DALLAS — The closing and consolidation of seven manufacturing plants combined with higher-than-expected transitory costs dragged down earnings at Dean Foods Co. in the third quarter. The Dallas-based company sustained a loss of $26,424,000 in the third quarter ended Sept. 30, which compared with net income of $1,382,000, equal to 2c per share on the common stock, in the same period a year ago.
News of the sluggish results led the company’s share price sharply lower on Nov. 7, falling more than 27% to as low as $5.62 in mid-day trading on the New York Stock Exchange.
“We’re proactively executing an exciting transformation of Dean Foods,” Ralph P. Scozzafava, chief executive officer, said during a Nov. 7 conference call with analysts. “We’re making enormous changes to a decentralized roll-up company, and we’re establishing different ways of working. Our business is changing, and we have to ensure that we have the right capabilities within and across the organization. Moving from where we were in 2017 to where we are today has been a significant undertaking. We’re making investments in new systems and capabilities that will enable us to compete more effectively in this dynamic marketplace.
“That said, it was an extremely challenging quarter as we embarked on a compressed timeline to execute seven plant closures. We incurred significant transitory costs related to ramping up receiving plant locations, while also experiencing deleverage as volume exited the closing facilities. These costs … combined with lower volume in the quarter, had a negative compound effect on our bottom-line performance. Clearly, we’re not happy that the rewards of our efforts are not yet readily visible in our results. The value from our enterprise-wide cost productivity plan will become more impactful in our operating results in 2019.”
Net sales at Dean Foods in the third quarter totaled $1,894,066,000, down 2.3% from $1,937,620,000 in the same period a year ago.
Elaborating on the consolidation efforts, Mr. Scozzafava said Dean essentially touched almost half of its entire network in a six-week period.
“This level of activity in such a short period of time is unprecedented in our history here at Dean Foods,” he said.
Mr. Scozzafava said the last time Dean undertook an accelerated cost reduction initiative it transpired over an 18-month period and included the closing and consolidation of 12 plants. The most recent activity involved more than 50% of what was closed during that 18-month period, but it was completed in less than one-tenth the time, he noted.
“So clearly, closing seven plants in six weeks is far more compressed and complex, which reflects more negatively in the short term, but will ultimately allow us to achieve our run-rate benefits much faster,” he said.
He continued, “When you close a plant, you’re taking volume out of a closing plant and you’re moving it to a receiving plant. This doesn’t happen overnight. In fact, throughout the volume transition process, the closing plant is deleveraging more and more each day until the day it actually closes.
“On the side of the receiving plant, it’s important to note that different plants produce different products. So many receiving plants need to receive and install new equipment and hire and train new employees, all well in advance of the new volume actually arriving. Once the additional volume arrives, there’s still a period of start-up time. And then there’s a need to stabilize the operations to ensure they’re running smoothly with the new volume now in the new plant.”
With four of the seven plants closing in the last week of September, Mr. Scozzafava said Dean expects residual start-up and transitory costs to extend into the fourth quarter.
Going forward, Mr. Scozzafava said the successful completion of Dean’s cost productivity plan at the end of 2019 will enable the company to be a leaner and more agile organization that can better meet the challenges present in the current marketplace.
“We have the right plan,” he said. “We’re moving quickly and with purpose. And importantly, we have the right team in place to get it done.”