富蘭克林資源 (BEN) 2019 Q2 法說會逐字稿

Good morning, and welcome to Franklin Resources Earnings Conference Call for the Quarter Ended March 31, 2019.

Statements made in this conference call regarding Franklin Resources Inc., which are not historical facts, are forward-looking statements within the meaning of 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 Jessie and I'll 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.

Good morning, and welcome to our second quarter earnings conference call.

Joining me for his final earnings call as CFO is Ken Lewis.

We also have Jenny Johnson, our President and Chief Operating Officer, with us today.

Importantly, strong investment performance translated to better flows from many of our flagship funds.

Retail sales and redemptions improved significantly, particularly for global fixed income that once again attracted inflows as did Franklin income.

Earnings per share improved to $0.72, a 33% increase from last quarter.

Higher investment income more than offset the initial impact of the cost structure optimization initiatives intended to increase operational efficiencies and streamline the organization.

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

(Operator Instructions) Our first question is from the line of Glenn Schorr with Evercore ISI.

I'm curious to see what you think what's behind the lowest redemptions since 2011.

Obviously the market got better and we're coming off a crap fourth quarter.

Your performance is better.

There is a lot of interesting things in there.

But to be lowest level since 2011, I'm curious on how much environmental versus Franklin-specific.

And are you doing anything to, obviously, bring that on in the retail channel?

Well, I think partly sometimes coming off a volatile quarter, it does slow down redemption activity.

We've seen that in the past.

But I think nothing else other than better performance comes to mind.

And certainly the pickup and focus on some of the flagship funds where we've had larger redemptions and then had better performance, I'm sure has helped as well.

And I'll just add that I think some of the investments we've made on adding talent to the distribution channels, we've seen upticks in our New York Stock Exchange channel and had some additional placements with gatekeepers and things and, most recently, hires in the private wealth and the SMA channels.

So I think that that's probably also helping.

And have we seen a slowing in the list consolidations that went on around the retail channel?

You're still seeing some of that.

I mean, obviously, is -- firms are rationalizing it, but we're also, in some cases, winning in those channels.

Got you.

Okay.

And just one other follow-up, if I could on -- just curious on I know we're not there yet on Benefit Street, but what's going on behind-the-scenes to start driving growth so can hit the ground running?

What's the overall plan once you're closed and out the door?

Well, I think the plan is to, first, get Benefit Street -- I mean, get our distribution comfortable with the investment process and team and then really go tackle.

And that's really what they've done, I'd say, in the early months, and now we're going out with roadshows around the globe to introduce Benefit Street to our -- many of our global clients.

We're also looking at expanding the retail part of the equation and developing some products there.

But it's still early stage, but the focus has really been on making sure that our entire team is up to speed on Benefit Street and then attacking the clients in an optimal way.

Our next question is from the line of Bill Katz with Citigroup.

And it's Ben Herbert on for Bill.

I just wanted to follow-up on the expense commentary '20 versus '18.

Are you still expecting to potentially be able to bend it a little bit lower than '18?

Or is that maybe pushed out a bit further?

Thanks, Bill.

Our guidance, we're pretty confident that we can get the run rate expenses to be at the 2018 levels.

That's as a result of all the cost-savings initiatives that we're doing right now.

And so we're not expecting to may be come in a little bit lower in '20 or just a touch?

In '20, yes.

In '20 -- I'm sorry, in 2020, we expect 2020 expenses to be at the 2018 level.

Great.

But any opportunity to come in a bit lower?

Hopefully.

Yes.

Working on it.

And then maybe just one unrelated follow-up would be, any change in capital management priorities with the CFO change?

No.

I think we all worked with the Board on the strategy around optimizing the capital management and certainly you'll have a new input to that, but nothing at this stage to really speak about.

Our next question is from the line of Brian Bedell with Deutsche Bank.

Maybe, Greg, can you talk a little bit about your views on the approval of the active nontransparent ETF, whether it's something that you would look to license for your -- some of your active strategies?

Maybe how that would potentially fit with your Liberty shares effort right now that, I think, spans both passive, smart beta and active?

And then also whether you'd be interested in accelerating the ETF effort with any acquisitions, say, in the smart beta space?

Well, I will turn that over to Jenny who is a Liberty Share Board Member.

We obviously have been paying close attention to the various blind trusts that are coming through the SEC.

And with the most recent approval, the Presidian, it's limited in that it's really U.S.-listed equities.

So -- and you're talking about ones that can be replaced.

So it's tended to be mid- and large-cap.

So in that space, if we have an active product that we think that makes sense, we would certainly consider it.

We have active fixed income that are performing very well, and they don't need that kind of blind trust.

And so it just depends.

We're open and looking at all of them.

And right now, we're seeing some good growth that we're about to just to hit $4 billion in ETFs with -- this quarter, we had 1 -- our FLQL, which is our liberty shares of U.S. equity ETF that is now $1.1 billion.

And one of the key things with ETF is just scale, attracts more institutional players and our smart beta performed very well through this volatile market.

And I would just that, I think, as we've always said in M&A, if we see something accelerates our ETF and potentially complements the offerings and things, we're certainly still looking at that as well.

Okay.

Great.

And then maybe just on that M&A theme.

Obviously, the Invesco-Oppenheimer deal is about to close and it's a fairly sizable one.

If that is -- ends up being successful in terms of -- sort of rekindling organic growth and obviously getting the cost saves, do you think that would potential spur more industry consolidation for these types of properties?

And would that lead you to think potentially it might make sense for you to even consolidate more on a sort of -- on a sort of a scale basis?

And maybe just any updated thoughts on, I think, you had mentioned the distribution agreements potentially in Europe in some past calls.

Any updated thoughts on that?

Yes, I mean, I think we just pointed that it's not -- it's a challenge to combine entities of that size.

But certainly there is a huge opportunity for cost savings and synergies there.

And I don't think we have that strong opinion one way or another, other than if we have the right fit and right culture and right complement, we would certainly take that on.

I just pointed to how disruptive it can be and difficult.

But certainly there is opportunity if executed well on that.

That's something that every firm, I think, has to be open to when looking at margins and other ways to reduce expenses in a challenged revenue environment.

The other -- I don't think there is much new to report, and Jenny can add maybe, but on looking at distribution plays and M&A.

I think that's certainly something that, as we have said on past calls, that we're more open to doing in certain markets and that we will continue to look, but there is nothing new really new to say there.

Our next question is from the line of Michael Carrier with Bank of America Merrill Lynch.

First on some of the efficiency initiatives.

Can you just provide -- I need a little detail on where you're pursuing those?

You mentioned outsourcing, but any other areas?

And then in terms of redirecting those savings, you guys have talked about either the multi-asset solutions, distribution, but just specifically, over the next 2 years, as you're getting those efficiencies, what are some of those priorities?

Okay.

I'll start with the cost savings.

It is a enterprise-wide effort.

So essentially, all the business units participated in it.

So it's difficult.

And I will point out that the outsourcing announcement is just in the early stages.

So there's going to be more to come on that in 20 -- in the year 2020.

But the cost-savings initiatives that we're referring to in the text and on this call relate to just the -- all the -- every department in the company looking at their operations and finding ways to become more efficient.

Maybe it's a leverage or low-cost jurisdictions and maybe just to eliminate processes that we're not doing.

So it's enterprise-wide.

And you -- do you want to handle what we're going to invest the money on?

Sure.

Yes.

No, obviously, multi-asset solutions and distribution are 2 big areas.

And in that, in distribution, it's both in people, so we've added key talent in important areas, as well as technology, technologies that support the distribution channels whether we're partnering or developing some capabilities on our own.

And then, of course, data science.

Data science that supports our distribution so that we could be smarter at providing the right products through the distribution channels and, of course, on the investment management side.

We believe that active managers need to be -- need to have the ability to leverage AI and machine learning and data science to gain insights.

And that's really nascent, but it's important.

We think it's very important over the long run.

And so developing capabilities around that is critical.

Okay.

And then just to sort of follow up on the flows.

You guys had some good pockets of improvement.

Greg, you mentioned the global bond and international retail.

So on the institutional side, it seems that continues to be a bit of a headwind.

I think you mentioned during the quarter some items that impacted you, but just maybe little color there and then just on the outlook what you're seeing in that channel.

Yes, I think -- it -- we do -- I think, you're correct in saying that there's -- that's where we had some headwinds continuing.

And I think the majority of our assets historically have been on the Templeton side and institutional and another -- as the markets have rebounded, they -- value trailed growth by about 400 basis points over the quarter, so that hasn't helped the relative numbers there.

And as we enter our 10th, 11th year of this cycle, it's just -- you still have pressure on redemptions and certainly not new sales to support that.

So that's where we saw some global equity accounts go as well as some variable annuity, that's been a continued headwind.

We probably have another $1 billion next quarter coming, and that'd be a business that some of it's going passive, a lot of it's just they've gotten out of the business and are looking whether it's low vol or or other type of fund managers or indexing.

We've seen a lot of that.

And that represented a large number of the redemptions as well for the past quarter.

So those are the 2 that continue, I think, to put pressure on the net numbers.

And overall, retail would have been just about breakeven or positive if it wasn't for the institutional side where we see some of the larger redemptions.

The good news is they're in lower cost fund -- separate accounts or funds.

Our next question is a from the line of Ken Worthington of JP Morgan.

This is Will Cuddy filling in for Ken.

Turning to questions.

Franklin has been investing in its RIA and advisory distribution.

Could you please update us on your progress on those investments?

And within retail, how much of the retail flows are coming from RIAs and advisory?

Are we beginning to see your investments in those channels pay off?

We are beginning to see it pay off.

We actually had a good uptick this quarter, but it is still a much smaller part of our U.S. retail distribution and one that we're very focused on growing.

And there's a lot of different ways to be able to attack that market.

We have -- our multi-asset solutions has launched the models that we think will be appealing to that market.

We also have come up with sleeves that can be incorporated into more of open-architecture models.

We look at strategic investments in tools that RIAs use because they tend to be more independent in some of the technology that they use.

And so whether we do strategic investments or whether we support those applications through our own models and content.

So all of those things are focused for us on the RIA channel.

Obviously, the ETFs.

We're getting some good traction on the ETF space in the RIA channel.

They tend to like ETFs, but we definitely see it as a very important strategic focus going forward.

Great.

Turning to tax prefixed income.

There has been a commentary on impact of tax reform on the [MENA] market.

Have you seen changes in broker sales patterns that's [contributed] to tax reform broadly?

And more recently, we're coming off of tax season.

Have you seen a change in behavior as a result of tax season and some of the speculation about lower refunds this year for the tax rate and fixed income bonds?

Yes.

I just would say in general, I mean, it was a stronger quarter for tax-free flows, and for us a positive inflow, which it hasn't been in a while, so that was good.

I think the -- everybody becomes more aware of taxes and especially in those states that no longer have the state deduction, the tax -- the double tax-free is very attractive and our Cal tax-free has done pretty well in performance on top of that.

So I think it's an area that clearly had improved gross sales and flows, and hopefully that will continue as people have to pay up more on their estimated taxes and things to make up the difference of not having that the state deduction.

Our next question is from the line of Patrick Davitt with Autonomous Research.

On the expense guidance, I just want to make sure I'm thinking about it right.

So you kept the guide -- the 2020 guide basically flat with 2018, excluding Benefit Street.

So is the 15% to 16% 2019 comp guidance excluding Benefit Street as well?

And through that lens, that was -- pardon me?

Yes?

I'm sorry.

I didn't hear the sentence.

I cut you off there.

Go ahead.

It includes Benefit Street.

This year includes Benefit Street, but...

Right.

I guess it still would suggest the vast majority -- sorry?

Okay.

There's -- do the -- is just the vast majority of that guidance basically severance?

Could you kind of separate out how much it would be up without kind of one-time or severance-type item?

You're right, it is severance.

I think we can give you perhaps a range for what we think the execution cost for all this cost savings are.

We think it's about 2% increase.

2% of the increase is related to the execution costs under cost initiatives.

Including severance?

Yes.

Okay.

cool.

On Benefit Street again.

Was -- were they -- did they add to the $60 million performance fee at all?

And do you have any updates on your views of timing of potential accretion from the deal?

I do.

Performance fees were minimal in total and inclusive of Benefit Street this quarter.

And I think we are still pretty confident in our projections that this year it was -- as we said, it's going to be neutral.

Next year slightly accretive and then as a result, the revenue growth accretive after that.

Great.

And any update on the potential noncash expense that's in numbers from that deal?

Yes.

The cash -- you could see the cash went down this quarter, though it's pretty much related to Benefit Street and a couple of other things.

But...

No.

I meant like noncash...

We just disclosed the purchase price and other cash price of that.

Our next question is from the line of Robert Lee with KBW.

Could you maybe just go back to Patrick's -- your answer to Patrick's question on the 2% increase.

Did you mean 2% increase in total expense, excluding sales spend?

Yes.

I'll simplify that even more.

Our estimate is like between $50 million -- for the remainder of this fiscal year between $50 million and $60 million of execution costs.

Great.

And then obviously that includes severance and whatnot?

That's right.

Exactly.

That's right.

Right.

Okay.

Perfect.

Maybe shifting gears.

I'm just kind of curious how you're seeing the rebound in demand for global fixed and, in particular, both in the U.S. and outside the U.S. I'm just kind of curious outside the U.S. where you're seeing some of the best traction.

I know in years past, it was Italy, for example, is a big market for you.

Are using it -- is it relatively concentrated in a couple of places?

Are you seeing spread out?

Just trying to get some color on that.

Yes.

I just -- I actually just returned from Asia yesterday and spent 9 days traveling around.

And we're actually seeing most of the growth in -- or rebound in sales coming from Asia.

And if you look at Hong Kong, Singapore, in particular, Europe secondarily.

But as we said before, a lot of these type of retail sales are driven from the home office and the platform and putting it back on.

And we're really seeing a renewed interest in the global bond fund.

And I think part of that is just the fear of retail investors right now having gone through December.

And even with the rebound, there's just a lot of caution out there.

And this fund had a positive return in December, which I think just highlighted how it can lower the overall risk in a portfolio and people looking for alternatives that are not as beta- and duration-related.

So we just had a strong renewed interest there and very optimistic that, that will continue as markets reach new highs as well.

So it's really been more Asia, then Europe and then the U.S.

Okay.

And then maybe going back -- the one last question.

Going back to capital management from earlier, and I apologize if you had addressed this, but share repurchases.

You had the lowest levels it's been at in a while.

Understanding it did Benefit Street this quarter, but with the cash investment levels now having come down as you've used it and returned it, I don't know to what extent the change in CFO and clearly someone who has background in M&A.

Is that at all kind of impacting how you think about the level of excess cash you want -- you're willing -- you prefer to keep on hand versus what you may have done otherwise?

I mean, just trying to see if that -- maybe I'm reading too much into it, but I'm just to trying to get your take on that.

Yes.

I don't think, as I said before, that the change in the CFO has a whole lot to do with the buybacks.

I think you had a very choppy December period and redemptions and you had the acquisition.

And we've been pretty aggressive in buying back and we -- if you're opportunistic, you really don't want to set the given level at any time.

And also there was much lower volume in the stock through that period.

So we don't like to be the market in the stock as well and just back up a little bit.

But I don't think it should indicate any think going forward other than we're going to continue to be opportunistic and use the cash and then have -- as we said before, we think the balance sheet provides us with a lot of options.

And we're going to continue to look at, whether it's alternatives or other things that we think can add shareholder value over time.

And there are market issues too.

Like, for example, this quarter, our 10(b)-18 volume dropped more than 40% versus last quarter.

So there's -- those execution issues as well.

Our next question is from the line of Alex Blostein with Goldman Sachs.

A question around -- another one around expenses.

So I guess, in the written marks, you guys highlighted the decision to outsource a portion of the fund admin business.

Can you walk us through what percentage of AUM and then what products will be outsourced?

Who are you guys outsourcing to?

And whether or not there's going to be an opportunity to outsource more over time?

I don't -- we're not looking at the -- we don't look at the outsourcing decision on a product basis.

It's more of a process basis.

And so I think, specifically, we're talking about aspects of the fund accounting, fund reporting process.

The decision to outsource, we feel, brings it more in line with our peers.

And it's part of a broader effort to kind of advance our capabilities.

And I think one of the things that's changed for the providers is that they've reached a scale where they can meet our global and unique needs on a cost efficient basis and that wasn't the case before.

I guess that's it.

And it would cover most of our funds, I would guess.

Yes, it covers -- yes.

exactly.

It's not product specific.

It's across the all the funds processed.

Got it.

Okay.

And I guess when you guys look out beyond 2020, and that guidance is fairly clear.

But, I guess, once you get through these cost-cutting initiatives and it sounds like you have the program, but the cost initiatives might end up being ongoing over time.

How should we think about the organic kind of net expense growth for the business taking account kind of the initiatives you guys have in place both on the cost side and the growth side?

One thing I think it's important to point out is we will continue to -- while we continue to invest in the strategic initiatives that Jenny mentioned, there was some frontloading of that last year.

Some investments we made last year.

And so you did see an increase in expenses there and that were kind of if you were backfilling or kind of normalizing the expense base as the rails of that.

So we'll continue to make those investments.

I think that this process that we're going through makes us more efficient and more scalable.

So normally, we might have seen a certain growth rate as the business grows -- I think certain growth rate of expenses as the business grows.

I don't think we'll see that in the future because of our -- we're increasing our scale.

So I think inflation is a good guideline to think about expense growth, but we will try to keep it under that.

We do have a follow-up question from the line of Patrick Davitt with Autonomous Research.

You mentioned $1 billion coming out from the VA.

Could you scale that relative to what you saw last quarter and remind us how much is left in that bucket?

It's probably similar to this quarter where we -- I can -- I had about $1.1 billion as well go out this quarter and just in -- we've identified another $1 billion next quarter.

And I don't have the assets that -- we'll get back on that.

But there's nothing, I think, any of the older assets you could put at risk just because that they are at change, but nothing beyond that $1 billion as far as visibility for the quarter -- the next quarter that we are aware of.

Our next question is from the line of Dan Fannon with Jeffries.

This is actually James Steele filling in for Dan.

Sorry, just one more on the outsourcing of the funds administration.

Is this going to entail any sort of a different ongoing fund admin cost just sort of outside of the one-time cost associated with it?

I'll just ask -- answer a couple of things.

I think that, no, you wouldn't see a dramatic reduction, but there will be some reductions to the fund's expenses.

So there is some savings to the individual funds.

And if anything, it's as much as a risk.

And as Ken mentioned, just historically, one of the reasons that we had it in-house is that the providers just didn't have the global footprint that we had to be able to do it.

Now they can and they have a scale that can meet our cost level.

And for us, it's also as much a risk mitigation as they are able to continue to invest in the technology.

Okay.

And is there -- if you -- could you size the difference in the all-in fund expense?

I mean, it's...

Yes, let me just say that this is -- there'll be more to come on this next year.

It's kind of -- it is a pretty early announcement on this.

And so even the execution of it will take us -- the beginning of the execution will take us into 2020.

And so it's really a 10-year cost benefit analysis on that.

So there'll be more to come on that in the future.

It appears we have no further questions at this time, so I'd like to pass the floor back over to Mr. Johnson for any additional concluding comments.

Well, thank you very much, everyone, for attending and I want to thank Ken Lewis for his tremendous service to our organization over his career.

He will still be with us through the transition here, but I just want to thank him on behalf of all of us.

Thanks.

Thanks, Greg.

Just a few words.

Yes, so it's been over 30 years and over 50 earnings calls here.

As Greg said, I'll stay in advisory capacity until September 30.

The march has felt like -- the 30-year march has felt like a good time to try to make a change and including a little R&R before the next opportunity.

There's no shortage of opportunities in the Bay Area, as I'm sure you can guess.

But I do want to say I feel very confident that I leave you in good hands.

I know the executive team here and will be successful.

One of the reason that I worked for so long is the company's deep culture of honest -- honesty and integrity.

I know they'll -- those values will serve them.

And I want to thank all of you for your thoughtful and thought-provoking questions over the past 13 years.

I'm sure I'll miss that quarterly challenge.

So hopefully our paths will cross in the future.

So thanks a lot, everyone.

Ladies and gentlemen, this does conclude today's teleconference.

Again, we thank you for your participation, and you may disconnect your lines at this time.