2013 Annual Results & Three-Year Plan 2014-2016 Announcement Analyst Meeting March 20, 2014
2013 Annual Results
2013 Annual Results Highlights (US$m) 2012 2013 YoY Change Turnover increased by 3% to US$20.7bn Turnover 20,222 20,745 +3% Total Margin 2,964 3,304 +11% % of Turnover 14.7% 15.9% Operating Costs (2,453) (2,433) (1%) Total margin increased from 14.7% to 15.9% Core operating profit increased by 70% as compared to last year Returning back to 2011 operating financial performance level (COP US$882m) Core Operating Profit 511 871 +70% % of Turnover 2.5% 4.2% Net Profit after Tax 623 755 +21% 1
2013 Annual Results - Net Profit Analysis (US$m) 2012 2013 YoY Change Core Operating Profit 511 871 70% Write-back of Consideration Payable 326 187 Gain on Disposal of Business / Assets (1) 30 5 Legal & Professional Fee for Acquisitions (11) (9) Amortization of Intangible Assets (65) (78) Non-cash Interest Expenses (25) (29) Net Cash Interest Expenses (90) (94) Share of Profits less Losses of Associated Companies / Joint Ventures 1 1 Tax (54) (98) Net Profit after Tax 623 755 21% Non-controlling Interests (1) Distribution on Perpetual Securities (4) (30) Profit Attributable to Shareholders 617 725 17% % of Sales 3.1% 3.5% Profit excluding write-back and other non-cash M&A charges Net Profit after Tax 383 669 75% Profit Attributable to Shareholders 377 639 70% Write-back of acquisition payables of US$187m vs US$326m in 2012 Net P&L impact of US$86m vs US$240m in 2012 (2) Profit attributable to shareholders increased by 17% to US$725m Includes full year effect of perpetual securities Excluding write-back and other non-cash M&A charges, profit attributable to shareholders +70% 1) Includes gain on disposal of the Roots license rights, as offset by the loss of other assets and business disposals 2) Write-back gain net of other acquisition-related costs such as amortization of intangible assets & non-cash interest expenses (before tax) 2
2013 Final Dividend - Per Share Data (HK Cents) 2012 2013 YoY Change Interim Dividend 15 15 Final Dividend 16 34 113% Total Dividend 31 49 58% 3
2013 Annual Results - Segment Overview TRADING LOGISTICS DISTRIBUTION (US$m) 2012 2013 YoY Change 2012 2013 YoY Change 2012 2013 YoY Change Turnover 16,131 16,308 1% 404 526 30% 6,436 6,708 4% Total Margin 1,451 1,498 3% 160 194 22% 1,353 1,612 19% % of Turnover 9.0% 9.2% 39.6% 37.0% 21.0% 24.0% Operating Costs 925 958 4% 136 159 17% 1,392 1,316 (5%) Core Operating Profit 526 539 3% 24 36 50% (39) 296 NA % of Turnover 3.3% 3.3% 5.9% 6.8% (0.6%) 4.4% US sales flat and Europe sales down by 4% with some improvement in 2H Logistics platform continued strong growth across four verticals LF USA recovering from 2012 restructuring ROW sales up by 17% mainly led by strong growth in Canada and Australia New customer wins benefitted from cross selling LF Europe posted strong organic growth Overall COGS trend flat Margin continues to be stable COP margin increased from operating leverage Investing in the business to maintain high growth trajectory LF Asia maintained steady growth with improved operating margin 4
Trading Geographical Market LF Sourcing Agency 2H growth improved despite US government shutdown and bad weather 13% Agency DSG Canada and Australia were strong international markets 17% 70% Trading LF Products Principal DSG continued its growth momentum with improved profitability USA Europe Rest of World Soft Goods / Hard Goods Principal LF Beauty LF Products benefitted from the start of a US housing recovery. Launched higher margin product categories LF Beauty steady growth 69% LF Fashion Overall weakness in Europe negatively impacted LF Fashion business but 2H showed incremental improvement 31% Hard Goods Soft Goods 5
Logistics Logistics Core Operating Profit LF Logistics Acquisition of China Container Line One of the top 5 sea freight forwarders in China Managing over 500K TEUs Network of 18 offices covering Asia, Europe, USA and Latin America (US$m) 50 25 5.9% 24 6.8% 36 8% 4% Growth 50% Strategic Benefits Significantly increase scale & scope on international freight forwarding platform Connecting Asia to the rest of the world 0 2012 2013 0% COP COP Margin % Provide end-to-end logistics to existing and new customers 6
Distribution LF USA Geographical Market USA restructuring and portfolio optimization showing positive results Turnover increased 2% despite some discontinued 25% LF USA brands in 2012 Recovery on track with over $270m swing in COP from 2012, driven mainly by margin improvement and operating cost reduction 25% 50% Margin recovered significantly and on track to 2011 level Distribution LF Europe LF Europe Europe solid growth and market share gain with 2H improvement in the UK market USA Europe Soft Goods / Hard Goods Asia LF Asia Benefitted from presence in UK and Germany LF Asia 54% 46% LF Asia focused on profitability and higher margin business Disposed of Roots licensing rights to focus on brands that LF Asia F&H can add value in design and merchandising Hard Goods Soft Goods 7
Group Geographic Turnover Mix 2012 6% 2013 7% 12% 12% 19% 63% 19% 62% USA Europe Asia Rest of World 8
Sourcing Trends in 2013 1% China 10% Vietnam LF s Top 10 Countries in Production Volume 2012 2013 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th China Vietnam Bangladesh Indonesia India Turkey Cambodia Philippines Thailand Guatemala China Vietnam Bangladesh Indonesia India Cambodia Turkey Philippines Thailand Guatemala 20% Turkey 9% Bangladesh 3% India 10% Cambodia 8% Thailand 19% Philippines 4% Guatemala 4% Indonesia China remains to be the key sourcing country 9
Financials & Cash Flow
Strong Return to 2011 Operating Level Total Margin % Core Operating Profit Operating Cash Flow 30% (US$m) 1,000 882 871 (US$m) 1,000 924 943 20% 15.3% 14.7% 15.9% 667 511 667 586 10% 333 333 0% 2011 2012 2013 2011 2012 2013 2011 2012 2013 Total Margin % Core Operating Profit % Distribution Trading 30% 23.9% 24.0% 21.0% 20% 10% 8.9% 9.0% 9.2% 0% 2011 2012 2013 6% 4.7% 4% 4.4% 3.6% 2% 3.3% 3.3% 0% (0.6)% -2% 2011 2012 2013 10
Organic Growth vs Acquisitions Core Operating Profit (US$m) 1,200 1,000 800 290 33 37 871 600 511 400 200 0 2012 COP Organic Business 2012 Acquisitions 2013 Acquisitions 2013 COP (Full Year Effect)* Organic Business 2012 Acquisitions 2013 Acquisitions Group in Margin 157 101 82 340 in Operating Cost 133 (68) (45) 20 in COP 290 33 37 360 * Incremental COP from 2012 acquisitions based on a full year effect 11
Operating Cost Analysis Operating Cost (US$m) 2,500 2,453 45 2,433 2,400 68 30 2,300 (163) 2,200 2012 Operating Cost Operating Cost Saving Cost Saving LF Logistics / LF Asia Investment in Organic Growth 2012 Acquisitions (Full Year Effect)* Acquisitions Related 2013 Acquisitions 2013 Operating Cost Total decrease in Operating Cost US$20m * Incremental operating cost from 2012 acquisitions based on a full year effect 12
Balance Sheet (US$m) 2012 2013 Bonds 1,255 1,255 Bank Loan 218 211 Total Debt 1,473 1,466 Cash 680 460 Net Debt 793 1,006 Solid balance sheet with low gearing ratio of 15.3% (3) No increase in total debt since December 2012 Total available bank facilities of US$1.6bn and undrawn facilities of US$1.4bn Shareholders Funds 4,622 5,037 Perpetual Capital Securities 504 503 Total Equity (1) 5,137 5,550 Total Capital (2) 5,930 6,556 Gearing Ratio (3) 13.4% 15.3% (1) Includes shareholders funds, perpetual capital securities, and non-controlling interests (2) Total capital is the sum of net debt and total equity (3) Net debt divided by total capital 13
Acquisitions
Acquisitions and Joint Venture (Since Interim Results Announcement in Aug 2013) Acquisition Update 5 acquisitions in 2H 2013 Total consideration: US$175m - Initial payment: US$69m - Earn-out + Earn-up: US$106m Joint venture with Iconix Group - Distribute licensed brands in SE Asia 2 new acquisitions in 2014: - The Licensing Company (TLC): Brand management - China Container Line: International freight forwarder Acquired Company - New Concept - Krasnow (Aquatalia) - Jiangsu Soho (Jeep Kids) - Sicem - R-Tsion (Scemama) Distribution Expand Global Brand Portfolio Expand Character License Platform 14
New Three-Year Plan 2014-2016
New Three-Year Plan Key Scenarios Production Base Migration End of deflationary era driven by changes in wage and macro policies in China Accelerated movement of factories to new, lower cost regions Worker Safety and Compliance Increasing global focus in factory safety compliance ecommerce Technology changing consumer interactions with brands and products Retailers facing increased competition from ecommerce Critical to have fast response time and multi-channel supply chain 15
Unrivaled Global Network Over 300 offices and distribution centers in more than 40 economies Trading Offices: 65 Logistics Offices: 49 DCs: 170 Distribution Offices: 66 16
Trading Network
Trading Network Multi-channel Sourcing Global Sourcing Platform Customers buy through multiple channels Trading Network operates in all channels to match customers requirements Trading Agency - Sourcing customers own designs - Commission margin basis - FOB - Product development and Sampling Principal - Acts as supplier on product margin basis - Deep product expertise - FOB / LDP - Product design / technical 17
Vendor Support Services Production Base Migration Worker Safety and Compliance Vendors Trading Customers Collaborate with vendor base to raise standards and improve efficiency Vendor Support Services Sourcing Services Strategy Vendor Support Services Safety and compliance training and audits Product development technical and operations support Raw material procurement Trade credit services Product liability insurance Product testing Logistics support services Consolidate various services provided to vendors into a new single business unit reporting directly to the Chairman Formulate full menu of services offering to the vendor base and not just focus on Li & Fung s own customers Continue to build-up capabilities in this 3YP and achieve scale by 2016 Be the Go To partner for both customers and vendors in the global supply chain 18
Trading Network Focus on Organic Growth Targeting 2016: * High Single Digit Top-line Growth Low Double Digit COP Growth * On a 3-year CAGR basis 19
Logistics Network
Logistics Growth Path 2011-2013 COP CAGR 42% 2013 2014 Acquired CCL to expand International Freight Forwarding 2010 2011 2012 Strong organic growth and cross selling Strong finish to 3YP Successful acquisition to strengthen Taiwan s transport platform Investing to maintain high growth trajectory Successful integration IDS Logistics acquisition 20
Key Customer Wins 2013 H1 2012 H2 H1 2011 H1 H2 H2 21
Connecting Asia to the Rest of the World North Asia China Hong Kong Taiwan Japan Korea Acquisition of CCL Expanding international freight forwarding capability Strong synergies with LF Sourcing 100% ASEAN South Asia India Pakistan Bangladesh Sri Lanka Indonesia Malaysia Philippines Thailand Singapore Cambodia Vietnam Myanmar 0% Before M&A In-Country Solution After M&A Freight Forwarding New country coverage (2014-16) 22
Key Verticals Footwear, Apparel & Accessories Fast Moving Consumer Goods Retail Food & Beverage 23
Logistics Network 3YP Strategic Targets Maintain growth trajectory of double digit COP growth Support growth with strategic acquisitions Network expansion in North Asia, Middle East, and India sub-continent Expand logistics platform and infrastructure to support omni-channel retail Leading Asia logistics provider in our product verticals 24
Global Brands Group
Reorganization of Distribution Network Private Label and Brands businesses are different in nature, and both are growth areas Requires different expertise and management focus Private Label Sourcing skills, product development and design, focus on value and pricing Brands Fashion design capabilities, responsiveness to fashion trends, brand development and marketing skills Private Label Focus in sourcing and supply chain management Brands Focus in brand and licensing development Strong network of suppliers and manufacturers Operational efficiency and cost management Superior design capability Responsiveness to fashion trends Brand development and marketing skills 25
New Structure Pre-Reorganization Post-Reorganization Brands & Licensing USA Brands & Licensing USA Distribution Brands & Licensing Europe & Asia Brands & Licensing Europe & Asia Global Brands Group Global Brands & Licensing Platform LF Asia FHBC Private Label USA & Europe Trading Principal Principal Trading Global Sourcing Platform Agency Agency 26
Global Brands Group Pro Forma 2013 Financials Net Sales US$3.3bn Margin US$1.0bn COP US$134m 3,000+ Employees 700+ Designers 350+ Licensed & Controlled Brands Over 50 Offices Globally 27
Business Overview Licensed Brands Fashion Characters Home & Accessories Controlled Brands Footwear Fashion Accessories Footwear 28
Business Model Licensed Brands Controlled Brands Fashion Characters Home & Accessories Footwear Fashion Accessories Footwear Service Group that maximizes value creation and growth opportunities for both controlled and licensed brands Strong Licensor and Retailer Relationships Focused Product Expertise Brand Management Global Distribution World Class Design 29
Global Brands Group Strategy Strategy Further build out portfolio of licensed brands Add additional category capability Acquire scalable brands which are capable of being globalised Increase geographic and channel footprint Continued increase in margin and rationalization of cost structure Targeting Return to 2011 operating margin More than double COP by 2016 Note: Targets represent Global Brands Group as a division of Li & Fung to achieve the company overall targets 30
Three-Year Plan Target
Three-Year Plan Target (2016) Focus on Organic Growth Trading Standalone COP larger than the entire group today Logistics 2X COP Global Brands Group Over 2X COP Improving Return on Invested Capital (ROIC) 31
Potential Spin-off of Global Brands Group Aim to achieve a listing on HKSE in 2014 Structured as 100% distribution in specie Fully capitalize on Global Brands Group s potential LF Sourcing will continue to provide sourcing services to GBG 32
2013 Annual Results & Three-Year Plan 2014-2016 Announcement Analyst Meeting March 20, 2014
Appendix
2013 Pro Forma Financial Turnover* Margin Core Operating Profit Pre-Reorganization 16,308 69% 1,498 45% 539 62% Trading Logistics (US$m) Distribution 6,708 29% 526 2% 1,612 194 6% 296 34% 49% 36 4% Post-Reorganization 18,515 83% 2,100 63% 701 80% (US$m) Trading Logistics Global Brands Group * Turnover per statutory account before elimination 3,288 15% 526 2% 1,010 31% 194 6% 134 16% 36 4% 33
Retail Value Chain Overview Brand Buying Office Direct to Consumers Factories Sourcing arrangement Sourcing arrangement Sourcing Providers Agency Principal Sourcing arrangement Sourcing arrangement Brand Owners Licensing arrangement Brand Licensees Wholesale Retailers Retail End Consumers Sourcing arrangement Retailer Buying Office Logistic Providers 34
Evolution of Distribution Network s l ba n tio u b i istr D Sourcing Onshore wholesale private labels to US top 10 retailers Glo d ran B IP Controlled Brands Licensed popular fashion & character brands for multi-retail distribution Licensed proprietary brands exclusive to single retailer Agency & Principal Sourcing Based in Asia Time 35
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