DALLAS — Dean Foods management and staff plan to close 7 processing plants and integrate that production volume into 21 manufacturing sites within a 6- to 7-week period. The project is designed to reduce costs and optimize the company’s manufacturing capacity. 

The move is necessary given the state of the milk processing industry and the dramatic rise in freight costs that have taken a toll on the company, according to Dean Foods. The situation was evident in the company’s second-quarter earnings for the period ended June 30.

Dean Foods recorded a loss of $40,094,000 during the quarter, which compared unfavorably to the same period of the previous year when the company earned $17,647,000, equal to 19c per share on the common stock.

“The changes we’re making in our business are large. They’re complex, and they must be done right the first time.” — Ralph Scozzafava, Dean Foods

Sales for the quarter ticked up to $1,951,230,000 from $1,926,722,000 the previous year.

“While we’re moving as quickly as possible, the changes we’re making in our business are large,” said Ralph P. Scozzafava, chief executive officer, during an Aug. 6 conference call with securities analysts. “They’re complex, and they must be done right the first time. In some instances, as with our network optimization, the timing of our changes will temporarily lag the changes in our volume and the benefits that we’ll receive within the year. This will impact our previous quarterly and full-year earnings assumptions in 2018 but will not affect our ongoing run rate cost savings objectives once complete.”

Jody L. Macedonio, chief financial officer, said the company is incurring duplicate costs as it prepares the 21 plants to receive the volume of the 7 original plants.

“As you can imagine, you cannot flip the switch overnight,” she said. “The transition requires some duplicate efforts across the network, creating volume deleverage until we completely close the 7 plants in late Q3. We do, however, expect to see meaningful savings from these closures in 2019.”

With regard to freight and fuel costs, Mr. Scozzafava said he expects the pressure to continue throughout the year.

Dean Foods milk“While our cost mitigation plans are being implemented now, we won’t be able to offset all of the cost increases within the year and will occur some above-planned costs in the second half,” he said.

The productivity project is taking place against a backdrop of a category slowly declining. During the quarter, the U.S. fluid-milk category declined 1.4%, according to U.S. Department of Agriculture data.

“In measured channels, I.R.I. data shows a category decline of 3.4%, with higher levels of decline in large format dragging convenience stores, being slightly offset by growth in the dollar channel,” Ms. Macedonio said.

The cumulative pressure prompted management to adjust end-of-year guidance to 32c to 52c per share.

“At the beginning of 2018, we set an aggressive plan, focused on executing a robust set of commercial and cost productivity initiatives,” Mr. Scozzafava said. “I’m pleased with the progress we’ve made in many areas of the business. However, the timing of our network optimization plans has shifted, and we now expect to see benefits beginning in Q4 versus Q3.  We’re also experiencing higher-than-expected non-dairy inflation, along with continued retailer investment in private label, which is impacting our branded product mix.”