Presentation 22 August 2018
Exceeded 3YP targets in 2017, but 2018 is challenging due to continued destocking, store closures and bankruptcies Profit attributable to shareholders (like-for-like) down 19% Highlights Divestment of Product Verticals brought in US$1.1B of cash Trade war has minimal impact on our business and mitigated by our 50+ countries of production Announced an aggressive plan to bring greater focus on customers, business development, production platform and digital initiatives Seeking IPO for Logistics business to enhance its growth 2018 Interim Results I LI & FUNG 1
Three-Year Plan Goal 2
Three-Year Plan Goal Our goal is to create the supply chain of the future to help our customers navigate the digital economy and to improve the lives of one billion people in the supply chain. 2018 Interim Results I LI & FUNG 3
Mid-way through the 3YP 3YP Financial Targets Announced in Mar 2017 The Group 2017 2018 2019 2019 Target Top Line Stabilize Growth Low double-digit by 2019 (1) COP Stabilize Growth Low double-digit CAGR COP Margin Stabilize Growth 50+ bps by 2019 Additional Capex $150M for Digitalization over 3 years (1) Low double-digit total growth from 2016 to 2019 period; single-digit CAGR 2018 Interim Results I LI & FUNG 4
Simplifying Our Business 2014 2016 2017 Asia Consumer & Healthcare Distribution Business Product Verticals Spin-off Strategic Divestment Strategic Divestment Distribution in Specie US$350m US$1.1B 2018 Interim Results I LI & FUNG 5
Business Simplification & Turnover Evolution US$ 2013 2017 Li & Fung Today 20.7B 13.5B 1.2B 1.9B 1.2B 6.4B Divestment + Spin off 3.3B 3.3B 3.3B GBG Spin off Strategic Divestment: Asia Consumer & Healthcare Distribution Strategic Divestment: Product Verticals 2018 Interim Results I LI & FUNG 6
2018 Interim Financial Results 7
2018 Interim Results Highlights 1H 2018 US$m 1H 2017 US$m (restated) 1 Change % Turnover 5,850 6,471 (9.6%) Total Margin 614 642 (4.4%) As % of Turnover 10.5% 9.9% Operating Costs 489 491 (0.2%) As % of Turnover 8.4% 7.6% Core Operating Profit 124 151 (18.0%) As % of Turnover 2.1% 2.3% Adjusted Profit Attributable to Shareholders (like-for-like) (2) 50 62 (19.2%) Turnover fell by 9.6% due to continued destocking, retail store closures, & bankruptcies Low single digit deflation Total margin percentage up 60 basis points to 10.5% Operating costs flat despite investment in Logistics business growth Core operating profit (COP) fell by 18% Profit attributable to shareholders (like-for-like) decreased by 19% (1) Restated historical financials to reflect the three Product Verticals presented as discontinued operations (2) Profit Attributable to Shareholders - Continuing Operations excluding write-back of Acquisition Payable 2018 Interim Results I LI & FUNG 8
2018 Interim Results Net Profit Analysis 1H2018 US$m 1H2017 US$m (Restated) 1 Change % Core Operating Profit 124 151 (18.0%) Continuing Operations w/o Product Verticals Profit for the Year 79 123 Perpetual distributions (29) (32) Profit Attributable to Shareholders 50 91 excl.: Write-back of Acquisition Payable - 30 Adjusted Profit Attributable to Shareholders 50 62 (19.2%) Discontinued Operations - Profit/(loss) Attributable to Shareholders (135) 10 Adjusted Profit attributable to shareholders decreased by 19% from US$62m to US$50m on a likefor-like basis o 1H17 included US$30m gains on write-back Discontinued Operations loss of US$135m in 2018 includes: o o US$21m operating loss from Product Verticals during first 3 months of 2018 US$114m disposal loss primarily triggered by non-cash foreign exchange reserve translation 2 (1) Restated historical financials to reflect the three Product Verticals presented as discontinued operations (2) The losses were mainly triggered by the realization of prior period foreign exchange non-cash translation losses in the the Group equity account at the time of closing in 2018 2018 Interim Results I LI & FUNG 9
Supply Chain Solutions 1H 2018 1H 2017 Change US$m US$m % Turnover 4,560 5,326 (14.4%) Total Margin 297 351 (15.5%) As % of Turnover 6.5% 6.6% Operating Costs 223 247 (9.8%) As % of Turnover 4.9% 4.6% Core Operating Profit 74 104 (29.1%) As % of Turnover 1.6% 2.0% Turnover fell by 14.4% due to continued destocking, retail store closures and bankruptcies Low single digit deflation Strong growth in off-price segment and hard goods categories Customers starting to embrace our speed and digital modules Operating costs decreased by 10% COP fell by 29% and COP margin declined 40 basis points to 1.6% 2018 Interim Results I LI & FUNG 10
Logistics 1H 2018 1H 2017 Change US$m US$m % Turnover 543 490 +10.9% Total Margin 190 166 +14.2% As % of Turnover 35.0% 34.0% Operating Costs 153 134 +14.0% As % of Turnover 28.1% 27.3% Core Operating Profit 38 33 +15.1% As % of Turnover 6.9% 6.7% Turnover increased by 11% driven by market share gains, geographical expansion and success in new markets Market weakness in freight rates impacted turnover Robust consumption growth in Asia provided strong impetus to in-country logistics, particularly e- logistics COP increased by 15% and COP margin improved 20 basis points to 6.9% 2018 Interim Results I LI & FUNG 11
Onshore Wholesale 1H 2018 1H 2017 Change US$m US$m % Turnover 763 674 +13.1% Total Margin 127 124 +2.0% As % of Turnover 16.6% 18.4% Operating Costs 114 110 +3.9% As % of Turnover 15.0% 16.3% Core Operating Profit 12 14 (12.9%) As % of Turnover 1.6% 2.1% Turnover increased by 13% due to recovery from selected customers and ramp of Asia business Total margin percentage declined by 180 basis points to 16.6% due to highly promotional retail and weak UK consumer sentiment COP fell by 13% and COP margin declined 50 basis points to 1.6% 2018 Interim Results I LI & FUNG 12
Capital Structure Jun 2018 US$m Dec 2017 US$m Bonds 752 752 Bank Loans 29 25 Total Debt 781 777 Cash 319 349 Net Debt 462 428 Total Equity 1,843 2,914 Total Capital 1 2,304 3,342 Gearing Ratio 2 20% 13% Maintained strong balance sheet and similar net debt level of US$462m Redeemed US$500m perpetual capital securities in May 2018 Conservative gearing ratio of 20% despite reduction of US$1b in total capital due to special dividend and perpetual securities redemption Total available bank facilities was US$1.6b with US$1.56b undrawn, of which US$827m was committed lines (1) Sum of net debt and total equity (2) Net debt divided by total capital 2018 Interim Results I LI & FUNG 13
Dividend Policy Dividend payout ratio tied to Profit to Shareholders Target 50-70% payout ratio Declared interim dividend per share of 3 HK cents 2018 Interim Results I LI & FUNG 14
Our Response to The Changing Environment 15
Aggressive Plan to Respond to Changing Environment Challenges What s Needed Responses Customer needs are changing Bring greater focus on core customers Reorganized account management teams Production base shifting Improve global KPIs & productivity Chief Operating Officer to lead global production platform End-to-End Digital Supply Chain Speed up development Chief Digital Officer to accelerate digitalization 2018 Interim Results I LI & FUNG 16
Focused Reorganization Customers Focus Front End Account Management Business Development Digital Platform Back End Production Platform (Operational Excellence) 2018 Interim Results I LI & FUNG 17
Business Development Progress 32 2 29 New Customers $1 Billion+ Prospective Potential Customers Speed Innovation Digitalization Data Analytics Productivity Supply Chain Solutions Global Business Development LF Ecosystem 2018 Interim Results I LI & FUNG 18
Diversified Sourcing Strategy Global network of 50+ production countries to mitigate US-China trade war Americas Europe Africa Asia 20-30 years of long term relationships with local vendors and business community Proven ability to move quickly between countries of production Brazil Canada El Salvador Guatemala Haiti Mexico Nicaragua USA Venezuela Austria France Germany Italy Latvia Luxembourg Macedonia Poland Portugal Romania Spain Switzerland Turkey Ukraine UK Egypt Kenya Lesotho Madagascar Mauritius Tunisia Australia Bangladesh Cambodia China Hong Kong India Indonesia Israel Japan Jordan Macau Malaysia Myanmar Pakistan Philippines Korea Singapore Sri Lanka Taiwan Thailand Vietnam 2018 Interim Results I LI & FUNG 19
Diversification away from China Total Sourcing Business from China 2016: 54% 2017: 53% 2018: 49% Apparel Footwear Hardgoods From China to these countries: Bangladesh Vietnam India Pakistan Central America Jordan Philippines Turkey Vietnam India Indonesia Italy Spain Eastern Europe Cambodia Indonesia Philippines Taiwan 2018 Interim Results I LI & FUNG 20
US-China Trade War The US announced plans to raise tariffs of up to 25% on a range of products made in China worth US$200B. could take effect on Jul 6 Aug 7 Aug 31 No. of tariff Lines: 818 279 6,031 Amount Impacted: US$34B US$16B US$200B Additional Tariff %: 25% 25% 10% or 25% Impact to LF Turnover: 0 0 < 2% 2018 Interim Results I LI & FUNG 21
Case Study Production Migration Over a 5-year horizon, lower China dependency to offset cost pressure Continue to expand in Vietnam, India, Bangladesh and Indonesia 2018 Interim Results I LI & FUNG 22
Three-Year Plan Themes 23
Our 3YP Core Themes Speed Innovation Digitalization Data Analytics Productivity Supply Chain Solutions Global Business Development LF Ecosystem 2018 Interim Results I LI & FUNG 24
Speed GOAL 12/2019 6/2018 1/2017 20 weeks 30 weeks 40 weeks Stabilize Lead time 10 weeks 50% achieved Speed Innovation Digitalization Data Analytics Productivity Supply Chain Solutions Global Business Development LF Ecosystem 2018 Interim Results I LI & FUNG 25
Destocking Illustration Customer Turnover Inventory Replenishment (Customer Order) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Destocking 2018 Interim Results I LI & FUNG 26
Destocking I Customers at Different Stages Customer A Customer B Customer C Customer D Year Year Year Year Year Year Year Customer Turnover 1 2 3 4 5 6 7 Customer Order 2018 Interim Results I LI & FUNG 27
3D Virtual Design Team size: 5X Customers: 10X No. of Design Style: 40X Speed Innovation Digitalization Data Analytics Productivity Supply Chain Solutions Global Business Development LF Ecosystem 2018 Interim Results I LI & FUNG 28
LF Ecosystem Our ecosystem of partners reaches more than $2 Trillion dollars of retail sales Areas of focus 3D Virtual Design Automation Blockchain Supply Chain Solutions Types of partnership Licenses Strategic Alliances Joint Ventures Investments Speed Innovation Digitalization Data Analytics Productivity Supply Chain Solutions Global Business Development LF Ecosystem 2018 Interim Results I LI & FUNG 29
LF Logistics 30
Li & Fung Logistics IPO Enhance growth of the Logistics business 494.HK Further strengthen the Group s capital structure Controlling shareholder LF Logistics (To be listed on HKEx) 1 Public Float 494 HK will remain controlling shareholder and consolidate Logistics results Already engaged third-party advisors for the spin-off and listing applications Expect listing in 1H 2019 1. Spin-off and listing are subject to HKEx approval 2018 Interim Results I LI & FUNG 31
Our Network 17 jurisdictions (incl. US and UK) Korea Japan 235 Distribution centers China >26 million square feet DC space >16 billion units shipped per annum >500,000 TEUs handled per annum >8,000 staff Pakistan India Bangladesh Thailand Taiwan Hong Kong Philippines Cambodia Vietnam Malaysia Singapore Indonesia 2018 Interim Results I LI & FUNG 32
Our Sandbox E-commerce Footwear & Apparel Channels Trade Partner Retail Core industry categories Core industry verticals FMCG Food & Beverage Healthcare Electronics 2018 Interim Results I LI & FUNG 33
Growth Drivers E-commerce New Categories Healthcare, Electronics Freight Forwarding Productivity Improvement New Markets India, Korea, Japan & Vietnam 2018 Interim Results I LI & FUNG 34
Healthcare Thailand 2018 Interim Results I LI & FUNG 35
Electronics China & Singapore 2018 Interim Results I LI & FUNG 36
2017 Singles Day 32 customers 13 locations 48M messages 8.48M units 5.81M orders LF Logistics Single s Day Volume (Unit: million units) 2013 2014 2015 2016 2018 Interim Results I LI & FUNG 37 2017
Freight Forwarding Over 500,000 TEUs shipped annually Europe China North America Leading freight forwarder in Ningbo, one of the largest ports in the world South Asia Leading C&F freight forwarder in China ASEAN Australia Top 15 freight forwarder on the Trans Pacific lane Continued cross selling with In Country 2018 Interim Results I LI & FUNG 38
Performance Trends Turnover COP US$m CAGR 20% US$m CAGR 27% 1,000 100 800 80 600 60 400 40 200 20 0 0 11 12 13 14 15 16 17 11 12 13 14 15 16 17 2018 Interim Results I LI & FUNG 39
Exceeded 3YP targets in 2017, but 2018 is challenging due to continued destocking, store closures and bankruptcies Profit attributable to shareholders (like-for-like) down 19% Summary Divestment of Product Verticals brought in US$1.1B of cash Trade war has minimal impact on our business and mitigated by our 50+ countries of production Announced an aggressive plan to bring greater focus on customers, business development, production platform and digital initiatives Seeking IPO for Logistics business to enhance its growth 2018 Interim Results I LI & FUNG 40
Disclaimer The information contained in this presentation is intended solely for your personal reference. Such information is subject to change without notice and no representation or warranty express or implied is made as to, and no reliance, should be placed on, the fairness, accuracy, completeness or correctness of the information contained in this presentation. This presentation does not intend to provide, and you may not rely on this presentation as providing, a complete or comprehensive analysis of the Company s financial or trading position or prospects. None of the Company nor any of its respective affiliates, advisors or representatives shall have any liability (in negligence or otherwise) whatsoever for any loss or damage howsoever arising from any use of this presentation or its contents or otherwise arising in connection with this presentation. This presentation contains projections and forward looking statements that may reflect the Company s current views with respect to future events and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements which are subject to various risks and uncertainties and no assurance can be given that actual results will be consistent with these forwardlooking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation does not constitute an offer or invitation to purchase or subscribe for any securities or financial instruments or the provision of any investment advice, and no part of it shall form the basis of or be relied upon in connection with any contract, commitment or investment decision in relation thereto, nor does this presentation constitute a recommendation regarding the securities or financial instruments of the Company. 2018 Interim Results I LI & FUNG 41