富蘭克林資源 (BEN) 2007 Q2 法說會逐字稿

Welcome to the Franklin Resources earnings conference call for the quarter ending March 31, 2007.

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 the 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 MD&A sections of Franklin's most recent form 10-K and 10-Q filings.

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.

Mr.

Johnson you may begin your conference.

Thank you, and good afternoon.

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

And joining me today is Ken Lewis, our CFO.

We're pleased to present another solid quarter with respect to asset flows, investment performance, asset growth and earnings.

First taking a look at the assets under management, we ended the quarter at $576 billion which was up 4% from the prior quarter and 17% from the prior year.

Average assets were $563 billion compared to $533 billion in the prior quarter.

Looking at the overall sales shift and the asset mix, of note was strong net sales and fixed income and our continued strong success in hybrid products.

And overall the equity assets decreased slightly from 60% of the overall assets to 59.7, and hybrid increased from 17.9 to 18.2.

Overall assets were up, as I mentioned, just over 4%.

But of note, Mutual Series assets had another record at 73.2 billion and were up over 10% quarter to quarter.

Looking at the overall asset flows, net sales were $10.9 billion, which were up just over 9% but up from the prior year's quarter at $2.6 billion net.

And as I mentioned on the last call, the last quarter's flow numbers did include one large global equity mandate of $2.3 billion.

Looking at overall sales they were up 15% for the quarter.

Redemptions were up 17%, and net sales as I mentioned were up 9%, and it was our 25th consecutive quarter with positive net sales with an overall organic growth rate of 7.9%.

Looking at the sales by region, the U.S.

was very strong, up 27% for the quarter.

Gross sales were up 17% to $25 billion.

Redemptions were up just under 14%.

For non-U.S.

net sales they decreased slightly from $4.4 billion to $3.8 billion or a 13% reduction.

The overall organic growth rates between the U.S.

and non-U.S., U.S.

6.7%, non-U.S.

12%.

Within the U.S.

gross sales were up 17% net up 27%, and some of the redemption activity that was up, some of that was due to the money funds, institutional money funds at $700 million, which relates to the stock repurchase for the quarter.

And the Franklin Income Fund continues to be our top seller with net flows of $2.9 billion versus $2.5 billion in the prior quarter and the founding funds or allocation fund continues to close the gap as our second best-selling fund.

Non-U.S., we also had an increase in redemptions.

Some of that was due to the India money fund where we saw 500 million of institutional assets go out of that fund in the quarter.

And that is more of a timing factor in that marketplace for institutional accounts.

And as I mentioned in the prior quarter, we had the $2.3 billion global equity mandate from a Middle Eastern client.

I think of note in the international retail side last quarter we launched three Korea domicile global funds following changes to tax laws that were attractive to investors from a tax perspective, and those reached 1.7 billion during the quarter.

Looking at flows by client type, again retail had a very strong quarter, up 17% with retail net flows increasing from 9 billion to 10.5 billion.

And on the institutional side a slight decrease from 900 million net to 200 million.

But again, the effect of that one large account last quarter will effect that.

And in the high net worth primarily fiduciary side gross sales were up 50% from $400 to $600 million, and net sales up from $100 to $200 million.

Of note, on the retail side Mutual Series overall continues to have quite a bit of sales momentum.

Mutual shares had net sales of $1.2 billion.

Templeton Growth continues to be very strong at $1.1 billion, and on the outflow side Templeton Foreign again primarily from the investment only side, but we saw redemptions there of $1.7 billion versus $1.2 billion in the prior quarter.

On the institutional side we had $510 million of redemptions of corporate cash relating to the BEN repurchase activity.

And again, the $2.3 billion account that went out last month.

The emerging debt side continues to be very strong on fixed income and existing and new clients contributed $650 million during the quarter to our emerging debt strategies.

Looking at net sales by investment objective, equity sales were down 22% from 4.1 to 3.2 in the quarter.

But domestic equity flows were up 1.2, which is up 50% from a prior quarter.

And the small MidCap led the net outflows on top of stronger performance but we were disappointed to see that continues to have net outflows of $482 million versus $396 million in the prior quarter.

Global equity sales, net sales of $2.1 billion were down 36% from the prior quarter and again Templeton Foreign was the primary reason for that.

Hybrid sales, Franklin Income Fund net sales of $4.2 billion which were up 20% from the prior quarter.

And taxable fixed had a very strong quarter with net sales of $3.3 billion, which is up 74% from the prior quarter, and Templeton Global Fund had net sales of $765 million versus $680 million.

Tax-free sales had another strong quarter with net sales of $700 million versus $500 million in the prior quarter.

And money funds, again as I mentioned, the effect of the share repurchase activity contributed to the negative number there with $510 million being affected by that.

Investment performance continues to be very solid across the lineup, in particular with domestic equities, we continue to improve our numbers.

And the effect of the one-year, which now 73% of the assets are in the top two Lipper quartiles versus 47% a year ago at this time.

And that number shows improvement throughout the 3, 5 and 10-year, as well.

And the same with taxable fixed, which improved from 28% a year ago to 91% in the prior year.

And we did reclass, just so if you are looking at numbers from prior calls, we reclassed the Franklin Income Fund as taxable fixed income, which used to be included in domestic equity because it is a hybrid, it's really a split between the two but we felt that it should be included in the taxable fixed category.

In the global international equity the one-year number did decrease from a year ago, it was 63% in the top two versus 29%.

And again, I think that is consistent with Templeton and the value buy is there and some of the stocks that we were working a year ago, particularly media stocks.

And they have increased their position in technology as the values look better there.

Have underperformed this more growth oriented market, and again that is just consistent with the Templeton style and the kind of market that we have today.

So with that I will turn it over to Ken who will touch on the operating results.

Thank you, Greg.

Hello, everyone.

We're very pleased with the results this quarter.

We're very much in line with our expectations.

Net income and earnings per share were up 3% -- more than 3% over the prior quarter; earnings per share was $1.73.

Operating income was down 2% on the quarter as we continue to reinvest back in our growing business.

Just a reminder when comparing the results this quarter to the prior quarter that there were two unusual items in the 2006 quarter, the revaluation of intangible asset and the additional tax expense resulting from repatriation were recorded in the second quarter of 2006.

Next I will make a few points about revenue.

Revenue increased 5.7% as did the simple monthly average of assets under management.

And as we announced assets under management ended the quarter at $576 billion.

Investment management fees increased less than average assets under management increasing 2.3% during the quarter.

And there were really two things that caused that.

First, there were two less days to earn revenue this quarter, and that had an impact.

And second, last quarter there was approximately $17 million of additional performance fees.

And if you were to normalize the effective fee rate you wouldn't see much change quarter over quarter.

Not much to say on shareholder servicing fees other than a heads up for next quarter that we will have the first of our annual purge, and that is effective first of May.

And that our estimates are would reduce revenue by approximately $1 million a month, of course offset by growth.

And lastly, on revenues as Greg mentioned, sales were strong this quarter.

That strength is reflected in the underwriting distribution fee line, which increased 12.5%.

The underwriting and distribution margin was around 6.5% this quarter, which was in line with where we expected it to be.

So no surprises there.

Operating expenses increased 9.8% as we continued to strategically invest in the business.

Compensation and benefit increased as we thought it might.

Merit increases that were effective on the first of December were fully reflected this quarter.

And this along with an uptick for seasonal payroll taxes accounted for more than half of the increase in the quarter, and the remainder of the increase related to variable compensation and headcount increases.

Headcount increased a net of 126 during the period and almost all of the adds to headcount this quarter were in low cost centers.

The other line where we saw some increased spending was advertising and promotion.

We increased our advertising spending this quarter with particular emphasis on our fixed income products.

We also increased our estimates for marketing support payments, and that was due to projected increase in sales for the year.

The amortization of deferred sales commissions increased approximately $3 million in the quarter as the result of an increase in the related deferred asset.

And lastly on expenses, other expenses increased 6.5% primarily from variable expenses such as consulting fees, as well as expenses that are driven by assets under management changes.

I am discussing other income as it added over $108 million to our results this quarter.

And starting with investment in other income.

This particular line item increased approximately $30 million quarter-over-quarter, and the increase is attributable to additional gains realized from the sale of our investment products, of our investments in our investment products.

So from time to time we invest in new products, and when those products attract enough outside investors, we liquidate our holdings.

And that really was the driver this quarter for our realized gains.

So following that as our holdings in these products decrease, so does our need to consolidate them.

So accordingly we saw a decrease in the sponsored investment gain line.

The effective tax rate for the quarter was 27.5%.

They were a couple of discrete items in the quarter.

Had they not been there, the rate would have been about 60 basis points higher, which is in line with where we thought it would come in at for the quarter.

And lastly, a word on capital management.

It continues to be a top priority for us.

In total, we purchased 4.6 million shares this quarter, bringing the year-to-date repurchase total to 5.2 million shares.

When you combine that with dividends, we've returned over 78% of the year-to-date earnings to shareholders.

So that continues to be an area of focus for us.

We think we delivered this quarter.

So with that, concludes my remarks on operating results.

I will hand it back to Greg.

Thanks, Ken, and I will just quickly touch on some of the business highlights during the quarter.

As I mentioned in the United States it was a very strong quarter for retail flows and on the back of the Franklin Income Fund Mutual Series, but also the founding funds which is now our second best selling fund here in the states.

We also have had a marketing campaign around fixed income sales and we are pleased to see the results there.

And you can see the quarter to quarter numbers as fixed income continues to grow as a percentage of the mix.

Looking outside of the U.S.

Canada hit an all-time AUM at 48.5 billion and had their best growth sales quarter ever and their best net sales number since 1998.

Outside of the U.S.

on the international front Brazil, we officially opened our office there with our new wholly-owned local asset management business and are registering funds for that market.

Korea, we just recently celebrated our 10th anniversary and had very successful quarter, as I mentioned, with $1.7 billion going into some of the now more attractive SICAV products that are registered in that marketplace.

In India as we mentioned last quarter we completed the acquisition of our local asset management joint venture there, so we now own 100% of that.

And in China, which numbers that are not included in our flows and where we own 49% of our joint venture, we during the quarter had a fund offering of $1.2 billion which puts our assets in that market to $1.8 billion.

On the institutional side we continue to see strong demand for more alpha type products especially around real estate and we are pleased to offer our third Australian private equity real estate fund to funds.

We also launched new Asian bond and global multicenter fixed income strategies, and we continue to see very strong demand for emerging debt strategies with 650 million funded during the quarter.

So all in all I think a very strong quarter for the firm with good net inflows and consistent performance across the groups.

I would now like to open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Chris Spahr.

I'm just wondering if you could just give a total of the amount of flows coming from U.S.

resources and percent of total AUM that is now.

Bear with me.

I am pulling out the number.

For sales outside of the U.S.

the gross sales number was $18 billion, and net 3.8 out of a total net of 10.9 and a total gross of 25.4.

And as a percent of total --

That was U.S.

U.S.

was 25.4, so the total, the 18 plus the 25.

Sure.

And I don't have the asset percentage, but we can certainly get that.

Thank you.

35% for non-U.S.

Okay, thank you.

Jeff Hopson.

Wondering about the fixed income now that I guess you stopped that particular campaign, any thoughts on whether those sales and/or flows can continue at that level.

And it seems like everything is kind of hitting for you guys right now.

Any particular concerns that you would have in this market?

I guess Templeton's short-term performance is off a little bit, but just curious if that would be a concern of yours at this point.

I think there are many concerns, and that is certainly one of them.

But I think looking at Templeton's philosophy and process, and if you look at the history where -- take the Templeton Growth Fund over history and look at how it captures 97% of the up markets, but 92% of the down market.

So you expect to see some lagging in this kind of market.

So when I look at the process and the people and the experience, that it has never been stronger at Templeton.

So I think we feel that this type of underperformance is consistent with -- and again, their peer group tends to be value and growth, when you are looking at retail.

So a real strict value manager tends to underperform in that marketplace.

So I think it is a short-term concern and one that we need to communicate with clients.

And it will affect your near-term flows.

But again, I think long-term, very strong team, very strong process, so we are not very concerned there.

The fixed income side, really this campaign is not a quick quarterly shot.

It is really, we think, a recognition of a longer-term trends in the retirement market where, looking at the demographics, that fixed income will become more of a core holding as the population ages.

And we want to be in position to make sure that we are capturing some of that shift.

The flows and real incremental flows on the institutional side are more around emerging markets, bonds, global bonds.

We've had just excellent performance there, and I've talked in the past about the new combination of that fixed income group and how it has been well-received by consultants.

And we still feel there is a very strong pipeline there and large demand for many different fixed income, global [plots], emerging markets, and more institutions taking on more risk to get that alpha.

So I think we are benefiting from that trend, and I don't see that changing any time in the near-term.

Okay, great.

Thank you.

Ken Worthington.

In terms of managing expenses, I guess you've indicated in the past that you have some flexibility -- maybe even a fair amount of flexibility -- so that if markets were to collapse or correct, you could pull back on nonessential spending; and when the market surges, you can increase maybe discretionary investment.

Over the last couple quarters, we have seen significant increases in investment income.

Does that income figure into how you're spending and investing?

For example, advertising was up quite a bit this quarter.

You guided to some increase, but I think it was bigger than we expected.

Other expenses was up.

I guess, are the two linked at all?

When we look at our expenses -- and we do think that we have good processes and controls around flexible spending -- it is really based on operating income, is what we look at.

And so the answer to your -- the succinct answer to your question is no, they are not really linked because it is an operating income focus.

But there are many things in the numbers, and particularly in this quarter that are very bold -- the advertising spend I would characterize as seasonal.

And perhaps strategic.

There was a definite timing to increase spending there.

The other part of that line item was revenue sharing, and that is based on our projections of increased sales.

So that is based on the trends that we are seeing.

Now should there be a downshift in that, that will quickly reverse.

Sales and assets, as the markets are stronger, then those numbers, the revenue sharing numbers on existing assets we have to accrue more for.

So that will have some effect on that advertising and promotions.

Okay, thank you.

And then with the 4 million share repurchase during the quarter, why did you pursued it in this manner?

Why this amount?

Last year you did a very large $10 million share repurchase.

Maybe why not something more significant at this point in time?

There were a couple of factors.

First, why did we choose this vehicle?

We thought it was a pretty efficient way for us to get a large block of shares retired and out of the share count.

And there are a couple of variables when you go into this vehicle.

Timing is one, and pricing is another.

And so in discussing with our partners we just thought that was the optimal balance.

The timeframe and the number of shares.

Okay, and then I guess lastly, you mentioned realizing some gains in the investment portfolio.

Anyway you can help us quantify kind of where those unrealized gains stand right now?

The portfolio is pretty big.

Any help there would be great.

The first it is a little bit dated, but going back to the 10-K there is a footnote in there that kind of shows you the amortized cost and the unrealized gains that were in the investments available for sales sponsored products, and that gives you an idea of what was there.

And obviously we took a lot of that out this quarter.

And I think you will see a little bit more of that going forward, too.

Probably not to this extent but certainly we are in that trend.

And you are absolutely correct, over since September 30th there has been a run-up in the market and depreciation and there is probably some more unrealized depreciation in there but I think that will give you a good idea.

Perfect.

That was very helpful.

Thank you.

Bill Katz.

Just on the buyback for a moment I certainly appreciate the 70 some odd percent of net income, but I guess it is the age-old question, some of your competitors are doing a much better job, more persistent job, more transparent job of buying in stock.

What is holding you back from a more proactive capital management story that would sop up some more of your liquidity?

There is nothing holding us back.

I think we are proactive, and but it has been our philosophy and will continue our philosophy to be opportunistic in that approach.

And obviously like I said before, capital management is kind of a tricky balancing act between funding organic growth and returning value to shareholders.

So I think I could kind of point to is the historical records in the last few years I think we've been doing a pretty good job there.

And I think the special dividend that we did last year and we paid out most of the cash flow back to shareholders last year.

So I think it is a much more active program than it has been in the past.

Greg, question for you.

Sort of curious given your statements about fixed income in the structural change with demographics I certainly agree with that.

But I'm just curious are you seeing any other type of tactical change in investor behavior either away from global and/or toward more domestic equity in any of the channels?

I am seeing the opposite.

I think even you look at funds that are having, like our small cap domestic fund which has had a strong year relative performance and still having outflows and I think that is a challenge of a lot of domestic equity managers today that if anything the allocation going to global funds is increasing.

And that is making it harder in terms of your net flows on the domestic funds.

So I don't think anything, and especially some of the articles on the markets are behaving differently now would probably make that trend even greater in the future.

And last question in terms of the advertising just to get a better sense obviously, a 30% sequentially is quite sizable.

From a tactical perspective, though, would you expect now that the 401(k) season is sort of behind us, would that slow down or is it more now a global advertising solution so that gives a sort of a more normalized run rate?

I think, and keep in mind there are two components to that, right?

That one was the revenue sharing accruals that I discussed, and the other, so they are about 50-50 if we had delta.

I think it is more seasonal than indicative of long-term sustainable trends.

That's very helpful.

Thank you.

Cynthia Mayer.

Most of my questions have been asked, but I am curious if you could just give a little color on what kind of net flow patterns you saw in the quarter around the sell off after February 27th?

And sell offs like that do you tend to see investors freeze and stop buying or do you see actual redemptions, and how long does it take for them to come back?

I think the -- we didn't seeing a whole lot of change in our numbers, and I think that was encouraging.

But I think you're right, you tend to see a freezing of activity in terms of new sales, not so much a big pickup in redemptions.

And you probably saw a little bit of that, but it was very minimal on the effect of the overall trends for the quarter.

So we didn't see a big change at all.

Okay, and any update on your thoughts on adding gross assets, whether domestic or international?

We have as I said before, we have a quite a bit of growth assets and its our job to make sure that those are visible and on the front burner of our distribution channels and we've made a lot of efforts in doing that.

But obviously we do have a heavier mix of value and fixed income, and that tends to overshadow it.

And as we've said before, we are always open to anything that can improve the lineup.

Okay, and I guess last thing is maybe you mentioned this, the tax rate, same guidance as before?

It's absolutely dependent on the mix of earnings, but where we stand today that looks like a pretty reasonable range.

Okay, thanks.

Niamh Alexander.

Questions.

Just a quick one on income series, is there nowhere near any capacity issues with that particular fund?

I think the good news about that fund it really is at a very broad mandate of what it can invest in.

It has always had a history of utilities which obviously are very large cap and a lot of liquidity and high yield bonds.

So we really haven't had any issues around constraints around size, but that is always something that if the portfolio manager thinks it is becoming an issue it is something that we will move quickly to close.

But for now we don't see any limitations, and there is a lot bigger funds in the marketplace with similar mandates than (inaudible).

That's fair, thanks.

And just on target date retirement funds, with the DOL about to kind of launch that new language for default investments, I am just wondering how you consider your position.

Because I would expect funded plan administrators have an advantage here with putting their own target date retirement funds in as default, and not being an administrator does that put you at a disadvantage with regards to your position and targeted funds near-term, or how are you positioning yourselves to roll out those funds?

I think that is a fair concern, but the trend and really what we're talking about the target funds is still a relatively small percentage of our -- very small percentage of the industries mix and our mix that is going to grow.

But again, performance I think will always find its way into any given plan.

And there is a lot of pressure to move to outside funds and more than ever than today.

So I think that is a concern but one that if you have the relative performance they will get into those plan.

And being a plan administrator doesn't interest you?

Not today.

And then if I could just indulge for the final question, and the European market particularly for retail flows, I understand each particular country is very different, but it looks like this year is looking a little bit more hairy than it could be last year and certainly from the start we have seen January and February.

Is that what you're seeing or because you are kind of based in Luxembourg and distribute internationally are you better positioned as one of those specialist money managers?

I think it is hard because everybody's mix is so different, and each market, especially for us we are in one market, we will have one style that's popular in another one.

So it continues to be very strong for us, and I haven't seen anything lately to change that view and especially in some of the southern Europe markets that are opening up to open architecture.

And the biggest market we haven't had a big penetration in and that is the UK.

So that tends to drive everybody's view of what's happening in Europe.

Fair enough.

Thanks for taking my questions.

You have no further questions.

Mr.

Johnson, do you have any closing remarks?

We just like to thank everyone for participating on the call, and we look forward to speaking next quarter.

Thank you.

Bye, everyone.

This concludes today's Franklin Templeton investment conference call.

You may now disconnect.