富蘭克林資源 (BEN) 0 Q0 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended June 30th, 2009.

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 any future results expressed or implied by such forward-looking statements.

These are other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission included in the risk factors and the MD&A section of Franklin's most recent Form 10-K and 10-Q filings.

Good afternoon.

I will be your conference operator today.

At this time I would like to welcome everyone to the Franklin Templeton quarterly conference call.

All lines have been placed on mute to prevent background noise.

(Operator Instructions).

Now I would like to turn today's call over to the CEO of Franklin Resources, Greg Johnson, for opening remarks.

Sir, you may begin.

Good afternoon, everyone, and thanks for joining us on our quarterly call.

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

Hopefully everybody had a chance to listen to the prerecorded commentary this morning but just to recap, while there are many highlights for the quarter, none were more important than the continued relative strength in investment performance and the turnaround in net flows.

The recent recovery this in most global financial markets has also driven a substantial recovery in our assets under management and run rate revenues and we continue to see tangible benefits from our cost management efforts with operating results improving substantially from recent quarters.

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

(Operator Instructions).

Our first question will come from Robert Lee with KBW.

Thanks.

Good afternoon.

Just a quick question, one or two modeling questions first maybe.

Just on compensation, obviously you had the full impact, I'm assuming, of the headcount reductions in Q2.

Is there any reason to expect that assuming you continue with the solid asset top line growth and performance that we shouldn't start to see that at least trend up a little bit from these levels?

Or or do you expect this to be where it is as you keep a close tab on expenses for at least the next several quarters?

Okay.

Thanks, Robert.

I think that June is a pretty good quarter in terms of run rate, reflecting the headcount reductions.

And most of that was behind us in the previous quarters.

But, of course, variable compensation is a big component of the compensation so that will fluctuate with revenue and so if revenue does go up, you can expect that line to go up, as well.

The other thing I'd mention is there's other expenses in there.

So that could have a little bit, I wouldn't say material, but a little bit of an upward pressure, things like compensation that's tied to the price of our stock, for example, could have upward pressure if the markets continue to go up.

Okay.

Maybe a question for Greg.

You gave some tables and color on US versus non-US business trends but can you maybe give us a little bit of sense on, at least from a retail perspective, how investors outside the US and in the US maybe, compare and contrast them, or are you seeing investors outside the US start to come back and take more risk?

Is there a little bit more of a lag effect there and how do you think that would play out?

I think there is more of a lag effect versus the institutional, but between the US and international for us, the reason you haven't seen the kind of turnaround in net flows outside of the US is because of the strength of fixed income within the US, and we really don't have the benefit of the muni funds and other fixed income products that really were the story for the last three or six months in our industry.

We are seeing a pickup in the retail investor as these markets have been very strong, but clearly there is a bit of a lag there.

And then I think just comparing the two probably by region, I think as I mentioned last time, you tend to see retail investors move back quicker in some markets like Asia where they're more conditioned to these kind of swings versus the US one.

The US one now has moved from money funds back into riskier high yield, longer term government securities type products and then some dipping back into equity.

So I do think it takes a little bit longer there.

Okay.

And maybe the inevitable question on capital, notwithstanding the comments on the prerecorded message about obviously still interested in an acquisition that makes sense, but if we look down the road and let's say, for example, you don't find one and you've got $5.5 billion of cash and investments, substantial amounts of liquidity, how would you think about maybe deploying that at some point?

I think it was four years ago already maybe when you did that special dividend.

Is that something you would ever consider again?

I wouldn't rule anything out including that.

Obviously the priority is to grow the business and that would be our first use of capital, to invest in the business, but I wouldn't rule anything out.

Okay.

That was it right now.

Thank you.

Our next question will come from Craig Siegenthaler with Credit Suisse.

Thank you.

Good afternoon.

First just a question here on M&A and it was on the back of the commentary in the prerecorded call.

I'm just wondering, it sounds like the chances that a deal gets done in the second half of this year are now lower, especially after listening to the comments in your prior call.

Is that conclusion justified or can you provide any commentary on that?

I'll start and then Greg can chime in.

I think the last sentence of that comment is that we continue to look at opportunities and the key point is that while we look at opportunities we do it in a very disciplined way.

M&A, in general, is, I would say, a higher risk way to grow a business than organically.

And in this business particularly, such a people business, that you have to be very disciplined in evaluating a property and that's what we've done and that's what proved the results.

That's what's given the great results we have for our shareholders in the past and that's why we've been so successful in the acquisitions that we've made.

So we'll continue.

The point is that we continue to look at all the opportunities that are out there as we've been doing for the last couple years.

So the quick answer is that you shouldn't read into that comment one way or another on the probability.

I think we just wanted to make the point that we don't treat it as a goal or an objective to complete an acquisition in the year ahead and then we're trying to be thoughtful about it, and that may mean something will get done.

It may not.

Thanks.

Understood.

One other question.

On that pre-recorded call you also provided some commentary on the South American Brazilian market, on the opportunities there.

I'm just wondering, the retail market there is very concentrated around a few large banks and you talked about a new relationship you have with one of the banks there.

Are you allowed to disclose which bank that is?

I wouldn't say it's a new relationship.

It's specific to the Brazilian market through Citibank where we have core funds and the plan is to continue to launch more funds with other banks in that marketplace.

And it was really an example of even when the markets were down and we were reducing expenses and headcount, it was still an area that we felt warranted additional investment and we did add people into that region, and we are starting to see some benefit from that, albeit relatively small right now.

You have a few businesses in Brazil and the other emerging markets like two in China, some large ones in India.

Are you still looking at new businesses in those regions or other regions in parts of Asia where you're under-exposed?

Or are you comfortable with the businesses that you have there on the ground now?

I think we're always looking at new markets and one of the examples of a new market where we're looking at building out local capabilities would be Malaysia and we had the benefit of $300 million or so that came from that opening of that office here in the last quarter.

I think there's areas where we feel like we could penetrate the markets greater, but as far as newer markets go I don't think there's anything that right now that we feel like we have to enter.

It's just other markets we feel like we could maybe do a better job in.

Great.

Ken, Greg, thanks for taking me questions.

Thank you.

Our next question will come from William Katz with Buckingham Resources.

Thank you.

Good afternoon, everyone.

Still sticking on the capital discussion for a moment, on the last page of your slide presentation you have the payout ratio and I'm just curious if you can talk a little bit about that directionally.

It's down pretty sharply for the last couple of quarters but it is consistent year on year.

Is it just seasonality that plays into the payout ratio or is there anything else I should be thinking about here?

I think it's seasonality.

I think it's a function of earnings and I think you shouldn't read too much into it.

Nothing's really changed in our strategy.

We give guidance, or we've had a practice, if you will, of returning 75%, 80% of earnings and we stick in that ballpark, but on any given quarter it might be a little bit off.

Okay.

And my second question is on the advertising and promotion line, we thought that might have trended a little bit higher.

Just curious as to how you're thinking about that line item.

Obviously you have good performance, and then with the Templeton funds and then the income fund going back into above medium on a one to three year basis, would you look to ramp that meaningfully to take advantage of that and probably inflect flows even faster?

I think that we did see a pickup in the advertising expense this quarter and we would expect to see a little bit more in the next couple of quarters, or at least in the short term for those very reasons that you stated.

It was a little bit offset by other expenses that went the other way but core advertising was up this quarter.

Okay.

So the support is was just lower?

Yes, correct.

Okay.

All right.

Thank you.

Our next question will come from Michael Kim with Sandler O'Neill.

Hey, guys, good afternoon.

First, maybe just to follow up on the capital question once again, I think you mentioned in your prerecorded comments that you passed or you may have passed on a number of potential acquisitions more recently.

I know each deal is different, but any color on maybe your thinking in terms of why you decided to stand pat?

Was it more structuring, the strategic fit, or was it maybe a function of the pricing, as well?

I think your opening comment sums it up.

Every deal is unique and it's hard to generalize, and all of those reasons that you mentioned are reasons why you would or would not do a deal.

But I think with the amount of comments that have been in the press we really wouldn't want to comment and have people read into that that may not be accurate.

So I don't think we can really say much about why these deals didn't happen.

Okay.

Fair enough.

And then in terms of the institutional channel maybe if you could give us some sense of what you're seeing in terms of the decision making process, whether that has picked up more recently, as well as what you're seeing in terms of brisk appetites more generally?

Yes.

I think we talked about it last quarter that things look like they were starting to move, and I think that's been the case, or that's what really has been our experience in the last quarter.

And some mandates that were won that they hadn't been funded yet and we saw some funding start, and that really is a good sign that people are feeling more comfortable overall about the markets.

I think as far as the opportunities and the pipeline, we are seeing increased RFP activity and it's really been, as you'd expect, on the fixed income side along with the global equities side and really not much in, say, US equities.

But those two areas would be the highest.

And then the other area, whether you call it institutional or retail, somewhere in between in the VA market, we had a lot of activity in the quarter and within the variable annuities side and some new fundings there and some big moneys moving both ways that resulted in about $500,000 net going into that area.

But our group is pretty optimistic right now about the pipeline and the opportunities that we're seeing, and again both the fixed income and the global equities side.

Okay.

And then maybe just a final question for Ken.

How should we be thinking about margins going forward?

Or maybe put a different way, at what point do you maybe start to ramp up spending assuming your assets continue to rebuild, and what areas would you focus on first in terms of the expenses?

We're going through our budget process now and I think it's fair to say that there is, from the business units, some demand for increased spending, but at the same time we haven't forgotten what a painful year it's been.

So we're being very selective and I would say strategic in how we would allocate dollars going forward if the revenue was there to support it.

It wouldn't be across the board.

Like I said, it would be based on the individual business case where we thought the spend would result in the most benefit and in terms of line items I think we do think it's probably a good time to do some advertising.

I think on the technology side there's probably some good reasons to increase spending in that area, as well.

And I would just add to Ken's comments that where you would see the increases would be more around the variable numbers like marketing support and things that go up as assets go up, but as far as headcount and things I think our outlook is that we're still being very cautious and very careful about adding headcount in this environment.

Okay.

That's helpful.

Thanks for taking my questions.

Our next question come from Jeff Hopson with Stifel Nicolaus.

Thank you.

In regard to the global bond product, it appears that most of the flows were on the retail side, and I'm just thinking that on the institutional side given the demand for fixed income that would be a natural product that institutions would be interested in, so I'm just curious what the outlook is there, what the pipeline is.

I think that's a fair comment.

I think if you look at the global bond category within the retail space, if one had looked at that category a couple years ago, you probably would have ignored it because it was very small, and I think it again points to when you have strong alpha in any category you will attract money.

I think it's a little bit harder in the institutional market where it has not been a large traditional allocation.

It doesn't fit neatly into a specific box, so there the searches are going to be a lot less than a typical category.

So we're seeing some interest but that really has not been an area where we're seeing the real potential.

It's really continuing to build out the retail side.

Another area in between would be variable annuities where, again, in the last quarter that product was added to some variable annuities where's they hadn't had global bonds in there before and they were very significant dollars going in there.

We think that trend will continue, but I think the greater opportunity is still in the retail channel and that's really just growing every month for us.

Okay.

And I assume that as the quarter has gone on and July, that international foreign product flows have improved.

Is that a fair comment?

We're having some background somewhere, but as always, we can't really comment how July -- I think as long as the markets are continuing to be strong and the dollar's getting hit, you'd expect foreign funds to be doing relatively well.

Okay.

Great.

Thank you.

Our next question comes from Mike Carrier with Deutsche.

Thanks, guys.

Just a quick question on the retail side.

I think you gave some indication that the retail investor's taken a little bit more risk, but industry flows, your guys' flows, is still weighted towards the fixed income product.

So is it just increasingly you're seeing them take on more on the equity side or is it just something that through the comments from the wholesale force talking to the different channels that you're just starting to see some activity there?

I think if you look at the overall flows, the change in the net outflow versus a slight inflow into equities is a fairly significant shift in the quarter.

So that trend continues, it would be a fairly significant shift towards positive flow.

I think you could conclude from that that it is a significant shift in the investor.

It's not the same kind of numbers that you're looking at on the fixed income side but they never had the net big outflow number anyway.

We do think that it is just part of the natural process of getting people back into long term funds.

Some people may have just got out of the market completely and then they feel like, well, gee, now it's no longer a systemic risk to the banks and they're willing to go back into longer rated fixed income type products.

So I think that will continue.

But equity is something that we as a company we just kicked off a big push on our own, Franklin Equity and Flex Cap and Growth products and so we're pretty optimistic that we can get some momentum there.

Our next question comes from Cynthia Mayer with Banc of America - Merrill Lynch.

Hi, good afternoon.

Just a question on homebuyers.

I'm not sure what, if any, impact this would have on your business, but what trends are you seeing in terms of investors moving into or out of securities from their own countries?

Are you, for instance, seeing non-US investors moving out of dollar denominated assets or as risk appetite improves are you seeing investors move more outside their own countries.

I don't know if that would benefit you or not.

I think any time you tend to see the dollar weakening you will see a shift with the investor moving in more global equities and I think that's definitely taking place today.

Outside of the US, again, it's hard to generalize because some markets, they don't have the ability to invest outside of their country.

So I wouldn't be able to answer that question except from the US investor's perspective and I think the answer is that that is shifting and it seems to be more pressed about why it's important to do that.

Okay.

And just circling back to the institutional just to try to put it in perspective, how's the RFP pipeline and traffic look compared to, say, a year ago?

I actually just spent some time with our head of distribution a few hours ago and he said that the RFPs are probably up two to three times from the bottom.

I'm not sure where they are right now relative to a year ago, but I would guess it's somewhere still below or maybe near that level, but there is increased activity right now that's fairly significant from where we were where everything seemed to be somewhat frozen.

Great.

And last question, it looked like in the quarter the headcount came down a little bit more and I was wondering where that came from.

That's a result of headcount reductions we had last quarter.

Okay.

So nothing new there.

Thanks a lot.

Our next question comes from Keith Walsh with Citi.

Most of my questions have been asked and answered, so I've just got one.

Just on the wire house distribution side with the consolidation we've been seeing, I know we've asked this in the past, just any thoughts on pressure on fees for asset managers in general going forward?

I think it's the same answer that we had.

We haven't seen any shifts.

I think that the more you concentrate distribution in fewer hands it's not necessarily a good thing, but it's also that percentage of our sales is decreasing, as well.

So you can look at it another way that other channels are becoming more important as the problems that some of the big wire houses have had and the consolidation that's taken place.

So it's not as big a percentage of our sales as it used to be, but we're concerned with that concentration just like you are, but it hasn't resulted in any changes to date.

Great.

Thank you very much.

Our next question comes from Marc Irizarry with Goldman Sachs.

Great, thanks.

Greg, just on the fixed income mandates that you've been winning, can you give us a sense of, I don't know if you can really tell or not, but the business that you're winning, is it rebalancing activity or replacement?

Do you think you're taking share there or is this part of new folks who are coming in to look at credit, maybe more opportunistically?

Yes.

I think it's all the above.

I think you do have a shift in allocation, a little bit heavier fixed income away from equities that you would expect after and probably the wrong time to do that, but I really don't have the data in front of me to know how much of it's changing managers versus new allocation.

Okay.

And just in terms of consolidation, obviously we've seen a pretty big deal from one of your competitors, and I think the thinking behind that is that there's more mandates going to fewer managers.

A, is that a trend that you think is going to be meaningful going forward?

And, B, how are you guys positioned to take advantage of it?

I don't know if I agree.

I think there's some strategic rationale in getting access to more clients, but I also think one could argue that the concentration of mandates within one organization is more of a negative than a positive, that people tend to do business with multiple firms and it really doesn't complicate their world.

You could argue I have one single point of contact but sometimes that's even more difficult because of the risk of that one entity, something occurring.

So I don't think that's a real reason, one that we would think would be a big benefit of doing a large scale deal like that, that more people are going to be dealing with less firms.

I just don't think that's the case.

I think there's always an appetite for boutiques and specialists that are recognized specifically for being best of class in that certain sector.

And then just maybe an update on the sorts of acquisitions that would make sense given your product set.

Ones that enhance shareholder value over time.

I think that that's what we try to look at and there's really no simple answer.

It can still be a consolidation of assets, that you get cost savings and synergies out of it.

It could be a new asset category to leverage.

It could be entering a market that will help us sell other of our products.

So we keep a pretty open mind and look again at what's out there.

So I don't think, other than the markets that we've stated in the past, that there's anything specific, that type of firm that we would go after.

Great.

Thanks.

Our next question comes from Douglas Sipkin with Pali.

Yes.

Most of my questions have been answered.

Just one additional one.

Just hoping to get some color maybe on the investor sentiment, particularly in the California muni market.

I know it's a big product for you guys and I know you have put some literature on your website, so just curious where investors' heads are as it relates to that particular product and the state in general.

I think, again, the tradeoff, you've never had yields that are available today versus inflation.

So many experts argue it's a good buy and that keeps some support of the purchasing.

So despite the headlines and all the difficulties that the state has had in getting a hold of its budget, the muni market has held in fairly well and it's not been a market that we've seen big inflows into, but it hasn't been a market where there's been a lot of redemptions.

I think that's the unique part of fixed income.

When things get tought, the yields get attractive and bring in new buyers and probably a good buy with these kind of spreads.

I think people do separate the two.

The headlines of the budgets versus the probability of GOs getting repaid, and we still feel pretty good about it.

Great.

And just to follow up, it sounds like, from your perspective, the investor preference, or I should say demands for fixed incomes on the taxable side, remains fairly high.

Would you make the same statement on the tax free side for broader munis?

Yes.

And I think the flows speak for themselves.

Those are categories whether it's high yield, strategic income, global bond or munis that had fairly strong inflows last quarter.

Those have been areas that have been treading water to outflows over the last couple years.

So clearly there is an appetite for fixed income.

Great.

Thanks for taking my questions.

Our last question comes from Mike Carrier with Deutsche.

Just one follow-up.

On the tax rate you mentioned from going from 35% to 32%.

Just wanted to make sure that's fiscal year '09.

And then just any color, I know it's far out but when you look at 2010 are we back to looking at 35 rate or will it remain a little lower?

Thanks.

Okay.

Thanks.

Yes, 32% fiscal year '09, that's our current estimate, and we'll take a look at it in first quarter.

It's super hard to predict given it's all based on the earnings mix.

So we'll do an estimate in December based on the information we have then and let you know.

Okay.

Thanks.

Mr.

Johnson, do you have any closing remarks?

Again, just want to thank everybody for participating on the call and we look forward to speaking next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you.

You may now disconnect.