富蘭克林資源 (BEN) 2013 Q1 法說會逐字稿

Welcome to Franklin Resources earnings conference call for the quarter ended December 31, 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 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 the Risk Factors and MD&A sections of Franklin's most recent Form 10-Q filing.

(Operator Instructions)

The Company asks that you limit questions to one initial and one follow-up question.

(Operator Instructions)

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

Mr. Johnson, you may begin.

Thank you, and good morning, everyone.

And thank you for joining us this morning, especially accommodating our earlier call.

Hopefully, you've all had a chance to listen to our recorded commentary on first-quarter results.

And as a reminder, our 10-Q was also filed this morning.

You can access that form from our website as well.

We are pleased to report solid first-quarter results, starting our fiscal year on a positive note, led by a strong investment performance and asset growth.

Operating results were also solid, with record revenue and the best quarter for operating income in over a year.

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

(Operator Instructions)

Craig Siegenthaler, Credit Suisse.

Just looking at operating revenue growth versus comp growth over last year, they were actually quite similar, it looks like, around 12%, despite the fact that revenue growth was very strong.

I was wondering if you could maybe provide some details why there hasn't been more operating leverage between comp and revs.

Sure.

Yes, it has been -- I was looking back for four years, maybe with the exception of 2009 and the global financial crisis, it has been pretty stable.

It's not a metric that we target or manage to, but as just an outcome of our process it has been pretty stable.

I think the answer is, it is based on operating income, so that's going to keep things relatively in line.

There's a component of compensation that is related to sales activity and commissions.

So as the business grows, that tends to grow, too.

So I think that's the main factors why that has stayed the same.

If you look at our increase in headcount, much of that has been in low-cost jurisdictions.

So the cost per capita has been actually decreasing, I would say.

Got it.

Then just -- you mentioned Riva a lot in the prepared commentary.

What's the current EBITDA or income contribution from this business?

Actually, how large could it get to?

Yes.

It's basically nil.

Up until this point, it's been an investment that we've been making.

The question is, we have a 51% ownership in the entity.

So when people see the functionality of the product, we think that there's a pretty good opportunity to grow that business.

So that's consolidated on the income statement?

It's up in other net revenues?

It could be in nonoperating income.

It could be in G&A, bits of it.

Jeff Hopson, Stifel.

Obviously, the US has seen a big pickup in flow activity in January.

Europe and the other areas did not fall off as much.

Any sense that you could give us on European overall industry activity in January?

How you think you're positioned there?

Well, I would just -- Jeff, we try not to talk about the next quarter.

I think, just speaking generally, January tends to be a very strong month for flows with retirement contributions and with the strength of the markets and momentum.

We expect to see that to carry through and are seeing that for us.

Europe continues to be strong and also was one of our improving areas, certainly, over the last quarter, where we had pretty good net inflows in many of our countries throughout Europe.

So that trend is continuing as well.

Okay.

On the global fixed side, can you give us some updates on the institutional pipelines and interest level?

Particularly, have you had much success in introducing that product to -- on 401K platforms, where there doesn't appear to be much embedded penetration?

Yes.

I think there continues to be strong a interest institutionally.

We have had a very significant win that we expect to fund this quarter in emerging markets debt.

I think the 401K side continues to grow.

It's still not a big portion.

But looking at the overall flows of over $5 billion in international bonds last quarter, it's safe to say that the momentum that we had back over a year ago certainly returned on the strength of performance.

We expect that to continue.

Robert Lee, KBW.

My first question is, in the prepared remarks, in looking at the balance sheet, just curious -- I think, Ken, you mentioned that most of the $5.9 billion or so of cash and investments is offshore.

Between the special dividend and continued share buybacks, is there a need to build US liquidity to some degree?

Should we think that maybe even for a period of time there could be a moderation in the rate -- the slope of a buyback -- at least for a couple quarters as you build liquidity in the US?

Yes.

I do think that's a fair comment.

Both the percentage of cash and equivalents and investments is about 40% in the US.

Obviously, when things like the Global Bond Fund grows quickly and all that, we can replenish that pretty quick.

So I think generally speaking, you could see a moderation in the short-term for share buybacks.

But if there was an opportunity, we certainly have the flexibility internally and externally to raise capital to take advantage of that, in terms of the stock price.

All right, great.

Maybe -- my second question is, with K2.

You closed on it.

I know there's about a month or so in there.

But, can you maybe just update us strategically on how you're thinking of incorporating it more broadly into the business?

Where you see the opportunity to really use their skill set?

And maybe some color on things you may even be working on right now would be I think helpful.

Yes.

I think the first step -- it's still very early in coming up with a definitive plan, how to leverage it.

But I think the first step was to get our own distribution system very familiar and then look at whatever areas of overlap we have around the globe and where we can get their message out.

So we've done that.

That seems to be working well.

We're getting RFPs where they wouldn't have gotten RFPs without the relationships we have around the globe.

So that's the first step.

Then we're studying the retail.

There's been a movement towards having a '40 Act Fund to Funds and a more liquid strategy there.

That's something certainly we're looking at as well.

But really, it's educating our force first and taking their traditional business and trying to leverage that.

Then, start to figure out where we can help out on the solutions side in the high net worth space as well as the retail space.

Mike Carrier, Banc of America Merrill Lynch.

Greg, I think on the prerecorded call, you mentioned on the international equity side some redemptions on the institutional side.

When we look at the industry trend, it seems like the interest in international equities continues to be there.

It seems like, given the Templeton brand, that you guys should be a beneficiary of that trend.

Yet the flows seem like it's not there.

So I was just wondering -- on the institutional redemptions, is that masking some of the more favorable trends that are happening on the retail?

Or is there something on the retail side that you're not quite getting those net flows into that channel?

Or is there a reason for it or a driver?

Yes.

I think it's a good question.

One that, if I had to look at any area and say where we underperformed, as far as distribution, it would certainly be in that category and a lot of that on the retail side.

Templeton had underperformed for a while, had made an early bet on Europe and financials.

Fortunately, that's paid off considerably.

If you look at how quickly the long-term records that were lagging are now back in the top two quartiles -- 1-year, 3-year, 5-year, 10-year even pulling back, so it just takes time.

Once you fall out of favor with advisors, it just doesn't snap back as fast as, say, the institutional world that looks more realtime at performance.

We did have a couple of large redemptions in Canada with Global Equity in the last quarter, which totaled about $2 billion.

Between Canada and Asia, there were a couple of redemptions in that category.

So that certainly contributed to your net outflow number.

But I think we feel confident.

We've been very focused on getting the message out on the retail side over the last year.

We have a pretty strong story to tell with good performance.

So I hope and we expect that to snap back.

But on retail flows, it just takes a little bit more time.

This is Ken.

I'd just add that, in January, we are seeing an improvement in the Global Equity groups flow, both on a gross and net basis.

It's early days, but it's positive.

Okay, thanks.

Then, just as a follow-up -- on the fee rate, just how we try to calculate it, it just seems like it was roughly flat, maybe even down a slight amount.

There's always moving pieces there, so it's always hard to gauge exactly.

But I think the performance fees were pretty similar this quarter and last quarter.

The only thing that was new would have been K2 coming in, and assets are probably in the full quarter and then the revenues are only two months.

But other than that, was there anything else from a mix standpoint?

It just seems like international market strong, global bond flow strong -- all should be higher fees, but it just seemed like it came in a little bit shy, where money expectations were.

Yes.

That's fair.

I think the answer lies in the mix, both in terms of the products and the channels.

So as we see more of a trend, relative mix towards fixed income and hybrid products; and also some of the institutional business, which a year ago was 20%.

Now, it's 23% of assets under management.

So they tend to be lower fees.

So we're seeing maybe a slight erosion of the effective fee rate.

Bill Katz, Citi.

Just want to come at the Riva opportunity from a different angle.

Given the synergies that you're getting from this platform expansion, is there a chance to pass along those synergies to shareholders in the form of lower expenses to further drive volume growth?

We think so.

We think it improves Riva -- things like Riva improves our scalability globally, a faster time to market without the incremental increase in expenses.

We're able to handle multiple share classes, multiple currencies, everything that you need to be a global investment manager is automated now.

So that and the combination of us continuing to use low-cost jurisdictions, I think that we will -- I'm not saying reduce expenses, but we certainly won't have to increase them at perhaps the rates that our competitors would have to do.

Helpful.

The second question is, you spent a fair amount of time on your prepared remarks in the prerecorded call -- so, highlighting, at least, Switzerland and Germany there I believe.

Are there specific initiatives there at the margin that you're focused on, that could accelerate growth on top of what you've already seen?

Well, I think each one -- those markets generally, if Global Bond, that's been a driver in Europe.

So you look at the last quarter, that's where flows really turned around.

So that's going to affect those specific markets more than most.

I think the initiatives have been to diversify while we have had one of the top selling funds in those markets to sell more of a multi-sector approach, which we've been pretty successful with in Italy, which continues to be our top -- one of our top net markets in still a tough environment there.

So our goal is always to try to build a more diversified base there.

Because Global Bond has been so big, we try to introduce other funds.

But there's nothing really specific to call out other than that.

Michael Kim, Sandler O'Neill.

First, just to follow-up on the Global Bond Fund.

Your performance has obviously been very strong more recently.

Now that the three-year numbers are quite strong as well.

So you've seen a rebound in flows, but it's still below prior levels.

So just wondering if there are any catalysts out there to maybe jump start flows even more so going forward?

Well, the question of whether you get back -- I think the volatility that we expect but sometimes maybe the market or investors don't expect is somewhat of a good thing going forward.

I've called that out on prior calls, that you want to make sure people understand that this type of strategy that is somewhat fairly aggressive, alpha-oriented, that you can have periods of underperformance.

So that may turn away some investors.

But I think again, like I stated earlier, January tends to be strong flows and the momentum of that fund is built and coming off fourth quarter where it had significant flows.

I'd also point to the Global Total Return Fund which outsold the Global Bond Fund last quarter.

That's another positive trend.

Okay.

Then you highlighted the success you've had selling the Franklin Growth products on the prerecorded call.

So just wondering how you think those strategies are positioned, assuming retail investors do continue to get more comfortable moving up the risk curve, if you will.

Yes.

I think it positions much better than it has been in the past.

As we said, the Franklin Growth Fund now is on many of the different retirement plan platforms.

So you would expect to see that flows, and flows over the last quarter in the Franklin Growth Fund -- it was one of our top selling US equity funds.

Also, the Franklin Balance Fund has been a new fund that we offered that has both an income piece, as well as an equity growth piece.

That's had excellent performance.

We've seen decent momentum there, certainly.

We think that's going to continue to build.

So, I think we're much better positioned as US equity flows come back.

We would expect to see, like many, a stronger number this quarter.

Ken Worthington, JPMorgan.

First, on marketing, can you talk about the approach that you're thinking about for the year?

What are you doing similar to years past?

And maybe anything that you're contemplating doing differently in 2013 versus what you've done in 2011 or 2012?

No.

I think the message is pretty consistent versus 2011 and 2012, and that's we want to continue to focus on the importance of equity investing and make sure that we're recognized as a leader in that area.

So that message will continue.

But I don't think there's any big changes of strategy other than that will continue to be a focus for us.

We also have our Tactical Asset Allocation Fund, things like that, that have been out there; continue to develop our solutions as far as product development.

But I don't really right now expect to see a big shift in our strategy, in our spend, and really our flows from what we've seen over the last year or two.

Okay.

So even if we really are seeing engagement, we're seeing better sales activity in your equity products, you think the positioning is just -- it's going to be consistent with what you've been doing.

Right.

It moves the needle on the margin, but the strength of hybrid, Franklin Income, Global Bonds, munis are going to continue to be the major drivers.

Performance is good in all those areas.

So I would expect to see a continuation unless you have changes in the market.

But for now, fixed income is still driving.

Equity is picking up.

But I don't think there's going to be a huge shift unless rates back up or something happens.

Then just on Global Bond and this ongoing capacity question.

So Hasenstab is talking about the lack of attractiveness of a safe sovereign debt.

It's been driving him into some of the smaller markets like Ireland, where I think he's now 10% of that market.

So I know in the past you've said that there's plenty of capacity in the areas that he looks at.

But now it seems like there's been at least a recent shift in his strategy.

So, based on that, is the Business now too big for what he's trying to accomplish?

Then, as managers what do you do about it?

Well, it's something we monitor very closely.

Look, defining and measuring liquidity is an art in itself.

We've spent a lot of time doing that in these markets.

I'd also point to that, this fund carries a cash position, because we know there will be shocks in the market and liquidity dries up when you need it.

But you look at the demand in the last offering of Irish debt that I think was three times oversubscribed, you could argue liquidity is pretty high right now.

But we know that's not there when things turn the other way.

So I think we're sensitive to that issue.

We spend a lot of time with the team and with our risk group measuring that.

But we feel very comfortable today that it is the appropriate level of liquidity.

But for those that want to be more aggressive, we have other type products available, in the less liquid markets with more of a -- restrictions around what you can do with redemption.

So I don't think for now -- I think the good news is that, we are diversifying with the Global Total Return Fund, which, again, is a much larger overall market.

We still feel comfortable, as Michael does, with the liquidity in the Global Bond side.

Matt Kelley, Morgan Stanley.

Just wanted to expand upon the K2 acquisition a little bit.

Just broadening the scope a little bit towards just the alternatives platform in general and the fact that you've got more traction with institutional clients.

What other sorts of asset classes outside of the Fund of Funds Business might make sense for you?

Would you consider more global real estate, private equity -- or anything else that you're thinking about?

I think we're in both of those, private equity and global real estate, and whether there's an opportunity to expand that platform.

That's certainly something that we're always open to doing if it makes sense.

So, as we said before, there's no hard rule one way or another.

If something makes sense and we can build scale and build a stronger group, we'll do that.

But we do have that capability today, certainly with Darby and our Franklin Real Estate group.

Okay.

Just to follow up on that.

I was asking -- I was trying to get more along the lines of -- there's obviously increased retail penetration or demand at least for some alternative products here in the US.

But do you see more potential growth in the retail channels or in institutional for the alternative asset class as a whole?

I think it's hard.

I think, again, and as you define what -- alternative covers a lot of ground, whether you'd call it a solutions and a target date and is that really an alternative?

So, the answer is that there's an appetite always to do things a little bit differently.

We're going to continue to build.

But whether or not -- the liquidity concern in a retail, I think, is something we're sensitive to and are going to be careful about less liquid type private equity investment vehicles like that, even Fund to Fund, hedge fund to funds, whether or not you can really do that in a '40 Act form I think is a question that, we're still analyzing.

Marc Irizarry, Goldman Sachs.

Just wanted to get some perspective on your growth outside the US versus inside the US relative to margins.

If your growth accelerates outside the US, how should we think about the near-term margin potential?

Then maybe -- I don't know if you have a view on long-term trajectory there as well?

I'll start with -- I'll talk a little bit about the margin.

To the extent that the growth occurs in our, I would call it a retail product, even though sometimes that's sold in an institutional channel -- is our CCAP funds.

I think the margins -- but I don't think we'll have incremental expenses.

So you could see some margin expansion.

To the extent that the growth would come from maybe our local asset management groups -- the in-country funds -- they're more expensive.

But on the other hand, they're such a smaller part of our business that they shouldn't really have a big impact.

So I would say that, if we did overall have international growth, that you could see some margin expansion -- or at least flat, or at least stable, but not compression.

Okay.

Then, Greg, can you just comment on your appetite for deals, given all the capabilities that you've added already and what you're building, what you currently have in the product line?

How do acquisitions fit in to your thinking there?

We have a lot of styles.

We feel like we've addressed most of the needs out there.

But if something pops up that again we think can be accretive over time, we're going to look at that.

But I wouldn't put any -- if we had to put a wishlist together, I think it would be difficult for us to say one, two and three, what do we need right now?

I think we've got a lot of pieces that we can actually build new products with some of the capabilities that we've introduced.

We've also haven't fully leveraged the distribution that we have with many of these newer acquisitions.

So, we're going to continue to look.

But again, the breadth of what we offer -- you do get diminishing returns at some point through distribution channels.

What we're looking at today is, whether or not things like -- we are investing and building out our alternatives distribution as a separate platform.

We think we're going to continue down that road.

So that enables us to potentially add more products and styles to that.

So that would be the one area that we're going to continue to be open to.

Greggory Warren, Morningstar.

Looking at the fixed income flows we saw during the quarter, how much of that do you attribute to the positive flows we saw from Global Bond and from Global Total Return?

A follow-on to that -- do you think that this is an appropriate quarterly run rate to assume as the year progresses?

Yes.

I think, again, January tends to be a little stronger, so to extrapolate -- or to take this quarter -- we all know how difficult forecasting where rates are going to be.

So you look at the strength, muni bonds, even in a period where you had some questions about tax changes that could have affected them and probably contributed to some redemptions but still had relatively strong flows, you would expect that to increase if -- with the increase in tax rates, just makes that much more attractive.

So I think it's a fair, certainly, run rate if rates don't change -- or maybe higher, hopefully.

Okay.

That's good.

Then just a quick follow-on -- looking at equity flows overall -- I'm sure you guys are seeing the same sort of data and you looked at what's been happening within your own funds in January.

It seems like a lot of the money is flowing more into international equity funds.

I would assume more on the active side.

Has that been the case for you guys?

Are you seeing more activity on that side of the business and less so on the domestic?

Well, again, we really don't like to talk about this quarter -- the current quarter as far as flows.

But as Ken mentioned, certainly for us, a drag has been the net Global Equity flows and we have seen a significant improvement.

I don't really have an answer whether it's passive or active, but you certainly have more active in the retirement plans.

That's going to generally drive more of the immediate flows in January.

Chris Harris, Wells Fargo Securities.

I want to come back to this point about Global Equity flows not really catching up with the better performance you've had.

Curious -- do you think enough time has passed here where advisors will actually start coming back to this product in a more material way?

Maybe to help us frame up the answer to this question -- in prior periods where you've had some performance issues, how long would it take for the advisors to come back?

Well, a couple points.

One, we are seeing an increase in -- it's certainly the gross level.

Much of that was masked by some of those big institutional redemptions.

But I don't have an answer to tell you how quickly.

I think I'm a little disappointed it hasn't come back faster.

But we tend to focus on it more than -- and it's even getting our own channel.

That's been a big focus of ours, is getting our own people to talk about it more than ignoring it, which could have been the case in the past.

So we have to get that message out.

That's been our focus, certainly, for the last six to nine months.

We are seeing a turnaround.

We're seeing interest on the gross sale level.

We're seeing a turnaround in the net-net numbers more recently.

So we are seeing that turnaround.

I couldn't tell you what a number is, because there's so many different factors in timing and when flows come back.

Okay.

That's helpful.

Then a real quick follow-up on performance.

Clearly Templeton doing great, but Mutual a little bit less so.

Can you give us a little color on what's driving other performance you're seeing at Mutual?

Yes.

I think it's just the value -- their deep value style, and some of it's currency moves as well that can affect the shorter term numbers.

Cash -- they generally hold a little bit more in cash than most equity funds.

That tends to create a lag in the kind of markets that we've had.

A much more defensive posture risk.

That's been traditional for them versus this kind of risk on market over the last year or two.

Dan Fannon, Jefferies.

Just to follow up on that for Mutual series.

Could you just highlight recent flow trends?

Remind us, in total, what the asset levels are there in that complex?

I don't have that.

We'll dig that up or you can call our Investor Relations group.

But I don't have the exact numbers in front of me.

I'm sorry.

Then just one on the global fix.

You talked about on the prerecorded call some of the geographies that have improved.

Is it some of the same customers coming back or some of the same channels that are resulting in the gross sales improvement?

Obviously, the geographies seem to be similar, but is it the same kind of end users as well?

Yes.

I think that's certainly -- I don't think there's been any real shift in distribution.

We saw some shift based on volatility that created some lumpier redemptions because of the gatekeeper approach to many of the big banks in Europe and things that may have just felt it was a little too volatile for how they were selling it.

But we're seeing a pretty consistent pickup really across Europe and the US.

Ken has some numbers.

Yes.

While Greg was talking, I did a little research there.

We have seen an improvement in Mutual net flows in the month of December.

That's -- we've even seen some positive flows early days in January and their assets at December were around $55 billion.

We have no further questions at this time.

Okay.

Well, thank you everybody for adjusting your schedules to participate on our morning call.

We look forward to speaking next quarter.

I was just going to say, go 49ers.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.