富蘭克林資源 (BEN) 2004 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Franklin Resources Third Fiscal Quarter 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. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Flanagan, you may begin your conference.

This is Marty Flanagan, along with Greg Johnson.

We're Co-CEOs of Franklin Resources.

First of all, thank you very much for joining us today for our third-quarter conference call.

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

There is a copy of it in our 10-K and latest 10-Q, but just to point out a subset of the statement, it 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 or implied by such forward-looking statements which may be discussed here today."

Today, to give you an idea of what we will address, first of all, I will give you a brief update on industry issues.

We will talk about assets under management, flows, performance, business highlights, operating results and finally and most importantly get to question-and-answer.

Let me start with the current industry issues that we are facing at the moment.

As you know, the current results include a charge of $21.5 million, representing a cost that can be currently estimated related to anticipated settlement of governmental investigations concerning payments to securities dealers (technical difficulty) shares, a matter that has been previously disclosed in our public announcements and is on our Web statement.

This $21.5 million charge is in addition to the $60 million charge we took last quarter ending March 31, 2004, and that charge focused on the market-timing allegations.

Clearly, we're doing our best to resolve these matters as quickly and as effectively as possible and we are committed to keeping everybody informed and regularly updating our public Web statements.

Again, because we are in the midst of working with regulators, please understand we cannot comment outside of our public statements and the Web site is the most comprehensive place to find that information.

The third quarter was a good quarter despite mixed markets.

We continue to do a good job controlling costs and have experienced another quarter of operating margin expansion, and we continue to be well positioned for growth with strong investment performance and very strong service levels.

Assets under management ended the quarter at $350 billion.

We had net sales of $2 billion and we did see market depreciation during the quarter of $2.3 billion.

Quarter-to-quarter, assets were down under 1 percent but if you look year-over-year, assets are up 22 percent.

We did see average assets under management in the quarter increase just under 1 percent.

Taking a look at the mix of assets under management at the moment, it's still very well diversified and we are benefiting from it, that diversification, as we continue to go through difficult and uncertain markets.

Equity assets now represent 55.6 percent of our assets under management; that's up from 54.8 percent last quarter.

That is a shift from fixed income, which is now 26.7 percent, as compared to 28 percent last quarter.

Hybrid was essentially flat at 15.5 percent quarter-over-quarter and the balance being in money funds.

So, we do continue to benefit from this diversification across investment styles, objectives, channels and also geographies.

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

Thanks, Marty, and good afternoon.

I'll first start with looking at the fund flows, and it was a difficult quarter for the industry.

We're pleased to report our 14th consecutive quarter of net inflows for the complex.

The quarter, as most everyone is aware, we had interest rates backing up and any fixed-income products were under a lot of pressure and redemptions increased.

For us, sales were up about -- or down 8 percent, redemptions up 13 percent, resulting in net sales declining to 2 billion from 6.5 in the prior quarter.

Looking at the flows by the various asset categories, the equity net sales decreased from 3.8 to 2.1, fixed income from 300 million to 2.2 billion negative.

Looking at it in more further detail, the global decreased from 3.4 to 2.4, which is actually still a relatively strong quarter of net inflows, based on our historic numbers.

Domestic equity went from 400 million to a negative 300 million, but it's important to note that 500 million of that was due to an institutional mandate that was redeemed during the quarter.

Tax-free was the area that was under the heaviest pressure of redemptions, and we really tracked a little bit better but still very heavy redemptions in the industry as a whole.

May was the worst month for municipal bond flows recorded since June of '99.

On the taxable side, the flows went from a positive 500 million to 1.1 negative, but here again, we had a separate account, which is somewhat unusual, a short-term cash-management account for a utility that was redeemed and a very low management fee along with that of $1.2 billion.

Looking at the investment performance, the investments I think, across the complex, their performance continues to look very strong.

Over 95 percent of our assets are in the top two quartiles to the 3, 5 and 10-year periods.

Over 90 percent of the fixed-income funds in the top two quartiles were the 1, 3, 5 and 10 and half of all the Franklin Templeton funds and assets were rated either four or five stars by Morningstar.

Within the Franklin Group, over 85 percent of Franklin's equity mutual fund assets were in funds ranked in the top two quartiles of their respective Lipper peer groups for the 1, 3, 5 and 10-year periods.

Looking at some of the business highlights over the quarter, we're pleased to see that a survey of our shareholders that we conduct on a quarterly basis said 95 percent of our customers responded that they would recommend Franklin Templeton.

The retirement division continued to forge new relationships and added two important new relationships in the last quarter, and one of those funded approximately 400 million in some variable annuity accounts, investment-only on the global equity side.

The private client group continues to grow significantly.

Templeton managed to cap up 49 percent year-over-year, and DALBAR recently ranked FranklinTempleton.com among its top five Web sites.

The international side, sales continue to be very strong and the SICAV assets, which is our European domiciled funds, just crossed $20 billion, which is up about 60 percent from the prior year, and year-to-date sales are running at a rate 60 percent over the prior year.

We received some best-performing fund awards in Taiwan, and here in Canada, we were voted the Best Fund Family in Canada by MoneySense Magazine.

On the institutional side, we are pleased that we received approximately 600 million in new business, including add-ons to existing accounts, most of that going into the global equity side.

We're pleased that one of those accounts was due to cross-selling an existing client, which resulted in a fiduciary European Small Cap mandate.

Within the Fiduciary Trust (indiscernible) work business, we had approximately 150 million in new assets during the quarter, and we recently introduced Fiduciary Trust Company of Canada.

Looking at operating revenues, they were $862 million this quarter, down 1.3 percent quarter-over-quarter, resulting in net income of $173.9 million; that's 69 cents per share this quarter as compared to 68 cents last quarter.

To give a little more insight into that, if you look into the operating revenue line, investment management fees were up 1.2 percent quarter-over-quarter, and that is the result of the average assets being slightly higher this quarter and also the mix to equity products from fixed income products, which have a somewhat higher investment management fee.

Underwriting and distribution was down almost 6 percent quarter-over-quarter, and that is on the back of the lower sales quarter-to-quarter.

Shareholder servicing fees were down 1.8 percent this quarter.

Part of that is we did have, during this quarter, 500,000 shares purged, which is the annual purge in Canada.

Look next quarter for something around 1.3 million shares being purged from the U.S. transfer agency.

But in total, even with that this quarter, shareholder accounts are at 15.9 million as compared to 16 million last quarter.

So, if you account for that single purge, you can still see we are adding new clients.

Looking at the operating expenses, underwriting and distribution was down 6 percent quarter-over-quarter.

That, once again, follows in tandem with the lower level of sales and underwriting distribution revenue.

One area to spend some time on is comp and benefit is down 1.8 percent this quarter.

The reason for that is really a fall-off in payroll taxes and less activity in our ESOP matching.

We have not cut salary levels or the bonus pool.

In effect, we're very focused on retaining and rewarding our best performers, and probably the best indicator to that is that, because of the good results, you can see last year we had about 6,500 people in the complex.

That's about the same number today.

Year-over-year, looking at quarter-to-quarter, compensation is up 18 percent, so we are very focused on retaining and rewarding the best performers within the organization.

The only other area that I would spend a minute would be the Other Expense line, and it is $31 million this quarter, up 9 percent quarter-over-quarter.

That is a combination of increased costs around legal fees and compliance work, as we are adopting a number of new compliance programs that have been mandated and also responding to a number of the inquiries.

Looking at the Other Income line, there was a lot of movement this quarter.

We once again did see these sponsored investment products gain move.

Once again, most everybody realizes that this is a result of the FIN 46 adoption and it's really marking-to-market a number of funds -- in fact, 31 funds -- that we have to consolidate through our results.

We expect that we will continue to see up and down volatilities as the markets move and this line will somewhat follow the natural movements in the marketplace.

Investment and Other Income was down almost 50 percent quarter-over-quarter, and as we discussed last quarter, that was more the aberration than this quarter, where there was a number of realized gains (sic) in that quarter.

I would like to also highlight, with regard to the share repurchases we bought back just in excess of 700,000 shares this quarter, and it brings the ending share count to 249,400,000 shares outstanding.

The total payout, as we described it, which would be the cash dividend payout and the repurchase, represents 34 percent of earnings during this quarter.

Looking at the operating margin this quarter as compared to last quarter and doing it on a pro forma basis and looking through the one-time numbers, the margin is -- operating margin is now 30 percent as compared to 29 percent last quarter, and it's at one of the highest levels that we've seen for a number of years.

So, in summary, a very solid quarter driven by good, core net asset flows and a very uncertain market environment.

This is off the back of very strong investment performance, very strong service levels.

We are clearly benefiting from the depth and breadth of our global footprint.

We continue to be very focused on not just meeting but in fact exceeding our clients' expectations, and we are sure that if we can continue to (indiscernible) our clients, we will in fact improve our position as a premier global investment management firm.

With that, we will answer any questions that anybody might have.

(OPERATOR INSTRUCTIONS).

Daniel Goldberg of Bear Stearns.

Good afternoon.

In terms of the assets under management flows, it seems like, if you just look on an absolute basis, the redemptions were the highest in terms of looking at the data, as far back as we have seen.

Can you just give us maybe a little bit more detail there, what really was driving some of those flows within the domestic equity and fixed income, which were, I guess, the two key areas (indiscernible) if there is anything else you can provide there, whether that should be persisting or that might come back down?

I think, if you look -- (technical difficulty) -- just quarter-to-quarter, it's up 13 percent, so you are right, it's a higher level than we've seen in the past but it hasn't jumped up on a significant percentage basis.

If you back out the unusual activity that I highlighted, which -- if you want to draw conclusions around what the retail investor is doing, you want to certainly back out the 1.2 billion that was a short-term cash account that we were running that was part of that 1.1 net number on the taxable side.

I think the area of concern -- I think everything else falls pretty much in line; the global is still very strong, net inflows, domestic equity.

If you back out the $500 million separate account, again would be in line with what we've seen, down a little bit but that's what you would expect.

So we don't really see any significant acceleration -- the kind of normal activity you'd see in the kind of choppy market that we've had.

The Munies were a little bit unusual, I think, on the retail side, where the industry did see a significant pick-up and it tended to be concentrated in that May/June period.

It's looking better now for the industry but still probably just net outflows and everything else, I think, as the markets have rebounded.

I can't speak for the last week but again, the sales and redemptions are back more to their normal levels.

Okay, when you say back to normal levels, meaning that -- you're talking about in July?

I can't really speak to what I mean by that other than in general industry terms that you had a very choppy market and we did have a -- it did seem to stabilize there a bit and that's what I mean; it's getting back to the norm but I don't want to indicate anything beyond the quarter end there.

Okay.

In terms of the compensation, we should expect it to be kind of along those levels, going forward.

You said the drop-off was due to primarily the taxes?

Right, but as we've said in the past, that line does follow our operating results it will move in accordance with that.

So, we increase our performance, it could inch up a little bit with that.

You added about 73 people in the quarter.

Any particular areas there you could share with us?

Nothing else in particular, no.

It was quite broad throughout the Company.

Just finally, can you give us a sense for the percent of assets within the each different geographical -- in terms of where the investor is domiciled, so what percent of your assets are U.S.-based investors versus Canadian investors, versus European investors?

Anything there you could share with us?

I could give (indiscernible) very high level.

About 25 percent of our assets under management now are from non-U.S. investors.

That does include the institutional content Fiduciary manages, which is a multilateral account.

It's almost on par where Canada, Europe and Asia are almost equally aligned now with assets under management, globally, in the big markets.

So we've seen -- as Greg was addressing, we just continue to see very, very strong net business flows outside of the United States and quite a bit of success there.

Richard Strauss with Deutsche Bank.

Okay, thank you.

Let's see.

Marty, I know you've got positive operating leverage this quarter but just looking at the market environment here and your advertising spend above 30, I'm just wondering, given that conditions have gotten more difficult, flows are harder to come by, do we have any leeway here to kind of go back toward lower levels, which is kind of where we were for instance all of '03?

What is your thinking on marketing right now?

Let me make a comment but Greg can address it more specifically.

We feel very much that we are very well positioned as an organization right now.

We are more focused on investing for the future and creating growth environments, as opposed to getting into sort of a cost-cutting mode at the moment.

Yes, I think it's hard to forecast where the market is going, but I think our feeling today is that we have to reinvest in the business when we see opportunity.

Performance has presented a lot of opportunities for us in just about every place around the globe, so I would expect that number to increase a bit in the coming quarters, because we think adding wholesalers in various markets and continuing to get our brand out in places like Asia and Europe, there's no better point in time than when you have good performance.

It sounds like you are fairly bullish on your business here.

Your share count was up a couple of percentages; you say you basically brought it back to where it was, to 249 million.

Can we expect that you would be looking to get that down even further -- a more aggressive buyback?

I think, as we do talk about each quarter, we do like our stock and we do show that we have been buying back stock.

Probably the most difficult thing is that we do it sporadically as opposed to some standard program.

But I think the best answer is to ask people to look back at what we've returned to shareholders through stock buybacks and dividends over the last number of years.

I think we have been doing a pretty good job of it and continue to focus on that.

Finally, just looking at the other expenses, you mentioned that this was legal in compliance and it's kind of hard to separate I guess what is just an added cost of the business and what is kind of getting information for the current regulatory scrutiny.

What is your best guess in terms of -- you know, what percentage of this $31 million number right now is going to just kind of complying with this investigation for the whole industry and where do you see this number settling?

I fully understand why you're asking the question and I wish I could respond.

We are in the midst of, one, putting in these programs and secondly, responding and just don't feel comfortable giving a public statement where were think we're going to end up.

Our primary focus right now is to absolutely get our compliance programs in place as quickly as possible and effectively as possible and to work with the regulators and try to settle any issues that we have.

We think that's the most important thing that we could do right now.

David Haas with Fox-Pitt, Kelton.

Good afternoon.

The first question is just on the use of capital, if you could give us an update on how much cash is being held overseas right now.

Then more specifically, just a broader question -- as a company, do you feel the need to deploy that cash?

Is the potential for a tax holiday -- is that the actual catalyst for it?

Let's see.

Of the $3 billion in liquid assets on our balance sheet, about two-thirds of them are overseas.

I think, as a number of people are following this closely, there's a proposal in the Senate and there's a proposal within the House right now and it will probably go into conference and yes, we are obviously very interested in this outcome.

Just to repeat what we've said in the best, we think it would be good a thing for the United States but also for our company if that was put in place.

Clearly, that would give us an ability to -- you know, more flexibility with our capital structure.

I'm sorry, what other question did you have?

Did I forget something?

I was asking, do you feel a need to deploy that cash.

I guess the question would be, within what type of magnitude?

No.

I think the good news is we are a strong generating cash flow organization and we won't do anything silly with it.

We will just stay focused on doing what we've done in the past.

So, there is no -- we don't feel any vast need to do something different unless there's a catalyst such as changes in legislation, which gives us greater flexibility.

Okay.

Just with respect to the anticipated settlement, nothing specifically around the monetary aspect but just in terms of how you see the distribution of funds changing around that, what sorts of practices do you see changing in terms of the day-to-day other than, clearly, the obvious ones around direct-to-brokerage and revenue sharing?

Is there anything deeper than that?

I think it's a little early on the distribution side.

It seems that that's really the focal point right now.

Some of the changes that have been proposed have basically already taken effect and that's no longer directing brokerage for sales.

Outside of that, I think you'll have increased disclosure.

Whether or not all marketing support payments will be banned, I don't think that's going to happen.

I think we will probably have more transparency and disclosure.

But as far as changing the way we operate, I don't think there's anything right now that we see that would have a significant change on how our funds are distributed.

Okay, thank you.

Bill Katz with Buckingham Research.

Guys, good quarter.

I was wondering if you could just maybe go one step further on the couple of one-off accounts and say anything sort of -- was it performance driven?

Was it maybe some regulatory overhang-driven?

That's the first question.

Part B of that question would be, if you would look at your sort of top five, top ten clients, is there any sort of meaningful concentration risk?

First of all, just on the two accounts that I highlighted -- and they both were somewhat unusual -- I mean, the one cash management account was run by Fiduciary and it was a utility, and so we knew that was going to be a relatively short-lived account.

That's why they put it in those kind of securities.

So, that was not related to performance or anything else.

The other account was an institutional sector mandate by Franklin, which was somewhat unusual, and we had turnover at the portfolio level that led to that account being redeemed.

It's somewhat unfortunate but that's the risk you take with a sector mandate, that you have that -- that can happen if you have turnover.

Are there any concentration issues with that portfolio (indiscernible) turnover?

No, not really.

It's pretty -- we don't -- the question you're asking, we don't feel we have the risk that you are -- which is the point of your question.

Yes, sure.

The second question is on the IS&T line, which fell yet again.

I'm just sort of curious where you are.

I know you guys have taken a much harder look and have a better sort of control over payoffs and what you're investing, but I keep expecting this to sort of tick back up at some point but it continues to go down.

What's your sense for the outlook for IS&T on a go-forward basis?

As we said, we do think we're probably doing that as well as we've ever done it as an organization, studying priorities and sort of implementing, so that's the good news.

There's still endless demand internally for technology and we continue to roll it out as effectively as we can.

The good news is we are doing a better job of it.

You are seeing part of that is just where we had huge infrastructure investments in the prior few years.

That stabilized a little bit and has relieved some of the pressure but I don't see the pressure dwindling over time.

Is this a 10 percent grower year-on-year, 5 percent?

What kind of growth rate are you thinking about?

I don't think I'd want to say something like that publicly, but it's not going down.

Fair enough.

On sort of distribution, I'm sort of curious there.

I guess maybe you gave part of the answer away, Greg, in what you just said.

Assuming a flat mix of assets under management, if you will, what kind of distribution margin that you sort of disclosed between your revenues and expenses is a sustainable number in light of all of the sort of shifts in what's going on from a regulatory perspective?

I think you came in around 10.75 this quarter; it was up a little bit.

Is 9 percent a reasonable number?

Is this number sort of a sustainable number, all else being equal?

Yes.

I think, all else being equal, I don't think there's anything today that I would feel like that number should change.

I think it should be pretty table, based on what we've seen, and I think it's more around a disclosure than it is on increasing costs.

Okay. just a final question, Marty, just back to you for a second.

Not to get specific but where do you think you are?

If you get specific, I would love it as well.

But where do think you are in terms of the compliance changes you need to make internally?

Are you still in the first -- second inning of this or is this sort of the latter stages of things you need to do?

First of all, we've always had a very strong compliance program.

Secondly, there's been many of them, right, from Sarbanes-Oxley and some of the 404 things.

Those are all going on right now and they are implemented to the degree they need to be.

The next big one is the adoption of some of the compliance rules in the mutual fund area.

That's a big drop-dead date the first week in October and we are right on top to have that in place, but -- so, a very serious undertaking within our organization.

Does it lessen after you get into the fall?

No, all it means is now we are putting it in place and then it is in place, period.

It is a way of life, going forward.

Terrific quarter.

Thanks a lot.

Glenn Schorr with UBS.

Just trying to turn a not-so-good thing into a good thing maybe, but I'm just curious.

As we hopefully approach settlements on the two issues that you've now reserved for, do you have any sense or commentary that you'd make one whether or not you've been delayed or seen some resistance in either the institutional sales channel or if you could comment on whether or not you are on any meaningful amount of probation or watchlist in, say, a 401(k) channel.

It's hard.

I think, as I said on the last call, I think it does have an effect in the institutional channel.

I think, any time you have fiduciaries and the -- (technical difficulty) -- so close in the final, there's probably business we should have won that we didn't get, so I think that's where we think there has been an impact.

I don't think we've seen -- or I haven't noticed anything on the retail side but certainly, it's not helping.

But that's really all I can say on that.

Okay.

I guess if you feel like it's hard to judge but it probably had some sort of impact on the institutional side, does it lift or does it -- you earn it over time?

In other words, let's say you settle tomorrow.

Do you feel some of that resistance changes, or that's a longer-term build?

Again, I mean, you're talking about the reputation that you build over a lot of years, and I don't think -- any time you name is in the paper associated with these kind of issues and they're complicated issues, that doesn't help your reputation.

But at the end of day, it's still -- it's performance is the key driver and if we continue to do that well, we don't think it's going to have any real long-term impact on our business.

I appreciate it.

Thanks, guys.

Jeff Hopson with A.G. Edwards.

Thanks.

A couple of question, just to follow up on the institutional side and any impact from the regulatory issues, is the pipeline still healthy, would you say?

I know it has been a good place for you guys but would you say the pipeline, is it still healthy?

Then on the international sales, I know they've been strong.

Are they strong relative to the previous consecutive quarter, I guess?

The first question, on the institutional pipeline, the answer is yes; we think the pipeline still looks very strong and we're seeing a lot of good opportunities.

Hopefully, that will result in some significant business.

But the global side with Templeton continues to have quite a bit of interest.

Again, we haven't seen any impact from the other issues on that pipeline.

What was the second part of the question?

It was on the international, the retail.

I know they've been strong but even in the weaker second quarter in the U.S., were the international sales strong?

Yes, and they would have actually picked up, as a percentage of our overall flows, a much more significant portion because, on the international side or non-U.S. investors, we don't have the muni bond redemptions affecting the net number.

So our number, being sold outside the U.S., it made up a significant portion of that.

Much of that, again, the equity sales continue to be very strong, both for U.S. equities and international.

There's some pressure on our Ginnie Mae sales, which have been very popular in Asia, as you would expect with rates backing up.

That would be the only area of weakness but overall, still very strong.

Mark Constant with Lehman Brothers.

Good afternoon, guys.

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

One, I certainly understand, having read your statements on the regulatory issues, the desire to sort of put things behind you, even when you believe you haven't done anything wrong.

But kind of to the point that Glenn was getting at, I mean, at some point, is it perceived as a confession, if you will, by a client whether you did anything or not, or is that something that, on the institutional side, you're sort of a able to explain to people and say, "Look, these are business decisions we had to make" and that type of thing?

That's a hard question.

I think you are limited somewhat sometimes by what you agree to when you settle on discussing these kind of issues, so you just have to kind of move forward.

I think every situation is a bit different how it's perceived; certain issues are going to be viewed as somewhat industry-type issues and that they are going to be less sensitive or they may be viewed as mutual fund issues, so they may be less sensitive to that.

They tend to be more focused on portfolio management issues that could disrupt the investment process.

That's number one on the consultants' list of concerns and fortunately, we haven't been impacted on those types of situations.

Also, Marty, I apologize if I missed this earlier, but did you mention anything with respect to securitizations or lack thereof this quarter when you were talking about Other Income?

No, I didn't -- (multiple speakers) -- you were going to ask about share repurchases.

That's next!

Don't worry.

No, there was not a securitization this quarter.

It's public; there was one in July.

As we did talk about at the last quarter, you're going to see less gains on sales from -- (Multiple Speakers) -- securitizations.

Okay, that will smooth out a little bit.

Okay.

On the repurchase, since you gave me the great segue, I just wondered actually if the timing (indiscernible) that you talked about that's sort of coming in lumps -- to what degree this particular issue with the SEC this quarter and the additional provision -- did that impact, in any way, your ability, from a disclosure standpoint, to repurchase stock this quarter?

Yes, it's a great question but I would prefer not to answer that.

Okay.

Finally, I think you mentioned, in your remarks earlier, Greg, that May was the worst month for Muni since the late '90s.

I know you don't like to talk into the current quarter, but does that kind of imply that June was better?

It seems like industry trends suggest that flows improved a little bit in several categories in June.

Is that consistent with your remarks?

Yes, that clearly -- it seemed to be more of a one-month dramatic increase and then back to more normal levels for the industry.

Cynthia Mayer with Merrill Lynch.

Good afternoon, just a few follow-ups.

I just want to clarify -- the PM turnover you talked about, you suggested that you wouldn't expect any more outflows from that?

No, because this was an unusual mandate.

It was a very narrow sector domestic-equity mandate that was not typical and we don't have any other asset-based that's vulnerable because of that departure, so it was really a single mandate that left and that was the only one that manager was doing in the institutional world.

Okay, on the Muni side, I think you mentioned in the past that you wanted to encourage advisers who were switching clients out of a particular asset class to switch them into another Franklin product and you were trying to sort or break down the silos a little bit.

I'm wondering, given the Muni outflows in the quarter, if you have a sense of how many of the Muni outflows then were exchanged into something else?

I'm not really sure.

I think that that has been a priority and one that we continue to, we think, do a pretty good job and all of our efforts for the distribution system is (sic) geared towards, so that's one of the goals they have and metrics on how many different products the advisers are selling.

But I don't have any numbers that would give me any sense for how much of that got exchanged or left.

Okay.

Just -- I know that securitizations are going to be a little even but what's your outlook in general for the auto loan business?

Yes, you know, we have continued to -- that business for us has improved quite dramatically from a number of years ago, and it's managed well and it's performing well and we will continue to monitor its performance and benefit from its current good success.

Okay.

I guess just one last very general question, which is the net flows outside the U.S. have been so good.

What, if anything, would cost them to slow down?

Would it be more a change in the interest rate or just -- what do you worry about when you look at the flows outside the U.S. in terms of the growth rate?

Well, you worry about relative performance, and that's the key driver.

Fortunately, the performance continues -- the funds continue to do very well.

I think any kind of major market sell-off is going to have a dramatic impact on any equity funds, whether it's sold in the U.S. or outside.

It's just that a lot of those markets don't have the old shareholder-based assets that, even in a normal environment, tend to have been -- whether it's a five or ten-year life, you're going to have a normal redemption level.

A lot of those are newer assets, so they tend to be a little stickier and have a better net flow number versus your asset-based (inaudible).

Okay, thanks a lot.

Just one more question, please.

John Hall with Prudential Equity Group.

Thank you.

It seems as if the domestic equity flows have been trailing off for a couple of quarters.

I was wondering if you could just talk about whether there is anything performance-related associated with that?

No, I think our performance actually has been very strong within the Franklin Group and Flex Cap and many of our growth funds have done very well.

I think the net numbers reflect just a kind of a weaker market and reflect I think the industry as a whole.

But we don't see any trends there from any one fund being less popular.

I think our income fund, which we categorize as a hybrid fund as our number one selling fund, is 50 percent or so in equities, so we do get quite of bit of flows going into that even though it's categorized within hybrid.

Has there been any concentration in terms of where the flows come from?

No, I think it really hasn't changed.

Our distribution is very broad and the channels have been fairly stable as far as the flow numbers.

There is actually one more question.

Robert Lee with Keefe, Bruyette and Woods.

Most of them were asked and answered, but I guess I will ask my usual question.

Amortization of deferred sales charges, I guess it's another quarter without really -- looks like there being a securitizations there.

I mean, I'm just curious what is sort or preventing you from being able -- you haven't done one in I guess it's going on about two years now, although I know it's still your intention.

Should we expect that it's possible that one could happen in the next couple of quarters, actually freeing up some additional capital or -- I mean, I'm just trying to get a better feel for what our expectations should be.

I think part of it is just sort of the fall-off on those types of sales, too.

Part of when we look to securitize it is getting a portfolio that's large enough that you can (inaudible) sort of the right economics around it.

That's been one of the principle issues.

To respond to your question, could you expect one in the next couple of quarters?

I think you could, but I couldn't say that definitively at the moment.

Okay, great.

Thanks a lot, guys.

Once again, thank you very, very much for joining us and have a good evening.

We will speak to everybody next quarter.

Thank you.

This concludes today's conference call.

You may disconnect at this time.