富蘭克林資源 (BEN) 2010 Q1 法說會逐字稿

Good afternoon and welcome to the Franklin Resources earnings conference call for the quarter ended December 31, 2009.

I will be your conference operator today.

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 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 in M, D and A sections of Franklin's most recent form 10-K and 10-Q filings.

After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions) I would now like to turn the call over to Mr.

Greg Johnson, Chief Executive Officer for some opening remarks.

Good afternoon and thanks for taking time out to join us for this call.

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

We're pleased to report another solid quarter across the board as our Company continues its strong recovery from the prior year.

At least 85% of our longer term assets outperform our Lipor peer group for the three, five, and 10 year periods.

And long term net new flows exceeded $15 billion.

Operating income increased 21% this quarter.

On the capital management front, we paid a special dividend of $3 and $1.4 billion to shareholders over the last 12 months alone.

Before we open it up to questions, I want to take a moment to note with great regret that one of our independent directors, Bob Jaffrey passed away today from cancer.

Bob was a partner at the law firm of Kravaz, Swaine and Moore and served as the firm's presiding partner from 1999 to 2006.

He joined our board in 2003 and served as Chair of our corporate governance committee.

Bob was also a member of the board of Fiduciary Trust, a subsidiary.

All of us at Franklin benefited greatly from Bob's guidance and oversight.

He will be missed.

Our thoughts go out to his family.

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

(Operator Instructions) Your first question comes from the line of James Shanahan with Wells Fargo Securities.

Good afternoon, and thank you for taking my call.

I'm sorry to hear about the news about the loss in the Franklin family.

And kicking off the calls is such a somber tone but I wanted to ask a couple questions about expenses.

First with regards to advertising.

There's a discussion in the prepared remarks about the seasonality in advertising and how it seems to be sort of weighted towards the back half of the fiscal year.

However, on a year-over-year basis, there was a relatively large advertising expenditure.

And I'm curious what you view is on sort of the outlook for advertising expense.

What it really takes to protect the value of the franchise and perhaps to grow it in this market environment.

Thanks.

This is Ken.

There is usually some seasonality in the advertising in the first quarter as I mentioned in the prepared remarks.

And maybe it would help, just to explain a little bit further that there are other things in the advertising and promotion line other than just advertising.

For example, a large component of that line relates to marketing support payments to intermediaries that are a function of gross sales and asset levels.

And in this quarter, that's probably about two-thirds of the total line item.

Normally, when advertising is at its kind of full level, that's about half.

So half for the marketing support and half for the advertising.

Going forward, just on the advertising line.

I do expect it to ramp up a little bit.

We think we have a good story to tell.

I think it might even be, just a pure advertising, might even be a little bit more than we advertised last year.

Can we expect Ken, to maybe see advertising expense at some point reaching levels that you reached in the fiscal 2008 calendar year or fiscal year?

Maybe not in the short term.

More like 2009.

I think it's important to note that the larger driver there is going to be assets and sales for that line.

And advertising as a whole would probably be higher than prior year because it was cut quite a bit.

And to add to that point, 2008 a large part of that higher level was due to the expenses that are a function of asset management.

Right, but those assets have grown considerably in recent quarters and with the favorable flow trends, it wouldn't be unreasonable to assume that we're talking about a higher sort of run rate for advertising.

But we'll just leave it at that.

I'd like to ask one other quick question on other operating expenses.

It's clear that in the recent down turn that there were items there that are discretionary namely travel expenditures, that sort of thing.

What are you comfortable with a run rate for other operating expenses?

Thank you.

I think generally speaking, there will be some pressure on the expenses.

I keep saying we're being really thoughtful about how we do that.

But we, I would expect to see some increase, but not a lot in most of the line items, including other expenses.

Your next question will come from the line of Robert Lee KBW.

Thanks, good afternoon everyone.

Real quickly, Greg, can you give us a little bit of color, and I apologize if I may be blanked out in the pre-recorded calls.

It's been a busy day.

If we're looking at flows from a retail versus institutional perspective.

Maybe starting with the global fixed income products.

Maybe to the extent you can, try to split that down between how much of that is constitutional and retail and domestic and global basis.

Unfortunately, I don't have that breakdown in front of me between what is retail and institutional.

But the majority of it is going to be institutional.

We did have one large addition, I think it was $1.2 billion into an existing emerging market debt account during the quarter.

No other large separate accounts in global bonds.

The majority of that number is driven by retail.

Most of that in the US probably two-thirds and the rest coming from international.

Okay.

And you had a pretty substantial pickup I guess in, I guess it was gross sales.

And obviously, and one of the equity categories I think.

But it was offset as you mentioned with a heightened redemptions.

Can you give us a little color where the increase was in gross sales, kind of the way you see driving that.

Well, again the big increase is around the global bond side.

If you look at most of the categories, they were relatively flat or close to flat as far as the gross sales numbers.

Really the global bond category where we saw the biggest pick up.

I guess I was looking at the global equity went from, I guess it wasn't as big as I thought, maybe from $9.7 million to little over $11 million.

Just normal flow, a little bit more activity among retail and the US maybe, but Nothing else --

I think of note, there's a pickup in the redemption line, and I do know that there were some lumpy redemptions.

We had a couple of large accounts go to passive during the quarter that affected the global equity redemption line.

So, again I think the retail numbers were fairly stable and the only really movement of note in that category was some institutional redemptions.

Okay.

Thank you.

Your next question comes from the line of Jeffrey Hopson with Stifel Nicolaus.

Ok, thank you.

Greg, I'm still a little surprised that the international equity hasn't picked up or the global equity, I guess.

I know equity flows in general have been kind of modest.

But surprised they haven't been a little bit better.

And then fiduciary trust, I think you mentioned that flows through that channel had picks up here in the quarter.

I haven't really heard much about that name in a little while.

I'm curious if you can give us any more insight into what's going on there.

I think it's a very positive story for the quarter.

And fiduciary probably had one of their best quarters to date certainly since we've been part of the organization.

And part of that shows up in the hybrid line.

And that's part of the reason you see the increase from $1 billion to $1.7 billion about $500 million to $600 million of that was in flows into Fiduciary balanced account.

So obviously good momentum there.

A lot of positive developments brought on some new people.

And we've seen some real growth there.

And I thinks that a very positive story.

And when you say fiduciary, you're talking about their private client business, I guess?

Correct.

Ok, great.

And on the global equity?

I think it's similar to the whole equity story.

I mean, you'd hope you'd see a bit more pick up.

Some of the momentum may be between the dollar being a little stronger overall in the quarter may be a contributor to a pickup in redemptions.

And I just think the overall uncertainty, some of the head winds that we've seen on the US equity side are still there on the global equity side as well.

Just not a whole lot of confidence overall in equities today.

Okay, thank you.

Your next question comes from the line of Mike Carrier with Deutsche Bank.

Question on the international side.

The sales were up 37% in the quarter.

A lot of strain product wise.

You're given some color on it.

From a client perspective, it's always harder for us to know how the distribution is structured outside the US.

So, whether it's coming from Europe or Asia and more importantly is distribution channels on the retail side, institutional.

And whether it's retirement or through banks.

Just trying to get some color on where the demand is coming from.

It was a very strong quarter on the retail side in both Europe and Asia.

And Europe again driven by global bond sales, very strong in Italy, Switzerland.

Some of that could be more platform driven where you're getting bigger chunks on platforms in those kind of markets.

Asia growth is very strong again for quarter for us.

Those are the two drivers as far as products.

And most of that is your typical retail distribution.

I don't have a breakdown between banks, planners, or the rest.

Okay.

And then the only other thing is the underwriting distribution margin just ticked up in the quarter.

Just curious if there was anything going on there, more importantly, just going forward?

There was one nonrecurring program that bumped that up a little bit, about $3 million.

And I think, if you back that out, the margin is about the same as it was last quarter.

Okay.

Thanks a lot.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Good evening.

Just a question here on compensation expenses.

And maybe you can go a little bit deeper on how you think about them.

With the a (indiscernible)likely be a very strong year for revenue growth if the market can continue the way they're going and if your flowing continue the way.

How do you think about comp stepping up to revenue?

And maybe that's a function of how much of com is really variable and will correlate with earnings and revenue and how much is fixed?

All right.

Well, I did try to give some guidelines for that in the prepared remarks.

We certainly do think that there'll be upward pressure and compensation and for a number of factors.

One is there's a little bit of seasonality that you see in the first quarter.

And there was also just one month of expenses in last quarter for things like bonuses and performance shares.

And also there was some salary rollbacks that happened last year that are being reinstated this year.

In general, I see that line going up about 2% to 4%.

And that is in the context of flat revenues.

If revenues increase, then I think you will see that line increase a little bit more.

Got it.

Thanks for taking my question.

Your next question comes from the line of Roger Freeman with Barclays Capital.

Hi.

Good evening.

I guess it looks like the outflows and equities were institutionally driven as you indicated.

Do you think it's anything more than year end (indiscernible) consistent with temporary jump in constitutional money impact balances as opposed to any interruption with the trend to higher risk that the institutions have been moving towards?

I think that's probably right.

I wouldn't draw any conclusions.

I think the pipeline is still very active and strong as far as global equity surges for us.

We really haven't seen any change there.

And just as a complementary to that, has it changes at all in the first quarter so far in January?

I don't think so.

I think it's been pretty consistent.

Just this quarter, we had a couple of larger redemptions and they weren't due to performance.

They were just due to a couple going passive.

Got it.

Okay.

And I guess the second question is on capital plans opposed to special dividend.

You still have significant cash on the balance sheet.

Do we look at that dividend as really just you acknowledging a less sort of less risky environment?

And willing to run with a lower cash cushion such that there's still future return of cash potential.

I guess, (indiscernible) I'd say that you really shouldn't look at our capital management activity last quarter.

It should not be a signal of any change in our philosophy going forward.

There were a number of factors considered in declaring that special dividend.

They looked at US cash flow.

US cash flow has been increasing because we've talked about the shift in investor preference (indiscernible) All of those assets are managed in the United States.

So we're getting some free cash flow in the United States from that.

Certainly, the low tax rate was a consideration.

Market valuations, all of that.

But having said that, again, I just want to emphasize that it really shouldn't be a signal that we're changing any of our philosophy whether that's our philosophy on acquisitions or share repurchases in the future.

Got it, thanks.

Your next question comes from the line of William Katz with Buckingham Research Group.

Thanks.

Good afternoon everybody.

Question on the equity, new advertising program that you have underway.

You highlighted that you interacted with 1,800 incremental financial advisers in Franklin product.

Just wondering if you could give me a sense of how many people you initially targeted?

What the target size of the audience might be?

And what the capacity opportunity might be on that?

I don't have the numbers in front of me on the size.

We're really targeting all of the advisers that we're in contact with.

And we just think that right now, especially with all the press around the loss (indiscernible) in equity investing, that we need to give advisers more tooling to deal with a growing trend of people feeling that equities are too risky or not providing the returns.

So, the 20/20 vision campaign is a nice, clean, quick facts on equity investing over various periods.

And it's consistent with our theme in marketing of increasing our equity presence.

And it's something we've talked about for prior calls.

And we are seeing an incremental numbers.

Actually some of our US equity funds had positive inflows during the quarter.

They're not large enough to mention but the trend is good there.

I would just add to that that the campaign is starting US but it's going to be leveraged globally.

Which is something new for us to be able to get that out that quickly.

Some of these newer countries that you're getting a little more scale in, whether it be Thailand, Malaysia, etc, where are we in terms of the opportunities set for some of that as well?

Could these with similar to what's going on in some of the European or Asian opportunities as well?

I think those two examples, Malaysia, Thailand, are two different markets.

And one in Malaysia, we got the immediate benefit and got significant wins this past metropolitan from the government there.

Thailand is more of a investment management office for us.

And I think Malaysia for us, we just received the license which is something we're going to start in that market.

And hopefully, it would be portable to other markets and could leverage our existing funds into a whole new audience.

It's going to take time.

There's been no portable (indiscernible) funds to date.

We think we're in a pretty good position there.

Just a qualifier.

A couple of wins this past month.

Are we talking January or December?

January.

Thanks so much.

Your next question comes from the like of Michael Kim with Sandler O'Neill & Partners.

First in terms of reinvesting in the business assuming cooperative equity markets from here, would you expect to see your margins continue to rise from here?

Or does maybe the step up in expenses work as about an equal offset?

I guess that relative to what the revenue increase is.

I think you're going to see some like I said you're going to see some increase in spending across all the categories.

But it's not going to be dramatic.

And if you see a sharp uptick in revenue, the expenses will definitely not keep up with that.

And all the same, if you see a sharp downturn.

We're kind of cognizant and days like today remind us that we're not out of the woods yet in terms of this market environment.

So we're just being pretty cautious.

But we are committed to increase our investment of the business.

Okay.

And then just in terms of the institutional business, it seems like a majority of your wins in the last couple of quarters have been centered in global equities and fixed income strategies.

Just curious as rebalancing and replacement activity starts to pick up at some point more broadly, do you expect to see rising demand for some of your other strategies?

Well, we would hope so.

And I think the one area that we haven't, we've had some wins that we think we have a pretty good product right now.

And are on a lot of platforms and consultants are getting good visibility through a lot of consultants as the Franklin global advisers and our global growth product.

And that would be an area we'll start to see some wins.

That would be a new category for us.

But as far as the opportunity set to date, immediate, it's still a global equity, a global act, emerging markets debt.

Okay.

Thanks for taking my questions.

Your next question comes from the line of Dan Fanning with Jeffreys and Company.

Good afternoon.

Can you give us color around as you look at your backlog for FRP activity here through the March quarter or a little bit beyond relative to what you guys were seeing in the fall of last year, the September quarter or even December.

I think as I mentioned, it really has not shifted for us.

And those are the areas that we're seeing demand.

We've been fairly consistent with getting decent sized mandates every quarter and we think that's going to continue.

And I really, putting it relative to a few quarters ago, I think it's still improving.

Okay.

And then anything on the regulatory front that you guys are watching or following whether it be tax related or just general potential impacts for your business?

I think the obvious area of concern for the industry is just the potential of some tax and what is being proposed to the banks today.

We are a bank holding company.

And the ICI, we're working with the ICI to make sure that an asset management company is not included in that.

That's our understanding.

We wouldn't be.

But we want to make sure that if anybody is thinking that, that we're making the case on why we shouldn't be included in that.

That's the one area of risk.

And I think for us, our structure is somewhat flexible.

We don't have to be a bank holding company.

If anything happened that was problematic whether it's taxes or regulatory environment, we have the flexibility to get out of the businesses that make us qualify as a holding company too pretty quickly.

Great.

Thank you.

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Greg, can your just help give perspective on the size of the redemption you saw in global equities?

I might have missed it.

And also, where are we sort of stand in the pipeline of activity in the global fixed arena?

And do you see any notable change in what the pipeline looks like there?

Thanks.

I think there were two redemptions right around $700 million in global equities.

The total was about $700 million.

Another one in Japan for $330 million.

So that's about $1 billion of those redemptions related to three accounts.

As far as the RFP activity goes, again, global equities continue to be very strong.

And what was your specific question on that?

On the fixed income side, are you seeing a notable change in demand for global fixed?

For global bonds?

I think we're still seeing strong demand.

For us, the strength we have, and I just spent two weeks in Asia.

And the relationships are very strong with the central banks, with the retirement, with the government retirement plans.

So I would continue to see that as a huge opportunity for us.

I think we have a bit of a unique position.

It's not consult driven in those markets.

It's more direct relationships.

And if you look at trade flow and everything else, those accounts and surpluses should continue to grow.

And that means additional monies into additional accounts and additional opportunities.

Great.

Thanks.

Your next question comes from the line of Cynthia Mayer Bank of America.

Hi, thanks.

Just some added color maybe.

When you say global equities are strong, what strategy in particular is in demand?

Is there a mutual fund we can look at that's a proxy for what's really in demand?

I don't think there's a specify mutual fund.

We've gotten some Asia, ex-Japan mandates.

We've gotten just pure global equities.

Templeton has always been somewhat two organizations as far as portfolio management goes.

Institutional has a separate, has a little bit of a different style than retail as far as matching a fund per se.

So there are some differences there.

But really, just your typical broad based global equity mandates.

Okay.

And in terms of comp, I apologize if you talked about this.

How are you thinking about head count for the coming year?

I think you will probably see some additions to head count.

And it wouldn't be anything dramatic, I don't expect.

It will be pretty slow.

But we'll see some uptick in the next couple of quarters.

Okay.

Thank you.

Your next question comes from the line of Ken Worthington JPMorgan Chase & Co.

Good afternoon.

So to beat a dead horse here on the global equities, I'll try to take a slightly different tack.

Your big retail funds all have very good performance, the top decile, the second quarter tile.

And none of the big ones have seen sales in two years.

And it seems like the market appetite for global equities product is pretty good.

Why the disconnect?

It seems like everything is in place for you guys to just be knocking the cover off the ball and there's not follow through.

Is it a sales issue?

Something in distribution?

Is the fact that they've got a lot of Europe in them?

What am I missing?

I think what you're missing, one, we've been very successful with our global discovery mutual series five star fund and that continues to have very strong flows.

So, we have been getting very strong net flows in that category.

Templeton, a year ago was lagging and had fairly significant lag that has been caught up with fairly quickly.

And I think it's just a matter of getting advisers back to selling.

You always have your core group there that continue to sell but getting new share is the more of a lag than it would be on the institutional side.

So we're still optimistic.

But remember, those funds had huge outflows a few years ago and every quarter are still getting a little bit better on that front.

Great.

Thank you.

Your next question comes from the line of William Katz with Buckingham Research Group.

Follow-ups.

In the quarter just completed, both the revenue yield and profits were stronger than I was anticipating.

Just curious, systematically how do the assets generate outside the United States compared to those in the United States.

I know you don't necessarily run the model that way.

Is non-US volume more or less profitable than the US business?

It's slightly more profitable.

Asset mix, you tend to have more equities and then global bonds is a better margin than say MUNIs.

Okay.

That's helpful.

And just to go back to discussion which I presume was talking about the bank holdings of owning a property (indiscernible) and private equity, if push came to shove, are you leaning more to potentially getting rid of the bank holding structure and/or underlining businesses of that.

Or would you be looking to potentially to carve out DARBY or other type of things that might be exposed?

I think it's premature to speculate.

We feel we have flexibility and we don't feel that legislation should affect us.

That doesn't mean it won't.

But I'd rather not speculate on what we can and can't do for obvious reasons.

I think it's just important to note that we do have flexibility and it's not core to our businesses.

That's helpful.

Thanks so much.

Your next question comes from the line of Roger Freeman with Barclays Capital.

I want to follow-up on that same issue.

I saw that ICI letter.

So that was your initiative?

Or are other asset managers backing this as well?

It obviously affects many asset managers.

So we participate along with the ICI.

It's not our single initiative, no.

But just to clarify, in looking, I'm looking at a summary balance sheet here.

This fee would be 15 basis points on a wholesale funding.

I guess would pertain to your securitization business.

Which at most is like $700 million.

It's probably less than that.

You're talking about a pretty tiny impact.

Right?

Like $1 million max a quarter.

I think it's too early to know how the fee is going to work.

And that's part of the problem for everyone to access.

And it's somewhat of a moving target right now.

Initially, they were talking about having fees on mutual fund buys and sells.

So, things are moving quickly, and we stay involved through the ICI.

But at this stage, there's just nothing concrete to go on.

Pretty hard to imagine that you'd be caught up in this but better safe than sorry.

Thanks.

Okay.

Your next question comes from the line of Robert Lee KBW.

Thanks again.

A quick question actually on deferred sales commission.

The last couple of quarters ramped up a fair amount while the related assets have been declining.

Should we expect that that's going to run at an accelerated rate for a while.

Or is there something in the last two quarters.

I know you had, maybe it's related to exiting that JV.

Make us think that the data expense line is going to decline pretty sharply soon?

I think you have two things at work here and they're both counteracting each other.

On the one hand, you will see a reduction in amortization and expense on the B shares as that runs off.

And that'll be fairly dramatic.

On the other hand, we have been seeing increased on the other deferred commissions.

They tend to be muddying the waters a little bit.

Because of the B share decline, I would not expect to see that line item accelerating in future quarters.

But because of the offset, it would probably be flat to slightly less I'd say.

Okay.

That's helpful.

Thank you.

And there are no further questions at this time.

I would like to turn the call back to management.

I'd just like to thank everyone for participating on the call and we look forward to speaking next quarter.

Thank you.

Thank you, ladies and gentlemen, for participating.

You may now disconnect.