富蘭克林資源 (BEN) 2015 Q2 法說會逐字稿

Good morning and welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2015. 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 filing with the Securities and Exchange Commission, including in the risk factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

(Operator Instructions)

Now I would like to turn the call over to Franklin Resources CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Hello and thank you for joining Ken Lewis, our CFO, and I today to discuss second-quarter results. Overall, there was a number of positive developments in the quarter; however, much of that was overshadowed by redemption pressure on global bond funds. Importantly, overall relative investment performance remains strong and we are encouraged by the continued strength of our institutional and high net worth businesses, as well as improved flows in several key areas. I would now like to open the line for your questions.

(Operator Instructions )

Ken Worthington, JPMorgan.

Hi, good morning. First, love to flesh out the success you're having on the institutional side. We've seen a number of quarters of success. Was hoping to get more detail. So what part of institutional is resonating best with Franklin? I think last quarter, you said it was really non-US institutional wins. Is it insurance companies? Is it pension and endowment? Again, any better color there.

And then what segments are you highlighting to them? And then I guess the last part of this question is, is there anything in the marketplace you see helping your success outside of the additional committed resources? Thank you.

I think it really reflects the effort that we started years ago and made it a corporate priority where we felt like the retail side was well represented across the world and really institutional. We didn't have the penetration that we felt we should have.

And as we've said in prior quarters, most of that has been outside of the United States. We spent a lot of time developing relationships with sovereign wealth funds. A lot of others have opened up insurance companies in other areas in certain markets that were not open to -- outside managers have opened up and with our strong presence in many of those markets, I think that's resulted in sales as well.

The area continues to be more fixed income. Templeton still has a strong relationships, and we saw some significant Templeton wins in this past quarter. But really a lot of it has been around the fixed income side and global ag and emerging markets debt, and that continues to be where we see the strongest pipeline.

Okay. Great. And then the follow up, just on DCIO, how big is DCIO for you now? What is the strategy behind the push? And similar to the other one, what products are you highlighting for the channel?

Well it -- I don't know what the exact numbers -- I'm sure we can get that for you. But for us, we've always felt that the defined contribution, especially investment-only open architecture will work in our favor. It's been relatively closed market for record keepers, and the trend in pressure towards open architecture just opens up more opportunities for us.

And if you take, even within the segment, the opportunity around target date funds, it's very hard to sell your own target date fund if you're not -- if you don't own the record-keeping. But the more recent trend of even opening up target date funds to outside managers within their proprietary product, I think is a near-term opportunity and be a near-term focus for us.

So you look across the product line, I think we are well represented on the equity side, and certainly with Templeton and global bonds is a relatively new area in the investment only. But the majority of the opportunities are always going to be around the equity side and global equity side in the DCIO market.

Okay. Great. Thank you.

Mike Carrier, Bank of America.

Thank you, guys. Greg, you mentioned on the global bond you are just seeing the redemptions pick up, and I think you mentioned that most of that was being driven outside of the US. Just curious, during the quarter, obviously there was a lot of volatility in the markets, but was there anything that you had put your finger on in terms of what was driving it? I know in the fourth quarter there was cap gains and stuff that was driving it.

And then from a marketing standpoint, what are the wholesalers doing to try to, I don't know if it's educate or try to get clients to understand what the product is? And when you go through this volatility, how to try to maybe steady some of those redemptions?

I think it is challenging, and part of the challenge is that it is a relatively new category and one that we have such a dominant share in, it is hard to really see how you are doing against peers and what are the expectations of investors?

I think, we said last quarter that the redemption spiked for the US fund, and that actually improved significantly quarter over quarter. The big spike was in Europe, and really it's even harder sometimes to get a handle on what the end shareholder is thinking about when much of that is sold through platforms and gatekeepers.

And if we drill down further, we can see specifically the markets where we had very fast and strong growth are the ones that are having higher redemptions. And if we talked -- I have talked to our distribution, they feel that there are a couple of factors working there. One, there was such a high level of fear in markets like Italy of where the euro was heading, where that market was heading, and a lot of the clients' portfolio got put into global bonds. So they think a lot of this is a reallocation now and a more normalized environment where the euro looks stable. European equities are always going to be the dominant share of any Europeans portfolio. That really is the trade right now, so a lot of money moving back into European equity.

So we can -- it is specific, really the high level of redemptions that we're seeing to those specific markets in Europe that probably had the highest level of concern over where the euro was heading. And we got those quick large sales is where we're seeing the greatest pressure. And it's, I think somewhat challenging from an education standpoint for those that feel that they want to get back into equities that's really what they're going to do with a portion of that portfolio.

And from our perspective, a couple of things. I think that fund in that market will do better when it's a risk-off environment in some ways and certainly when it comes to the euro and European equities. And then if rates rise at some point, because it is positioned for that as well. I think those are the two key areas in turning around the more near-term flows.

Okay, thank you. And then as a follow-up, can you -- you gave some expense guidance on the prerecorded call. I just want to make sure the G&A, I think this level, you're saying comfortable with. IT I think you were saying 1% to 2% for the year. And then occupancy, I didn't know if there was anything there or on comp, whether it was in the quarter that was unusual or the go-forward.

I think the -- maybe one of the unusual events in the quarter that affected all of those line items was FX. That alone, while it did not have a significant impact on operating income on the expense side, it did have a decent -- favorable impact on comps, so that's maybe an order of magnitude of $6 million or so. And then you probably have another maybe $3 million or $4 million in the other expense lines related to FX, so that's one reason we expect expenses to go up.

I think if you look at the comp line, I'm expecting that to go up a little bit, maybe 1% occupancy; I'm expecting that to go a little bit as well. And then just to be clear on the information systems and technology line, that guidance is projected 2015 versus projected 2014. So that would imply a pretty big increase next quarter.

Okay. All right. Thank you a lot.

Michael Kim, Sandler O'Neill.

Hey, guys. Good morning. First, just to follow up, maybe on, Greg, your comments on DCIO. Just curious to get your thoughts on the recent proposals from the DOL and any potential issues more broadly, or how that might impact your businesses at all.

Yes. I don't think it's going to have a big impact on our business, just because, again we are more of the content provider. We are not the point-of-sale person in that. And I think regardless of what happens, they are still going to need DCIO plans. I don't think that fiduciary standard would have a big impact for us one way or another.

Okay. Fair enough. And then maybe one for Ken, just to follow up on the outlook for expenses more broadly. I think last quarter you talked about reserving the right to tap the brakes, so to speak, just assuming AUM and revenue growth flattened out. So just wondering if you've maybe started to rein in some initiatives at this point or is it still steady as she goes?

It's somewhere in between, I would say, and we're talking about initiatives, on the, if you will, the easy-to-cut expenses, things are already in motion to slow that down. Slow down hiring a little bit. So that's been communicated throughout the organization, and we are seeing some of that come through the income statement, and we will see that too.

But it does take time now, and there is always a little bit of lag to these things. And I guess I am guiding up on expenses a little bit from decisions that were made in the past, and that will probably come through the next couple of quarters. Today we are definitely taking a little bit closer look at expenses and putting a little bit more pressure on cost savings.

Got it. Okay. Thank you for taking my questions.

Bill Katz, Citi.

Okay. Thank you so much. You called out K2 as having some nice momentum and getting some scale, and then you also mentioned in your prerecorded call that you have a couple of products in the wings. How quickly do you think those products can come to market, and how quickly do you think you might be to leverage them to add an incremental layer of growth?

I think they can come to market pretty quickly within probably three months or so. And I think the hard part is really getting the first one out there on platforms, and I think that's really where we've made key inroads is having, I think 72 platforms now, that that is represented on. So that will make it easier for us to bring the next.

And it really now is starting to get momentum here in the last few months where we're seeing larger trades and more interest. And now I think it's up to, I think $840 million between the two funds. So it's always the first few years on a new product are always tough to get going, but this one I think we are all very optimistic that we can expand that and really start to make a meaningful contribution to flows.

That's interesting. And, Ken, just to clarify, I thought I heard in the prerecorded call that G&A would look like last quarter, not this particular quarter but fiscal first quarter as we look out to the next quarter. Is that right or wrong?

And then just stepping back, when you think about the comp dynamics, I think you called out that there was a little bit of a decline from variable compensation due to lower sales. So if sales pick up, is there still operating leverage that can be driven off the comp line looking ahead?

I think there is a little -- yes, I would agree with that. On the variable comp side, there's -- we have some room there. Regarding the G&A expense, I am talking about the quarter that ended December, so more like that level versus --

So $90 million, if I recall correctly? Something in that ballpark.

Yes. Somewhere in the ballpark.

Okay. Thank you for taking my questions.

Patrick Davitt, Autonomous.

Good morning. Thank you. You mentioned the expense benefit from FX, but said there wasn't really much impact on operating. So it's fair to assume then that the negative revenue impact is pretty close to one for one on the numbers you gave?

I wouldn't say one for one; I think there was a positive impact on operating income but I just wasn't material relative to operating income. It definitely impacted revenue and expenses but they offset somewhat. Not entirely though.

Okay. Good. And in that vein, is there any one currency or index we could use to better forecast the foreign exchange revaluations in other income?

Yes. I think that in this quarter was the euro dollar [which was up] to be 13% or something like that. And so in this particular example, we did have a subsidiary that has a functional currency other than the US dollar that holds US dollars. So it's just kind of an oddity of the accounting rules. It does get offset in other comprehensive income, but it does add to the volatility in the income statement. After that it was the euro to dollar.

Euro dollar. Okay. Thank you.

Robert Lee, KBW.

Thank you. Good morning, everyone.

Good morning.

The question I have is going back to flows. So if I look at the board franchise, one of the attributes of you guys is you have a lot of big franchises, whether it is global bonds or equity income or some of the Templeton equity strategies, mutual shares. And I guess one of the challenges you have is some of -- multiples of those are suffering through some not even really high rates of redemptions, but enough to put them in outflows.

So if you look across those, are there any one or two that you can look at where right now you are having some flow issues? Maybe it's the Franklin income products where you feel like you are starting to feel like maybe it is settling down or you feel more optimistic about the ability to kind of get those franchises flowing in the right direction again?

Yes. I think it generally will relate to where your shorter-term performance, what is driving that on whether you are going to be optimistic around a turnaround. I think the good news for Mutual Series, which historically has always had a exposure to Europe and always benchmarked against the S&P, that's been a real drag, and they hedge, Templeton doesn't. So their more recent numbers are looking much better on the mutual side. And certainly global discovery is doing well in the global equities side, and I think that will continue to be a near-term driver of flows that we're pretty optimistic about right now.

And then I think the silver lining with Templeton that because of Templeton's historical philosophy of not hedging the dollar, that's been a significant drag on relative performance, as well as on just assets for us. And that, combined with the value discipline of again, overweighted in Europe, that's been a near-term drag. And that, in the last month or two, the dollar seems to be leveling here, which is helpful. And then Europe for the first time as well as all markets outside of the US outperformed the US. Maybe that's the beginning of a longer-term trend that from our asset mix would be, I think, very beneficial.

The other area, hybrid area for us, you had a little bit of a backup in the high-yield bond market that created some fear there. But again, we feel pretty good about the hybrid in Franklin income flows, despite that anytime you have a high weighting of high-yield bonds you're going have more energy exposure. And that created a shock over the last quarter and that seems to be a little bit better.

So those are the areas that I think we're more optimistic about in turning flows around. And then you take an area like municipal bonds, it's been under pressure the last few years. That's turned around into positive flows here over the last quarter, and hopefully we can start to see a pickup there as well.

Great. And maybe going to capital management and the share repurchase, you mentioned that you put in place a -- get the 10b5-1 program. So is it possible to give some color around that? Maybe size or how you -- the structure of it around strike prices, things like that?

I can give you high level, because it is fairly complicated when you get into the details of the mechanics. But I guess the first question is why did we do it now and what we were seeing was kind of a reduction in tradable volume for us. And we felt like this would help us meet our -- we are not changing our capital policies or strategies, but it would help us meet our goals, because that was sort of a challenge for us in times.

And so the idea that during the period where we would voluntary black ourselves out from trading, we have this 10b5 plan, so it just opens the window up for more trading days for us. In general, about the mechanics, we try to be more -- buy more when the price is down during that period and buy less when it's up.

Okay. Thank you, and then maybe one last question. You called out the high net worth business as being an area with some relative flows and growth. And isn't the business really over the years has been talked about too much. So could you maybe refresh us to (technical difficulty), and what you're seeing there in terms of new business flows? And maybe if there's any incremental investment or expansion of that that's taking place?

I think our goal is to grow that business and make it a more meaningful contributor and get scale from size. So that's -- whether that's through an acquisition or continues organically, that's really -- we know that needs to be bigger. I think we're displeased, and I wouldn't call it a trend; it's just a lot of work has been done to get some major wins with that group, and we want to highlight that. But it's something you wouldn't just expect to happen every quarter to have $1 billion in net inflows going into that segment. But it's progress in the right direction. And on a base of $10 billion or $12 billion or $14 billion, whatever it is today, that's meaningful to that business and important in growing the bottom line.

Okay. Great. Thank you for taking my question.

Brennan Hawken, UBS.

Good morning.

Good morning.

Question here on the excess debt capital you guys raised. It looks like you raised about 400 for a -- to pay down 250 of outstanding notes. Would the excess then be used to boost US domiciled cash and potentially fund some buybacks?

Yes, that's one -- yes.

Great. Then there's also been chatter on the capital fund. There's also been chatter out of DC out of a potential repatriation holiday. And could you talk about how you would view of reduction in the tax rate in order to bring some cash back stateside?

Yes. I think that the devil is always in the details on these things, but clearly conceptually, if it was advantageous to the shareholders and from a tax perspective and from a capital management perspective, we would take advantage of any repatriation law that was enacted.

Great. And then last one, quarter to date we've seen emerging markets bounce nicely. Can you give any color on what you've seen here quarter to date, whether or not some of the trends that you noticed and highlighted here in recent months, whether or not that's been continuing and maybe even gotten a little extra fuel as we've seen emerging markets bounce?

Yes. I think we're careful about trying to give any kind of indication where we think flows are going. This quarter, I think as I've stated, it's helpful to have the stronger performance certainly in areas that have been dragging like emerging markets, and I think that will help a lot of our different products. But it's probably too early for that to translate into a shift in flows right now.

Okay. Thank you for all the color.

Chris Harris, Wells Fargo.

Thank you. So year-to-date, your performance fees are tracking down a fair amount relative to last year. Just wondering if you guys can comment a little bit on that dynamic and maybe what the outlook might look like for the second half?

Yes, sure. I don't think that we will have repeat of last year in the second half of this year. I think what drove most of the performance fee -- the incremental increase in performance fees in 2014 was from K2. And at this point, it doesn't look like that number will repeat itself for the second half of the year.

Okay. Follow-up, a bigger picture question, the global macro team, just curious to get your guys' expectations for how that team is going to operate and if everything goes according to plan, what kind of impact might that have on the franchise?

Well I think it hopefully will result in just better collaboration with the different groups. We've always been a Company that has had a lot of autonomy with its investment groups, and the groups' different sources, different research organizations for information. And we've just felt like we have such a strong team in place with a team of PhDs and led by Michael Hasenstab that it makes sense to try to leverage that.

Certainly the other factor near-term performance with what central banks are doing I think is becoming more important to traditional stock picking that we tend to do. It's not something that we're going to push on the groups. It's just a way for us -- for them to have another resource and a view that I think will result in an overall more consistent view for the various different groups in the Company. And part of that is thinking about currency when you're looking at global equities.

And whether you decide to hedge or not, that's up to the various groups, but this will be a strong voice and a strong opinion on looking at currencies and how to add alpha through currencies instead of just leaving that up to the individual groups. I think that's where we will see probably the majority of change.

Understood. Thank you.

Brian Bedell, Deutsche Bank.

Hi, good morning. Thank you for taking my questions. Maybe just staying on the theme of the global macro team. Greg, if you could talk about the potential to launch new products that are based on some of the global macro research, particularly in alternatives and whether that opens up any distribution channels.

And then as you've mentioned, this helps create a lot of different ideas and unified research perspective. Is there any view that you would centralize any type of research, I guess, throughout the firm in terms of pushing that down onto investment mandates? Thank you.

Yes. I think it early to talk about what effect it would have on products. I think the near-term question is when we look and discuss Templeton and the philosophy around not hedging and how that's been so detrimental when you have this kind of move for US investors, a year where the dollar has been up 25% against the basket of currencies.

So I think those are the more near-term discussions. You wouldn't go hedge everything, but you would certainly consider hedging some of the funds or some of the classes of shares for those that want to have that protection and potentially lower volatility. So I think that's where you'll see the near-term effect on products, but that's still something that we're discussing with the group.

I think the other part around how does it affect our solutions and our tactical asset allocation, I think all of that we're still working towards coming up with what we think is the most efficient way to leverage all of that expertise we have in-house. But I think first and foremost for that group is they manage close to $200 billion, and that's really where you want their focus to remain.

Great. That's helpful. And maybe a question for Ken on the info systems. Can you talk in a little more detail about what the plan is there in terms of what you're working on that's driving the elevated expense in the second half of the year?

Could you just repeat the question please?

Yes. On the info systems expense, the shift up, I know we are going to be up 1% to 2% on a year-over-year basis, so the shift up into the second half if you can talk about, a little bit about what you're doing in that area in terms of project build and whether that is going to continue into next fiscal year as well.

Yes, this information systems technology line, it's pretty hard -- it's very hard to predict. There's a lot of big projects underway and there's project plans and sometimes they come in on time, sometimes they get delayed. But we do and have had some fairly big system initiatives underway. They tend to be more operational in nature, HR systems, some fund accounting systems, that kind of thing, and they tend to be multi-year.

The only point I'm trying to make here is the expenses have been lower, and I just didn't want people to think that that is a good run rate going forward.

Yes, that's fair. And then maybe just while we're on the topic, is there any thought to ever outsourcing things like fund accounting and some of the administration on the investment side?

That's something that gets looked at, I wouldn't say quite frequently but certainly every couple of years here And to date, the conclusion has been not to change that, although every time we go through the exercise, we do identify ways we can improve our existing structure and systems and processes, which is -- that's a current discussion right now too and that's part of the technology projects that I am referencing.

Great. Thank you very much for taking my questions.

Douglas Sipkin, Susquehanna.

Yes. Thank you and good morning, guys. Two questions, really just follow-ups from some of the things that I've heard. So just on the new 10b plan, is the assumption that you guys put it in place because you weren't able to achieve your capital return goals previously and this may help that?

I think it's more that we thought we would have trouble meeting our goals in the future and this would help that.

Okay.

It was just becoming more and more difficult to meet our goals is how I would characterize it.

Okay. And then secondly, just shifting maybe to global bond, and I believe you guys touched on it a little bit, but just judging by the performance which has been reasonably fine, and obviously looks like it's gotten a little bit better here in April, what do you think has been the driver of the outflows? Because it feels like it isn't so much performance, maybe some of the headline stuff or macro stuff. I'm just curious what your guys perspective is, because it looks like it is performing reasonably fine.

I would start with the global bonds overshadows good stories underneath, and it's such a unique category. And I think it's fascinating that our two best-selling funds are global bonds right now. Last quarter the global bond fund Global Total Return was number one and two in gross sales. So there's still plenty of investors that want that exposure.

I think it's just, again, a unique set of -- because you have shareholders throughout Europe that just have a whole different view and came into that with significant portions of their portfolio that that creates some near-term disruption. But it's also our best-performing area still on a consistent basis over time. So I think that -- when you have $4 billion in outflows in one quarter, that's going to overshadow a lot of stories underneath.

So I think the other, as I've said before, global equity with Templeton, the headwinds there by the dollar and the philosophy of not hedging, that's a pretty strong, especially on like the Templeton foreign fund creates some strong headwinds in the near-term. So I think that's another area that is somewhat unique.

And then you take other areas, like I've talked about Mutual Series, why that has been a bit of a drag over the last few years, but could be -- could turn around fairly quickly. And then areas where our deep value, like we've always had such strength with rising dividends fund. In this kind of market it's more tech-oriented; that's going to drag as well. They tend to be more defensive funds. Some of the funds that we have led with have been a little bit more defensive in this type of market.

Now we have growth funds, Franklin Growth Fund has a very strong track record across all periods. We're getting good flows there, but it gets lost, I think in the story.

Great. Thank you.

Thank you.

Eric Berg, RBC.

Thank you very much. Greg, just one question. Do you think broadly speaking, fixed income investors are more willing to stick with the asset class in the past, despite the prospect of higher interest rates because of the changing nature and the more expansive nature of fixed income investing?

Well, I think that remains to be seen. We really haven't had a significant rise. We've had a couple of blips on short-term that have moved back quickly. So I think there's always a market for fixed income, and the difference with fixed income is that rates go up; you attract new investors as they go up. And people want to lock in liabilities and things, that creates demand in a down market for fixed income. So I think there's always -- there will always be a place for fixed income, regardless if it's rising or not.

I think the unconstrained question is one that we will see how that plays out and how those funds really do in a rising rate environment. And we think our global bond fund with negative duration will do very well in a rising rate environment, and that's what I've said earlier. That is probably one of the catalysts to get increased flows back into that area. So I think there clearly is a concern on investors' parts for rising rates, and that's going to affect people going obviously into longer duration assets right now. But I think there's always clearly a place for fixed income.

Thank you.

Bill Katz, Citi.

Just a little bit of a modeling follow-up. Ken, as you look out into the next couple of quarters, can you give us an update of what you're going to have in terms of purging some of the dormant shareholder accounts?

Yes, we don't -- we probably won't know that till July.

Okay.

You're right, seasonally that's when that happens.

Okay. I'll follow up later. Thank you.

Thank you. And it seems that we have no further questions at this time. I would like to turn the floor back to management for closing remarks.

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

Thank you.

Thank you, ladies and gentlemen. This does concludes today's conference. You may disconnect your lines at this time and thank you for your participation.