富蘭克林資源 (BEN) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Kim (ph) and I will be you conference facilitator.

At this time, I would like to welcome everyone to the Franklin Resources second fiscal quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two on your telephone keypad.

Thank you.

Mr. Flanagan, you may begin your conference.

Great.

Thank you very much and thank you for joining us.

This is Marty Flanagan, along with Greg Johnson.

We're Co-President's of Franklin Resources.

And before we get started I would like to refer you to our forward-looking statement in our 10K.

And just briefly what is that statements in this presentation regarding Franklin Resources, which are not historical facts are in fact forward-looking statements.

These forward-looking statements involve a number of risks, uncertainties and other important factors that could cause the actual results and outcome to differ materially from any future result or outcome expressed or implied today in our call.

What I'm going to do is give some highlights of the financial results and the operating results.

Greg is going - and assets under management.

Greg will focus on funds closed, investment performance and business highlights and then we'll open it up to Q&A.

And in summary, the second quarter was a challenging quarter for all businesses.

But we think our results were quite strong in that environment.

We continue to focus on controlling costs while taking advantage of business opportunities and we believe we are very well positioned for the future.

A few financial highlights.

Operating revenues for this quarter were $613 million, up from $605 million last quarter.

Net income was $109 million, essentially flat from the prior quarter.

Earnings per share were 42 cents per share, once again flat with the prior quarter.

We continue to see net sales in most of our major investment objectives throughout the complex.

Asset center management ended the quarter $252 billion, down from $257 billion in the prior quarter.

Average asset center management for the quarter were $255 billion, essentially flat quarter over quarter.

And with that, I'm going to actually make a couple more comments just about our asset mix.

Right now 46 percent of our asset center management are equity, as compared to 48 percent last quarter.

SO we continue to feel a shift towards fixed income, which is now 36 percent of our asset center management as compared to 34 percent in the prior quarter.

Hybrid now represents 14.8 percent of our asset center management, essentially flat from the prior quarter.

Money market funds are 2.2 percent of our total asset center management.

We continue to benefit from a diverse set of investment objectives throughout the complex and also the diversity of our brands and channels.

And with that, I'm going to pass it on to Greg to have him discuss flows (ph).

Thanks Marty.

Looking at the net sales numbers for the quarter, you can see they increased from 1.1 to 2.6 billion.

Gross sales were up about two percent in redemption to a more normalized level.

We're down about 7.5 percent.

Looking at the flows taking out reinvested dividends, I think it has - it's a more favorable outcome when you compare the prior quarter by 600 million for overall equity flows increasing to 1.1 billion when you exclude reinvested dividends.

The same trend on the fixed income side, from 800 million the prior quarter to 1.4 billion.

Looking at the overall mix in assets and changes from the prior quarter, I think the international side experienced the largest decrease.

And I think that's what you'd expect to see.

The performance was very choppy in the quarter.

Probably the weakest performing sector in the market, with the war and SARS, the overall sales there dropped 17 percent on a gross basis.

And net closed declined from 1.3 to 800 million.

The other area is munis (ph), which seem to be under a bit of pressure not only from the state budgets but I think some concern that rates could rise from here at the very low levels.

And we are seeing some movement into the lower duration short-term type municipal bond products.

Investment performance has been very stable over the period.

Not a whole lot of changes there and I think that's good news.

Seventy percent of Franklin Templeton's long-term U.S. retail fund assets were ranked in the top two quartiles for local (ph) peer groups for the three, five and 10.

And over 90 percent of the assets in the top two quartiles were five and 10.

Over 80 percent of Franklin Templeton's total equity assets ranked in the top two quartiles for the local (ph) peer groups for the one, three, five and 10-year periods ended in March.

Over 95 percent of Templeton assets were in the top two quartiles for the one, three, five and 10 in the Templeton growth world and foreign ranked in the top quartile for local (ph) groups as well for the one, three, five and 10.

All of the mutual series funds still have four and five stars by Morningstar and ranked in the top upper (ph) quartile for the one, three, five and 10.

Franklin income, utilities, micro cap, all having very strong performance, as well as the fiduciary global fixed income that's had outstanding results to date as well.

Looking at some of the business highlights over the quarter.

First of all, just on the retail side, a lot of the trends that we've talked about, momentum that we've seen, we recently just received a market metrics update which is a third party that interviews dealers and gives you feedback on how you're doing on various sales and marketing categories.

And we were pleased to see that in every measure we actually had improved ratings from the prior year from the financial advisors.

And I think that bodes well for momentum in our relationships in that channel.

Looking at our web site, and we've talked a little bit about the global web site and some of the infrastructure investment that we've made.

We're pleased to see today that we have over 200,000 shareholders registered online and are processing approximately 15 percent of transactions that go through the United States transfer agency through that global web site architecture.

On the private client group, we continue to broaden our distribution and have recently gotten more core products improved, approved through various broker, dealer channels including the large cap value and a large cap growth.

On the retirement front, with 529 plan with New Jersey, which unlike our other plan is one that we control and control the state relationship and control all of the underlying investments in that plan, has been rolled down on a national basis.

And we have done some TV advertising behind that launch to gain visibility.

As well as overall, I think the advertising, hopefully many of you have seen some of the increased exposure over the last quarter.

A lot on cable news networks, which we think, you know the branding and visibility will be very strong to that additional spend here in the last quarter.

On the international side, again, the trend continues to be very strong.

We're seeing more towards the taxable income, especially the U.S. government funds being very attractive in places like Asia.

We recently got a $100 million additional mandate from the Central Bank of China in Taiwan.

We continue to receive various awards for performance in Korea, Belgium, Singapore, China, Switzerland and in Germany we're recognized as being the top service provider.

So we're very proud of those awards.

On the institutional side, I think there was, like most people have seen, less search activity in this kind of environment.

But we were pleased to see some add ons to some of our larger separate accounts, calpers (ph) and Ontario Teachers and Swedish pension plan.

That those relationships and cross selling are picking up momentum and have resulted in add-ons.

Now I'll turn it back to Mary for the operating results.

Just give a little more color to the operating results starting with operating revenues.

As I've mentioned, operating revenues increased about one percent to $613 million.

Within that we saw investment management fees at $347 million, down a percent quarter over quarter.

That's largely driven by the shift towards more fixed income products, which have a lower effective fee rate.

Underwriting and distribution revenues picked up based on the increasing sales quarter over quarter.

Shareholder servicing fees were up quite a bit, 15 percent to $55 million.

This is the first quarter in which the new shareholders servicing agreement was put in place, which we discussed in the prior quarter.

Other revenue was down quarter over quarter.

We did have a secure division this quarter, which we did in the last quarter.

Highlighting operating expenses, they were $473 million in this quarter, up one percent.

Quarter over quarter a few of the highlights.

Underwriting distribution expense was up 2.5 percent to $173 million, and that is on the back of the increase in sales during the quarter.

Comp and benefits up one percent, essentially flat.

It is a new tax year so we had payroll taxes up but also increased pressure around insurance and the like.

We would expect that our compensation expense as a percentage of net revenues will keep the same percentage in the next few quarters.

IT and occupancy, down 1.7 percent quarter over quarter.

Within that decrease came on the real estate side decrease in occupancy.

IT was flat within that quarter.

Advertisements up seven percent, and as Greg had pointed out, one it's a seasonal increase but also some very specific changes in the advertising during the quarter.

A couple of other comments.

Investment and other income was up quite a bit, 26 percent this quarter over last quarter.

The bulk of that coming from foreign exchange gains from our foreign entities with the weakening dollar.

The other area that was the tax rate was moved up to just under 28 percent this quarter.

That is our best estimate for this year of where we think the rate will be.

It is more simply stated following the asset shift again, but it is more complex than that with foreign tax credit and the like.

But as we said, that from what we understand and believe at the moment, that's where we would expect our tax rate to be for the year.

Another note, we did buy back 2.7 million shares of Franklin Resources stock during the quarter.

And to put this in context, the stock buy backs and the dividend would amount to $100 million, basically given back to shareholders which is just under a 100 percent of the net income within in the quarter.

And to also put that into context for the fiscal year 2002, dividends and stock buy backs accounted for 46 percent of net income in the prior fiscal year.

One last note.

Our operating margin was 23 percent again this quarter, and if you look over the past five quarters, it's been essentially flat at 23 percent.

We think that's a real strong result and in this very volatile market environment, being able to generate that type of profit margin, and at the same time continue to be able to invest in the business and take advantage of opportunities as they present themselves.

So all things considered, we see this is a good quarter, but all of us look forward to the benefit of our strong performance and service levels translating into increased flows and greater shareholder returns.

And with that, Greg and I will take any questions that anybody may have.

Again, I would like to remind everyone in order to ask a question, please press star, then the number one, on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Richard Strauss of Deutsche Banc.

Thank you.

Good afternoon.

Greg, maybe you could just - you know, you told us some of the things that you're doing with regard to advertising.

If you could just give us a sense as to how much of these dollars are being - how they're being divvied up, Templeton versus mutual series versus Franklin versus fiduciary right now some.

We don't really break those numbers out, but I think it - if there's any change in how we're spending the moneys, I think you'd there's more of a TB generic kind of branding, even though those adds are specific now to mutual or Templeton or Franklin.

The real goal there is the visibility for Franklin Templeton investments on the TV and that's really where the big incremental spend is, and we think that will continue.

We seem to get a greater reaction from the TV as far as just raising the awareness than we do from the print ads.

But we try to - you know, we don't really try to change the mix too much as far as well, if one's in favor, we're not going to do the other.

We try to maintain the visibility of all of them at any given time.

And that's why we're one of the few advertising munis (ph) five years ago.

We think it's important to keep that market share.

Yes.

And let me ask this: Do you anticipate - it actually didn't go up, the market - the advertising spend didn't go up as much as I would have thought.

I mean, given that, you know, your style is back in favor and that you kind of have - you've been doing better than others, so you kind of have the flexibility to do more, do you anticipate that you'll be picking this up?

Well, it's not planned right now.

I think it's something we're looking at.

You know, one of the areas that we think we have an opportunity still is that - looking at that market metrics report, that there's still a perception that, you know, our performance - we think it's a lot better than the perception out there, so that means there's an opportunity for us to continue to get that message in the marketplace, and that's something that we're looking at, whether it's, you know, increasing your wholesaler force or doing more advertising.

That's certainly on the table for us right now.

But nothing in the - immediately planned in the near future.

Also, just if you could just give us a sense on pricing.

Has there been any - are you sensing any fee pressure in institutional or in high net worth at this point?

Well, I think there's always fee pressure and especially today, but I don't think there's been any changes there that - or anything unusual from the past.

And less so, I think, in - obviously in the high net worth market than you'd see in the - in the institutional market.

Okay.

And then Marty, on the tax rate, I'm sorry, I missed this.

You said it was 26 percent is the one that we should be looking for going forward?

Twenty eight.

I'd look at 28.

28, okay.

And on the buyback and the dividend, you said you bought back 2.6 million.

What are you thinking on this going forward?

No, we bought 2.7 back this quarter.

Right.

You know, as - I know you want to ask that question.

I can't give you that answer going forward.

But I guess what I would point to is just, you know, the past and we've been pretty consistent, I'd say, so it is - you know, we are focused on it.

Okay.

All right.

Well, great.

Thanks.

Thanks, Richard.

Your next question comes from Ken Worthington of CIBC.

Talk a little bit about the Canadian business.

Franklin used to be the eighth largest asset manager in Canada and it now looks like when the April data comes out, BM is going to move you to number 11.

Seems like a very profitable business but you're losing share.

Can you talk a little bit about the strategy in Canada and are you going to regroup up there, or is there a chance that you exit that business?

Oh, I think we feel very good about how we're positioned in Canada.

I think it's really the ranking is a function of our asset mix and Templeton still being relatively out of favor due to other styles in that marketplace, and Templeton's been in Canada a long time and has very strong awareness in that marketplace.

But the international or global category has declined significantly as a percentage of the assets in Canada, so with that, you know, our market share has declined.

But with this now, this 4.5 billion growing with very strong performance, we really address that issue a few years ago.

The real slide in our share was more two, three, four years ago, and we realized that we needed a domestic Canadian manager and that's really what Bissett (ph) has offered and really rounded it out and we've also moved in mutual series as well, and some of the Franklin products into Canada that's still heavily weighted for the company because of its history as a Templeton organization, but it is it is now Franklin Templeton investments, along with business set in Canada and has a very well-rounded product line, so we're still very optimistic and the flows in the areas that - like Bissett are still very strong in Canada.

Okay.

Great.

Thank you.

Your next question comes from Glenn Schorr of UBS Warburg.

Close enough.

How are you guys?

First question is: Just a clarification on the tax rate.

Is it mostly attributable to mix?

Just the smaller percentage in the national?

Yeah, that's it.

Okay.

It's amazing, because to go from - I just want to make sure that - like six quarters ago, we were at 24 percent and we're up at 28 percent.

There's no backward looking ramifications, right?

This is your best estimate on a go-forward basis?

There wouldn't be have to be an adjustment at any point, right?

Oh, no, not at all.

Okay.

I mean, I think you have to, I mean, go back six quarters, go back 12 quarters and look at the asset mix too.

We were --

Yeah.

Went from 42 percent to 32 percent.

I'm with you.

Yeah.

So the next question is: In the past, we've spoken about the - building capital and cash position and a good chunk of it being offshore.

Is there any tax rate that we look at if this mix shift continues that it starts to become a little - that money gets freed up a little bit, if you will?

In other words, the repatriation isn't so expensive anymore?

Well, I guess that's true.

The close closer you get to the U.S. tax rate, the less it becomes an issue, clearly.

But that's hard to predict, you know, what's going to happen.

But clearly we're closer to it than we've been in ...

Than in the past.

I'm with you, Marty.

Than in the past, yeah.

Okay.

And then maybe the last clarification, you mentioned the comp to net revenue ratio, we could look for that going forward, or at least the next couple quarters, to be a similar percentage?

Yes.

I just want to make sure.

If the market falls out of bed here, does that hold?

In other words, is that a plus/minus and neutral environment?

Yeah, that's the environment that we're in, and I think once again, I would just point to our history.

I think we've been pretty good at, you know, managing the business in a very volatile time, especially around - well, just throughout the business.

So we're very cognizant of the environments that we're in.

Super.

Thanks, Marty.

Your next question comes from Jeff Hopson of AG Edwards.

Hi.

A few questions here.

Seems like the percentage of sales from foreign markets picked up a little bit.

Can you put any percentage on that?

And maybe comment on investor behavior and/or assist in foreign markets versus the U.S.

And maybe comment on the recent sales in the past couple weeks, if we've seen any improvement there.

I think the - the trend in sales is - we would expect to see that increasing, you know, as far as the percentage of the overall mix, the investment that we've made across the grown in building these distribution channels, so, you know, the acceleration is about probably 30 - somewhere around 30 percent of our gross sales.

A much higher number than our asset base, but that's what you'd - you'd expect to see.

And what we're seeing in many markets, you know, like Japan and some of the rest of Asia, is the taxable fix, which you saw that line increase and has really almost doubled over last year, even on a net basis, and a lot of that has been due to money coming in in some of these global markets, like Asia.

But, you know, we - of course we've always said, you know, we think that we already uniquely positioned in many of these markets that are still in the early stages of, you know, developing investors into savers and, you know, we expect that trend to continue to grow to a larger percentage of our sales.

And the second part of the question?

Recent activity in the U.S., you know, maybe the last couple ...

Yeah.

I think like most groups, the uncertainty of the war, I think, has gotten investors off the sidelines and we, like most, are seeing better - improved flows through the month of April because of that.

Okay.

Very good.

Thank you.

Your next question comes from Mark Constant of Lehman Brothers.

Hi.

Good afternoon.

Just wanted to follow up on a couple of things.

One, you said you didn't do a securitization.

Is the asset accumulation lending volume in the bank consistent with kind of the - every other quarter securtization (ph) pattern you've had for the last year or so?

Yes, it is.

Yes.

Okay.

So we can expect one next quarter?

Okay.

Yeah, we'll continue to - yes.

Environment allowing?

There.

Thank you.

There you go.

Those are the words.

Okay.

And on the tax rate, my understanding - my recollection was that you do that on sort of a year-to-date full-year expectation basis.

And for the full year, even though it's just 28 for this quarter, I get like 27.1 for the year-to-date.

Yeah.

So would that actually suggest that the balance of the year it would - it would seem like if you were expecting 28 for the last two quarters, you would have done 29 or 30 this quarter.

Yeah, it's - just - Mark, I guess the best way to look at it is as we're stating this quarter going forward, so that's why you got that ...

I'm sorry?

We're looking at this quarter going forward at 28 percent.

For the third and forth.

Yeah.

So your full-year will exceed the year-to-date?

Yes.

Yes, okay.

Unless something ...

Okay.

It A similar little confusion around your comment about compensation, too, though.

Was that sort of a general statement, you know, broad parameters about, you know, roughly keeping the comp to revenues ratio the same?

I'm just looking at, you know - at the impending rolloff of a decent chunk of the fiduciary trust amortization next quarter.

Yes.

I'd think you'd have to have a pretty meaningful increase in other compensation to keep the ratio up there.

Fair comment, and, yeah, so past this next quarter, you know, what is - you know, us like many institutions, depending on the performance of the business, at some point - and I don't want to get too far ahead of this - you know, the issue with salary increases where we haven't had them for three years and I don't want to set that expectation internally or externally at the moment, but at some point that is a reality.

Okay. but you weren't being, you know, incredibly precise with respect to it being flat, just general.

No.

Exactly.

Okay.

Well, I will also put you down for the record as confirming that you'll continue to repurchase 1 percent of your shares every quarter ...

Thanks a lot, guys.

All right.

Your next question comes from Robert Lee of Keefe, Bruyette and Woods.

Thanks.

Good afternoon, everybody.

Real quickly, is it possible to get a little bit more color on some of the institutional business as well as you mentioned maybe RFP activity?

Have you seen some slowdown?

One, you know, can you talk a little bit about the pipeline, if you've had any wins that are out there that just haven't been funded yet?

The-open and also like after that maybe ask you a question or two on the high net worth business.

Yeah, you know, I did mention the - the - a few of the additions to some of our existing accounts.

One, central bank of China with a $100 million addition, and, you know, nowhere just, (inaudible), and Tarateaches (ph) are some other ones that we've had additions.

We've had some bins as well - I mean I don't want to get in the habit every call of predicting what will fund for the next quarter because I think it's somewhat misleading if we mention two or three and - you know, I think - I think the comment that I made is that speaking to our institutional people, they felt like there was a slowdown in search activity but right now things look pretty good as far as the pipeline and I think specifically for us, the global fix is something we're getting more excited about just because of the performance numbers continue to be very strong there and we think that's an area that, you know, we'll see some additional searches here in the next quarter.

Okay.

And on the high net worth business, at least my sense is at least in the last several quarters - calls, excuse me, it's not something that's - you've really touched on much but, you know, a few years ago you bought fiduciary in part to get into that business.

Uh-huh.

At one point talked about growing that.

You know, where does that stand?

Have you actually been opening up offices?

Are there plans to accelerate investment in the high net worth business?

You know, where - where ...

Yeah, I think the - it is approximately 8 percent of our assets.

I don't - and, you know, we don't spend too much time and I think the other part of - you know, from our standpoint, what's occurred since the acquisition, obviously, 9/11, and a period where a lot of change for that group, a lot of just getting business back to where it was.

And I think we're close to that now.

We have expanded our presence on the west coast, specifically, here with an office in San Mateo, and we're still very optimistic about that business.

It's been a very stable, strong, good, profitable business for us but it's just undergone a significant amount of change here.

So we think the results have been very good as far as some of the wins that we've had in that area.

We think things look very good with the pipeline at over $2 billion, that we've - you know, identified.

Now, what that means as far as what we're going to convert, you know, is a whole 'nother story but I think it's one that we have spent a lot of time, you know, putting a discipline in place and as far as the sales process goes, and one that our plan is to continue to expand that.

But on what, you know, time frame, we're going to do it gradually.

We have also - are in the process of an office opening in Nassau, as well, so two new offices there here in the last year.

Great.

Thank you very much.

Your next question comes from Marc Panzer of J. P. Morgan.

Hello.

I just had a couple of quick questions for you.

The first one was regarding your account closures, which I know in the third - third quarter, you generally have closed some Canadian accounts.

Yeah.

It's - yeah, third quarter for Canadian and fourth quarter for U.S., you see them kick in.

Do you have any kind of guesstimate as to how much you'll see closing there next quarter ...

I'm sorry, I don't have that right now, but I expect if you look back last year, you wouldn't be too far off.

But that's the best I have at the moment.

I'm sorry, I don't have that for you.

Okay.

No problem.

Then on the - sorry.

On - last quarter, you talked a little bit about a couple of big ones, equity international mandates was about a billion dollars worth when you add them all together.

I was wondering if they'd all funded during the quarter.

I believe they have.

I think that was two mandates.

Right.

It was like the Sweden and then the employee retirement account of Texas.

Right.

And then the Bank of China one hasn't funded yet?

No.

Okay.

And then I just one last thing and I apologize if you covered this already and maybe I missed it, but I was wondering about the - the additional 3.9 million in partial service shareholder accounts, and what those consisted of.

Yeah.

I guess the best way to describe it is that going back a couple quarters ^, we had looked at our shareholder servicing fee arrangements, and, you know, the business had changed so much that, in fact, a group of people looked at, you know, a better way to have fee arrangements where there were some accounts where the full-service model, medium-service model and no-service model, and so we basically changed the fee structure to represent that as what was historically a single fee model.

And so that's really what's happened.

That's why you've seen that 3.9 million that you're talking about was a group of accounts that we were not getting compensated for previously.

Okay.

They were already on the books.

You shouldn't have a mind-set that we just added new clients.

We just weren't getting paid for it.

Oh, okay.

So that explains the - the jump-up in shareholder servicing fees then?

Yes, yes.

Okay.

All right.

So we can expect that number to be a little more consistent going forward then?

Yes.

Off the new base?

Right.

Okay.

And sorry, actually I did have just one more follow-up question.

And it was on the effective investment management fee rate and, you know, my calculations could be off, but I'm getting 55.3 basis points this quarter.

Okay.

Versus 54.6 in the last quarter.

You know, and given the way the mix went, I - you know, it doesn't - it's not making sense, so I don't know if I'm getting the number wrong there or ...

You know what?

My number is exactly the opposite of that, so I think it is 54.6 this quarter, so maybe we could follow up with you off-line but --

Okay.

Great.

Thank you.

Okay.

Your next question comes from Bill Katz of Putnam Lovell.

Okay.

Thank you.

Good afternoon, everybody.

Could you sort of quantify what rolls off for fiduciary trust from the retention package over the next couple of quarters?

That's what we're going through right now.

Bill, it's - it will start, you know, the had next quarter, and somewhere around, we're estimating, $4 million, assuming nothing else changes, and that's what we're suggesting is probably not likely, but we don't know.

Okay.

And then what you're saying is you might use that to essentially self-fund higher compensation for portfolio managers and analysts if good performance.

Am I reading too much into it?

Yeah, you're reading too much into it right now so I think the best thing to do - I bean we'll be very straightforward when the time comes, it's just not now, so - and that's why I'm just suggesting, you know, looking at our current percentage of - the current ratios is surely a good indicator through this next quarter and we'll talk more about it next quarter when we're more informed.

We're just not prepared to ...

Okay.

Fair.

On the - on your discussion around capital management, I'm just sort of curious.

You mentioned it's been relatively stable but then in the same statement, you said you did a hundred percent of your free cash flow or your net income this quarter ...

Net income, yeah.

... was sort of capital management versus 40-some-odd last year.

Are you sort of signaling now a greater proclit (ph) to using - topping off (inaudible) versus what has historically been the case?

No.

I'd say it's very consistent with what's - in the past, and I guess the real point that we've been trying to get across is that we are a buyer of our stock, we're a selective buyer, you know, coming in chunks, and as opposed to seeing some very consistent repurchase within a quarter.

So if you ask me what are we going to repurchase next quarter, I couldn't answer the question.

Okay.

Was it just - looking at the graph, was it earlier in the quarter in which you were a little bit more aggressive than the latter half?

Yeah, I - I wouldn't say that.

You would not?

I just don't have that information.

Okay.

I just want to step back to a broader statement.

I was wondering if you could update us a little bit on the retirement initiative, on the DC side, see how that was sort of going along and sort of what your incremental thoughts are these days on sort of fund to fund or alternative products.

I think the retirement side, as we said before, I mean the investment only continues to be, you know, probably the most profitable segment of a business that we have, and a very important one for us, and one that's growing.

I think the - you know, the other side, the bundled area is challenging, as we've said before.

We've made a lot of progress, in streamlining, you know, our servicing and getting our costs under control, but still a very challenging business to be in, and one that we're committed to, to be one of the final players in, but one that is - is going to be, you know, a lot more difficult than other segments of the retirement marketplace.

What was your other question?

Maybe I can just follow up before I get back to the other one.

You know, talking with T row, they've actually of indicated that competitive pressures are abating to some degree.

Your comments would sort of be the inverse to that?

Well, that could be on the pricing front, but I think the - what we've seen is the amount of searches in the smaller end of the market, in particular, you know, have slowed down.

Maybe some of that is due to the war.

Most he have it is around year-end anyway.

But I think we're just seeing less searches than - than what we felt as far as when we're, you know, forecasting that business for the year.

In the smaller end of the market.

And I think that's probably ...

... where you are in terms of fund to fund and alternatives products?

Yeah.

We have a - we've attacked the alternative products and hedge funds and long/shorts from a lot of different sides.

You know, we've - with Templeton and Franklin, have a long/short kind of quasi mutual hedge type fund that has a fulcrum fee pricing that's been very successful with very good performance.

We have a fund to fund with the - with one (ph) that subadvises that partnership, and that's primarily through smaller institutions, through our institutional channel, as well as through the high net worth channel at fiduciary.

So we - we - and then around that, we've built an infrastructure and structured an alternative group with a support group and staff to credibly, you know, go after that business which - and tying all this into the alternative group that we hadn't done in the past.

So we think it is going to be an extension of what we do.

We're also in the process with mutual, bringing out a distressed fund there.

So it's an area of the business that we think will continue to grow and one that we're going to be a player in.

Okay.

And just last question, just can you quantify what your outlook in terms of what you've seen in April.

Is it a pickup across the board by asset class or is it style specific toward bonds and still more conservative investment styles?

Well, the only - I think the general statement would be the areas that were hurt the most, you know, from the uncertainty of the war, are probably the ones that, you know, are picking up the most, and, you know, so from that, the international side, where you'd expect to see a rebound in some of the - this uncertainty globally being removed is where we've seen, you know, the best pickup to date.

Okay.

Thank you very much.

Your next question comes from Daniel Goldberg of Bear Stearns.

Good afternoon, guys.

Two questions.

First, in terms of drilling down a little bit on the retail segment, it looks like looking at the flows, that redemptions in the current quarter were the lowest in numerous quarters, going back for a long time.

Is that any trend that we see?

I mean, obviously there's some impact from the war, but is there any specific trend there that, you know, the retail participation is increasing or improving?

I think it's just - it's consistent with the more volatility that you have, the more people stop doing anything, and most - most redemptions are because they think there's a better opportunity somewhere else.

And in those kind of periods where you're having that kind of volatility in the market, really the movement of money tends to slow down.

So I think that's - it was - you know, I don't see that as a trend that - I think it will get back to more of a normalized rate but I expect to see the gross sales number pick up from that as well.

Okay.

And then second of all, in terms of the regulatory environment, just want to get your thoughts on the potential impact, I guess, to the asset management space or to Franklin in particular.

There's a lot of talk in terms of unbudging (ph) of commissions and soft dollars, a lot more going on in Europe than in the U.S. it seems to be occurring also in the U.S. but what your thoughts are there, and also what your thoughts are if there is anything you can share with us in terms of the global research settlement and kind of what happens with soft side research in terms of how the asset managers or portfolio managers use soft side research going forward.

You know, clearly it's a topic everywhere and this is just, you know, one of many that you're highlighting, and I would say with regard to this notion of unbundling, what you're paying for through the commission structure, which is sort of coming out of the U.K. at the moment, from our standpoint, you know, clearly we're keenly aware of it, we're watching it, but I would put ourselves in a very good position from that standpoint where we have basically 500 investment professionals around the world that if, in fact, that is the case, and you see Southside research, you know, change probably by, you know, focusing on a different accounts than those accounts that can pay for it, the larger firm - asset management firms will probably do fine.

It will be the smaller firms that rely very heavily on it that will probably be under a lot more pressure.

But it - you know, it's a topic that we're watching and preparing for what the outcome might be but it's not clear to us.

And on the - you know, on the other side, just the issue of the momentum building on some - you know, what some people refer to as a regulatory bubble and, you know, what will this mean for the - typically the mutual fund industry which seems to have the media attention right now, I think as a company, obviously we work through the ICI on that, but I think we are going to take a more proactive role and take a, you know, a responsibility with sitting down with the media and talking about this and not relying entirely, you know, on the ICI to do that, because I think the whole transparency issue, you know, praying, directors, all these things, are - there's a lot of misinformation about, and one that we need to - we need as an industry to do a better job to really present that argument on how mutual funds are still, in many ways, the lowest cost and best alternative for the majority of investors.

But I - you know, I think beyond the - the - the question on the brokerage side, what does that mean, you know, our mix is still much lower than anyone else as far as, you know, our equity assets, so I think as a business, we have a much lower risk there than - than anybody else, if - you know, whether it's disclosure or any other form of limiting soft dollar practices.

Okay.

Thank you.

Your next question comes from Henry McVey of Morgan Stanley.

Great.

Thanks.

And this will be the last one.

Okay.

Just a couple quick questions.

Marty, you had talked about renegotiating - renegotiating IT arrangements with IBM.

Any progress there?

No.

We are - we're having those conversations, but we've not concluded them.

Okay.

And just, Greg, on the international, you said 30 percent of sales came from international.

How much of those are Canadian-based and how much is the rest of the world?

Yeah, I don't have that number in front of me.

I'm sure we can - hen reap can get that to you.

And then just on the - on the institutional side, I guess I was trying to get a feel for how much of the flows that you're picking up are coming from people coming out of bonds versus just some of the aggressive growth guys losing mandates and then the other thing is just in Europe, are you seeing demand where they're getting out of equities and buying your fixed-income product?

Yeah, I think that's - that's true.

I don't have a - any way to convey what that means, as far as a percentage or, you know, I think you're right as far as the trends that you're identifying there.

I think how much more of that is left, a lot of that has already occurred.

I mean the insurance companies have sold huge amounts of equities.

You know, and you can only go so far on that, and you know, that's why the fixed-income has been such a great opportunity on the institutional side.

But I don't really have any way to tell you what that has meant as far as our individual experience is.

Yeah.

Henry, I don't - from just data points, I mean I don't think that you've yet seen the movement of institutional money out of fixed-income into equity products.

In fact, I would suggest that there are probably still more investment committees making that higher commitment to fixed-income at the moment would be more prudent.

And just final question, Marty.

Is - on the - the (inaudible) the distribution margin did go up and that came in a little bit above expectation.

Is that just higher sales this quarter or was there anything else going on?

Yeah.

No, there - nothing specific that, you know, I could identify that you could put your arms around.

Okay.

Thank you, guys.

I do - Canada is about - a little over 10 percent of our overall non-U.S. sales.

And what's the big - what's the biggest one?

Asia. is bigger than U.K./Europe.

I don't have the exact percentages broken out, but not by much.

Thank you, guys.

Is that close enough?

Yep.

Sounds pretty good.

All right, Henry.

Thanks, everybody, for joining us.

Talk to you next quarter.

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