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Strong Growth in Asia Fuels Li & Fung

Net profit for the full year 2011 rose 24 percent, driven by acquisitions and synergies gained from its three-year growth plan.

HONG KONG — Li & Fung Ltd. said net profit for the full year 2011 rose 24 percent, driven by acquisitions, synergies gained from its three-year growth plan and strong growth in Asia.

The sourcing giant posted net profit of $681.2 million, compared with restated earnings of $548.5 million a year ago. Revenue for 2011 rose 26 percent to $20.03 million. Results exceeded what analysts had expected. Analysts, on average, forecast net profit of $617 million.

Speaking at a press conference, Bruce Rockowitz, Li & Fung’s chief executive officer, said he expects continued growth as the company grows organically and continues to capture synergies from its expansion plan. He also said the U.S. market is “doing pretty well” and expects the economic recovery to continue gathering strength. The European market is more grim, he said, although it has likely hit bottom.

Li & Fung’s better-than-expected results come a year after the company unveiled an ambitious restructuring plan that included a shake-up of its top management and the division of the company’s businesses into three segments: trading, logistics and distribution. As part of the three-year plan, the company set a target of reaching $1.5 billion in core operating profit by 2013, with trading, logistics and distribution contributing $700 million, $100 million and $700 million, respectively.

The company’s core business, its trading business, posted the strongest results in 2011, Rockowitz said, with $565 million in net profit, a 31 percent increase from a year ago, and 16 percent growth in revenue. Results from Li & Fung’s logistics business were boosted by its acquisition of IDS (Integrated Distribution Services Group). The unit posted a net profit of $13 million and revenue of $446 million, a 510 percent increase. Net profit in Li & Fung’s distribution business was under pressure because of rising costs. Net profit rose just 2 percent to $304 million while revenue rose 61 percent.

Rockowitz said the company didn’t pass on some of the higher costs to customers, preferring to hold on to market share rather than preserve profit margins. He expects price pressure to ease this year.

Operating costs were on the high side in 2011, increasing 14 percent in the trading business, 61 percent in distribution and 398 percent in logistics (but mainly due to the acquisition of IDS). Rockowitz acknowledged that costs were higher but that increases were actually slowing and are expected to moderate.

“Lots of the heavy lifting was done in 2011,” Rockowitz said.

As part of the three-year growth plan, the company needed to build a bigger network. The company did a lot of that building out in 2010 and 2011, Rockowitz said, explaining the company will grow into its overhead. Barring any large acquisitions in the future, overhead costs should be trending down, he said.

Li & Fung had a “very acquisitive year” with six new acquisitions and 13 small roll-up deals. The company disclosed three new deals on Thursday, saying last September it acquired True Innovations, which sells business furniture through retailers such as Costco and Office Depot. It also acquired smaller companies in roll-up deals: Midway, a licensee for Disney products in China and elsewhere in Asia, and Catalyst, a company that makes electronic tags for clothing.

Asia has become an important growth platform as brands and retailers around the world are increasingly focused on the region, the company said. While the company has always done most of its sourcing in Asia, it’s now selling more in the region, and global retailers are eyeing the area. Li & Fung said that 12 percent of its revenue in 2011 came from Asia, compared with 4 percent in 2010.

“If you look historically at Li & Fung, our reliance on the U.S. was always 65 to 70 percent. It’s now 60 percent, which we’re happy about. We’ve always produced in Asia, but in this case, the market to sell to is Asia,” Rockowitz said.

Li & Fung also said sourcing in China continues to be key.

“In spite of what you hear about China, for us it’s been very important,” the ceo said, adding that sourcing in China has actually increased. As prices have gone up, the company has shifted to higher-end business in China, he explained. “The lower margin businesses have left China,” he said.

While China remained the number-one sourcing destination for the company, Bangladesh jumped two spots to become the second-biggest sourcing destination. Production in Bangladesh jumped by 41 percent and exceeded that of Vietnam and Indonesia in 2011, the company said.