富蘭克林資源 (BEN) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to Franklin Resources earnings conference call for the quarter ended December 31, 2011.

My name is John, and I'll be your operator for today's call.

Please note the financial results we discuss on this conference call are preliminary.

Statements made on this conference call regarding Franklin Resources Incorporated, which are not historical facts are forward-looking statements within the meanings 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 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 Form10-Q filing.

(Operator Instructions)

Now I'd like to turn the call over to Mr.

Greg Johnson.

Mr.

Johnson, you may begin.

Thank you, and good afternoon, everyone.

Joining me, as always, is our CFO, Ken Lewis.

The first quarter had many challenges, but overall, there were a number of positives, including investment performance, improving flow trends in many asset classes, operating margins and capital management that we highlighted in our commentary that was made available this morning.

Hopefully everyone had a chance to listen to that, as well is take a look at our 10-Q, that was also filed this morning.

Now I would like to open it up for your questions.

(Operator Instructions).

Michael Carrier, Deutsche Bank.

On the equity side of the business, it looks like the flows in the quarter, probably better than you expected.

I know last quarter you had some redemptions on the institutional side.

I think it was maybe $2.7 billion that you pointed out.

This quarter, you mentioned on the pre-recorded call, some wins.

Just wondering how significant those were, because it seems like on the retail side, depending on how big those were, you saw some improvement there.

Trying to figure out what's driving that?

And then any product granularity that you could give, I think you mentioned income products, but just any color there?

There was no real significant moves on the institutional side, except there was one large account, about $840 million in global equities, that was a new mandate during the quarter.

And then there were a lot of wins in the $200 million to $300 million range.

But really nothing more, I would say normal, as far as wins and losses during the quarter.

Nothing to call out, as far as retail trends.

There's a lot of noise quarter-to-quarter on the institutional side.

On the global bonds side, you provided some color on the pre-recorded call.

Any more color, when we look at the US products, in the flows versus the non-US?

And I think even if we look at in the past maybe two years, there's a lot coming in the non-US channel, and you had mentioned over time where it's not as sticky.

When you have some volatility in the markets, you can see some more outflows there.

We've asked the question before in the past on capacity in those products.

Sometimes there's -- you can have the same strategy, different funds.

When you think about some of the concentrations that the fund can take in say the emerging markets, have you ever considered, or would it make sense to have a product where you can focus more on some of the smaller markets?

And then have a product that, just given the size of the fixed income markets, you could continue to grow, and you probably wouldn't have any capacity issues?

I think we've considered all of that.

I will start with just the flows.

As we've called out on prior calls, I think the level of flows coming in to the CCAV and in the cross-border funds, we felt that was not a sustainable level, and this was the first setback.

Also, I think the other factor is that you do have more control by gatekeepers.

And with the increased volatility, they have -- they can slow down a larger portion of your flows versus the US, which is more one-on-one out with advisors, and also I think in the US, generally, a smaller portion of an overall portfolio, and in the offshore sales, a lot of newer investors to this category.

What we're seeing, and what is consistent with our thinking, is that the US was less vulnerable to the downturn, and didn't have as much in terms of outflows, and is quicker to rebound based on the performance.

It's early for January, but much of underperformance that we experienced over the last year, we've had a strong rebound in the month of January.

So I think that'll help, when people see where they're -- where the fund is priced today.

And then on emerging markets, bond and capacity, those are all good points.

I mean, we came out with an emerging markets balanced fund this quarter, which would have more exposure into the smaller markets, along with emerging markets.

Capacity is not a constraint right now with sovereign debt and how this fund has been run historically, so we don't think it's an issue with the global bond fund.

I'd also point to the Total Return Fund, which continues to grow in terms of flows, which includes corporates as well.

Robert Lee, KBW.

I had a question on the margins.

Maybe it's a little conceptual, but if I look back over the years, you have done a really good job of improving the operating efficiency of the business, and whether it's through transitioning expenses to lower cost locations and other things.

How do you think about going forward, do you feel like there is any more, or much more opportunity to make the big drives in efficiency that you were able to gather over the last decade?

Whereas at this point, it's more about top -- if you're going to grow margins, it's really pretty much a top line driven story, that is not as much -- beyond trying to be tight on cost, not a lot of other big moves you can make in infrastructure side?

Those are good questions.

I think there is capacity in the low cost jurisdictions.

We have this campus in Hyderabad, there is capacity there to add more people.

We're constantly looking for ways to increase our efficiencies using that.

But having said that, it's a hard fight to really make a -- to move the needle on the margins.

When you do that, it's more of a long-term effort.

The big swings in the margin comes from the revenue, but I think there's room for us to become even more efficient.

Maybe as a follow-up for Greg, you touched on this in your comments just now, on the control the gatekeepers exert.

To what extent do you think there is a risk, you become a little bit of a victim of your own success?

And what I mean by that is you're so well penetrated in distribution in the US, and whether it's through the global bond products and maybe mutual shares or others, that you get to a point where certain distributors are just like look, performance is good, we like you, but we have enough exposure at this point.

Do you feel like that's something you bump into at different places?

Or do you think there is still plenty of runway, so to speak?

I don't think that's a problem.

I think the way the world looks at it, advisors look at asset management, is they look for a category and a strong performer that they have a good relationship with, and for us, it's under multiple names, with really distinct groups.

I don't think you have that kind of concentration risk, where they would feel like, oh, this is our number one outside firm, and we need to cut back on that.

It's just not an issue.

I think people like the global bond, are going to look at capacity on an individual basis with individual funds, and not really going to roll it up, and see how much they have with the overall firm.

So I've never really experienced that, as being any kind of barrier.

Matt Kelley, Morgan Stanley.

Based on what you're seeing in January so far, in your conversations with clients, just curious to get your thoughts on the retail side and institutional side.

How willing are your clients to re-risk, and what you think are going to be the biggest growth drivers in your products this year?

One you've had a pretty significant rebound in the market, but still headwinds with active managers on the equity side that we've seen.

We haven't seen people coming back into the traditional long-only equity mandates.

I think where you see the movement is on the dividend income side, the hybrid income fund.

It's clearly still a flight to quality.

We saw movement in our US governments fund, muni sales, those are doing well.

The area I expect to see continued growth is around is rising dividends, equity income, and the Franklin Income Fund.

Those are the funds that have equity exposure, have a yield better than a money fund yield certainly, and we think offers better risk/reward.

And that's really what we're talking about in distribution.

I was hoping you could shed a little bit more light on the response in the US particularly on the discussions you're having with advisors on the Templeton Global Bond Funds.

Is there more of a skew to the investors who have been with you for a longer period of time, say 2009, understand it a lot better?

Do you think the ones -- the people that put money to work with that fund in 2010 and 2011 really understand the long-term strategy as well?

Yes, that certainly helps, and we are looking at it, and trying to understand, are the redemptions coming?

And certainly they are a little bit higher with the newer money, that haven't really seen the ups and downs over time.

We have had periods of underperformance in the past with this fund, and because this fund does not really run to a benchmark or an index, and to get the kind of returns we've had over time, you take you do take risk.

You're going to have periods like we had, with this unusual flight to quality, that can move the needle pretty quickly.

What we've seen here in January, and we saw it in past years, is that the markets will normalize quickly, and you can get much of that back.

The longer somebody is in a fund, and experiences the ups and downs, the better we are.

I think that is the silver lining to Europe, where you have a lot of new investors that came in, and the ones that now stick with the fund, understand that it can go up and down, that kind of level.

And it's really not a money fund equivalent, so I think that's the good news, if there is any.

Cynthia Mayer, Bank of America.

You mentioned on your commentary, you expect expenses to turn a little bit higher this quarter, and specifically mentioned comp and merit increases.

I was looking back, and it looked like last year it was forecasted something like $10 million to $20 million in merit increases.

I'm wondering if you're expecting that same range?

And since you pulled back on variable comp in this quarter, would that then bounce back?

I think you're right on both points.

If you look back to the first quarter of last year versus the second quarter of last year you can see a -- on percentage terms, you can see an increase, I think it was about 7% or 8%.

We have grown the employee base a little bit, so I do think it's reasonable to expect something a little bit higher than that in the next couple of quarters.

And, of course, on the variable side, if things pick up, you could expect some pressure there as well.

The other thing I'd mentioned also is, depending on your assumption for sales is, don't forget about the sales distribution and marketing expense line as well, which typically grows a little bit faster than it's revenue counterpart.

You didn't mention G&A.

Is that pretty much a level rate?

I think that there is a lot of things that go into that line item.

Certainly, one of the bigger ones is advertising.

And for us, seasonally, the first quarter of our fiscal year is pretty low on the advertising front.

In the normal circumstances, I would expect that to go up.

We have been pretty cautious about expense management in this first quarter.

I've asked everybody to try to keep underneath even their budgeted levels, and they're doing a fantastic job at that.

So with that as background, I'm not sure that we would see the normal pickup in advertising in next quarter.

But certainly, there'll be some pressure in the advertising line, that might drive that expense category up.

Bill Katz, Citigroup.

Greg, you mentioned on the call, activity has picked up a little in January.

The question is, is that both gross and net sales?

And if so, where specifically, are you seeing the leverage?

Any time you see the market rebound like it has, and certainly, global bonds settling down, that's going to help the pressure that we were under.

As I mentioned before, the leverage, the trends that we saw in the fourth quarter, where we saw pick up in hybrid sales, and funds like the US government fund had very significant net inflows.

I think that trend, along with municipals, should continue.

That's where I would expect to see the biggest move.

And then obviously, the global bond side, the net outflow pressure should be a lot less.

A number of platforms are out there for sale.

You're sitting on a ton of cash, great free cash flow, what's your appetite for deals in this environment?

And if so, what kind of products or geographies might be of interest?

We get this question quite often.

And the answer is, there's really -- we don't limit the universe.

Small deals, certainly, we've done small deals in targeted areas to bolster our local asset management capabilities.

On the balance I'd say, that probably appeals to us more than a mega deal, but we certainly wouldn't rule out a big acquisition, if we thought that there were substantial synergies to be had by doing that.

Craig Siegenthaler, Credit Suisse.

On the other revenue item.

I'm just wondering, or if you could help us think about this, in terms of run rate, because the reclassification impact, it lifted it a little higher, is $27 million a good run rate to think about for next quarter?

Or is there anything we should be backing out?

Yes.

Because we have limited historical data, it's a little tough to say.

But certainly, I feel comfortable saying it's going to be higher than it has been in the last four quarters.

Whether it will be as high as it is now, I can't really say at this point.

And then just another question.

There's a few data points -- I was wondering if you could help us, in terms of thinking about flows this quarter, but I'm sure you have probably seen some of the data.

So I am wondering if you have any commentary, in terms of how sales have trended, as of the first month or the first quarter?

Or overall sales or maybe Templeton Global Bond flows specifically, or even aggregate flows?

Any data in that type of category that let us think about flows, quarter-over-quarter?

I can't really add much to what I mentioned earlier, that the markets are stronger, things have stabilized, and we expect a much better quarter.

But it's a little bit early, and I wouldn't want to lead anybody to some numbers, one month in.

Then Ken, just one question on the auto business.

I believe you said no impact, but when we think about the forward run rate of earnings after you sell the business, is that basically also very little impact?

It's going to have very little impact, because essentially we have been running that book down.

It's becoming less significant part of the business over -- since 2008.

So I wouldn't say, no impact, but it wouldn't be significant.

Jonathan Casteleyn, Susquehanna.

You mentioned active equity mandates still not recovering, despite the uptick in the market.

I'm just wondering, in your view, what's the catalyst for the improvements in equity mutual funds on active side?

That's a good question.

That probably just comes to the type of risks that people are taking, and just looking at the overall portfolio.

I think most of the active side you're seeing, through the target date funds that are flowing through 401(k).

But individuals -- and I've said this in past calls -- probably had an over-weighting view of US equities, and continue to bring that number down, and that's put a lot of pressure on active.

It's not certainly the movement towards passive, which is a small percentage, but not the conclusions that people have when they see the big flows into passive, and now in active.

I think it's more a rebalancing of their own, and that includes alternatives, commodities, other type of strategies in their overall portfolio.

So I think still it's a headwind for the industry.

But we're going to continue to pound that message into our -- on the distribution side, because again, we think risk/reward, it's a better place to be, than fixed income at this point.

And any ballpark timing?

You've seen many cycles before, so just wondering, do you think this is an '012 item, or is it more longer data than that?

Until we see the -- ?

Well, I hope so, but it's taken longer than I thought it would.

I think the -- you can see some real movement on the equity income side.

And I know there's a lot of advisors now that are looking at that, and even looking at, as a substitute for some short-term cash, that it may be a better place to park money, than even holding in a money fund, or certainly in bond funds.

And then quickly to the Templeton equity side, one-year number is still quite weak.

Do you have any color on the underlying exposures there so we can understand how they are trending during the course of '12 here, on a go-forward basis?

Yes, I think the one-year number is about average, because the growth fund is 55 percentile, foreign fund is 51 percentile, so they have had exposure to financials and the Eurozone, and that's been a little bit of a lag, but maybe a little bit of a help more recently.

So it -- that could move, really on a daily basis in the top two quartiles.

Ken Worthington, JPMorgan.

Follow-up on auto lending business.

I wanted to hear little bit more about the benefits of unwinding that business.

Does that change the bank holding company status?

Does it free capital?

Are there other ancillary benefits outside the P&L that are worth highlighting?

No, not really.

It was treated as a stand-alone business.

It was certainly part of the banking segment, but it was treated as stand-alone business.

And the decision to wind it down, was just cost benefit for that business.

It didn't really impact the bank holding company status.

Is there a reason to keep that holding company status if you don't have the auto lending business?

Well, it's -- really the reason, we're a bank holding company is for the high net worth business, custody business in lending in that area.

On investment income, can you give us, some better details on the results this quarter, what was realized versus unrealized?

In what part of the investment portfolio did you see the majority of the gains, if it actually came from one part or the other?

I'll try to give you a little help with that.

In the presentation, that chart that shows the different components, I think there's probably two ways you could look at this if you were trying to model it.

There's a back of the envelope way, which says, okay, look at the investments and cash that the Company has legal ownership to, and in our slide, we show that, that generated $55.6 million.

Then you could say, look at the things that we don't have ownership to, and in our slides, net of the non-controlling interest, it's really almost nothing.

So the majority of the net-net bottom line impact was for things that we own.

Then we've broken it out in the different categories.

The trading investment category is the bit that is unrealized, the available for sale -- most of that would be realized.

So that's the back of the envelope way.

Another way you could look at it is looking at the underlying securities.

We put a disclosure, I think it's on page 42 of the Q, that lists about $1 billion of trading securities by investment objectives.

And those are the ones that get mark to market.

In addition, we note that there's about $800 million of non-current investments that get driven by the market, and we show what categories those are in.

And that drives the equity method investment bar on slide 17.

And in addition to that, we have $1 billion of VIEs.

And most of the variable interest entities are collateralized loan obligations.

So what you are seeing in the P&L there, is the changes in the net asset liability position of those products.

Hope that is helpful.

Michael Kim, Sandler O'Neill.

First, now that flows into the Global Bond Fund have slowed a bit, do you have a sense of how much of the redemptions you are recapturing into other products, similar to what you were able to do when you had some muni fund redemption pressures earlier last year?

I don't have those numbers in front of me.

I did see fairly significant exchange activity into our government fund, which I think would be, a normal place for that to go.

But I don't know how much we're capturing offhand.

And then maybe a question for Ken.

Given the recent step up in dividends and share repurchases, has your thinking changed at all as it relates to the payout ratio?

I think previously you talked about, maybe a 60% payout range, but maybe are you a bit more willing to stay above that level, just given the strength of the balance sheet?

I think we're probably going to consistently stay with that target for now.

And keep in mind that all of those great shareholder returns, in terms of dividends and share buybacks come from US cash, so it's not the entire balance sheet.

I think we're going to continue with the targets that we said in the past.

Bill Katz, Citigroup.

I may have the numbers wrong from memory, but I think in your prepared remarks this morning you mentioned that the yield launch program, you were saying they mailed out like 20,000 fulfillment kits, if you will.

How long has that been going on?

And how does that beginning, compared to what you did with maybe Vision 20/20 or even fixed income back several years ago, as well?

I think it's a complement to the 20/20, and the equity story, and specializing in a category, that today with yields at historic lows, and certainly 10-year historic lows, we feel it's a compelling story to focus.

So the literature was just mailed out, I think just over this last quarter.

It's a new campaign that just kicked off, and it will be ongoing throughout the year.

I don't know, Bill, if that answers -- ?

Close enough.

Close enough.

(Laughter).

It's late in the day for all of us.

Coming back to Ken's commentary about other income, I just want to make sure I understand.

The step up though, is there an equal offset in the non-controlling lines, so that there is really no net economic impact, regardless of the new regular revenue line?

Back to slide 17 -- I believe we even color-coded it -- the areas above the purple, which is $7 million -- most of that is offset by non-controlling interest.

Right.

(Multiple Speakers).

Not the entire category, just the things that we consolidate.

Robert Lee, KBW.

In the prepared remarks, Greg, I think you mentioned that -- and you've talked about this in past calls -- launching some multi-asset-class products, and some alternative products.

And one or two questions.

Is there anything within that mix -- I know it's early days -- but that when you look at and given your distribution capabilities, that you think you are particularly excited about, that you think could be -- I'm not going to say another Global Bond product -- but something you think can be a good driver of flows over the next couple of years?

And then on the alternative front, are those mainly retail type products, or have you actually started launching more alternative strategies for institutional investors?

I think the multi-asset fund is just a natural for us to have that, with all of the capabilities that we have.

And as I have said before, I think it's important that you have that commodity exposure.

And then the other one that we just launched this quarter, the real return, real asset fund, and in this environment, I don't expect it to move.

But it is very important to have that fund in there if rates do start to back up at some point to capture exchanges, and have a fund that's designed to beat inflation over time.

So that's a big risk to the Company, so having that in the lineup I think, and being visible will be important for us.

But I think in the near term, the multi-asset fund is the one that we think, has the shorter-term opportunity.

And what was the other question?

It was just on the alternative.

Oh, alternatives.

Yes, I think probably more on the institutional side.

But you could argue that some of these funds are a little bit more alternative, because they do have the commodities in them and futures in them, and a different type of exposure than our traditional long-only, and as well is currency forwards, and things like that.

Glenn Schorr, Nomura.

Just one follow-up question on the Global Bond.

I'm curious, when you -- it wasn't a big pickup in redemptions, it was small pick up in redemption, so it's really the gross sales [fall off].

And so, you had literally 3 or 4 times the fall off in gross sales than you did in the US products.

I'm curious how you might attribute it?

What kind of feedback you got from the sellers, if you will, of -- is it a performance or was it a performance issue?

Was it a -- people are freaked out on Europe issue?

And what is it about that customer base, that is that much more active in quarter-to-quarter, than the rest of your clientele?

Well, I think it's all of the above.

I mean it is -- in Europe there -- it's a heightened concern I think, over what was going on at the time.

There were rumors around the fund at the time, I mean that could contribute.

And I think some gatekeepers may have been worried that they had too much concentration in there in certain cases.

So all of that adds up to a slowdown.

How quickly it can come back, I think that's a question that we're all -- we're hopeful that the January rebound will accelerate that.

But clearly, it's moving in the right direction in the US, it's going to be a little slower with the cross-border sales.

Daniel Fannon, Jefferies & Company.

Following up on that a bit, you have highlighted regionally, areas of strength for sales.

I think, Italy, you mentioned at least a few quarters ago.

If you could talk about areas of strength, and also the regions where there was potentially a pickup in redemptions, or where you saw the most weakness?

I don't really have any trends to call out, other than obviously Italy, which the majority of that was Global Bond.

So you'd obviously see a big drop, from where it was, as far as flows.

I think it is important to point to the other big driver in cross-border, which is the Asian Growth Fund, which had a tough quarter last quarter, but had good relative performance.

And as we would expect in that fund, it's a much quicker rebound in sales.

And that's consistent with those markets coming back.

We have seen a pick up there, so any of the markets that we're selling more equities, more Asian Growth, more US opportunities, they have rebounded a lot faster than the ones that were concentrated more on the global bond.

And really, Italy is probably only market that had the significant concentration on the Global Bond Fund.

We have no further questions at this time.

Okay.

Well, thank you, everyone for participating on the call, and we look forward to speaking next quarter.

Thank you.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.