富蘭克林資源 (BEN) 2006 Q4 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended September 30, 2006.

Please note that the financial results to be discussed in this conference call are preliminary.

Statements made in this conference call regarding Franklin Resources, Inc. 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 actual results to differ materially from any future results expressed or implied by such forward-looking statements.

These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

Good afternoon.

My name is Lynn and I will be your conference operator today.

At this time I would like to welcome everyone to Franklin Templeton Investments quarterly 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 session. (OPERATOR INSTRUCTIONS).

Thank you.

I'll now turn the call over to Mr. Greg Johnson.

Sir, you may begin your conference.

Thank you, and good afternoon, everyone.

This is Greg Johnson, CEO of Franklin Resources, and joining me today is Ken Lewis, our new CFO.

I am going to discuss the asset flows, investment performance and the business highlights of the quarter, and Ken is going to focus on the financial results.

For those of you that are not familiar with Ken, he has been with our organization for 17 years.

He has worked in many different areas, including finance, distribution, risk management and treasury.

And he has also opened many of our offices around the globe.

And with that, I will introduce and turn it over to Ken.

Sorry -- I am going to start with AUM, okay.

The AUM for the quarter was up just 4% from $490 to $511, but the more important number, the average -- quarterly average AUM was up just 1%.

So most of the performance and appreciation occurred towards the end of the quarter.

We were pleased to see assets crossing $500 billion.

And the mix of assets as you would expect with the strength of the Franklin Income Fund, we saw a higher percentage in hybrid, moving from 17.3% to 17.7% and equity assets decreasing from $59.5 to $59.1.

Overall, the various brands continue to be very attractive across many different channels, and year to year the Templeton assets were up 15.6%, Franklin up right around 8%, and mutual series up just over 31% and crossed the $60 billion mark during the quarter.

Looking at some of the asset fund flows, the quarterly net sales increased from $1.4 to $2.4 and we had appreciation of $19.3.

It is the 23rd consecutive quarter with positive sales.

But again, I think there are some important onetime events that we need to call out.

As we reported last quarter, the Fiduciary Global Advisors small cap team was lifted out of the organization and that resulted in a loss of some institutional accounts that totaled $2.3 billion for the quarter.

And if you also recall last quarter, we redeemed $700 million for repurchase activities.

So if you really look at more of a normalized number, more of an operating type flow number, and remove those two events, you would have flows of about $4.7 billion this quarter versus $2.1 last quarter.

Gross sales for the year were also a record at $128.8 billion, up 8% but unfortunately redemptions were also up 35% to $116 billion, and net flows overall down 66% from the prior year's $36 billion.

Looking at the flow detail by region, U.S. net sales were positive net inflows of $1.1 billion versus $800 million in outflows in the prior quarter.

Sales outside of the U.S. $1.3 billion net inflows versus $2.2 for the prior quarter.

In the U.S., gross sales were down 3% but redemptions were down 12% and the Franklin Income Fund continues to be our top seller.

International retail -- year-to-date sales are up about 25% but the fourth quarter was down versus the third quarter, and we get have some unusual events in the third quarter where we had the launch of the India Fund, which was somewhat substantial in the prior quarter.

But overall, European distribution activity was relatively sluggish with the summer months of August and sales were off about 30% in August from the July levels.

We are also seeing a somewhat soft market in Germany as well.

Assets in Taiwan crossed $10 billion during the quarter and also hit a record of over $5 billion in India.

Looking at some of the flow detail by the various channels -- retail, $3.6 billion in net inflows versus $3.4 in the prior quarter.

And institutional, $1.2 billion net outflows versus $2.1 billion net outflows in the prior quarter.

But again, I would highlight the $2.3 billion in various small cap accounts that were at very low fees -- some of them had performance fees, some of them had fees at very low levels, below the market, so the net-net number on revenues will not be -- will not have much of an impact.

The strengths on the retail side, as I mentioned, the income fund up over 90% from the prior quarter, so the performance flip that we had during the year -- that fund has done very well and is again back up in the top decile.

Templeton Growth Fund up 84% from the prior quarter.

And overall Mutual Series flows up over 60% from last year's levels.

And we continue to see strong interest in the Templeton Global Bond Fund.

On the weakness side in the U.S., retail channel, would be the Templeton Foreign Fund.

We are continuing to see pressure there, with outflows of $1.1 billion versus $465 million during the quarter.

And again, most of these redemptions due to increased plan level redemptions from the 401(k) business that seemed to spike in September.

Institutional overall gross down 7% and redemptions down 18%.

As we mentioned on the last call that Darby closed a $600 million -- Korea Emerging Infrastructure Fund.

And we also during the quarter had an additional global balance mandate from a Taiwan pension fund of $200 million.

But again, the $2.3 billion affected the overall institutional flows with those small-cap accounts going out during the quarter.

Looking at the flows by objective, the overall equity net sales down $2.1 or $2.1 billion in net redemptions versus $900 million in the prior quarter.

Looking at it between domestic and global, domestic actually turned around from a negative $500 million in the prior quarter to a plus $200 million but global equity declined from a $400 million net redemption number to a $2.3.

But again in that $2.3 number -- there is $2.3 billion in those global small-cap institutional accounts.

And the hybrid sales were up 22% and Franklin income had $1.7 billion in net sales versus just over $900 million in the prior quarter.

We continue to see a lot of interest on the fixed-income side.

And we're pleased to see that the quarterly net sales increased from $1.1 to $1.7 billion.

Tax free's were relatively flat at $100 million in net inflows.

The taxable increased from $1 billion in net inflows to $1.6.

And we're pleased that a state pension plan mandate was funded during the quarter in core plus for $300 million.

So we are continuing to see strong interest with the fixed-income group and the strength of their performance numbers.

I will now turn it over -- no, I'm not going to turn it over yet.

I'm going to start with -- sorry about that -- with investment performance, and -- before we go to Ken.

In investment performance, we're pleased to see some positive development there.

I think the one area that has been difficult this year has been some of the Templeton short-term numbers.

And we had a very strong relative performance quarter.

And you can see in the one-year numbers for international equity that we in the prior quarter 16% of our funds were in the top two quartiles, and just in the fourth quarter ending 9/30, 58% of those assets.

So you can see that even in a three-month period, there has been a dramatic improvement there.

So overall for the Company, better one-year numbers versus where we were last quarter and still very consistent long-term results.

And now, I will finally turn it over to Ken.

Ken, take it away.

Thanks, Greg.

Hello, everyone.

We are happy to report net income for the quarter of $381.7 million; that is a 2.8% increase quarter-over-quarter.

This was the end of our fiscal year.

We ended the year with net income just shy of $1.3 billion mark.

And that is a change over the prior year of almost 20%.

So with that as background, I will touch on some of the highlights for the quarter, starting with revenue.

Investment management fees were down 2.7%.

The overall decrease from the third quarter was due to the additional $34 million of performance fees earned last quarter and I think we discussed that on the call.

The effective fee rate was 61.1 basis points.

Underwriting distribution margin came in at around 6.9% and that was a little higher than we expected but in the ballpark.

Shareholder servicing fees were down from the prior quarter.

In July, we completed an annual purge of 1.6 million U.S. closed accounts.

Moving down to expenses, compensation and benefits was up slightly this quarter.

The increase was due to the variable component of compensation as well as headcount.

Headcount was up approximately 165 people, and approximately 120 of those people were in low-cost centers.

I just wanted to make a reminder that the usual seasonal upticks in this expense item occur in the next two quarters due -- because that is the beginning of our fiscal year, so we have merit.

And then in quarter two, we have another uptick due to payroll taxes and the full quarter of merit increases.

Increased our IT and occupancy spending this quarter, primarily due to investment in new technologies to increase service levels and efficiencies.

I would like to point out that most of the incremental dollars that are in that change went to independent contractors.

So that is something we feel very confident we could turn off if there's a change in the operating environment.

Advertising and promotion expenses was up almost 18% this quarter.

We increased Web, print, TV advertising and promotion spending as we saw opportunities to spend effectively, promoting both the overall brand but also sub brands such as Mutual Series.

Other income and expenses had a volatile quarter.

Most of that volatility was concentrated in the sponsored investment product gains line.

That increased $22.6 million.

And that is just the reflection of the market -- that there are funds that we have invested investments in that we consolidate.

The tax rate, the effective tax rate for the quarter was 22.5%.

The lower rate reflects distinct onetime credits.

Without those onetime credits, the effective tax would have been around 25.6% for the quarter.

We did complete the repatriation of the $2.125 billion this quarter.

And a final note I would like to make is that we repurchased approximately 577,000 shares this quarter.

So that concludes my remarks.

On the business highlights for U.S. retail, we're pleased to see that the growth for net U.S. retail trend was in the right direction and the highest level that we've seen since the fourth quarter of '05.

As I mentioned, Mutual Series, it has been a focus for us here in the last year on the marketing side and we feel like the number of reps and advisers out there has never been higher and we're up 60% in inflows there.

As far as some new launches for funds on the retirement side, a new Franklin Templeton retirement target series.

And a BRIC fund for U.S. investors following up the success of the BRIC fund reaching $1 billion in assets for those non-U.S. investors.

On the international retail side, we completed in acquisition of our Brazil joint venture partner and plan to expand our operations to include locally managed funds for that market.

In Korea, we were pleased to see that insurance agents are now able to sell mutual funds and we have developed strong relations in this channel, which should allow us quick leverage as that opens up.

And in India, regulators now allow capital protection oriented funds and we are the first to gain approval for such a fund that will launch November 1st.

On the institutional side, we continue to see strong demand for global equity strategies and continue to get in front of a lot of clients and feel that a strong pipeline exists there.

The demand for alternative investments still remains high.

Significant interest in our real estate fund to funds, $300 million in commitments for our European property fund, which final close is in October.

And we'll launch an Asian property fund in early '07.

We have also seen continued demand for other high [alpha] strategies, and raised $1.2 billion in new assets this year from institutional investors for our emerging markets debt strategy.

And overall, we continue to be pleased with the interest across all of our fixed-income capabilities in global bond, global credit, emerging market debt, U.S. core plus and U.S. high yield strategies.

And now, we would like to open it up for questions and thank you again for attending the call this quarter.

(OPERATOR INSTRUCTIONS).

Daniel Goldberg, Bear, Stearns.

You did mention on the global equity side, the key driver there of I guess the net outflows for the quarter.

Was there anything else in there that we should be aware of in terms of looking forward now that you have had two quarters of I guess of net outflows?

Should we assume no lumpiness, there should be a return to positive flows?

Well, I think clearly that -- the Templeton Foreign Fund is different than the global small cap situation, where clearly that was a lumpy onetime event.

But I think overall, the global markets have been so strong and the flows -- if we continue to see this kind of strength in the global equity markets, I would expect to see positive flows there.

And then the hybrid, it looks like the gross sales was really the driver there of the increased net flows.

Anything else there you can provide in terms of why that was up -- probably the highest in about three or four quarters?

I think it was just the turnaround in the relative numbers.

There was a slight blip in the short-term performance, and that turned around quickly with the markets and got back to its top decile performance level.

So I think that's really what created that momentum last quarter.

And can you just update us again on the cash usage?

Obviously we are aggressively buying back stock during the quarter.

With the stock up, is that something you will continue to do?

And then on the acquisition front, an update there would be helpful.

We will continue our policy of being opportunistic in our share repurchase.

It continues to be an area of focus for us, and I think that is evidenced by the historical track record.

If you look back over the year, we have returned 87.4% of earnings last year to shareholders in terms of share repurchase and dividend payout ratio.

I think we will continue to focus on that.

And then on the M&A activity, it is really the same answer that we are out there looking at everything in the marketplace and evaluating where we think we can add shareholder value and we will continue to do that.

But there's no plans -- no definitive plans that we would announce other than really that policy.

And then I guess just lastly, Ken, on the headcount, you said 120 of those were -- I didn't catch exactly what you said, due to --?

Yes, low-cost centers, so predominantly India.

And is that a trend that you would expect to continue that you would be adding people?

Yes.

Ken Worthington, JPMorgan.

As part of the repatriation, you brought back $2.1.

What portion of those dollars if any has been allocated or spent on eligible items to date?

Ken, we haven't disclosed the plan, but I can say this about the plan -- if you look at the tax law and [what allowed] the uses, our plan is in line with that.

But we haven't disclosed the specific uses and plan.

But even beyond, usage, just amounts -- have you started to allocate yet?

We have started to use the money in accordance with the plan, absolutely.

And we would expect to be done with that in about four years or so.

And can you just -- how much has been allocated thus far or is that something you're not going to share yet?

We're not ready to share that yet.

And then I guess second, on the $65.7 million of other income this quarter, can you help us kind of characterize those gains?

What portion is realized versus unrealized versus FIN 46.

I guess what I'm trying to get at, what is really paper gains versus actual dollar gains?

And was that actually influenced at all by the repatriation of the remainder of the $2.1 billion this quarter?

Well, the other income line of $65.7 includes sponsored investment product gains and to your characterization, I would call that paper -- paper gains.

Investment in other income, that reflects income on the corporate portfolio.

That also has things in there like minority interest and equity in affiliates.

And the variance there -- a lot of it is -- you can almost say that the last quarter was maybe -- [crept] a little bit due to the minority interest expense related to those performance fees that we talked about last quarter.

Okay, so the vast majority of that is really paper gains.

I guess you were saying?

Well, of the 14.

But in the 57 -- there is a fair amount in there and I don't really have the breakdown -- but there's a fair amount in there that is real money on the portfolio.

Cynthia Mayer, Merrill Lynch.

How do you think about the capacity for the Mutual Series products?

Are there any that would be capacity constrained if they even say doubled?

I think that is always an issue and one that they have the authority to tell us when that happens.

And they really don't have a small-cap bias in any other fund, so I think that helps from capacity.

And many of the funds are run in a similar way, so there's a lot of similar holdings across the funds.

But we haven't -- that really has not come up.

They do have a percentage in global stocks, and they are continuing to expand their reach, which had been primarily in Europe now to building out Asia.

So they are really opening up new markets that they haven't been exposed to, and they can do that with the core funds because they invest up to a quarter of their assets in global equities.

And just a couple of questions on the cost side.

I don't know if you mentioned the information systems in tech uptick.

I understand it's consultants, it can be turned off.

But for now, should we just assume it continues?

I think we are going to continue to invest in technology.

So, yes.

And what about advertising?

I know you have different seasonal patterns for that.

That's right.

And if you look back, there's typically a little bit of a drop-off in the first quarter of our fiscal year.

I wouldn't think that this would be any different this year.

And with some of the performance coming back, would that influence comp at all?

I think kind of the size of the business -- it's a lot bigger than it was last year.

So that of course will impact comp.

And as I'd mentioned, we have that normal seasonal uptick in quarter one.

Merit increases are affected for one month of the year -- one month of the quarter, and then you get the full effect the following year plus some payroll taxes.

And last question, just could you elaborate a little bit, you alluded to softness in Germany.

Does that have any impact or is it so small that it is really just a bit of color you were providing?

Well, it is one of our larger markets, so it does have impact, and the Templeton growth funds have been a top seller in that market.

And there has just been, for some reason, more of a conservative kind of bent with the retail investor there lately.

And how much impact that will have, it explains some of the overall decline that we have seen -- and some of the weakness overall in Europe.

That was one of the reasons that our country managers put forth.

(OPERATOR INSTRUCTIONS).

Bill Katz, Buckingham Research.

Greg, I was wondering if you could circle back and talk a little bit more about the reallocation in the 401(k) platform?

Is this a one-off account loss?

Or is this more of a building trend?

Well, the issue around specifically the Templeton Foreign Fund and that was where I cited some of the increased activity in September.

And that has been where we've seen the majority of pressure on the net outflows on the international side.

And I don't know whether or not that's going to decrease or what percentage.

It's hard to say right now.

But that's really where we've seen the majority of the redemptions coming from -- 401(k) investment-only kind of plans that the relative performance of the foreign fund makes it difficult to hold there.

Can you size how big that exposure is?

No, I really can't.

I just don't have those numbers available and we don't break that out.

And I'm just sort of curious as to the rollout of the target retirement funds.

Can you give us an update of how that's going and where you think -- what distribution channel you see the greatest leverage?

I think it is too early.

I think it's just part of the solutions-based selling -- we're seeing a lot more packaging of the existing funds for the advisers.

We have been very successful with our founding funds.

We think they are great for rollovers and IRAs and that's really addressing that trend of just retirement is getting so much more important to mutual funds that we want to have pre-packaged solutions to make the adviser's life a little bit easier.

And then just sort of one final question -- are you seeing more broadly now -- I guess get a pretty good perspective from your franchise -- any systemic change in investor risk preferences back toward growth?

Well, you see the flows the same way that I see the flows.

I think we have been waiting -- everybody has been waiting for that to happen, but there hasn't -- there may be a rotation towards larger cap stocks.

But I really haven't seen anything that would indicate there's a big shift going on to growth right now.

If there were, does that change your answer on the acquisition front?

No, I think we recognize and know it is inevitable and that will happen.

But we also feel very good about the kind of numbers that we are generating with the Franklin Equity team with those growth numbers.

And I think we are continuing to build and strengthen that platform, and we believe that organically, that is probably the best way for us to be successful in that type of investing.

And we have long histories there and it's a matter of getting that message out.

Robert Lee, KBW.

Just a couple of quick questions, could we get a little bit more color on the tax rate?

I'm assuming you had some old tax returns that weren't -- settlements under that caused that rate to come down.

And is 25.6% what we should be thinking about going forward?

We did have some credits in the quarter, and part of it is as you described, but also part of it was a change in estimate of NOL utilization; that is a one-time distinct event.

And I think going forward, we are in the ballpark -- 26% plus or minus 50 basis points.

And I'm just curious, Greg, you mentioned you've been focusing on Mutual Series and you've seen a lot of pretty strong results there.

But at the same time you have had performance come back in a lot of the Templeton products.

Just going forward, where is your marketing emphasis going to be?

Given the breadth of your products and you keep coming out with new ones, how do you actually decide where you are going to focus your wholesalers and marketing attention?

I think -- we don't -- when I talk about highlighting a campaign, it may mean you are doing some more advertising specifically, and we try to keep a very balanced approach in how we go about the presentations with advisers.

And the last thing we are going to do is jump on whatever the latest, hottest selling fund is because that is not how you build a credible, long-term relationship.

So they are out there -- Templeton is the core international story for us and continues to be.

And that really hasn't changed.

And that's the approach that we try to take with the wholesaling force.

So it's not -- nobody is sitting back, saying, this is the story you tell this month or this quarter.

We try to look and see where the bulk of the assets are and stay consistent in how we are servicing and getting that message out.

But with that said, Mutual Series is still a new story to a lot of advisers.

It has only been sold through the advice channel for really a handful of years.

And some of the strength around what they have done with discovery fund and their international funds is not well known.

So that is a message we want to take out there and really try to quantify and target as many new representatives as we can.

And that was really the idea behind that campaign.

But I agree with your point that you only have so many stories to tell out there, and it is diminishing returns.

And that is really one of the challenges we have -- is you have so many different styles and funds and products, making sure that we are getting that message out there to the right audience.

And that is one of the -- I think the hard part of the job and marketing stuff.

Mike Carrier, UBS.

I just had a quick question on the comp.

I understand the seasonal -- or not the seasonal, but the first quarter, second quarter increase.

But when you look at the performance-based comp, you guys tend to pay on performance of three-year, five-year, and that has been fairly consistent in terms of solid.

So we shouldn't see a big increase just on the performance side, should we?

Not on the performance side.

And then if I look at some of the alternative products or funds like the infrastructure fund that you announced, some of the real estate funds, can you quantify as a percentage of kind of assets what you would say is in the like the alternative category?

No, it is still relatively small.

And I think it also gets into how you -- categorize --

What you include, yes.

And they are all so different that even putting them in the same category -- I'm not sure what that means.

Okay.

And then on the foreign series fund, a lot of times, what we typically look at is just the performance relative to its Lipper peers and we can see the performance over time.

And sometimes on the international funds, they get categorized a little differently than U.S., just given the different buckets.

Just wondering is there anything in that fund that can be or has been done just on the performance side?

Or are you comfortable with how they are kind of managing the money in their strategy?

Well I think one of the drags has been the cash levels were relatively high and that is one of the reasons that a lot of the investment only and consultant-driven side sees cash positions and they really -- that is going to be a red flag.

So that has been addressed and the fund is close to being fully invested and we hope to keep it that way.

So that is really the only I think significant change.

It's still a process.

It's a bargain list.

With out Templeton invest money and the bench is as deep as ever.

So we're not very concerned that there's something fundamentally wrong or something wrong with that fund.

Marc Irizarry, Goldman Sachs.

A question on the fee realization.

I guess I'm a little surprised by the international flows, that they really haven't seemed to hit yet.

But what are the hybrid -- the foreign and the income series fees like relative to international?

And then, how would you help us think about the fee realization rate going forward here?

I think the -- it kind of goes down.

There seems to be an echo here (technical difficulty).

Let me try it again.

So the effective fee rate was 61.1.

It really hasn't changed much.

The question was what's in hybrid and obviously the global (technical difficulty) fees are higher than the hybrid fees, which are higher (technical difficulty).

So should we expect that some of these flows internationally start to come through in the next couple quarters and we will see a bit of an uptick in your fee realization?

If they are in the international funds, yes.

And then Greg, if you would, just would appreciate your thoughts on a couple of consolidation questions, I guess.

First on the fixed-income side, would love an update on how you are progressing and kind of building, taking share, if you will, on the fixed-income side of the business, on the institutional front.

And then also, do consolidations maybe play into your thinking on that side of the business, as well as maybe as far as gaining more global scale, if you will?

Well, I think we were very pleased with the progress (technical difficulty) the teams have come together very effectively working as one unit.

And performance results have been outstanding.

And we're actually getting quite a bit of traction with the consultants that started seeing some seeing wind.

So we know that you don't turn on a switch and it happens overnight.

But we are getting out there and getting the message out and getting the [feel for dollars].

And we are very optimistic next year that that's going to be a big part of our growth if we execute our plan properly.

Thanks.

Okay.

Well, thank you again, everyone, for participating on the call.

And we look forward to chatting next quarter.

Thank you.

Thank you.

This does conclude today's conference call.

You may now disconnect.