富蘭克林資源 (BEN) 2006 Q1 法說會逐字稿

Good afternoon and welcome to the Franklin Resources quarterly analyst call.

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

After the speaker's remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]

Before we begin the conference call, relating to Franklin Resources, Inc.'s financial results for the fiscal quarter year ending December 31st, 2005, as announced in the press release dated January 26th, 2006, the Company would like to note that the financial results are preliminary.

Statements in the press release and/or discussed in the conference call regarding Franklin Resources, which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause the actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements.

These and other risks, uncertainties and important factors are described in more detail in Franklin's recent filings with the U.S.

Securities and Exchange Commission, including, without limitations and risk factors and management's discussion and analysis of financial condition and results of operation in Franklin's annual report on Form 10-K for the fiscal year ended September 30th, 2005 and Franklin's Form 10-Q filing.

With that, I'll turn the call over to Greg Johnson, President and Chief Executive Officer of Franklin Resources, Inc.

Thank you.

Hello.

This is Greg Johnson, Chief Executive Officer of Franklin Resources.

Joining me today is our CFO, Jim Baio.

We're pleased to present -- be presenting another strong quarter for the organization.

First of all, looking at the asset growth, closing near $465 billion was up just about 2.5% from the prior quarter and up 15.5% year-over-year.

Looking at the mix of assets, as you would expect in a quarter where international equity performance is very strong, our overall equity percentage increased from 58.2% in the prior quarter to 58.8%.

And fixed income declined from 23.2% to 22.8%, along with our hybrid balanced category, down to 17.1% from 17.3%.

The fund flows overall were another good quarter, but down 26% from the prior quarter to $5.9 billion versus $8 billion, or a decline of 33% from the prior year.

Looking at overall sales, they declined by 3.5%, redemptions increased 4%.

And looking at it by asset category of equity versus fixed income, overall equity flows increased from $2.8 to $3.2 billion and fixed income declined from $1.6 to $900 million.

Most of -- or all of that increase on the equity side was due to the strength in international equity flows and I think that was seen across the entire industry.

For our organization, we had $3.3 billion in net inflows for the quarter versus $2.8.

And domestic equities continued to have a slight outflows of $100 million, which again, I think is consistent with industry trends.

Our hybrid did decrease a bit from $3.5, which was a high historically in a quarter down to $2.1.

Most of that is our Franklin income fund sales, which did have a dividend reduction and that probably affected some of the sales there.

And on the tax-free side, slight decline in net flows from $600 million to basically flat, and taxable decreased from $1 billion to $900 million.

For a total net, as I mentioned, of $5.9 versus $8 billion.

Investment performance continues -- I think our goal of having long-term consistent performance across the organization, we believe is very much in place and 84% of our long-term fund assets were in the top two quartiles for the third period, 92% for the five and 96% for the ten-year period.

The funds continue to gain recognition and Templeton growth ranking in the top third for one, three, five and ten mutual shares and in the top quartile for one, three, five and ten, and all of our tax-free funds continue to have very consistent long-term performance.

I'll now turn it over to Jim for the operating results.

Thanks, Greg.

And just at the top end of the income statement, for the quarter our revenues were $1,182 million, a 2% increase over last quarter and a 20% increase over the same period a year ago.

And then to look right to the bottom line then, net income for the quarter was $318 million, a 5% decline over last quarter and a 33% increase over the same period a year ago.

And you'll recall that there were a few items last quarter that really gave rise to some unusual, but positive things that are more normalized this quarter.

So we feel we actually had a very strong quarter in spite of the direction that the net income line went.

To look a little closer, then, at some of the operating revenues, the investment management fees were $687 million, up 5% over last quarter and 21% over a year ago.

As Greg was mentioning about the asset mix and flows and performance, our effective fee rate for the quarter was 60.7 basis points, compared to 59.5 last quarter.

Underwriting and distribution fees were down 2.8%, really coinciding with the impact that sales -- net sales had.

And our margin on distribution was a more normalized 8.4% this quarter compared to prior quarters.

Looking then, towards the operating expenses, total operating expenses were $777 million, down 2% from last quarter and up 13% over the same period a year ago, and I'll call out just a couple of items on the expenses.

Compensation and benefits were $219 million, up 5% this quarter.

And what you're seeing there is a few things.

We added head count, as you know.

We also had merit increases that took place December -- effective December 1st, so the rest of the merit increase, you'll see increasing the comp and ben line next quarter.

And also, as we've been talking about, we did have the first quarter of impact of option expensing and that number was about $4.9 million this quarter.

So we expect to see the comp and ben line tack up next quarter.

Also mentioned, advertising and promotion, and as you all know, we tend to have the lowest quarter of A&P spend, generally speaking, that's our first quarter and that's what you're seeing there.

It looks like a big contrast to the prior quarter because we actually had higher than normal advertising and promotion expenses last quarter, as we had stated that we took advantage of some low -- low rates, particularly in Europe last quarter.

So we're back to a normalized run, this quarter being relatively low as we start the new year.

So operating income, very strong $404 million, up 10% over last quarter and up 35% over a year ago.

Looking below the line, you'll recall last quarter we had some very positive but nonrecurring types of things in our other income line and so you see that more normalized this quarter at $34 million compared to last quarter's $51 million.

In the tax rate -- again, there was a big story there last quarter, where we had the very favorable impact of some refunds from California.

This quarter, we're back to a normalized rate of 27.5%, pretty much in line -- or in the range of what we had thought it would be when we last spoke.

So that gets us down to the net income line and in terms of diluted earnings per share, $1.21, down 5% over last quarter's $1.28, but up 32% over the same period a year ago.

In terms of payout with repurchase -- share repurchases, we acquired 502,000 shares during the quarter, about twice as many as last quarter and paid our dividends.

So all in all, about 24% payout during the quarter.

And then lastly, before we turn it back to Greg on some business highlights, you probably noticed crossing the wire after the press release this morning was an announcement that Greg and our Board of Directors have approved a repatriation plan -- a dividend reinvestment plan, which will allow us to bring about $2 billion of cash back into the U.S.

And although that's at a low tax rate, we will have a tax charge in the -- in our second quarter ending March, of about $112 million.

So look for that as well.

And with that, I'll turn it back over to Greg for some business highlights.

Thanks, Jim.

I think some of the significant highlights for the quarter; one, we recently announced the formation of the Franklin Templeton Fixed Income Group, which creates a new global fixed income platform, integrating the fixed income teams of Franklin Advisors and Fiduciary Trusts.

And these combined teams, with complementary investment strategies, create a stronger global fixed income platform with over 100 investment professionals representing $130 billion in assets.

As I said on the prior call, we think it's a real opportunity for us with this new combined entity to compete head-to-head with the larger players in the institutional fixed income space.

Another area is Japan, which I recently came back from and I think we've been very pleased to see the progress of our local Japanese equity team that continues to have very strong performance in that market.

And we just crossed the five-year number for that group.

And have been very pleased to see the acceptance in Europe of our CCAT Japan fund, which recently crossed over $600 million in a relatively short period.

And we are very optimistic about the opportunities in Japan and institutional marketplace for that local group.

On the U.S. retail side, I think the relationships continue to be very strong and we've been very focused on building new relationships with Edward Jones and continue to focus on Edward Jones and have had many regional sales meetings as well as one on one meetings and we continue to move up within their system.

In the alternative area, we're pleased to have closed a Franklin -- Fiduciary Trust European real estate fund to funds managed by Fiduciary's real estate group, headed by Jack Foster, which was $250 million during the quarter.

Some other milestones, in Canada, the potential program crossed $4 billion in assets.

Our college savings plan with New Jersey crossed $1 billion.

And in Switzerland, we're pleased to see tremendous growth there and have recently reached $3.9 billion.

The shareholder surveys that we do within the U.S. continue to be -- indicate very favorable relationships.

An NQR study of shareholder satisfaction showed that 96% of their customers would recommend Franklin Templeton to others.

And on the Dow Bar front, the most recent quarterly ranking in Canada ranked our call service there number one among broker-distributed firms in Canada.

We'll now close out and just say that we have been very pleased by the results for the quarter.

And very pleased, again, with the consistent long-term performance and we will remain very focused on leveraging that strong investment performance to grow our assets under management.

Thank you.

And now we'll open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Jeff Hopson with AG Edwards.

Hi.

Thanks.

Could you talk a little bit about domestic equity and look at what you've done and what you can plan to do to spur the sales there?

And then in regard to the tax rate going forward, once the repatriation comes over, what do you anticipate actually doing with that?

And what would -- what impact, if any, on the future tax rate -- operating tax rate, I guess?

I think first of all, on the domestic side, as I mentioned, not a big change relatively flat as far as net flows go.

But gross sales are still very strong and Mutual Series continues to do very well there.

And I think our growth group, which it really is, despite the market's perception of size and presence, we feel that at $14 billion is a pretty significant group with 38 investment professionals.

And we think that is our organic and best option to participate in that growth category and that will continue to be our focus.

So we don't think there's anything there immediately that is requiring attention.

I think it's very much like the entire industry, the domestic equity sales for that quarter were not very strong on a net basis.

So there's really nothing to add there.

Okay.

I'll turn it to Jim for the other part.

Yes, then, Jeff, as to the tax rate next quarter, I think you were asking -- it's probably -- our best estimate right now is going to be consistent with the rate that we had -- the operating ongoing rate, excluding any repatriation impacts would be consistent with this quarter's.

Again, it's subject to a lot of things beyond our control, like the mix of assets and where they are and so on.

Your next question comes from Chris Meyer with Morgan Stanley.

Hi, guys.

Hello.

Just on the -- I mean, Greg, it's pretty amazing that the operating leverage that your business is showing right now.

Just maybe just help me think or help us think about how you address growth versus allowing the operating leverage to continue to expand. 50% operating margins is certainly nothing that we have seen in the asset management sector before.

So how do you weigh up letting that run versus reinvesting in the business versus paying your people?

Well, I think first of all, we don't look at the business as a way -- of starting with the top-down view of the margin and that deciding how we invest in our business.

I think it's the last part that comes out.

And what we try to do is look at what's required to grow the business.

And we've always taken approach where we start small and feed the areas that show the most promise.

I think we have a good discipline of doing that.

As far as the operating leverage, that's a difficult one to answer on whether it caps out at some point, but as we do get more efficient in this business.

And if your assets are concentrated in areas, you will get that leverage.

Jim can add his thoughts on that.

I agree.

It's -- we -- it's part of the culture to just keep trying to do things better and more efficiently.

And the assets are going in the right direction and we stay very focused on that and fortunate enough to see those good results.

Your next question comes from Daniel Goldberg with Bear Stearns.

Good afternoon.

Hello.

Could you just talk a little bit about what -- when you look at your organic growth, obviously your base of assets is continuing to grow, but look at it on an organic growth basis versus what we've seen from some of your peers, it seems to have slowed down this quarter.

Anything there that you would highlight?

Or how should we think about that, going forward?

Well, I think -- again, you're always going to have periods where the growth rate may be less or more and a lot of things happening out there and somewhat of a rotation in the market.

Growth did outperform value for the year, so you expect to see some movement away from the strength that the traditional value funds have had.

And I think the other is some of the short-term -- Templeton, as I mentioned in the prior call, has always -- has never hedged the currency risk and the dollar was strong last year and that's hurt some short-term performance.

So that's going to create a little bit of lag as far as net flow numbers there.

But I think overall, those are short-term issues.

They tend to turn around.

You could argue that the dollar more recently will benefit that.

So that doesn't really concern us.

I think the rotation away from value -- I think that could have an effect over time, but we'll see.

Your next question comes from Christopher Spahr with Prudential.

Good afternoon.

Hello?

Hello, yes.

Hey, good afternoon.

Hi.

I just wanted to relate some of your international growth initiatives versus the tax repatriation.

It seems like most of the initiatives that you laid out in your lease and in prior leases have been mainly international.

So I just want to get a little more color on what are you going to do domestically.

Separately, I also want to know -- your international AUMs, and they seem to be helping some of your effective rates on your assets.

I want to know if there's some stickiness to this?

And if we can expect to see some more rate increases in the future?

Hello?

Yes.

We're -- let's see.

The first question was on the international initiatives versus the repatriation, I think.

And I'm -- I think the nature of the question really was about -- given that we're bringing this money back and we have a lot of growth, nevertheless, internationally, do we -- I guess the way to say it would be we have -- the money that's accumulated and is being brought back is something that has been out there and building for years and years.

And there's -- we still have -- we're mindful that we maintain enough capital in those organizations to continue the business objectives.

I think that's where you were going.

I'm not sure.

Yes, and I would just add that I don't think anything has changed regarding our strategy or how -- what we fund or focus on due to repatriation.

And the effective rates?

I'm sorry?

And the international AUM and its effect on the effective rate for assets?

The fee rates, I'm sorry.

Well, I guess it's going to be what it's going to be.

And we're out there just trying to provide good investment solutions to everyone.

And the mix takes us to the rate and it's hard to say where -- what it's going to be next quarter.

Okay, thank you.

Your next question comes from Cynthia Mayer with Merrill Lynch.

Hi, good afternoon.

Hi, Cynthia.

Hi.

Maybe you said this, but did you say when you were going to update on what you're going to do with the repatriated money?

Well, we did not.

I mean we're not -- we're not planning to disclose the details of our plan in particular.

I can tell you, though, that the law is -- and the rules are very specific as to what you can use the money for.

Things like cash compensation to nonexecutive U.S. employees, M&A, research and development, capital expenditures of certain kinds, advertising and promotion, and the like.

And the law is also very specific as to what you can't use that money for to get the tax benefit.

Things like dividends and executive bonuses and stock buybacks and things like that.

So we can tell you that we have studied this very carefully and we've crafted a plan that will comply to ensure that we get the benefits.

But it has probably all the elements in it that you would suspect, although we're not going to go and disclose all the details of it.

Your next question comes from Bill Katz with Buckingham Research.

Hi, thanks.

Good afternoon.

Just wanted to stay on that topic for a second.

You had another -- looks like very strong numbers and you sort of repatriated, if you will, 24% of your earnings this quarter.

What's to give investors confidence that you might not just sit on this money?

Is there any kind of timeframe to what you're dealing with?

Or maybe I'm asking the second part of the question, there's some speculation out there that Morgan Stanley and Black Rock might replicate what Legg Mason just did with City Asset Management.

How do you see your franchise fitting in on this quickly shifting financial landscape?

Well, Bill, we're -- we don't feel that we're under any time pressure.

And really our philosophy on any of this has not changed.

It remains the same as it's been.

We like our stock.

We'll acquire it opportunitistically.

And in terms of business combinations and acquisitions, we look at what comes along, we evaluate everything and we can't say one way or the another that one will happen in the near future or won't happen.

We can just say that we're open to looking at everything and doing what makes sense, as the situation develops.

And I'm not sure we can draw any conclusions on what this means to the landscape for investment management firms because what happened with one deal now is the opposite with another deal that's pending.

So I don't know what that means.

I don't think either of them have a big effect on our view of the landscape.

Okay.

And then just sort of to come back to the margin discussion, was there anything else in the revenue or the expense line that may have influenced the margin this quarter?

It does seem like it took a significant step up, even with a higher head count.

So I mean, are we really now at a new level of earnings power for the company, even as you continue to hire on?

Well, again, we remain mindful of our cost structure.

We know that, as I said earlier, Bill, we expect the comp line to go up and probably a comparable increase again next quarter that you saw this quarter.

And, again, we try to find the right investment solutions for people and that will drive the revenue side.

So, we're -- we don't -- we'll continue to invest in the business and let those things play out.

And our view is one of the long-term and not necessarily next quarter.

Okay, and just one final question.

I appreciate the time.

Any sense of the amount of dollars raised, organic growth, outside the United States in this quarter and maybe over like the last rolling 12 months?

It's been pretty consistent right around 38, 40% of gross sales and similar line for net as far as what's coming in outside from investors out of the U.S.

[OPERATOR INSTRUCTIONS] Your next question comes from Robert Lee with KBW.

Good afternoon, thank you.

Actually, most of my questions were answered.

And I got on a little late, so I apologize if you mentioned this, but did you repurchase any shares in the quarter?

We did, Rob.

It was about 502,000 shares.

502,000, great.

That was it.

Thanks so much.

Okay.

Your next question comes from [Brian Buchesney] with River Source Investments.

Hi, good afternoon.

Just a follow-up on the repatriation.

Are there any IRS deadlines for when you need to use the cash?

Is the first one.

Then I have a follow-up.

Yes, Brian.

We have to spend it on qualifying expenditures in a five-year time period.

And that time period actually started -- now that we've executed our plan, started October 1st, '05, so five years from there.

Okay.

And then just a more general philosophical question about acquisitions, and your thoughts on how much leverage would be acceptable in the transaction.

I know when you did the Templeton a number of years ago, you used quite a bit of debt to fund the purchase.

And I'm just wondering what your appetite is for levering up any type of an acquisition?

Thanks.

I don't think there's any hard rule.

And I think we -- every situation is a bit different.

But at the end of the day, we are a bigger organization with a stronger balance sheet than we were in the early '90s.

So that probably means less -- less leverage in a deal.

But we really wouldn't rule it out if it made sense on a given situation.

Your next question comes from David Haas with Fox-Pitt.

Hi, there.

Just a quick question on hybrid assets.

It looks like the income series had somewhat of a lower inflow in December.

I was wondering if there was anything that was sort of an anomaly there?

And if you can give us a little bit of color on what things look like into January.

And then I have a follow-up after that.

Yes, I did mention that the fund did have a dividend reduction, which I think will have an impact on that fund and some of the major holdings, which it has in utilities, have underperformed for a period here.

So that's hurting the short-term performance, but, again, very, very popular core fund for us.

And we're still very optimistic about the flows there.

Okay.

And then just a question on where we are in the rate environment and what -- how that would effect your capital management?

Thinking about $1.5 billion of debt or so and this repatriated cash, and I understand that debt can be paid down within the cash repatriated, can you take us through your thought process around your level of leverage right now in light of what's going to likely occur in September?

Yes, David.

One of the things that I can tell you also is that we had the -- we have the liquid yield option notes, as you know.

And they-- the holders were able to convert through December 31st because of the pricing mechanisms.

And through December 31st, about 55% of those holders converted their debt to equity.

So that takes care of a big piece of the debt on the balance sheet.

Also, those same triggers kicked in again.

And so the holders are still able to convert to stock through March 31st.

Then following that, in May of 2006, lots of opportunities happen.

The holders can put the bonds to us, which we could pay off in cash or shares, or we can call the bonds.

So there's a -- a lot of movement around that particular number.

And then most of the rest of the debt is due in '08.

So we're going to have to wait and see what happens between now and March with the Alliance holders, because that's beyond our control.

And then see where we stand, going into the May timeframe there.

Okay, great.

And just one final question on -- and I hate to get back to the margin issue, but if I do just look at last year's comp as a percentage of investment advisory fees, you were at a markedly higher level than you are now.

We've got two quarters in a row where it's around 32% versus the 35%.

Can you give us a little bit more color on whether this is really a new range?

Or what the process is around accruing for comps throughout the year?

Well, no real change in philosophy.

We continue to tie compensation to how well the Company does and how well the individuals do.

Again, we had -- the strong effective fee rate helps that a lot.

So we -- it's something we look at continuously, quarter-by-quarter and it's hard to say.

Right now, it's been good for the last two quarters.

If the mix of assets changes a little, we might -- that number might tack back up.

So it's hard to predict.

We just-- we're not looking to manage it to a range.

We're looking to do what we need to do to keep the right people on board and think about it in the long-term sense.

Okay, thank you.

Sure thing.

At this time, there are no further questions.

I would like to turn the call back over to management for closing remarks.

Well, thank you, everyone, for participating on the call today, and we look forward to speaking next quarter.

Thanks.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation. [OPERATOR INSTRUCTIONS]