富蘭克林資源 (BEN) 2008 Q1 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended December 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 risk, 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 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 filings.

Good afternoon.

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

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.

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 report another record quarter of earnings highlighted by positive overall net flows during a period of heightened volatility in the equity markets.

Looking at the assets under management, relatively flat quarter-to-quarter, were down 0.3% and ended at $643.7 billion and quarterly average assets were up 4% over the quarter.

Really no shift to note.

A slight shift towards fixed income as you would expect with fixed income having a relatively strong quarter versus the equity markets.

But in terms of our overall mix by objective as well as by investment brand, really no significant changes.

Very stable from the various quarters.

Looking at the fund flows, flows did decrease from $9.8 billion to $4.9 billion on the back of a quarterly depreciation of $3.5 billion.

Gross sales were down 3.8% to $50.6 billion, redemptions were up 6.8% to $45.7 billion resulting in the net number of $4.9 billion.

Looking at the sales from within the U.S.

and outside of the U.S., overall the U.S.

net sales declined from 2.9 to 1.2, and non-U.S.

sales from 6.9 of inflows of to 3.7.

Within the U.S., the income fund had net sales that decreased to $540 million from $993 million in the prior quarter and we're pleased to see that our year-long fixed income sales and marketing campaign continues to do very well, highlighted by the Five Star Templeton Global Bond Fund, which is our best-selling fund in the quarter with net sales of almost $1.2 billion compared to $776 million in the fourth quarter.

And it was still remains a top decile performer for the one, three, five and 10-year period.

Not looking at non-U.S., Europe has been very difficult where the industry continues to be hit with net redemptions as investors continue to migrate towards more conservative vehicles.

But looking at the overall year, our cross-border sales of our SICAV products remains very strong globally and FTI ranked number two in estimated net flows for cross-border funds for the period of January at '07 to November of '07.

We continue to see many good growth opportunities in Asia, and particularly in China where we're pursuing opportunities in the QDII market directly through our JV and through China Life.

We had a successful launch in Hong Kong of the Templeton Emerging Markets Smaller Company Fund that had about $536 million via an IPO in that market.

Looking at some of the net sales by client type, overall retail net were down 64% from 5.9 in the prior quarter to 2.1 this quarter.

Institutional sales were down 24% to 3.7 from 2.8.

In the retail U.S.

and international, decreased equity in hybrid gross sales were offset by higher fixed income gross sales and the increase in redemptions and some of the global international equity, we saw the Templeton Growth Fund increase outflows to $800 million versus net sales of $300 million in the prior quarter.

But we are pleased to see that outflows from Templeton Foreign Fund slowed to $673 million from $1.8 billion as overall redemptions were cut in half due to the better performance there on our international foreign funds.

The top-selling fund in the quarter was the Templeton Global Fund as I mentioned.

Looking at the institutional side, we funded the Company's first QDII mandate out of China, $475 million into [funds of funds] into three underlying SICAV products.

Turning to flows by investment objectives, we had net outflows in the domestic equity side of $800 million versus inflows of $300 million and continue to see strength in the taxable fixed side where we had sales up 44% to 2.6 from the prior quarter.

I would like to now turn it over to Ken for operating results.

Thank you, Greg.

Hello, everyone.

We are pleased to report that this was another record quarter for us, driven by good expense and capital management.

Net income increased 18.6% from last quarter while earnings per share was up more than 20% to $2.12 as a result of our share repurchase activity during the quarter.

Operating income increased 17% from last quarter due to increased revenue and effective management of expenses.

Just a couple of comments on the individual line items.

Investment management fees increased almost 6% due to the 4% increase in average assets under management, and the remainder was due to some performance fees and an extra day in the quarter.

Underwriting and distribution fee revenue decreased slightly, reflecting a shift in sales mix, and that was offset by increased distribution fees from increased average assets under management.

I guess one of the expense items that might have jumped out is compensation and benefits.

That decreased almost 2% for the quarter.

But if you normalize the prior quarter to exclude nonrecurring items, we actually experienced approximately a 3% sequential increase, and that related mostly to variable compensation.

Technology and occupancy expense decreased from 11% from the prior quarter.

Just as the last quarter was a little high, this quarter is a bit on the low side, and that is consistent with seasonal patterns.

And on advertising and promotion, that decreased nearly 17% this quarter as we reduced our TV and Web media advertising.

And typically, we do see reduced spending in this line item in the first quarter as well.

Amortization of deferred sales commission decreased slightly as expected, reflecting lower U.S.

sales, and other expenses were lower by about 20% due to decreased legal, consulting and professional fees, as well as general and administrative expenses.

I should also note in this line that amortization of intangibles is now included.

So to summarize on the expense side, while we are definitely tightening our belts in this volatile market environment that we're living in today, we will continue to invest in the long-term growth of the franchise.

Investment income was down 6%.

Half of that decrease was due to lower yields on cash and the other half was due to nonrecurring items and the effective tax for the quarter decreased to 26.9%.

We did have some nonrecurring items that pushed that rate down.

Our current estimate is for the tax rate for this year to be in the same range we saw last year.

It's also reasonable to expect some more volatility in this line item in any given quarter as we implemented FIN-48 at the beginning of the year.

So hopefully, you have found our added disclosures on capital management in the press release useful.

We did repurchase 6.5 million shares this quarter.

The Board authorized a 33.3% increase in the quarterly dividend.

In addition, the Board of Directors authorized an additional 10 million shares for our repurchase program, and that is the third such increase in the past 1.5 years.

Our total shareholder payout, including dividends and stock repurchases, was 160% of current quarter earnings.

So I think I will leave my comments at that and turn it back to Greg to touch on some business highlights.

Thanks, Ken.

For some highlights in the U.S., our year-long fixed income as I mentioned earlier campaign has seen very strong results with market exceeding 11%, up from 9%, and actually hit a high of 13% for [non-prop] sales.

We're also pleased to see our New Jersey BEST College Savings Program passed $2 billion in assets.

In Canada, Quotential, the number one wrap program in Canada, passed $8 billion in assets.

So we continue to see strong growth in both gross and net sales in Canada with one of our best quarters there on record.

Overall on the performance side, really not too much change.

I think the 66% of long-term assets were in the top two quartiles, 79% in the five-year and 92% in the 10-year.

So we would now like to open it up for your questions.

(OPERATOR INSTRUCTIONS).

Michael Kim, Sandler O'Neill.

The first question I have deals with portfolio allocations.

To what extent, if any, do you think investors, both on the retail and institutional side, are starting to reallocate money back into U.S.

strategies and perhaps out of international funds, given some concerns around slowing economic growth, particularly in emerging markets?

I think it's a little early to draw any conclusions there.

The dollar really hasn't done much, so I think the trend quarter global equities is still very much in place.

I think the bigger move has been towards fixed income and we are seeing some real shifts from both U.S.

equities and global equities into fixed income in this kind of environment.

Maybe in terms of investment performance, if I look at the percentage of fund assets that are ranked in the top two Lipper Quartiles, based on one and three-year returns, it looks like you had some declines across the kind of broader equity platform but some improvement on the Templeton side.

Can you just give us a sense of where the turndown may have been during the quarter?

I think it's always hard, and that is why we don't talk too much about the one-year, other than it can give you some leading indication of where the three and five are going.

But just to give you an example, the income fund for the period ended 12/31, which is about 16% points in shift in Lipper Quartiles for the overall group, slipped down into the third.

But if we look at the 12 months through yesterday, it's back up.

So even that one fund in that short a period resulted in a big shift in the one-year numbers.

I think in terms of general performance statements, mutual series in the kind of market through 12/31, a relatively average short-term year but in the kind of market that we have seen since then, doing what we expect and that is outperforming other funds.

So we expect to see those numbers increasing.

Templeton has done much better on the international foreign side and we continue to see a little weakness in the overall world category for the group.

But some big improvements in the area where we have had the biggest outflows at Templeton.

Okay.

The final question, in terms of maybe more generally speaking the muni bond markets with some of the recent issues surrounding the bond insurers.

I guess number one, how do you see the potential for ratings downgrades affect pricing and demand for muni bonds more generally?

And number two, do you think you're in a position to perhaps gain market share given from what I understand the fact that your funds would not be required to sell any potentially downgraded holdings and strong investment performance records?

I think I share the sentiment that munis are probably one of the most attractive categories right now, and maybe even some of the problems with the insurance wrappers really, they give some people comfort.

But at the end of the day, I think you have had defaults of somewhere around 0.5% historically.

So we don't see that as a big problem for us.

I think the muni funds have still been in positive flows.

Our relative performance has been very strong with some of the problems of some of the other different strategies.

So that's an area that we're pretty optimistic on and we have very good results and I think there is probably not fewer, cheaper, attractive sectors in munis right now.

Craig Siegenthaler, Credit Suisse.

I was wondering if you could give us some perspective on institutional front.

So while in the retail front, we're seeing a lot of shift towards conservative asset classes, both in the US and Europe, such as money market funds.

What is going on on the institutional front?

Are your clients satisfied earning the low rates of returns that some of your bond products may provide, or are they look more towards global equity now?

I'm just wondering if there's any asset shifts going on.

We really have not seen any shifts on the institutional side.

I think some of the big mandates that we won in the last quarter were around global equities and global bonds.

The global bond is a new area for us where we have a lot of momentum, but the global equity searches are still very steady.

And I guess the good news is that you won't have as many redemptions from very positive performance and rebalancing and may get the benefit of some from the other way.

So we're not seeing a real -- any meaningful shift there from the institutional side.

I think most of these plans cannot afford to go into lower yielding vehicles at this point.

So you think the institutional side of the business could continue to give mandates to global equity, which is kind of the opposite of the trend we're seeing right now from the retail investor?

Yes, I think that's -- we would expect that.

There's a lot more discipline around the consultants and the time frames with institutions.

And then on one of your other income lines, the consolidated sponsor investment product line, we see a lot of volatility there.

There's some speculation -- I've never really had good color on what's actually in that item.

So I'm wondering, is it [CDO] equity pieces, or what is actually in there?

I will get that one.

What is in there are -- sponsored investment products are potentially products where we have a controlling interest, and that's the unrealized gains and losses that go through that line.

So it's kind of -- you get the volatility in there because it's reflective of the volatile overall markets we have.

It's pretty match [loan]-only products, plain vanilla equity.

So is this seed money for some of your funds?

Yes.

Oh, it is.

Is there a portion of that in CDO equity or a fixed income structured product?

No, not material, no.

I just have one more question on target date funds.

I'm just wondering what's your view on the market, because certain executives out there, like Booz Sanders or Alliance Bernstein, are pretty positive on the prospects there and the shift within defined contributions plans.

You guys are very active in the DC market.

I'm just wondering what your thoughts are on target date funds?

I think clearly that they will continue to grow in popularity, and as more people are mandated to invest through their retirement plans, these are somewhat of a natural.

And whether it's lifecycle or target date funds, it's a nice simple way to get diversified and try to get some suitability there without maybe having an advisor in between.

And what's your AUM in target date funds?

I don't have that in front of me, so I'm not sure.

Is it less than $5 billion.

Yes.

Jeff Hopson, Stifel.

Two questions.

On the non-US flows, it seems like a fair amount of that is driven by newer products.

Can you give us any sense of the pipeline of new product possibilities down the road?

And Greg, you mentioned that there is a little bit of a shift to fixed income.

Does that include domestic as well?

Well yes.

I think the big seller for us in on the global bond side, and that's sold -- it has actually been as popular in the US as it has outside of the US.

And what was the other part of the question?

In the new product pipeline, on the retail side overseas.

We've brought out a lot of new products in the last year so, and a lot both on the equity side and the fixed income side.

And I think we have most of the mandates out there covered.

We'll continue to bring new funds.

We're bringing out a core equity fund here in the US market, and actually our aggressive growth fund that had a very strong quarter in the SICAV as well.

So that's something the pipeline will continue to bring in.

I think with the strong performance on the fixed income side, there's a lot of other categories in the global aggregate side and core plus that we think have opportunities as well.

William Katz, Buckingham Research.

Question I have is, just coming back to retail for a moment, you look at some of the trends here, and eventually US retail you have sort of slipped negative in the quarter.

I am curious if you could talk a little bit if you are seeing any kind of change into the first quarter.

And a related question is, strategically have you given any greater thought to potentially accelerating the penetration into the growth platform via acquisition rather than de novo?

I think first of all, this quarter you wouldn't expect to see a big turnaround in flows from the prior quarter.

It has been an extremely difficult equity market and I think a lot of people are going to stand on the sidelines until we seem to settle here.

So I think that trend of volatility, especially in flows as you would expect, just like when you look at the industry, would be a difficult period.

The growth side, we have -- we continue to wrestle with and I think one of the positive notes on performance has been with the Franklin and Global Advisors, and specifically the team within fiduciary has had some very strong results on the growth side, and especially global growth.

And we're able we think to leverage those performance records, so that again gives us another arrow there to hopefully address the growth platform.

But, it is and it continues to be a priority for us to fill that gap.

Are you giving any greater probability to doing an acquisition if there is a more decisive shift coming into the new year?

As we've said before, it continues to be a large segment of the market where we have a lower penetration.

And as always, we're open to looking at everything out there.

Separate question.

If you calculate the manufacturing margin, if you will, excluding the impact of distribution, it was 55% which in my recollection following the Company is probably the highest it has ever been.

I'm curious -- can you dimension how much of that was "belt tightening" versus any residual leverage you have in the platform?

I think what you're seeing there is classic revenue growth outpacing the expense growth.

I think what you see on the expense side is, there was a little bit of belt tightening.

There was also a little bit of what I called seasonal spending patterns that we saw at the same time this last year.

So a little bit of both there.

Okay.

And then just finally, I'm just sort of curious if you could talk a little bit about on the -- you just gave a little dimension there, but on the global products which have slowed versus the -- Greg, your comment that the mandate environment has not really slowed that much.

What then is driving the sequential deceleration on a product basis, the global product?

And what -- given the earlier question on relative performance sort of deteriorating a little bit sequentially, what gives confident that that won't continue that sort of adverse trend?

I think the big one I mentioned earlier was around the world product, specifically Templeton growth, and that quarter-to-quarter was a difference of $1.3 billion in flows from the prior quarter.

So that is under pressure and that is really the one that has contributed to the overall decline.

Mutual Discovery continues to perform extremely well, Mutual European continues to perform very well and continues to have strong inflows.

But the real change has been with the Growth Fund, and it has had a difficult year and just some of the weightings with consumer discretionary not having materials made it a very difficult year.

But the good news is that the foreign and international side that -- is where we had the big outflows, has turned around.

If you look at your -- I know you don't necessarily run the business the way this way, but if you look at your comp to revenue ratio, and maybe it's days weighted, et cetera, that ratio has dropped pretty precipitously.

Is this tied to relative performance or any other sort of strategies?

The reason I ask that is I'm sort of curious how you dimension trying to rebuild the equity side of the business against efficiencies?

Sorry for the background noise.

I think that's a little bit of a lot of questions in there, but the equity groups do have separate pools that are based on performance, but they're really a bottom-up build of the overall pool which tends to be a percentage of PTOI, which is fairly actually consistent with the prior year.

So there's not a big change in compensation anticipated for equity performance at this stage.

I don't know, Ken, if you'd want to add anything?

I would just add, it's kind of the first quarter of the year we're taking our best guess at what the number's going to be for the full year.

It is based on profitability, so we have to take a stab at what that's going to be for the whole year.

But it's nothing -- it's kind of business as usual.

Marc Irizarry, Goldman, Sachs.

Greg, just a question on the positioning on style, if you will.

Do you have any comments -- obviously, there's this perceived or actually observed shift into growth.

What are you doing strategically, if anything at all, or how do you think the firm is positioned strategically at retail or institutionally to capture or to benefit from this shift in any way?

Well, I think I talked a little bit about that.

We have a lot of initiatives within the firm to address just that, and part of it was the combination last year with fiduciaries, analysts and portfolio managers with Franklin's and the development of a lot of new growth products from that.

Franklin here and in San Mateo also has had very strong performance, but had somewhat of a tough year, year-to-date with -- not all, but some of the growth products.

So it is something that we're aware of, but it really doesn't change our thinking to building it and focusing on taking the organic path.

What was the other part of the question?

Just in terms of the style shift (MULTIPLE SPEAKERS)?

You know, I think one thing to look at just year-to-date is a lot of the large cap growth names that have really led to some of the outperformance here, have been some of the worst performers in the sell-off in the market.

So it may not be as obvious of the value to growth rotation and I still think it will be a stock pickers market more towards core than the kind of shift that we have seen to value and the shift before that to growth.

So I just don't think you're going to have the same kind of move and you don't have the same kind of valuation in equities that you had in the past cycles.

So I just don't think there will be a huge swing in the growth.

Understood.

In terms of your acquisition appetite, obviously you did the deal with -- or the investment with [Algebra].

I'm curious, regionally, where do you see some of the pockets of opportunity to sort of increase your investment expertise, your local level investment expertise?

Is that something in this environment -- do you think that the valuations would imply that you will be able to maybe accelerate that initiative?

I think that's certainly a possibility.

I think we've been a little bit hesitant on some of the past valuations on firms that we were interested in, and hopefully some of those will get cheaper and look attractive to us.

But I also think that as far as number of fund styles, we do have quite a bit to support today.

But, whether it's a small niche that fits in nicely, or a firm that is outside of the U.S.

that helps build our local business in that market, those again are things that we're going to be open to.

But our appetite has not changed.

Cynthia Mayer, Merrill Lynch.

I'm wondering if you could just talk a little about the pattern of net flows within the quarter between three months and whether things -- the sales or redemptions tailed off in December?

Again, I think it's really -- you look at the volatility and that will tell you that it will follow very closely to what the market is doing during the quarter.

We did have positive flows in every month.

Okay.

And on the Income Fund, what has caused the underperformance there?

I remember back in the summer, you were talking about utilities, but they actually wound up doing pretty well through the end of the year.

So I'm wondering what else it could be.

And also, in terms of the sales falling off in that, is that a function of relative performance do you think, or is it a function of people recognizing that it's not a pure substitute for a bond fund?

I think it's all of the above.

It has an approximately 50% weighting in high-yield bonds.

So relative performance, as credit spreads widened, that fund did not do as well relative to its peer group.

That fund has always had high-yield bonds and it probably always will.

So really we expect that kind of performance.

Now the good news is that our high-yield selection has done well across the board for us relative to its peer group.

You were right, the utilities did do well.

When we talk about underperformance, we're talking about a very small amount that was primarily due -- it had some financial exposure and some high yield.

Now as I mentioned, some of that has gotten actually better and the relative numbers are back to the top two quartiles for the year-to-date numbers.

It has such a huge swing on our total numbers because it is such a large part of our asset base when we're looking at those weightings.

But there's also some concern from the buyer at this point, will credit spreads widen.

So anything with high yield I think advisers are being a little bit more cautious with as we've had this kind of volatility.

So that too has affected the income fund flows.

Okay.

And then on the expenses, I'm just wondering if you could give a little more color on what you mean by belt tightening and how sustainable your lower other expenses line is.

And also, in a tough market environment, is that something -- is that a type of environment where you would pull back on marketing expenses?

I would just add before Ken, I think as far as belt tightening, hopefully we're always belt tightening, and that's king of the culture we have.

And I don't think anything in this quarter was due to a concerted effort to suddenly control the costs.

I think a lot of that -- some of that was due to some timing differences.

The marketing number, as Ken mentioned, that is really a seasonal lower spend for us, but it's not something that we expect to have to reduce.

But if the markets do get -- if you continue to have a sell-off, at least that is a decision you can make during the year and control that.

So really, some of that seasonal, but -- and today, with the market [sell-off], it's a little bit different situation than where we were three months ago.

So I think like any business in this investment management, you're going to take a hard look at all of your discretionary spending right now.

Let me add a couple of things to that.

First, just a clarification on the previous question about the Income Fund.

The high yield holdings are like 50% of a fixed income component, which is -- it's not all -- it's not 50% of the fund.

But on the expenses, I agree with everything that Greg said.

I don't think we should make too much about this.

Any decisions that we made today to -- in our cost base probably wouldn't be reflected for some time.

So in the short-term, it's kind of hard to make too much of the belt tightening comment.

Ken Worthington, J.P.

Morgan.

-- answered at this point, thank you.

Are there any more questions?

Jeff Hopson, Stifel.

Just back on the growth products, you actually have a fair number of large cap growth products that have done pretty well.

So I am curious, is there just a perception issue out there that that you don't have with those products, and is there any attempt here to place more emphasis on those products as we move forward, or have you been doing that?

The answer is yes to both.

I think you, if you are successful and perceived whether it's international or value, it will always be difficult to get the kind of attention you deserve on the growth side.

And it is an area that our distribution group is focused on and is talking about and will continue to be.

And we'd like -- we think the organic path is clearly the best one for us and we have the team and the expertise in place to do that.

So that's really the path we're going on.

But, I think you have hit it on the head, that it is somewhat difficult and that's part of reason why we retain separate investment management firms and brands because the advisers and consultants identify so strongly a brand with where it has been specifically successful and has the greatest penetration.

So that is why we keep all of our options open and just thinking about what is the right formula going forward.

But the organic pattern is the one that we're committed to today.

Is that the final question?

At this time, there are no further questions.

Do you have any closing remarks?

Well, I would just like to thank everyone for participating today and we look forward to speaking with you next quarter.

Thank you.

This concludes today's quarterly analyst conference call.

You may now disconnect.