富蘭克林資源 (BEN) 2018 Q3 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 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.

Good morning.

My name is Elmer, 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 Resources' Chairman and CEO, Mr. Greg Johnson.

Mr. Johnson, you may begin.

Well, hello, and welcome to our third quarter conference call.

I'm joined today by Ken Lewis, our CFO.

While some clear challenges persisted in the quarter, investment performance within our growth strategies was very strong, and net flows into our U.S. equity and hybrid products improved.

U.S. equity sales reached the highest level in 3 years, driven by demand for a number of our growth funds within the category.

Additionally, we continue to make progress with several strategic initiatives to offer lower-cost options to investors, notably in the DCIO space.

Importantly, operating results remain strong, with over $503 million of operating income generated on $1.6 billion of revenue in the quarter.

We continue to prioritize capital return with elevated share repurchase activity in the quarter and a $0.23 per share regular quarterly dividend.

We'd now like to open the line to your questions.

Our first question comes from Craig Siegenthaler, Crédit Suisse.

On Page 4 of the prepared remarks, I see you adjusted fee structures in your A shares.

So I'm just wondering, how large is this A share from an AUM base standpoint?

And also, what's the estimated economic impact in terms of EPS or revenues or earnings?

Yes, I mean, I don't we have a number.

I think it -- I would say it would be nominal any impact.

It's really just adjusting the payout schedule to be more competitive on the breakpoint schedules.

And we think the real impact would be in the lower duration kind of products, where we've seen a lot of over $1 million sales being competitive on the brokerage side of those still selling A share assets.

So I just don't think it is a number that would adjust anything at this stage.

Hopefully, it will, if we get strong sales.

Right.

We think it will increase sales.

And if it does increase sales, then you would see the sales distribution, revenue and expense line increase, which is a good thing.

And then just as my follow-up.

I don't know if you guys did this intentionally, but it looks like you pulled the text and commentary around the pipeline in the prepared remarks.

I'm just wondering, how did the institutional, 'won but not yet funded' pipeline trend from last quarter?

Well, I think that the --- was the question how the pipeline related back to last quarter?

Yes, so how did the institutional pipeline of 'won yet not yet funded' mandates trend, the current -- I mean, right now versus 3 months ago?

Yes, I think, for example, the big win for our local asset management in the U.K., I don't think we noted that last quarter, so that was an upside surprise.

But I would say for -- the pipeline came in pretty much -- yes, for the rest of the pipeline, it came in pretty much as we expected.

Our next question comes from Bill Katz, Citi.

So first question is just on expenses.

I appreciate that you -- hold on a second, guys, sorry, some background noise -- so just appreciate the guidance as it relates to the fourth quarter on the G&A side.

So I guess, first of all, the question is, where is the spend?

It sounded like there's a little lumpiness to it.

And then now that you're so close to the end of the year, how are you thinking about the growth next year relative to the growth rate you articulated for this year?

Right.

You know there were a few one-time charges in the G&A, but there's also -- there was a bit of kind of expense trends going on in there as well.

So that's why we gave the guidance.

Some of it relates to sub-advisory expense.

So you're seeing an offset to that in revenue as well.

But that -- I think that's probably the biggest driver there.

And so that's why we're -- giving that guidance for the fourth quarter.

I mean, it's early in the budget process for us looking forward to next year, but our target is to try to keep the expenses under 3% growth rate next year, year-over-year, '19 versus '18.

Okay, that's helpful.

And then just stepping back, you mentioned, I think, your priority is capital return.

Where are you in terms of the buyback versus sort of the stepped up repurchasing you announced more recently?

And I guess, so I think going forward from here, is buyback still the priority use for that within sort of the overall capital plan?

Yes, I would broaden the answer, and just say that returning capital to shareholders is, continues to be a priority.

And part of that is share repurchases.

I would point out, this quarter, there were -- you know we like to be opportunistic with our share repurchases.

This quarter, there was a couple of factors that kind of elevated the share repurchases compared to the previous quarter.

One of them was a pretty big spike-up in volume during the quarter.

And also, we repurchased shares to cover any -- some share issuances that we had related to M&A.

So a little elevated this quarter, but it continues to be a priority.

Our next question comes from Ken Worthington, JPMorgan.

And to follow up on the capital return conversation, you're clearly returning a bunch to investors, but at the same time, the business is under tremendous pressure.

And you've got a tremendous amount of cash, gives you the opportunity to kind of redirect the business or buy your way into better growth.

And you've done acquisitions, but nothing that I would consider transformational.

So how serious are conversations in the boardroom about leveraging the cash for more than just buybacks and dividends, and if the opportunity arose to do something truly transformational for what has been a struggling business?

No, I mean, I think you're dead on.

And I think I was going to add that to the last -- to Bill's -- to Ken's response to Bill's question, that when you look at capital, M&A is still the priority for the use of that capital on the balance sheet.

And I think the challenges that you mentioned, and we all know, whether it's fee pressure, passive or just the move to advisory from brokerage, will continue to put pressure on organic growth rates.

So we are, as we said on past calls, very active in looking.

And that still would be the #1 priority, to invest the capital into growth channels, and not make the priority just buybacks and dividends.

And I think, obviously, and those board discussions are ongoing, looking at all aspects and all channels of growth, and are much more interested in that discussion than the level of buybacks.

And evidenced by what you guys have been doing, you guys have done a number of smaller deals, but they've been smaller deals and not sort of big, transformational deals.

If the right opportunity arose, is transformational something that would be under serious consideration?

Or really, is the better approach, do you think, continue to kind of nudge the battleship and maybe transform the business longer term using smaller transactions?

Like, I guess, it's been so long since -- like Franklin has done big, big transformational deals in the past, but it's been a long, long, long time since you guys have taken that approach.

Well, and also very different organizations from when Franklin brought Templeton to where we are today as far as the breadth of what we offer in as many places.

So I think the answer is that we continue in doing bolt-on, developing products, whether it's alternatives.

I mean, we're building out businesses like private equity.

We want to continue to scale up the high net worth business.

We've said that in the past.

The transformation -- I mean, define transformational, but I think they're harder to do.

And of course, we are open to that.

But I think combining with a company of this size is very challenging to maintain who we are as an organization.

But I think those discussions, again, are ones that we are open to.

But more probably, you'll see continued investment in those other categories that can't be duplicated by passive strategies as a priority, and then just, again, scaling up the businesses that we're in.

We'll continue to do that.

But I think as far as a transformational, whether it's 2 huge organizations combining, I think that, that's more difficult.

But we could certainly still do something in between that, that would absolutely change the organization in a significant way.

So those are all things we're looking at.

Our next question comes from Michael Carrier, Bank of America Merrill Lynch.

Maybe first one, just on the fee rate, it seems like there is a little bit of -- a little bit more pressure here this quarter.

Just wanted to get some sense, were there any other changes that were made in the quarter on pricing?

Or was it more -- whether it's product vehicle shift that was just playing into that?

I think one of the factors was just simply that there were some one-offs last quarter, and that weren't -- that didn't happen this quarter.

But we're not really seeing any major shifts in -- fee reductions in any of the major retail products.

I think some of the institutional accounts coming in, there's some fee pressure on that we're seeing for new accounts, but nothing significant.

And I would just add to the mix.

And if you look at the emerging markets, they were down 8% for the quarter.

That probably counts as 2 or 3x per dollar of assets.

So that kind of move can have an impact on that line as well.

Right.

Okay, makes sense.

And then just on the investments on the M&A front.

I think you guys have said in the past that yes, you look at a lot of opportunities, but it's also from a timing of the cycle, like pricing or valuations are a bit tougher.

Just wanted to get your sense, when you guys go through that math and the calculation, how much do you focus on sort of like the price being paid versus maybe the longer-term consequence of not pursuing those with the outflows continuing, the cash flow deteriorating?

Just wanted to get your perspective on how much does the current maybe decay factor into potentially doing something.

Well, I think every target, if you will, every potential acquisition is bespoke.

So I don't think we look at it and say, "Oh, it can improve aggregate net flows." But we look at the opportunity set that a potential M&A target presents.

We -- I mean, of course, that would include where we think it will be improved flows in a certain sector and all that or a product or improve our investment capabilities, et cetera.

So I think -- I don't know if that answers your question.

But basically, it's a case-by-case analysis.

And I would just say that, first and foremost, we would -- we think our stock is probably still the best buy out there.

So we'll continue to do that.

And I think the -- we don't think the pressure that we're undergoing.

I think in a rising rate environment, a different kind of market, the value growth cycle, the 30-year spread of where we are of value versus growth, the strength of the dollar, all of these things can mitigate some of the pressures that we're seeing on the current flows.

So I think that, that's -- we don't think that's forever.

So let's start there, that we have to change the business.

But I think, and to your question on how we look at acquisitions and pricing, obviously, a smaller one, you can pay a higher multiple to get exposure to an area that you can grow quickly.

I think it gets more difficult when you're looking at larger deals at very high multiples.

And then the market becomes such a factor in how that works out in the next few years.

So we're willing to pay up for talent and people.

And we recognize it's expensive.

But also at times, when things are expensive, that's when you have opportunities to purchase quality organizations.

So I think we're certainly open if we think that it's a business that can scale to pay above-market multiples.

Our next question comes from Dan Fannon, Jefferies.

I guess, a little bit more on kind of the areas you're spending in and kind of opportunities for growth.

Headcount, if I just look at some of the numbers, went up 3.5% sequentially.

I assume part of that's the deal.

But I guess, could you talk about, as you look into next year with, whatever, 3% growth, and we know what's happening in the fourth quarter pickup, like where those dollars are going, what areas you're investing in the most in terms of, I assume, for kind of future growth?

Well, I think the key areas that are new channels for us and new products would be -- first would be the ETFs.

And that has been a build organically and grow.

And if we find the right acquisition to bolt on that, that's something we would certainly do.

But the significant headcount in the ETF business as well as separate distribution there has increased the headcount line overall.

Solutions, another area that we've talked about, having tactical asset allocation, having multi-asset products and having better retirement target date glide path funds is a priority for us.

And we've added quite a bit of talent there.

We've -- the institutional side's been a priority to grow that part of the business, and we've added headcount in the institutional side.

And just the changing distribution landscape in the U.S., switching from your brokerage selling product to more of the consultative planning side.

We've really revamped and reconfigured our entire -- what was our retail distribution and have a New York Stock Exchange channelization focusing on the traditional wirehouses with more of a planning approach.

That has required all additional resources.

So I think there's been a lot of areas where we've spent and invested incremental dollars.

Hopefully, we can find savings in other areas, but that's really the probably 3 or 4 areas where we've added headcount at more of the higher-cost type of headcount.

This is Ken.

I would add, across the enterprise, we've also been -- as we forecasted years ago, we've been increasing our investment in technology, and you're seeing that come through the numbers.

Got it.

And then just a follow-up from the prepared comments about the 28 recommended list placements across the broker/dealer channels this year in fiscal '18.

I guess, can you give us some context, like what is that?

Where was it a year ago?

Or kind of what's the bogey that you're trying to get to?

I guess, it's hard to get a sense of what that means.

It's on a stand-alone basis.

Yes, no.

I don't really have that -- those numbers to give you that context.

I think it was really -- we tried to set specific goals and targets and that was one of our targets, is to get that product placement.

I think the importance, it really speaks to, again, some of the investment that we made in that side, bringing in more consultants and building better relationships in the home office.

And we all know that getting the product placed doesn't necessarily mean you suddenly get flows coming in your funds.

But what it means is you'll have that pipeline when the market does turn, and when people are looking for whether it's value or other styles that could be out of favor right now, we want to be on that platform.

And it also helps you retain assets when assets are moving from brokerage to the fee-based, you need to be on that plan or on that platform.

But I don't really have a number to give you what -- in terms of how many platforms or -- it just -- it was a goal that we set, a metric that we set out there for that team.

And for them, they hit it 3/4 of the way through the year.

Our next question comes from Brian Bedell, Deutsche Bank.

Maybe, Greg, if you could talk a little bit about the broad strategy and global equity in the Templeton franchise with the acquisition of Edinburgh Partners.

Does this change how you're thinking about either managing the Templeton Global Equity franchise or delivering the product?

No, it really doesn't.

I think it -- one, it allows us a little bit more flexibility with pricing, where Edinburgh has done a good job building sub-advisory relationships that Templeton wouldn't be able to price to with the existing assets in 40 Act Fund.

So that gives us a new channel to distribute the value side.

I think having the resource of Sandy Nairn who is a highly respected person in the industry, one that we know well, we think can only be helpful on just the overall Templeton side.

But there's no plans to do any combination.

And we think the benefit of accessing a growing distribution channel on the sub-advisory side that we can leverage our distribution to do that, and I don't think there's any other plans other than having the stand-alone entities with the benefit of Sandy there with -- helping with the Templeton side.

Great.

So more of a bolt-on and leveraging that -- those extra capabilities rather than any kind of transformational move?

Exactly.

Yes, okay.

And then just, Ken, one on expenses.

Just wanted to make sure I had this correct.

I think the top of the expense growth guidance for this fiscal year, if I'm correct, is about 7.5%.

And that was from the -- an expense base of $2.0 billion.

Am I correct on that?

You are.

You are.

Our next question comes from Chris Harris, Wells Fargo.

Can you guys talk a little bit about the trends you're seeing in Asia?

That's been the one region for you guys that's been growing the fastest, at least on an AUM basis.

So maybe you can elaborate on what you're seeing.

And then also, related to that, is China loosening up their restrictions an opportunity for Franklin down the road?

I mean, first of all, I think the -- if you look at our distribution around the world, Asia continues to be the areas that are still having net inflows in a tough environment for our traditional strengths.

So I think that markets like Taiwan and India continue to grow, and are generating positive sales.

I think the China question on -- they have announced the intention to allow the minority owner in your JV to become a majority owner.

We don't have exact clarity on when that'll happen, but we are having discussions with our partners.

And that's always been our intent, to do that.

And I think once you have control of that, that, I think, enables you to put further resources in on building out distribution there.

So I think everything probably is on a little bit of a holding pattern right now with some of the trade issues, on giving clarity around that.

I don't expect to see that.

But from everything we've heard, we expect that to be within 12 months that we'd be able to do that.

Our next question comes from Robert Lee, KBW.

Maybe following up a little bit on capital management and M&A deals.

I mean, some of your competitors have made investments and acquired various types of digital -- have a digital strategy for distribution and otherwise.

And you've talked in the past a little bit about some strategic investments, small but strategic investments you've made in different companies.

Can you maybe update us on how you're thinking of, do you see a place for a digital strategy at Franklin?

I mean, is that a possible path you could go down for future M&A?

Yes, I don't know if we need -- I think it's absolutely a path that we are continuing to develop a strategy on.

We're doing direct in some of the markets around the world, and are doing it in a very efficient way in a market like India, where it's probably 1/4 of our business there, direct.

So we've been building that out.

I think the robo piece is fairly simple.

I don't think we need M&A to do that on top of it.

The digital tool capabilities and customizing service levels, those are all things we've got people working on actively.

As we've said before, we have an investment in some different robos around the world, different companies like ADVIZOR, that do financial tools that our high net worth fiduciary trust is looking at leveraging there.

So we are experimenting with it on various channels and developing.

At this stage, we still have a lot of accounts that are direct, that some that came through Mutual Series.

And it would be just a better way to service those accounts, where we could have $30 billion or so of no-adviser record accounts, and think that a robo, some type of service there makes sense.

So I think like most firms, we think, first and foremost, that technology is going to help distribution, help partner with the adviser, provide better tools for them to more efficiently serve more clients.

So that's the first goal.

But then we're thinking longer term about how we can also service those direct accounts as well.

And whether it's in the U.S. or other markets, we'll be thoughtful about how we roll that out.

And I would just add that, that is an area that we've been increasing expenses in and investing in.

So that's been part of the expense growth.

Okay, great.

And then maybe as my follow-up.

Can you update us on your ETF initiative?

I mean, where does it stand now?

And now that you've been at it for a while, I mean, do you feel like it's meeting your expectations, particularly with the low-cost kind of country-specific strategy that you started with?

So just kind of a progress update.

Yes, I think it's moving along.

It's probably in the range of $2.5 billion, I think, roughly today.

And we are still early in rolling out many of these strategies in terms of distribution.

Our goal has been to get on platforms.

We continue to make progress there.

And every -- it seems like every month or quarter, we're being approved on new platforms.

Some just take -- may take 3 years to get on, but others we can get on a little bit faster.

So I think the progress has been good to date, and one that we just recognize will take a little bit of time and actually sales support to grow.

But we are seeing decent growth at this stage.

And we -- in June, we kind of had a targeted campaign to grow awareness at the RA channel, institutional, so -- and also, we're marketing ETFs through print ads and digital and conference advertisement, et cetera.

And we launched 3 active ETFs last quarter.

Our next question comes from Alex Blostein, Goldman Sachs.

Question for you regarding non-U.

S. retail distribution broadly and, I guess, specifically focusing on the U.K. market.

I know it's been an area where you haven't had a lot of presence in the past.

I don't know if that number changes materially, but given some of the more structural changes unfolding in the U.K. retail market, is it still a priority for you guys to try to expand there, or not as much?

I would say it's a priority and one, again, that -- one that we have identified.

It's a market that, I think, in the past, we felt that our core strengths around global equities, there were plenty of global equities in that market.

So it's one that we really didn't put a lot of resources in.

But I think now, I think what's changed is we look at the size of the market and the potential still for us.

So it is a market that we've made a strong hire to run that effort there, and we're putting more resources into that market.

So I think despite some of the changes that one could argue make the retail sales a little bit more difficult, it's just too big of a market for us to ignore.

So we are building that.

And we've been very successful with our local manager there and have very strong performance in U.K. equities.

And just in the last quarter, as we mentioned, we got an institutional win over $1 billion, which, again, I think validates the strength of that local team.

Got you.

And just a follow-up question around expenses.

So I heard your comments in the near term, and kind of just as you start to think about '19.

But I guess, in an event of a downturn, can you help us think through what you would be able to scale back on, granted, you're obviously trying to pivot the business towards some of the more faster-growing areas, so where would be the flexibility in the expense base?

And what are some things you would need to pull back from if we see more of a prolonged period of tougher markets?

Yes, I'll address that 2 ways.

One, you can kind of -- we've had these downturns in the past, and you can kind of see how we reacted.

I think there's, there is that level of flexibility.

If we needed to do it, we wouldn't -- we don't want to do it, but if we had to do it, we have that level of flexibility.

But part of the process that we're talking about, and part of -- to incorporate it to my trying to keep the expense growth minimal next year, is to look at investments that we've made in the past that maybe aren't panning out, and cull operations that we don't find -- we don't see the benefit in performing a certain service and all that.

So we're looking at all of the areas to see where can we create savings that we can reinvest.

Because we do want the actual incremental growth into new things to be above the 3% guide, as I said, that I gave you, but we also want to fund that through some savings from outdated processes and services.

Our next question comes from Michael Cyprys, Morgan Stanley.

So just wanted to follow up on M&A.

As you think about the opportunities out there, what's sort of a holdback or hesitation on some of the larger-size acquisitions at this point?

Have you gotten close on anything?

And if so, what's happened?

And as you think about any sort of hesitation, is it price, a view on the cycle in terms of where we are?

Does that kind of factor into consideration?

And is there a view to maybe be a bit more patient on M&A, wait for a turn in the cycle, and then kind of get a better price?

How do you sort of balance the near term versus more medium term of a better purchase price?

Well, I think, first of all, we did close 2 deals last quarter.

So it's not like we're not doing anything.

Although, obviously, not of the scale you're talking about.

I think we have been as active as we can be in looking at multiple deals.

Then we only have so much capacity for working on, even it's an -- a number of partners, that's going to take resources and tie up for a bit to close that.

So I don't think it's -- price is always a consideration, of course.

I mean, that's going to be one.

It could just be what we think is not the right fit, not the right culture.

We're concerned about where we are in the cycle in the business.

All factors, all of the above, but not any one stands out.

As I said in an earlier answer that, again, if it's an area that we think we need to be in, and we've got an opportunity to bring in a quality organization, we're going to pay up for that.

So I don't -- we don't have any set number that says, "Gee, it can't be -- it has to be accretive in year 1 or it can be" -- those are the factors that we're going to think long term and try to just bring the best in at what hopefully isn't overpaying too much.

As Greg mentioned, price is always a factor, but that's the benefit of having a strong balance sheet, that if we see an opportunity that we think makes strategic sense, we can just get it.

Okay, great.

And just as a quick follow-up.

I think I may have heard you, you said that you were building out a private equity business.

If you could just talk a little bit more about that and some of the alternatives capability that you're building out organically, how that's progressing, what we can see next there.

Yes, I think the -- for us, we've been in private equity and other areas with Templeton and for a while.

It's really the U.S. side that we've developed.

And part of it is the growth of the private markets, having analysts that built strong relationships here in Silicon Valley, and just seeing a lot of opportunities on the private side.

That's one that we just said it made sense then to start a business.

I think the -- and the fund's not a big first fund.

But at $50 million, it has significant outside investors that recognize our access and strengths on the analysts side here in the Valley that, that made sense.

We're doing and we're also looking at AI and Big Data and have some partners there that we're bringing in to do that.

And I think just we're trying to take advantage of our location and the strength of our technology team here in San Mateo.

It's very hard to go out, as you know, to go buy a private equity firm.

I think that's -- we've seen that, that's extremely difficult.

Again, if the right situation came up, we would entertain that.

But I think building it organically, taking time there and just building strong records is what we want to do.

The other alternative side, the K2, we didn't talk about that, but it had an extremely strong quarter.

Whenever you see the kind of disruption in the market like we did earlier in the quarter, we tend to see a strong interest in the alternative category.

And they've had very strong results on a relative basis and on a flow basis, and had a major win last quarter as well.

So that's another business within the alternatives that continues to grow.

And then other categories that we're looking at on the M&A side, we'd like to build a larger real estate group within that.

So that's certainly something that we've been looking at deals, and recognize that, that's going to be an important category.

Our next question comes from Brian Bedell, Deutsche Bank.

I wanted to come back to a couple of comments that -- a couple you guys made.

Ken, one on the balance sheet, in terms of M&A, it sounds like it will be -- you'd be looking for doing any deals strictly in cash.

So maybe just give us an update on what you view as excess cash on the balance sheet.

And then you mentioned also building the ETF franchise potentially through acquisitions.

So would you consider a large transformative ETF acquisition relative to your current footprint there?

I'll do the cash question first.

So let's see, we have net cash, net of debt, is about $7 billion.

And we think that, as we disclosed, we need about $3.5 billion for regulatory requirements, internal uses.

So that leaves about $3.5 billion.

And the other question on...

The other question was on, would we purchase a large transformative ETF?

We would consider it.

There's not many of them out there, but we certainly would be open to the idea.

Okay, okay.

And then, also, you mentioned in the deck a strategy sort of in the collective trust area, and that is, obviously, a growing area.

Can you size sort of your AUM in the collective trust or at least characterize to what extent you are either transitioning mutual fund assets into collective trust structures or actually just getting new sales with collective trust and DCIO?

Yes, I think, right now, we have $6 billion in the collective trust.

And as -- I think, as you know, the flexibility of what we can do, pricing, it's like an R6 class.

So it's a lower-cost alternative.

And the pressure on fees within the retirement channel, we just find this to be a very strong vehicle well-suited to do that.

And also, the flexibility of combining and building within your solutions group using trust, that's more flexible than a 40 Act Fund.

So we have seen strong interest there on especially the DCIO channel, and have built strategic partnership with another firm that allows us to kind of plug-and-play those funds into existing -- already existing platforms.

So I think our retirement group felt like there was $10 billion in the pipeline.

I'm not sure what the probability of any of that, but $10 billion right now that they've identified and working on within the DCIO channel.

But obviously, I think the market itself is like $2 trillion or something like that, the vehicles.

Yes, and then just in the formation of that $6 billion, was that -- is that mostly new money to Franklin Templeton?

Or was a good portion of it switches from your own mutual funds (inaudible)?

No, it's money, most of it's money that's been there for a while that we used that vehicle for the institutional side with Templeton.

So those funds have existed.

But where we're seeing the incremental growth now is really the -- what our group's excited about is just the opportunity within the DCIO channel to have a more competitive pricing structure.

And we seem to be getting a lot of interest there.

Okay, great.

And can I sneak in one more?

Or would you -- or should I get back in the queue?

You can go one more.

One more?

Okay.

So just maybe if you can characterize the environment in July.

I mean, obviously, we've seen the other companies talk about some net outflows.

A lot of them have come from lumpy sources.

But maybe with the uncertainty in the markets on trade and everything, if you could give us a flavor for what your sales teams are hearing from financial advisers in terms of retail appetite for funds, and maybe any kind of July flow, early July flow outlook, if that's possible.

Yes, I don't have much color to offer there.

I don't think we're seeing any significant shift at this stage, but probably consistent with some of the other remarks that have been made.

Our next question comes from John Dunn, Evercore ISI.

Just going back to the 28 recommended list placements.

Is that a gross number?

And on the flip side, can you talk about, like funds, what you're seeing as far as funds maybe getting consolidated off lists for you guys and for the industry in general?

Yes, I think it's probably a gross number as far as new placements.

And I'm not sure how you would net -- if you have a new advisory platform, that it's really getting on those.

I don't -- I think the -- I'm not sure we even keep a statistic if you went off one and they're not -- it's really once you're on it -- and then most of these are new lists that have -- and you could argue if you go from the old open architecture to a new list, are you off that list or on?

I don't know how you'd calculate that, because everybody was -- had access before it moved.

It's just really when they set up their new advisory platform.

And you're absolutely right.

It's a funnel.

It's a narrowing of what's available.

And that's why it's so important and meaningful to get on that, because if you're on it, the opportunity to get greater share is there because you're not competing with thousands of funds.

But we all know the downside.

If you're not on it, the brokerage assets are more vulnerable to redemptions as they move to advisory.

Our next question comes from Bill Katz, Citi.

So a 3-part question.

How much -- where do you stand right now in terms of remaining A, B and C share exposure in the U.S.?

And then as you reprice now into the A-class share, where are you like within sort of your peers in terms of that pricing?

And then if you are to be successful and sort of realign yourself so that you are better flowing relative to the brokerage to advisory shift, what's the economic impact on the business as you look ahead?

Yes, so when we look at the -- well, first of all, the pricing was to make sure that the pricing was competitive with our competitors.

And if we just -- it's effective -- it'll be effective next fiscal year, it'll go into effect.

And in terms of the economic impact, it's hard to quantify.

Certainly, there's a cost, but it's -- there's only a cost if it results in increased sales.

So that's a good thing to have.

So we'll have increased assets under management.

And you'll see the sales distribution and expense line go up as a result.

And some of it was just being consistent as part -- as they've adopted even their brokerage model or adapted it to more of a -- trying to get a consistent pricing model, for example.

We have a new class that would just make -- we were an outlier with a lower 12b-1 at 15 on some of our funds, and we've had to move them to 25 because that's the standard pricing for that asset class within certain advisers that had to have that.

So repricing there doesn't really have -- and that won't have an impact financially, other than, hopefully, generating new sales.

It's really just some of the tweaks within the payout structures and more flexibility around the $1 million pricing.

And hopefully, that leads to larger tickets and better sales.

But we don't have an exact impact number, because as I said earlier on the call, I just don't think it's going to be material for a while there.

And I just don't think it's a material change in any way.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Johnson for closing remarks.

Well, thank you again for everybody attending today's call, and we look forward to speaking next quarter.

Thank you.

This concludes today's conference.

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