富蘭克林資源 (BEN) 2004 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Franklin Resources fourth quarter analyst 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).

I would now like to turn the call over to the Co-Chief Executive Officer, Marty Flanagan.

Sir, you may begin your conference.

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

This is Marty Flanagan, along with Greg Johnson.

We are co-CEOs of Franklin Resources, so thank you again for joining us.

Today, the agenda will be as we've done in the past, we'll talk for a moment about some of the financial highlights, talk about investment performance, business highlights, operating results and most importantly, then get to Q&A and answer the questions that might be on your mind.

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

There is a copy of it with our 10-K and 10-Q, and you can access it on our website.

I would like to point out sort of subset of the total statement, which states that 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 as such forward-looking statements which may be discussed here today.

To get started, just a couple of the highlights.

The fourth quarter fiscal quarter of ours was a very good quarter, on the back of increasing assets under management from both market appreciation and net sales.

We've continued to do a good job controlling costs and have experienced another quarter of operating margin expansion.

This has resulted in net income increasing 15 percent quarter-over-quarter to just $200 million during this past quarter.

We continue to be well positioned for growth based on very strong investment performance and very strong service levels.

Looking at assets under management, we ended the quarter at $361.9 billion in assets.

That is the highest level ever that this company has achieved.

That is a 3 percent increase quarter-over-quarter, and that, once again, was made up of net (indiscernible) of $6.6 billion and market appreciation of $5 billion.

If you take a look at the mix of assets under management, it is not a material change from the last quarter.

Equity assets represent 55 percent of the assets under management.

Fixed income is 26 percent of assets under management, hybrid 16 percent of assets under management.

We continue to see the very strong flows (ph) in the hybrid area, in particular, the Franklin Income Fund.

We continue to benefit with our very diverse set of styles that we manage, different investment objectives and the different channels and geography where our business is located.

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

Thank you, Marty, and good afternoon.

Looking at the flow detail, we are pleased to see that the net sales have increased from 2 billion in the prior quarter to 6.6 billion.

Also, the assets as Marty mentioned, appreciated by about 5 billion.

The overall sales were relatively flat at 23.5 versus 23.8 in prior quarter, but redemptions declined about 23 percent from close to 22 billion to 16.8 billion in the current quarter.

Looking at the flows by equity and fixed income, the equity fund flows were 3.7 net versus 2.1 in the prior quarter and really a flat overall quarter for equity performance, as far as the appreciation being 800 million for the Company.

On the fixed income side, the performance of fixed income was very strong and we reversed the prior quarter's net negative 2.2 to a net inflow of 400 million and the bulk of the depreciation to the overall organization was in the fixed income sector with 3.1 billion.

The global international equity flows increased from 2.4 to 3 billion, domestic equity from a slight negative outflow of 300 million in the prior quarter to a 700 million inflow, and tax-free and taxable, which had net outflows of 1.1 and 1.1 in the prior quarter, both -- or actually, the taxable side just turn into net inflows of 600 million and tax-free at slight outflows of 200 million.

Investment performance continues to be very consistent and very strong across the lineup, over 96 percent of the mutual fund assets in the top two quartiles for the three, five and 10-year periods, fixed income with even stronger results with over 95 percent in the top two for the 1, 3, 5 and 10.

Templeton Growth (indiscernible) continue to be very strong performers, Mutual Discovery, Mutual Beacon.

And on the Franklin side, the Flex Cap Growth Fund was ranked in the top quintile with Lipper group for 1, 3, 5 and 10.

And our number one selling Franklin Income Fund continues to have very strong relative performance.

Looking at some of the business highlights for the quarter, we are pleased to see that our Dow bar (ph) and NQR scores improved.

Our Dow Bar ranking, which was number five out of the top 10 firms, improved to number three this year.

We recently got approval for our joint venture in China where we own 33 percent, along with our partner Sealand (ph) Securities.

In Japan, we were pleased to see the Mayflower Fund, which is our U.S. government, our Jennie Mae equivalent in Japan, is now the fifth largest unit trust in Japan with over $3 billion in assets.

And our Luxembourg based C-Cab (ph) assets crossed the $20 billion mark, so that continues to be very well-received across the globe.

On the institutional side, we're currently kicking off a campaign on the Franklin side to talk about our large cap growth capability's performance continues to be very strong there, as well as our capability in the high yield fixed income area, which again, is another area on our top performers in the Franklin Templeton family.

On the high net worth side of fiduciary, we introduced open architecture for accounts with over 100 million and just recently revamped our website.

And now I will turn it back to Marty.

A few comments on the operating results, looking quarter over quarter.

Operating revenues increased 1.6 percent to $881.7 million.

Just two points I would highlight there.

Investment management fees increased to $511 million, just a 1.1 percent increase quarter-over-quarter, and that is very consistent with the change in average assets under management during the quarter.

Underwriting and distribution fees increased 3.7 percent to $293 million.

That increase is largely distributed to the mix and type of pricing structures that made up the sales during the quarter.

Another point, the investment management effective (indiscernible) is now 57.9 basis points.

Taking a look at the operating expenses, and I'll just highlight a couple of areas.

Operating expenses quarter-over-quarter were just under 1 percent to $621 million.

Within that, comp and benefits was $189.6 million, down 2 percent quarter to quarter, and that decrease was due to a couple of things in particular -- declining payroll taxes during the quarter, and also performance incentive bonuses, which were earned in the prior quarter but not this quarter.

And as you do know, this is the end of our fiscal year.

So looking into the future, it is (indiscernible) few time we will having merit increases within the organization.

And we have to increased a number of individuals in the organization by -- almost 140 individuals -- quarter-over-quarter to 6696 individuals around the world.

Advertising and promotion was down 11 percent this quarter to $27.7 million.

That was a combination of things, some seasonal decreases in advertising and really as we all go through some changes in marketing and support areas within the industry.

As we grow, though, we are very committed to maintaining strong advertising and promotional support in the various channels that we operate.

Another area, other, is up 6 percent this quarter to $33.9 million.

Largely, the increases are from increasing insurance, legal compliance and we're very focused on cost control.

But we are being very aggressive in implementing the various regulatory regimes that have been put in place, and that is one of the causes for that increase.

Looking at investment and other income, it was up to $30 million from $14 million last quarter.

And as we highlighted last quarter, it was somewhat lower than normal.

We did see during this quarter higher interest income on the cash on our balance sheet.

We also had some realized gains in the portfolio.

And if you take a look at the operating margin, the operating margin for the quarter was 29.5 percent, up from 27.8 percent in the prior quarter.

So in summary, a very solid quarter, driven by a good increase in net flows, strong investment performance, strong service levels and we continue to be very focused on doing a very good job for our clients.

And we think we're very well positioned looking forward.

And with that, Greg and I will answer any questions that people might have.

(Operator Instructions).

Mark Constant.

Good afternoon, guys.

A couple of quick numbers things first, Marty.

One, are you at all comfortable making more objective I guess quantifiable either your expectations for ad budget next year and/or giving a sense as to how much of the other investment income was realized gains versus interest income on the cash?

Let me -- clearly, I can't give as much as you would like.

There will be more in our K. But I think for other income, I think if you look to -- the last quarter, but the prior quarter -- you can get probably a better sense of what things would look like.

And I think, just repeating myself, I think advertising promotion is -- we are committed to that going forward, but there has also just a change in how we support the various programs out there.

That's I guess what I'm trying to understand a bit better, a change such that it won't cost you quite as much as it maybe did the last two quarters, but seasonably something more than this quarter?

That's what I'm trying to get a sense for.

It's probably even too early to -- I think the number is probably unusually low for the quarter.

And just based on what we're seeing as far as the demand from all of our channels in terms of advertising and promotion, I think that number will probably get back up to older levels.

And actually the last numbers question for Marty.

On the other net, on the operating revenue side, is that really just more of that sort of smoothing, shrinking of the securitization gains as they get less lumpy, or was there something else in margin or credit losses or something in the bank that (indiscernible) that?

That was exactly it.

The securitization during the quarter, there was a small $600,000 gain, so it was smaller than what we have seen in the past, as we suggested.

But the accounting change that we adopted three quarters ago, something like that.

But no margin compression or credit losses?

No.

And Greg, it seems like they have almost been offsetting, but we've seen some kind of, particularly in the international global equity, we've seen some spikes and some dips in both sales and redemptions quarter-to-quarter.

And this quarter in particular, it kind of seemed like both of them were maybe a little lower.

Was that mostly seasonal, or sort of this slow summer we all felt certainly in our business?

I think we did see a slight drop in the detailed (ph) side with the international funds.

And I think in the short term, there could have been some impact on performance from the dollar.

It seems to have reversed the other way, and Templeton doesn't hedge for their short-term performance.

It related a lot what the dollar is doing.

And that I think had some impact on the retail sales this summer, as far as the decline.

Final question.

In terms -- I obviously don't expect you to announce your intentions on this front either, but with respect to the foreign earnings repatriation legislation that just passed, is it reasonable to assume that you would wait until there is formal confirmation from the IRS that share repurchases and dividends would be acceptable uses of domestic reinvestment, or are you pretty confident that those would be open options?

I'm just trying to get a sense of what you might consider to be the timing of the IRS type position in your considering an action?

We did not see that (indiscernible) -- I'm just kidding.

We're very excited.

We think it's a very good thing for the Company, frankly.

But as we understand it, they are clarifying the legislation right now.

We are waiting for that.

And just from what you and many other people are expecting, if it ends up the way we hope it would, we would finalize a plan that we would take to the board for approval and with the notion of doing what's in the best interest of shareholders. be we are just waiting to see the final outcome.

Is your sense that you'll hear from the IRS pretty soon?

That's our sense.

We thought this was going to be the past 1.5 years ago.

Hopefully, the IRS is not as quite as slow as Congress.

Thank you.

Richard Shaw.

Good afternoon.

Just a follow-up to that.

Do you have an unlimited -- how much time do you have?

I think you have a year to make your decision as to whether or not you want to repatriate it and pay the 5 percent tax?

Do you have a year to make the decision idea, or do you have a year to actually do something with that capital?

Those are some of the clarifying points that we're waiting for.

One is the difference between the fiscal year and a calendar year.

And if you have a plan that is approved, you have to do something within a (indiscernible).

But those, frankly, are the points that we're waiting for some clarification on.

Also, Marty, your billable shareholder accounts, they've been down a couple of quarters in a row now.

What is it, the dynamic there?

It was -- this past quarter was another quarter where we had the U.S. -- remember, we get two purges of closed accounts.

This past quarter, it was the U.S. purge, and I think that number was 400,000 -- 1.3 million shares were purged this past quarter.

You have to look at that as a net change.

And it was in the prior quarter that we had the Canadian purge.

So actually, we're still seeing net growing shareholder account.

So we should see this come up going forward?

Right.

Finally, the amortization of the deferred sales commission, I'd say that was up about 8 percent sequentially.

Is this just reflecting increased sales, or is this a change of the mix, in terms of the type of funds that people are buying?

What is going on here?

Really, as we've said in the past, it's just the result of behavior and what people are buying and nothing that we've done to change that, other than that.

So, more people are buying like a level load type product?

I don't have those mixes right now, but there has definitely been a movement, actually in this quarter, thought, it was more towards front-end sales charges (indiscernible).

Interesting.

Great, thanks.

David Hauss.

Good afternoon guys.

Quick question to start just on compensation ratios.

Looked like they were pretty low this quarter, relative to historical numbers.

And I was wondering if we sort of look back at history and use that as a guide and then go forward, is there anything secular about your business today versus what it was a few years ago, with respect to how the comp ratios should emerge?

I think, as we talked about last quarter, where we are looking at some of the common Fed's ratios right now, I think it is hard to draw a conclusion based on the past, because you've never had assets under management as high as they are right now.

And the issues that have dropped them so quickly is the rapid increase in assets under management.

So it's usually instructive to look into history.

But we are hitting just another level with the assets under management which are having an impact on that.

So I think what Greg and I would tell you is, our commitment is to make sure that we attract and retain the most talented people on our board, the best performers and compensation is going to be competitive.

And I don't think we can translate that right now into a comp level.

I guess just a follow-up.

If we're thinking sort of directionally, the fact that you have such greater level of assets under management, you would think that bumping up against the previous high levels of comp, you would not see that.

I would only add that, I think looking back, the company today is very different than even two, three years ago, or especially four or five years ago, as far as our mix of assets, the channels where those assets come from and the profitability.

So it's very hard to draw a secular conclusion around the percentage comp line against revenues.

Okay.

The next question on flows.

Is seems like they've been coming in pretty strong.

Is there any sense on whether these are coming from new accounts or from new money from existing accounts?

Is there a general trend that you are seeing?

I don't really half a -- I think most of it is coming from new accounts versus add-ons to existing, but I don't have a breakdown of that.

Okay.

And just final question on 12 B-1 (ph) reform (ph), if you have any views on what you think the timing is of that coming down the pike.

And then, if you just have any views on what you think, if 12 B-1 does go away, what you think the reaction of the customer would eventually be.

Do you think that they would show away from playing any sort of rat (ph) fees on the business, or do you think that they would have a problem with that?

I will give you my opinion.

I think there's a lot of opinions out there.

I think the difficulty of doing away with 12 B-1 and charging some kind of separate fee has been pointed out, and that's the tax consequences and administrative burden of redeeming shares to meet that distribution fee.

My opinion is that it will be revamped, it will be called something else.

It possibly will be called distribution fee or a service.

And probably some of the reimbursable features that are allowed for marketing and promotion under 12 B-1 could change.

But I don't think that there is a real possibility of just doing away with that distribution fee because of the huge impact it would have financially on the industry.

Okay.

Thanks a lot guys.

Jeff Hopson.

I have two questions.

One, could you comment on the narrowing underwriting margin?

And then, two, with foreign equity markets outperforming the U.S., the dollar getting weak again, would your expectations be that you will see an improvement in the Templeton flows from U.S. investors?

With regard to the margin, I think we have seen it jump around in various quarters, and I don't think we, although it has taken a little this quarter, we wouldn't draw any conclusions from that right now. (indiscernible) some change that's going to continue going forward.

With regard to the international flows into international type products, that's very hard to know.

And my personal opinion would be that you're seeing more investors put money (indiscernible) greater appetite for diversification and international products have been popular recently, but not to the levels that they were five years ago.

Okay, thank you.

Bill Katz.

Good afternoon, guys.

I'm just curious if you can talk a little bit more about on the institutional side, where you're seeing the growth coming from or maybe just broadly, if you could segment account growth, U.S. versus non-U.S. and retail versus institutional, just sort of get a sense of the delta there, is the first question.

I would say overall, retail probably had a stronger, as far as looking at net flows year versus year, stronger then institutional.

And I think the opportunities we have said going forward, when I look at the pipeline and where I think there's going to be growth, as far as the overall flows, I think we are very well positioned in the institutional marketplace and I think a lot of the work that we've been doing and the successes that we have had, whether it's the Franklin Equity side, or we just had a recent win on the fiduciary side as well, that will grow as a percentage of the overall flows.

But I don't have the percentage of breaking out between what's coming in outside of the U.S. versus what is inside.

But most of it today's within the U.S., but we think the great opportunity and where we're doing a lot of work is outside of the U.S., and I think that will increase significantly in the next year.

The one thing I would add, Bill, you have followed the Company for a long time and we've talked about broadening the Company's success in both the institutional market and non-U.S. markets.

And if you go back to five years ago, the institutional assets represented 15 percent of the assets under management; today, now it's approaching 30 percent of assets under management.

So it's growing quite substantially, and the same thing with the international shareholders.

That is, our clients outside of the United States.

It was 15 percent of our assets under management five years ago, and today, it is about 25 some of our assets.

So the strategic notion that we laid out, we seem to be making progress towards that.

For sure.

Just to belabor the institutional point for a second, Greg, you had mentioned that you're looking to sort of lunch a large cap growth marketing effort.

Is that in anticipation of a shift in demand from sort of value of fixed income, or is it just taking advantage of very strong performance in that product, or a combination?

I think it's a combination.

I think we view ourselves as having the capabilities in almost all of the major categories.

And we have said before, large cap growth is the one area that, in terms of marketshare and presence and penetration, is our lowest.

But we have a very strong team, very strong record and we've gotten some wins in the last year in the institutional market.

But we think it's just a matter of getting the story out there and we think there's a good time to get that story out there relative to what is happening in the industry in the large cap growth area.

Just two follow-ons.

Marty and/or Greg, I'm curious, you talked about doing what's right by the shareholders, in terms of repatriation opportunity.

Any way for us to think about sort of the mix of that use, if you will, between sort of dividends versus buyback?

I'm curious.

I'm hearing there's a pickup in sort of the early stage of M&A discussions.

Is there anything out there that we should be thinking about on those lines?

With the mix, we love your opinion.

That's about the 25th one that we've had so far.

So not to be sarcastic.

I think, look, we're doing the work that you would suspect we would be doing and our conclusion we believe we think it will be thoughtful and it will be openly what we think is the best way to get returns for shareholders.

And I don't mean to be so ambiguous, but I think we just have to be at the moment.

Any comment on what you're seeing, in terms of the possibility for industry consolidation, and how you might be involved in that at all?

Yes.

I think, once again, it is just an opinion, and I think all of us that have been in the industry for a long time, it's probably more of the same, that you will continue to see some consolidation.

One could speculate that there might be more of it than in the past as the cost of running the businesses are going up and the complexity is going up.

And I think you could possibly see some of the smaller mid tier layer determining that it might be in the best interest to find a partner.

You don't see evidence of that at the moment, but I think maybe over the next 12 months, you could see more of that.

Okay, thanks a lot, guys.

Daniel Goldberg.

You touched upon it earlier, but any more detail on -- redemptions seemed to slow in almost every category and every customer segment and product line.

Anything in particular there that you point to that was really driving that in the quarter?

I think it was just a very quiet quarter in the equity market, in terms of volatility.

And for us, the big reversal was in the bond market.

It had a very -- the bond market reversed, of course, quarter-to-quarter and interest rates, people react quickly in those fixed income funds to where they think rates are going.

So that was the big change overall in our redemption rate.

And I think the international side compared to what it was doing, it had been pretty quiet.

So you would expect to see redemptions drop in that kind of environment.

Okay.

Share repurchases during the quarter?

It was not a very active quarter.

About 300,000 shares during the quarter.

Do you have an average price?

We usually do that in the K. So not to ignore it, but we will wait for the public disclosure.

And then on the international opportunities, you talked about briefly the progress made in China.

Do you view China as the most opportunistic area, or what would you this say is kind of the biggest non-U.S. opportunity out there for Franklin?

I view China as a very long term opportunity that is far too early for us to be comfortable projecting any kind of flows in the next few years.

I think it's a place that we feel like we have to slowly build presence, and that's really what we're going to do.

The immediate opportunity for us as we have seen dramatic growth in Europe.

Germany, we have had a foothold for a long time and that just gets stronger and stronger as open architecture in the traditional big German banks is opened up for us.

Southern Europe, Italy, Spain have been tremendous for us, as far as growth.

And Asia, Korea, Taiwan and Japan have all been very strong.

And then India is another one that we enjoy.

Over 20 percent market share in India, $4 billion in assets, and it's still a very small market.

But the potential for growth in our positioning I think puts us in a very good shape.

So those are the immediate opportunities.

And I think China is a very long-term play for us, that we are not projecting any real big flows in the next year.

So I think we think there's some institutional opportunities in the next year that may happen because of our presence there.

But on the retail side, I think it's going to be a longer-term play.

And then just finally, any comment on the reason SEC decision to increase disclosures and registration for the hedge funds -- anything regarding the industry, and then any impact on Franklin as a result of that?

Just to comment on that, obviously, there's a lot of opinions on whether that was a good thing or a bad thing.

We'd been in the camp that we think that was a good thing, just from a standpoint of all those sophisticated investors largely invested in hedge funds.

The problems in any type of investment product tends to impact others, so we think ultimately, that was a good move.

Do you think there is any impact positive or negatively on your business?

Not on us, no.

Okay, thank you.

Glen Schorr.

Hey, guys.

Franklin Income Funds has been a monster of fund in taking a lot of the hybrid flows.

And that 25 billion, is there any reason why we should think about capacity constraints, or maybe you can just address that?

I think that's a good question, but I think if you look at the makeup of that fund and its history, if there was any fund that I think can handle growth, it would be the Franklin Income Fund, because it is really not restricted in how it invests.

It generally had utilities, gold stocks, high yield bonds, corporates, so it is really a mix.

And I think capacity at this stage is just not an issue for that fund.

Next year, or have been made any further thoughts on option usage, option expensing, restricted stock?

I know we're at year-end and in thinking about merit increases for next year, but I'm sure that's part of the thought process?

Yes, it is.

We haven't come to a final conclusion on it, but our view would be similar to what most people are thinking out there, is that it is the current construct of how options would be expensed, seem to be -- cost (indiscernible) then for the company seem to be at a mismatch and the value to the employee.

So we are looking at that but (indiscernible) that we want to make sure that we tie in our talented individuals with equity rewards, and people do that.

And just thinking to your comment on that, Marty, is whatever the decision you come up with, is that something that we probably hear about over the next three months, just because it is year end and grants are made?

Or, is that something kind of wait to how accounting rules play out, things like that?

We'll be happy to update everybody next quarter.

We're literally going through that process right now.

And as a matter of fact, that's not a problem for us to talk about (indiscernible).

Last question is -- with the changes on payments for distribution, and then us being in a much more transparent and explicit world, obviously, I would love it if you want to throw numbers at it, but you probably don't want to throw numbers at it.

So, I just want I know, is in the current expense base, have we seen the full impact of the changes in distribution payments?

I think it reflects, what we know today, the reality is there has not been a dramatic change in that line and how it affects the Company to date.

And based on what we have seen, I would not expect to see that number change a whole lot.

Excellent.

Thanks.

Robert Lee.

You wouldn't think there was anything left to ask at this point, I guess.

We count on you, Robert.

I always seem to bring up the rear here.

Real quick question.

If I remember correctly, you have one of those co-co (ph) convertibles.

Are we going to have any kind of disclosure in the K on how you think this is going to impact your -- if at all, your diluted share count, starting in '05?

We will put it in the K, and we're going to be impacted by the if-converted method.

Secondly, I know you've talked a little bit about it a little bit and, clearly, headcount is up, as you point out, for the year.

But given your strong business volumes, are you -- from where you sit today, do you think you're sort of properly staffed for the volumes you expect over the coming year, or are you expecting that you're going to need to do some additional investment in other service infrastructure or distribution at all, just to handle the volumes you think may come on?

We have just wrapped up our plan, and so the plan is for a few hundred more employees than what are -- that you're seeing right now over the next year.

But as Greg and I have talked in the past, we respond to market conditions and to need.

So you're going to see, we talked about an increase in staff during this quarter, salary increases coming through and adding probably 400 people, if things go as planned over the next 12 months.

There is still always an endless demand on technology resources, and that was a pretty flat expense category over this past year.

But we will continue to invest in technology investments over the year also.

Lastly, just following up to that point, is there anything in particular -- I guess a lot of companies out there have been ramping up their investment in their dedicated divestor (ph) recovery facilities, things like that.

Do you have any of those types of investments on the horizon?

Yes.

We are, again, we have been investing in them.

Just remember going back a couple of years ago, really the technology infrastructure, there was a lot of that that was done.

But just on the people's movement side, we've done that.

We actually have to do some more.

Greg talked about the success that we have had in Asia and the like.

And success means you have more things connected to the best recovery support (ph) in the region.

So there are those incremental investments that we will be making.

Great.

Nice quarter, guys.

Thank you.

Once again, thanks for joining us during this quarter and we look forward to talking to everybody at the end of the first fiscal quarter.

Have a good evening.

This concludes today's teleconference.

You may now disconnect.