富蘭克林資源 (BEN) 2012 Q3 法說會逐字稿

Good afternoon and welcome to Franklin Resources earnings conference call for the quarter ended June 30, 2012.

My name is John and I'll be your conference operator today.

Statements made in this conference call regarding Franklin Resources Incorporated which are not historical fact are forward-looking statements within 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 the risk factors and MD&A sections of Franklin's most recent Form 10-Q filing.

(Operator Instructions).

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

Mr. Johnson, you may begin.

Hello and good afternoon everyone.

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

Today we reported a strong quarter of results, highlighted by solid relative investment performance and net in-flows into the organization.

Hopefully you've had a chance to listen to the commentary or take a look at the 10-Q that were made available earlier today.

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

(Operator Instructions).

Michael Kim, Sandler O'Neill.

First, maybe just focusing on the equity funds business here in the US -- seems like you've got a number of income-oriented funds that continue to be in demand but at the same time some redemptions from some mutual series and Templeton Global funds.

Just curious if retail risk appetites do start to pick up at some point down the road, how do you view your positioning in that type of environment, just from a flow perspective?

Yes, I think the sentiment obviously -- and you've seen the flows for equities for the industry continues to probably be the biggest challenge the industry faces, and we certainly are not an exception there.

I think you're right.

I mean, anything with a yield, and certainly looking at equity funds for us, Rising Dividend was our top fund and continues to be very attractive in this kind of environment.

The global equities with Templeton -- you mentioned the mutual series fund, that had a large redemption due to one of the platforms switching, I think about $750 million.

So I think when equity funds return, we feel like we're in pretty good shape, because the growth funds have excellent performance.

It's just our focus has been to get on as many platforms as possible, and when retirement flows come back we're in a much better position than we were in the last cycle.

But when that happens I think is everybody's guess right now.

Okay.

And then maybe a question for Ken.

You mentioned on the pre-recorded call that you expect comp and IT and maybe occupancy costs to tick up, just given some hiring and seasonality.

So has your thinking on spending more broadly changed at all, just given the ongoing market volatility?

Or are you still focused on building out the franchise and so margins will likely mostly be a function of the level and mix of AUM?

Well, certainly market conditions have caused us to rethink a little bit, but there's usually a decent lag between when we make a decision to change our expense or spending habits and what you actually see in the results.

So I think that it's reasonable to expect -- I mentioned compensation -- it's reasonable to expect things like compensation to go up, not a lot in the short term, but a little bit.

And there are some seasonalities in some of the spends that we see in advertising and technology, too.

But we're clearly, as we think towards 2013, we're mindful of the current market environment and proceeding cautiously, I would say.

Okay.

Thanks for taking my questions.

Robert Lee, KBW.

Thank you.

Good afternoon everyone.

Just curious, Greg, you mentioned on the call and in the prepared remarks that the institutional business, you saw some added traction there, particularly for demand for emerging markets products.

But is it possible, is my first question, to get a little more color on geographically where you're seeing that pick up?

And any color you can provide on, I guess I'll call it pipeline?

Or how you feel about that business staying or continuing to accelerate.

Well, it's always hard.

I think, trying to get a sense of institutional flows and looking -- they tend to be lumpy, and we stated that we continue to he see strong opportunities in Global Bond Plus and Emerging Markets Debt and that certainly has been the case.

And I don't think there's any -- I think most of the big wins in the last quarter were in the United States versus outside, but again, I wouldn't draw anything from that.

And I think the pipeline continues to look good.

We had one of our largest wins during the quarter that should fund in August, so I think that bodes well for institutional flows going forward.

But again, I wouldn't draw a run rate or anything from that number.

They tend to be very lumpy and it's been an emphasis of the firm to continue to build that, and I think like we feel we're doing a better job on that front.

Just one follow-up question -- you have -- there's the $300 million-odd of debt that comes due in the next couple quarters, I forget exactly when.

Just kind of curious -- since so much of your excess capital and cash generation is outside the US, how are you thinking of, at this point, given low borrowing costs, dealing with that which we -- if you just use available cash to pay that down, would that affect in the short term share repurchase?

Or are you thinking that, given the debt environment, maybe just roll it over and keep buying back stock?

Yes.

Clearly, the focus is going to be to continue our capital management practices, and I think we made some points on that regard in the prepared remarks.

Yes, it hasn't escaped our attention that the debt markets are attractive and it's reasonable to think it's something that we'd be looking at in the future.

Thanks for taking my questions.

Matt Kelley, Morgan Stanley.

I was hoping to quickly start with a modeling question.

I know you called out the performance fees this quarter.

Anything seasonal in there?

And how your performance is stacking up so we can gauge where to expect that going forward?

Yes.

Unfortunately, I wouldn't call it seasonal.

And there's nothing that we know of today that would make us think there's anything significant coming, but they are happening -- getting performance fees on a more frequent basis, so I guess that's fair to say that's a secular trend.

But I can't really help you much there on the modeling front with performance fees.

Okay.

And then a little bit of a bigger picture question for you.

What's your view on the role of ETFs in target date funds?

I saw some press recently about the funds increasingly using them.

Just curious where you guys stand in terms of ETFs overall versus mutual funds?

And ETFs, the usage of them in target-date funds.

I think with pressure on expense ratios in a more difficult equity environment, that the use of ETFs especially in target-date funds is to get that market Alpha, especially against large cap value, large cap growth US funds -- they're going to be more vulnerable, the active ones that were traditionally used in those retirement plans.

So we think that's a natural trend and one that should continue.

Any area that has pressure on expenses and where the active versus passive question is openly debated, you'll see probably a growth on the passive side.

Great.

Thank you for taking my questions.

Bill Katz, Citigroup.

Before I ask my specific questions, can you just quantify the win in August -- was that equity or fixed income?

It wasn't clear from your commentary.

It was equity, a Canadian equity fund.

My two questions are -- number one, looks like you had coming up in this upcoming quarter about 4 million shareholder accounts that you're going to be closing out due to dormancy.

The question is that seems like a very high number to me relative to the account base.

Can you give a little more detail behind that?

Is it a situation where you have a good success of opening up accounts and not getting good follow through?

Or is there something else at play here?

Again, seems like a very large number to me.

I don't think there's anything noteworthy in terms of trends there.

Keep in mind that, when the accounts close it stays on the books for a year, so that might be clouding the perception of timing.

So this is when the year's up, and this is when they get purged.

To that end I would expect the shareholder servicing fee to be slightly down next quarter.

Nothing noteworthy in terms of underlying trends relative to the business.

Okay.

That's helpful.

And then the second question is around capital management.

Again, what are your latest thoughts between use of a special dividend versus potentially increasing your quarterly payout?

Latest thoughts are probably the same thoughts as we had last quarter on that.

It's clearly top of mind for the Board.

We start engaging in those conversations in the fall and the Board makes its determination in the December quarter.

A lot of things go into that, as I mentioned earlier.

Looking at the competitive environment, the current tax environment, and the total shareholder return, and our historical payout ratios.

Okay.

Thank you.

Craig Siegenthaler, Credit Suisse.

Just looking at the impact here from the CSIP accounting, on Slide 18, and I'm just wondering if you look at the impact to revenue sequentially and expenses sequentially, you have a $14 million increase in operating income -- largely GAAP, I believe; not really much of a cash change.

I'm wondering, is this accurate?

Also, how do you see this trending into the fourth quarter?

I know there's a lot of moving pieces there.

But also, was there any offsetting adjustment for this in non-operating, more of a neutral impact to total EPS?

I was looking at Slide 18 under SIP and VIE-related adjustments heading.

Clearly there was a net $17 million on earnings.

But when I looked at the three quarters cumulative amount, that number is only $1 million or less than $1 million.

On a year-to-date basis, not that material overall.

But there was a $4.9 million impact in operating income.

Then a negative $47 million on nonoperating income and that was offset by the noncontrolling interest.

So that's how you get to the net $17 million.

It really -- all of this is driven essentially by mark-to-market on our trading investments and our consolidated products.

So a lot of it's unrealized and it swings back and forth in the quarter.

We look at it from an evaluation of whether we need to enhance our disclosures and perhaps even do non-GAAP disclosures going forward, but at this point the conclusion is that it really isn't material over the long term and on an annual basis it hasn't been material.

Ken, good color.

My only follow-up would be is -- if you had a quarter -- this quarter, fourth quarter -- let's say the markets were up a nice 2%, wouldn't you see a decline in your operating income, all else being equal, as the operating revenue and operating expense adjustments sort of normalize.

Looking at the sequential change, looks like operating income would go down a little bit.

The impact you mention on nonoperating -- that's really this trading loss here which is always going to be quite volatile, right?

Correct, correct, correct.

Yes, I don't think I could predict that it would go down -- or up, really.

The line items -- you might see a little bit less dividend interest income or interest expense, but that could be offset by the unrealized.

Got it.

All right, great.

Thanks for taking my questions.

Ken Worthington, JPMorgan.

I wanted to follow up on Rob Lee's question on the balance sheet.

Maybe said a little bit differently.

Assuming you had a good use for the cash, how comfortable are you in terms of taking on more debt?

You obviously have capacity, but you've acted conservatively in the past.

You have $1 billion of debt today.

You've had $1 billion in the past.

Would you be willing to take on another $1 billion or $2 billion of debt given the demands on the Business as it exists today and the characteristics of the Board?

I guess what I'm trying to get at, is the Board so conservative that they would really not feel comfortable with putting on that kind of leverage on the balance sheet?

I don't want to speak for the Board, but I don't -- I think that if there's a good use of the proceeds and it's for the long-term benefit of the shareholders and the Business, they would be open to it.

Clearly, their leverage is relatively small, relative to some of our peers, and I think even for our rating, it's reasonable.

So I think they would be open to any reasonable request, as long as there was -- the use of the proceeds was in the best interest of the Company.

So no bias against having debt, I guess.

Okay.

Perfect.

And then, to beat the dead horse on Global Bond -- returns and performance bounced back; you got modest redemptions.

Anything that you see leading to the redemptions, given the actually really good returns?

No.

Obviously, the redemptions were a lot better this quarter than they were in the prior quarter when they had the headwinds on relative performance.

So they both continue to be our top selling, gross selling funds.

So I think they're still very attractive out there in the marketplace.

I think the question is always out there -- how are they sold in terms of volatility?

And you probably had some investors in there that just didn't expect that kind of volatility and those would be the ones that you would expect to see redeemed.

But I think we're still getting a lot of attention, both on the institutional and retail side, and continues to be a great way to diversify from the heightened sense of currency risk that's out there for anybody holding one currency.

So we're still getting a lot of interest and I think as the relative numbers pick up and the short-term numbers improve, I think that will help just the net flow numbers.

You're not selling it any differently and you're not emphasizing the Global Total Return Bond Fund?

There's nothing -- no pointing the wholesalers in a different direction?

Well, I think they've always been talking -- I think the Global Total Return Fund -- and that was the number one seller on a net basis -- and so obviously they are talking about that.

I think they have been talking about that.

It was just the Global Bond was kind of the known story with sovereign debt in it, and we think that's going to continue with the diversifying with the Total Return Fund.

We're really talking still about both.

As the other's gotten bigger, I think it's just gotten a broader audience to sell outside of the US.

I think that will continue.

Thank you very much.

Thanks.

Luke Montgomery; Sanford Bernstein.

A question on distribution.

I know there's not a lot of evidence in your results, but could you comment on any pressure you're feeling in terms of wirehouse distribution costs?

And maybe speak specifically to what advantages Franklin has in negotiating with its distribution partners, especially relative to your other mutual fund competitors?

Several have been saying that wirehouse has really been playing hardball on this stuff.

I think that pressure will always be there, and the more you concentrate distribution the more that pressure will increase.

So we've seen that.

But I think the other side of it -- for us, there's a limitation by prospectus on what we can pay out on revenue sharing or marketing support, so that does limit what we can do.

So that helps us and I think also when you're a certain size, too, you have just a little bit more leverage, like the distributor has a little bit more leverage on others.

So that pressure's there.

I don't think it's going to result in any meaningful changes to our margins here in the short run, but something we obviously watch very closely.

But again, nothing that I think would cause us concern right now.

Thanks.

Regarding the 20-20 Vision Equity campaign, I imagine it's a little too soon to say whether you're getting any real traction with that.

I was wondering if you could help us think about it.

Have you had success in the past effecting broad changes in investor or advisor psychology with those types of educational campaigns?

What's your confidence this thing could work?

Yes, it's a challenge.

You're into a strong headwind.

But when it does turn, having that -- I mentioned earlier, whether it's the shelf space in retirement plans, and that's really been our focus -- and then just creating awareness of what Franklin offers on the equity side, especially with the strong performance around some of the growth funds.

That does put us in a relatively strong position.

At the end of the day, these are tools for the advisors; it strengthens our partnership with them.

Turning sentiment I think is a big challenge.

But giving advisors the right tools to maybe -- that investor's sitting on the fence, and push him over, obviously, is what we're trying to do.

There's really no way, I think, to measure can one group go out and market and change sentiment; but when things do turn if you're there with the right awareness and the right tools with the advisors, I think you're going to benefit.

And we have been picking up market share on the domestic equity front, and I think when it does turn, that's just going to put us in a much stronger position.

Great.

That's it from me.

Thanks.

Glenn Schorr, Nomura Securities.

Just one quick follow-up.

Long-term performance is still very good, but the one-year performance has slipped -- I wouldn't say across the board, but in more than a few spots.

And just curious -- as it starts to leak a little bit into the three-year, if you've done any attribution analysis, see how you're positioned and if any remedy's necessary, just work through, again, recognizing that the long-term performance still looks very good.

Yes, I think there's not much you can do.

As you know, in the short run you're going to underperform and given pockets -- and I think the point that I would always make is how quickly the markets move and underperformance turns to outperforming your peers.

So look at the last quarter, with Franklin Income Fund at $60 billion-some-odd moved from lower to first quartile that quickly.

That's going to affect all of the time periods as well.

So if I look across the fund family and say, all right, where have we had weakness?

We'd say we're kind of positioned for more of the risk-on macro view of the world, where if Europe holds together and the euro holds together, that's going to benefit our relative short-term performance numbers.

And we think those are the kind of bets that we need to make as an active manager.

So in the short run -- markets, you can always look silly and the markets can underperform, but we try to look at -- understand the reasons of attribution and we feel very comfortable in the areas that are lagging.

But to try to change gears because of a one-year number, and worrying about a three-year -- I think that really is something we wouldn't do.

Okay.

Thanks very much.

Alex Kramm, UBS.

So some of your competitors have actually started to talk a little bit about the current quarter and how July has seen a significant snapback, given what the markets have done, and that has translated into pretty solid flows.

So can you talk a little bit what you've seen so far?

Or at least tell us that fairly similar to what we've heard from other guys?

Thanks.

We try not to talk about the current quarter and I would stick with that position for us.

And this quarter did start out very choppy.

It's had a little bit of a rebound lately, but the markets have not been on a complete upward trajectory since the beginning.

So I would rather not speculate on where, for us, other than to say that, remember a big portion of our net in-flows this quarter were from institutional wins and that's always an uncertainty, whether you can maintain that level of in-flows going forward.

That's fair enough.

I figured I'd try.

Then just one specific question -- I think in your prepared remarks you talked about strength in hybrid.

Right.

So when I look at the numbers in my model, I think it was 1% organic growth, which is a little bit of a deceleration from the last couple quarters.

So just want to perhaps reconcile that, when you talk about strength, maybe you were talking about a particular area, and maybe what was offsetting that during the quarter, just to get to that number -- which still positive, obviously, but a little bit slower than last quarter's.

Thank you.

I think that's a good question.

Really comes down to the lag in performance of the Income Fund that was lagging on the short-term and during the quarter actually has done very well and moved back into the first quartile.

So you would expect to see a little bit more momentum then from that pick-up in performance.

And I would look at the whole quarter and say, there wasn't any real significant moves in performance except that one fund and it's a large fund.

It's been a driver for us for a lot of years.

So I think that, that's a good indicator on hybrid going forward.

All right.

Very good.

Thank you very much.

Dan Fannon, Jefferies.

I think, Greg, on your prepared comments you talked about penetration of institutional distribution channels.

And wondering if you could elaborate on that, and see where the momentum is, whether it's through consultants or other intermediaries?

I think the point that we were making, is this an area that we have dedicated more resources into building better relationships.

And part of it is just the trend of platform selling and how that's certainly even more important outside of the US.

So we needed to make sure we had the right structure in place to service that model.

So I don't think there's any really significant changes to call out between retail or institutional, or even consultant-driven.

I was looking -- I have it right in front of me, the new accounts and some -- actually, this quarter more were consultant-driven than in the past.

Where in the past we seem to have the bigger ones come directly from some of the sovereign wealth that may or may not use a consultant, but this was more of the traditional wins.

Very small number to look at.

So again, I wouldn't draw any conclusion from that.

Okay.

And then Ken -- a question on the sales and distribution margin.

You called out the AUM being the biggest factor in terms of the movement, and also sales activity, and my question is -- does the type of sale make a difference in terms of the impact to the P&L, like a CCAV product versus a US version.

Does that have any economic variance?

It's a factor in the line items but not on the overall profitability of the Company.

So the asset-based component of the revenue is probably about 2/3 of the whole line item, and then on the expense side it's about maybe a little bit higher, like 70% of the total expense.

And that has to do with the geography of where the product's being sold.

So outside the US, just generally speaking, you have a little bit higher investment management fee.

Part of that is, call it earmarked or allocated to cover distribution expenses -- so that's why you would see a little bit more on the distribution expense side for the non-US products.

But overall, it tends to wash out and doesn't impact the overall profitability of the Company.

Great.

Thanks.

Gregory Warren, Morningstar.

Yes, this is just more of a general question in regards to, say, the fixed income side with Total Bond.

In your conversation with the wholesalers and the advisors, are you guys getting any sort of sense as to what the key thing is that's keeping them from selling the fund?

I mean, the performance has dramatically improved this year through the first six months.

There's been a few spotty months here and there.

Is there a feeling from what you're hearing from them as to what the big inhibitor is to get people back on board?

And potentially get the flows from this side of the Business back, not necessarily to what we were seeing in '10 and '11, but somewhere closer to that?

This past quarter was pretty good but just being able to see that growth vehicle back online.

Again, I talked about this a little earlier in the call.

If you look at the gross numbers, it's very much online as far as the interest level, just the redemptions are higher, which obviously is putting pressure on the net number.

And to me, the only answer is that some money goes in there, thinking they're buying a better yielding money fund, and all of a sudden they see that volatility that you're going to get from currencies and they're rethinking that strategy and moved out.

So it was a relatively new product on the retail side, and I think it's a little bit of a learning curve, and we think a healthy one, where people understand the risks and the volatility and you're going to have some shakeout; and maybe that first net in-flow number is not a sustainable number in an environment where they have that track record of more volatility.

Okay.

And then are you seeing some decent traction on the institutional side of the business, with the different fixed-income strategies that are being put in place on that side?

Yes, we are.

We had numerous significant wins in both Emerging Market Debt and Global Bond Plus, and we continue so see a decent pipeline there as well.

Okay.

That's good to hear.

Thank you.

Cynthia Mayer, Bank of America-Merrill Lynch.

So you mentioned a bunch of new platform wins over the last year on the equity side and being positioned for growth.

I'm just wondering if you can mention specifically which products are really getting the wins in terms of equity products?

Franklin Growth Fund is probably the one that stands out.

It's one of our flagship funds, and it's had excellent performance, and we've spent the last five years or so really trying to build out its presence on retirement platforms and measure it by how many we're getting on, not necessarily what kind of flows that we're getting.

We've seen a market improvement in the market share for the Franklin Growth Fund.

The Rising Dividend Fund continues to be very popular as well.

Those would be the two that I think that stand out for us in that area.

Okay.

And maybe just a follow-up modeling question -- last couple of years you've had a pretty substantial uptick in IT expense in the fourth quarter.

And you mentioned that you expect it to be a bit higher.

But I'm just wondering if you can compare it to the last few years, where it was like a 20% jump.

Yes, I think there have been prior years where that's jumped pretty high, but it depends on where we are in a market cycle.

I don't expect it to jump up that high, but certainly, I guess, 10% would be reasonable.

Okay.

Great.

Thanks a lot.

We have no further questions at this time.

Okay.

Well, thank you, everyone, for participating on the call today 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.