Yahoo Finance U.S. Xpress Enterprises Inc (USX) Q2 2019 Earnings Call Transcript
Image source: The Motley Fool.
U.S. Xpress Enterprises Inc (NYSE: USX)
Q2 2019 Earnings Call
Aug 01, 2019, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the U.S. Xpress second-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Baubach, senior vice president, Corporate Finance.
Please go ahead.
Brian Baubach -- Senior Vice President, corporate finance
Thank you, operator and good afternoon everyone. We appreciate your participation in our second-quarter 2019 earnings call. With me here today are Eric Fuller, president and chief executive officer; and Eric Peterson, chief financial officer. As a reminder, a replay of this call will be available on the Investors section of our Website through August 8, 2019.
We have also posted a supplemental presentation to accompany today's discussion on our Website at investor.usxpress.com. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.
More From The Motley Fool
Such risks and other factors are set forth in our 2018 10-K filed on March 6, 2019. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S.
GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Eric Fuller.
Eric Fuller -- President and Chief Executive Officer
Thank you, Brian, and good afternoon everyone. On today's call, I'll review our second-quarter results and provide an update on the progress that we have achieved executing upon our strategic initiatives designed to improve our operations. I will then provide an update on the market and our outlook before turning the call over to Eric Peterson for a more detailed discussion of our second-quarter financial results. Before I begin, I would like to touch upon four main themes that I would like you to keep in mind during today's call.
During the second quarter, our Dedicated business continued to perform well as a result of our initiative focused on growing the business with accounts that offer a more attractive combination of rate and utilization. Second, our OTR business margins were negatively impacted during the quarter as a result of an environment with excess capacity combined with the additional 350 tractors that we redeployed from cross-border to U.S. lanes after exiting the Mexico business earlier this year. I will go into further detail and touch more on this shortly.
Third, our margin differential year over year was mainly attributable to the market impact on our OTR business which gives us just as much, or more, of said opportunity where the market turns, rates improve and we redeploy cross-border trucks and better freight. And lastly, we believe we have the management team, revenue base, modern fleet and capital structure that position us very well to continue to execute upon our initiatives, drive further operational gains and deliver long-term value for our shareholders. Now, let me get into details on our OTR shortfall against expectations. As background, the OTR business comprises approximately 60% of our asset base fleet.
Historically, about 80% of our OTR freight moved under contract rates and 20% moved under what we call spot rates which really means loads not moving under the rate and volume commitments we've made with customers. Through the second quarter, our spot exposure increased to approximately 25% as a result of several factors that I will touch on in a moment. This quarter, overall freight volumes were consistent with the prior year. However, truckload industry capacity is increased year over year as an attractive spot market to the end of 2018 and higher driver pay resulted in incremental trucks and drivers entering the market.
Last year, we turned down over 4,000 loads per week during the second quarter, while this year we had significantly fewer, which adversely impacted our rate and utilization in our OTR division. Additionally, we pushed the capacity of about 350 tractors from Mexico cross-border to the general Over the Road fleet. In the fourth quarter of 2018, the timing seemed right for this transition and it was still the correct long-term move for our network. However, the timing ended up hurting us this quarter in terms of rates and the ability to generate sufficient miles per truck.
Our OTR contract rates were up approximately 8% in the second quarter on a year-over-year basis. However, spot rates were down approximately 35% year over year which put them at an approximate 20% discount to contract. Year in and year out, the vast majority of what we call spot freight is made up of incremental loads or specific projects from our customers. Our average spot premium has been more than 20% higher than our contract rates over the last ten years and our spot rates have not been below contract for any of those years.
Based on our history, we believe the market conditions experienced in the first half of 2019 are not representative of a typical market regardless of cycle and we will continue to target approximately 20% spot exposure in our OTR division. Taking these factors together, average revenue per tractor per week for the quarter declined 8.4% compared with the second quarter of 2018 in our OTR division. This was the result of a 5.3% decrease in average revenue miles per tractor per week combined with a 3.3% decrease in rate per mile. To reemphasize the point, contract rates were up approximately 8% in our OTR business, but overall rates in the division were down 3.3%.
This illustrates the significant decline in spot rates that we experienced in the second-quarter 2019 compared to the second-quarter 2018. Turning to our Dedicated division, average revenue per tractor per week, excluding fuel surcharges, increased 10.2% in the second-quarter of 2019 as compared to the year-ago quarter. The revenue per tractor per week achieved in the second quarter of 2019 of over $4,000 is the highest in our organization's history. The increase was primarily the result of a 5.4% increase in the divisions revenue per mile in addition to a 4.5% increase in a divisions revenue miles per tractor per week.
Our strong results are due to improved execution and managing accounts to achieve a more attractive combination of rate and utilization. We've been working on this initiative for about a year and are very encouraged with the results as if -- as we have experienced three quarters of consecutive improvement and continue to believe there's additional opportunity for further gains. Brokerage segment revenue decreased to $39.5 million in the second quarter of 2019, as compared to $58.4 million in the second quarter of 2018 on fuel loads and decreased revenue per load. The revenue decrease was mostly offset by higher gross margin as transportation costs per load decreased significantly due to sourcing third-party capacity more efficiently.
As a result, operating income was $1.3, essentially flat with the $1.4 million of operating income reported in the year-ago quarter. I would now like to spend a few minutes updating you on our key priorities for 2019. One focus for the year has been our drivers who remain our most important asset and critical to our success. Last quarter we spoke about the launch of our new driver development program and the opening of our redesigned development center in Tunnel Hill, Georgia.
This program provides continual learning opportunities for both new and experienced drivers with the goal of providing our drivers with the knowledge, skills and ability necessary for a successful career. While still early in its rollout, we are seeing positive results from those drivers who have completed this training versus those who have not. We are optimistic that over time this training will improve our driver satisfaction and retention while also reducing their accident rate and the company's insurance expense. Given the positive results that we're seeing, we opened a second facility in July and expect to continue to open additional facilities across the country.
A second initiative is our goal on improving our operations by focusing on technology including digital load matching, automated load acceptance and prioritization and working toward our ultimate goal of the frictionless order. As we continue to make progress, we expect to see our speed of operation improve and the day-to-day challenges that our drivers encounter decline. Our near-term focus is to integrate our legacy systems and utilize existing data to reduce many of the manual decisions that are made. These manual decision points not only open the door to less than optimal decisions along with potential for errors, but also require unnecessary driver input which reduces efficiency and creates driver frustration.
As we remove more of the friction that exists, we believe errors will decline. Our operations will become more efficient, utilization will rise and our driver turnover will decline. We are optimistic that this will reduce costs, optimize freight planning and improve capacity. Turning to the market and our outlook, the third-quarter freight environment remains depressed, however, July is typically a weak month for demand and we don't see anything beyond normal seasonality.
The next two months will be a better indicator of ongoing market conditions. While the market has been challenging, we are confident that capacity is exiting the market and that we will hit a point in the near future where supply and demand will begin to tighten. Additionally, we continue to believe that the Alcohol and Drug Clearinghouse that is expected to go live in January of 2020 will further squeeze capacity out of the market which should lead to a better rate environment in 2020. Turning to our guidance, we previously adjusted our full-year 2019 adjusted operating ratio guidance to a range of 95.5 to 97.5, where the high end assumes a continuation of the lackluster market conditions as seen in June and July persisting through year end.
I would now like to turn the call over to Eric Peterson for a view of our financial results.
Eric Peterson -- Chief Financial Officer
Thank you, Eric, and good afternoon. Operating revenue was $413.9 million; a decrease of $35.9 million compared to the second quarter of 2018. The main drivers were lower brokerage and fuel surcharge revenue as well as the discontinued portion of the Mexico cross-border business. Truckload tractor count, and average revenue per tractor, excluding fuel surcharges, were essentially constant year over year.
Operating income for the second quarter of 2019 was $8.8 million, compared to the $2.0 million achieved in the prior year quarter, excluding $500,000 in costs related to the exit of our Mexico operations in the 2019 quarter and $6.5 million of IPO related expenses from the 2018 quarter, our adjusted operating income for the second quarter of 2019 was $9.3 million which compares to $26.5 million in the second quarter of 2018. We delivered a 97.9% operating ratio and a 97.5% adjusted operating ratio for the 2019 second quarter which is an increase relative to the 97% OR and a 95.7% adjusted OR that we reported in the first quarter and the 95.5% OR and the 93.4% adjusted OR that we have reported in the year-ago quarter. The main difference in profitability, year over year, within our Over the Road fleet. As Eric Fuller explained, revenue per mile dropped and miles per tractor decreased.
In addition, driver pay increased approximately $0.06 per mile since last year's quarter as a result of wage inflation and lower utilization. Net income for the second quarter of 2019 was $2.7 million which compares to $600,000 in the prior-year quarter. Adjusted net income for the second quarter was $2.9 million and compares to the $11.3 million in the prior-year quarter. Adjusted earnings per diluted share were $0.06 for the second quarter of 2019.
Our effective tax rate for the quarter was approximately 12.2% as a result of discrete tax items. As a result, we are lowering our full-year 2019 effective tax rate guidance to a range of 23% to 25% from the previous range of 27% to 29%. For the full-year 2019, we continue to expect our cash tax rate to be in the low single digits. As market conditions have continued to underperform earlier expectations, we revisited our capital planning as part of a more broad-based review of our forecast for the balance of the year.
To this extent, and to prudently manage our cash flows, we have reduced our capex budget to $110 million to $130 million, as compared to our previous guidance of $170 million to $190 million. The reduction will come from a combination of deferred tractor deliveries and financing more equipment with operating leases instead of debt. We do not expect this change to materially impact the average age of our company tractor fleet as we continue to manage our tractors to an approximate 475,000 mile replacement cycle. During the quarter, we also invested $8.7 million to purchase the last 10% of total transportation which had previously been 90% owned by U.S.
Xpress and 10% by one of its founders. In regards to leverage, we ended the second quarter with $436.9 million of net debt and had $121.0 million of cash and availability under our revolving credit facility. Interest expense for the second quarter was $5.3 million and we continue to expect interest expense to approximate $22.0 million for the full-year of 2019. With that, I'd like to turn the call back to Eric Fuller for concluding remarks.
Eric Fuller -- President and Chief Executive Officer
Thank you, Eric. Our results this quarter were below our expectations largely as a result of a more challenging market combined with our decision to exit our Mexico business. Taken together, these factors caused our spot exposure in our OTR division to rise above its historical average which adversely impacted our OTR margins and secured several positives in the quarter including performance in our Dedicated division continued to improve as a result of our initiative focused on improving our mix of business with those accounts that offer a more attractive combination of rate and utilization. The early results of our driver training program show favorable results and we remain optimistic that overtime our driver satisfaction and retention will improve while our accident rate, and the company's insurance expense will decline.
And lastly, the continued progress toward improving our operation as we execute upon our most recent initiatives designed to move the company toward our goal of achieving a frictionless order. To conclude, we had a significant opportunity to improve our operations and our profitability through the cycle as we execute upon our initiatives. As I look to the second half of the year, I remain confident in our team and our strategy, additionally, I'm encouraged by the early signs of capacity leaving the market which should lead to improved trends. That said, we are working extremely hard to reduce our spot exposure to more historical levels regardless of the market backdrop as we focus on improving our financial performance.
Thank you again for your time today. Operator, please open the call for questions.
Questions & Answers:
Operator
[Operator instructions] Our first question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Ravi Shanker -- Morgan Stanley -- Analyst
Thanks. Good evening, Eric and Eric. So kind of just given what's happening kind of in the market space right now and just given how volatile kind of the spot rate typically is, kind of, is there a long-term strategy to just significantly reduce your spot exposure and maybe kind of bring it down in line with some of your peers?
Eric Fuller -- President and Chief Executive Officer
Yeah. This is Eric Fuller. So our plan is to get back to that 10% that we've consistently managed our spot on our total revenue percentage. And with that change with our Mexico operating in the first half of this year, we ended up getting a little bit more increased exposure than we would like so we would like to get that back down into that 10% range.
But we don't have any plans to take it below that. We do think that that 10% range is a prudent area to manage our business and we'll continue to do so over the long term.
Ravi Shanker -- Morgan Stanley -- Analyst
Got it. And is that shift going to come from growing the contracts out of your business or are you looking to just reduce your truck count overall?
Eric Fuller -- President and Chief Executive Officer
No. I think it's a combination of increasing our contract business and putting more trucks into Dedicated and being able to allocate some of that equipment over into our Dedicated division. So, this is something that over the next two to three quarters we're really focused around trying to put more trucks into more consistent business so we have less exposure to that spot, but it does take a little time.
Ravi Shanker -- Morgan Stanley -- Analyst
Got it. And just lastly, kind of just given that there's a little bit of a step back in the OR here kind of back to the high 90's and you guys have made some pretty good traction in recent years in the cost side and closing the OR gap with some of your peers, just thinking long term kind of how do we get back on the path to getting to an ideal OR?
Eric Fuller -- President and Chief Executive Officer
Yeah. You know, first off, obviously we were disappointed with the performance this quarter but we -- we believe that a lot of our initiatives are still -- are still moving in the right direction and they still are bringing a benefit and that this quarter exposure to spot and how bad the spot rates really turned this quarter kind of masked a lot of those improvements. We are seeing some near-term improvements in our insurance and our safety initiatives, you know, we've talked a lot about the forward-looking event recorders and our training program and going to hair follicle testing and up to this point, it's been a lot of, we believe, we'll start seeing an impact and this quarter and second -- the last half of the second quarter and into the third quarter, we're actually seeing some improvement in our safety statistics. So, we believe that we will start -- that will start meaningfully showing up in our insurance number so that's one that we have a lot of, you know, insight into and a lot of -- we're really excited that we're going to start seeing some impact there.
There's other areas where we are seeing some improvement as well as we work on our driver retention and, you know, with this frictionless order, we truly believe that that's going to have an impact on just about every line item in our -- on both on the expense side and on the revenue side. I mean, that's one that we think touches just about everything and it was an area as we started identifying some of our deficiencies, it was declaring the obvious that our systems were overcomplicated and that we were putting too much of the burden on our drivers and our office employees to do too much when a lot of that -- a lot of that work could be automated and optimized. And so that's really what we're working toward.
Ravi Shanker -- Morgan Stanley -- Analyst
Thanks for your help.
Eric Fuller -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Scott Group -- Wolfe Research -- Analyst
Hey. Thanks. Afternoon guys.
Eric Fuller -- President and Chief Executive Officer
Hey, Scott.
Eric Peterson -- Chief Financial Officer
Hey, Scott.
Scott Group -- Wolfe Research -- Analyst
So we don't have a lot of history just with the seasonality of the business in these tougher periods. So $0.06 of earnings, 97.5 OR in the second quarter, do you think third quarter is better than that, similar to that, could it be worse than that? Just as I -- as we think about 3Q?
Eric Fuller -- President and Chief Executive Officer
Yeah. I mean, I think normally we would see that -- that third quarter and second quarter are usually close in performance. I would say this year's a little different in that I think that the market conditions could meaningfully improve as we go through the third quarter and I think we're seeing a little bit of firmness in the market as of late and so from our perspective I think there's an opportunity for things to improve. So it's hard to really say one way or another but I do think that at this point, the market feels a little bit better than I would say it did after the first month in the second quarter.
Scott Group -- Wolfe Research -- Analyst
So when we think about -- so rate per mile and Over the Road down three, utilization down five, do you think those metrics are better or worse in the third?
Eric Fuller -- President and Chief Executive Officer
Well, again, I do think that a lot of that is going to be market dependent with our exposure to spot and the fact that a lot of that utilization was based on a lack of volume in the market. So as volumes come back, opportunities for spot at a premium potentially come back then I think that we can -- we can beat those type of numbers.
Scott Group -- Wolfe Research -- Analyst
Maybe talk about the Over the Road fleet, what you're doing with it and then the capex cut for this year, does -- are we pushing capex into 2020 or could this be the new sort of normal run rate for capex and maybe we're not going to do as much of these lease to deny conversions?
Eric Fuller -- President and Chief Executive Officer
On the Over the Road division, we made a significant management change at the end of the second quarter within that division at a VP-type level to try to put more of -- you know, put more of our top talent into that Over the Road division and trying to boost up some of that operation. We're already seeing some -- some nice return from that. We're seeing just a little bit more of what I call a sense of urgency. I would -- it felt like a little bit like that group had gotten a little complacent and we're now seeing some nice energy in that group, looking at different things, making sure that things are taken care of on a per truck basis that this is the type of stuff that you have to do when you're operating, especially on in an Over the Road division.
So, you know, I'm really excited to see what the new management can do over the next couple of quarters in that division and so that's one of the things that we've done to try to shake things up and get things moving in the right direction in our Over the Road.
Eric Peterson -- Chief Financial Officer
Yeah. And Scott, I think as in regards to our capital plan and the equipment, you know, obviously we'd like to increase the percentage of our fleet that's owned relative to lease but, you know, we're not going to do that agnostic to the market conditions in our -- in our free cash flows. So, I would say that as our earnings improve, expect to see a greater percentage of our fleet owned but that we're going to do it in a prudent manner. And the second part of your question is, there were -- there was a portion, you know, of the tractor deliveries that we did push out but that was a nominal number relative to the total $60 million of net capex that we lowered the guidance by.
Scott Group -- Wolfe Research -- Analyst
OK. And then just last thing, Eric Peterson, can you just remind us, you know, where we are on leveraged targets, what are the thresholds we need to be better than and sort of where you think we're going to end in the year?
Eric Peterson -- Chief Financial Officer
Yeah. I think -- you know, on the year, obviously, that's going to depend on what the market conditions do if we're, you know, on a seasonality basis we would expect to, you know, like Eric said, second and third quarters are usually comparable but from a cycle perspective changing, you know, you could see significant pickup in the market. So if you believe that freight is starting to tighten, right now I'd say that's more of a cycle phenom than a seasonality phenom as it impacts our model. So from a leverage target, you know, I would say, look, we're -- we're still marching toward the same landing pad and path and as we go through cycles in this industry, you know, that march is going to speed up or slow down.
I think that we still want to march toward, you know, one times levered company and we're not going to do that agnostic. If we think that there's an opportunity out there that we think will enhance our enterprise value and be right for the shareholders, we're going to make those decisions as well but we believe we'd like to be, you know, sub two toward one.
Scott Group -- Wolfe Research -- Analyst
OK. Thank you.
Eric Peterson -- Chief Financial Officer
Thanks, Scott.
Operator
Our next question comes from the line of Jack Atkins with Stephens. Please proceed with your question.
Jack Atkins -- Stephens Inc. -- Analyst
Hey, guys. Good afternoon. Thanks for taking my question.
Eric Peterson -- Chief Financial Officer
Good afternoon, Jack.
Jack Atkins -- Stephens Inc. -- Analyst
So I guess, you know, Eric Peterson, if I could just go back to the -- you know, the comments you -- Eric Fuller, if I could go back to the comments you were making earlier about the markets sort of tightening up a bit here or maybe beginning to see the early signs that it's tightening up a bit here. Could you kind of walk us through sort of what's -- what's leading you to that conclusion and sort of what you're seeing and the leading indicators to make you think some capacity is coming out?
Eric Fuller -- President and Chief Executive Officer
Well, I think the biggest thing for us that we look at is just the amount of freight that we're being tendered and offered on a regular daily basis from our customers. You know, a lot of customers are following a TMS system and so when the market is exceptionally weak then we get less offers as -- and because we may not be the No. 1 in that TMS, maybe we're Number 3, 4, or 5, we're finding that the opportunities -- we're seeing more opportunities recently that maybe we're, you know, hitting that number in that TMS guide and so we -- that leads us to believe that the market is tightening sheerly because we're seeing more opportunities. And at this point, we haven't seen anything that's materially changing the spot rates, but I know that as volume goes up and things strengthen, then that usually does lead into better spot opportunities.
So, we're just of the -- you know, as we watch this thing on a daily and a weekly basis, there occasionally can't be head fakes but right now it does feel like the market is firming up.
Jack Atkins -- Stephens Inc. -- Analyst
OK. Well that's very encouraging to hear. I guess, as you talk to your customers about their outlook for peak season, you know, we've kind of heard some mixed things around peak this earnings season. You know, what are your customers telling you, I guess, first about their freight flows in general and the state of their business but then secondly, what their outlook is for peak season?
Eric Fuller -- President and Chief Executive Officer
Yeah. From what we're hearing from the customers, their overall shipments are going to be up. Their overall demand is going to be up. I think there's a little bit belief from some customers though that there's so much excess capacity in the market that even though they're on an absolute basis, their volumes are going to be up, they may actually be able to source that capacity at a lower rate because of the supply in the market.
I think that some have that opinion, some don't. I do think that right now, like I said, I feel like supply is coming out of the market. We see it in some of the things that we look at and so, you know, I think that if everyone believes that their volumes are going to be up, which I'm hearing most people saying that, then I think the -- the peak season could be a little more difficult for some shippers than the expectations at this point.
Jack Atkins -- Stephens Inc. -- Analyst
OK. Gotcha. Gotcha. And then just back to the Dedicated business for a moment.
Could you just talk about what the pipeline looks like there and, you know, are you seeing some longer lead times in terms of getting deals across the finish line? Does any additional color on sort of what the go-forward outlook is in Dedicated, that would be -- that would be great?
Eric Fuller -- President and Chief Executive Officer
So last year, there was a sense of urgency from the shippers to lock up capacity so we had a lot of people moving in to Dedicated who have not previously done Dedicated or potentially people who have done Dedicated or do Dedicated that opened up more of their overall portfolio into Dedicated business. We're actually seeing a little bit of the opposite now when the market weakens, we're seeing people then take some of that dedicated opportunity off the table or not pursuing Dedicated opportunities. So right now, I would say the dedicated opportunities have pulled back a good bit. Not to say there's not dedicated opportunities in the market, and those that traditionally did -- did Dedicated are still sticking with that model but those that kind of rushed into Dedicated last year or in 2017 are kind of now, kind of rushing back and are not obviously as committed to the Dedicated model as others.
And so that is leading to a little less demand from a Dedicated perspective but I don't -- but it's not really putting any kind of pressure on rates or anything at this point.
Jack Atkins -- Stephens Inc. -- Analyst
OK. That's -- that's great. I'll jump back in queue. Thanks again for the time.
Eric Fuller -- President and Chief Executive Officer
All right. No problem.
Operator
Our next question comes from the line of David Ross with Stifel. Please proceed with your question.
David Ross -- Stifel Financial Corp. -- Analyst
Yes. Good afternoon, Erics.
Eric Fuller -- President and Chief Executive Officer
Good afternoon.
David Ross -- Stifel Financial Corp. -- Analyst
First on the Over the Road fleet, does it make sense to downsize that much?
Eric Fuller -- President and Chief Executive Officer
You know, not in our experience. I -- I think that these things are very cyclical and you go and you look at the length that these cycles typically take. By the time that we did some substantial downsizing and downsizing with the customer base, because there's not a -- it's not like Dedicated where I can take a scalpel and remove a certain section of business when we get out of -- if we were to remove a certain amount of trucks, we would have to remove a certain amount of business and net/net, I'm not sure it would change anything except you'd have a lower overall revenue and you'd have less trucks. And so with these cycles being fairly short, I don't know that it makes a lot of sense for us to go.
Now, if we thought this was a three of four-year down cycle, which we've never really seen before, then I think that would be a different decision. But at this point, no, I don't think downsizing makes any sense.
David Ross -- Stifel Financial Corp. -- Analyst
And I know you didn't expect the second quarter to be as weak as it came in, you know, but in hindsight, would you have been better off just selling those 350 trucks when you took them out of Mexico?
Eric Fuller -- President and Chief Executive Officer
You know, for the second quarter, possibly, but as we look out over -- again, these cycles don't last forever and we believe that we will be back in a positive cycle in a relatively short period of time and we'll be able to benefit from having those additional trucks in the market either at a contract rate or potentially at a premium rate. So when you look at it over a long cycle, I think it still makes sense to keep that capacity.
David Ross -- Stifel Financial Corp. -- Analyst
And then, Peterson, on the consolidate net leverage ratio, just knowing that there's all these little add backs that aren't clear in the financial statements, what was that ratio as of June 30 as defined by the lending agreement?
Eric Peterson -- Chief Financial Officer
Yeah. I'd say sub 2.5.
David Ross -- Stifel Financial Corp. -- Analyst
OK. And is there any chance of year-over-year earnings growth before the first quarter of next year?
Eric Peterson -- Chief Financial Officer
Yes. I think if you looked at the third and fourth quarter of last year, you know, where we came in, with sub 94, I think we're about adjusted 92.5 in the fourth quarter and you looked at the adjusted guidance that we've given for the year to 95.5 to a 97.5, is that would indicate that there would not be year-over-year earnings growth in the third and fourth quarter compared to '18.
David Ross -- Stifel Financial Corp. -- Analyst
Excellent. Well, thank you.
Operator
Our next question -- our next question comes from the line of Ken Hoexter with Merrill Lynch. Please proceed with your question.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Hi. Good afternoon. Eric, the debt was up $50 million year over year now, about $437 million. Do you -- I know you talked about the leverage ratios.
Do you have any debt that's coming due or anything that we need to be concerned on a call on cash in the near term?
Eric Peterson -- Chief Financial Officer
No. I think it's -- you know, that's a good question and thanks for asking it. I think when you look at our net capex for the year through June, you're going to see that that number is in the $90 million range and so you can look at that net capex we experienced if we were about -- you know, call it $30 million through the first quarter and $90 million through the second quarter. That means $60 million of our net capex came in the second quarter.
Our annual guidance we just gave you is in that $110 million to $130 million. So you can see, you know, our net capex are substantially complete, not complete but we -- we burden the first half of the year with more of those dollars. So as you look out to the second half of the year with minimal capex for the remaining six months, I think we'll be fine.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
I'm sorry, maybe I wasn't clear. I don't mean in terms of capex call on capital, I meant on -- in debt. Is there any debt coming due or anything concerning with the -- you know, as you added $50 million of debt, is there anything on the timing of, I don't know, call it principle, amortization, anything we need to be concerned on calling the capital dollars?
Eric Peterson -- Chief Financial Officer
I apologize, I missed your question. No, we're fine. I was speaking to net debt levels as far as what's current and what's coming due, no concerns.
Eric Fuller -- President and Chief Executive Officer
So can you just -- is there anything on call in the second half or anything you're gonna need to...
Eric Peterson -- Chief Financial Officer
Yeah, I think what -- so, yeah, so you know, if we go through our, you know, what's on call, you know, if we look at the facility, you know, five-year facilities entered into in June of 2018 when we went into the right -- with the IPO, as far as debt coming due, that's just going to be our normal equipment cycles. When you look at the current portion of our debt, in our fixed assets, that current portion of debt is really covered by, you know, the value, the residual value of those tractors that we're trading in and so, you know, essentially what happens is we'll trade that tractor in and it covers the balance due on that debt and the difference run though gain/loss. I think if you look at our financial statements, there's a very minimal gain/loss in the grand scheme that runs through our financials but for the most part, our equipment covers that balloon payment. So they're all part of it.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
I just wanted to -- Yep, no, I just wanted to clarify that. Thanks, Eric.
Eric Peterson -- Chief Financial Officer
Yep.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
And then Eric Fuller, the -- CH on their call yesterday, noted the need to move up in the load book given where the spot market is and to kind of avoid that exposure. Given your increase in your exposure, what are you doing here to move up in the -- in the load books? Is it -- is it using price to move up, is it converting into contracts? How do you get into that top tier to not have that increase of exposure but to flip that spot out?
Eric Fuller -- President and Chief Executive Officer
Yeah. You know, a couple of things, so with existing customers you're exactly right, where there's some opportunities for us to get a little more aggressive in areas where we had more exposure to spot so that we can capture more business at a contract rate and so there are some -- some selective areas where we are getting more aggressive from a rate perspective to put us in a better position. So that's one thing. The other thing is with new customers we've actually opened up a -- an inside sales group which is something that we've really never had to be aggressive about bringing new customers online and these aren't like large mega customers but one -- but smaller customers that we can engage on an inside sales basis and it will help us to fill gaps and help us to bring new volume in the door.
And so that's a part of the strategy as well to try to take some of that spot capacity off the market and lock it down.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
So, I want to make sure I'm asking this the right way and not an attack, but you kind of -- you talked more about management change on the truckload side. At the IPO, you noted that you were confident that you had the right team given you had 61 of 94 executives that turned over and you were pleased with the way -- what -- what kind of change, what went wrong? Was it just the market that went wrong and this person needed to move on, or is there something fundamental or other shift going on within the company?
Eric Fuller -- President and Chief Executive Officer
Well, I mean, I think, and by no means would ever say that we're not going to be making changes when you've got that -- at our size, there's always going to be improvement and changes and so at a VP level or whatever level of executive, I always expect to be making changes every year. If we're not, then we're getting stale and we're not -- we're not trying to improve. So there's always tweaks and I would say that, yeah, on an overall basis, I'm happy with the management team and we've got the right people in place but there will always be changes as we move through the year and that's just about trying to make yourself better and if you have the opportunity to hire somebody better or put somebody in a role that you think will do a better job or will shake things up, then that's the direction you go.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
If I kind of just -- just two more, one quick one. Just, should we see more insider selling at these levels? I know we've seen a lot lately. And then secondly, maybe bigger picture. I think Ravi was talking more about -- before about all of the plans at the IPO to lower costs no matter the market.
You talked about the insurance but, I don't know, is there still anything coming from the load-playing initiatives, fleet managing initiatives, all of the kind of four crux things you talked about at the IPO. I'm just surprised. Is it just the market that we're talking about, the deterioration and not in the -- in the OR, or have some of these not panned out in terms of cost saving initiatives? Thanks.
Eric Fuller -- President and Chief Executive Officer
No. I'd say on the initiatives, I would say, actually, the opposite of the initiatives have really continued to really provide a big payback for us. We've seen a lot of positives in most of those initiatives that we undertook over the last 12 to 18 months, and we're continuing to see improvement. As I said, that that increased exposure to our spot actually caused some of those initiatives to be hidden by a much more exposure to the spot market.
And so that was the reason that you don't see those initiatives being as impactful, though I can tell you that on a case-by-case basis we've actually seen some significant improvements. And like I mentioned, the insurance is one that we're very excited about that we're starting to see some near-term improvement on and I think we'll -- that will lead to some meaningful cost reduction over the next couple of quarters.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Sorry, on the insider selling at these levels, we've seen a bunch lately, just any thoughts you want to share?
Eric Fuller -- President and Chief Executive Officer
Yeah. I don't think we've seen a bunch. One specific situation, but other than that, no, I don't anticipate any kind of insider selling.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
OK. Appreciate the time and thoughts. Thanks guys.
Operator
[Operator instructions] Our next question comes from Brian Ossenbeck with JP Morgan. Please proceed with your question.
Brian Ossenbeck -- J.P. Morgan -- Analyst
Hey, guys. Good evening. Thanks for taking the question.
Eric Fuller -- President and Chief Executive Officer
Hey, Brian.
Eric Peterson -- Chief Financial Officer
Hey, Brian.
Brian Ossenbeck -- J.P. Morgan -- Analyst
I just want to go back to Dedicated for a minute, and we've heard a lot on the calls the last week or two about fleets going more into Dedicated trying to get more sticky business, so it doesn't seem like it's just you guys who were pushed in that direction but it sounds like maybe some of the shippers are pulling back, or at least the ones, you know, maybe they wanna have the first place, they were -- were there just when things were tight. So maybe if you could talk about the -- you mentioned pipeline already but just how it looks from a margin perspective, you know, an area, I think you took up the target on. Are you able to still kind of get awards in those ranges and when you do a private fleet conversion, are you still having success or running into any challenges, rather, replacing those with your own drivers or converting them?
Eric Fuller -- President and Chief Executive Officer
Yeah, Brian. Yeah, I think we're not seeing any, what I would say, pressure at this point from customers on rates or anything like that. Where we are seeing is on the new bids that are coming through. I think our intention of being in that 15% to 20% margin perspective that we mentioned last year, you're not going to get any takers at that type of margin levels and in this market.
I think you're having to moderate a little bit of your expectations. But, like I said, the opportunities, while they're not non-existent, are a little -- a good bit lighter than what they were last year. But at this point, rates and margin on existing business is holding strong and we're not seeing really any pressure there.
Brian Ossenbeck -- J.P. Morgan -- Analyst
OK. Any thoughts on diversifying away from some of the normal or typical Dedicated customers? Is this something you're trying to diversify the shipper group with as well?
Eric Fuller -- President and Chief Executive Officer
Look, we're all -- I mean, yes, and no. I mean, we're looking for getting more concentration from our current customer base. I mean, the nice thing about -- the thing about Dedicated is there's a lot of stuff that you don't know when you're going into a new Dedicated situation with a new customer and so for us the -- the one benefit of being deep with a number of customers in Dedicated is we know how their business behaves and we know how to price it and we know what type of margin expectations we're going to get. And so there's a benefit for doing more with that group that we already do business with and so we'd like to expand our concentration with that group.
There's also some new customers and some new types of verticals that we're looking at and exploring about getting into those as well. But, of course, we'll be a lot more mindful and careful about those areas because, as I mentioned, they're not -- we may have some stuff we don't know about how their business operates, and so we probably wouldn't be as aggressive about growing that piece without getting kind of our foot, you know, our feet wet first and understanding how the business operates as opposed to something that we already work, as a customer, we already work with, and we know how their business operates and therefore we know how to price it.
Brian Ossenbeck -- J.P. Morgan -- Analyst
OK. Thanks for that. On the -- just going back to the insurance and the cost savings initiatives. You know, is that something you see big chunks of gains and improvements on the cost side as you get more training, you get the actual incidents down and push that through some of the premiums in your contracts? Or is that just a slow kind of steady improvement that we should see just kind of build over time into next year?
Eric Fuller -- President and Chief Executive Officer
Yeah. I think it's a steady, incremental, improvement. We're seeing the incident rates in our accidents go down and that directly impacts our claims expense and so as we see less accidents we'll have less claims expense which is what we'll call insurance and so we will see our costs go down but I think it's going to be incremental. It's not one of those kind of all of the sudden you jump, you go off a cliff, it incrementally improves.
But I can tell you that we are seeing that incremental improvement in our accident rates. And so we believe that our insurance costs will continue to improve as well.
Brian Ossenbeck -- J.P. Morgan -- Analyst
All right. And then last one for me, you mentioned the Drug and Alcohol database expecting to come into place. Do you think that gets put into place on time and then also on the hair follicle testing, I don't think you mentioned that except that you're going through it yourselves right now, so I have a sense of how impactful that could be, I would imagine.
Eric Fuller -- President and Chief Executive Officer
Yeah.
Brian Ossenbeck -- J.P. Morgan -- Analyst
What's the status on that? Is that something that you're expecting will move forward faster and start to make an impact or is it still too early?
Eric Fuller -- President and Chief Executive Officer
Yeah. On the -- on the Drug and Alcohol Clearinghouse, everything we're being told, and we're hearing is that that thing is on track. And so I'm always a little skeptical about what the -- the Federal government and doing things on time, but at this point, we're being told that's on track. So, I've got to believe it's on track and I think that will be very impactful to the driver availability and driver capacity because I do think that we have a fairly substantial drug problem in our employee base.
And so that leads into why we believe that hair follicle testing is so important and why the industry as a whole, and the overall regulatory environment needs to move toward hair follicle testing. However, I'm not real hopeful that that will happen anytime soon because there is not -- seems to be a strong appetite in the Federal government to move to hair follicle testing on a broad scale. So that's one that probably will be something that will happen over a number of years but, hopefully, the Drug and Alcohol Clearinghouse does go into effect like planned and we'll have a positive impact on getting the drug users out of our market.
Brian Ossenbeck -- J.P. Morgan -- Analyst
All right. Thanks Eric. Appreciate the time.
Operator
Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Eric Fuller for closing remarks.
Eric Fuller -- President and Chief Executive Officer
Sure. Thank you. One thing I did want to point out, we've been given this update over the last couple of quarters and we are through the end of the second quarter, we have renewed our contract business. Now, this is both contract rates and Dedicated rates but of the year of 2019, we -- we've renewed about 75% of those rates and we're clocking in just a hair above 3% overall on all of that contract business.
So I think it's just worth pointing out that we're still seeing positive contract increases even though when you look at, you know, on a sequential or year-over-year basis, we have been impacted by that spot base. But with that said, I appreciate everybody for joining today and, you know, we look forward to talking to you again. Thank you.
Operator
[Operator signoff]
Duration: 51 minutes
Call participants:
Brian Baubach -- Senior Vice President, corporate finance
Eric Fuller -- President and Chief Executive Officer
Eric Peterson -- Chief Financial Officer
Ravi Shanker -- Morgan Stanley -- Analyst
Scott Group -- Wolfe Research -- Analyst
Jack Atkins -- Stephens Inc. -- Analyst
David Ross -- Stifel Financial Corp. -- Analyst
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Brian Ossenbeck -- J.P. Morgan -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com
