富蘭克林資源 (BEN) 2003 Q4 法說會逐字稿

Good afternoon.

My name is Dawn and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Franklin Resources fourth quarter and year-end earnings 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 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.

Thank you very much and good afternoon, everybody and thank you for joining us.

This is Marty Flanagan along with Greg Johnson.

We're co-presidents of Franklin Resources.

And today what we're going to do is address some of the financial highlights.

We'll then go through assets and the management flows, investment performance, address some business highlights, the operating results then we'll open it up the question and answer.

Before we get started I would like to refer everybody to our forward-looking statement.

There is a copy of the statement on our Web site, in our 10-K and in our 10-Q and I would just like to point out a subset of that statement which states that forward-looking statements involve a number of risks and uncertainties, and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied and such forward-looking statements which we may make here today.

In getting started, not only is it our fourth quarter but obviously it is the end of our fiscal year and I would like to highlight a couple of those points.

It turn out to be a very good year for us after what looked like what was going to be a difficult start if you remember this quarter a year ago.

Assets under management ended the quarter at $300 billion.

That is 22% increase from the prior year.

Although average assets year-over-year are relatively flat.

We had some real strong sales in growth during the past couple of quarters.

Gross sales hit an all-time high of $80 billion and we had net inflows for the year of $14 billion, and if you recall it was not too long ago in 1999 when we had $18 billion of net outflow so there has been use it a dramatic change in the results for the company.

Net income on the back of this increased assets under management increased to $500 million, 16% increase year-over-year.

That is our best year -- second best year in the past five years so really a good result year considering the market we have been there.

Earnings per-share increased 19% year-over-year and the incremental increase over earnings per share over net income is a result of stock buybacks during the year.

We have also seen margin expansion over last year and the prior year, operating income level of 25%.

Looking at the quarter it was a very strong quarter organically but also aided by the market conditions where we saw an increase of assets under management $11 billion of the increase was attributed to market appreciation.

We continued to do a good job controlling costs resulting in operating margin expansion of 300 basis points during the quarter.

This resulted in net income during the quarter increasing 16% quarter-over-quarter.

So we believe we continue to be very well-positioned.

We think we have very, very good investment results, service areas are very very strong and we think we're very well positioned for the future.

And a little more color on the quarter.

As I said, we ended the quarter with assets under management $300 billion.

That is a 5% increase over the prior quarter.

Excuse me, an 8% over the prior quarter in assets under management.

Looking at the asset mix, at the end of this quarter 51% of our assets under management are in equity.

That is up from about 49% in the prior quarter. (inaudible) 31% of our assets under management are down from 33% last quarter, and the balance hybrid products increased to 15% of our assets under management.

So our diversification by product and by investment objectives, we think is serving us very well and our clients very very well.

With that I'll pass it on to Greg.

Thanks, Marty and good afternoon everyone.

As you can see the flows were very strong for the quarter at $4.4 billion in net flows long with market depreciation of $11 billion.

Sale were up approximately 10% from the prior quarter and up about 50% for the prior year.

Redemptions were also up and most of that a big part of the redemption number on international side which in the net number was just $500 million.

We had an institutional account in Canada which had been a long-term account and still a very important relationship for us there, our original institutional account and very low-fee piece of business but one that the client has diversified their base and with that we had $1 billion redemption in an institutional account.

So that really explains why the global equity line is down despite the gross sales transit international actually net and retail trending up very nicely.

On a gross basis, $7.9 billion in international versus 6.3 in the prior quarter and 4.6 in the quarter before that.

The equity trend very strong overall, over the last three quarters, 1.1 to 1.7 to 2.4 in net sales and as you expect with the back-up in rates and the pressure around some of the state municipals that we did see some redemptions there and industry did experience new redemptions as we did in the Muni category and sales were (inaudible) within the Muni group but redemptions were up about 50%.

We think that has leveled off a bit going forward.

On the investment performance side, again, I think this story is very strong for the long-term numbers with over 85% of our assets in the top two quartiles for the three, five and ten year periods.

As I mentioned on the last call with the outperformance of the NASDAQ, some of growth in technology stocks, you expect to see some of our numbers under a bit of pressure for the one year numbers and I think that is true with some of the value, more value oriented funds.

Templeton continues to have very strong relative performance and on the Franklin side the income fund which is our top selling fund in the complex is in the top 6% with our peer group for the one, three and five-year periods.

Some business highlights of note over the quarter, we are very pleased to have a successful offering of our limited duration income trust through the retail channel in a very difficult market rising rates really a lot of headwind there but we're happy that we're able to close with $425 million.

We're also pleased with the recent Dow Bar survey which we improved from number four to number two in general opinion of the investment representatives which is a very good leading indicator for retail sales going forward.

As far as new products in the retail area, we expanded our municipal bond offerings with more short duration type funds.

The 529 plan is starting to get traction and on the international side, we are pleased to see in Taiwan that we exceeded $4 billion in just about every air contract is exceeding their targets and sales and assets for the year.

On the institutional side, we rebranded FTI Institution to be more consistent with the overall companies Franklin Templeton brand and rebranded Franklin Templeton Institutional across the globe.

I think the pipeline still looks good after the quarter.

We, one of the big funding in the past quarter was the Norges funding of approximately $1 billion which we mentioned as a win in the last quarterly call but a funding in this quarter.

The high network side we're leveraging some of the Franklin Templeton Bank and trust capabilities and mortgage products into that channel and there again the pipeline still looks very strong.

I'll turn it back to Marty.

To give you a little more color on the operating results within this quarter.

Operating revenues increased almost 6% quarter-over-quarter on the back of the increase in average assets under management.

Net income increased 16% to $152 million, once again on the back of the increased in revenue and cost control during the quarter.

Earnings per share increased 17% quarter-over-quarter to 61 cents per-share.

Once again, the delta between net income and earnings per share is a result of additional buybacks during the quarter.

Drilling down a little bit more in operating revenues, Investment Management fee has increased 9% quarter-over-quarter on the back of the increase mass under management and also we're seeing a mix more towards equity product resulting in our affective D rate increasing to 56 basis points up from 55 basis points last quarter.

Underwriting and distribution revenues increased 6% as a result of increased sales.

Shareholder servicing fees were down a little bit in the number of shareholder accounts dropped as we had an annual purge in the last quarter of 1.6 million shareholder accounts.

Other income is down 38% quarter-over-quarter and that is because in the prior quarter we had the securitization in those results.

Focusing on operating expenses, an area that we've talked about in the last couple of quarters is comp and benefit increased 2% quarter-over-quarter to $167 million during the quarter.

A couple of things, we've ended our fiscal year and we're going into our new year in this quarter.

We are going to be doing merit increases and if we continue to see a strong operating results, you know, bonus pools will be adjusted accordingly.

We talked about a range of comps and benefit as a percentage of net operating income of 35% throughout the year and we think that's a pretty good target, assumption we can keep the operating results coming through.

IT occupancy was flat during the quarter and will continue to try to focus on that, although we do continue to make some strong investments in the IT area.

And the other line at $28 million during this quarter, we do continue to see pressure there.

Much of it's being driven by a lot of the regulatory undertakings whether it be an accounting change or whether it be FIN 46, some of the 404 efforts, Sarbanes-Oxley still coming in responding to a number of the inquires to say nothing of the increase in insurance rates which we've talked about in the past but we'll continue to try to give focus on cost controls as possible.

Other income dropped 10% during the quarter.

We had some singular gains last quarter within the portfolio but within the -- this period that we have $5 million of income as a result of FAS 150 where we have to show some premium income now through the income statement in market-to-market which is in this quarter.

During the quarter we bought back 6 million shares of our stock.

Last quarter was 4.9 million shares.

Year-to-date for the fiscal year we bought back $15 million, $15.3 million of Franklin Resources stock.

That would result if you look on a whole year basis, if you consider stock buybacks and dividends that we have put back in shareholders' hands, 130% of this year's net income.

The operating margin during the quarter increased from 24% last quarter to 27% this quarter.

Much of that with the help of the market appreciation (ph) during the quarter.

So, very good year, very strong quarter driven by strong investment results, good flows, strong service levels, continued focus on cost controls and, you know, we're very hopeful that we're going to stay on a very, very positive path delivering good results for our clients and also for our shareholders.

With that, Greg and I will open it up to questions.

At this time 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 Mark Constant with Lehman Brothers.

Good afternoon, guys.

A couple of things.

One to clarify the FAS 150 impact on the put (ph) options.

The Q referenced to $1.9 million gain on the expiration of options and is just wondered on the accounting transition should we read that that you had $1.9 million plus 3.1 from mark-to-market this quarter, is that how you got the five?

Mark actually I think are you picking up the number of options outstanding?

I have to look at that.

I thought it was 1.9 million shares.

My recollection is 1.9 but we can do it off-line if you like.

We'll follow-up off-line if that is OK.

Absolutely.

The, also on the underwriting distribution margin that you're referencing there is lot of things obviously that affect that mix but if one were to assume that, you know, for a variety of reasons, B share sales are a percentage or loaded sales as a percentage and total sales declines, should that be improved, if I kind of isolate that one effect.

Yes, that would seem to be some of the trends at the moment, although as you know, we have been pretty well dominated by A-fund sales but if the interest continues to follow -

That is part of what we saw this quarter I guess is what I'm asking?

Yes, yes.

OK, I don't OK.

And on the sort of regulatory front, your Web site has the statement that, it explains that the subpoena was not to Franklin but to the former employee or to Massachusetts rather is there anything that you can add in terms of I presume you've sort of followed up and double checked that employee's activities in the last week or so.

Is there any other color that you can add with respect to the investigations.

It is impossible to completely eliminate the possibility of a loose cannon somewhere but how far along are you in that process of making sure there are not any loose cannons or there haven't been, I guess?

Well, we really can't comment on that one, because we have not been subpoenaed directly and really not knowing any details around it, you know, our position is that we will not comment, you know, I think it's been in the press; it's been reported, you know, that it's involving some Prudential brokers specifically but that is all that is really public.

You know, that is really all we can say on that.

I think this subject is a whole obviously is an area that we do need to comment on as far as, you know, the affect on the industry and our business and really how are we responding to what is a very serious issue, the credibility, you know, of our industry.

And I think before I say anything we just want everyone to understand the sensitivity around any comments that we make in that we're going to be very careful and somewhat generic in how we respond today because we are discussing this with regulators and we would rather have those questions answered directly with the regulators rather than any kind of misinformation coming out, you know, in any other form of -- whether it's in a report or publicly.

You know, as you are aware, we have received subpoenas, one from the SEC requesting information on our internal timing policies and we have done our own investigation and have found no special arrangements or exceptions to our stated policies.

We also in October received a subpoena from the New York State Attorney General again on mutual fund trading policies and it doesn't imply any wrongdoing on our part, but we cannot again comment on any specifics around that.

As I mentioned, the question around the final third piece was the state of Massachusetts with the former employee, which we were not subpoenaed.

We were sent a copy and really have no comment.

You know, I think the company's position is we support strict compliance with the laws regarding trading and security valuation and we felt like we have had very strict policies with regarding timing that gotten more restricted over time as this issue has become more prevalent in the and industry and certainly around the international equity funds.

We have been diligent in routing out timers and we are actually sued by a timer by rejecting a trade so this is an area where we have proactively gone off the problem and we feel have had a real impact on dealing with it.

Late trading is something that gets put in the same category as market timing, but late trading is really a black and white issue for everyone in the industry.

It's prohibitive period and it is not something that should happen and if it does happen, we support, you know, whatever full prosecution would be appropriate under those circumstances.

And I think finally, we welcome, you know, more specific regulations to these complex issues around excessive trading and fair value pricing, and we hope that discussions that everyone is having with the various regulators that we're all gaining a better understanding of what is a very complicated issue.

And if you start with market timing and really try to define what is a market timer and I think we're starting from almost an understanding today that any form of market timing is detrimental and should be banned and I think you have to -- you have to go beyond that and understand that the definition itself is very vague.

And one that we have wrestled with quite a bit over time and I think over the past few years we've had a more subjective approach where we try to identify bigger trades that might be moving in and out and figure out what works for the fund.

But I think more recently with the international funds and at bosses that and abuses that was done and the attractiveness that was done around fair value pricing which is really unique to global funds where you have securities priced around the globe and a fund that has daily liquidity and daily based on the market, you really have a problem for international funds and this has not been a new issue for the industry.

We have been talking about the appropriateness of fair value of redemption fees, all of these things have been identified as possible solutions and I think where we're -- we look forward to is some clarification, you know, around what is a very complicated set of issues.

But I think it's just important to understand that market timing itself and the rights of individual shareholders that are already in a fund, you're really trying to balance all of these factors in your approach of going after what is a really small portion of people that are doing excessive trading.

And we've continued to put more restrictive language in it and finally now have a redemption fee.

And we get the question a lot why don't you have a redemption fee on all of your funds.

Why don't you ban any form of timing?

That sounds like an easy solution but in fact in practice again it is a very difficult one to implement.

But we do think we have taken the appropriate actions.

We're a company that our philosophy is always looking well down the road and looking out for our shareholders and we take that responsibility, I think, very seriously as an organization and I think we gain comfort that all of our actions regarding this issue and how we responded over time, you know, have been consistent with that philosophy.

OK, great.

Thank you.

Final side topic is there anything that you can share with us in terms of what you've heard on the repatriation bill?

Yes, clearly we continue to follow it and it -- I think it just got taken out of the house bill, the senate passed it.

The senate passed it but it's out of the house bill?

Yes.

So if it continues to go forward it will end up in committee.

So we're still following it.

We're still thinking that it is a very, very good idea for the United States, outside of just for ourselves but I think it is a very complicated time to get legislation passed at the moment.

So, you know, that is as much as we know at the moment.

OK, thank you very much.

OK, Mark.

Your next question comes from Henry McVey with Morgan Stanley.

Good afternoon.

Can you hear me?

Yes, sure, Henry.

Just a couple of questions.

One, Marty, you said on the compensation number, I think you ended the year at 34.9 and you were saying that you're targeting around 35 for next year.

I just wand to make sure I heard you right.

Yes, as a percentage of net revenues.

Although the fourth quarter was at 32.7.

Right and once again I'm trying to give a range for the year and it is based on some expectation where we think operating results are going to be.

What we are doing clearly is, you know, merit increases are going into effect October 1st of this year.

You'll see that in the fourth quarter and a big portion of our compensation is through, you know, operator results and so we're anticipating, you know, a reasonable result for the year.

Right.

And in terms of the -- just on that compensation that doesn't include options I think you had pro forma I would have heard it ten to 15%, that number is excluding it, right.

Not including expensing options, yes.

Your policy is just waiting to see?

We're just waiting to see.

If you look at, yes, our -- our options and our use of them, we would not classify ours as being really excessive but we think the better thing to do would be more informative is to see where it all comes out.

OK.

Just a couple of others.

Greg, when you talked about the second subpoena thing I think it was from the New York State, I guess I wanted to just make sure I understand, there was something in the "Wall Street Journal" today talking about directive brokerage and revenue sharing, was that the -- was the New York State was that on market timing or was that on directed brokerage and revenue sharing?

It was on market timing.

OK, it was.

So you guys have not been subpoenaed on anything on the directed brokerage or revenue sharing?

No.

OK.

So I want to make sure.

And then the put feature from an earnings volatility standpoint it is great to get the income but given the changes in the accounting, are you guys when these things expire are you thinking you won't do this any more?

You know, Henry, this has worked out very well on the programs and this new accounting definitely makes it less attractive so if we did it I think it would just have to be in a situation that it is just so attractive that we would do it but it really makes it, you know, such that I don't think we're going to be doing a whole lot of it going forward.

The final one was on the institutional, this is would for Greg.

I think you said last time you guys had like funded $125 million out of a big mandate in Japan and then I heard you say on call I think you had a billion from Norges.

Can you just update us on the institutional effort on what has funded and what hadn't?

Yes, there was an addition to a Japanese institutional client that was $120 million that was funded in the prior quarter for this quarter and as I mentioned earlier, the Norges, which was just under $1 billion and consumer products and technology mandated.

OK.

On the Japan I couldn't understand you , on the Japan -

It was in addition to an existing client of 120 million.

OK.

Good.

But sounds like on that front things continue to do well and gain momentum?

Yes.

But I wouldn't expect those kind of -- that kind of a win every quarter, you know, as far as an individual size.

OK.

Good enough.

Thank you, guys.

Thanks, Henry.

Your next question comes from Glenn Schorr from U.B.S.

Hi, Glenn.

Two questions, one is a quick one.

On the share buyback, what was the average price on the quarter?

Do you have that handy?

Yes, it was 43.95, I think, for the quarter.

OK, thanks.

And then a bigger picture.

International flows, let's just strip out the $1 billion issue.

I guess redemptions picked up also a little bit along with grows sales.

It is kind of interesting, the markets outside the U.S. have outperformed the U.S.

Gross sales are starting to pick up.

Do you see this as a flat-out building trend?

Is it historical example that we can look at.

Are you thinking this is going to follow through and are you seeing that in the pipeline as international starting to build as a percentage of the pipe?

Are we talking about international as a percentage of U.S. equity or U.S. retail flows or are we talking about international non-US investors for our organization?

I am talking about what fits into your Global International Equity bucket so I don't care who is buying it as long as it.

That is the whole -- yes, I think we -- we talked about that in past calls that we, you know, with the win and the performance now and relative performance in that area that we would expect to see a pickup.

If you look at the gross levels, the increase quarter-to-quarter -- you know, from quarter over the last three, it's a fairly significant increase and I think that is a trend that we would expect to see as long as, you know, that performance is there.

It -- the appetite is clearly growing and most of that is due to the strength and performance here in the last year.

And I think clearly if you talked about a subset of that merging markets a couple of years ago, I don't think you would have thought that you would start to see interest in it but the out-performance has been so strong that I think even in a emerging markets is outclassed and institutionally it is getting some notoriety again so in total emerging markets through the global equity products, you know, we think we have a strong steam as anybody in the world and there is some real interest there so we're pretty hope full.

This might be too general of a question but the average basis point on Global International Equity versus domestic is about a spread of 20 basis points?

You know what, it's not a simple question.

It is actually very complicated because of different pricing structures around the world but you could -- that is as good as you're going to do.

I think that is pretty -

Within shouting distance?

Right.

OK, thanks a lot.

OK

Any other questions?

Your next question comes from Cynthia Mayer of Merrill Lynch.

Hi, good afternoon.

Just a quick -- a couple of quick ones.

Do you have any update on the direction of the tax rate right now and I'm also wondering about high net worth flows which you kind of highlighted last quarter and whether you guys are going to be a securitization next quarter.

With regard to the tax rate, you know, at the moment we're, you know, clearly thinking 29% is the right number.

And I think as we've talked about when we have seen big volatility moves in our assets, that's what gets us offtrack some.

But right now we think that's the right tax rate going forward.

With regard to the timing of the securitization, it will really depend on, you know, the market and, you know, the loans that we generate.

But I'd say it's, you know, we're on track to publicly doing that this quarter something

And the high worth, the number I have on the gross side was just over $100 million in new business from individuals in the last quarter.

OK.

Are you seeing any trend there, in particular, when you look at the last few quarters?

I think it was a little higher in the June quarter, right?

Yes.

I don't -- I don't see any major trend there.

I think the relative performance is better for the Group because of their buyers from the growth side so that is going to hopefully help them in the near-term but no real major trend there.

Uh-huh.

OK.

And what about, what are you thinking on advertising spending going forward?

Well, historically the first quarter for us is generally lower than, say, the average for the year and that's like many companies, we don't do as much TV or print during the first quarter and expect to see the second quarter where we pay a pickup.

So I think the trend would be similar.

We don't anticipate any unusual items here in the next quarter.

OK, great.

Thanks.

Thank you.

Your next question comes from Jeff Hopson of A.G. Edwards.

Hi.

Just to focus back on the expense side real quick.

Your commentary about the comp line would suggest that maybe margins would fall from here.

Obviously depending on your assumptions about the market and whatever else.

Is that from the fourth quarter run-rate.

Jeff, I have a hard time answering that because that's, you know, one element of obviously, you know, all the component parts.

So I think the only way you could do that is assuming that we had a 35% percentage of revenue in this quarter then you would have had lower margins, but I think that is hard to -- too many other factors to be responsive.

OK.

Then just to focus on like info systems, you're still spending money.

Will you consciously ramp-up that spending line now that you theoretically have more to spend?

No.

I think -- yes, we have talked about this in the past.

I think over the last number of years we have gotten very, very disciplined on how we manage technology projects.

There is still a huge demand obviously but we're very, very focused on starting projects, you know, when we can see, you know, the business leaning towards the company across worldwide and we're very business any in impacting the projects as they go out so we have planned through really this year but it actually rolls out for almost three years.

OK.

But we won't react I guess is the answer to quarter by quarter swings in our operating results.

OK.

And then on the fixed-income side you seem to upped the trend a little bit in terms of keeping flows neutral to maybe slightly positive here.

Any thoughts on how you see that playing out in the next quarter or so?

Yes, I think part of it, we had a half billion dollars help from the limited duration trust during that period so, you know, without that it may have been a little bit more, you know, did to -- you know, I don't anticipate the pressure that we're under, we had a pretty severe back-up in rates there, and the Muni you don't, I think you had another set of issues around some of the state budget but tend to be a little stickier than some of the taxable and Jenny may by its nature tended to do a little better in a rising rate in a fixed-income so I think we're a little bit, you know, a little bit more protected from rising rates with Muni and Jenny Mae assets.

OK, very good.

Thank you.

Your last question comes from Daniel Goldberg with Bear Stearns.

Good afternoon, guys.

Can you just clarify, you said the billable shareholder accounts, did you say $1.6 million were purged during the quarter.

Last July, this last July.

That bring the total to what, 13.6?

Give me two seconds to get to that.

That is 16, excuse me, 14.2 million shareholder accounts at the end of September.

OK.

Any comment on October activity to date, anything different that you're seeing versus what we -- versus the just complete quarter?

I wish we could be more helpful but, you know, we tend not to comment on that.

OK.

Can you.

Sorry about that.

Can you then talk about, you mention in the release your is that true gee your strategy in Canada going after the high-networth client.

Can you give us a little more detail on that in.

Yes.

When we brought this in 2000 they also had, you know, now with fiduciary which was our principal high networth platform also, there is a forming a trust company in Canada called Fiduciary Trust also which we'll be working in conjunction with the fiduciary high networth business and the strategies not dissimilar to that, you know, within the United States and, you know, we think we have very strong investment products and we can make those available with some other services to high net worth clients and we think that is a nice add on to our corp (ph) Investment Management business.

We have been -- one of the announcements was this tapestry program which is 11 different investment strategies really utilizing all of the capabilities in the organization and that is something we're looking at right now, you know, that has been successfully introduced in Canada and something that we're looking to introduce here in the States with fiduciary.

OK.

Then just finally you also mentioned in your prepared remarks on the retail side the 529 plan.

Any update there and what the total assets are in the 529 plan?

It was more the trend we feel it is starting to gain interest in the marketplace and still relatively small for us, you know, as far as assets, probably under $100 million.

Thank you.

Gentlemen, are there any closing remarks?

Thank you very much, Greg and I would just like to thank everybody for joining us.

We feel we are very well-positioned for the future.

We have very strong investment results, very strong service levels and very broad product line, you know, across the globe so we're looking for very, very good things in the months and years to come, so thank you for joining us.

Thank you for participating in today's conference call.

This call will be available for replay beginning today at 7. 30 p.m. eastern time through 11.59 p.m. on November the 6th.

The conference I.D. number for the replay is 277-5729.

Again, the conference I.D. number for the replay is 277-5729.

The number to dial in for the replay is 1 (800) 642-1687, or, (706) 645-9291.

Thank you.

You may now disconnect.