Why is Fonterra looking at selling Tip Top?

Fonterra' is considering sale of its ice cream brand Tip Top.

Chairman John Monaghan said it was looking at its ongoing ownership of Tip Top and had appointed FNZC as an external advisor to consider a range of options.

STUFF Fonterra has appointed advisors to help it decide whether or not to sell Tip Top.

"We want to see Tip Top remain a New Zealand based business and this is being factored into our options," Monaghan said.

"While performing well, Tip Top is our only ice cream business and has reached maturity as an investment for us. To take it to its next phase successfully will require a level of investment beyond what we are willing to make."

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A "save Tip Top ice cream" petition has already been launched in light of the announcement.

Fonterra chief executive Miles Hurrell said the key thing was to find a New Zealand buyer.

"We understand the importance of this brand in a New Zealand context," Hurrell said.

The Tip Top brand and a manufacturing plant in Mt Wellington would be included in the sale review.

He could not say how many staff worked at the manufacturing plant but if put up for sale Tip Top would be sold as a going concern, he said.

"It has a strong brand a strong presence in New Zealand so we see no impact on those manufacturing staff."

Very few Tip Top products were exported, he said.

DOMINICO ZAPATA/STUFF Miles Hurrell took over as Fonterra's chief executive earlier this year.

If a sale went ahead Fonterra would want to keep supplying Tip Top with dairy ingredients, he said.

Fonterra chief financial officer Marc Rivers said the sale review was part of an overall portfolio review, designed to reduce its debt by $800m.

"It's a great business and one that we're very proud. It's done well."

JASON DORDAY/Stuff.co.nz Take a tour of Tip Top's Mt Wellington factory in Auckland, where all the Trumpets are made.

Tip Top was first established in 1936 in Wellington and has been under Fonterra ownership since 2001.

It's had various owners over the years, including Western Australian company Peters and Brownes which bought it in 1997.

It was then brought back into New Zealand ownership when Fonterra was formed in 2001.

JASON DORDAY/STUFF Fonterra chairman John Monaghan says it's looking at its ongoing ownership of Tip Top.

Fonterra retaining part or full ownership were both options, he said.

If a sale did go ahead it would be by the end of the fiscal year, which ends on July 31 for Fonterra.

Fonterra gets a lot of interest from potential buyers, he said.

"We get a lot of interest in this one."

The Tip Top announcement came as Fonterra posted a first quarter gross margin down $14 million on the same period last year.

The dairy giant posted a $646m gross margin for the first quarter on revenue of $3.8 billion, which is down 4 per cent.

Fonterra reports profit at half year and full year financial announcements only.

Rivers said gross margin "contributes to profit but it doesn't go all the way down so it's sales minus cost of goods".

But it did not include some other items that featured in a half or full year profit and loss statement, such as other expenses, he said.

CHRISTEL YARDLEY/STUFF Fonterra collects 82 per cent of milk produced in New Zealand.

The co-operative also downgraded its 2018/19 forecast Farmgate Milk Price range from $6.25-$6.50 per kilogram of milk solids to $6.00-$6.30 per kilogram.

A 25 cent milk solid price cut would cost the country about $459m. For the average New Zealand farmer milking 431 cows averaging 368kg MS per cow it represents a $39,652 blow.

It is the first financial performance update since the dairy cooperative posted its first ever full year loss of $196m in September.

The September loss was largely due to a $405m write down of its Chinese investment Beingmate and damages payment of $183m to Danone following a court case in relation to the 2013 botulism scare.

STUFF Fonterra factors in fat and protein levels in milk when buying it off farmers.

Hurrell said the co-op generally makes a smaller proportion of its total annual sales in the first quarter due to the seasonal nature of milk supply.

"This means the results from Q1 do not give much insight into the co-op's expected earnings performance for the full year," Hurrell said.

"It does, however, put the spotlight on where we have challenges that we need to address," says Mr Hurrell.

At the company's annual meeting in November Fonterra said it would be reviewing its assets and some would be divested.

That process appears to have gotten underway, with Fonterra announcing on Wednesday it had reached a provisional agreement on key terms to unwind its Darnum joint venture with Beingmate.

The Darnum plant was opened by Bonlac Foods in July 1997, before Fonterra acquired the site in 2006. The plant produces nutritional powders for the domestic and global markets.

Fonterra would regain full ownership of the Darnum plant by December 31 and enter into a multi-year agreement for Beingmate to purchase ingredients from it.

Units in Fonterra are trading at $4.71, a 26 per cent discount from where they were a year ago.