goes on, you'll see more normalized.

Stephen L. Bruffett

Yes, just for -- this is Steve, for additional comment on that, the size and complexity of the projects that Menlo took on in the second half of '13 was some of the largest they've done in their history. Things that are in their pipeline now are more average in size and complexity, if that helps provide some additional context.

Operator

Your next question comes from the line of Jeff Kauffman with Buckingham Research.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Quick questions for Steve. Steve, you mentioned how the pension plan was up to 93% funded status, but you didn't talk about how this is going to affect the pension expense for this year versus last year and maybe your contributions as well?

Stephen L. Bruffett

Yes, Jeff, good question. And as far as pension expense, which as a reminder we now reflect in our corporate and other portion of the income statement and don't allocate that to any of the business units, it is expected to be nominal in 2014. And we incurred, I think, roughly $5 million of expense in 2013. As far as cash funding, our current plans are for a very similar level to that of 2013 which was between $50 million and $60 million. These would be discretionary contributions. However, we have been on what we refer to as a glide path to ultimately derisk this plan and perhaps terminate it at some point in time in the future. But that decision remains to be made. What we are doing in the near term is removing volatility from the plan and on a steady path to funding it.

Jeffrey Asher Kauffman - The Buckingham Research Group Incorporated

Okay. And one other follow-up. You mentioned the $8 million impact of weather in January and continuing in February, is that $8 million a lost revenue number? Is it an estimation of an operating income hit? How should I think about the $8 million?

Stephen L. Bruffett

You should think of it as an estimation of an operating income hit that is comprised of everything from snow removal to the impact of lost revenue to operational disruption and overtime and pickup and delivery function and on and on. It's quite disruptive.

Operator

Your next question comes from the line of Todd Fowler with KeyBanc Capital.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I'll just start by saying, Greg, you may not want to use the football rebuilding analogy with those of us who follow the Cleveland Browns. But...

Gregory Walter Lehmkuhl

Hey [indiscernible]

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

3 years will be good for us. So I wanted to start, just to clarify, Steve, the first quarter freight guidance for operating income to exceed the prior year, that includes the $8 million of weather, right?

Stephen L. Bruffett

Yes, I said despite the weather we still expect to, from where we sit today -- now February looks like January in terms of weather. Might have to revisit that comment, but from where we sit today, believe that operating income at Freight for the first quarter of '14 should exceed that of the first quarter of '13.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

With the weather impact, right?

Stephen L. Bruffett

Including the weather.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

Got it, okay. And then, I guess, my main question is there's been a lot of conversation recently about Truckload pricing and I guess I'm just curious, you've done a lot of work within the LTL network on the linehaul initiative. How do you think that -- and I'm not sure if this is for Doug or for Greg, but how do you think that the network's positioned, if we see a rising truckload rate environment, maybe greater than what we've seen over the past couple of years, into '14? How would you expect that to impact purchased transportation costs within the LTL network?

Gregory Walter Lehmkuhl

So if truckload gets tight, 2 things happen. First of all, we have more rate leverage with our customers and also big shipments flow into our network. So our purchased transportation contracts, in the majority, are on 2-year contracts. So we would not see immediate rate inflation for the most part and it would help our business environment. So I would honestly welcome that change.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

So just to understand, I mean, is it that 100% are locked in right now for 2 years or I would assume that maybe a percent would be renewing this year and then another percent would be -- like 50-50 will be renewing this year and another 50% will be renewing next year?

Gregory Walter Lehmkuhl

I would say we're pretty much locked for this year already and some will expire next year.

Douglas W. Stotlar

Todd, I would also point out that the new linehaul algorithms that we have, if pricing goes up, we load the new rates into the new algorithms and it automatically will pick the lowest-cost solution which might be rewriting it back into our own assets and our own network. So I just want to say we're looking at the lowest-cost delivered solution for providing linehaul and these algorithms take those -- take price increases into account.

Gregory Walter Lehmkuhl

These early results of our linehaul, I talked in previous quarters about our new models and how that could impact purchased transportation and one of the models that rolled out in late November, actually, we believe had an impact on PT in the fourth quarter. Our total purchased transportation expense, net fuel, in Q4 was down 3% year-over-year despite a 1% increase in tonnage. So we are starting to see some shift in the company-owned versus PT.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I know that purchased transportation is not all linehaul, but I guess if I understand this correctly, the 1.5% increase year-over-year on purchased transportation, based on what you're saying, it's -- you wouldn't assume it to be greater than that going into '14 on a year-over-year basis?

Gregory Walter Lehmkuhl

Actually, you're probably looking at consolidated results. At Freight, our purchased transportation expense was down 3% Q4-over-Q4.

Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division

I was looking at full year, but, yes, that's okay.

Gregory Walter Lehmkuhl

Okay, yes. The models came late in the year.

Operator

Your next question comes from the line of Ben Hartford with Robert Baird & Company.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

This is Kenton on for Ben. I have a question on the IT side of it. When you talk about these $25 million in costs, what percentage of this is persistent expenses going on beyond '15 and then how much of it is just expense incurred onetime in '14?

Stephen L. Bruffett

Yes, this is Steve. It's a good question. Given the nature of these investments such as the EOBRs that we mentioned and the data and voice networks, there are some implementation start-up costs associated with those things, but by and large, that defines a new run rate. There's a few million of implementation costs that we're incurring in 2014 that will subside, go away, as we go forward. But these services are often delivered in subscriber service fees. And so they become ongoing costs. At the same time, as I mentioned, they have short payback periods. And so we would anticipate by the time we get into 2015, that these projects would be more than offsetting the incremental investments that are being made.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Got you. And then in 2014, could you remind me again maybe what that all-in IT cost spend came in at?

Stephen L. Bruffett

We haven't provided...

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

I mean, not 2014. Sorry, 2013.

Stephen L. Bruffett

The total number that we invested in IT, it's a typical amount of investment that in the past we've been below the competitive space in terms of IT costs as a percent of revenue. The actions we've taken over the last couple of years have increased our IT investment, but it's more getting to a normalized state for this space.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

And then I had, maybe, one quick question on the Logistics side. When we look at maybe like a revenue run rate, I know this was a large business add [ph], is it fair to model it closer maybe to the type of revenue level that you had in 4Q?

Robert L. Bianco

Are you talking net revenue?

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Yes, net revenue. Sorry, yes.

Robert L. Bianco

Net revenue, we grew by 17%. And I think that's way high to project.

Douglas W. Stotlar

I think the one thing I'd want to be cautious of is the fact that one of these customers is an e-fulfillment contract and obviously, they have a huge surge at the end of the year associated with the holiday season. So I wouldn't think that's representative of the full year run rate for that customer.

Operator

Your next question comes from the line of Tom Wadewitz with JP Morgan.

Alexander K. Johnson - JP Morgan Chase & Co, Research Division

It's actually Alex Johnson on for Tom. So I wanted to ask a question about the weather from an angle that might not be quite as intuitive, given the timing of the year and the winter weather and so forth. Apparently, there is a pretty significant drought going on out west and in prior years and in particular I think in the first quarter you've mentioned some impact from agricultural customers. So I'm just wondering whether you're seeing any impact from drought conditions now, whether you're hearing anything from customers in terms of what the impact could be in first quarter or whether it's not an impact at all?

Gregory Walter Lehmkuhl

So we have heard a little bit out in our Sacramento region about the drought and the impact on customers. But it's -- that region is a very small percentage of our freight and will not have a big impact on Q1 or Q2.

Operator

Your next question comes from the line of David Ross with Stifel.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Doug, can you talk a little bit about this new LTL sales leadership team you mentioned? Who are they and where did they come from? Were they outside hires, internal promotions and what they might be doing differently?

Douglas W. Stotlar

Sure. I'll turn it over to Greg.

Gregory Walter Lehmkuhl

So our new Senior VP of sales is a gentleman named Steve Dean. He was formerly the Senior Vice President of Sales and Marketing at Ryder. He has a 3PL background, a trucking background and has solid relationships and proven results in sales. So we're excited about that. And a new gentleman on the national account, Vice President of Sales addition is Jeff Rivera. This is a gentleman who has very deep knowledge and experience of lean, came from a 3PL background and is very good at collaborating and is building solid relationships with customers in that segment.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

So the expectation is the sales force is going to grow or just going to be reenergized and improve their efficiency?

Gregory Walter Lehmkuhl

I would say reenergized and change their focus a little bit.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just last question for Saul. Can you talk a little bit about the cross-border business levels versus what's going on with the domestic truckload demand?

Saul Gonzalez

So our cross-border business, we did see an increase in the fourth quarter, but the first 3 quarters of the year were relatively flat. And so that is one of the areas that we will be targeting for this coming year. We expect to have some modest growth in Mexico.

Operator

Your next question comes from the line of Willard Milby with BB&T Capital Markets.

Willard P. Milby - BB&T Capital Markets, Research Division

Just wanted to touch on health care. I think you mentioned that you made some changes to the way you're handling that and I was hoping to get the health care expense for Q4 and 2013?

Stephen L. Bruffett

Yes. Give it to you on a consolidated basis, which is how we normally report it to the investment community. For the fourth quarter, it was $53 million. That compares to about $49 million in the fourth quarter of 2012. For the full year, our consolidated health care expense was $181 million, that's down $11 million from $193 million the prior year.

Willard P. Milby - BB&T Capital Markets, Research Division

Okay. And with the changes, where do you expect this number to fall potential savings?

Stephen L. Bruffett

It's a tough one to predict. We're hoping to mitigate increases. Because we know for a fact that there are additional taxes, if you will, coming our way, several million dollars, so -- in addition to medical inflation, so you have to make quite a number of steps just to try to break even and then actual claims experience and usage of the plans and composition of employees and so on. There's a lot of variables that go into it. But our overall actions are designed to keep these costs as flat as possible.

Willard P. Milby - BB&T Capital Markets, Research Division

Okay. And just one more thing, I don't know if you've already mentioned this. But did you guide on a tax rate for 2014 and was there a propane tax credit in 2013 that you expect to continue?

Stephen L. Bruffett

I did guide to 40% and noted that it was expected to be higher than '13 due to the expiration, expected expiration of tax credits and that propane one is the one I was referring to. That by itself is 1 to 1.5 percentage points on the effective rate.

Operator

Your next question comes from the line of Justin Yagerman with Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

So if I'm going to take the most optimistic interpretation of what you guys have said, it sounds like Menlo and Freight are a coiled spring and all the work for the last couple of years, despite kind of flattish earnings, is going to pay off and we'll start seeing that in the next 2 years. But we haven't seen that for the last couple of years and that's been a bit of a story and you guys are hesitant to give any kind of real targets around your operational goals. So I'm just trying to understand how I should hang my hat on what you're saying here. I mean where do you think you guys can get to in the intermediate term? And, I guess, I'm just trying to understand when we're going to start to see this progress that you keep talking about?

Gregory Walter Lehmkuhl

So at Freight, you're going to see the progress this year. There's a lot of ways to look at it. Obviously we're not giving full year guidance or multiyear guidance, but one way to view '14 is that we anticipate our revenue management activities to roughly offset all of our investment costs and our cost headwinds. And that means that the improved efficiencies, from MPG, from linehaul should provide our year-over-year profit improvement.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. And in terms of thinking about incremental margin goals, even if you're not going to give me a margin goal for this year, how are you thinking about that, Greg? What do you think a proper incremental margin goal on tonnage growth should be for Freight?

Gregory Walter Lehmkuhl

I don't think we've guided to substantially changing the tonnage this year. What I stated was that we're going to be -- we're shifting our focus here in the first half with our new sales leadership team and we'll start to layer tonnage in the network strategically. As far as the exact incremental tonnage goal, we know it's certainly better than the balance of the business and depending on how well we can layer it into specific lanes, whether it's backhaul or head haul and what region of the country and at what yield levels determine incremental margins. So I'm hesitant to throw out a number because it's hard to track back to.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, all right. So just if that's the case and you do expect to see improvement in your underlying operations this year and that will show up on the bottom line, the implication then would be that the stock should go higher. If that's the case, Steve, why are you guys keeping this much cash on the balances sheet? What are you going to do with that money?

Stephen L. Bruffett

Well, as a reminder, we built the balance sheet predominantly coming out of the recession and it was to address 3 primary concerns at the time which were pension and fleet age and margins. We've made a ton of progress on pension and fleet age. And margin, we've made progress on that but it's been slower than on the other 2. So we believe that more time is needed on there. All 3 of those factors I just mentioned play heavily into our investment-grade considerations on the rating. And we believe that investment-grade rating is important to our company and that is the predominant lens that we look through as we consider the strength of our balance sheet and what to do going forward.

Justin B. Yagerman - Deutsche Bank AG, Research Division

But, Steve, why is that important? You guys don't have any near-term debt maturities. I mean is it just a marketing thing when you go around to your customers? I mean you're in a cyclical business, it's asset-based. Why do you have to have an investment-grade rating?

Stephen L. Bruffett

There are a lot of aspects. I think it tends to get overly simplified if you don't have to deal with it yourself, the difference between the 2. For example, secured credit facilities are an automatic in non-investment-grade land. And what do you have to secure? You have thousands, tens of thousands of pieces of equipment that have to be retitled in addition to the extra expense of being non-investment grade. And it just goes and on and on, there's a whole series of concentric circles of complexity and difficulty to deal with from a practical standpoint and an economic standpoint. So it does matter. It's not just a reputational thing, even though that is a factor. It's more grounded in practical matters such as capital -- access to capital markets throughout the cycle as well as these friction costs that I mentioned. So it does matter to us and...

Justin B. Yagerman - Deutsche Bank AG, Research Division

Is there some ratio that we should think about in terms of trying to determine how much cash you could distribute without bumping up against a rating agency change?

Stephen L. Bruffett

I wish it were that straightforward to be a formula or a metric. There are a lot of considerations that go into it. And each rating agency looks at it differently. But in our view, the one key thing we need to do is expand margins further. So that's what we're focused on.

Operator

We have time for one last question, which comes from the line of Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

You've talked a lot about the restructuring initiatives to ramp up in the second half of that process and we're now in the latter half of that. And I'm just wondering as we start seeing the impact of these, how do we discern the pricing and volume growth that's anticipated relative to the market change? Like how do we know the improvements are going to be company-specific as opposed to just the broader market?

Gregory Walter Lehmkuhl

I think it would be the percent at which we're growing our operating income versus the market.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. Now, just given the lack of guidance on the margins, I mean, what should we be looking at in terms of signposts to be monitoring how this process is evolving? I mean, do you anticipate, perhaps, giving a little bit more maybe monthly guidance as to what you're actually seeing and doing to give us some indication that things are ramping up and improving?

Douglas W. Stotlar

You will certainly see it reflected in the quarterly result as operating margins expand and we can add more color at that time. But I can assure you our complete focus is on operational execution and extracting the value of the investments we've already made in the business. And we made a lot of investment this last year. It was very disruptive. We did a lot of training. But we have some new underlying capabilities that we didn't have before and we expect to harvest them this year.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. And if I can just ask with regards to lean. Can you give us some update on what's happening there? And then as we look at overall productivity, I've been looking at sort of, let's say, simplistically revenue to employee or tonnage to employee and it's been relatively stable and I'm wondering is that the right metric we should be looking at to see how the lean initiatives are taking shape?

Gregory Walter Lehmkuhl

So our lean efforts are certainly on track. We remain very encouraged about the impact they're having on the business. We have 170 buildings implemented and 70 of those have achieved their initial bronze certification. So the way we think about this is lean's really the foundational initiative that enhances the culture and gives us the ability to drive continuous improvement across the business. So we use the lean approach in everything we do from lane-based pricing to HR to all aspects of operations including P&D, linehaul, dock. And so you can't -- we don't measure the success of lean in a lean bucket, we measure the success of lean in the major initiatives that we implement across the company, like lane-based pricing and linehaul. So it's lean is the how and those things are the what. So I think you can track our progress on lean on how effective we are at impacting efficiencies or our profit through -- our profit contribution through our lane-based pricing but ultimately all that shakes out into our margin and operating income.

Patrick J. Fossenier

I think we're done, Phyllis. If you can just give the replay information, I appreciate it. Thanks, everyone.

Operator

Thank you for participating in today's Con-way Inc. Fourth Quarter Earnings Review Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today through 11:59 p.m. Eastern Time on Thursday, March 6, 2014. The conference ID number for the replay is 31372668. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406.

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Con-Way Inc. (CNW): Q4 EPS of $0.23 beats by $0.02. Revenue of $1.35B (-0.7% Y/Y) misses by $20M.