富蘭克林資源 (BEN) 2003 Q1 法說會逐字稿

Ladies and gentlemen, I would like to thank you for standing by and welcome you to to the Franklin Resources first fiscal quarter of 2003 teleconference call.

At this time, all participants are in a listening mode.

Later, we'll conduct a question and answer session and instructions will be given at that time.

If you should require any assistance throughout today's call, please depress the 0 followed by the star key and one of the specialists will be with you immediately.

As a reminder, today's conference call will be recorded.

I would now like to turn the conference over to your host, Mr. Marty Flanagan.

Please go ahead, sir.

Yeah.

Thank you very much.

This is Marty Flanagan along with Greg Johnson, we're both members of the office of the President and thanks for joining us for our first fiscal quarter of 2003.

As we typically do, I am going to hit some of the financial highlights, talk about assets under management, Greg will talk about fund flows, performance, business highlights, will get a little deeper into the operating results and then open it up to Q&A.

And, before we get started, I would like to refer everybody to our 10-K with - where our forward-looking statement policy is outlined there.

Getting started, you know, to highlight the quarter, for us, like everybody else in the industry this past quarter, continued to be a challenging one.

We think our results were quite good in light of the market environment that we're operating in.

We continue to be focused on cost controls but looking longer term, we feel that we're still very well positioned with a very diversified product line, strong relative investment performance and good service.

Some of the highlights - financial highlights for the quarter were operating revenues were $605 million during the quarter, down from $608 million last quarter.

Net income was $109 million as compared to $68 million last quarter but, for those that follow the company, last quarter we did have a one-time writedown on our portfolio so trying to compare like with like, net income would have been $113 million last quarter.

Earnings per share were 43 cents this quarter and normalized last quarter were 43 cents so - really a flat earnings quarter, quarter for quarter.

We continue to see net flows in all major investment objectives although at a reduced level.

We did have market appreciate of $9.5 billion during the quarter, which was helpful and although average assets under management were down during the quarter we were able to keep operating expenses relatively flat on the back of flat revenues.

Taking a look assets under management, we did end the quarter at $257 billion in assets under management and that compared to $247 billion in the prior quarter.

One of the main drivers of investment management revenues is the average level of assets under management which was $254 billion this past quarter as compared to $259 billion in the prior quarter.

We continue to benefit from our diversified brands and investment styles, all the different brands, whether it be Franklin , Templeton, Fiduciary, Mutual Series, or Bissett continue to have relatively good investment performance across the board.

Equity assets represent now 48% of our assets under management, within that category, 41% is either value or blend, about 7% being growth.

Fixed income represents 34% of our assets under management in hybrid, 15% of the balance being in money market funds.

Now I'm gonna pass it over to Greg to start his comments.

Well, thank you, Marty.

I, unfortunately, am in the process of catching a plane in New York so if I drift off during the Q&A, I'm off to get my flight but hopefully, I think we can get to most of the questions.

Looking at the flow details, as everyone is aware, it was a difficult quarter.

I think the entire industry had fairly severe equity outflows for the quarter and a lot of that is due to the lag effect of the weak markets, the backup in rates that we had seen in October and I think it is really reflected in some of the sales trends and net flow numbers for the organization.

If you look at the quarter to quarter numbers of about 3.1 for the prior quarter versus 2.5 and you can see that, looking at the net sales number, a more dramatic decline from 2.5 to 1.1 when you exclude the reinvestment dividends.

Sales actually were up on a gross level and with volatility, sometimes you see that along with an increase in redemption activity and unfortunately, the redeterminations were up more than sales, up about 19% versus the sales being up 6%.

Looking at some of the details between equity and fixed income, most of the appreciation for the quarter, about 6.4 billion was on the equity side, most of that with international funds versus $800 million for the fixed income.

The flows for the global international picked up a little bit, but again, a lot of that number is the reinvestment of dividends where the net flow number actually declined.

And Muni,s as you would expect, again, trailing off that backup in rates and some of the pressures that we've seen with the press around the state deficit problems, with I think, the redemptions there a little bit higher still and net inflows but currently, you know, with the low levels that they're providing, some of the tax legislation are putting those flows, I think, under pressure at the current moment.

But again, relative to what we're seeing for the industry, we feel very good that all our major categories had the 9th consecutive quarter of positive net flows.

Looking at investment performance, again, a very consistent story from what we've been talking about.

We were recently recognized in Barons as the top performing equity manager from the high of the market, again by a very significant margin.

And looking at the various funds with 75% of Franklin Templeton's long term U.S. retail funds were ranked in the top two quartiles for the 3 and 5 year periods, 97% of Templeton's assets 4 or 5 star by Morningstar, over 90 percent of the assets in Templeton top quartile, Mutual Series, again, all of the funds ranked in the top two quartiles and Franklin, a specific fund, the utilities fund now ranked number one in [inaudible] for the 1 and 3 year periods and a fund that could be very interesting I think if the dividend legislation goes through when that type of high dividend paying fund with a very strong track record could be, you know, we think, very interesting in that kind of environment.

Looking at our largest funds, our top ten funds, again, very consistent numbers in a very difficult market and all of those funds have 3 and 4 star ratings from Morningstar.

Turning over to some of the business highlights for the quarter.

U.S. retail, I think the major initiative that, technology initiative for the company, and part of that was unveiling our redesigned FranklinTempleton.com which with our new architecture now features enhanced content and customization services for shareholders as well as advisors.

We also expanded our institutional website as well.

And just to really, I think, highlight the interest we're seeing still from the reps in the organization, we put on conference calls two times a year with our Chief Investment Officers and did one here actually in January and had a record-breaking number of about 890 advisors dialing in.

So again, I think that just highlights the strength of the overall organization, really the interest still in the funds.

Retirement flows continue to look very strong, that's been one of our priorities here in the last year, is raising our visibility and we've seen significant new retirement business as well on the small end of the plans where we received 28 new plans in the quarter bringing in over 100 million in assets.

We recently had a symposium here in San Mateo where over a hundred financial advisors that specialize in the smaller end of the market and really renewing our commitment to that area.

And FranklinTempleton.com recognized as a top 20 website in financial services.

On the international side, again, good momentum, good net flows for the organization.

We recently did a reorganization of our international retail distribution group with [inaudible] working out of San Mateo.

We recently signed a joint venture with [Seiland] Securities in China and are gonna pursue one of the 5 or 6 licenses for investment management groups in China.

The Pioneer integration has been completed with significant cost savings and at that time, the assets were about $1.6 billion.

We're pleased to report that we've crossed $2 billion in India and good sales momentum there.

Our c-cab product line, total assets passed the $10 billion mark which is a significant milestone there.

And we continue to introduce new products in Korea, Taiwan, Japan, and Australia, and recently received honors for Canada for service, for Germany being named as the best products brand and service for an investment manager.

India and Korea as well receiving awards for the outstanding performance of the various groups in those countries.

On the institutional side, again, good momentum and we saw some recent wins here that should fund this quarter, $600 billion international equity assignment from the Employees Retirement System of Texas as well as $350 million mandate on the international equity side and more recently, a $200 million mandate from the Swedish National pension plan.

So good - the pipeline still looks good there and hopefully we'll start seeing the benefit of those funding here during the quarter.

High net worth side, pipeline looks good, Fiduciary has moved into the new renovated offices and I think that will have a big boost on morale there for the FiduciaryTrust people and now I will turn back to the Marty for the operating information.

Great.

Just to give you a little more color on the operating results for the quarter, as I had mentioned, operating revenues were $605 million net income, $109 million during the quarter, looking at components of operating revenue, investment management fees were $351 million down 1% quarter over quarter.

And that is on the back of the lower average assets under management.

Underwriting distribution fees down 2% and that is reflective of the lower -- slightly lower levels of sales during the quarter.

Shareholder servicing fees were up 2% quarter per quarter.

We did add another 500,000 net new shareholder accounts so that continues to be a good, healthy sign that we continue to add more clients.

One thing that we did want to update people on is that as the industry has changed in the way clients are serviced, whether now through full service networking or Omnibus, we have reconstituted our fee levels through our transfer agent with the funds and some fees are going up, some are going down.

But in total, what it's gonna result in is that we will add $4 million of net new shareholder accounts which were previously we were not getting compensated for which were Omnibus accounts.

The bottom line is that, what you'll see beginning January 1st is a increase of $7 million in shareholder servicing fees each quarter.

And clearly that will change if account levels go up or down but that is the net take away from that.

Other income was up during the quarter largely because we securitized $126 million of auto loans which had a gain of $5.5 million during the quarter.

Taking a look at operating expenses, underwriting distribution costs were down 3% quarter for quarter and that is just on the back of the lower sales during the quarter.

Compensation and benefits were up 1% quarter for quarter.

That is largely due to the first full quarter of the Pioneer acquisition and the 180 people coming on to our payroll.

ISNT was up 2 1/2% this quarter.

We talked about it last quarter that we had a credit and that we expected this increase.

This is more indicative of our run rate.

It is an area where we have slowed investing in technology but we are still spending on major projects.

Another key element of our ISNT expenditure is that there's a large fixed component and that is something we'll continue to work through to try to make it more variable over time but that will literally take, probably, six months to do that.

Advertising and promotional is down 12% quarter for quarter, and that was a seasonal dropoff and going forward, what you should do is take a look at the typical spending in March at those levels and that will be reflected in this next quarter.

It's a much busier time for us and we advertise in accordance with that activity.

The other expenses were up during the quarter 25%.

Once again, as we talked about last quarter, we really put on the breaks.

This is more in line with a run rate.

We will continue to be very, very focused on expense levels and spending as wisely as possible and walking the tightrope of making sure that we're supporting the business growth while, at the same time, being very cost conscious.

Another couple things to highlight.

Other investment income was $12 million this quarter, that's probably more indicative of what you could expect going forward with the interest rate environment that we're in.

The bulk of the portfolio is in shorter dated fixed income type products.

And the tax rate did increase 1%, one percentage point this quarter.

As you know, we try to look out 12 months and take some estimate of where we think the earnings mix will be and this is reflective of that analysis.

We did buy back a million and a half shares during the quarter.

And another -- another thing to point out is our operating margin was 23% this quarter.

Pretty much in line with what we've seen over the last year.

It is hard to have margin expansion, you know, in these very volatile market places with assets under management being so tight.

All in all, considering the environment, we think the results are very good.

We continue to believe we're very well-positioned for better times and we'll stay very focused on generating continued good results.

And with that, Greg and I would like to take questions.

Ladies and gentlemen, we'll now begin the question and answer session of our conference.

If you wish to ask a question, please depress the 1 on your touchtone phone.

If you have depressed the 1 before - prior to this announcement, please depress the 1 again.

One moment please for our first question.

Our first question will come from the line of Henry McVey of Morgan Stanley.

Please go ahead.

Good afternoon, can you hear me?

Yep, sure can.

Just a couple of quickies.

You said the gain on securitization, how much it was?

$5.5 million.

Okay.

And then on the shareholder servicing, that will be $7 million each quarter starting this quarter, right?

This quarter, right.

Two other things, can you just -- on the - you had set - I know you set up some puts last year on buying stock, can you just update us, where we are on those?

Yes, the next put date is in May.

May 11th, I believe is the date..

We obviously continue to watch that but I think the real message is we're in a position that we have multiple choices if investors choose to, you know, put the bonds to us, we apply the credit, we have commercial paper, we have cash on the balance sheet, we will not be in a strained position.

So we will end up making the best investment decision at that time but that's really where we are.

And then just two other things that came in [inaudible].

It looked like one was that the amount of available options that are exercisable right now double to a little over 5 million shares and it looked like you had a pension - your pension expenses creeped up, or you're more exposed.

Is that gonna be- Is there any drag that would offset the pickup in the shareholder servicing fee?

I don't know if I got that question.

Well, the 10-K that came out in your pensions.

Right.

It looks like you are under funded and it got worse during the year.

So I was just trying to figure out, is that something your gonna have to think about this year?

And then the second thing was it looked like the amount of exercisable options went up quite a bit and I was trying to figure out, given what is going on with all the option stuff - how are feeling about that?

Right.

Gotcha.

Okay.

With regard to the pension plan, I think the one you are referring to is the one that was grandfathered in, it was a Fiduciary plan and so we'll continue to sort of pay attention to what we need to fund but we're not expecting, you know, a big hit by any stretch of the imagination there.

With regard to what we're doing with options, I think if you look at our total options outstanding, it is still about 5% of the shares outstanding which we think is really, you know, quite reasonable.

And our position is that, we think the wisest thing to do right now is see where the legislation ends up with regard to expensing options and think that's probably a better thing to do than to choose a separate approach on how to expense them.

But that would be, as you point out, ourselves and other institutions that issue options, that's certainly an outstanding item.

And a final question, you said on the technology, you thought it could move towards more variable.

Can you just elaborate on that?

Yeah, I am glad you picked up on that.

That is our goal.

I think it is -- we've talked in the past, we have entered into an arrangement with IBM for our data centers and that- longer term that's a very good thing.

They'll provide good service levels but that has just been a fixed cost level that is very hard to manage in these volatile times.

So that is something that we're trying to address to give us more flexibility going forward.

So that is not a - we have not completed that but that is a good goal of ours.

Okay.

Good enough.

Thanks guys.

Our next question comes from the line of Richard Strauss of Goldman Sachs.

Please go ahead.

Yes, thank you.

Marty, the EBITDA margin actually flipped under 30 percent this time and I understand what you are saying, it is hard to expand a margin in an environment like this but your marketing came down quite a bit and you say that is going to pick up.

Also the other expense, this is the right run rate so should we be looking for the EBITDA margin to perhaps go towards 25%?

No, no.

I mean, really, if you do some analysis where -- if you have seen the margin compression, much of it can be explained by the decrease in level of assets under management over time.

Now, that is not an answer you want but it is factual because I continue to think that we've done a pretty good job on the cost side.

But I can't imagine that happening unless we end up in a very, very -- well, miserable environment and it feels like we've been in a tough one the last three years so ....

Also, I think you mentioned the securitization of the auto finance.

I am looking at the balance sheet and actually that number, your on balance sheet number actually moved up so factoring in the $126 million you actually got rid of it, it looks like you are actually building that portfolio.

Maybe you could just comment on what the strategy is with regard to auto finance?

I thought it was to lower those receiveables?

Yeah, there's something else going on there at the same time.

It is not just all related to the auto loans.

We sell B shares also and they build up on our balance sheet, interquarter and at periods, we securitize them.

So that is part of what you saw in the buildup there.

But you - the auto finance business, it is something, you will remember a number of years ago, we didn't do a very good job at it and our focus has been to improve the performance.

And it's really improved quite dramatically.

And, you know, that's what you're really seeing happening here.

So it has been building up based on really the good performance there.

Okay.

Then finally, just domestic equities.

I was a little surprised that that was a negative number in the period and maybe you can just let us know what you are seeing out there.

Is this becoming more of a growth market with investors?

Well, I think if you look at the - I don't think it is either right now.

I think the -- it's just everything got hit and, you know, you may have had some pressure on tax selling for the losses on the year as well, but,,t if you look at the flows for the industry, I mean, it was the first year in, what, 17 years that they had equity outflows for the industry as whole, and December, was a just horrible month for the industry in equity flows as well so.

We're not seeing any real pickup in growth versus value right now, I think everything was kind of taken down and value was with that and equities just had a bad, bad quarter.

Okay, great, thank you, guys.

Our next question comes from the line of Mark Constant of Lehman Brothers.

Please go ahead.

Good afternoon guys.

Actually my questions are on the edges of a couple things that have already been touched on already here.

Kind of to that last point and to your earlier comments, Greg, about the phenomena within the tax-free funds.

It did seem like, not so much sales impact was felt, but the redemption rate was maybe a little bit higher than would have anticipated.

And wondering if maybe you thought it was not going to come because there wasn't a whole lot of tax laws as people still incrementally harvest.

Did that surprise you at all?

Is there something else aside from the tax freeze?

[overlapping speakers].

I think the - it is always surprising, some of the volatility some of it doesn't always make sense, especially the international side, when you see the sales pick up yet the redemptions pick up.

And that never really makes a whole lot of sense other than maybe with -that just people move moneys for different reasons when the markets, you know, move much more.

But I do think we did see a very dramatic spike of rates in October of about 50 basis points and a lot of Muni investors that, I think, did spook especially when you looked at the - you know, where rates were and the kind of move that they have had and people are concerned that maybe rates are going to go back up and that was the concern then.

I am not sure that is the concern today.

But, you know, I think Munis are going to be under a little bit of pressure in the kind of environment with the state deficits and where rates are and where we are in the cycle and there's gonna be a little bit of concern on that.

Okay.

And a couple of financial things for you, Marty, am I correct in understanding there's no expense offset that flows through to you from the shelter service fee increase?

No, there's not.

And to sort of go back to what Henry was asking about, the options, I should look from the K like the value of options you guys issued as a percentage of - relative to the expensed compensation in the P&L actually was half what it was in the prior year in' 02.

Is that indicative of a lower use of options and should we expect that to fall lower in '03?

Well, you are exactly right.

I mean, we did issue fewer options and I think it was really reflective of the company's performance and you know, once again, just being more selective in options.

But that would go back then up if company performance is better irregardless of the -oh, that's bad grammar.

Irregardless of the changing accounting rules?

Well, I couldn't -- I --.

There's too many factors involved there that - that depending on the labor market and all those things that you have to do to put the right incentives in place to keep the balance.

It is not as simple as," Well if the company's earning growth is this, this many more options come out."

So it is to be determined?

Yes.

And then, wondered also, you guys seem to be doing much a better than expected job with the finance business but you read in the industry in general - I don't follow it particularly closely, but that auto loan collateral is suffering, sort of, with the new leasing wars, et cetera.

And I wondered if that is impacting your securitization execution or your expectations for loss realization on the excess servicing positions you retain?

Yes.

I mean, so far.

I mean, the performance of the portfolios has really been good.

We are watching delinquencies, you know, very closely.

And you know, we securitized, last quarter, we thought it was very opportunistic where we could get to the market and generate a gain at the same time.

So we went out probably a little sooner than we typically would but that was, once again, just being opportunistic and cautious.

Okay.

And the tax rate, if I recall last year, you had to pick that up at the end of the year and your initial estimates were a little on the low side.

Should we conclude from this that you are trying to get now the front of things this year?

Well, we're always trying to get now the front of things but it is so much as we've talked about in the past, the mix of asset center management, where that is generated, the volatile markets, that has been a key factor in making that harder to anticipate but we're definitely trying to stay out ahead of it.

Okay, thanks.

Our next question comes from the line of Glen Shore of Deutsche Banc.

Please go ahead.

Hi, good afternoon.

Hey, Marty.

Maybe we could just start with a follow on on the tax rate.

I, too, would have thought the mix of assets would have had a big impact on the tax rate but actually if you look at it quarter to quarter, the international component actually went up almost 1%.

I know I am splitting hairs here but are there other big buckets that influence besides just the mix of assets?

No, that is it.

But once again, you are looking quarter to quarter and we're trying to look out a year.

Understood.

Understood.

and I think that's --.

But it is a reasonable thing we can follow in terms of just the mix of non U.S. Assets?

Yes, absolutely.

Okay.

On earlier comments on the institutional pipeline, three specific items were named that add up to about 1.2 billion.

Did I hear correctly?

Have non of them funded, should we expect them all them to be funded this next quarter?

I think the majority of those will fund this next quarter but I'm not sure on one them.

One of the smaller ones, whether it's this or next.

The majority of those -- all of those have not funded but most should come in this quarter.

And on the retirement business ones? 28 plans, $100 million in new assets?.

Right.

Has anything changed there?

Are you winning on that business?

Are you getting a very large portion of market share of assets to manage in that business?

I am not sure what the number exactly is as far as, you know, because it is difficult to get an exact mark on what is a small plan market, but clearly, for us, we're picking up a share against the other players in that market, because there's less and less people committed that can have the critical mass to make that work in that marketplace and we've put resources into that at a time when many have pulled out.

So we're starting to see the benefits and I think many of the advisors that specialize in the small retirement market, kind of wait, build the relationship, see if you really mean it.

And part of that was the symposium we had and bringing in, you know, the people that are doing business in that market.

And we really are seeing a pickup, you know, in the plans and the assets and that is not a big number to the organization but it is a big number, you know, for that market that we're in there.

Right, and that is primarily marketed through a lot of the same avenues in terms of brokers and advisors that are selling your other products?

Right and I think one of the big developments is that we've learned a lot as far as pricing, finder's fees, R class shares.

That we now have a much better sense of profitability and understanding the right model to make that work.

Great.

And then, Marty, maybe just a tiny tidbit to end.

Average cost on the small buy back in the quarter?

You know what?

We'll put it out next Q, if that is all right.

Yeah, no problem.

Thanks, guys.

Our next question comes from the line of Jeff Hobson of AG Edwards, please go ahead.

Thanks, hi.

A couple of questions.

In regard to the China venture, can you give us a few details on your partner and kind of, the implications of that particular partner in getting a license, I guess?

Number two, could you address the tax proposal and any positive and / or negative potential impacts on various types of your business?

And then finally, the institutional pipeline looks good but in the quarter, the redemptions, I guess in the institutional/international area was you up a little bit or more than I thought.

So any comment on that, I would appreciate it.

I will take the first one on the China venture.

I think some of you may have been aware we had another venture with a larger organization and I think that our business strategy in entering this marketplace was to was gain control of the entity as quickly as possible, you know, with respect to the Chinese legislation and how you start as a minority interest and gradually over time can build that into, hopefully, a majority.

And that is how we structured our deal, was to make sure we had clear understanding over time, that we would, when permitted, take control of that entity.

And that has been our experience in entering a lot of these JVs, that we want to have a clear understanding up front of what have our time frame and what our buyout capability is to gain control.

And that was why we structured with this type of partner with Seiland Securities in China.

Marty, want to take the next one with tax?

Sure, our general view would be, you know, as we understand legislation to be now and who knows where it ends up, but if you eliminate double taxation, that would be a good thing for equity markets.

It would probably be a good thing for corporate worlds, just balancing out the level playing field between equity and debt financing and so in total, you would conclude that it is probably a good thing for our business.

The one area of the business that -- I mean, if you have read about how might it affect the Muni bond market, we really think it is still two separate decisions that people would make and wouldn't really have a negative impact on our municipal bond business that we're in.

So all in all, I would think it would be a good thing.

Okay.

Could I follow up on the China thing?

Any sense of, you know, how many players are out there, trying to get the licenses?

Well, yes, I mean from our understanding, it is that it could be anywhere from five to eight and I believe there's a few that initially have been approved.

You know, we would expect to hear shortly on how our, you know, licensing is going on that but, you know, they have not announced how many.

They know it will be a limited number and I think the real concern there is having a local partner in each group putting up enough capital to make it a meaningful venture.

They have very specific capital requirements for the initial ventures and the structures as well.

Okay.

Thank you.

Our next question is from the line of Ken Worthington of CIBC.

Please go ahead, sir.

Hi.

My questions have been answered, thank you.

Our next question comes from Brian Badell of Merrill Lynch.

Please go ahead.

Hi, good afternoon guys.

Let me start with Templeton given the excellent performance and the prospect of declining dollar, you know, low allocation and probably through retail and institutional accounts.

What - If you can give me a sense of the pulse of the demand for Templeton products throughout the different distribution channels and, I mean, start with the financial advisors.

Are they saying anything different than they have been in prior years?

I know you said you got a record number of advisors on that call.

And then, just to talk about it, in the institutional channels, such as defined benefit plans, and the potential for rebalancing of equities, whether you think you may see better flows into the Templeton products there?

Well, I think if you look at the - even the gross sales for, on retail, looking at the funds.

They're up over 60 percent for the calendar year, I think, through 12/31 versus the prior year.

So you can see clearly there's a renewed retail interest and we get the benefit of the value bias, you know, as a percentage of those international flows.

So clearly, we had a lot of momentum, it is still there, the selloff that all world markets experienced, I think everybody took a little bit of a setback on tha,t but clearly a renewed interest and on the institutional side, a lot of plans rethinking their allocations are underweighted on the international side.

We just did a white paper on exactly that issue, that we still think we need to educate the market on the importance of international diversification.

But the interest is there, the allocations are increasing and they're still at record low levels.

So I think, you know, the opportunity clearly is there to get up both on the retail and institutional side.

Are you allocating significantly more resources towards promoting the international product either through advertising and promotional and also in terms of the sales force, you know, pitching that product versus the other products in your portfolio?

I think they clearly on the institutional side, they are going to talk about, they're trained on x-number of different styles and mandates that we support and the international is still the bulk of our assets so they are out there promoting, you know, where they see the opportunity.

So obviously that is easy to adjust to whatever is popular.

I think the retail side as well, we're consistent with the store.

We start with diversification, we think everybody should have an international allocation of x percent in their plan and then - then we talk about investment process.

We don't try to go out there and say this is the fund of the quarter or month, whatever, but we do fine-tune it, we fine-tune the advertising expenditures where, we think the opportunity is we but do try to stay consistent, similar to what you would do in a financial plan.

Right.

Okay, and then outside the U.S.

In both Canada and Europe, if you could comment on those two areas and specifically in Europe, whether you are seeing an opening of the architecture there over the last few quarters in terms of banks selling funds and whether you have any new agreements there?

Yes, I mean, clearly, that has been the case and you can go market by market, where they are opening up.

Germany is one example, a marketplace we have been in for a long time but just in the last year or two, we're now getting into the big banks that historically haven't supported Templeton.

So, that open architecture and - country by country, everybody's at a little different stage in the evolution.

You know, as they get more comfortable and the consumer gets more aware and the demand increases for more choice.

But that trend is working and it's one that we've placed a lot of bets on that these distribution systems that do control a lot of the assets will open up, and clearly that's happening, especially, I think, in Europe.

And right now, I'd say or maybe over the last couple of quarters or so, where the bulk of your sales are coming from in Europe in terms of the distribution channel?

Well for us, I mean, Germany would be the bulk there.

I mean, we're a somewhere around $8 billion in retail assets in Germany, and that's been a tremendous success .

We think the momentum there has been very stong and a lot of people that are now disappointed with the German market, that may have only invested there, are looking for other alternatives and that obviously with Templeton fits very nicely.

So for us, it is where we've been the longest, and that's Asia, and that's Germany, but the fastest growing on a percentage basis could be Italy, Spain and some of the rest of Europe but - And they're all very different, you know, it's hard to generalize on one.

And is - on the actual channel, banks versus the independent financial advisors, is it more right now - You know, in the long term you want to in the bank platforms, but currently is it more of the independent financial advisors that are-?

You know, again, it depends by market.

That is the way we started in Germany but it could be in France that we're doing more through the banks but a different type of funds-to-funds product.

So it's really -

Again, Europe is a lot of different markets and you have to look at each market.

And some of them don't have- Some of them the banks are the only way, especially in southern Europe versus having some form of intermediary or independent financial advisor, that network doesn't exist today but probably will.

So then you have to go to the banks.

And then, if could you just comment on the 401k business.

You mentioned your forrays into the small plan market, and that's going well.

What portion of your overall 401k assets are investment only to large plans versus the small plan market that your talking about, I assume it's turn key?

Yeah, it is probably 90 percent investment only or even higher.

I'm not sure of the exact, but that's the dominant portion of our assets by a long shot.

And how are the profitability characteristics between -

It is better.

I actually have to run here so I'm gonna turn it over to Marty.

Great, thanks.

Marty, just to follow up on the international.

If we are in a scenario where we do - where there are expanded - where Templeton's sales exceed that of other product lines, clearly then this tax rate would be going down from here, I would assume?

All else equal?

Right.

Okay.

And then just one housekeeping question.

The other expense line, can you- you touched on that briefly in your comments but maybe if you could just talk about some of the actual items within that that caused the sequential increase this quarter?

Well, P&E was one of them but you're also seeing - we're experiencing the same thing.

Other insurance rates and those types of pressures that are very, very difficult to control in this marketplace.

That would be another one that came through in that quarter.

Alright.

Okay.

So then it is sustainable at the current level?

It is a good run rate then to use if it's your insurance rates then, I suppose?

Right.

Okay, thanks very much.

Good, Brian.

Thanks.

Next question comes from the line of Michael Fruenstein of J.P. Morgan.

Please go ahead.

Yeah.

Hi, Marty.

Just a couple of quick questions here.

First is, in terms of some of the regulatory changes from what we've heard about, the one getting the most attention the proxy vote disclosure.

Any additional costs associated that you could see here that we should be aware that might show up meaningfully?

Actually, that vote was today, I don't know if anyone has heard about what it is.

I haven't.

But there would definitely be additional costs.

The magnitude of them, you know, estimates are all over the board.

But its hard to conclude, I mean, we really just have to see where that vote comes out.

Okay.

And away from that though, in terms of sort of other things you are picking up in the winds in terms of any potential regulatory changes, is there anything you would to want comment on now that you would want to make us aware of?

Not to any material degree.

I mean, obviously, us, like and you everybody else in the financial services business, but investment management in particular, is very, very highly regulated.

Always has been and that has always been an important part of our costs but clearly, the SarbainsOxley, you know, guidelines have even, you know, increased the rigor around that.

So there's some pressures around that side as well.

And that will show up largely in your other, I guess, right?

Right.

Okay, another question here around just sort of some color, we've seen some retail brokerage firms reporting earnings the last couple of days and the indications from them would, sort of, suggest that the retail investor is still, sort of, like a deer in the headlights at this point.

And so I was wondering in terms of your own business whether you have seen any sort of discernible lack of retail investor interest in terms of fund flows or things like that.

Or whether it looks pretty much like any other January to you?

Well, I wouldn't say it is like any other January but I'd say, in the context of the last couple of years, I think we're a beneficiary of the type of, you know, channels that we're in, that being through the advice channels and people that have had advice for many, many years are just really moving their portfolios around.

I think the institutions, the brokerages that you are talking about where they probably, really feeling the pinch, are sort of do-it-yourselfers.

And I think that has really dried up quite dramatically as a lot of investors just got really beat up pretty bad without the help of investment advisors.

And then, secondly, just as our institutional business becomes stronger, pension plans are pretty smart and they just continue to reallocate assets to the different categories so I would say, you know, the channels we're in are really where -- impacting our Relatively good operating performance.

Okay, great, and my last question is just around -- on that topic of the advice channel, I guess, is broker proprietary funds seem to - lost share last year to nonproprietary.

An obviously that would accrue to your benefit.

Have you noticed any pickup through those channels as a result of perhaps, you know, some of the conflicts of interests overhang perception related to broker proprietary?

Yeah.

We have gone back up from a few years ago, on a relative performance in the types of money that we manage were not really of interest to the same degree that [inaudible] growth in technology were.

We have benefited by, you know, investor interest again, and Muni bonds, fixed income, value, international, those types of things, so we've gone up the scale within the distribution channels.

I don't know that I would conclude that the increasing flow is going to nonproprietary as a result of conflict of interests but I think if you look at the underlying performance of the different asset management companies within, you know, the distribution houses, it would really be more performance related, I think is really - would be my estimate of what has happened.

Okay.

Actually I just had one last clarification I wanted to get from you on what you said about outsourcing and as you're trying to get some variability into the costs on information systems technology.

We saw a little bit of an uptick and you may have commented on it but was that just some additional investment here in the fourth quarter specifically or is it just going to be a little bit more volatile as you're working out that variability?

Let me be clear and I know not everybody was on the last conference call but we literally had a $2 million credit last quarter so that was the main driver in decreasing the technology costs.

This is closer to the run rate it, could go up a little but it is not going to go down much from here until -- or once we become successful in reorganizing our outsourcing arrangement.

Great.

Thank you very much.

Okay.

Thank you.

Our next question comes from the line of Cynthia Mayer of Salomon Smith Barney.

Please go ahead.

Hi.

I think everything has pretty much been answered.

But one thing is uhm, maybe you could elaborate a little bit, you mentioned something about savings from Pioneer.

Right.

In the scheme of things, it is --.

Small.

Small.

So it is all really relative and I don't know that could you --.

Too small to elaborate on?

Okay.

Right.

And then it sounded like you were on the verge of talking a little about flows so far this year.

Can you give any color on that?

I really can't.

You don't customarily do --.

No, I'm sorry.

Okay.

And just one broader question, I guess, on the selling overseas.

Are you seeing any difference in terms of an appetite for equities and a shift toward more equities in terms of overseas investors versus U.S. investors or is it pretty much that everybody is still shying away.

I mean, overseas, the bulk of the sales are, you know, the core products would be equity sales, and I think as Greg was discussing, much of them being in the global products.

So once again, our business is becoming more and more successful overseas but I would imagine -- I think you have to put it in the context of relatively small in each of those countries.

So I wouldn't to want draw a conclusion on investor behavior in each of those countries.

Okay, thanks a lot.

Our next question comes from the line of Daniel Goldbard of Bear Stearns, please go ahead.

Good afternoon.

Most of my questions have been answered, but just a couple of quick ones.

In terms of head count, do you have a number there?

It was flat, 6700 quarter over quarter.

And then you said about 500,00 new share - billable shareholder accounts.

Does that - that brings the total to about $10.3 million at the end of the quarter?

Is that right?

10.1 million, yes.

And then finally, just maybe a question for Greg but maybe Marty, you can help us.

In terms of the high net worth, you talked about Fiduciary moving to some new office and I just wanted to know if there was any specific initiative [inaudible] to kind of grow that business as we all know it 's a, kind of a more profitable business.

Just to be clear, we did move into new space shortly after 9/11 and it is just really getting through the remodeling so it has been a long process to get that done.

So they had to move physically.

With regard to the high net worth business, the focus of Fiduciary has really been on doing a good job for their existing clients, you know, post 9/11.

I think that was the most important thing, you know, that was the focus and it's really now, as Greg discussed, the pipeline looks pretty good and we're hopeful that we'll continue to see more new business success going forward but no dramatic strategic change in the direction.

We think it is a good business.

Thank you.

Our next question comes from Bruce Brewington of Putnam Lovel.

Please go ahead.

Hi.

Good afternoon.Two questions.

Could you give us a little more detail on the dynamics of the underwriting spread?

I know that last quarter [inaudible] there was a larger proportion - a smaller proportion of Class A shares and with the fall in assets, there is also pressure on 12B1 fees.

And with revenue being down 2%, expenses being down 2%, can you give us a little more color on the dynamic?

On the mix?

Within it?

Yes.

Please.

Yeah.

It is really the level, not just the mix but also the level of the investment made and that was really the main driver and hoping not to expand that margin this quarter.

So, it's just as simple as that.

And looking at the institutional business, you were discussing a dramatic increase in redemption levels.

Can you give us a little color on the redemption activity on the institutional side?

On the institutional side?

If you are talking about the separate account businesses, we continue -- we did not see defections during the quarter.

No.

I was trying to get to when you were discussing other assets, [inaudible] 7.2 billion in redemptions, versus 5 billion in the prior quarter, 44%?

Yes, but that also includes the non-U.S. business, so it was retail redemptions within those portfolio.

So it was not client defections on the institutional side of the business.

We have been, as Greg was discussing, we're very, very strong on the institutional side of the business the last 12-18 months.

Okay great.

Thank you.

Just one more question, please and we'll wrap it up.

Okay.

Our question we have is from Mark Constant of Lehman Brothers.

Please, go ahead.

Hi, Marty, I just wanted to follow up on a couple of things.

One, just so you know, the SEC did adopt rules related to proxy voting today.

But my question is, as I understand it and as it reads from their announcement, they're gonna require significant incremental filing with them as to how everybody voted but the disclosure to shareholders will be on an as-requested basis, website, phone number, et cetera.

And wondering how you would view that as your understanding of the proposals in terms of incremental cost to versus what would be borne by shareholders directly through fund expense ratios?

Yeah.

Good question.

Hard to respond to with that news.

But I would suggest that the expenses would be lower than what we're anticipating.

The original proposal was that there would be, you know, public disclosure to all investors on a very regular basis.

So when your comment was speaking to potentially higher expenses, you were assuming that meant you had to mail it out to everybody.

Yes, absolutely.

So it sounds like this is a compromise position.

Which, probably is a very good solution.

Okay.

And just to circle back on something else that Henry was discussing earlier, I think he was asking about puts and you addressed the, you know, your many options with respect to dealing with the convertible line.

My question is and I suspect Henry might have been referring to the unique kind of put structure that you developed as an alternative to share repurchase a couple months ago and I wondered if you could, sort of quickly, refresh sort of why that isn't an EDS for my old man's memory here?

Oh, Yeah.

I'm sorry.

Yes, we have been -- I mean we've discussed, we like buying back our stock but we do it more selectively.

We have been writing puts selectively also on the Franklin Resources stock as an indication of our, you know, that we do like our stock and the reason why we did that was simply the valuation.

When the volatility was very, very high, it's something that seems like a wise investment decision to do that.

And so that has really been why we have been selectively, you know, writing puts on Franklin Resources stock.

But you, am I correct in remembering, you still don't have any potential even income statement impact of those transaction?

It was just effectively [inaudible] of the money share repurchase.

Yes.

That's exactly right.

Yeah, thank you very much.

Okay, thank you.

Okay.

Well, thank you everybody and we'll be speaking next quarter.

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