Q2 2020 Earnings Call
[music].
Welcome to the Franklin Resources earnings Conference call for the quarter ended March 31st 2020, My name is Darryl and I won't be your call operator today.
They must meet in this conference call regarding Franklin resources, Inc., which are now historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act 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.
Future results expressed <unk> implied by such forward looking statements.
These and other risks uncertainties and other important factors are described in more detail Franklin's recent filings with the Securities and exchange Commission, including and their risk factors and Dan H. section. So frankly, its most recent form 10-K and 10-Q filings.
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Hi, I would like to turn the call over to Franklin resources, President and CEO, Johnny Johnson <unk> Johnson you may begin.
Hello, and thank you for joining us today to discuss Franklin Templeton second quarter fiscal result.
Significant events have unfolded in our world. Another company since we held our first quarter earnings conference call back in January.
This is my first official earnings conference call as President and CEO Woody today, I continue to be filled with excitement and gratitude for the opportunity and promise at the beach or hold for industry and for our business.
Today I'm joined by Greg Johnson, our executive Chairman and Bakken Nichols our CFO.
We hope that everyone on this call in your loved ones are staying safe and healthy.
As an organization our top priority is on the health and wellbeing of our employees and their families. We're extremely proud of and grateful for how resilient they've been are these difficult conditions and their ongoing efforts to keep the business running efficiently while maintaining our strong focus on our clients.
With respect to business priorities admits that recent market volatility security selection is more critical than ever we like to say that today's market dislocations are tomorrow as alpha and I've got a number of encouraging conversations with our investment teams who are finding compelling opportunities that result from.
The sharply increased volatility.
It's also encouraging did note that over the recent volatile period or strategies are preserved producing strong results for the period from February 20-F through March 31st which is the timeframe, which reflects the sharpest market volatility during the quarter approximately two thirds of our U.S.
Listed mutual funds and eat yes, we're in the top two cortiles of their respective morningstar categories and more than half of those were the first quarter mile.
Performance across many of our investment strategies have been strong in such areas as U.S. equity municipal bond global macro and global equity among others. Our funds continue to outperform through April.
Our acquisition of Legg Mason remains on target to close in the third quarter.
Third calendar quarter and integration plans are well underway. We continued to see the long term value of these combined franchises and that our strategy to diversify and create new opportunities is the right one.
Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business.
I remain more confident than ever that as an organization, we have the talent discipline and foresight to continue our long term success, while helping our clients achieve their financial goals now I'd like to open it up to your question.
Operator.
Our first questions come from the line of Craig Seigenthaler Credit Suisse. Please proceed with your question.
Thanks, Good morning, everyone and hope you all stay unhealthy in the merger agreement with Legg Mason, there's a criteria of 25% net outflows are quite good side I just wanted more color on this constraint and can you confirm that net client outflows at Legg Mason when you do see this level before.
The transaction closes in order for Franklin to elect not to pursue the transaction.
Yeah, I mean have met nickel pit for that.
Yeah, Hi, Craig that's correct.
[music].
Got it and is there any he wasn't level for Legg Mason, where you would consider not to pursue their transaction just given that it's an all cash transaction.
No.
Okay. Thank you.
That's correct.
Our next question Scott the line of Glenn Schorr at Evercore ISI. Please proceed with your question.
Okay. Let go dancers that's good lead into this question then [laughter].
So let's talk about what you can do prior to closing.
What you have to wait score.
After closing I'm, specifically interested in things like on consolidation opportunities across fixed income and how you lever there at global distribution platform.
So our focus up pretty close as we've said is really on integration of the holding companies and integration of distribution.
So you don't want and and and really leaving the affiliates alone.
Which means that we're not focused on fund consolidation, having said that there's very little overlap in our products. As we said this was really about filling in a product gaps and and so there's very little overlap anyway, but that's where it focuses.
I think I think just to add to that as.
Very countries that we have presence where like Mason does not have presence with folks on those two in terms of potential growth distributions, we talked about extensively on various cool.
As a key area.
I don't see what the operational side of things at the holding companies is is a big folks in terms of the planning a.
Right.
Our next question has come from the line of Ken Worthington JP Morgan. Please proceed with your questions.
Hi, good morning.
Outflows continued to be quite high or almost interesting that even with a decline of Irish impact on the markets. They didn't get too much higher from where they were in the December quarter, but with market conditions for covering now off the bottom I can you just walk through what you see is the Pos stock.
Not flows for Frank one clearly with the Legg Mason acquisition, there's a lot that you're dealing on the sell side, but maybe give us the pass through both on distribution.
And product to get back to a positive sales position. Thanks.
Yeah, So a couple of things on their.
You know the just just within our own from you look our April numbers.
Well you know we've been improving consistently.
Until we sort of hit a bump here in March and I would say that our April members are back to where that improve that was so that was first thing second of all of course flows solid performance and you'd always we mentioned a we've had almost 70% of our assets orphan.
Performing in the top tier cortiles in that this period of volatility and that's carried through so you take like the global bond Yeah Global Bond fund has outperformed its non traditional bond peer Chris category Morningstar by 4.4% and its prior category of World bond by 3%.
So you know it's markets like this with the volatility where active managers get to show outperformance and a you know as you have outperformance. The flows will follow and then you'd always we've talked about we've invested a lot in distribution, we've seen a good progress on things like SDMA ER.
Yes, a bit in net net inflows.
And Ah and our U.S. equity is now just getting honestly that the do that its deserved as far as the recognition that its deserved around its outperformance and so we've seen good positive outflows there.
Greg you want to I mean, I would just sad that I think you know J Mac somewhat short term numbers and certainly templeton's one in that category as well that we're seeing some relative performance you know during the downturn I think muneeza I'm working we're seeing strike there we've had very good performance on the Muni side and benefit Street.
Which is ideally situated and has put a lot of up capital to work in these down markets. You know, we're seeing strong interest in the year ahead in flows there I mean, the big category killers routes or the global bond as Ginny mentioned and we're really out there telling everyone. You know about the defensive nature with all the uncertainty in the market.
Good how it can lower risk in a portfolio and I think we're getting a reception to that as people's risk concerns and awareness is heightened and the income fund yeah, Walid lagging a performance wise, it's not unexpected and you know as we've said before its two exits industry as far as good as far as its.
Dividend payout so yeah, it's been under pressure more wood with high yield just generally to its counterpart. So high yield holds in there in this market you know that that should continue so no I think the income fund a global bond fund are the ones that.
We'd like to see.
A leveling off and hopefully we're starting to see that but I think we've got some other areas that we are seeing strong interest in strong performance.
Hi, good lease out a couple of things as Greg pointed out a muni I just want to say you know you heard a lot of noise on mute east because of the Levered do you need in the market. We didnt have levered needs. We had already moved to higher quality, which is actually is theres been dislocations in the muni market has enabled us to.
Raizen and and really gained some opportunities there and I think as you hear states talking about bankruptcy and others. There's been no time like the present for a true solid credit team on the municipal bond area that will really differentiate so we're excited about that and then as Greg mentioned B.S.P.B.S. freeze raised one.
Point 3 billion a in this window, including just under a billion for their private debt special situations fund, yet and that's where quite far and well we're basically at month end today that.
We can say that you know we expect and.
The the month.
Just over $600 billion under management and the flow picture will quite similar to.
Fabry, maybe a little bit maybe a little bit more elevated in February, but but the probably close to that.
Great. Thank you.
Thank you.
Your next question has come from the line of Dan Fannon with Jefferies. Please proceed with your questions.
Oh, Thanks, Matthew maybe if you could talk about the expense outlook for the remainder of this year. That's your core radio within frankly in some of the letters that you're looking to either address you know kind of to lower he went levels given what's happened in how we should think about flexibility from here.
Yeah, Thanks, Dan I mean hope as you've seen in the quarter. We've we've continued to display quiet.
Disciplined expense management, its really hard as I think everybody can appreciate to guide.
Based on the current unique circumstances, where we're facing but.
Our previous guidance of two to two and a <unk> percent.
For the yet based using 29 team.
As a base of non SD expensive I'd say that we can certainly double that for sure.
And what probably got a little bit deeper than that is always safe analysis, probably between five and 7%.
This is 29 team.
Great.
Yeah.
[laughter] the kind of more recent training is on flows just curious about your gross sales versus gross redemptions in terms of worry that rate of change is coming and also within U.S. equity you Didnt have a good gross sales period in the March quarter could you talk about which flow he or she got success. So.
We had a couple of large institutional wins.
In March.
Which accounted for I think about 2 billion of that and it was in the multi asset advisory and kitties strategy.
You know we're getting the.
Inflows in the the a U.S. equity I've been very strong.
The the fixed income has been Franklin fixed income is actually in the tax free spin you know picking up they had.
Large redemptions as others, but the performance has been very very good.
Yeah, I, just I mean, I think particular funds in the U.S. equity side are dying to touch upon it has a lot of momentum it's now.
About $10 billion in size are relatively small base and had 775 million a net flows for the quarter, which was up from 400 million.
We're excited about our new innovation fund, which we just kicked off and has five stars and kind of leveraging that bad style and then in art Sicad base. The U.S. opportunities fund continues to have strong performance is strong flows as well so that group.
Has really done extremely well and obviously a market where technology even in this downturn has continued to do.
Extremely well.
And this is critical and BSP yeah.
Okay. Thank you.
Thanks.
Your next question has come from the line of Bill Katz with Citigroup. Please proceed with your questions.
Okay. Thank you very much full disclosure hope everyone's okay, maybe just staying on the expense discussion for a moment, a matt well that 5% to 7% plus drop year on year, how much that is permanent persist potentially some delay to the extent the revenue backdrop would improve that might sort of turn on some reinvestment perhaps.
Well I hope the compass and permanent because [laughter] for appropriate encompass the kids.
Continues to evolve and grow again.
I think you could look at the S&P pauses being pretty prominent we're being very disciplined.
Disciplined around ensuring that comes in a given the high fiftys low sixtys.
Million per quarter, so that we're pretty confident and that includes investing in.
So there is a technology, so that that six or 7% lower iced tea.
The 2020 includes a shifting of projects Reprioritization data, we invest and lowering and lowering.
Costs, let's say part so gionee, which we expect to about 10% love for the is also comment obviously going through this period as exceptional.
Exceptionally low TNT by definition, because nobody's traveling.
So we can expect that to come back up but still for the year, we'd expect that to be down 10% and excluding one off items like impairments and things of which some comes on the June that we'd expect that to stay at that level in a disciplined way and again. This is just Franklin Standalone of course, we call.
Talk about what this what it looked like we'd like based at this point in time.
And then the occupancy expense I think I've talked about this before it's going up little bit.
As we reposition talks about real estate here.
Built more real estate, but then thank Tom we're offsetting that by leasing possible.
Paul it's about <unk> and real estate too.
To tenants that are still still paying us.
That's how it sort of.
Present that.
So called the benefits obviously, we remain.
Variable.
But the other expenses that we other expense adjustments that we've made across iced tea and GNS more positive ones.
Excellent. Thank you and then just a just two follow ups just in terms of the deal.
Can you sort of walk us through where we aren't down in terms of incremental milestones between now and completion.
Yes, so we have let's say we had two critical work streams going on what we call price as one company.
As you know between signing and closing, but we have.
You know work streams around planning so there were ready closing and we're not closing till September one so we.
Approximately September one so we have good amount of time to get ready. The two major work streams is one the holding company functions.
We obviously don't need to holding companies, we only need one so we're working on what that would look like.
And planning what that what the results that will be.
And then the second one is around.
The LMGD and what we would use Legg Mason distribution group at the holding company level.
Which is really retail distribution for the most pop.
As you note that the affiliates that they have their own institutional distribution.
Our global Advisory services, which is how much larger distribution marketing proletariat. So there are there a strategic planning streams going on in both of those.
And I'd say that you know Jenny should talk more about distribution side on the holding company function side.
We feel quite organized would probably be ready at least a month before closing in terms of how we're going to do things going forward.
Yeah, and I would just to add that you know the other piece of this is theres a lot of regulatory approvals that uptick on the process and we are on path towards our those are on schedule and were getting.
Yeah, we've already gotten several approvals have been required as far as a distribution yeah, though no the.
Distribution World. It Franklin Templeton is going to have to look different when you think about all the underlying brands that we will happen. So.
Not only are we ensuring that we get the best of for both organizations, but that we structured in a way that supports what will be this new organization.
And with them we're very.
Because bells I think we described very clearly in this business we know.
The importance of stability and continuity and with the client.
Sure you notice in particular us were extremely focused on that but.
The same Tom we're extremely focused on the cost structure, the combined company and making sure that we delivered exactly what we said we were going to the and I would just make a general statement I think just observing through this cobot period in the amount of work that's been done leveraging technology and really getting messaging out.
To clients and advisors in a very efficient way and I think that that behavior could change and lead to efficiencies and distribution as well as advisors are really getting used to getting information quickly.
And leveraging technology from the portfolio managers directly.
Right and when we've had over 20000 clients intending webinars.
You know virtual conferences, and just as Greg said, one they're much more receptive to it and they are actually starting to like it because they recognize the efficiency of being able to get the information quickly.
Great and just just one final question just in terms of qualifying that looks like February you talk a little bit about maybe at the product level, where you're seeing it because as I look back just some work we've done in February it looked like it was pretty broad based outflow. So just trying to get a sense of or is it just a slowing in redemptions because it sounds like the gross sales may Peter off a little bit.
From somebody unique stuff in this particular quarter just trying to get the has around the engine asked a little bit better.
Yeah, I would say that the gross sales or more like the February number.
In.
Essentially March two if you took out the two big institutional wins.
And then the what's happened is redemptions have reduced significantly and I guess, it's interesting I mean, what always happens in periods of volatility to you get spikes in sales and spikes and redemptions as people are trying to take advantage and others are just saying I got to get out and that's what you saw that kind of in March and a lot of categories and now you're getting down.
To probably werent settling and people are kind of assessing what's going on so you're seeing a slowdown in redemptions in a slowdown in sales.
Generally yes.
Okay.
Got it one way or can it bill is out.
Yes, the net flow picture for March is going to be one.
Yeah, one third of the.
Oh, sorry that slippage for April is about one third of Mark.
Okay. Thank you very much take another question destroy hoberman stay safe.
Bill fluctuate.
Our next question has come from the line of brine Battle of Deutsche Bank. Please proceed with your questions.
Great. Thanks, good morning, folks up around safe and well also.
Maybe just thing along lines of the other like deal if you could talk a little bit about.
Conversation that you're having with your institutional clients and gatekeepers and the distribution channels.
No not sure if you can.
You talk about conversations that leg is having with its.
Distribution partners and affiliates, yet I'm, giving you haven't closed the deal, but maybe just to get a sense of what your distribution partners or thinking about.
Yeah, the impact of the deal and and whether there's any.
Additional sort of hand holding.
With that with the clients in regard to that.
And then also along those lines.
Yes. It does the fact that just the market downturn with cobot 19 does that change your thoughts about product rationalization or or or reaching for more synergies or or g. religious view. It as it is supposed to even out over the over the long term anyway.
Oh, So you know actually that the first conversations with institutional clients is it the institutions.
Set up calls independently would lag in Franklin to make sure. We had the same story so and the good news is the feedback was Wow you guys are absolutely consistent in your story.
I can point of feedback was that there was it was actually anywhere from neutral to positive because.
There was certainty around ownership for the.
Affiliates at Legg Mason and they saw the Franklin's kind of long term approach to things.
As being positive and that there would be certainty around that and then the third.
The fact that Franklin has a record of acquiring and leaving the independent investment teams in place.
Really fit to two how legg Mason as approach things and how the affiliates wanted to work and so it was a demonstrate a record around that to they had a lot of confidence in the that we wouldn't go in and model with the investment teams and their investment process and so I would say that overall.
You know that that it has been anywhere from neutral to positive Matt you I think in terms of the synergy Paul Brian I'd say that.
When we announced transaction, we talked about a gross synergy number and a net synergy number than that was.
Following up.
$100 million investment.
We don't need to make the $100 million of investment right away, we can do that over a longer period of time and in this market conditions. You can expect that we will do that and we will be extremely focused on the gross synergy number. So that's 1.1 and that was 300 million the to the to the second point of make you said.
I think as we all know there is a there is a portion of an asset management companies.
Expense base.
It's just fixed to make sure that you retain the right people and the team to make sure you're investing in the business for the future and making sure you're positioned appropriately.
Across the across the board.
In the various parts of the company, but operations and front office and so.
When you when you.
Go through a market like this.
She was exceptional.
The except for the bad Okay for them for the industry.
The it means when you look at our combined company, our ability to be able to control costs across a broader base.
As we have more leverage basically.
So as a single two single companies you have that fixed space and as any so much you can do together, we probably will have more levers to pull any event that we has sustained.
Mark it down.
Shift.
Back to where we were.
In in mid March for example, and that's how we think about it from a risk management perspective, we have to be prepared for obviously, we hope for good times that we also want to be ready for very difficult times, it out and have industry a company.
Greg did you want to adding.
I'd just add from from as Jay said to the distribution platform is something we're looking at working on and.
We have engaged outside consultants and that are interacting with intermediaries advisors gatekeepers and try to get their view of what the ideal servicing model is and I think the beauty of this putting these two together is that we have that flexibility.
To go to what we think will be a better.
And more efficient distribution platform, but we want to do it through an unbiased hi, and Thats really what the consultants are driving through our client size.
And so I just kind of summarize that when we announced this deal I think that that.
The market was pleased with this strategic.
Nature of it in that settling into product gaps diversifying our client base.
Adding scale in major markets and I think the concern was.
Well to be outflows as other deals have seen and again, because there was very little product overlap.
No we felt that that was less of a concern here.
I think that the initial conversations with the institutions and the consultants has been positive. So again tomorrow well, it's still early days, we actually feel like.
That concern is on warranted.
That that that's it that's very helpful. And then if I could just confirm on the.
The base of expenses method.
Talked about for the down 7% is that.
<unk> point 4 billion for fiscal 19 is that the right number to be based number.
Yes.
Yes, I mean, it would be about the same on the adjusted as well, it's not too far off on that.
Maybe a little bit more on the adjusted.
And as you know on the adjusted number that's what we have more control over.
This is.
You know what the business. These two intensive payment policy distribution services.
Okay. Okay. That's helpful I'll get back in the queue for another one. Thank you what we're going to have on the on this topic of.
Non-GAAP financials were going to have separate cools the GE analysts to make sure that we address all the questions for your models. So.
If that's what you're trying to get out as well Brian.
Yep perfect great. Thank you.
Thank you.
Your next question comes with a line of my carrier of Bank of America. Please proceed with your questions.
Good morning, and thanks for taking the questions.
First just on the performance you mentioned some of the areas across equities, meaning that improve which is good to see.
Some of the areas that are more macro exposed.
To currencies in energy like global macro series I'm, just curious on how you need.
Just thinking about the environment a repositioning so the global macro yes, they've been using some of that higher level of cash should take advantage of opportunities and then same thing with income series, just how they're thinking about energy.
Yeah.
Yes, I would say just in general global macro is still very defensively position for the market and and you're correct. I mean, they there they have a heavier higher cash position I think that.
The changes there we continue to be under weighted towards emerging market currencies, we've taken off the.
Kind of negative duration bet.
You know over the last quarter so.
Mutual series is really still a very deep value group, we didn't talk about that much but continues to lag certainly the S&P in line with other deep value managers, but as you know that's been sector that unlike most cycles, where you have these big downturns in value outperforms growth in this case.
With the unusual nature covidien everything the stocks that the best performing areas around technology have gotten stronger and the more traditional cyclical value.
Energy all these other financials with with negative rates have continued to be under pressure and that's that's really what has continued to be a drag on mutual and we'll continue to be.
Difficult on the flow side I would say in general we were reducing our energy exposure.
Cross.
The entire organization has the macro view had a negative view of prices.
But you know with something like the income fund that has a heavy exposure to high yield I take out of our income fund, we have 3.5% exposure in the bond side.
To energy and probably three and a 3% to equities. So that's still a 7% exposure, which which had a negative impact.
And I think it's hard to avoid any energy when when you have an income orientation.
But I think overall our outlook was that we were reducing our exposure and that was true with income front as well.
Okay. That's helpful. And then back just a quick one on buybacks moderated as expected in your prior comments you typically more focus on investing in areas of growth ahead.
But just given the market backdrop in impact on the stock price does anything change in the near term in terms of travel.
No I think you you said, it's actually right like I think we did you know with Conservative company when it comes to capital management and.
Well, we think.
Just to be very clear, we think how.
Equity price is very very attractive.
It's just prudent for us to make sure that we.
Faced this market with.
In a way that's very balanced and in our view, we don't see just earmarked a big portion about cash to acquire a company to position ourselves for future as we've got that we have repurchased some shares we will repurchase shares to hedge.
Our employee grants and other groups around the stock, but aside from that our plan now is to sort of take a step back from it and other than completely opportunistic.
Repurchases.
We don't intend to to use our comps to repurchase shares until after the Legg Mason transaction close.
Okay. Thanks, a lot.
But that the its is complete the Captain America dividends.
We keep where they are.
With yours, you know we're pretty.
Commit to us we continue to payout dividend.
I'll answer the question of share touches terms of the other capital management.
[music].
We.
You could expect to see.
Very little in terms of other strategic inorganic purchases from the company because we've got.
Several transactions to to Digest, we have to wealth management deals, which are already going quite well.
And obviously, we have Legg Mason and we got some distribution things that we've been doing so.
We are really done for now in terms of inorganic.
Use of capital.
Thanks.
Thanks, Mike.
Our next question has come from the line a Robert Lee with KBW. Please proceed with your questions.
Great. Thanks.
You want to overboard and.
Families are feeling well.
[music].
Hi.
Most of my questions were asked this key quick ones maybe.
On the.
On the sales fund.
Activity.
Maybe the improvements so far in Q2.
If you could you maybe give us regional perspective, and that means very interesting to see how you're seeing like apacs personally.
Do you asked for.
The differences.
And that's our strongest area of improved performance has been around the U.S. retail side.
But we do have some strength in.
Some of the APAC region.
Australia was.
Big improvement, that's actually where that large institutional win.
Malaysia.
Korea.
So we do have some strikes in in some of the APAC region as well.
Great and Matt just make sure I heard it correctly.
Are you, suggesting that between now and deal closing going to pretty much the freight.
The purchases the next couple of quarters.
Yes, so other than very modest repurchases to hedge.
Hedge employee grants and things but.
Yes, we expect to that's going to be very minimal.
Okay. That's all I had thanks so much.
Thanks, Rob.
Our next question is comes with a lot of bike Cypress of Morgan Stanley. Please proceed with your questions.
Hey, good morning, Thanks for taking the question I.
I would just hoping you talk a little bit about how you're cells and wholesaling teams are adapting to this current environment that were and work from home wholesaling function arguably not quite set up for this sort of backdrop, maybe just what are some of the.
Techniques.
And changes you guys are putting force and how might the whole selling function evolved and look on the other side of this crisis.
So you know I mean first of all as a firm because we've been were we operate in 35 countries. We have over 100 offices.
We have broad global platforms, we adopted to video conferencing at the desktop.
Years ago, there isn't a meeting internally that happens without somebody being on video.
And so for US one it was an easy transition.
The firm to shift to working from home and that includes.
Probably 90% of our employees in India, which is where a lot of people had trouble and so we just built this into it. So it wasn't a hard for us to make that adjustment. What was what has been actually positive is that now clients want to be interacting that way and so yes. The beauty as you can scale you take eight we have our C.
I always are doing.
You know virtual conferences I mean, they literally are doing virtual road shows where they are scheduled one client meeting after another they'll give up a date or region in the client will have.
You know a series of it or that the distribution person will have a series of advisors on those client calls and what you're just finding is that people are much more accepting of it and so.
We have as I mentioned, we've had over 20000 clients attending just the webinars.
We have podcasts out there that had been picked up.
We have a volatility center.
Where which actually is our distributors have found is so good there are highlighting it within their own.
Virtual conferences and pushing their advisors towards it.
So.
I think where does this go into future I think that you're going to see many of its it's much more effective than both cost effective and in some ways just from a time standpoint, it's absolutely a better duties, Texas calls if your clients want them that way. So I think the hybrid wholesaler is going to be much more the model the future.
I'm going to completely replace visiting people, you're just going out a lot less in person visits.
Great. Thanks interest as a follow up question I was hoping you talk a little bit about the high net worth build out maybe just.
And update there you've done some acquisitions.
How is that progressing interest maybe an update on the overall strategy and build out be helpful. Thank.
Yes, so our high net worth business.
It's been about.
20 billion and.
We think it's a great business for a lot of reasons. One is it's a great business itself, it's a very sticky business.
But it needs more scale fiduciary trust is older than Franklin Templeton is a business that really is one of those core.
Just a premier high net worth and so we wanted to get more scale. So you know we.
In that when we acquired Athena and Pentrust It gave us to capabilities to add not just skilled at the business.
But specific capabilities at the into is renowned Andy you asked for endowments and foundations for TSG and Pentrust has specialty on on in for people that special needs children in managing those trust for those so not only do we get capability, but we're adding scale of adding.
With that that increased by 50% the size of.
Fiduciary Trust assets under management. In addition to that as the World is moving to more fee based advisers are getting pressure by clients to provide more of a wealth management. What was historically preserve to just really ultra high net worth people are now being requested financial advisors, so things like financial planning taxes.
Deficiency, even to state planning so having this resource within the firm allows us.
To be able to take some of that and be able to offer it to advisors and just as an education. We have are one of our heads of Trust Council.
Doing a.
Webinars for financial advisors to just talk about educating them. So they can talk to their clients about.
You know a state planning and so these types of capabilities, we think we'll build greater loyalty and.
With that.
Pfizer that growing fee based advisor network.
We also we've also being very focused on the on the profitability of this.
Business.
That was important prerequisite to agreeing to.
Helped build out the business through.
Some acquisitions.
And the acquisitions is certainly helping.
Solidify the profitability story around this around around fiduciary trust and even though we don't reported externally. This way, we're really pleased with the loss quota.
Results from Fiduciary Trust, which was I think represents almost a record.
With that business, so we're quite pleased with well and actually.
We've had referrals, we actually have won a client that was a referral from Athena and again, we haven't closed pentrust, yet and we actually have.
About 825 million in the pipeline that are just.
Referrals from Athena that Athena would not have been position to be able to take on but the broader fiduciary Trust Ken.
Great. Thank you.
True.
Our next question that's come from a line of Travis Edwards of Goldman Sachs. Please proceed with your questions.
Hi, I'm not sure who travel says, but it's Alex Blostein Hello [laughter].
Thank you said this habit [laughter] I've been call I've been called lots of things Travis as a new one.
[laughter].
So so just another one for you guys are on capital management thoughts are understanding the approach here until the like deal closes, but I'm curious to get your thoughts on priorities for capital returns between buybacks and maybe deleveraging months' worth through the closing of that deal I think you're going to have a little bit of a net debt position. So just curious how quickly you are looking to do.
Kinda Buildout down and then back to you on your point around M&A and sort of saying you're gonna down with M&A for the foreseeable future. I think you guys talked about doubling the size of future Sri Trust through deals. So should we consider that that's kind of part of the deal making is also off the table.
Yes, Okay. So a couple of things that first of all on the on the fiduciary Trust front.
We do still intend to grow fiduciary trust, we already increased it by more than 50% through the actions we've taken this year.
Yes, we could do a couple of smaller transactions, but that would be sort of really not material to anything we're talking about around capital management.
So that when a completely.
Say were closed at the point as making is there won't be anything material that we're going to do around cap from ashford involving involving M&A, but but we.
With fiduciary trust just some smaller bolt on type transactions in particular Stakes for example, the that.
Doug frankly mood.
However, the impact to have capital management strategy can make a real deference to how we continue to reposition and grow that business that so I wouldn't say that my comment on shostak M&A down for the foreseeable future impacts our strategy on the small bolt on type transactions.
In terms of the.
Pro forma capital management.
[music].
I think it's a little bit tough onex to also because the market's been evolving so much as we all know.
Between signing and closing this transaction that.
Beforehand.
We announced that it could have a very balanced approach across.
M&A share repurchase debt.
Servicing and.
And internal.
Capital allocation for example that type of thing I think.
Although slightly.
If we become more leveraged than we anticipated longer term, we will want to reduce debt.
Little bit.
We we want to remain high investment grade company.
I'd say, our goal will be always to be less than two times debt to EBITDA out of the gate, we would be in a one to 1.25 times debt to EBITDA. That's gross debt to EBITDA as you know, there's a portion of Legg Mason's capital structure debt capital structure that sort of has equity content.
Tied to it but we look at that is just gross debt frankly, as a company and and our intention is to make sure. We have a conservative debt capital structure. We also have some levers to pull in net debt stack pretty soon after closing in 2021, where we can.
Save $18 million to $20 million that in our view from repositioning it providing.
A situation where within probably three years well have.
Three or $400 million less debt.
One way to sort of look at it.
But we really have to assess.
Our pro forma.
Free cash flow.
Which should be very substantial in particular on the post synergy.
Basis and that will.
The opportunity to.
Repurchase more shares.
Invest more tons of seed capital investing now type thing, but I'd still stand by the M&A comment I think yes al modus operandi here is to have absolute success in execution of what we've got enough plate and frankly bandwidth because at the Max right now and it doesn't make any sense to be look.
At other larger scale transactions.
But down the line we've made it very clear, we'd like to be bigger and wealth and we'd like to be bigger any alternative asset area and that stays the same it's just the timing match for making sure we're being incredibly prudent without.
Cash flow and out now.
Capital structure, we do not want to be.
Net debt.
Heavy so as you know at close even with the impact on the capital structure through this.
Through this crisis.
Global scale, we we will be about net debt flat.
Maybe a little bit posted.
That's where we have jumped up yet.
Gotcha. Thanks for the gels and my second question was around some of the recent dynamics in your emerging markets distribution. There's been a couple of headlines I think with you guys.
Shutting down a couple of funds in India, I think that out about $3 billion to $4 billion, but curious sort of what happened there and maybe speak to a little bit you're going to any risk. Good that's sort of creates for your footprint in markets like India, maybe some of the other emerging market a geography. So thanks.
Yes.
We entered the India 20, plus years ago and.
What we were a fixed income manager there and the our portfolio manager in India anything below AAA is AAA rated is considered.
Non investment grade.
And the high yield market is still very immature there.
So we've had a large fund a alert it's actually six funds.
That we're invested with a lot at this kind of private debt.
And.
In October of 2019, Unfortunately, SEBI came out with new guidelines, saying that any investments in unlisted instruments in funds.
Could either be you can't have more than 10% in a fund and you can't trade them. So that orphaned about a third of our fund there.
Now in the meantime, we managed we had worked hard to managing Laddering maturities.
Diversifying sectors diversifying ownership.
And had been able to manage really.
A decline from about 7 billion to just under 4 billion.
Fine, but unfortunately, with this 33%, including actually not increasing as we've had that decline in the U.M. not increasing the percentage of.
You know unlisted instruments, but it just got to the point with the pandemic, where essentially the market froze up.
You had increasing redemption there were couple of defaults there in India.
And things like Vodafone ended up in default because the Supreme Court ruled against them and so that created a bit of a run on the funds and we looked at it and just decided the only way to really preserve the value for our investors was to halt any kind of subscriptions and redemptions and really go into.
To wind down mode.
We the underlying holdings. This is not a solvency issue, it's very good credits and the underlying holdings.
It was really just a timing of redemptions versus our ability to create liquidity to meet them. We were worried about the impact on our equity business, there and our high credit business. There was initial.
Redemptions in the high credit, we about 2 billion in high credit and I think about 6 billion in equity.
And that seems to have stabilized there. It's just very unfortunate because obviously as you can imagine with India being locked down.
There are people, who who need that that debt.
Liquidity, but it really was about selling those assets at a fire sale and very little buyers because at this regulation not permitting trading having said that as of last night SEBI, just reverse that is actually, allowing some trading and allowing banks to hold that.
So it remains to be seen how well that opens up the market. So that we can return that capital to the to the clients.
Maybe I'll just add that every one of the steps we took in that funding and liquidity something that we were watching carefully for long time was to ladder the maturities where it. So it's not it is locked up the liquid or a lot of this is in short term debt that creates immediate liquidity for at least some redemptions as as we move forward.
But I think your question on the impact on the business, obviously not good yes, something the duties your last resort.
To take steps like that and we hope to minimize the what it will due to the brand in the equity side, which is a healthy business for us as well.
But you know it will have an impact and that would you say that.
The press has been very fair on this they've actually really dug into the and understanding the issue I'm not sure that all the press around the world would be as far as India has been around the issue of the underlying credit still being good.
And we have not seen a broader contagion in our emerging market business in other markets, it's really been.
Within India, and even within an India it hasn't seemed to impact our equity business very much.
Got it so it's the $3 billion to $4 billion essentially now you AUM that will go through a wind down over the next couple of months quarters right Yes.
Great. Thanks, so much.
It could it could be it could be over longer periods than that.
But were waiving fees anyway over that period of time, Alex. So you consider it to be from a piano perspective, it's basically go and we're doing everything we can for those shareholders eight to make sure they get to lend money back that's what the strategy is all about maximizing proceeds the investors and funded this is the strategy that make the most sense to do that.
Yes, part of that we were not charging any FESIL those funds anymore and that's about.
If you look at the amount that's.
The were closing it's about $20 million revenue revenue revenue.
Yep.
He is expenses that will come down this comes from this.
Thanks, perfect. That's great. Thank you so much for all the questions.
Thank you.
Your next question has come from the line of Brennan Hawken, a few BS. Please proceed with your questions.
Hi, good morning, Thanks for taking my question.
Just wanted to follow up on the question there from the infamous Travis.
And the Indian credit fund.
Is that going to stay in a U M. You guys wind it down are you guys going to move it to discontinued.
Just.
Little bit of a more of a housekeeping question.
You can state.
You mean, just on those credit funds are you talking yes, yes, just a 4 billion.
Yeah that that will be wound down it doesn't mean that we don't have a credit business in India.
The question is how we treating it from a perspective.
Yes, just about the reporting whether or not it yet.
Adam.
If I mean, it will be on that maybe what we'll have to do as the footnote back that.
Because we do have the asset so I don't know show how you take it out probably the but well just footnoted and say that on $3.4 billion of assets in India, we're not charging any piece.
Great Great [laughter] Travis had that were covered like a blanket I just wanted.
[laughter].
And for my second question.
Given the plans that you guys have to consolidate distribution teams.
How are you guys ensuring that the distribution teams each distribution team remains engaged during this transition period.
In prior.
Deals we've seen some distraction there it's it's not.
Surprising really and particularly given we're going to this really extraordinary period of distraction already.
How might you be adapting those communication efforts and coordination effort.
So I don't see first you know what are the good news and again as we talked about the strategic benefited this deal was this diversification of a client base.
And so.
There isn't necessarily direct overlap between coverage. So that's that's one.
And to when we got under in things like us retail their strong or weak and vice versa. So our goal is to have little disruption on the distribution side with the frontline people, who are engaged with clients and so that's the area that we are leased looking for.
This is kind of.
Synergies.
Having said that the distribution leadership from both sides are very engaged.
In.
Designing this and decide figuring out what the best.
Approaches going forward and so it's really trying to get the best to both.
Yes. It's also one of those things where I think in any market a great salesperson always has has value but is it. This is probably a tougher market then other times to be able to walk out the door.
No we don't rely on that there are retention mechanisms in place and.
Where we're focused on exactly making sure that we get the message.
Out as quickly as how restructuring this and and who will be there, but we're trying to I think the key messages were trying to have a little disruption on the front line client error facing people as we possibly can have I mean, this a fair amount of what changed at all I mean, there the institutional piece will not change very much tool and just be better.
Coordination across the firm and.
Retail distribution perspective, it's totally focused on making sure client has been put in this and we have continuity I mean that's.
Keep keep pointed to stability.
Okay. Thanks for that color.
Thanks.
We only have time for one more question. Our next question has come from the line of Patrick Daven Autonomous Research. Please proceed with your questions.
Hi, good morning, guys.
One quick one on the India.
So it sounds like away from the 4 billion Theres another $8 billion that correctly in terms of the yeah, I think thats right Yep Yep, Okay cool.
And then on the fee rate given all the moving parts towards the end of the quarter could you kind of frame the exit fee rate into Twoq you.
This is what you reported for one Q.
The exit fee rate on.
Like what's what's the kind of weighted average fee rates kind of as we start to Q.
Well it.
In the first few quote.
Very very consistent says that the by point.
Three.
Exactly exactly [laughter].
[laughter] another.
Non-GAAP basis, its 50.6, and I think that the changed versus the previous quarter was literally like north 0.1 basis point going into the going into this quarter. We don't expect it based on the changes within different things he does.
It doesn't have any impact on that average.
Thank you.
Thank you.
We have no further questions at this time I'll now hand, the call back over to management for any closing remarks.
Well I just want to thank everybody for.
Taking the time to do this call and wish everybody.
To remain healthy and safe in their shelter in place and not too crazy in your shelter in place.
Take care everybody. Thank you.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great day.