Fonterra is considering the sale of its New Zealand ice cream brand Tip Top as it aims to reduce its debt levels by NZD 800 million ($550.1 million) by the end of the financial year.
Tip Top, which was founded in Wellington in 1936, sells a range of ice cream products and ice lollies. The dairy co-operative said it wants to see Tip Top remain a New Zealand business.
Fonterra chairman John 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.”
The announcement comes as Fonterra reveals its first-quarter results, in which its revenue was down 4% to NZD 3.8 billion ($2.61 billion) and sales volumes shrank 6% to 3.6 billion liquid milk equivalent.
In its full-year results, published in September, the firm reported a net loss of NZD 196 million ($128.5 million) – its first annual loss since its inception in 2001.
The poor figures were affected by a legal settlement with Danone after a false botulism scare in 2013 and a NZD 439 million ($287.7 million) writedown on Fonterra’s investment in Chinese infant formula maker Beingmate.
Fonterra chief executive Miles 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 its 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,” he said. “It does, however, put the spotlight on where we have challenges that we need to address.
“In particular, we are seeing challenges in our Australian ingredients, Greater China foodservice and Asia foodservice businesses. I want to be clear with our farmers and unit holders about how we are tackling these issues.
“In our Australian ingredients business, we have lower milk collections as a result of drought conditions and increased competition for milk supply. We are responding by focusing on the performance levers in our control – the main one being reducing our operating expenses to reflect lower milk collections.
“The lower gross margins and sales volumes in Greater China foodservice and Asia foodservice in Q1 are mainly due to the high sales volumes of butter and cream cheese at the end of Q4 2018, a slightly slower start to sales of UHT culinary cream and more sales of UHT milk which has a lower margin relative to our other products.
“We are expecting our sales to lift as we are seeing strong sales from our distributors off the back of demand in China for New Zealand made products, particularly our UHT culinary creams. We are also prioritising value and moving away from lower margin contracts.”
Fonterra chief executive Miles Hurrell
Yesterday, Fonterra announced it had reached an agreement with Chinese infant formula firm Beingmate to unwind their joint venture in Darnum, Australia.
Fonterra will return to full ownership of the Darnum plant by 31 December 2018 and enter into a multi-year agreement with Beingmate for the Chinese business to purchase ingredients.
In respect to a three-point plan to lift the co-op’s performance, Hurrell added that progress is being made on fixing the businesses that are not performing.
“Fonterra brands New Zealand is one of the businesses that is starting to turn around,” he said. “It’s early days but overall our consumer and foodservice business in Oceania delivered higher sales volumes and margins for Q1 compared the same period last year. A significant contributor of this is the improved operational performance in New Zealand.
“We have set our capital expenditure (CAPEX) limit at NZD 650 million ($446.5 million). While we are ahead on the same time last year, this was planned as we completed the final stages of projects from last year. Once these assets are delivered, our focus will turn to ensuring they hit their return on capital targets.
“We remain committed to returning our operating expenses (OPEX) to FY17 levels – however, they were up 3% for the first quarter compared to the same period last year. The majority of these costs were committed to before I set our new OPEX target.
“They relate to higher advertising and promotion and storage costs in our consumer and foodservice business, additional costs since taking the management of anmum back from Beingmate and higher storage and distribution costs for ingredients as we collected and moved more milk than we budgeted for.”
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