富蘭克林資源 (BEN) 2005 Q2 法說會逐字稿

Good afternoon, my name is Kate and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Franklin Templeton Resources quarterly analyst call.

Mr. Flanagan, you may begin your conference call.

Thank you very much, and good afternoon, everybody.

This is Marty Flanagan along with Greg Johnson, co-CEOs for Franklin Resources.

Just quickly this afternoon, we will give some highlights of the quarter talking about assets under management flows, performance, some business highlights, address the operating results and then open up to question and answers which Greg and I will address.

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

There is a copy it in the latest 10-Q, and 10-K and also posted on the web.

Just to summarize: 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.

Starting with the quarter, the second fiscal quarter for us is really quite strong.

We saw assets and net flows at all time highs resulting in strong operating results.

We think we are -- continue to be well positioned for growth over the long term, on the back of strong investment performance on service levels and a very broad global platform.

Taking a look at assets under management, we did end the quarter at $412 billion in assets under management.

This is up 2.5% from the prior quarter and 17% from the prior year.

It you look at the average assets quarter-over-quarter, they increased almost 7%.

This quarter to last quarter and up almost 18% from the prior quarter.

The strong net inflows were some what offset by market depreciation during the past quarter.

The assets under management continue to be well diversified.

We have seen with the market movements and the movements in net flows, a slight shift again, towards equities and hybrid.

If you look at the equities at the end of this quarter.

It was 57.3%, as compared to 56.9% last quarter.

Fixed income now represents 24.5% versus 25% last quarter.

And hybrids have also seen a slight increase at 16.8% as compared to 16.5%.

Last quarter money market funds have not changed at 1.5% quarter over quarter.

We clearly continue to benefit from the diversification across our various investment styles and investment objectives, channels and geographies in which we operate.

With that I will pass it over to Gregg.

Thank you, Marty.

Looking at the flows Marty mentioned, it was a record quarter for us in terms of gross sales and net inflows hitting $11.5 billion up from 8.8 in the prior quarter, and that's a 77% increase from the year-over-year quarter.

The overall sales hitting 33 billion, compared to 28 billion were up 16% from the prior quarter.

Looking at the flows a little bit more in detail, as Marty mentioned, the equity is where we saw the big pick up, especially on the global side.

Total equity flows of 7.3 billion in net sales, compared to 4.7 and fixed income declined slightly from 1.7 to 1.1.

Within the equity sales, the global and International equity sales increased 4.4 net to 6.8, and it is important to note that there were two somewhat unusual events or two big -- one big global equity mandate of 1.6 billion that was funded during the quarter and then in India, we had an Indian Flex Cap fund offering of 425 million in U.S. dollars which is part of the increase in the global equity flows.

Hybrid continues to be very strong, driven by the success of of the Franklin income fund, increasing from 3.1 to 3.4, and tax-free and taxable were relatively flat on a net basis.

The investment performance continues to be very strong across the broad group with over 90% of the long term assets in the top two quarttiles, and three, five, 10 year periods, Templeton Growth ranging in the top quartile for the one, three, five and 10, and the flagship Franklin income fund continues to perform very well in the top quintile for the one, three, five, and 10 year period.

Looking at some of the business highlights for the quarter.

We did have a large push in the U.S. retail market place, celebrating Templeton's 50th anniversary with the Growth Fund and the timing was very good with a strong performance in the international market in the prior quarter, and we are pleased to see very significant results in market share improvements with the Templeton Growth Fund and we added 3,000 new advisors that have not sold any Templeton funds in the last year, as a result of that campaign, where I believe we did 5,000 cluster meetings around the country.

We are pleased to see our Dow bar rankings continue to improve, as far as the financial services websites are ranked, and we improved from our fourth place ranking up to number two in the most recent survey.

The international retail sales continue to be very strong, and we are pleased to see in India we received an award for mutual fund of the year.

Japan we crossed $4 billion in retail assets, and our Franklin Mayflower fund is the third largest fund in that market place.

On the institutional and high net worth, continue to see good pipeline, no real significant news on that front, but certainly on the institutional side, we are still seeing a lot of interest in global and international searches.

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

Great.

Let me hit a few highlights.

Clearly it was quite a strong quarter and if you look at operating revenues, they were up just over a billion dollars this quarter.

That's a 6.6% increase quarter-over-quarter.

If you move over to net income.

You can see that it dropped 7.8% this quarter as compared to last quarter and let me take a minute to explain the various changes.

Starting with operating revenues, investment management fees were up 4.6% this quarter over last quarter.

The effective fee rate was 58.2 basis points, as compared to 59.5 basis points.

The reason why that happened is twofold.

One, there is a couple of shorter days in the quarter, but at the end of the last quarter we actually had some performance fees which resulted in the effective fee rate being higher last quarter than this quarter.

Underwriting and distribution fees obviously, almost 11% on the back of the strong sales greg just discussed, and also shareholders' servicing fees up as billable accounts increase 1.1 million shareholder accounts to now 17 million shareholder accounts around the world.

Moving on to operating expenses, total operating expenses during the quarter increased 13.4 percent to 777 million.

And let me highlight a couple of areas.

Underwriting distribution expense increased in lockstep basically with underwriting distribution income based on sales.

Comp and benefit was up 3% this quarter.

Couple of highlights we added 89 people during the quarter, and there is 6868 people part of the Franklin Resources organization around the world.

And if you look at the percentage of comp as a percentage of net operating revenue it was 31% this quarter, down slightly from last quarter at 31.4%.

Another item of note that if you didn't pick up on it, the stock option expensing has been deferred now for us until fiscal 2006.

The other area I would highlight -- advertising promotion was up quite strongly to $31 million, up almost 20% based on advertising programs during the past quarter.

Moving on to the other income area, continued volatility in that area sponsored investment product gains, you can see that there was market depreciation during the quarter and market- to-market.

That's what you are seeing, and investments and other income, there were some realized gains during the quarter.

Interest expense, very little change, up slightly with commercial paper rates increasing during the quarter.

The tax rate was 26.7% this quarter.

The effective rate really was 28%, the off setting benefit was based on the settle men with the OSC, and very good point there was the one time provision for the settlement of market timing in Canada in the quarter, which was $42 million that was the biggest change in operating expenses, quarter-over-quarter.

With regard to shares outstanding, we did buy back 117,000 shares during this quarter.

More relevant, we declared a $2 stock difficult dividend during the quarter and during the quarter, total payout to shareholders was 242%.

That is taking the regular dividend, the special dividend, and the stock we repurchased during the quarter.

So we continue to be focused on generating returns for shareholders.

So in summary, very solid quarter driven by the high assets under management.

Net flow was off the back of strong investment performance and continued very good service levels and as Greg discussed we are benefiting from the depth and breadth of the global footprint we operate with.

With that, Greg and I will answer any questions, anybody might have.

[OPERATOR INSTRUCTIONS].The first question is from Glenn Schorr.

Hey guys.

Just following up on your comment, Marty, on this is still a little weird, International is so strong.

I appreciate the comment on the 2 billion between the new fund in India and the one mandate funding.

But you still have over 13% organic growth.

MSCI is down.

Is it mostly institutional?

Is there any way you can give us just great performance starts great flows even though the market is down.

Surprisingly strong outside of those two events.

It is really, something Greg and I have been talking about for many years now, it is really seeing the continued success over many years of work and just being recognized for doing good things in the various countries we operate in and the retail side of the business is very strong, and as Greg addressed also the institutional side is starting to pick up some but the leader has been the institutional side of the business.

I would say, that remember the quarter ended in December was performance.

Came into the quarter with the wind at your backs and tremendous performance in the global market.

So as you would expect you are under a bit more pressure today, and during the quarter you didn't have that kind of pressure.

You generally had the wind at your back.

But clearly the global side.

Even in the retail U.S. market continues to expand as a percentage of mutual fund flows.

Great.

And then, Marty your comment on options expensing, can we make sure exactly what it means?

Until fiscal 2006 does that mean no expensing until the December quarter?

I don't have the exact quarter for us next year, but I can confirm that it is not going to happen this fiscal year.

It would likely happen in the first fiscal quarter of '06.

Last one is there is some extra, or more than we expected on the investment and other income.

Any way that you can help us, is there maybe an unrealized gains position you can give us, or something that would get us a little close to in terms of what we can expect?

I know it is not the only thing on his mind.

You know, we struggle with it too.

Very difficult to give any guidance.

It is simply a market to market and as you know, very big strong balance sheet and we do invest in equity markets also and we're going to see the volatility.

Now doesn't help you from a guidance point of view but right now, nothing comes to mind.

Even an unrealized gain loss.

Appreciate it.

Thanks, guys.

Your next question is from Mark Constant.

A lot going on this afternoon, so I'll try to be quick, just really two primary questions.

One: nice sequential increase, I know you don't have the purch yet, but nice sequential increase in the billable accounts, yet the shareholder service fee increase sequentially wasn't as strong as I'd like.

Relatively small number.

Curious that there is something else going on with the pricing or something like that in that front.

No, I think it is timing more than anything.

Late addition of accounts.

Yes, so that's nothing unique in that.

Simple answer.

And then also just your thoughts briefly, you obviously combined between the share repurchases and the dividends this quarter.

For this fiscal quarter.

Can you give us a sense of your thoughts on to balance those, or how we should expect you to balance those two options going forward in terms of returning earnings to shareholders.

Yes,.

Any change in thinking?

No, I mean, there isn't really a change in thinking.

What you are seeing is by what we have done is confirmation what we say each quarter.

In fact, we will look at what we think are the best ways to return value to shareholders, whether it is one time cash dividend, or stock buy backs and I think the best way to look at it is you know, if you go back last five years, we have actually continued to do you know, be pretty active and buy buybacks and cash dividends and we'll continue to do it, but I don't know if you can trim it specifically more than that.

I guess there were issues related to utilizing cash in advance for the foreign earnings repatriation potential, but I guess there was the question, should we presume a lesser inclination for share repurchases versus dividends, or was it more of the former there?.

Versus dividends or more of the former.

I wouldn't say that.

I think it is, just a point in time we thought this was the best thing to do at this point in time.

So there would not be a lesser inclination for stock repurchase.

Next question is from Daniel Goldberg.

Good afternoon, guys.

Can you just give us an update on the payout to the Ontario regulators, and what is remaining in terms of outstanding regulatory items?

Well that settlement we announced in the prior quarter around the market timing activity in Canada, and and I don't think there is anything else other than the class actions that have been filed and disclosed over the past quarters.

As far as any ongoing investigation right now.

Okay and then any update on repatriation where we can hear more about that and timing and use?

We don't have any new information.

I think we had the same position in the past.

Hopefully it is a very good thing and when it becomes clear, what we can do we will take advantage of it.

But we have come to no conclusions at all and waiting for further guidance from the I.R.S.

And then lastly, information systems technology expense is up about 5% sequentially.

Looks like it is the highest in about six quarters.

Would you say it is a good run rate, or can we expect it to change versus what we saw this quarter?

It is a good run rate and continue to invest in technology and we have the same issue with most organizations and endless thirst for investment there and we think we are doing a pretty good darn job of it you know, balancing at the business and delivering along the technology line.

Anything specific in terms technology investment?

No, it is pretty broad.

Really the last couple of years -- three or four years ago loss of infrastructure there's been much more of a focus on what we call a front end type of investment.

For the investment management, sales, marketing.

Shareholder servicing type activity, but pretty broad across all elements of the business.

Okay.

Great.

Thanks.

Your next question is from Chris Meyer.

Good afternoon.

The first question is, I agree it is pretty impressive, the growth in the International Global Fund.

Can you give us a sense of who you are taking a share from?

Particularly in the institutional space, where it is a little harder for us to gauge the flows in a particular quarter, and obviously we know that one of the strong competitors there is pretty weak from a performance standpoint.

Wonder if you could share with us who you're taking the share from?

It is hard to do on the institutional side.

We would rather not say who we think we are taking share from.

It is not as clear as on the retail.

Where that is clearly published.

It is just aside from even share, it is a strong trend certainly in the U.S. with the dollar and investing more assets abroad.

I think we are benefiting from that.

But, I am not really you know as well as I would on the institutional side where you think we might be taking it.

Then on buy back.

It seems everyone is kind of waiting for you to announce something more material, I guess, and I just wondered whether the share price was a factor in your decision about when to announce, if at all, a bigger buy back?

Yes, Chris, we are not going to get specific on all the factors, you can imagine when we look at the capital decisions, we consider all the factors that you would want us to consider and the I think best thing to do is if you look back from pick a period.

'99 through this quarter, you know, we continue to buy back stock, more sporadically, but over time it has been pretty strong stock buyback program, and the best way for us to answer it when they ask about going forward is to look at our actions over the past and that's as good as I think we can do to give you a sense that we are serious about doing it.

Then finally, we have had a question from Glenn on the options expensing.

The options expense can be a lot less onerous than what you reported in your Q's, and that's true, I guess, for the whole market, But is there any guidance you can give us as expected expense from option dilution and how materially different it will be from what you reported in your public disclosure?

We really can't.

We have to stick with what we have in the public disclosure.

What Gregg and I both discussed.

More relevant going forward is with the notion of expensing stock options, you know this past year -- fiscal year, we made a decision to use restricted stock and not stock options just because our view of the "cost" -- the expense of costing options vis a vis the value in the employee's hands was a mismatch and we took the path of changing our methodology of putting equity in the individual's hands.

We'll continue that going forward.

Other than the valuation.

Our best estimate of the expense will, this effect has been disclosed.

Thanks a lot.

Your next question comes from Bill Katz.

I was wondering if you could talk about what you expect to be the account purge, if any, over the first couple of quarters?

We expect about $450,000 in April in Canada.

Any sense of what it might be for the U.S. next quarter.

Don't have that right now, Bill.

Second question, just curious the distribution margin keeps bouncing around a little bit.

How much of an impact it would have been quarter-to-quarter due to the fund issuance in India versus anything else that might be going on systemically?

That did have an effect.

The unusual event where one time,more of a negative margin impact on the normal run rate.

I think we get back to a more normal kind of margin in the underwriting number.

So there's nothing else beyond --just upfront payments that is clouding that.

The main difference is the India fund.

Okay.

Just a couple of big picture questions.

Number one, just curious, we've had some repricing adjustments by some major competitors.

American Funds and also Vanguard recently.

Obviously, your performance is very good.

What is your sense for pricing in the domestic market?

I think like everybody it is a very competitive market place and there is a lot of pressure on all pricing in mutual funds.

So if you are not on the lower end, obviously there is greater pressure.

Most of our funds are below the averages as far as the overall expenses go but we are not anticipating any real changes, but I think any fund that is not competitive out there has to now look at expenses.

Clearly in the surveys we have seen, with our advisors, the expense ratio are becoming one of the more important reasons to sell a mutual fund.

So, you will continue to see changes, continue to be pressure and those funds that are not properly priced will have to be reduced.

Final question, just curious.

It is hard to fathom given the good organic growth this quarter, and last couple of years.

Any price gaps you look to fill via external acquisition rather than internal?

I think it is really the same answer.

We feel pretty good about the product breadth that we have.

We're still out there, looking for ways to improve the lineup.

We don't think any major gaps today.

The big push that we have this quarter is with the Franklin, the large cap and core growth group and increasing visibility.

We still think that's the big opportunities where we have the biggest gap as far as market share.

So that really is a priority for the company right now.

Okay.

Thank you very much.

Your next question is from Ken Worthington.

My questions were asked and answered.

Thank you.

Thanks, Ken.

Next question is from David Haas.

Hi, I have just a couple quick follow ups.

Daniel asked about the IS &T spend and we've seen a couple of competitors that have been ramping of hiring of individuals.

Where are we in that sort of process?

Sort of in the middle or do you think the head count rampup continues from here?

In the firm or just in IS & T?

In the firm.

We added almost 90 people this quarter.

Our plan for the year was somewhere around another 100 people.

And that is pretty different areas of the company, around the world.

That's where we are at the moment.

Okay.

Just also follow up on the rapid growth and some of your core portfolios.

I don't get the sense that there is any capacity constraints.

But can you touch on that?

Across some of the funds that have seen major growth.

I think that's right.

If you look at the one fund, today we get the question around.

Franklin Income Fund. $32 billion and still growing.

The nice thing about that fund, it has a very broad mandate as far as what it can invest in and has a history of having a lot of bonds and treasuries and large cap stocks like utilities and gold stocks.

So we haven't really seen any pressure and it continues to perform very well as it's gotten larger.

Outside of that, we will continue to close funds where you have small cap constraints and liquidity issues but really nothing as far as if you look across the lineup at the 10 largest funds, there doesn't appear to be any capacity issues.

Finally in terms of cost or distribution, you are obviously taking a share from some other competitors there.

As you sort of build up this organic growth at a rate of rapid rate.

Do you have any advantage in sort of pushing back on the cost of distribution relative to some tiers that have not been selling as well?

I think you don't really have an advantage as a there are a lot of components to cost and distribution and obviously, you become much more efficient as your, the amount of moneys that cost from the productivity of wholesalers and things when your funds are in favor.

And that is almost a fixed cost in a lot of ways, so you get economy there.

The other part around marketing support -- you would think you have more leverage but the reality is, it is really almost industry standard now as far as what everyone tends to pay about the same in you know, poor marketing support and no real break point, advantages of size with that, so that's the area where you don't get any real benefit.

Okay.

Thanks.

Our next question is from Matt Rothchild.

Good afternoon, can you quantity the performance fees in in fiscal Q1 versus fiscal Q2.

We haven't made it public.

So we aren't going to do that.

I think you can really just get a sense of it just by looking at the growth and aspects vis a vis the growth in investment management fees, but I am sorry, just can't do that.

Driven more by absolute or relative performance?

It is relative performance based on the relevant bench mark within the product.

Okay.

Just final, on that, is it reasonable to assume that they would tend to be higher in fiscal Q1 with the calendar year ending?

Our year-ends.

It is a 12-31 year-end for the handful of funds we have that way and the next one I believe is June.

Okay.

Performance would be higher in the fund year-end?

We hope so.

Okay.

Thanks very much, guys.

Next question is from Patrick David.

Good afternoon.

Do you still believe the shift towards greater investment in international global assets is secular rather than a reaction to the falling dollar?

I believe it is.

Falling dollar gets, in the U.S. we get complacent about the market.

We don't need to go abroad.

We've always been a strong believer that a that the more opportunities you have out there is providing more output for the shareholders.

If you look at markets like the UK, you have a much higher portion invested outside of the domestic market that that trend should continue in the U.S.

It is still with a very small percentage.

As the world economies grow, we believe it can only increase.

Okay.

Great.

And do you view exchange funds like high shares as a competitor for international flows, or is that a different sale?

I think it is different.

In my opinion, it is the better form of indexing and it's an efficient tool for money managers to use, but at the end of the day, we're active money managers and we think we can provide with output with lower risk than those indexes.

If we don't do that we will lose to the ETS and the index fund.

One quick one.

Have you had any traction in terms of focusing brokers and intermediaries on the Flex Cap fund as a core growth fund?

We have and that is really the core effort of the marketing group right now where we are going out and talking about that story and think we do have a very credible but not well-known record and capability there and that's one of the key areas for success we see in a lot of different places.

Even in a separately managed account.

We have to be more successful in the U.S. core kind of category.

Thanks.

Your next question is from Jeff Hopson.

Hi, couple of questions.

In terms of the international asset flows, I guess, any change in the amount coming from I guess retail, non U.S. retail investors?

I think it is fairly stable as far as the overall mix for us.

I haven't seen any big shifts in the last year between the amounts coming in from non-U.S. investors and the global.

Then as you look at maybe March, markets have been choppy, in one sense, that might actually benefit you from a market share standpoint.

Because you have a lot of I guess conservative funds.

Equity income funds.

Products like that.

Is that a reasonable assumption, do you think that's a possibility?

Well, I think in an on a growth basis it is not going to help you on a market share basis it may help you relative to the other groups, but when you have the kind of selloff that you had in the market and that includes the global indexes in the market.

That will effect our gross and net numbers but when you have a more conservative value oriented and fixed income mix.

You will do better than others.

That doesn't necessarily make it feel very good.

Any thoughts on the current fixed income market and now that the bottom market settled down if you think that is going to allow you to produce decent flows from here on the fixed income side?

I don't have a strong opinion one way or the other.

I really don't either.

I think, what we have seen over time is the -- on the retail side, the financial advisors continue to focus on the balanced portfolio for people and close tend to follow that way .

Okay.

Thank you.

Your final question come from Robert Lee.

Good afternoon, guys.

Two questions- first on advertising and promotion.

Performance has been so good.

Business has been guide good.

Do you see an opportunity there to do a little bit more to leverage it more or are you pretty much at the point of diminishing returns with that?

And then I have one follow up question.

That's a good question and one we ask ourselves quite a bit.

What is the rate?

We are not at the diminishing return stage and I still think we have an opportunity, one of the areas we have been talking a lot about is the perception of performance within our fund family.

It is not as high as we think it should be.

With our key customers the advisors and the consultants.

It means you have an opportunity to get that message out for advertising, and do an incremental spend, we think it helped, and that is something we certainly consider.

You know, in this kind of market with the relative performance.

I think it is money well spent.

And the second question, if I remember correctly.

In the past quarters is when you stopped selling B shares within the U.S.

How should that impact the commission going forward?

I mean should we see it start to level off or is that being driven more by sales outside the U.S.?

For the U.S.

B shares it should level off in over time and you if amortize that and it should decrease and you are right, it did stop I think, in the middle of the past quarter, the B share sales in the U.S.

Is a lot of that being driven from outside the U.S., similar share structures.

Yes, it would have been a very small percentage of what the, the deferred a.m., so, the effect of what is still being sold in the structures outside the U.S. is significant in that number.

Thanks guys.

Good quarter.

Thanks.

At this time, there are no further questions.

Mr. Flanagan, any closing remarks.

No, just one again we want to thank you for joining us this quarter.

We thought it was a solid quarter and we will continue to stay very focused in the months ahead.

So thank you very much and have a good afternoon.

OPERATOR: This concludes today's Franklin Templeton Resources quarterly analyst call.

You may now disconnect.