富蘭克林資源 (BEN) 2007 Q3 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended June 30, 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 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 sections of Franklin's most recent form 10-K and 10-Q filings.

(OPERATOR INSTRUCTIONS) And now I will turn the call over to Mr.

Greg Johnson.

Sir, you may begin your conference.

Well, good afternoon.

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

First of all, thank you, everyone, for attending, on another quiet day on Wall Street.

We are certainly pleased to report another relatively strong quarter, highlighted by record net flows and asset levels for the Company.

Looking at the AUM overall, the average assets for the quarter were up 7.4% to 605 billion from 563 billion, and the quarter ending assets ended at 624, versus 576, or just over an 8% increase.

The shift, as you would expect, continues towards equity for the Company, crossing 60%, 60.3% of the overall assets, or 376 billion in equity assets.

Looking at the AUM by the various investment groups, Franklin's assets closed the quarter at 239.4, or up 6%, and up 24% year-over-year.

Templeton at 237 billion, versus 216, or a 9.6% increase, or a 29.5% increase year-over-year.

And mutual with the most dramatic increase in assets of 13.8% to 83.3 for the quarter or 53% ahead of last year's numbers.

Looking at the fund flow, as I mentioned, it was a record quarter for the Company, and the best quarter since the second quarter of '05, where we had 11.5 billion in net sales.

We did have 15.9.

That was versus 10.9 in the prior quarter which was up about 46%.

A couple of larger mandates for the quarter of note, we had an addition to a global equity account of 900 million, in the Middle East, and we had a global bond account in India of 400 million come in during the quarter.

Asset appreciation was 33 billion.

Sales were up just around 20%.

Redemptions up right around 11% for net sales, increasing 46%.

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

net sales were up 28% to 9.1, from 7.1, and the non U.S.

were up 79%, from 3.8 to 6.8.

The flows really follow a similar pattern from what we've seen with the income fund continuing to be the top seller with net sales of 3 billion versus 2.9 in the prior quarter.

A record quarter for international retail, with gross sales up 30%, redemptions up 17%, and a lot of that strength coming from Europe and Asia, and Europe in part to our launching of our euro currency hedge share classes and our C cap funds which have been well received, and also as I mentioned that those two large mandates in the Middle East and in India and Taiwan had a very strong quarter as well.

Looking at the net sales by distribution or client type, the retail sales were up 27% on a net/net basis, 13.4 versus 10.5 in the prior quarter.

Institutional had net inflows of 2.6, versus 200 million.

On the retail U.S.

side, we continue to see strength in the mutual funds across the board, and we had--- in the U.S.

funds of Mutual Series flows increased to 3 billion, from 2.7 in the prior quarter.

We talked about our fixed income emphasis, and campaign that's been going on since January, and we're pleased to see that gross sales increased 20% in this quarter and the top three sellers in this area for the quarter were the Templeton global bond fund with close to 900 million net flow strategic income, 250 million and the [Cal Techs Free] to 110 to 60 million.

In South Korea, we also had strong flows, as five new funds, part of our new South Korea domicile, their national funds aimed at taking advantage of tax waivers there and we saw assets top 1.9 billion in those funds that have been launched in the prior year.

On the outflows side, continued outflows with the Templeton Foreign Fund, but at a little bit of a slower pace, 1.6, versus 1.7.

On the institutional side, we still see increasing demand for global investments, and alpha generating asset strategies and in addition to the mandates that I mentioned we had a second U.K.

local authority mandate of 150 million that was funded during the quarter in global equities, and we continue to see very strong interest in all of the global fixed areas, and year to date, on the institutional side, on our emerging market debt, we funded close to $2 billion.

Looking at the net sales by investment objective, equity sales were up 40% on a net basis, from 3.2 to 4.5.

Hybrid sales overall were down slightly, 7%, 4.2 to 3.9.

And fixed income were up 66%, from 4.1 to 6.8.

And again, the -- on the domestic equity mutual shares continues to be very strong with inflows of 1.1, versus 1.2, and on the global equity side, Mutual European, Mutual discovery, and Templeton Globe all had very strong net flows.

On a taxable fixed side, net sales were 5.3 billion, up 61%, from the prior quarter.

And that's really on the back of the Global Bond Fund, with net sales of 1.2 billion versus 420 million in the prior quarter, and tax-free, also, we saw significant increase in net flows to 1.5 billion versus 700 million in the prior quarter.

Investment performance again, I think is consistent.

There is really not a lot of changes, as far as the trends and longer term numbers.

We're pleased to see that 85% of the long-term assets were ranked in the top two quartiles for the three-year period, 81 for the five, and 92 for the 10-year.

I think of note in the shorter term trends and numbers, the taxable fixed numbers continue to improve on the one-year and are very solid across the rest, as well as our domestic equity numbers, and also our tax-free numbers.

On the international side, some shorter term, again, performance, we talked about that on the last call, and I think the same trends there with the one-year number lagging the peer group for the -- on the Templeton side.

And I will now turn it over to Ken for operating results.

Thanks, Greg.

Hello, everyone.

We are very pleased with the quarter marked by strong flows and disciplined expense management.

Net income for the quarter was up 9% while earnings per share increased 10% as a result of our share repurchase activity that I will talk about in a bit.

Earnings per share ended the quarter at $1.91 and the net income was 479.8 million.

On the revenue side, total operating revenues increased 8.7%.

Investment management fees increased 9.1%.

That was a little bit ahead of the increase in simple monthly assets center management which as Greg mentioned increased 7.4%.

We did have some performance fees in the quarter.

About 5.5 million.

So if you exclude that, and normalize the quarters for days and all of that, we really are not seeing a big change in our annualized effective fee rate.

Moving on to service fees, increased 2.6%, consistent with the net increase in billable shareholder accounts.

Billable shareholder accounts includes the Canadian purge, which we talked about last quarter of 299,000, and a heads up for the next quarter.

The U.S.

purge in July was about 1.5 million accounts.

As we've seen, sales had another strong quarter.

And we see that in the underwriting and distribution fee revenue line.

The underwriting and distribution margin however was about 3.8%, which is lower than where we've been running at.

We've been running about in the ballpark of about 6% or so.

And that is due to one-time expense related to the dissolution of some partnerships that we formed many years ago up in Canada to finance B shares.

We talked a little bit about that in our Q last quarter so if you want more details on that, I would refer you there.

Excluding that expense which is about $12 million, the underwriting distribution margin would be very close to its historical averages that we've been running at.

Also, in revenue, this quarter, we had a securitization, and that resulted in $2.7 million of pre-tax gain, which is in the other net line item.

On the expense side, overall, expenses increased 9%, but if you exclude that 12 million charge, I mean we did see a bit of operating leverage during the quarter.

Compensation and benefits increased 2.6%.

That was driven primarily from increased variable compensation, which of course is tied to investment management performance, the Company's overall profitability, and sales volumes.

We increased head count during the quarter by 328, over two-thirds of that increase was in low cost centers.

We also saw some increased spending in IT and advertising and promotion.

The concentration of that spending was related to support or global activities outside the United States.

For example, in Korea, we increased spending in support of five new products, launched there, and part of the expense of the advertising line related to a fund offering in India.

And we also did increase some promotion and marketing expenses inside the U.S.

to support the fixed income campaign that we talked about.

Amortization of deferred sales commissions increased 8.5%, which was in line with sales volumes.

And amortization of intangible assets had a little spike this quarter.

We were doing some adjustments on estimated lives.

I would expect that number to revert to historical averages going forward.

And lastly, on the expense side, other expenses was up 10.8%.

That line item is being driven by primarily, primarily by expenses that are geared towards assets under management levels.

So as asset management levels increase, we are seeing an increase on that line item.

Moving on, below the operating income line, to other income expense net, that continues to have a significant contribution to our bottom line.

Included in the investment and other income, this quarter, we do have some realized gains.

I think if we remember last quarter, there was about 40 million of realized gains in that line item.

That decreased this quarter by almost 18 million but it was replaced by equity and net income of affiliates which was about $13 million this quarter.

We also had a realized gain in the quarter related to the sale of a subsidiary which was about $3 million.

And the effective tax rate for the quarter was 26.8%.

It is below our expected range, due to a couple of one-time or discrete items, the biggest one was that Canadian limited partnership charge that I mentioned previously.

Overall, we saw our operating and pre-tax income margins stay in line with historical trends.

And lastly, a word on capital management.

We repurchased 4 million shares this quarter.

Bringing the year to date share repurchase total to 9.2 million.

Also during the quarter our Board of Directors authorized the repurchase of an additional 10 million shares.

So when combined with dividends, and share repurchase, we've returned about 92% of year to date earnings to the shareholders this year.

So that concludes my remarks on the operating results.

Before we go to Q&A I will hand the microphone back to Greg for some business highlights.

Just quickly, some highlights for the quarter, I mean obviously, on the strength, the net flows, I think market share numbers across retail and international had a very strong quarter against its peer group.

We are pleased to see the introduction of having today expanding our service offering to financial advisors, and we will be on the DST Vision platform which allows aggregation of client account information, and that is something that has been a little bit of a barrier in some of the U.S.

retail sales, so hopefully we will remove that.

We introduced the Franklin All Cap Value fund.

Founding funds continues to be very popular, and it is along our objective of building into that core position with advisors and clients.

And we established some sub advise funds which have been very popular within the insurance segment and certainly with the annuity providers.

In Canada, net sales continued to improve there, and we're pleased to see the potential with Canada's number one wrap program by broker distributed firms and it grew to over $7 billion in assets.

I mentioned in Korea, that the new funds that are taking advantage of favorable tax laws have done very well, and we just crossed over $6 billion in Korea and celebrated our 10th anniversary there.

In India, we announced distribution agreements with the Central Bank of India, which is a leading public savings bank, and the State Bank of India, the largest public sector bank, and combined those two have more than 12,700 branches.

In Europe, I mentioned earlier the launch of the currency hedge share classes within our C Cap Funds.

On the institutional side we completed our first close of the Asian private equity real estate fund to funds product and we continue to see a strong demand for global equity as well as global fixed strategies.

So, overall a very solid quarter and we would like to now open it up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Your first question from Ken Worthington, with J.P.

Morgan.

Hi, good afternoon.

First question goes to the other income.

I think last year, you had a hedge fund gain of about $35 million before expenses, and there is a number of expenses associated with that.

When you talk about the 13 million of income from associates, is that what that is?

Or is that income from associates kind of something else?

Most of that is exactly what you're referring to.

I think what you're referring to last year was a subsidiary that we deconsolidated--

Yes.

-- on the first of October.

So you are seeing the performance fees from that, and you know, that's most of the 13 million.

Okay, and that's net of all expenses--

Right.

-- on the fund?

Right.

Okay.

Thank you.

The second is given the market environment, you did do a securitization during the quarter.

If we continue to have troubles in the credit markets, to what extent does that cause you problems on the auto leasing side?

Well, I think, you know, it is just a matter of pricing.

But I think the quality of the loans really shouldn't present much of a problem there.

And then third, income series, the track record is exceptionally strong.

Performance has weakened in the near term.

What are the bets that have worked against the fund, sort of year to date?

Well, I think first of all, no matter how well you manage a fund in the short run you will have periods of underperformance and that fund historically, and I think in the future, it will own public utilities.

We think those are a natural fit for what investors are looking for and utilities, you look at the last quarter, as the bond market kind of decoupled away from the equity markets, and utilities probably underperformed by about 7% from what the S&P did.

So that was a major contributor.

And then more recently the high yield bond will have a negative impact as well but I don't see us changing our strategy.

People are used to it.

They know that's what the funds invest in, and in the shorter run, you're going to have those periods.

Great.

Thank you very much for taking my questions.

Sure.

Your next question comes from Jeff Hopson with A.G.

Edwards.

Hi, thanks.

Greg, if you could comment on the sales outside the U.S., explain exactly what that currency hedge product is, and then it seems like offshore, you're having good success, and can you put in perspective maybe the difference in performance that we see of Templeton products in the U.S., versus, you know, the range of products you might be selling offshore?

Well, I think first of all, the hedge is really just to hedge into the local currencies for those markets in Europe, and not be dollar-based.

And that's something that the local retail markets there demanded.

I think as far as lows, I mean some of the big differences in product mix is if you really look by country, you will see a big difference between what we sell in any given country, around the world, so it is hard to kind of generalize around international versus U.S.

The big one is that you don't sell the income fund outside of the U.S.

So that is -- you know, that is a big shift in how the flows look, and also, the international tend to be a little bit chunkier, as far as -- so that results in more volatility quarter to quarter when you have a lot of platform sales that can put assets on quickly or take them off quickly and also large institutional mandates, and those have tended to be in the Middle East and Asia for us, so these are things that create more volatility, where I think the U.S.

is more of a little bit more of a stable quarter to quarter number.

Okay.

And then the global fixed income product, or products, obviously picked up in momentum, and you did have one relatively big mandate, I guess, but it seems like that pipeline continues to build.

Is that fair?

Yes.

And that is significant for us, because it is really a whole new area of flows, and on both the retail and the institutional side where we have had those funds for a long time, but you know, as a percentage of our assets they are very small, but we have had excellent performance and we are seeing both on the institutional side and the retail side a lot of momentum there, and that is based on the performance, I mean obviously global bonds have done very well over the latest cycle.

Okay.

Great.

Thanks.

Your next question comes from Robert Lee with KBW.

Helo.

Thanks.

Good afternoon.

Just a couple of quick questions.

Is it possible to get an update on the cash and capital on the balance sheet, what proportion of that is still held outside the U.S.

and can't be brought back, and also maybe get a feel for, of your current cash generation, how much of that is outside the U.S., or how much cash needs to be building there?

I don't have the actual cash balances handy.

You know, I could tell you, though, the income that is being earned is, outside the U.S., it is getting a little fuzzy now, but certainly the Templeton funds are managed outside the U.S., and so you can get an idea on the mix of flows there.

And that kind of gives you an idea of ongoing cash flow.

But we will take a look at our disclosures to see if we can do that to give you a better handle on that.

Okay.

That would be great.

Also, if I could, the -- I did have another question just on the expense items.

You did have a little bit of pickup when you were talking about advertising and promo and some of it seemed to be around I will call it one-time marketing events and is that fair or should we see this as kind of a run rate to work from going forward?

No, I think on the advertising and promo side, I mentioned last quarter, there are two things in there.

There is a little bit of charges that are based on sales volume.

So as that goes up, you know, the expense is going to pick up.

And in terms of the advertising and promotion, I think that we are spending a little bit more on that line item, particularly out for products and brand awareness outside the U.S.

Okay.

That was it.

Thank you.

All right.

Thanks.

Your next question comes from Marc Irizarry with Goldman Sachs.

Great.

Thanks.

Perhaps you guys could give a little more color on the domestic equity flows.

Obviously, we've got a couple of straight quarters here of better flows.

Could you just, you know, give a little more color on what is happening on the domestic equity front?

And maybe differentiate retail versus institutional interest for the product?

Thanks.

I think it is a little unusual when you look at the trends overall in the industry, and where you're not seeing that kind of momentum on the domestic side, and mutual does have an advantage that a percentage of those funds are invested in global securities, so they may be categorized as domestic, but they do have exposure to global markets, so that is going to help the relative performance and some of the reason why that we've seen a real pickup in interest.

I think the other big point in the retail market is that it seems that the investors we've talked in the past, about the percentage allocation to foreign stocks, and I think really what has happened, because of performance, that investors are just getting much more comfortable investing in global securities and that's really why you've seen all of the net flows just about on the retail side going into global equities.

And I think that trend will continue.

And whether or not you get to the stage where it is almost the core holding in a diversified global fund, you know, at some point, we probably will be there.

On the institutional side, do you not see the same kind of momentum on the domestic equity side because of mutual, because of their style, we really haven't promoted that group on the institutional side, because it is unique style.

They do four or five things differently together that doesn't quite fit neatly into a given objective that a consultant is going to want to fill.

So it really has been limited interest on the institutional side and that is really why, if you look at our flows, you will not see the same kind of consistency between retail and institutional for domestic equities.

Great.

And then can you just give a little color on some of the fixed income exposure relative to some of the volatility in the CDL market?

You know, how that maybe would impact your hybrid securities?

Thanks.

Yes.

I mean it is a hard thing to answer, because as you know, I mean everything is linked together and you can't -- just because one area is affected in sub prime, and everybody wants a quick and easy answer and a percentage and I think what we've looked at it, and we feel pretty comfortable that as far as direct linkage to tranches that have been experiencing difficulties or areas that we do not have really any exposure to, or if we do, minimal exposure to, and we had a couple of funds reported in the Journal that had -- I was kind of alarmed when I saw the numbers because it certainly looked higher than what I understood but when we looked into it, it was really the AAA higher quality.

So yes, it is related to sub prime, but it is very different when you're looking at risk and trying to understand what the potential is for the investor.

So I think at the end of the day, everything is linked.

This is kind of a trigger event for the credit markets as a whole and spreads are going to get a bit wider and that affects the entire spectrum, but I feel comfortable that when you're talking about the specific areas that have the kind of exposure that we've seen highlighted in the papers, I think we have very little of that.

Thanks.

Your next question comes Chris Spahr with Deutsche Bank.

Good afternoon.

I was wondering if you could quantify the amount of alternative investments you have as a number of total AUM.

I think we can but I'm not sure it is meaningful.

It is probably 5 billion.

And some of that would be private equities.

Some real estate fund to funds.

It is kind of a mishmash between all of the different groups and we don't really have one specific entity that it is all dedicated under, but I think 5 billion is the number that we use for alternative.

And in the past, you've talked about maybe acquiring an alternative asset manager.

Would that be for direct investing or would it be a fund to fund manager?

No, I think it would be more active direct investing.

I think that is really what we focused on.

And you know, are focused on as a company.

And whether or not you can have a catch-all alternative manager, I think, is the question that we wrestle with internally.

And is that still a priority for you guys in terms of deals?

Well, I think -- I don't know that I would categorize it as a priority.

It is something that we're certainly looking at if the right situation came along -- we think it is important to raise the visibility of a lot of the various efforts and they tend to get buried amongst the more traditional asset management groups and you know, I think it philosophically, we agree with that.

Whether or not we can execute it, I think that takes the right situation.

Okay.

And then finally, I don't know if I missed this or not, but what percent of AUM are held by non U.S.

domicile claims?

I believe it is 30%.

I think that is the latest number.

I believe that has been the -- roughly the percentage the last few quarters.

But it seems like the amount of net client flows and certainly the appreciation has been greater with non U.S.

Am I missing something here?

No.

It may have increased slightly, and I just don't -- I don't have that number in front of me, so we can -- I am probably basing that on the last quarter or two.

Okay.

But I know it hasn't shifted in a meaningful way from that.

I mean regardless of what the flows have done, it is probably close to that.

All right.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from Cynthia Mayer with Merrill Lynch.

Hi, good afternoon.

Hello.

You named a bunch of good-sounding distribution relationships in India, Korea, like China Life, Central Bank of India and I'm just wondering if you could put them in perspective a little bit, compare them to past distribution relationships you've had.

Are these small milestones?

Or is this -- or do you view any of these as sort of a major beginning step?

Yes, I think it is hard to say, and many of these markets are still young, and a lot of these banks have not had a history distributing funds, so it is really -- the potential is huge but it is also the timeline and the education and the kind of legwork that's got to be done to realize that.

I think that is the question mark.

So I don't think any of those announcements are going to result in all of a sudden, you know, next quarter or two, you go wow, all of these new flows.

But I think getting in there early with those kind of relationships really creates the long-term value, which could be a decade out.

So, it is a longer term process around education, and creating investors.

And that's what we're trying to do.

Okay.

Also, the big wins that you had in global bonds, if we wanted to track them, or sort of relate them to an existing product, what -- are they managed in the same style as the fund?

Close to it.

I think it is really global bond, or emerging market debt, so it would be similar to those, but I don't -- you know, the nuances between the fund and that, I can't imagine it would be that much difference.

Right.

Okay.

And I guess lastly, you've done a couple of quarters of 4 million share buybacks.

What is your thinking on further buybacks, and were these done in the open market?

We started in reverse, Cynthia.

The last block was a private transaction.

And so that kind of segues into our strategy, which is to be opportunistic.

So we saw an opportunity there to take a large block and we took it.

And I think going forward, we will continue on the opportunistic approach.

Okay.

Thanks.

Your next question comes from Bill Katz with Buckingham Research.

Okay.

Better late than never.

A couple of questions if I may.

Can you just go over the DST arrangement and give us a little more detail of what was precluding you from greater sales and what kind of leverage there might be to that?

We were on an alternative more start-up platform that I believe is still around, that offered a competitive product, and you know, at the end of the day, the majority of the world is on DST, and it got to the point where our clients were asking for, it so it was something that we went forward with.

I don't think it is again, going to be any kind of major difference in the flows, but it is a positive and does remove one of the barriers that we've heard a lot of noise from our distribution on the last few years.

Okay, I want to come back to the margin discussion for a second.

If you strip out the impact of distribution, and look solely at the quote-unquote manufacturing margin, despite the elevated advertising and the jump in IST, it looks like you had some margin expansion sequentially and it comes after the head count as well.

Is there something fundamentally that is allowing you to both grow the business as robustly as are you plus the margins?

Is there anything unique in this quarter that doesn't necessarily replicate itself?

Just trying to understand the dynamics between volumes versus margins going forward.

I really don't think there is anything unique in this quarter.

In terms of the numbers, everything was was pretty much in line with what we would expect and so I don't think there is anything in there to kind of call out for.

Okay.

Just so I understand in terms of last question, the ebbs and flows into the nonoperating discuss, and the decline in the realized gain, but I was looking at the Q earlier, the equity earnings was about 12 million last quarter as well so it doesn't seem like there was as much of a Delta sequentially.

Am I thinking about that right or is there something different?

I think

-- if I get the question, is 105 million now sort of a real run rate?

No, there is so many ebb and flows in there that it is tough to predict.

I think there was last quarter, it was probably a little bit unusual, in the sheer magnitude of the realized gains that we took.

And you know, we saw that decrease this quarter.

And then on the equity and affiliate line, that $13 million number that I pointed out is a seasonal number.

And that's from really the performance fees on that affiliate that we now hold a minority interest in.

So we typically see that come in the June quarter, and then a little bit of that in also December.

Okay.

Thank you.

And your last question comes from Mike Carrier with UBS.

Thanks, guys.

Just another question on the international side.

Over the past 10 or 15 years, you built out a good platform both in terms of products and distribution.

When you kind of look around the globe, in certain European markets like the U.K., and certain Asian markets, maybe some of the more developing ones, how do you go through the process of whether you want to acquire or whether you want to do a partnership, and is it more for the distribution or for kind of the product capables?

Well, I think again, it is hard to -- each situation is very different.

And generally, any partnership that we've done in the past, or joint venture has been a result of the regulatory environment which keeps out, you know, outside -- or requires to you have X percent local partner or a majority in the case of China with a local partner.

So we would really never entertain a partnership unless we had to from the local regulatory environment to do that.

And as far as acquisitions, really the -- in a more mature market that we, for example, have been selling global funds and you look at the case of a Canada, we have been there a long time, we have a good -- we have a very strong presence there but we didn't have a local domestic Canadian equity and bond alternative, and that was really needed to build out the platform, and that's where this for us made perfect sense and it has been a very successful example of that kind of acquisition.

And that's why we stated in the past, you know, the U.K.

obviously is a lot -- is bigger, but also having a local product is very important in that market.

Now, we can do that organically but it will take longer than doing it through acquisition and we have looked at both alternatives.

Okay.

Thanks.

And we'll finally turn the call back over to CEO Greg Johnson for closing comments.

Great.

Well, thank you, everyone, for attending in what obviously is a very demanding day in the market, and we appreciate your time and look forward to speaking next quarter.

Thank you.

And this concludes today's conference call.

You may now disconnect.