Shareholders shocked by LIC's $20m 'transformation costs'

LIC is dominant in the country's dairy genetics supply and herd testing sectors and provides information technology and farm advisory services.

Shareholders of Livestock Improvement have been shocked to learn from the farm services company's half-year result that it has spent $20.7 million on "transformation costs".

Chief executive Wayne McNee said the costs were accrued in the past two years and were not related to a continuing proposal to restructure the cooperative's share standard.

He would not say where the money went, but it is understood that consultant fees are involved.

"We can't disclose that, we gave an agreement that we won't disclose who payments were made to, although not all was made to one [party], there are some operating costs in the business and the like. But it's transparent in the accounts that we had significant transformation costs."

LIC is farmer-owned with farmer "investment" shares listed on the NZAX. It has a market capitalisation of $66m and is dominant in the country's dairy genetics supply and herd testing sectors and provides information technology and farm advisory services.

Shareholder and Federated Farmers dairy chairman Chris Lewis said farmers would be "astounded" to learn about the amount of the costs. He suspected many would not have read the half-year result.

"It's a small company, farmers will be bewildered by that amount."

Waikato dairy farmer shareholder Garry Reymer was not aware of the costs, which seemed "an awful lot of money".

But he said if shareholders lost interest in their cooperatives and did not pay attention, they lost control of them.

"I'm as guilty as anyone else. I don't know what the costs are."

Reymer said it was troubling if the $20.7m costs were just for running the business. If they were for assistance rationalising the share standard as is being proposed now, consultant fees mounted very quickly.

But McNee told the Herald "none of the cost related to that [share restructure]".

He said LIC had to transform the business after it posted its first ever loss in 2016 after the milk price slump which saw farmers close their wallets.

"The business needed to change significantly."

The resulting cost savings and growth initiative benefits were evident in the half-year result for the six months to November 30, he said.

Revenue of $153m was up 16.6 per cent on the same period the previous year, and earnings before interest, tax, depreciation and amortisation (ebitda) was up 36.6 per cent at $57.5m, excluding the one-off transformation costs.

Net profit of $15.1m was 21.9 per cent down due to the one-off transformation costs. There would be no more transformation costs, McNee said.

Asked what senior management of a medium-sized business were paid for if consultants had to be brought in to improve it, McNee said LIC had been through a difficult and unusual period.

"We needed to do things differently and we didn't have all the ideas. We did have some help but the benefits of that are really clear to see in the accounts."

LIC's last annual report suggests McNee's salary is in a band of $850,000-$859,999.

LIC in its half-year report said underlying earnings for 2018/19 were expected to be in the range of $18m to $26m assuming no adverse weather event or milk price drop.