富蘭克林資源 (BEN) 2016 Q1 法說會逐字稿

Good morning and welcome to Franklin Resources earnings conference call for the quarter ended December 31, 2015. Statements made in this conference call regarding Franklin Resources, Inc. which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and MD&A sections of Franklin's most recent Form 10 K and 10-Q filings.

Thank you, everyone. Good morning. My name is Manny and I will be your call operator today.

(Operator Instructions)

As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Franklin Resource Chairman and Chief Executive Officer, Mr. Greg Johnson. Thank you, Mr. Johnson, you may now begin.

Good morning. And thank you for joining Ken Lewis and me to discuss first-quarter earnings. Although we face a number of headwinds impacting investment performance and flows, we have been through periods like this before and it's one of the reasons we value diversification and a strong balance sheet.

As we work through these challenges, and maintain our focus on expense management we will continue to invest in a number of long-term growth opportunities, including strategic beta ETFs, liquid alternatives and related solutions, while delivering our value-added services to a growing customer base around the world.

And now Ken and I are happy to take your questions.

Thank you.

(Operator Instructions)

The first question is from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.

All right. Thanks, guys. Greg, first for you, just on the flows in the quarter and the outlook, you hit on a few things on the prerecorded call, but it sounds like the institutional business continues to gain some traction. So I just wanted to get an update on the pipeline and what you're seeing on that front, particularly given some of the pressures in the market and where institutions are looking to put some money.

And then on the retail side, it seems like the pressure on Franklin income and Global Bond has been out there. It seems like there's more outreach to the client base and just any kind of reaction to that.

(Technical difficulty) normal searches with global ag and global equities. I think of note, and what has happened over the last, say, 3 to 6 months, some of the pressure on global currencies affecting various countries and then looking for those countries to diversify. I think we are seeing more opportunities in the Global Bond space in Asia right now. As those currencies have been hit and with the further risk of some going down to diversify away from their local currency.

I think any time you have periods where you face challenges and headwinds in performance, certainly a risk-off environment that any income funds that have heavy high-yield exposure are going to be under pressure. And we want to make sure we communicate the value and really the appropriate kind of understanding of risk in those funds. And when you get the kind of spreads that you have today from treasuries, you do have room for even some defaults in those and still continue to do very well against treasury.

So we think the markets have been under stress certainly in these areas. It's affected Franklin income fund, it affects any high yield funds like our high income fund. And we just want to make sure we continue to get as much information out there and hand holding to help advisors deal with their clients right now.

All right, thanks. And when you hit on the institutional question, I don't know if my phone wasn't working but I didn't hear the start of that. I didn't know if you mentioned anything on the pipeline.

Well, I would say the pipeline -- the new opportunities in the pipeline would be more Global Bond opportunities like the wind we had in Asia over the quarter. We are just seeing more interest, whether it is sovereign wealth funds or government entities in diversifying from their own currencies that are under pressure right now.

Okay, got it. And then, Ken, just a quick one for you. Given the pace of the buybacks, just wondered if -- see if you can give us an update on maybe the US versus the non-US cash balance and just given the level of cash flow you are generating, what's the outlook on buybacks?

Sure. So the buyback activity is -- relative to history it's been pretty elevated the last two quarters. And I could essentially say that US cash has remained unchanged. As a matter of fact, it has remained unchanged year-over-year as well. We've been having plenty of US cash generation to cover our needs.

Okay. Thanks a lot.

Thank you. The next question is from Craig Siegenthaler of Credit Suisse. Please go ahead.

Thanks; good morning. I just wanted to follow-up on the Weddell news yesterday because you guys also have a high competition of A class mutual funds. So I'm just wondering, do you have any load-waived A's that currently sit in fee-based accounts?

Yes, we do. And that's been a growing portion of our sales as more advisors have gone to the wrap advisory fee accounts.

Do see need in the future of those transitioning from a low [glave aid] to a high class or a zero rev share share class?

I don't. I think part of the reaction, I don't want to speak for [Weddell], but for us, it remains to be seen on the fiduciary rule which we have -- I think we are expecting something out in 90 days on that. But we don't think it would affect our existing A shares in any way.

And if there are different rules around use of those in advisory programs, we already have the 12b-1 class available, so it would be easy. For us, it's up to the broker dealers and advisors to interpret those rules to best fit their business models. But I think we would have all the share classes that would do that right now.

And then I don't know if you have this number handy, but if I look at your US mutual fund business, do you have the mix that sits in fee-based accounts and the mix that sits in commission-based accounts?

I don't right now. I think I just looked at a number off the top of my head that said right now we have about 40% of sales going into the no 12b-1 share class, and that has grown from 30% in the prior year. I would still say that our A share account is higher with a 12b-1 due to our distribution model and our strong partnership with Edward Jones that still favors that class.

Can I just add that it does also vary by fund in that mix.

Thanks for taking my questions. Thanks.

Thank you. The next question is from Bill Katz of Citigroup. Please go ahead.

Thanks. I appreciate you guys taking the questions. Good morning. Ken, if I can start with you, you had given a little bit of update expense guidance in the prerecorded call. I appreciate that.

Could you talk a little bit about -- I guess there was some disclosure, I was skimming through the 10-Q, but some of the disclosure of where the severance is occurring and if the markets -- what are your underlying assumptions for markets with this guidance and if the markets were to continue to work themselves lower, what kind of incremental flexibility would you have in trying to protect margins?

Well, regarding where the expense has been incurred, I think geographically maybe the majority of the expense is US-based across business lines. We haven't really impacted the investment management sector of our business. It's been spread out pretty much across the board other than investment management.

The assumptions regarding -- we talked about a target of 3% to 4% and that was a few months ago. What this market volatility has led us to conclude is that we should just be looking at all of our business and seeing where we can increase efficiencies, leverage efficiencies. And that's what we're doing and that's going to be a theme for probably the next nine months.

And that is just based on the volatility. We're not assuming that markets are going to go up or down but it's obvious that they're volatile, so we need to be looking at our expenses closely.

So is there -- if the markets -- just to clarify, if the markets were to continue to work their way lower away from volatility, downward trending for the short term, is there more levers to pull to protect the margin?

We think there are more levers to pull. But as I said, we're looking at the entire business almost without regard to the markets. So it's just been opportunity for us to make sure that initiatives that we started years ago, we still believe in. Invest in things that we believe in now and just try to reengineer all of our processes.

Got you. And just to follow-up, I'd be curious, Greg, your thoughts here. Very big picture, you're doing a nice job of some of these ancillary businesses, K2 continues to grow, you're investing in smart beta portfolios. But when you step back and look at your portfolio, you do have a lot of relatively sizable flagship retail funds with some choppy short intermediate-term performance. What measures are you taking to try and protect those assets, particularly in the retail channel?

And then as a corollary, any thoughts of maybe amping up the marketing spend? Or is that just wasted dollars as given the backdrop we're dealing with right now?

I think it's a good question and one that is really performance driven, like anything in this business. We're on our 10th year now of growth outperforming value and you look for a glimmer of light out there or hope. And certainly in January it's been a very choppy market. Value did outperform growth for the first time. So that would be the key driver to get more attention to some of these flagship funds that have been lagging.

And we looked at some of the big laggards, and even in January made some ground back with our rising dividends, Mutual Shares, Mutual Quest had a very strong January. I think if that trend continues, that will be important.

I think the other part, as Ken said, is looking at our entire business and validating everything we're doing. I think part of the changing distribution landscape, advisors looking at our industry and what they need differently. I think if you have redundancy with certain funds or it's just not clear what that fund offers in a various category that advisors need, we may need to tune some of the lineup or merge some of the lineup. And that is something we really are looking at now and that can drive some cost savings ultimately longer term as well.

Okay. Thank you, guys.

Thanks.

Thank you. The next question is from Michael Kim of Sandler O'Neill. Please go ahead.

Hey, guys. Good morning. So first, Greg, on the prerecorded call you highlighted some initiatives to better position the institutional business by building out some infrastructure, optimizing the product lineup. You also alluded to pricing. So just wondering if you could give us a bit more color in terms of how you might be thinking about either the level or structure of fees in that channel and just the potential impact from an economic standpoint as you move through that process?

Yes, I think it's always a challenge on the pricing side, especially when you have funds in the marketplace and the sensitivity to making sure we have consistent pricing across. I think the comment was just more on some of the development we've been doing also with the smart beta ETFs, as I said before. I think that allows us to get some lower cost vehicles out there that have market beta at a much lower cost and that's going to be attractive to certain institutions as well as within our solutions and outcome group.

But I'm not -- I think the, I don't think there's anything really to call out on the pricing side that we look at. I think we continue to study the markets and try to be competitive and we all know the pressure on lower fees continues. And we're trying to meet that or develop new capabilities that don't conflict with some of the retail styles that we can build out capabilities.

Got it. That is helpful. And then also on last quarter's call, I think you mentioned about one-third of the $17 billion in the sub-advise variable annuity channel was at risk. So just following the $5 billion redemption last quarter, does that suggest that related AUM at risk from here is de minimus or immaterial at this point?

I think there is still probably another $5 billion at risk right now with one of them. And from there, I think we have today low $40 billions, $42 billion in those sub-advised assets, about 6% of our base. When I think of risk, I would put another $5 billion for the changes that are taking place in that market.

Hopefully the other side of that is that we are, because of the build out we have with our solutions group and some of the development -- and we just got our first mandate in our managed volatility fund. So that is an area that hopefully we can more than make up the loss of the $5 billion coming up.

Got it. Okay. Thanks for taking my questions.

Thank you. The next question is from Ken Worthington of JPMorgan. Please go ahead.

Hi. Just first, simply on the new marketing materials that you gave out on Global Bond and the income fund. When was that rolled out? And then you said in the prepared remarks that there was good engagement in interest by clients. What does that really mean? Are you actually seeing any indication that redemptions are slowing or sales are increasing? Thank you.

I think we rolled it out right around the end of the year, around January 1, though early to quantify any behavioral changes there. I think what you're trying to do is get the tools in the advisors' hand so they can quickly sit down with their clients and walk them through the logic on why you would stay put in a period where there is a lot of headlines around high yield and stress and liquidity and make sure that they have a broad understanding of what is going on with those funds.

I think the other point I would make just around -- because I think that is the question I would look at is when would you see your flagship flows returning? And I think when I look at the income fund and its long history and it is a well-diversified portfolio, but it's always one that doesn't fit neatly in any category. It will always have high yield exposure. It will always be the highest yielding in its category, so it would be naturally a little bit more risky than its peer group. So you will expect to have periods where it lags performance.

I think the other side of fixed income, as I've said before, when the markets settle and high yield settles and you'll have very attractive spreads to where certainly treasuries are today, and you will have a 6%-plus yield on a fund that's done very well long-term. I think it's very easy to get momentum back in flows. It's a little bit easier than an equity fund. It's the attractiveness of that coupon and the history. That's where I would expect to see it turn. So I think it's really just when the markets settle and when the high yield bond market settles in, I would expect to see that fund start to get lower redemptions and hopefully better sales.

Great. Thank you. And then on the -- I guess, now, $5.5 billion mandate, which I believe all that funded this quarter. There was initial amount and then there was like a stub piece that was added. What is the potential here for more money being mandated from this investor?

It would seem like there's a lot of money out there, a change in strategy. I guess my erroneous view is that that was kind of a one-time thing. But is this the potential to be the gift that keeps on giving here for a couple of years?

Yes. I think not only that relationship, but other institutional mandates in that market as well. It's a high-profile relationship there that gives us better visibility in that market, so hopefully we can extend that into a few more relationships. But it's one we hope will grow.

Okay. Awesome. Thank you.

Thank you. The next question is from Ken Hill of Barclays. Please go ahead.

Hey, good morning, guys.

Good morning.

In the prerecorded comments you mentioned a new head of global ETFs and then the registration of the strategic beta ETFs. I was just wondering if you could talk a little bit more about how you're looking to package those with some of your active products and what you're hearing from clients, maybe the demand for it ahead of a launch like that?

I think the need, whether we use someone else's ETF or our own, between our own lineup we know we have the need for a lower cost beta in outcome-oriented or solutions-type products. That is something that we feel we have an immediate place for those ETFs. And then I think it will take more time in marketing to develop more presence and probably a broader lineup.

It's just our first step into the ones we think internally we don't have to go out and use somebody else's ETF, we can use these. And that there's some demand from the retail channel as well. I wouldn't try to quantify that right now. But enough immediately to make it meaningful to us.

Okay. And then last quarter you guys spoke about potential acquisitions. Just wondering how the thought process there might have evolved, given how you look at repurchases and capital returns with the stock price and then also the value of other companies you might be looking to purchase there to fill in perceived gaps. Does that look better or worse than it did last quarter and how are you thinking about that for the course of the year?

Yes, I wouldn't -- I think it's unchanged, the strategy how we look at M&A. I don't think it's changed. I don't think the level of repurchases changes that. As we always say -- when we say we are opportunistic, one of the factors is the share price in the market, but the other factor is what are the uses of cash? If we were to identify a target, we would probably [scout] back on the repurchases to balance it out. But we continue to look for opportunities in M&A and that hasn't changed.

I would say from my perspective it's more probable just based on what's happened in the marketplace. Unfortunately, we have been sitting with a lot of cash and that puts you in a unique position. And with the sell off in a lot of asset managers and a sell off in currencies around the globe, the potential for doing something I think is a lot more attractive today, just looking at currency moves around the globe than it was before. So we are actively out there and are hopeful that something will come up that enhances the lineup and adds value long-term.

Okay, great. Thanks for taking my questions.

Thank you. The next question is from Dan Fannon of Jefferies.

Thanks; good morning. Ken, I guess a couple of specific modeling items. The G&A you mentioned on the prerecorded call, there was a one-time item that boosted it. If you could give us a sense of what the starting point is normalized going forward?

Yes, I think we would expect that line to be more like it was in 2015 on a quarterly basis than what it was this quarter. Maybe that implies -- I don't know the exact number of the item, but probably in the neighborhood of $10 million.

Okay. And then just to follow up on the last comment on M&A. Can you talk about some of the things you find interesting, whether it be from a product perspective, geography or is it just scale? How do we think about what you view as realistic in terms of adding to your existing suite of products?

I think it's really all of the above. I mean, it could be a large scale that you get efficiencies from distribution and servicing. It could be parts expanding the high net worth business. It could be the solutions outcome. It could be real estate.

There are a lot of areas that we're looking at. But I think the probability of the right situation offshore, even with Asia-type funds that are very much out-of-favor right now, I think would look attractive for us long-term.

Great. Thank you.

Thanks.

Thank you. The next question is from Brennan Hawken of UBS. Please go ahead.

Yes, hey, good morning. Just a follow-up on the comments you made about the -- I think you said 40% of the sales are in I class and the rest carry some kind of distribution. With those that carry distribution, do you happen to have visibility into what portion is in retirement accounts at this point?

No. I don't have that number and, obviously, that is the relevant one as far as the potential with the fiduciary rule.

Okay.

We can certainly get that for you.

That would be great. Any additional -- I know in the last quarter's call you were asked on DOL and at that point it didn't seem like you wanted to make many comments, given it is not final. But now that we have the rule in OMB, right? We are a couple months, at most, away from final and it's expected to be largely unchanged. Do you have any sense of the extent to which this might impact your AOL -- your AUM, rather, through the broker-sold channel?

No. I think it is still too early and I don't think it has an immediate impact. I think what it does is it has an impact on your future sales in those markets. And I think you're absolutely right. Every indication, despite record comments and concerns raised, it's something that looks like it's going to move pretty quickly and try to be enacted before next January. And whether that results in lawsuits, I think that's still very much out there as a possibility to take this up.

But we are going to work with our partners and try to work through what will be a very complex transition to deal with this new rule. But, again, I couldn't quantify what that means other than it is not a positive.

Sure. Yes. No doubt it is going to be difficult. Thanks for the color.

Thank you. The next question is from Brian Bedell of Deutsche Bank. Please go ahead.

Thanks. Good morning, folks. Just a little bit more on the strategic beta initiative. First, how substantial or how -- what kind of breadth of product do you want to ultimately develop in this area? And then if you can talk a little bit about the distribution game plan for the products and also is this partly in response to potential DOL with these products, they obviously become more attractive in a DOL or in a (inaudible) fiduciary rules?

I don't think it's in response to the DOL world. I think it's in response to where we see growth and needs in our lineup. And again, as I said before, just getting a cheaper beta that doesn't conflict with your other funds will be important for us. I think the question on how big this market and whether or not at some point there is a vehicle that makes it more efficient than your typical 40 act and transfer-agent-type driven product. I think those are also questions that are still very much out there.

We just felt like the business is too large for an asset management company to ignore. And whether it's, again, through acquisitions or organic growth, that's going to affect our plan on how we roll this out. We think it has to be a separate effort, but also part of -- you get the leverage from your existing wholesaler group as well. And how big -- I think, again, we're starting kind of small, but we will continue to roll out or acquire new ones as we see fit. It is just getting in that space and building a team there and growing it.

Is there any desire to develop actively-managed nontransparent ETFs? You have obviously a number of applications in the SEC for that, to deleverage your own investment management products in a (multiple speakers)?

Yes, I think that's a possibility that we are looking at. So I think, like everyone, we're studying that and it is certainly a possibility to do that if you get the right regulatory relief on that and if it makes sense in that specific vehicle, it is something we certainly would consider because there are efficiencies you can gain.

And then just lastly on the -- question for you, Ken, on the costs. Obviously if you -- regarding the flexibility, if we are in a longer term difficult market environment, does it cause you to look at the outsourcing of fund accounting, administration and back office as one of those potential longer term cost saves versus maybe looking more deeply at the investment management segment of the business?

Yes, I think I mentioned -- we've talked about the subject before. That topic, regardless of market conditions, has come up over the years and we've done a lot of analysis on it. But I wouldn't say -- I think that market volatility, as I mentioned, has caused us to just look at our entire business, all of the business processes, all the business lines and rationalize everything. And I would include outsourcing of any type.

You would include that?

I would include that, yes. We will look at that again.

Yes, that's a little bit of a change. You guys, I think, have been more steadfast on keeping that in-house in the past. Is that a little bit of a change in view or was it always something under consideration?

Well, I think -- it's not a change of view to look at it. The conclusion may or may not be different this time. There are very valid reasons for us to do some of these things in-house. Some of the business is very customized and very difficult to outsource everything.

So I don't know that philosophically we have changed what we think is important to our customers and our business. But we will look at it.

And I would just add, again, in any environment this is something that we would look at and because of our structure and capabilities in lower cost regions like India, we're very cost competitive to the market in those services. If we were not, then that's something we have to consider. So those groups know that's something they need to validate and continue to press costs down, and they've done that effectively. So it really hasn't given us a reason to go out and outsource it.

Right. Understood. Okay, thank you very much.

Thank you. The next question is from Robert Lee of Keefe, Bruyette & Woods. Please go ahead.

Thanks. Good morning, guys. Two questions. Going back to the M&A question, I'm just curious. A couple of your peers have done some acquisitions in -- I guess I'll call it the FinTex space, so whether you want to call it Robo Advisors or something else, I was just curious, your thoughts about maybe not those specifically, but your thoughts of opportunities to enhance or strategically position your business with acquisitions that maybe we wouldn't normally think about for you guys.

Well, I think certainly the industry is exploring that space and looking at lower cost alternatives that can reach broader groups through digital marketing and capabilities that exist in trying to get the millennials in a different way than the traditional broker-dealer advisor model. So for us, that's another one, with the FinTex space and looking at Robo Advisors, is something we certainly are studying. Whether or not we need to go acquire one or to build that capability, I think that's the question that we're looking at today.

And I think the opportunity for the industry as distribution landscape changes, as we go to more advisory-driven models, is the traditional barriers between a broker-dealer fund sold group versus a direct group continue to erode and disappear at a pretty quick pace. I think the opportunity is what does that mean for investment management firms? And I think that's where a lot of groups are looking at.

And for us, I mentioned the partnership we are doing with a large global bank and using our solutions capabilities, targeting the emerging affluent market through digital marketing to existing customers in the bank. And that's very similar to what a Robo Advisor can do. These are funds that are multi-asset and have a lot of different --they have other managers than Franklin Templeton in them, and we can do that.

So that is somewhat of what a Robo Advisor can deliver. And to me, there is not a lot of magic or [there] there to what a Robo Advisor can do versus a solutions group can do or anybody modeling out. And I think the direct space -- the Vanguards and the traditional people in that space, or Schwab, have a pretty good head start on dealing with that marketplace as far as Robo advising.

Hey, great. And maybe just one follow-up. The macro business which I guess is housed within the global bond business. But that's a place you got that big mandate, hopefully more, you have talked about as a place of success. Just curious, could you size maybe how big that book of business is? Give us a feel for, in addition to this $5 billion-plus mandate, kind of the growth trajectory of that?

It would be very difficult. I think it's still -- well, it's called a global macro mandate from that group. It is really more aligned with your traditional Global Bond as a separate account. And I think the opportunity, we still feel, is a significant one. And I think it's just been some recent pressures around global currencies and a short-term lag in performance. But we still feel that that's kind of a pure alternative category to rates rising or equity markets dropping, that it really does provide a nice cushion to a portfolio.

So we think it still has a very large potential in a market. I think like last time, when did it do well? It did well when the equity market sold off and other markets were under pressure and it had good relative standout numbers. And I think when you have that, you'll see large flows there. As I said before, I think the feedback we're getting from the institutional side in Asia is that that opportunity is real today in getting other separate accounts in that space. But I don't know if I could quantify that.

Great. I appreciate it. Thank you.

Thank you. The next question is from Eric Berg of RBC Capital Markets. Please go ahead.

Thanks much.

Good morning.

A number of your competitors in the alternative area have described the rapid widening of credit spreads in the energy area and in the high yield area in general. And in the bond market in general, you have created just tremendous investment opportunities in the area of what they call stressed and detressed -- or distressed investing, rescue lending, these sorts of opportunities to invest in fixed income that is involving troubled companies.

It's, again, stressed or distressed. Understanding that your primary business is traditional investing, to what extent do you have the capability -- product capability and human resources to spend in this opportunity if, in fact, you think it -- if, in fact, you agree that it exists?

I think that's a perfect question to lead to our introduction of the fund we just rolled out in the last year is our K2 long/short credit fund. And really, again, to meet that need in an alternative category.

And we feel it really does offer a way to lower risks in a portfolio and really seize these opportunities that come because of stress in the marketplace, because of liquidity constraints and forced selling by some long-only holders that you want to have the ability to capture that on the other side. And that was a category of one of many categories, but the one that we felt made the most sense to introduce now. And we're just in the process of rolling that out to complement our $2 billion-plus in the global macro space of K2.

Very good; thank you.

Thanks.

Thank you. The next question is from Gregory Warren of Morningstar. Please go ahead.

Yes, thanks, guys, for taking my question. I know we touched on surety purchases a little bit here, but I'm just wondering what sort of capacity do you feel you have to make surety purchases this year? From a cash perspective, there are limitations, given how much cash is held overseas. And you spent $400 million in the first quarter and, arguably, the stock is cheaper right now. Do you anticipate being able to spend as much in the current quarter? And what sort of quarterly run rates are we thinking about going forward?

Yes, I would just say the quarterly run rate is dependent on several factors, many of which we have talked about today. M&A, share markets, et cetera. We continue to think the stock is a good value. We purchased shares in January. You can see that from our filing.

And we have many options in terms of capacity. I don't see that as a near-term issue at all. I think future share repurchases are just dependent on many of the factors that we talked about previously.

Okay. That's good to hear. Thanks for taking the question.

Thanks.

Thank you. The next question is from Michael [Supres] of Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking the question. Just wanted to follow up for a moment on the expense side of the equation here. On the prerecorded call you mentioned that you're expecting expenses to be about 3% or 4% before 2015 levels. But it sounded like you wouldn't necessarily expect all those to come through, hit the bottom line, because of the execution-related costs on that. So I wanted to make sure I heard that right, and that those expense costs will be fully offset in 2016? And how should we think about the run rate there into 2017 and the expenses coming through that?

Your question was a little bit garbled, so I am going to try to answer it. But if I didn't hear it right, please correct me. So right. So we are thinking, if you compare 2016 to 2015, we were targeting 3% to 4%, and we're thinking it's 4%. That's inclusive of some of the expenses. It's going to take some of the restructuring expenses that I mentioned in the prerecorded remarks.

Our attention now is focusing on 2017. But we will do some modeling in 2017. And, as I said, we continue to look at all of the business lines and then once we come up -- if we have additional guidance, we will provide that in future quarters, but it's an ongoing process.

So the 3% to 4% would fall down to the bottom line. That's not offset. Because I think that's inclusive of the --

That's correct. That's inclusive. Yes, correct.

Great. And could you elaborate a little bit more on what sort of actions you have taken so far, because expenses did come down in the quarter, and what you're thinking about next? You did mention earlier some thoughts around outsourcing, but how high up and realistic is that on your priority list?

Sure. We've had some staff reductions. That's part of it. We had a voluntary retirement plan that we talked about in our filing. So those were the examples to date.

And then looking forward, I did mention -- there was a question about outsourcing, but there are several things that we're looking at. We're looking at offices. We're looking at -- we're looking at offices, we're looking at business lines. Of course, the variable compensation is a lever we can use and did use this quarter to a degree. So all of those things are on the table.

Okay. Thank you.

Thank you. We have no further questions at this time. I would like turn the conference back over to Management for any closing comments.

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

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.