富蘭克林資源 (BEN) 2007 Q1 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended December 31, 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 Incorporated, 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 section of Franklin's most recent Form 10-K and 10-Q filing.

I will now turn the conference over to Mr. Greg Johnson, CEO.

Please go ahead, sir.

Hello and good afternoon.

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

And joining me today is Ken Lewis, our CFO.

We're very pleased with the quarterly results that we announced this morning.

And on the back of very strong equity markets, we had increased net flows as well as an increase in earnings for the quarter.

Looking at the AUM, it hit an all new high at $552.9 billion, which was up 8% from the prior quarter.

Looking at the assets and some of the shifts, as you'd expect, we had a slight shift towards equities which increased from 59 to 60% of our total assets, and fixed income decreased from 22 to 21% of our assets.

Franklin ended the quarter at $215.8 billion, which was up 7.2%.

Templeton entered the quarter at 211.6, up from 191.6, and mutual series increased 12.7% from 58.9 to $66.4 billion.

Looking at the flows, we are pleased to see the net flow number increase to $10 billion for the quarter, which is up from 2.4 in the prior quarter.

And we also had market appreciation during the quarter of $36.3 billion.

It's our 24th consecutive quarter with positive net sales and actually our second best quarter in terms of net flows, and we are pleased to see the organic growth rate increase to 7.8% for the firm.

Looking at some of the net sales by region, U.S. gross sales were up 16%, redemptions were down 8.5 and net sales were up 400% from 1.1 to $5.6 billion.

Sales outside of the U.S. increased 35% to $15.9 billion from 11.8.

And net for non-U.S. sales were $4.4 billion versus 1.3 in the prior quarter.

Franklin Income Fund continued to be our top seller with $2.5 billion in net sales and that's the primary contributor to the U.S. flows.

Outside of the U.S., we were pleased to see that the European sales were much stronger this quarter.

And in particular, our SICAV global bond fund had net sales of close to $700 million.

We did have one large institutional international global equity mandate from an existing Middle East client, which funded $2.3 billion during the quarter.

Looking at some of the net sales by channel, retail sales were up 25% to $26.9 billion, or a net retail for $9 billion, up from $3.6 billion in the prior quarter.

And institutional, which had outflows in the prior quarter of $1.2 billion, had inflows of $900 million.

We did continue to see interest in the global fixed area, and had many mandates, a couple to mention in the global credit fixed income and emerging market debt.

And we are pleased to have a final closing of a European private equity real estate fund to funds during the quarter as well, which was $273 million.

The net sales by objective, equity led the way, as you would expect, during the quarter, with a rebound in net flows from a negative $2.1 billion in the prior quarter, to a positive $4.1 billion at an increase of 38% in equity gross sales.

Hybrid was also very strong, up 27%, and on a net basis, up from $2.4 billion to $3.5 billion, again on the back of the Franklin Income Fund.

Fixed income overall increased 41%, net flows from $1.7 billion to $2.4 billion.

Looking at global equity, within the equity numbers, net sales of $3.3 billion versus outflows of $2.3 billion, and mutual discovery still with very strong sales increasing to $523 million in net sales.

And as I previously mentioned, that global equity number included the $2.3 billion from the existing, from an existing client.

Hybrid, we're up 46%, again on the Franklin Income Fund.

And taxable fixed net sales were up 19%.

And the Global Bond Fund continues to be very strong.

On the tax-free side, net sales were $500 million versus $100 million in the prior quarter.

Turning to investment performance, we are pleased to see that many of the numbers continued to improve.

Actually all of our major asset categories improved their one-year relative performance numbers, with the most dramatic increase in the taxable fixed, which went from 35% of our assets to 79% in the one-year comparisons versus the prior year.

Some other comparisons of note, within the domestic equity we saw our 10-year number improve from the prior year, from 77% of assets to 87%, and in the global international equity, we saw the three-year number increase from 58% to 70%, but the five-year number did decrease from 99% of assets in the top two Lipper quartiles, down to 77%.

But overall, very consistent strong long-term performance, with 81% of Franklin Templeton's long-term mutual fund assets in the top two quartiles for the three-year period, 87% for the five, and 94% for the 10-year period.

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

Thank you, Greg.

And hello, everyone.

We are very happy with the quarter, as Greg mentioned, and I'm pleased to see the financials reflect benefits realized from initiatives launched in prior periods, and validating our strategy of disciplined cost management.

Earnings per share for the quarter was $1.67, an increase of 12% over the prior quarter, and 38% year-over-year.

Operating income ended at $508 million, an increase of 19% over the last quarter, and 26% compared with the first quarter of 2005.

Net income increased almost 12% over the last quarter, and 34% year-over-year, ending the quarter at $426.8 million.

I'll touch upon some of the highlights in the individual line items, starting with operating revenues which were up 10% quarter-over-quarter, and almost 21% year-over-year.

The simple monthly average assets under management increased 7% over the quarter.

Investment management fees increased at a rate of 9%, slightly higher than the average AUM increase.

The annualized effective fee rate increased to 62.4 basis points from 61.1 basis points last quarter, and there are items in both quarters that skew the comparison.

If we normalize both quarters, removing nonrecurring items which were not significant, we're looking at effective fee rates of 61.0% in the first quarter compared to 60.7 basis points in quarter four.

And that is in line with what we saw in the assets under management shift to equity.

As Greg mentioned, sales were strong.

We see that reflected in the underwriting distribution fee line, which increased 14%.

The underwriting distribution margin was 6.2%, in the range with our expectations.

We maintained our cost discipline during the quarter and that shows in the financial results.

Operating expenses increased less than 6%.

Compensation was in line with our expectations.

As I mentioned last quarter, merit increases were effective the first of December.

Our net increase in head count during the quarter was 229.

Over 90% of that growth was experienced in India.

We opened -- we had the grand opening of our Hyderabad campus in India, that Greg attended on Tuesday.

The new facility has the capacity to accommodate approximately 1800 employees.

IT and occupancy expenses decreased 6.7%.

Independent contractors that drove our increase in spend last quarter were lower this quarter.

In addition, lower occupancy and equipment expenses contributed to the decrease.

We will continue to invest in technology to improve our efficiencies and service capabilities.

Advertising and promotion expenses was down sharply, and that's consistent with seasonal patterns we've seen in previous years.

We expect spending to increase incrementally in the same fashion as years past.

As a point of reference, our average spending in advertising and promotion for the prior three quarters was around $42 million.

A few words on other income, which has been an area of interest in the past.

It grew 45%, adding over $95 million to earnings in the quarter.

And if you're interested, I'd refer you to our 10-K footnote 18, where we provide details regarding the components of other income.

One of the bigger increases in the line was sponsored investment products that grew by $16 million, quarter-over-quarter.

And that's consistent with strong market returns.

But I do want to point out that over half of that increase is attributable to one product that invests in China and had a fantastic quarter.

Investment and other income experienced strong growth, increasing $13 million or 23% quarter-over-quarter.

About half of that increase related to realized gains on investment sales.

Our effective tax rate increased to 29.3% due to a couple of one-time items in the quarter.

But we are also experiencing upward pressure and that's the result of the success that Greg was talking about earlier, as we're seeing a shift to a larger proportion of earnings being generated in the U.S.

During the quarter we purchased 700,000 shares.

We are acutely aware of accumulating cash position and have placed a high priority on capital management.

In terms of specifics, the best thing that I can point to is our history.

Over the past two years, we've returned approximately three-quarters of the current earnings to shareholders in terms of dividends or share repurchase.

So in closing, we're very happy the results for the quarter.

We continue to be disciplined in our expense management, our prioritization of initiatives and capital management, all the things that have made us successful in the past.

With that, I will turn it back to Greg for some business highlights.

Thank you, Ken.

I'll just touch on a couple of areas quickly and then open it up for your questions.

Obviously the net flow was the main highlight, net flows for the quarter.

In particular, the broker dealer channel was very strong.

The Franklin Templeton Founders Funds, which was the fund to funds, the Founders Allocation Fund passed $11 billion in assets, and that was initially offered in August of '03.

Mutual Series continues to be well received.

We just finished a campaign there and have many new advisers representing that fund group.

The SICAV products, which we distribute globally, crossed $50 billion, which was up from $10 billion in '02, or $37 billion a year ago.

We also announced a global expansion of our Franklin Templeton Academy, which has been a very successful training program for financial advisers to date.

More than 18,000 advisers have attended academy workshops.

We initially kicked that off in Asia and used it in Europe and now we're going to expand it here in the states.

Some other highlights, Canada, we had the very successful Quotential program and we will now offer that through a new division of the Company known as the Franklin Templeton Managed Investment Solutions Group, with approximately $22 billion in assets.

As I mentioned earlier, we're pleased to see the continued interest on the -- with our institutional fixed income groups, and received two $150 million mandates, one in global credit fixed income, and another one, emerging markets debt.

We also secured and haven't funded yet two locally managed Indian equity mandates from two large U.S. endowment funds, and again, I think that speaks to the success of our local groups and the ability through the global platform to leverage institutional clients around the globe, in particular the states for those two.

We're also pleased that the institutional fixed income group continues to get consultant upgrades and global aggregate, as well as global bond plus, which we think continues to put us in a very strong position going forward.

So I think overall, as you would expect, with the kind of global markets that we've had, we're very pleased with the results for the quarter, both from a net flow and an earnings standpoint.

We'd like to now open it up for your questions.

Thank you.

(Operator Instructions).

And our first question comes from the line of Daniel Goldberg with Bear Stearns.

Yes, good afternoon.

Hello.

On the capital management, Ken, you touched upon it briefly.

But can you just talk a little bit more?

You're clearly continuing to buy back the stock.

I guess, one, what would be your thoughts as the stock is $120 or so?

And then to also just refresh our memory in terms of what you're thinking regarding acquisitions.

Right.

Well we are always, we're going to continue our strategy of being -- of buying our shares opportunistically.

And on the acquisition front, we're no strangers to acquisitions.

But we also think that in some areas, organic growth is the way to go.

So we'll just continue to invest in the business where it's most accretive to shareholders, really no change from prior quarters.

Okay.

And in terms of the head count you mentioned, it jumped I think about 3% in the quarter.

You said most of that was in India.

I guess I would expect that to offset some reductions in the U.S., or kind of replacing people in India, or how should we think about that, or should we expect the head count to continue grow at such rates?

It's, we're funding new growth and new opportunities through India.

And I think the head count growth is in line with our expectations for the quarter.

Okay.

But looking forward, should we expect that to continue to grow at that type of a rate?

Yes, as the business grows, it is a function of business growth, really.

As the business grows, what we're looking to do is to fund our growth in a scalable way, in low-cost centers like India.

Okay.

And then just lastly, it seemed like the billable shareholder accounts rose, I think, about 10% sequentially to $19.5 million.

Just any thoughts there?

Right.

We disclosed, we kind of -- that was -- we're expecting that, and we disclosed that in our 10-K.

We recalculated some beneficial accounts under Omnibus, and so shareholder servicing fees increased about 5% for the quarter and that recalculation accounted for about 2% of that change.

Okay.

Thank you.

Our next question comes from the line of Jeff Hopson with A.G. Edwards.

Okay, thanks.

Greg, it sounds like the institutional pipeline, at least on the fixed income side, remains very strong.

What about on the equity side?

Can you comment on that?

Not that we expect $2.3 billion every quarter, but any comments would be great.

And then on the tax rate, you mentioned some one-time items.

How much were those?

And any guidance on the tax rate in the near term that we might expect?

Well, I'll address the first one, Jeff, on the institutional pipeline.

And I think while I speak about the fixed income because I think it's relatively new and somewhat exciting for us to be competitive in that, in the institutional marketplace, the pipeline for global equities for Templeton continues to be very strong and we hope to get those kind of mandates every quarter.

But those are somewhat one-off.

But I think we're still very, very optimistic and the Templeton numbers are very competitive in that space.

So that's probably still our biggest opportunity, as far as getting near-term assets versus the fixed income side.

Okay.

And on the taxes, the nonrecurring items accounted for about a percentage of the increase.

So going forward, you're looking at a rate about 28% plus or minus 50 basis points.

Okay, great.

Thanks.

Our next question comes from the line of Ken Worthington with J.P. Morgan.

Hi, good afternoon.

Investment income and sponsor investment gains now represent about 20% of operating income.

At what point do these gains really become excessive and at what point do you start to be more aggressive really managing those?

And I understand in your prepared remarks you said you are focusing on that.

But as you look at your balance sheet, the current assets grew another 10% sequentially.

Do you feel like you need to be more aggressive than you are right now?

And is that something that we can expect in coming quarters?

I think in any given quarter, you're going to see variations in share buybacks and our uses of cash.

Again, not to reiterate, but if you look back on not just the last two years, but if you go back three years, we returned over 100% of earnings.

So in terms of being more or less aggressive, I think we're going to maintain our philosophy as we have in the past.

And I think that's about all I can say.

Okay, great.

And then, given, I guess, very -- well, very solid performance or strong performance in the Franklin Equity Funds and the Mutual Series equity funds, I would have expected sales to be better overall in your domestic equity funds.

Why aren't domestic equity fund sales, I guess, in aggregate not better?

And is there anything you see or anything you can do to maybe improve these sales?

Yeah, I think that's a fair observation.

And it's been relatively difficult for domestic equity sales for many firms.

I think mutual clearly for us has had strong momentum, and year-over-year was up somewhere around 70%.

So we have seen a strong pickup there.

And even for the quarter, we saw a pickup.

But I think as a general statement, global equity has been taking a lot of the share away.

And there's just a lot of competition on the domestic side.

So we'll keep plugging away with the story and eventually that will turn.

But I think I would share that view that it has been somewhat difficult.

Is this, do you think this is a marketing issue or is it a distribution issue?

Is there changes that need to be made among the wholesaling ranks?

Do you need to get the name out more?

I just -- it seems like things should be better and I don't know.

Should we expect a change?

I mean, I think if you look at in particular for Franklin, you have the Small-Mid Growth Fund which has been in net redemptions and the performance has been better there.

And that's been a big driver for us on our domestic flows.

But I think we're very pleased with how mutual is going and that's picked up quite a bit.

I mean, we have not -- the domestic flows for equities have not been that large for us.

So it has been something we've been focusing on quite a bit and it was a big campaign for the Company to get the mutual story out there.

And the other one is with the Franklin Value Group, has done extremely well there.

But for us, still the growth side, although for the industry, maybe not big in terms of net flows, but still big in terms of gross numbers and something that we think that's an area where we need to be more competitive and still have an opportunity to grow.

But I think as far as mutual goes and our other value funds, they've been doing very well.

Great.

Thank you very much.

Our next question comes from the line of Cynthia Mayer with Merrill Lynch.

Hi, good afternoon.

Hello.

Cynthia.

On the comp, sounds like a month of merit raises was in there.

Can you tell us what that was equal to so we could get a sense of how that might move this quarter?

I don't have that figure handy.

But you're right, it was one month so you're going to have a full quarter of that next quarter.

Some uptick for taxes.

I'm sorry, we'll have two months of merit raises plus payroll taxes, you said?

You'll have the full quarter, next quarter.

You only have one month this quarter.

Right, right.

Okay.

And the impact of the additional shareholder accounts on shareholder servicing fees, is that all in at this point?

Yep, that's all in starting the first day of the quarter.

Okay.

And on the $2.3 billion mandate, is that done at a reduced fee when it's something of that size?

Well, it would fall on the schedule, but it's still a global equity mandate, so it's a better fee than your typical equity or fixed income.

But lower than your average, certainly.

Right.

Okay.

And let's see.

I guess since you just opened your India campus, can you let us know how many people work there, how many could in the future, what the capacity is and the main functions they're doing there?

Roughly, it's 1,000 that are there now.

There's capacity for 1800.

And there's growth capacity after that.

We have additional land there.

And they're really doing everything except that we're not doing any direct phone service, but just about every other type of operation that can go there, accounting, legal, technology, everything today is represented there.

Okay.

And last question, you mentioned a couple of things which have been won but not yet funded.

How big are those?

The ones with the -- the India ones are relatively small.

And I don't -- we have not announced but that would -- it's not a significant number.

But I think it is significant, the -- it's very prestigious institutions and I think it will, hopefully, bode well for future mandates there.

Are there other things that you've won and not yet funded which you can give us a sense of?

Nothing.

Nothing significant.

We try not to do that.

Right, I know.

I thought I'd try anyway.

Thank you.

Thanks.

Our next question comes from the line of Marc Irizarry with Goldman Sachs.

Oh, great.

Thanks, guys.

Nice quarter.

Thank you.

A question if you look at the level of flows outside of, kind of, domestic equity, hybrid and global, it's pretty solid growth rate, if you will.

What should we expect?

And I know this might be a little bit hard to predict, but what's a good level of, kind of, organic growth to assume for your business?

Thanks.

Well, I think that's always hard.

I mean, you're coming off such a strong quarter with a lot of momentum.

I think it's just as I mentioned, you want to make sure that you back out the one significant international mandate before you're kind of looking at what is a more meaningful organic rate.

I mean, hopefully we can replace that, but I wouldn't, as far as an ongoing number, to get a sense of that, that is somewhat one-off.

So I -- to me, it really depends on what the markets do in the short run, but I think if you back that out, that's probably a reasonable and a strong market or reasonable rate.

Great.

And I know you don't target an operating margin necessarily, Greg, for the business, but how -- can you help me think a little bit about the leverage in the business?

I mean you showed some margin expansion.

I mean, is this kind of, is it business given, kind of, investments that you've made historically, or you are about to hit kind of a new run rate margin on a go-forward basis?

Or is this kind of a stable rate to kind of assume?

Thanks.

I mean, I'll maybe take a crack at that and have Ken add his thoughts to me.

One, as we've said before, I mean, a margin is a nice thing to look at, but it's not how we operate the business.

And I think we try to look at every cost and understand the returns when we're reinvesting in the business, and wherever that ends up, we're going to do our best.

So I think there's always, if assets appreciate, and you have $36 billion in a quarter, you have that -- any, that kind of appreciation, I mean, some of that will flow in terms of margin improvement.

But at the end of the day, it's still a very competitive marketplace and compensation pressures are there in these kind of markets and only get greater in these kind of markets.

So that's -- there's pressure there.

There's pressure on the distribution side as well.

So we'll do our best but I think as a general statement, if assets rise from appreciation, you should get some benefit out of that every time that happens.

Ken?

Do you have anything to add?

I think we mentioned it before.

We look at the margins, as margin expenses, I should say, as more of a step function.

Sometimes when you have a big quarter like this, you'll see that -- we'll see some of the expenses pick up after that quarter.

And as I mentioned earlier, we're going to continue our investment in technology and we expect to continue spending in advertising and promotion.

Great.

Thanks a lot.

Our final question comes from the line of Michael Carrier with UBS.

Thanks.

Just a question on the international front.

You guys announced the agreement with China Life, and then you had a few other announcements, one in Greece.

I'm just wondering, how significant do you see these?

Is it more short-term, long-term?

And then are you actively searching in all the different international markets for more kind of distribution partners?

I think the China Life is something probably worthwhile just to spend a minute on.

And it for us, it doesn't really change our strategy, which is to build our own investment management firm for the local market in China.

We have a joint venture that's doing just that with Sealand Securities.

We had some relationships with China Life, which allowed us to have some discussions.

They wanted to set up an asset management firm outside of China for non [remindy] assets, and we had an opportunity to partner up with them and manage some of the China Life assets there.

And we view it as strategic in the sense of, for one, it raises our profile in a very important region with the largest insurance company.

Whether or not it has distribution possibilities for us with 640,000 insurance reps, that's down the road.

But I think it's a premiere company in China and one that doesn't really change any of our distribution efforts in China or outside of China from a competitive standpoint.

And we see that as really a long-term win/win in terms of our profile in that market.

Our goal is always to, in some markets you have to do joint ventures, and another example, in Brazil where we bought the remaining portion from our Bradesco partner there.

We like to control our destiny and be the majority owners and that's really our strategy and that hasn't changed.

Okay.

And then just in the quarter, were there, in the investment management kind of margin, were there much in terms of performance fees?

There was some, not much.

There was roughly, just looking it up there, $17 million in the quarter.

Okay.

And then just a final question.

On -- I know in certain quarters in the past, you've had some pressure on the underwriting distribution margin when you kind of launch new products.

Any of the products that you are mentioning in your past remarks, anything coming up in the next couple quarters that you'd expect that kind of pressure, still in that 6% to 8% range?

I think that we see a gradual trend down. 6% is a good approximation but there's nothing that we see that we know of today that would cause that to change dramatically one way or the other.

Okay.

Alright, thanks a lot.

There are no further questions at this time.

Do you have any closing remarks?

Yes.

I just want to thank everybody for attending today, and say that obviously we're very pleased with the results and look forward to speaking to you next quarter.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.