富蘭克林資源 (BEN) 2018 Q2 法說會逐字稿

Good morning, and welcome to Franklin Resources earnings conference call for the quarter ended March 31, 2018. Statements made in this conference call regarding Franking 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.

Good morning. My name is Matt, and I'll be your call operator today. (Operator Instructions) As a reminder, this conference is being recorded.

At this time, I'd like to turn the call over to Franklin Resources' Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Well, good morning, everyone, and thank you for joining Ken Lewis, our CFO, and me to discuss second quarter results.

Although outflows remain a challenge, year-to-date flows improved significantly from last year. And we remained optimistic as we continue to make significant investments to enhance our investment management processes, bolster our global distribution capabilities and build out our solutions.

Given recent market dynamics, including heightened volatility and a rising interest rate environment as well as the cyclical nature of growth versus value, we believe that our investment teams are well positioned for potentially significant outperformance going forward. Capital management also remains an important area of focus for us. And during the quarter, our board declared a $3 per share special dividend, and we accelerated share repurchases bringing our total payout for the trailing 12 months to over $3 billion. Financial results also remained strong.

Now we welcome any questions you might have.

(Operator Instructions) Our first question here is from Glenn Schorr from Evercore ISI.

So I kind of agree that you might see this switch over from growth to value. Curious on why you think we might not have -- haven't gotten there yet? And then maybe more importantly, if you look across the whole franchise, why haven't we seen a bigger move towards being style agnostic across the franchise anyway? In other words, why be in the position such that you're more exposed to style preference over time?

Yes, I think both good questions. And I think, the growth value cycle clearly hasn't played out yet. I mean, the same stocks tend to keep bouncing back and you've had -- you have more volatility there. I just think that the macro environment is set for that as rates rise and your discounting future earnings with the growth stocks and historically, value tends to outperform. And the one thing we are really seeing, I think, an interest in right now is, you do have -- we talked about it, more gatekeepers, looking at funds and positioning portfolios and having more influence [than] the broad-based advisers. And we are getting a lot of interest in those traditional funds that actually have been underperforming in this environment significantly in the 3 to 5 numbers, but have had very good long-term numbers and much better downside protection. So we are seeing a renewed interest on the shelf space side to position those funds. But like anything in the retail side, it's going to take some time to see that the rotation really happen before you'll see the flows really happen. But we just believe right now that based on where the markets valued and based on the backdrop of rising rates that, that should take place. And I think, as I said it's being supported by many of the gatekeepers. The question of value versus growth -- and it is interesting too, because, I mean, it's something we debate quite a bit and [would] have the same kind of why would you have a fund that specializes in one versus the other. And looking at our performance and our growth area, which is excellent, but it's just not as big to the franchise as the rest, so it gets a little bit lost. But you look at the Franklin DynaTech, Franklin Growth Fund, Franklin Technology and the SICAV, all with just outstanding performance and record flows right now, but that doesn't offset the other side when you have the deep value players like Templeton and Mutual Series. I think, we -- the thought of more core type offerings is something that we think about. But we also think the solutions group and having more of a tactical allocation between the value and growth is a very simple alternative to just creating a bunch of new funds where we can offer the allocation between value growth and really have core offerings with our solution groups, so that would be probably where we would address that.

Definitely appreciate that. I'm glad you brought up the gatekeepers getting more involved because I agree. What will -- how do they look at? How do they balance the 1-year, 3-year, 5-year, with the 10-year like your performance is borderline amazing long-term and the last handful of years is tougher? How do they balance that? You said they're looking at some of the better funds right now. I'm just curious on how that changes.

Yes. I mean, I think you will find it's all over. I mean, have had consultants come in and clearly they would say that 10 year's the most important number, but they also recognize that the patience level and it's a little bit different of the time horizon on the retail side. So we think the 10 year is still very important and it's still measured. But I would say the 5 year's probably weighted higher on the retail side. But many look at really try to evaluate the cycles and how you do over time. I mean, it was interesting for us. Somebody was pointing out and it was a slide that they would use on a retail presentation on the Barron's ranking overall for family and up until [night] -- right before the last big reversal in growth value, we were last on the list for 3 years and then we were first on the list for the next 5 or 6 years. And now we're back to near the bottom of that because of the cycle. And they were just pointing to how important these -- the macro moves affect an overall franchise when your assets are concentrated in one area. So that, I think, to his point in that slide was that who do you want to partner with for the next 10 years? Don't look back on the 5, but to your point, I mean, it's really the 1 year is not very important, the 3 and 5 are and the 10 year is right there as well.

The next question is from Craig Siegenthaler from Crédit Suisse.

First, just starting on capital management. And actually, I'll just ask 2 questions here. What is the level of excess capital that can be withdrawn after you make the $700 million debt repayment and the April 12 special dividend? And then secondly, could we see another special dividend over the next year or should we assume the $3 was it?

All right. So we are estimating and it's in the filing too like -- that our kind of operational capital needs are about $3.5 billion and then you could do the math, you could see all of liabilities. Remember that the dividend was paid in April. So that -- you'd have to take that out of the cash number. All the, debt -- the tax repayment and all that. You have to factor all those in. And then regarding the special dividend, I wouldn't assume anything. I think, that capital management is a long-term process, being shareholder friendly is a priority. We'll continue to -- I think, we have demonstrated. We'll continue to demonstrate that it's a priority. And so over time, the Board of Directors will assess where we're at in terms of cash requirements and needs and whether they should do another special dividend.

And to just add that. M&A activity obviously falls into why you have to be flexible and answering that question on what your intention is. And there's always a possibility of another one, but there's also another strong possibility of M&A activity.

And how large is that tax repayment?

It's $1 billion.

Great. I've got it.

$1.1 billion.

Our next question is from Ken Worthington from JPMorgan.

Invesco announced, like an hour-or-so ago, a pretty big insurance mandate loss. How big is -- I guess maybe first, how is your insurance business doing? That had been an issue for you in years past. What is latest in terms of AUM here? And what are the recent trends in terms of sales and redemptions?

The insurance business right now is [about] $2.5 billion in the variable annuity?

It's more like 30, I think.

No, I don't mean that. I meant like -- I'm sorry, I meant the variable.

I would say that the -- it's probably somewhere $30 billion to $40 billion. The redemption activity has slowed down. Still, some of that at risk and we're really -- we've been working with the insurance companies to come up with alternatives through our solutions group for more lower volatility type equity exposure in the markets and retain some assets through that. But not -- right now, not in a growth position. Although we are seeing, I think the viability of variable annuities going forward in the market and some of the repricing of annuities and continue to have very strong relationships with the insurance companies and hopefully get that back into a net inflow. But for now, I would still say it's more of a potential net outflow looking at a year or 2 ahead.

Great. And then, Ken, shareholder service fees expect to be flat compared with last year? I guess, is there a new level of seasonality in the March quarter? To get to your guidance of flat, you kind of need that to really pull back in the last half of the year. And I couldn't quite get there based on the description of how they're now calculated so...

Yes, that's correct. Yes, last November, we changed the model and how those fees are calculated. It's a combination of fixed and variable. And the variable is related to transactions and because of -- in this particular quarter, you have all the tax transactions that kind of increase the seasonality of that line. So that should fade out and that's why we're saying overall year-over-year should be flat.

Okay. But next March and the March after and March quarter after that, we should see the pickup in the first quarter, typically?

I'm sorry, I didn't hear that.

So in terms of seasonality, the March quarters going forward will be elevated and the rest of the year will be sort of depressed. Is that how we should think about it in years forward?

Correct.

Your next question is from Brennan Hawken from UBS.

Just wanted to follow up. You guys have put in some good clarity on updating your expense guide and saw how Edinburgh is going to provide an uplift to some of those line items. Could you help us think about how we should be modeling the revenue pickup from the Edinburgh AUM coming on? What kind of fee rate, et cetera?

I think that -- overall, we talked about the Edinburgh acquisition as being not material to earnings and that's still true. I think, what I been doing with the expense guidance is previously we've talked about some of the initiatives that we've invested in and that's where I've given, I think, the 5% guidance. And what I'm trying to do now is just to factor in all of the expenses. I wouldn't say Edinburgh Partners is a big part of it, but we had a severance in Korea this quarter and all that. So when you factor all of that in, that's why I'm giving the 6.5%, 7.5% guidance.

Okay. So effectively, Edinburgh being just one contributor there, not really a driver. And therefore, the offset from revenue isn't going to be material either, is that what you're saying?

Correct. That's correct.

Our next question is from Dan Fannon from Jefferies.

In the prepared comments, you talked about a pickup in retail redemptions outside the U.S. I guess, is there anything specific that happened, like, platform related? Or how should we think about the trends there, maybe going forward?

No, I don't think there was anything trend-wise. I mean, I was looking underneath it, trying to answer that question as well. I think you did see a pickup in some redemptions in Global Total Return. But you had fairly steady flows into the emerging market spot. Some of that pickup, just quarter-over-quarter, could have been a platform moving or a major reallocation in a platform because you do get that more in Europe than you do here certainly in the states. But no real underlying trends to report there. I think, the performance is lagging a little in the short run, but picking up here in the last -- this month as rates are climbing up. So -- and we also think still the defensive nature. This is a fund that kind of shines in down markets, because it's not correlated with anything else. So hopefully, we can get some absolute return in a tougher market environment and get flows back. But it just seems like right now, the emerging market bond fund is continues to get momentum versus the other 2.

Okay. And then to just follow up on another comment from the release. You talked about an outreach program for at-risk assets. I guess, can you put some color around that, maybe how you size those at-risk assets and I guess, how that outreach is going?

Well, I think, it's -- there is no, I think -- again, the institutional is just looking at areas where you have had deep value and long-term relationships and making sure that we are being proactive in meeting with those. And I don't think there's any one category. I think like at-risk, we certainly on the VA side and that's where Ken's number came -- at-risk we'd say $2.5 billion was the number that he came up with off the top of his head and that was the at-risk assets for this year, that we just know based on the relationship that they may be shifting that to something else. And I think it's just recognizing everything is at-risk every day. But certainly, the deep value assets that have underperformed, we've got to get out there and make sure people understand how that performance should turn around based on the macro environment. That's really the effort that we're doing with the institutional side. And I think a lot of -- you have to recognize that a lot of -- when you have big assets and styles out of favor, a lot of your efforts are defensive versus going out and trying to get new business. You have to make sure you maintain the relationships of the existing business because they're under pressure as well.

Our next question is from Patrick Davitt from Autonomous Research.

As a follow-up to Craig's question. It sounds like you're still optimistic on the M&A opportunity. Do -- have you noticed any changes, I guess, in the willingness of sellers to sell through the recent volatility? And within that, should we think of the repurchase authorization as separate from the pool you're keeping to do M&A? Or is kind of a placeholder for capital return until something gets done?

It's the latter. Yes, it's a placeholder. It's not a separate bucket.

And I wouldn't say the volatility has changed the opportunities here, certainly not in the traditional space. But we are seeing more, I think, opportunities in the alternative side.

Okay. Great. And as a follow-up. The management fee rate, I think, was probably a lot higher than people were expecting. And you mentioned periodic revenue sources as one driver. Is that really just the performance fee? Or is there something else there? And how much of that was really just driven by the average equity component?

Well, the -- yes. So was performance fees, there was -- it was our Romanian operation fund, [dual] that was part of it and then regular performance fees. And I think that the daily average assets under management kind of clouded the calculation a little bit. But the takeaway is that we're not really seeing a big dramatic shift in the effective fee rate at this time.

Next question is from Michael Carrier from Franklin (sic) [BofA Merrill Lynch].

Just one on capital management. Just given the pace that you have in buybacks and in the authorization that was announced. Just trying to get a sense of what we should be expecting as maybe like a run rate basis versus where you can be opportunistic and then still wanting to have a strong balance sheet and kind of firepower for M&A? So any color on what might be, like a run rate just given the elevated level we saw this quarter?

[Mike], it's a tough one to say, (inaudible) depending on so many different factors. So I don't think I'd feel comfortable actually saying this is the run rate. I just say that it's a priority. It's a continued priority to return capital to shareholders. This quarter there was a lot of reasons for the elevated repurchases. We might have better -- we might have -- next quarter might present more opportunities or less opportunities. So it's tough to say.

Okay, got it. And then Greg, I think, you mentioned in some of the commentary. Some of the things you guys have been doing given the industry changes. So whether it is investments in the business, some of the M&A stuff. So I just kind of wanted to get a sense like when you look at what you're doing, say, in '17, '18, heading into '19. What are some of the, kind of, the big maybe investments you think can, kind of, start to shift some of the flow trends? Obviously, there's the performance aspect, but maybe take that away and whether it's on like the product side, the distribution side, where we might be able to start to see some traction as we head into 2019?

Yes, I mean, I think the investments that we have made and continue to make, recognizing the changing distribution landscape and we certainly have added to the number of people calling on the home offices and gatekeepers. And we have seen, I think, results from that already where we target the number of funds on platforms and we've exceeded the targets for the year on making sure that funds are either maintained on the new lists for adviser platforms. So I think, that's been a very important area of investment. The ETFs is another very important area for us that we continue to build out. We added 7 new funds in the last quarter and have to have a separate distribution approach to that. So that's an incremental investment for the firm. The solutions team, we've added very senior people there over the last year and think that, that's just going to be increasingly important. And now, in a position to really offer a better suite of multi-assets and target-date funds and customized solutions. And in the last quarter, we got a $300 million mandate in the multi-asset category, which is something we would not have been competitive in last year. I think the other areas around just data, it would be longer term. But we have made -- we bought Random Forest and really that's more of a fixed-income effort now in the nonbank lending section. But just having the data scientist here and then building it out with each of our investment teams with the hub and spoke. And India is going to be important in how we consider -- how we look at and build our capabilities in looking at data. So those would be a few of the areas. And then private equity would be another that we have -- as we think about technology changes and disruption and Fintech and we approached it kind of piecemeal and one-off, so now we have a much more organized way of looking at it where we have a specific strategic pool of money. We have dedicated teams that are actually raising private equity funds now. And we have a partnership with a firm looking at data in AI investments where we've already made a significant amount of those. And all of those help us as we think about tools for our investment teams and better information and better data.

Our next question is from Alex Blostein from Goldman Sachs.

Just a couple of questions around just investments and then spending trends. I guess, Ken, can you, I guess, help us bridge the -- and I know there's a couple of questions to that, but what I'm trying to get to is, relative to the 5% in expense growth that you outlined last time, going up to the current range, how much of the initiatives kind of so the Edinburgh acquisition, Random and the JV with Korea? How much did that add? And should we assume the rest is basically incremental growth spend? That's part one. And I guess, part two is, as you look out at the next couple of years, I guess, where are we in the investment cycle? You guys are clearly implementing a bunch of new things, but just thinking beyond this year, what should be the expense growth for the foreseeable future?

Well, I think the -- on the expense growth, the main part is like I said earlier, it's just kind of given all of the activities that we've done, but I'm trying to just give you an estimate of where expenses will be in this fiscal year. Part of it is the seasonality also of the comp line. So that's why I gave the specific guidance on the compensation. But that's just kind of in the short term. I think going forward next year, and I made the comment in the remarks, that it's a year for us to assess the investments and cull those that aren't working and look for ways that we can temper that expense growth to something more in the inflation range. So that's going to be looking forward for next year. And there'll be more to come on that the next time we get together.

Our next question is from Brian Bedell from Deutsche Bank.

Maybe just on that vein on the last comment you...

(technical difficulty)

Could you repeat the question?

Yes. Can you hear me?

Yes, now...

Okay, great. Just, Ken, relative to the comment you made in the prepared remarks about assessing the investments. Just your view again of outsourcing the custody fund accounting and back and middle office, obviously, custodian banks are talking about an increased trend of outsourcing from asset managers. I know you guys have always wanted to keep that in-house because you can scale that. But is that something that is part of that assessment or would you rather just keep that? And I guess also, how do you think about the market environment to the extent that if we do go into a bear market, obviously, it would be better -- better to have a variable cost structure with that?

Sure. And I think we have a nice -- I do think we have a nice mix of fixed and variable comp. And I think, also as we mentioned before that our presence in these low-cost jurisdictions really does make a compelling argument for not outsourcing. But having said that, it's not something we do on an annual basis that assessment, but it's certainly something that we do cyclically. And so maybe 3 years ago, we did that analysis to decide that we should make some investments for the internal systems. But going forward, we're going to continue to look at those things as well.

Okay, okay. And then question for you Greg on the U.S. retail redemptions this quarter -- this first quarter or the March quarter, if you could maybe -- it may be hard to do, but if you could parse that out between what you think is more due to the market conditions with the corrections we've had versus the platform product lineup changes at the wire houses and the other broker-dealers? And just maybe your view of where we are on that platform consolidation for the industry broadly? I know we (inaudible) obviously since DOL, but is that -- are we most of the way through that or do you see a lot more of that happening?

Yes, I mean, good question. I don't think there's any real quarter -- or shifts in retail flows. I mean, I think you have the drag of the significant value assets and larger funds. And then you had volatility in the first quarter. For the first time, where you had a big risk off kind of moment there and fairly a decline in the market at the end of the quarter. So you did see a spike up in retail redemptions. But nothing -- I didn't see anything by asset class or product line really to call out other than you just -- again, first time, we've had some real volatility in the market. And I think we did a little better redemption rate-wise through that period. And certainly, performance-wise for that short period of volatility like we would expect with some of the value funds. And the other part of the question was?

Well, on the [wire houses] (inaudible)

Right, right. I think, that's a good question. And I was actually talking to some of our sales heads about that. And I think it's interesting this -- the new, call it, a higher standard of conduct or new best interest standard that is under comment period with increasing the suitability requirements and disclosure. I think what's important in the proposal is that certainly, brokerage as it exists today, can survive and doesn't have to be modified to a level where you can't have differentiated commissions. So I think that is important. I think the other obviously not being enforced by plaintiff attorneys is a good thing for that proposed legislation. And so I think it would slow down the acceleration of movement from brokerage to advisory accounts, and the urgency to do that would not be there. And I think that's a good thing, certainly, for our mix of assets that has high exposure on the brokerage side. So I think, the -- we're not done. I don't know what inning we're in, in this shift. It seems like, I was looking at one of our major distributors and partners and they probably had a ratio of 65:35 still of brokerage to fee base. But the other side of that is the new assets coming in are probably 70:30 fee. So I think, regardless, you have to get your model position more for the fee side. But I think the DOL being vacated and some of the difficulties in complying with that rule certainly will slow down that trend and brokerage can run off in a more reasonable way instead of having to convert.

Right, that gives us great color. And then from the actual number of products on the platform, do you see that continuing to come down significantly? Or do you think we've gone through a sort of a housecleaning already in the first quarter?

Yes, I think we've gone through it. But I think the -- clearly, there is less on there, and that means that you have to rationalize your product lineup which is something that we've spent a lot of time in the last year, really looking at and deciding what is going to be viable to continue to promote in the future. We -- and that's really where the initial investment -- or the investment we've made in more relationship specialists and consultants have been important to make sure that those funds get that shelf space. But I think the -- you have a narrowed funnel and it's just the question is how quickly the brokerage assets move to that narrow funnel. And you have -- that's where you're really getting some of the accelerated or higher redemption rates for your traditional base. So it's a narrower funnel. It hopefully will not get much more narrowed. I don't think there's any reason to for that. But really, it's the speed of the movement that's the question.

And that's still coming is what you're saying, [in reference to] the actually flow?

Yes.

Our next question is from Robert Lee from KBW.

I guess, a question on, kind of, I guess, retail distribution. I mean some of your competitors have talked about how they're -- success they're seeing in retail distribution because of their SMA presence. Others have talked about how they've invested in building out that capability because it kind of recognizes a need if they want to be in that distribution channel. And I mean, I don't have a sense of that's been a product lineup where you've traditionally had as much focus. So could you -- do you think that's -- and maybe as you get the centralization on a lot of platforms of decision-making and a lot more advisers shift to kind of SMA-type WRAP products that -- I mean, is that -- do you feel that your position is you should be there? Is that one of the places you're focused on making, rolling out new products and making new investments, just trying to get a feel for that.

I would say yes. I mean, I think, as we said before, we view ourselves as -- the content's in active investment management and the vehicle we're agnostic to, whether it's commingled trust, SMAs, ETFs, we're going to do all of that. And I think the -- now with technology improvements and efficiencies, we can do SMAs much more easily than we could, say, 5 or 10 years ago. So that is an area that I think we will continue to expand and offer more products and certainly the commingled trust and flexibility with that is something we've been doing here in the last year.

Okay, great. And then maybe one last question not to beat the capital management horse too much, but -- and understanding you had a $3 special and increased dividend 15%, I guess, was back a couple quarters ago, if I think of your kind of, let's call it regular dividend payout ratio, it's still kind of hovering around -- or just around 30%. And I think your -- many of your peers are kind of in that 40% to 50% range. And now you have access to worldwide cash. So -- I mean, could you maybe talk about just kind of your regular dividend? Is the goal just to kind of start low and just keep your track record of increases? Or is there a possibility that you kind of raise that normal payout ratio up towards kind of more a peer average?

Right. When we talked about this at the February meeting, we talked about all the aspects of the dividend, the payout ratio, the yield and all that, the special dividend, the shareholder preferences, we went out and talked to our major shareholders. And I think the answer to your question is, time will tell. The regular dividend will probably be a topic at future board meetings. And so I wouldn't rule out a larger increase, but I wouldn't count on it either. It's definitely a board decision.

Our next question is from Bill Katz from Citi.

Just in terms of coming back from a bigger picture perspective, Greg, it seems like your verbiage is that you're still open to transactions, but you, as a firm, have been more tactical in approach in terms of what you acquired or what you're building out. Where are you from a bigger picture perspective of a bolder move that might be needed to jump-start growth? I hear you on the long-term performance, but you have great performance, but you're not leveraging that in any way across the platform whether it be equity or fixed income. And I hear what you're working on a little bit. Is there something larger to do that could either accelerate earnings growth or accelerate the flows rather than just sort of trying to see if some of these more skunkworks things actually get hold? And how you think about the risks of something like that today?

Yes, I think the risks are great to think about a large-scale merger of and what you're left with. So I think, that's, again, as we said, less probable but you look at something like a K2 now that is generating $0.5 billion a quarter in net inflows. That's fairly significant to us in balancing some of the rest of it. So I think, that those kind of incremental adds are still going to be very important to us. And the priority is to find more noncorrelated alternatives that we can offer, specifically through retail and institutional. But we're open as we always say to look at everything that we think can jump-start or be incremental. But I think the thought of combining 2 large firms that have multiple styles underneath them gets a little bit daunting and risky for the shareholders and trying to understand who they are and what they do. So we as always have are looking at many different situations and are finding firms in that medium size that are not -- we have done a series of smaller ones and they sometimes they take as much work as the bigger ones. And so we want something that's going to move the needle. And we are seeing things more in that midsize versus tiny or extremely large. And that's really what we would like to do.

Okay, that's helpful. And then just one quick one for Ken. Is there anything in your numbers here in terms of revenue recognition restatements, some of your peers have had to sort of adjust certain fee waivers and/or distribution payments that may have affected the optics of report numbers this quarter or comparably from prior quarters?

No, no. That's effective for us next year.

The next question is from Patrick Davitt from Autonomous Research.

It looks like Global Bond is top decile again year-to-date. The last time we saw an improvement like that I think post-election, saw pretty quick kind of uptick in sales there. Curious if you're seeing that again? And if there's any reason to think that this period would be different than that period in terms of the improvement?

Yes, I don't think -- it's fairly -- that's fairly short term and that was news to me. So I doubt the market knows it yet. I know we were certainly had a big move in relative numbers in the last few weeks, which I've seen. But I think, it'll take a little time. But again, I think, the more volatility you have in the market and then people start looking for alternatives, this is a fund that really was pretty obscure and small until it had a 10-year record during the lost decade of equities where it was up 10% a year. So you really do have an alternative that can add some balance to a tougher market environment and that's what people are looking for. And it's been competing with a ripping market for the last decade in places like Europe, where it was an alternative to the euro. Euro stabilized has been strong. So it has had a lot of headwind just from the local debt in its local markets. And that tends to be when it really does well in Europe. But in the U.S., when -- clearly, we think it's an alternative category that if the markets get choppy and if rates go up, there's not going to be many places to hide. And I think, it can do very well in that environment.

Our next question comes from Brian Bedell from Deutsche Bank.

Just I want to clarify (inaudible) Ken, I think about a prior question about the revenue contribution from the recent deals. I think you said the expense obviously is going up from those deals. And then part of that was severance, I think. And then, I guess, you said, it was if I heard it correctly, it's not material so is that a match of revenues and expenses? Or do we see a [profitability] profile for that next year after we get through the severance?

Yes, I don't think it's material on revenue or expenses really. I think that just trying to clarify maybe I added more confusion but I was just trying to clarify the effect of what's been done this year and how it will play out in future quarters.

Okay, okay. So just not that big. Okay. And then just on the cash, the $10.4 billion. If we look at that pro forma for the dividend payment, the tax payment and your bond paydown, we would be a little bit north of $7 billion, not including any other factors. Is that -- I just want to make sure I have that right?

And then our kind of -- or the money we put aside for operational and regulatory needs, that takes it down significantly from that number.

Yes, the 3.5, right? The 3.5 that you keep for...

Right, right.

Yes, yes, so your excess would go to 3.5, basically?

Yes, that's a reasonable conclusion.

We don't use that word.

This does conclude the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.