富蘭克林資源 (BEN) 2009 Q2 法說會逐字稿

Welcome to Franklin Resources earnings commentary for the quarter ended March 31st, 2009.

Please note that the financial results to be presented in this commentary are preliminary.

Statements made in this commentary regarding Franklin Resources Inc.

which are not historical facts are 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.

This commentary was pre-recorded.

Hello and welcome to the second quarter earnings commentary.

I'm Greg Johnson, CEO along with Ken Lewis, our CFO.

We are pleased to introduce a few changes to our quarterly reporting process.

The first of which is the commentary that is being made available before the market opens.

The presentation that accompanies our comments is available on our website.

At 4:30 eastern time, Ken and I will also host a live teleconference to answer any questions that are not covered here.

Turning to the quarter, net flows improved from the prior quarter as it started out on a stronger note with the positive net flows in January and early February.

Following several days of sharp global market declines in the second of half of February, investor sentiment shifted and we began to experience net outflows albeit it nothing like those experienced in the fourth quarter.

Toward the end of the quarter, flows again stabilized as the global markets reclaimed some of the recent losses.

Relative investment performance continues to improve especially at Mutual Series in Templeton with overall relative performance improving for the one, three and five-year periods while the ten-year number held steady at 94% of the assets in the top two Lipper Quartiles.

Highlighting our strong long-term performance, Barron's recently named Franklin Templeton Investments "King of the Decade" for the ten-year period ended December 31, 2008.

Income before tax was $178 million, despite incurring approximately $86 million unrealized losses as well as increased severance charges as we made the difficult decision to reduce our global work force by approximately 8% in the quarter following our recent reduction at the end of March.

That brings total headcount reductions for the fiscal year to around 10% for the organization.

Moving to slide six, you can see that assets decreased to $391 million or 6% quarter-over-quarter and simple monthly average assets decreased by almost 10%.

AUM by Investment Objective changed since our preliminary AUM release earlier in the month after completing a review of our products and our investment strategies.

This did result in some small percentage changes in Equity, Hybrid and Fixed-income AUM.

We also introduced the new category Cash Management to describe our 2a-7 money market funds and our other non 2a-7 cash management products.

We reclassified a few products of cash management from global fixed-income due to a new Securities and Exchange Commission board of India rule that requires these types of cash management funds only invest in money market and debt securities with maturities up to 182 days.

We did not restate prior periods and the major change looking at the new versus the old style of classification was Cash Management increased from $7.6 billion to $8.1 billion or 6.6%.

Market movements and sales mix push the asset mix further towards fixed-income at 34.5% of assets compared with about 32% in the prior quarter.

Looking at flows, we also had some changes or enhancements in the presentation format.

We introduced long-term sales and long-term redemptions that exclude cash management to provide more clarity on flows to our core products as cash management products represent only 2% of our AUM but historically have been a much larger percentage of sales and redemptions.

Cash management sales and redemptions are now presented on a net basis and we included long-term sales and redemptions by sales region.

Looking at slide nine, you can see that market depreciation continues to have the biggest impact on AUM levels as it accounted for over three quarters of the decline in AUM again this quarter.

Long-term sales decreased approximately 29% while long-term redemptions decreased over 45% but this decrease is partly due to the reclass of the India cash management products and global fixed cash management this quarter.

We have not restated prior periods but for comparison purposes, the decrease in long-term sales and long-term redemptions would have been approximately 10% and 36% respectively.

If you're looking at the presentation, comparable period data is included for your reference.

Long-term net outflows were $5.1 billion, which was a 73% improvement from the prior quarter's outflows of $18.7 billion.

Looking at the flows by sales region, in the United States, long-term sales decreased slightly from the prior quarter while redemptions slowed 35%.

Our retail sales and marketing efforts in the US are focused on asset classes that appeal to advisers in volatile markets, primarily fixed income.

We continue to see gross sales and exchanges in our more conservative products especially our government securities funds.

Franklin Income, our largest fund, had outflows of approximately $700 million, which was a significant improvement from the prior quarter outflow of about $2.8 billion.

The institutional business continues to experience both new accounts and withdrawals from existing accounts over the quarter, but generally we have noted a slowing down in the decision making process.

While search activity continues, final approvals and levels of fundings have become slower and more conservative.

Looking at international flows, long-term sales declined by 55% while redemptions declined by 57% but again the majority of that was due to the reclass into cash management from global fixed.

For comparison purposes, the decrease in long-term sales were about 25% in sales and 39% decline in overall redemptions.

Within our cross border C cap product range -- fixed-income funds, high yield US government securities and regional equity funds like the Latin America/Asian growth -- have continued to draw investor interest.

Our diversified C cap product offering is the third largest in terms of net assets, continues to be a strength to recent market conditions and posted positive net new flows this quarter of approximately $100 million which is an improvement from $2.3 billion in outflows in the prior quarter.

Our largest single outflow outside of the US was a withdrawal from a Middle Eastern client of a $500 million separate account from an emerging marketing debt mandate.

Looking at the flows by investment objective, overall equity sales decreased by about 32% -- I'm now on slide 11 -- while redemptions decreased 34%.

Net new outflows of $5.5 billion with a 35% improvement over the prior quarter's $8.5 billion in outflows.

Global equity new outflows flowed to $3.2 billion from $6.5 billion in the prior quarter and our four largest global equity funds all experienced new outflows again this quarter but at a much lower rate than the prior quarter.

Domestic equity net new outflows increased to $2.3 billion, from $2 billion in the prior quarter as shareholders exchanged into bond and cash management products.

Growth products such as -- or growth opportunities and flex cap growth fund were among our best-selling domestic equity funds with positive flows in Q2 and Q1 while our mutual shares fund had the largest outflows of $645 million for the quarter.

In the hybrid category, we saw increased sales coupled with decreased redemptions and exchanges which led to a 75% improvement in net new outflows.

Looking at fixed income, we swung back into positive flows with $1.2 billion of net inflows, and most of that was due primarily to slowing redemptions.

Tax free and domestic products generated net new flows of $800 million and $1.5 billion respectively as both categories experienced increased sales and slowing redemptions.

Global fixed-income had net new outflows of $1.1 billion compared with $5.6 billion of outflows in the prior quarter.

The global bond fund in the US was back to inflows of approximately $350 million compared with outflows of $580 million in the prior quarter while the C cap version had outflows of $100 million which is an improvement from $1.1 billion of outflows in the prior quarter.

Two biggest outflows were from two institutional clients that redeemed almost $900 million.

On the cash management side we had outflows of $400 million compared with inflows in the prior quarter.

It was a positive story on investment performance.

We continue to have very consistent long-term results.

Overall the percentage of assets in the top two quartiles -- 71% for the one-year, 66% for the three-year, 80% for the five and 94% for the ten-year period.

We saw improved equity performance from Templeton and Mutual Series which contributed to most of the near-term performance improvement.

Franklin Income which remains in the bottom two quartiles for the one and three-year periods and represents 14% of overall assets has seen its relative performance improve over the shorter period but still lagging for the one and three-year.

Franklin Templeton fixed-income continues to deliver strong performance with over 90% of its assets in the top two quartiles for all periods and Franklin tax-free fixed-income also continues to perform well with improvements in the one and three-year periods while the longer periods were unchanged.

Templeton Equity experienced the biggest increase in rankings -- and I'm now on slide 14 -- with 93% of its assets in the top two quartiles for the one-year, Templeton Growth improved to the second quartile for the one-year period and represents almost half of the assets in this category.

Templeton Foreign Fund improved to the top quartile for the one and three-year periods.

Mutual Series equity has almost 100% of its assets in the top two quartiles over all time periods.

And Franklin Equity -- overall the one-year period declined to 25% of assets while the three-year improved to 27% but the Franklin Income fund is very dominant in this category with over 53% of the equity assets.

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

Okay, thanks, Greg, hello, everyone.

My comments are going to start on slide 16.

We're seeing tangible results from our cost management efforts over the last 12 months.

Operating income decreased 17% during the quarter.

Operating revenue was down 6% and operating expenses down 2%.

Inclusive of $25 million of expenses related to staff reductions during the quarter.

Excluding that charge, the sequential decrease in operating expenses would have been over 5%.

Investment management fees on slide 17 decreased 8% reflecting a 6% decrease in daily average assets under management and a 2% decrease in the number of days in the quarter.

The effective fee rate is about the same as it was last quarter.

Underwriting and distribution fees were flat this quarter as decreased average net assets were offset by increased commissionable gross sales.

Also last quarter, we had about $5 million more of redemption income from A and C classes.

Shareholder servicing fees were also flat from the prior quarter despite a 4% increase in billable accounts.

Like everyone else we've been experiencing an increase in closed accounts that are billed at a lower rate.

A reminder that our Canadian transfer agent purchased closed accounts next quarter and our US transfer agent purchased closed accounts in quarter four.

Other net revenue was a negative $13.6 million in the quarter reflecting a $26 million write-down of retained interest in auto loan securitization trust.

Slide 18 takes a look at operating expenses, which decreased 2% as we continued to focus our attention on expense management.

A portion of those were once again headcount related and included a 4% reduction at the end of March in addition to the 4% reduction in January that we discussed last quarter.

We have reduced our headcount 10% since the start of our fiscal year.

Total employee headcount was around 8,200 at the end of March, 7,850 when adjusted for the employees that were notified on the 30th of March but left in April.

At the end of September, employee headcount was 8,809.

Included in compensation and benefit expense which decreased 3% sequentially, was about $25 million of expenses related to the January and March reductions versus $11 million last quarter.

Also, there was about $15 million to $20 million of lower variable expenses, including bonus that are not expected to recur in future quarters.

Our [key mood] of headcount reductions this year are expected to reduce base compensation and benefit expense by about $60 million on an annual basis.

Of that amount, approximately $20 million relates to the March staff reductions.

Technology and occupancy expense decreased 5% quarter-over-quarter due to a decrease in technology consulting fees, data and voice lines as well as lower occupancy expense.

Advertising and promotion expense increased $2.5 million or 10% quarter-over-quarter due to increased marketing support payments that were partially offset by decreased advertising.

Our advertising team has been very creative in maximizing the impact of lower advertising spend and we continue to believe it's important to support our brands, both in the US and in international retail markets.

In fact, in light of improving performance and global opportunities, we expect advertising to increase over the next two quarters.

Other expenses decreased 13% as a result of lower travel and entertainment and discretionary spending as well as some non-recurring charges included in the prior quarter.

Moving to slide 19, other income increased $37.4 million to a net loss of $45.3 million from a net loss of $82.7 million in the prior quarter and that was due to several factors.

Consolidated sponsored investment product losses decreased $27.2 million to a net loss of $9.3 million due to decreased market values of the securities held by those consolidated sponsored investment products.

Investment in other income net increased $11.1 million to a loss of $33.9 million compared to the prior quarter's loss of $45 million.

Included in this line item is an other than temporary impairment, unavailable for sale investments of $23.8 million, an unrealized mark-to-market loss of $21.2 million on retained securities from our 2008 [auto] loan securitization and equity in affiliate losses of $10.6 million.

Interest expense increased due to an adjustment related to [thin 48].

And effective tax rate for the quarter was 37.7% due to an increase in the estimated annual effective tax rate to 35.8% as well as other discrete items.

On slide 20 showed the operating margin declined to 24.5% for the quarter and the margin was 26.1% for the fiscal year-to-date.

And on capital management, we repurchased 1.4 million shares during the quarter and the board authorized the Company to purchase an additional 10 million shares of its common stock from time to time.

The total payout ratio was 106% for the quarter and 89% on a year-to-date basis.

Total cash and investments were approximately $5.1 billion versus $5.2 billion at December 31, 2008.

I'll turn it over to Greg to talk about some business highlights.

Some business highlights over the past quarter in the Middle East we increased our equity stake in Dubai-based Algebra Capital to 40%.

To date we have successfully launched and marketed five [mean to] equity funds worldwide, leveraging our global distribution platform.

In Mexico, we launched the new asset management company that enabled us to assume management of our four existing funds that we've been sub-advising as well as launch three new funds in February.

We still see Mexico as a good long-term opportunity for mutual fund growth.

Malaysia we opened a new office in Kuala Lumpur.

Malaysia is one of the largest markets in terms of assets in Southeast Asia.

Looking at distribution trends in the US insurance channel, heading into next quarter, when many insurance companies will be making changes to their product lineups, we're making good progress in adding our funds to insurance company platforms.

We're also pleased to see that Franklin Templeton real estate advisers announced the final close of the Franklin Templeton Asian real estate funds with total commitments close to $400 million.

In summary, it's been another difficult quarter in the asset management industry, but we were pleased to see some positive developments for the organization, particularly around flows, which improved from the prior quarter, investment performance, specifically with Templeton and Mutual Series, and the impact of our cost management programs, which have resulted in lower expenses overall for the Company.

I would like to thank everyone for taking time out of your busy morning to listen to this commentary.

We hope you found it useful and we will be available for your questions on a live call later today.

Thank you.