富蘭克林資源 (BEN) 2004 Q1 法說會逐字稿

Good afternoon.

My name is Melissa and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Franklin Resources first quarter 2004 earnings conference call.

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

After the speakers' 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 1 on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

Thank you.

I would now like to turn the call over to Mr. Marty Flanagan.

Sir, you may begin.

Thank you very much, and welcome everybody.

It's Marty Flanagan and Greg Johnson, Co- CEO's of Franklin Resources, and we thank you for taking the time to join us.

Let me spend a second to talk about the agenda.

I'll give some financial highlights, talk a little bit about assets under management, Greg will talk about investment performance, business highlights.

We'll discuss operating results and get to Q&A.

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

There is a copy of it in our most recent 10 K, but I would like to address one or two points within that which states a forward-looking statements involve a number of risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements which may be discussed here today.

In getting started, I would just like to highlight a couple things about the quarter.

It was a very strong quarter for us, aided by favorable market conditions.

We think we have also done a good job of being focused on controlling costs and operating the company very, very strongly.

We think we're very well positioned.

We continue to see strong investment performance.

We're seeing good organic growth and need to have good service levels.

A few of the highlights around the financial results.

Operating revenues were $806 million this quarter, up from 722 last quarter.

We saw net income of $172 million versus 152 million in the prior quarter, and earnings per share of 69 cents per share compared to 61 cents last quarter.

We continue to see strong sales across the various asset classes.

We ended the quarter with assets under management of $336 billion, that's an 11% increase from the prior quarter, and a 30% increase from one year ago.

If you take a look at average assets during the quarter, they were $318 billion, an 8% increase quarter-over-quarter, and a 25% increase from a year ago.

We did have strong market appreciation during the quarter, which generated $27 billion of the increase in assets under management.

Looking at the asset mix of the assets under management, we ended the quarter with 51% of our assets in equity securities, 15% in high grade balance, and a 29% fixed income, just under 2% in money market funds.

We continue as an organization to benefit from this diversification of assets under management across all the styles, objectives and also the various channels and I will highlight that during this call.

With that, I'm going to pass it over to Greg.

Thank you, Marty.

Looking at the flows, as Marty mentioned, you can see a rather strong pick up in the net number to 7.5 billion from 4.4 in the prior.

Overall, sales quarter to quarter relatively flat, but redemptions much better number, down about 17%, and year to year gross sales up close to 40%.

Looking at the net numbers, as you would expect, the equity increase in net flows from 2.4 to 4.5; fixed income relatively flat; and within the equity group, big change in the global international area and with the weak U.S. dollar, the relative performance looks very good for that asset class.

And as we said on the last call, we continue to see that category accelerate.

The muni's continue to have slight net outflows.

Overall all of the fixed income areas under a bit of pressure with the perception that rates could be trending upwards and especially Muni's with some of the state budget issues.

Investment performance for the year, again very consistent, very solid across all of the asset classes, over 95% of our assets in the top 2 quartiles for the 3, 5 and 10 year period.

Templeton Growth and World ranked in the top quartile for the 3, 5, and 10 and Franklin tax refunds continue to perform in the top quartiles for 1, 3, 5 and 10-year periods.

Looking at some of the various business highlights within the U.S. retail, we are now out with three new television commercials on all the major networks, which is consistent with generally our advertising spend, increasing in this quarter and something that we continue to do on more of a seasonal basis looking at the year.

Our website was just ranked again by Casino within the top 10.

Our retirement sales continue to be very strong in the investment only, 401(k) picking up some rather large investment only business.

I think more importantly, our top advisors now, one of our initiatives in the last year or two has been to get our top advisors to represent more than one asset class.

We're now seeing many of them selling three or four asset classes within the Franklin Templeton organization.

The international retail flows continue to be very strong.

We continue to set records on just about a daily basis as far as assets between various funds and record assets in places like Hong Kong, India, Italy.

I think of note, Bissett, which as many of you are aware as a group that we acquired in 2000 in Canada, is up 90% since the acquisition in 2000 to $7 billion, which is really quite an accomplishment in Canada.

Looking at the institutional business, as we mentioned on prior calls, again, the international equity trend, we're still seeing very strong demand there.

Fiduciary International during the quarter launched a small cap growth strategy, that's another area that we're seeing interest in and the pipeline continues to look very strong.

Within Fiduciary Trust, again, pipeline looks good.

Several good wins in the quarter, and we recently announced a new Chief Investment Officer, Jeffrey Applegate, who will be replacing Jeremy Biggs, who will stay on as Vice Chairman at Fiduciary.

The Private Client Group was recently named the best all around manager by Morgan Stanley and reached record asset levels in that segment of our business.

Marty, I'll turn it back to you.

Thanks, Greg.

I'm just going to give a little more color on operating results before we get to Q&A.

And couple things to highlight around the operating results.

We did see a 10% increase in investment management fees quarter-over-quarter, and, which is a greater increase than the increase in average assets under management, which was about 8.5%, that is that you're seeing that asset mix change to equities.

Our effective fee rates increased 57 basis points during the quarter, which you would expect with that change in mix.

The underwriting distribution margin dropped a little bit during the quarter and that was really caused by just, once again, different flows into different share classes more than anything outside of natural events.

We did see an increase in the number of shareholder accounts we have by 900,000 during the quarter, which is great, it's a almost 9% increase quarter over quarter.

Looking at the operating expenses, just a couple areas of note, comp and benefits was up about 13% during the quarter.

We did mention last call that this was a quarter that you would see the first impact of the salary increases, which we had not had over the last few years.

So that was a result in this quarter, and also a smaller impact with the Darby(ph) organization becoming part of Franklin Resources during this quarter, and then finally, the good performance resulted in bonus accruals during this quarter.

Advertising promotion was down this quarter compared to last quarter, and that's more seasonal.

We'll continue to stay focused on the same programs as Greg was just discussing in this prior comments.

Then the other area where we saw an increase was other incentives, we said $30 million, and we are, like any organization, spending a lot of time and effort in the number of the regulatory (INAUDIBLE) and costing us some money in those efforts.

During the quarter, I just want to let you know we've purchased just under 300,000 shares of our own stock, not nearly as active as last quarter.

I'll just remind everybody that the prior quarter we bought back 6 million shares.

We did increase the dividend this quarter up to 8.5 cents a quarter, that's a 13% increase, which we think is a strong increase indicative of some of the tax law change and how we think the company's going to perform.

So just to summarize, this was a strong quarter, driven by strong flows, good investment performance, good service levels.

We continue to stay focused on controlling the operating environment within the company, and we're very, very focused on doing good things for all of our clients.

With that, we would like to start the Q&A part of the call.

But before we get started, I just wanted to address our prior call.

And during our last call, we discussed a number of the industry issues and there were some reported inaccuracies and while the errors were later corrected, we are in the midst of working with regulators and inaccurate information is something that we just absolutely must avoid.

That said, we would like to emphasis that information on the current industry issues, as they pertain to Franklin Resources, can be found on our statement on industry issues on our public website, Franklin Templeton.com, and in our effort to ensure consistency and accuracy in disclosure of this information, we're not able to comment outside of what is in our website statement and the company Q&A section on the website.

Clearly, these are very important issues and we're committed to keeping all of our shareholders, clients, financial advisors informed and regularly updating our website and we would encourage you to please read the statement of the company's Q&A very thoroughly.

As I said, it is our main source of keeping people updated on a very consistent basis.

Again, we are in the midst of working with regulators and we really cannot comment outside the website statement.

With that, Greg and I are more than happy to answer any questions people might have.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad.

Your first question comes from Daniel Goldberg of Bear Stearns.

Good afternoon, guys.

Hi.

I guess what you're saying is that we can't really ask any questions regarding any of that regulatory issues other than what's on your website?

Yes, yes, I mean--

You prefer not to comment?

We really can't.

We think if you read our disclosure, we think it's a good disclosure.

The 10 K is really very thorough and we are very much trying to be open and clear and let everybody know where we are responding to regulators .

We are obviously very cooperative and are working very, very hard to respond to any of the inquiries that are out there.

Okay.

So then we won't go there.

That's fine.

Okay.

Can you just give us an update, you mentioned in the release you hit some pretty good numbers, internationally and in terms of countries like Italy, Hong Kong and India?

Can you give us an update there on what some of the initiatives are and what you're expecting going forward?

Well, those were just, I think, you like to talk about when they cross billion dollar milestones.

And in those markets, Italy, I believe in the last quarter crossed a billion, India 3 billion, and just as a percentage of our overall sales and net, it just continues to look very strong.

There is no real new initiatives out there.

The markets that have been growing for us continue, but I think places like in Italy, like a Hong Kong that we've mentioned, are relatively new for us to have the kind of sales success that we're having here in the last year or so.

Okay.

So no specifics regarding growth in those areas or any other countries internationally?

I think we feel, as we've always said, that with our infrastructure in place, that we're in a unique position to benefit and the percentage of flows coming in from these markets continue to be much higher than the asset base and continue to be a key driver to our growth.

But as far as an overall number, it's not something that we have.

Okay.

In terms of the other line item on the P & L, assuming that there was a securitization in there causing the growth, about 16% quarter-over-quarter in other revenues?

There was a securitization, it was smaller than in prior quarters, but that was in that line also.

Any details on that?

We'll have it in the Q, but nothing out of the ordinary.

Okay.

In terms of the cash on the balance sheet, any thoughts there on going forward?

I know you increased the dividend recently, and your repurchasing shares, but any other thoughts in terms of the pretty significant cash and cash equivalent balance?

Hard to respond other than to say obviously it's a result of strong operating results.

We are very focused on trying to generate good returns with the cash that's on the balance sheet.

And we also are very active in trying to find ways to put it back in shareholders' hands in the most efficient manner, whether it be stock repurchases, which we, over the last while have been really quite active in.

We did increase the dividend more significantly than we have in the past.

So we are very focused on what we should do with the very strong balance sheet that we have.

But we do want to generate the best returns we can for shareholders with it.

Okay.

Then just finally, any thoughts on acquisitions or areas of business where you think buying rather than building might be the better way to go?

Yeah, I think Greg and I've both said recently, I think we feel that we have a very full array of talent and we have very few holes.

If there was anything we would look at, it would be probably add on type things in the local countries.

Greg discussed Bissett, those types of things that worked for us most recently.

Okay.

Great.

Thank you very much.

Your next question comes from Ken Worthington of CIBC.

Hi.

Good afternoon.

Information technology, your investments seem like they continue to go down.

At what point do you feel pressured, or do you think you'll feel pressured to actually start to increase investments in systems and technology, especially given your revenue continues to increase significantly and yet you're keeping this investment sort of flat to down.

I guess at what point does that start to change?

We have been flat for the last couple years, but we're still making what we think are, for us, important investments and we would also suggest that we're probably-- that area is being run as well as its ever been run for us as an organization.

We saw the real big spike was really '99, early 2000 when there was all sorts of things going on, transfers agents, and cxxonversions, year 2000 type things.

We're very active in managing that.

We are investing in the area and I think-- I'm sure in your organization also, there is endless demand for technology investments.

You have to weigh that against a balance of the effectiveness and efficiency of layering them into the organization, so yes, we can afford to do more right now, but we won't do more unless we can make sure that it is going to be deployed effectively and efficiently.

So we're very open minded to continuing to invest in a very positive manner in the technology area and our platform is probably as good as it's really ever been, not perfect, but really heading in the right direction.

Great.

Thank you.

And if you could answer this, it would be great.

You made some changes in your directed brokerage policy in November.

Are there any implications for the income statement that we should be aware of, or should we see no impact there?

Yeah, it's an area that everybody is addressing right now.

It's not clear where the outcome is going to be, but we're very focused on that.

As an organization there are a number of changes afoot in the marketplace, whether it be increased compliance, increased corporate governance, change in top dollar practices or marketing support.

What we're really building into our operating plan is be prepared for responding to increased costs in managing the business.

Now, it's more ambiguous, but I'm just telling you we see them coming and we're aware of them and I think you have to plan for some impact, increased costs in operating the business.

That's just the fact of life as we would see it going forward.

Okay, but no impact on sales here?

Like obviously you had a directed brokerage policy for a reason.

Probably to enhance shelf space, your performance is great, so your performance speaks for itself.

I guess I was going for any other implications of the change in your policy.

What I'm getting from you is you don't expect any?

Is that correct?

From a P & L point of view or from--

From a sales point of view, from an expense point of view.

I think it's too hard to really try to answer that accurately.

Okay.

Okay.

Thank you very much.

Your next question comes from Bill Katz of Buckingham Research.

Thank you.

Good afternoon, everybody.

Couple questions.

First one I have is just in light of your solid growth in both just market appreciation also flows, are there any scale issues across the platform that we should be thinking about in terms of potential for closing accounts either on the retail or perhaps even on the institutional side?

I'll take a crack at that.

We just closed a fund here in the last quarter.

Generally the funds that we're going to close are going to be smaller ones anyway.

They are not going to be the bigger ones.

We're always looking at the implication of size on portfolio management and if we think it is disruptive, that's an action we're going to take.

I think if you look at the big funds, our biggest seller right now, Franklin Income Fund, is a fund that is well diversified, can do a lot of different things in the big cap, fixed income world, so you're not really contained there.

The big Templeton Funds, again, we don't feel like that's an issue.

So I don't think we're anywhere near that problem in the big funds.

Okay.

Second question I have, just maybe Marty commented maybe on a slightly different angle from the prior question.

In reference for being prepared for elevated costs in light of this post regulatory reform.

Would that potentially dwarf or negate any type of leverage you're getting from reduced head count and the market appreciation on a go-forward basis?

You had a little bit of margin expansion year on year, but it was flat sequentially.

Directionally could that pick up, or will things sort of be offset by higher costs?

Greg was saying it's early days, our expectation is you're seeing some of that in other income that there are some increased costs, but the magnitude that you're discussing, I don't think is likely.

Okay.

And the final question is on your compensation guidance was sort of between 34 - 35% of, I think, adjusted revenues excluding distribution.

Are you still sticking with that for the full year?

Yeah, I think as we were trying to be helpful, I think what you saw was just such a strong run-up in the marketplace, I think how best we would describe it is that if you saw another round of this quarter, you're not going to see an increase in net percentage.

It might even go the other way.

We want to make sure that we're compensating people for good results and making sure we can attract and retain good people, but it's not going to go dollar for dollar up with the market.

Okay.

Thank you very much.

Your next question comes from Jeff Hopson of AG Edwards.

Hi.

Follow up on a couple of points you made in the 401(k) side.

Can you judge or give us a sense of how much more market share you can pick up there?

Our sense is that you still, historically, have had a lower market share than some very visible peers.

And then in general, in the domestic equity area, how would you say your market share has been doing for the past 6 months or so?

Well, I think first of all, 401(k) side, we have very good penetration in universe of plans out there.

What's happening is we're picking up more and more investment only business, and I think that the big shift in market share is going to be more of the reallocation of assets international that we are getting that direct benefit, a trend that's going to be hard to measure what that means.

But I think any-- even if it's 2-3%, 5%, that can be a significant impact in our share just within the buckets that we're already in in the 401(k) universe.

What was tge second question?

In terms of domestic equity, I think your flows were maybe up a little bit versus the previous quarter, just kind of curious if you think you're increasing market share, maintaining market share?

I think in this kind of market, you're probably losing a little bit in that, but I don't really have that exact number in front of me, just because the growth funds are having better performance, so you would expect them on at least a gross sale level to be coming back a bit.

And some of the areas where we are, whether it's mutual that has a more defensive position, will tend to under perform slightly in the kind of robust market that we've had in the last year.

So flows continue to be strong there, but I think in this kind of market, our leading category is not the large cap growth and that's probably having more of a benefit in this kind of environment.

Okay, and when you bought Fiduciary, you had introduced some, I guess global growth products back then, and I know initially they didn't take off, but have those ever really taken off?

No.

I think that's still is just an inactive category that has come back dramatically in the last 6 months, but not to the level that you're going to see any real sales momentum, but it's an area that we know will be important and we're still optimistic there.

Okay.

Great.

Thank you.

Your next question comes from Richard Strauss of Deutsche Bank.

Okay.

Thank you.

Marty, on these changes afoot that you mentioned, one of the things you said was top dollars and Janis kind of took a lead here with regard to quantifying what would fall under the ICI proposal for them.

And I just want to know, are you looking to kind of also take a lead in identifying these costs?

Making them public, is that what you're asking?

Yeah.

Well, we haven't, but let me tell you what we are doing.

We're supportive of the proposal that's out there.

And who knows, there's lots of thoughts whether it's good or bad, whether it went far enough or too far.

But from a business point of view, we're doing what you would imagine and the prudent thing is just looking at our uses under the current regulation and being prepared for that to go away.

And if that's the case, how in fact, we would manage that accordingly, internally and how it would impact us financially.

We have not made public the dollar amount, but I think indicatively as we look at where Janis is, the relative sizes, we probably wouldn't be too far off where they are.

As a percentage?

On a financial impact, but I just think it's dangerous for us to go too far without making it public.

Right.

Okay.

Then just the other thing here, your advertising, I might have missed this, but it was actually lower than a year ago, and clearly everything you're doing is in favor right now.

And I'm just wondering, is your strategy there, hey, people are just flocking to us anyway, or are you looking to ramp this up?

What should we be thinking on this, Greg?

I think if you look at our history of how we spend the advertising dollars, I mean in past years we did do some strategic additional spends.

I would expect overall for the year would be in a similar amount that we spent in the prior year.

And this quarter generally, if you look at history, is one of our higher quarters where we feel it's important to get the brand out there when 401(k) plans are reallocating.

And that's something that hopefully everybody's seen a few ads here in the last month that we've run on a national basis, so this quarter on a seasonal basis is always higher.

Huh.

Now, your distribution, underwriting distribution expenses were-- it looked like you had negative operating leverage there.

I mean your expenses there, actually rose at a higher rate than your fees, which I would think would be just the opposite given that more people are buying your funds, so what was behind that dynamic?

Richard, that was really just a change in investors picking the different asset classes, A, B and C actually.

So it was not anything other than that, and as you know, we have little ability to control that.

All right.

Well, thanks.

Thanks, Richard.

Your next question comes from Mark Constant of Lehman Brothers.

Good afternoon, guys, and I promise, Marty, I won't get on you quite yet about your repurchases.

Going to give us a whole quarter off?

Give you a whole quarter off, exactly.

The couple questions that I had still left.

Last quarter, Greg, you had spoken of at least one redemption, if I recall, that was unusually large, a low field account, and obviously the redemption numbers were much better this quarter.

Was there anything else of note either in sort of the extraordinary sales side or something in terms of a pending withdrawal you're aware of that might make us look at these numbers potentially less favorably?

That was an unusual one and we haven't seen any activity here in the last quarter of that magnitude and I wouldn't expect, hopefully, never know--

These were real numbers is what you're saying?

Yeah.

On the comp side, Marty, if I could just sort of drill down a little bit.

You spoke to the annual raises, presumably those weren't 13% across the board.

In the year over year was even higher than that too, so just trying to get a handle to the degree you've done bonus accruals, variable comp.

Should we read that is to some extent being with a typically conservative kind of rainy day view in terms of we just had a real fortuitous market quarter, take advantage of it to make accruals, you never know if we'll be able to do it later in the year kind of thing, or was there some change in the mixed cash versus options that required a higher accrual or just trying to understand the order of magnitude there.

There's a number of things going on, and it's not as simple as bonus accruals and salary increases.

That was the lion's share of it, but it's also going into a new year, you've got more payroll taxes associated with it, you're also seeing insurance around that also, health insurance, those types of things are in there also.

It all happens on a fiscal basis or calendar basis?

Calendar.

Okay.

Payroll taxes, that is.

Mm-hmm.

And then with the bonus accrual, I mean it is true, we have been clearly moving more towards a, they keep referring to it as a performance based culture and we want, to the degree possible, have greater flexibility in compensating people with variable compensation bonuses.

And it was a good quarter and that was reflected in an increase in the bonuses and your point too was a good quarter to do that based on the results.

With regard to cash stock mix and options, I think people didn't look we used options to a lesser degree this year than prior years, and a little bit more of a shift towards bonuses, but as options become less favorable from an accounting point of view and the like, we were moving away from them, but we do continue to use restrictive stock, but that is included within our P&L accrual.

Am I hearing you correctly that sort of implicit in the fiscal '04 then is that you're continuing in that direction, I guess?

Yeah.

Okay, okay.

And the foreign earnings repatriation legislation, what we're hearing is that's expected to be back on the table again in the first quarter.

Is that consistent with what your sources are telling you or no?

We're hopeful.

It's probably too early in everybody getting back to work there know that we have heard no current movement, but we would sure be hopeful that that is the case as you understand it too.

Okay.

Finally, since actually you mentioned the calendar/fiscal thing, any further thought over the last couple of quarters to moving yourselves to a calendar quarter and/or realigning the firm name with the business name, you'll perhaps feel better?

No, we haven't, but is this going to be the quarterly--

If you don't get the repurchases, you get that one.

Okay.

You gave Greg and I some work to do.

Okay.

Thanks.

Have a good day.

Your next question comes from Cynthia Mayer of Merrill Lynch.

Hi, good afternoon.

Just a little question on shareholder accounts.

It looked to me like they moved up 6%, but the shareholder service fees moved up 9%.

I'm wondering is there some component there that moves with assets under management.

There is not, and about a year ago, a little more confusing than in the past, different shareholder accounts have different levels of revenues to us based on the amount of work that we do with the different shareholder accounts, and so we're likely to see more of that type of, if you want to call it mismatch in a number of accounts than revenues associated with it, so it was really just a, once again, sort of an increase in the accounts, but also the mix of the accounts changed.

So you would expect to see that move up a little faster than the actual shareholder accounts going forward?

Don't know.

I hate to be ambiguous.

It's really going to depend on the mix of the account.

Okay.

On the institutional side, in terms of net flows, can you give any more color in terms of about what percentage of institutional net flows are going to global international mandates?

Yeah, I don't really have those numbers in front of me right now.

I did speak with the head of our institutional group and he said that they are just seeing strong interest still in the international side as far as a search is, but I don't know what percentage that represents.

Okay, and any detail in terms of wins to be funded this quarter?

No, we don't have any detail for this quarter.

Okay.

Great.

Thanks.

Your next question comes from Matt Snowing of Freedman Ramsey.

I think I'm all set.

Thanks.

Thank you.

Your final question comes from Robert Lee of KBW.

How you doing, good afternoon.

It's hard to imagine there's any questions left, but I do actually have just one, really just one or two.

First in the preferred sales commissions, looks like you haven't done a securitization in a while.

Could we expect one there that may cause that to bump back down deferred sales commissions?

Not in this quarter, but it will happen during the year, but I don't think, once again, you're going to see any (inaudible) for the last few months.

Okay.

The last question is the tax rate has held pretty steady at 29% the last three quarters after rising.

I know it dependent upon mix and whatnot, but should we take this to mean that this should be a pretty good run rate going forward for a while?

That's our best efforts at it and that's what we then based on.

That's watching the company for so many years, it really is dependent on (inaudible) moving around, but right now we have a good number.

All right.

Nice quarter, guys.

Thank you.

Thank you.

Gentlemen, there are no further questions at this time.

Both Greg and I would like to thank everybody very much for joining us, and we'll be speaking with everybody next quarter.

So have a good evening, everybody.

Thank you for participating in today's conference call.

This call will be available for replay beginning at 7:30 p.m. eastern time today through 11:59 p.m. eastern time on Thursday, January 29, 2004.

The conference ID number for the replay is 4951519.

Again, the conference ID number for the replay is 4951519.

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

Thank you.

You may now disconnect.