富蘭克林資源 (BEN) 2004 Q2 法說會逐字稿

Good afternoon.

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

At this time, I'd like to welcome everyone to the Franklin Resources second quarter 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. (Operator Instructions).

I would now like to turn the call over to Martin Flanagan.

Sir, you may begin your conference.

Thank you.

This is Marty Flanagan, along with Greg Johnson, co- CEOs of Franklin Resources and I thank you for joining us this afternoon.

The format that we will follow today is as we have in the past.

We will discuss financial highlights, asset center management slows, some business highlights, operating results and then Greg and I will answer any questions anybody might have.

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

And as you know, there is a copy of this in our 10-K and our most recent 10-Q.

I would like to point out some subsets of that statement which states -- 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 are implied by such forward-looking statements which may be discussed here today.

I would like to begin our call by just giving some comments on the current industry issues.

As you know, today we announce a $50 million charge, $45 million net of taxes representing costs that can be currently estimated related to ongoing governmental investigations of the companies as we've disclosed in the current industry issues on our website.

Clearly, we're doing the best we can to resolve these matters as quickly and as effectively as possible and are committed to keeping everyone informed by regularly updating the website.

Again, because we're in the midst of working with regulators, please understand that we cannot comment outside of any of our formal statements.

Well, starting with the quarter, it was a strong quarter.

The results were aided by very favorable market conditions.

We saw $9 billion in market appreciation during the quarter, which is the primary driver of the results this quarter.

We have done a good job controlling costs.

It is a continued focus of ours as an organization, but there are cost pressures and we'll talk about that during the call.

We continue to be well positioned with exceptional investment performance and service levels and continue to see strong organic growth rates throughout the Company.

Net income for the quarter was the $172 million, or 68 cents per share, more or less on track with the spending level this last quarter.

We continue to see net sales really across the board in long-term investment objectives.

There is increasing momentum in international equity area, but as you would expect, it's flat to down in the fixed income products.

Assets under management for the quarter ended at $351 billion.

That is a 4.4 percent increase quarter over quarter.

Average assets for the quarter were $345 billion, an 8.5 percent increase quarter over quarter.

Looking at the makeup of the assets under our management, we continue to see movement towards the equity assets.

Equity now represents 54.8 percent of total assets under management.

Balance and (indiscernible) 15.4, fixed income 28 percent and money market funds, 1.7 percent.

If you look at the various brands, Franklin Templeton Mutual Series Fiduciary (indiscernible), a number of them are approaching all-time highs in assets under management, in particular, Franklin branded products have reached $154 billion.

We continue to benefit from the diversification across the different investment styles, objectives, channels and Greg will bring you up to date on those results.

As Marty mentioned, we are pleased with the close for the quarter at 6.5 billion versus 7.4 billion in the prior quarter.

And looking at sales on an overall gross basis, they were up just over 8 percent for the quarter and redemptions were up slightly, up 17 percent.

In a little bit more detail on the equity side, we saw 3.8 billion in net inflows.

And as Marty mentioned, the fixed income was slightly down from 500 million to 300 million in net.

And the hybrid category, which is primarily the Franklin Income Fund, which is our top-selling fund, increased from 2.3 to 2.5 billion.

The appreciation for the quarter was 6.8.

And over the last year, it has been about three-quarters of the overall depreciation or asset gains.

In the Company of 100 billion, three-quarters of that has been due to appreciation and a quarter due to net inflows.

As Marty mentioned also, the global category, we have seen the biggest increase from 3.3 to 3.4.

It is actually our highest net levels since March of 1998 and that trend looks like it will continue.

Out of our equity flows, we did have a termination of an institutional mandate of a non-U.S. client in a U.S. sector -- mandate here, which affected the equity of flow numbers, particularly the domestic equity flow numbers for the quarter.

Our investment performance continues to be very consistent and solid across the complex, looking at the long-term numbers and are over 95 percent of the assets in the top two quartiles of their respective Lipper peer groups for the 3, 5 and 10-year periods.

Fixed income continues to be very solid as well with over 87 percent in the top two quartiles for the 1, 3, 5 and 10.

Templeton growth in the world ranked in the top quartile for the 3, 5 and 10 and Franklin Performance with tax-frees and equity funds continues to be very consistent.

And the income fund, which again is our top-selling fund, is in the top 5 percent of its Lipper peer group for the 1, 3 and 5-year periods.

On the business side, looking at some of the highlights for the quarter, U.S. retail enjoyed its strongest quarter, in terms of gross sales.

It actually had -- some of the metrics that we set out for the year and have talked about cross selling, getting advisers to sell more asset classes.

We're pleased to report that we've seen a 45 percent increase in the number of advisors selling three or more asset classes.

We've found that to be very helpful in market declines in retaining assets by having a broader-based book with the advisers, and that has been one of the metrics that we've set out for the year.

The retirement division continues to perform very well.

We have seen a lot of additions on the international side and it continues to be very strong.

Private client group assets under management has increased 40 percent year-over-year.

International retail, again, continues to be very strong.

The foreign sold C-CAV (ph) funds have reached $19 billion in assets.

Franklin Templeton is now the largest private sector mutual fund house in India and we have recently crossed $1 billion in Italy, Switzerland and Japan, have reached $3 billion in assets.

The institutional side from the one termination in the quarter still looks very strong, primarily in the global fixed area where we have had some recent wins with our fiduciary trust and also in the international side with Templeton continues to be very strong.

High net worth, we added 170 million in new assets for the quarter.

I will turn it back to Marty for the operating results.

Thanks, Greg.

Operating revenues for the quarter were $874 million; that's an 800 percent increase quarter-over-quarter, which resulted in net income of $172 million and -- which was flat quarter to quarter, although there was some onetime items in this quarter which we can discuss.

Given you a little more detail, investment management fees were up 9.9 percent following the increase in average assets under management and also the movement towards equity assets during the quarter did help.

Underwriting distribution fee revenue was up just under 8 percent to $294 million based on the sales that Greg just described.

Also good news is that we added 900,000 mutual fund shareholder accounts during the quarter and we now have 16 million shareholder accounts.

Looking at operating expenses, underwriting distribution costs increased 7.5 percent to $264 million, consistent with the increase in underwriting distribution revenue.

Comp and benefit reached $197 million in the quarter, a 4.2 percent increase.

That follows on an increase in our proponents' pool accrual as we continue to have strong operating results.

Advertising promotion was up quite strongly at 50 percent to $31 million in the quarter.

We were very active in the advertising and promotional campaigns during the quarter.

One thing that I did want to come back to is that we did have a strong quarter, largely driven by the market appreciation and the assets under management and the sales, but we are clearly seeing cost pressures.

And as you would imagine in the legal compliance area with the new regulations and we are also strongly expanding our internal legal compliance efforts with great vigor.

And as the economy is turning and business continues to grow, there is hiring pressure also you can start -- we want to make sure we can retain the best employees possible during this period.

So we would envision continued employment cost pressure.

And so as this is going on, we would expect that the cost pressures we'll see in the future quarters -- that is not to say we're still very focused on controlling costs, but the economic realities are also very important that we are addressing.

I would just point out two other areas.

Investment income was up strongly this quarter, almost 78 percent.

And we did have some realized gains in the portfolio, largely through rebalancing internal product.

And also the tax rate is up to 31.5 percent and that is due to the higher U.S. tax rates because of the insurance recovery and the provision for our estimate of costs around the investigations.

So all in all, we believe it was a good quarter.

Service levels are strong, investment performance is strong and we think we're doing a good job for our clients and we will stay very focused on doing that in the future.

With that, Greg and I would open it up any questions.

(Operator Instructions).

Mark Constant.

Good afternoon, guys.

I guess I will start with the quarterly nagging on the share repurchase thing.

Two quarters of leeway, but I will really get angry next quarter, of course.

The other thing is I wanted to follow-up with is twofold.

One, Greg, can you comment on or Marty with respect to second quarter in particular, the advertising and promotion increase and what the outlook might be for the next couple of quarters going forward?

I will take the advertising first, and then Marty can deal with the repurchases question.

As you would expect, and we have seen in the past, this tends to be a heavy quarter for us in terms of advertising.

We did do a little bit more TV, introducing some new ads for the quarter.

So that is a number you would not expect to see throughout the year, but it is consistent with the trend of doing a little bit more advertising in the January-March quarter.

I don't know if I have much to add about the lack of share repurchases during the quarter.

We are really on the same program that we have been on in the past (multiple speakers) stock and we will.

I was just giving you my usual hard time.

The other question that I had -- with respect the post FIN-46 disclosures -- if I remember correctly from last quarter, the consolidated sponsored products income net line that is in revenue; that is net of some expenses, so that is fees on products that would otherwise have been in fee income and relate to assets in the base, but net of some expenses.

Are those expenses that you're (indiscernible) against that material, or am I remembering that incorrectly?

They're not that material, Mark.

Is that how we should look at that?

Would that have been investment management fees, had you not done this consolidation thing?

Yes.

But what you will see -- we will also in our Q, continue to try do a more continued full job of disclosure around that area, because it is new for us and everybody.

And I know it's hard for everybody to get their arms around it.

You mean, in terms of the (MULTIPLE SPEAKERS) that you did -- with the last press release, was that in the Q?

Right.

The other piece of this, and I guess we'll get more color in the Q too, but just have an understanding of the other income effect as well.

I also recall that there were, at least last quarter, minority interests in those gains that were netted against investment and other income -- was that again the case?

Yes, but actually, they're different.

Last quarter, if you will recall, we did have some sort of write-downs in there.

So if you're looking quarter over quarter, last quarter is probably a little bit lower than what might have been sort of an ongoing run rate, and this is probably a little bit higher because of the gains in the portfolio.

But even if we are splitting the difference on both, we should see the gains themselves kind of overstate that effect because they don't have the other minority interest -- is that right?

Yes, that's a fair comment.

Glen Schorr.

I feel obligatory in the environment to ask an interest rate related question.

But first is -- can you give us -- the average duration on say your fixed income assets changed dramatically.

I kind of remember the last conversation was in the range of six years.

And are they changing that, or actively managing that down at all, given the higher rate of rate anxiety, if you will?

Yes.

Obviously, we have not talked much about that, nor probably will we.

But I would just come back to the type of fixed income that is largely managed share and it is largely generating current returns and not trying to be very aggressive in making interest rate calls.

So you would not see huge (indiscernible) that changes quarter to quarter.

I'm (indiscernible) trying to get to a guesstimate of if, in fact, rates moved x-percent, what kind of depreciation we would see more than anything else?

Because you had a fee off of the average assets (inaudible)?

And then the other one I guess is related to the bank.

And given that business, and I think there is a billion in banking finance assets on the balance sheet, should we think any differently about that business in a rising rate environment?

Clearly, we did benefit by the falling interest rate environment and we think that, clearly, it's the next round of rates going up.

That's going to have an impact on the business also.

But we're very focused on the quality of assets in there also.

As you can imagine, looking at those hedging strategies and balancing the costs against the risk in doing something like that.

We also think it is a pretty strong servicing platform.

But in a rising interest rate environment, it will really be a little more challenging.

And that would probably only show up in terms of maybe a lower securitization gain?

In other words, anything that flows through is really just the securitization gain, so it might on the pricing side of that?

We are expecting lower gains on the securitizations in the next couple rounds.

Okay, that's cool.

Just a posted item -- cash on hand -- at quarter end, we get current assets, but I think cash is a little more than half than half of that.

We're going to leave that to the Q, but you're probably not so far off looking into cash flows.

That's great.

Thanks, Marty.

Richard Strauss.

Okay.

Marty, just any thoughts on the testimony that has been going on in the Senate?

Maybe you could just comment on what you are thinking right now on soft dollars, shelf space, 12-D 1 -- where do you think that this could come out relative to the House bill in December?

You know what, I'm like all of us -- we all love to speculate on those things, but I'm going to hold my personal opinion on that, or they're going to be wrong.

Just looking at -- you talked about the pressure on costs on the operating margin.

It was up about 300 basis points year-over-year, it was down a couple of hundred sequentially.

Obviously, there's going to be an offset, or hopefully there will be an offset if you are doing all the hiring you're talking about.

Where do you think this margin can settle out?

What should we be thinking going forward?

I would come back to some of the comments we made last quarter is that these markets over the last couple of quarters have been so strong and so much of our increase in assets under management, as Greg was pointing out, came from market appreciation.

And then you just see a runoff in the profitability because of that and it's really not fully realistic to expect that going forward because as the business is growing, we do have to invest behind it.

So I'm not answering your question about a range of margins.

But what we're trying to get across is that we are feeling pressures, whether it be from regulatory changes and also just investing in the business.

So I would not expect margin expansion.

But in fact, we should be aware of cost pressures.

That said, the big driver is the market.

The market can take it away from us just as quickly as it gave it to us.

It looked like your international redemptions actually were pretty high.

But then I looked at your international equity and actually brought it about $3.5 billion net.

And I am just wondering -- was this coming from fiduciary?

Were these big fixed -- was this one big fixed income mandate?

Was this spread out?

How should we be thinking about this here?

No.

It really -- the international number relates to the retail more than it does the institutional side and it is just the strength in the U.S. retail.

And also as I mentioned, retirement, we have some decent chunks of business there through the investment only-side in the 401(k) marketplace that funded during the quarter.

So that helped the mutual fund numbers.

Great, thanks a lot.

Bill Katz.

Thank you.

Good afternoon guys.

On -- Marty, I think a couple quarters ago, you gave sort guidance on the comps to net revenue ratio, exclusive of underwriting distribution between 34 and 35.

And understanding that the market's influence this quarter, are you shifting the guidance a little bit, in light of what you are saying about sort of building the compliance part the business with bigger?

No.

I think it was two quarters ago, we were talking about the sort of, that 33-34 level.

And then I think it was this last with, we were saying we saw such a run-up in the market.

It's just not realistic -- we were to get some sense of where things could be.

But with the run-up, it's not reasonable that we will be at that sort of 34 percent level of compensation.

I'm sorry, it would not be reasonable?

No.

If the market keeps running, and that is what we are trying -- one of the methods we're trying to get across (multiple speakers) the market appreciation is such that it's unrealistic to imagine that quarter-to-quarter, you are going tom see what our historical, if you want to call it ratios, were carried forward.

Right.

Within the conversation, as you look out for next year, any change in thought on the option expense, how you might be thinking about that?

We have obviously been talking about it quite a bit internally.

And we will -- we want people to be share owners and restricted stock might make some more sense for us because (indiscernible) institutions and options.

If one of its terminations is the cost of expensing the options, it seems greater than what it feels like, the benefit as an employee's hand (ph), which is not a great thing to have.

So we think restricted stock might be a better answer for us using more of that for employees right now.

Could you give us a little bit more color, maybe Greg on this one, in terms of the billable accounts, where they came from and what drove the growth?

Was there any acquisition in there?

No.

That is really just, you see the net inflows and it's just adding new accounts on a daily basis, both in the U.S. and all around the globe.

Final question is -- on Templeton with the backup in the dollar more recently, I'm sort curious.

I know you guys don't hedge in there.

Any thoughts of hedging to lock in some of the performance gains, rather than see some deterioration?

Yes.

They will stick with their investment philosophy, which would indicate that they would be doing that.

Maybe one technical question.

What percentage of your net flows came from outside of the U.S?

You were swinging around a lot of statistics, but I did not hear sort of an absolute number?

Twenty percent, which is down a little bit from the prior quarter, but that is due to some of the fixed income pressure that is a little bit higher of a mix in Asia and some of the other markets.

Thank you very much.

Jeff Hopson.

Thank you.

First, the outflow, the one institutional outflow, can you give us how much that was by itself?

And then when you talk about the retirement, you're getting more mandates.

So does that result in chunks of money coming in, or are you getting on programs?

And then as they allocate to those funds, you will continue to see cash flow increase from those areas?

And then finally, any sense of any impact to your sales from I guess Morning Star, Watchlist or whenever they put you on in that regard?

Any sense of overall negative impact sales from negative publicity from the industry or you in particular?

I will start with the retirement.

The comment on some of the money that came in over last quarter, it is really a combination of what you had mentioned.

It is chunks of money that come in when they plan, for example, changes their international manager and we get the benefit of whatever assets were held in that fund that moves over in one chunk of money.

And then you get the benefit ongoing of funding going into the 401(k) plan and being part of that plan.

So we did -- we clearly had some changes in the last that may have actually occurred, even in the prior quarter, but they were funded in the last quarter.

There's generally a leadtime when that happens.

I think the question around the effect of the press and Morningstar is a hard one to gauge.

I think as we have said before, the key driver tends to be performance and I think the headlines have not helped.

I think in the institutional marketplace, they've certainly put us on hold in a couple of situations where we felt like in a normal environment, we may have been selected.

But it is harder to measure in the retail marketplace.

But I think as long as you are delivering performance, you will tend to still do very well.

On the retirement side, do you get the sense that some of this momentum will continue?

I believe so.

I think it still comes down to, as long as those, the performance numbers that we talked about and the steadiness, that seems to be more appreciated by the marketplace today.

So I think that will continue, and hopefully the trend towards allocating more towards international in the plans that we already exist is something that we think is still very low, relative to where it could be or should be.

So I think those both work out too.

If I could ask one more.

As cash builds, is there increasing pressure on you to do something additionally with cash?

Clearly, there does not appear to be an immediate need for cash, but any additional thoughts there?

The good news is we are a strong cash flow generating business and what we try to do with the cash is what we've said in the past and to get back to shareholders through dividends or stock repurchases or reinvest in the business or if it makes sense, an acquisition.

But we won't do something that does not make sense economically for shareholders.

And the consequence of that is building a strong balance sheet.

But we are -- clearly, we've paid quite a bit of attention to it and we won't deviate from we've done in the past.

On that institutional outflow number, just from that one account, do you have that?

No.

We really aren't disclosing it.

I'd just say, it's under $1 billion.

Very good, thank you.

Ken Worthington.

Hi, good afternoon.

Could you just give us an update on what your lobbyists are telling you about the tax holiday on the foreign income?

And if there is a tax holiday and there are restrictions that prevent you from repurchasing stock, how do you plan on spending that money?

It's a great question, but you're quite a bit ahead of us on what's going to happen with it.

I think as we saw, Kerry has out a plan that has some version of that tax holiday in his tax proposal.

So some of the thinking right now is that that has slowed down the other tax holiday that we have been talking about.

So it would simply be speculation on our part at the moment, but it is definitely still being talked about, but in different forms in Washington still.

There has been talk about restricting the use of cash.

Any thoughts about wish lists, holes to fill in, anything like that that you could share with us?

Who knows where that all ends up?

But I think the whole point would be what would be good for the United States is to have multinationals bring cash back into the United States and have them invest in the United States or give it back to shareholders.

And once again, this is going to continue more than anything else.

Once you start to put restrictions on that, you tend to limit the benefit of the tax holiday.

Great, thank you.

Robert Lee.

Thank you.

Good afternoon, everyone.

Most of my questions were asked, I just had one quick question.

In the last quarter's Q, and you announced it previously, I guess you had stopped using directed commissions.

And you're looking at a distribution expenses and what not, again, pretty much in line with revenues there.

It doesn't really look like there has been much of an impact.

Is it possible to -- should we expect to see one?

You did say in the Q that it would have a material impact.

Is it something that maybe coming down the road or just try to give us some color around that?

It is having an impact and it is part of the number.

I think it's still early for us to quantify the overall number because we're still in discussions with some of the dealers on that.

But it is having an impact and it is increasing our numbers and it has in the last quarter, as far as the marketing costs.

So it sounds like this is not something that just hits one shot, that it may sort of phase in over the course of the next couple of quarters?

Correct.

Thank you.

Cynthia Mayer.

Hi, good afternoon.

Most of my questions have been asked too.

But I just wondered if you could give a little bit more color on the timing of the cost pressures you're talking about?

I guess, in terms of compliance people, that would be current stuff.

But just in terms of maybe competitive or in terms of compensation pressures, are you thinking further out?

I think you have probably seen it within your organization too.

It is now a regular conversation and it is not going to happen all tomorrow.

But over the next number of quarters, I think we should expect to see those increased costs.

Okay.

Also, you mentioned the 45 percent increase in advisers selling three or more asset classes?

Is there -- can you give us sort of a number that is a base for that?

From what to what, or what percent of the advisers that sell your products sell more than one asset class?

I don't have the numbers, but I think when we have studied them, we've found that we had a high proportion.

It's probably because of our history and merging and acquiring where you have very loyal Templeton advisers, very loyal Franklin advisers Mutual, and we really had to make a strong effort to get the Templeton people to sell Franklin and Mutual people to sell Templeton and that has really been a concerted effort.

And I think when we did a redemption study years ago, we found that there was a correlation between those selling more than one asset class with lower redemption rates.

We found that to be the most effective way to get better attention of assets and build better relationships and it is been a real strong push for us.

So it is a significant, we believe, increase.

It's not coming off the tiny base, it's above 45, I just don't have that number.

Okay, thanks.

Mark Constant.

Hi, thanks.

It just wanted to follow-up (indiscernible).

The shareholder services fees being flat with the increase in accounts and the purging later in the year.

I just wondered if there was anything unusual there?

I think a couple of things.

One, you will see in the next quarter that the Canadian purge is coming up for this next quarter.

I would've expected it later, I'm just wondering why it was flat sequentially this quarter, I guess.

Yes, with the increase in account -- it's really just the timing of the fees.

And I think as we did say too that the fees were restructured, so it is not as easy a one for one as it has been in the past.

Okay.

And then the other net, including the bank securitization, also it seems like we've been on this every other quarter, securitization income jumped and it looks like that was smoothed a little this quarter too.

Should we expect something smaller next quarter as a result of that?

No.

I think we would anticipate it being more of a level going forward, which I think will make it a lot easier for all of us. (multiple speakers).

So therefore, less of a sequential increase next quarter, but that much of a fall-off, that kind of thing?

Exactly.

Thanks a lot.

Mr. Flanagan, are there any closing remarks, sir?

Just once again, thank you very much for participating and for your questions and we will speak to everybody next quarter.

Thank you for participating in today's conference call.

This call will be available for replay beginning today at 7:30 PM Eastern time through 11:59 PM Eastern time on April 29.

The conference ID number for the replay is 665-63.

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