Q3 2020 Franklin Resources Inc Earnings Call
Quarter ended June Thirtyth Twentytwenty My name is Joanne and I'll be your call operator today.
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 and uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risks and factors of the M. DNA section a franklins. Most recent form 10-K, and 10-Q filings at this time all pitched purchase intent to listen only.
The mode. If you would like to ask a question.
At that time press star one on your telephone keypad. The confirmation Tony will indicate your line is in that question Q. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
At this time I would like to turn the call over to Franklin resources, President and CEO, Jimmy Johnson <unk> Johnson you may begin.
Hello, and thank you for joining us today to discuss Franklin Templeton third.
Fiscal quarter result.
Today I'm joined by Greg Johnson, our executive Chairman and back to Nichols our CFO.
Oh, we hope that everyone on this call in your loved ones are staying safe and healthy.
We're pleased to announce that our landmark acquisition of Legg Mason is expected to close this Friday ahead of our original schedule.
Your ticket rationale for this powerful combination has only strengthened since we announced the acquisition February it will unlock growth opportunities driven by greater scale diversification and balanced across investment strategy distribution channels and geography.
Significant work has been completed as we near day, one, including having announced the leadership teams for corporate functions and global distribution Brooks.
But if the market stabilized during the quarter would watch dogs outperforming value stocks by the widest margin on record over the past two quarters, which impacted some of our flagship funds.
The positive side, we have seen strong performance and momentum in several key asset classes, most notably in our municipal bond and U.S. equity strategies.
Flow trends continued to improve across all investment objectives this quarter.
It was going to U.S. equity and fixed income strategies turned positive with eight of our largest 20 funds generating positive net flows year to date.
We continue to believe that active management will play an increasingly important role in quite portfolios, we're well positioned to capitalize on this.
Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business.
Finally, and I'd like to Oh, I'd like to say all of that we're poised for significant effort to keep our business operating at the highest level to a sister please help them to achieve their financial goal now I'd like to open it up for all your questions.
As a reminder to ask a question you'll need to press star one on your telephone withdraw your question each Brett dependent or hashi. Please standby we've compiled acuity roster. Your first question comes from line of Dan Fannon from Jefferies. Your line is now open.
Oh since my first question I guess was on the updated integration targets for for gaming.
Jim you talked about I guess, 40% lower integration execution costs, you curious as to what's driving it and then also just in terms of faster than expected synergies.
Sure. The you know it's not true disruptive.
Oh Gee the business as you can body.
Got it seems to be packs, where we've seen a pretty normal course.
Yeah. Thanks, Dan it's about the opt I'll take that so that lots of part of the question, which is about the the execution around the synergy realization I.
As we outlined in the prepared remarks, we're talking about they got to realize 25 said that these savings and above 60 day, 50% by the end of the an age but said by the end of that within 12 months of closing the transaction.
We're quite confident that the to work streams that we've organized walking around the holding company functions the although around.
Distribution organized in a way where the first part we think we can execute pretty quickly we think that about 65% to 70% of those savings can be achieved.
Within 60 days on a run rate basis.
And then the rest of it around distribution will be at a slower pace to manage exactly the risk you talked about around client management product.
And maxing coverage.
So what we think this sort of being the frontend, but the business, we're being very careful methodical in how we execute upon that over the over the 12 month that we're talking about him. The other thing to mention is that the reduction.
On that front and side of things all quite modest relative to the size. This transaction I think we indicated between 10 and 15% reduction across our combined.
Cells business so cells.
Group, so that it makes it indicates a big quite careful how we how we manage that the execute well I'll just add to that I mean, you know this is what is what makes it complicated it makes it so far in some ways, which is the structure of Legg Mason would be independent investment teams and so you know weve right out of the gate.
Said that we had no intention of disrupting any of that so as long as the investment teams are disrupted and were slow methodical on the distribution, making sure that were first and foremost focused on no impact on clients.
You know, we think that goes much smoother, maybe if you take a transaction where you're trying to combine investment team, that's where I think you get into a lot of a lot of trouble.
So structure that in itself all helped and I think in terms of that the that the execution cost.
In other words is is that yeah, how much we having to pay things like extension payments severance payments and all the.
Another sort of structure arrangements around the execution of the transaction.
When we announced that the transaction, we had estimated that to be about $350 million. We now think it's it's close to 200 million dog and that's pretty no more complicated than pay sort of a person by person group by group analysis.
Order intake, we now have that we didn't have at the time, we made the announcement.
We're able to retain a lot more folks than we thought that lower cost them, we anticipate.
So that's the that's the reason for the though execution costs.
Thank you.
Sure.
Your next question comes line of Patrick David from Autonomous Research. Your line is now open.
Good morning, everyone thinks.
First question on.
The kind of new guidance on the cash tax benefit and refinancing.
First are you planning to include the 500 million cash tax benefit and your reported adjusted <unk>, Yes.
And then does the combination of that tax benefit and the refinancing had that already factored into your guidance of high Twentys Kashi P.S. accretion or should we consider incremental it's incrementally touchy below the line to in a way. It's just the according to this having more cash what about it she dwell with model it isn't that a three years.
I'd say would probably get.
Half of the 500 million said, I'd say, 25%, 25%, 50% the way to think of it is do we have that additional cash where we could.
Yeah, the best in the business buyback shares or pay down debt.
In terms of 20 to 25 million.
Just to be clear that is not de levering the capital structure that is low interest.
Payments on about seven from $50 million <unk> debt.
That is quite high cost like makes its balance sheet. The we intend to refinance into first quarter <unk> or <unk>, let's call. It.
A 20 or 21.
Great and that's incremental as well yeah, yeah incremented, we didn't have either of those you know.
You know accretion estimate correct.
My follow up.
The.
The outflow trend for the income fund looks like it's starting to accelerate a bit more after the recent underperformance I know you've taught.
In the past about that being more sticky given the yield focus of the investors, but do you have any updated thoughts on that potential sticking that's relative.
So the global Bond fund experience, rather when they had similarly bad performance.
Yeah, I mean, you know the income fund again is is is always rated lower in its category. Because you know its managed for yield as opposed to the total return and there is.
Retirees with it that just loves the nature of that product and there's not as many competitors directly in that space up but it has had you know some underperformance here and you know it is impacting it but yeah. We still it's been here for 70 years, because it does exactly what would it.
You know, it's supposed to do what she's generate that's stable income.
[noise]. Your next question comes from the line of Smart Carrot and Mike carrier from Bank of America. Your line is now open.
Good morning nature.
Thanks, Good question deeper insight on the expenses.
That you mentioned you similar guide them.
Because you know we've shifted a little bit in terms of.
You know the adjusted I, just want to make sure you know from the comparable period.
And then as you're thinking through the year, whether that that range longer term.
You've mentioned some other sort of expense initiative as you know the flip side is you're also you're probably looking at investment grade is just getting way.
Just wanted to get an update on your thoughts on some of those long term opportunities.
Yeah. Thanks, Mike So I think the way to look at it is that the base is about 2.2 to 5 billion. So that's a non got 29 team.
Face.
And 29 team fuel expenses.
And we expect to reduce that by between 100 1300 $50 million, which is between five and 7% not that guidance remains exactly the same notwithstanding the fact, we increased our comp accruals. This this quarter.
The the we adjusted our comp accruals upwards to reflect the momentum in our business. This quarter at it obviously reflects more where we ended the quarter versus where we started because a.
Law school to pull that out of the second quarter weird.
Being quite aggressive and reductions in comp accruals.
Frankly based on exactly where we were at very significant uncertainty across the marketing in the industry.
So we did what we thought was the appropriate thing to do there and frankly, we've we've reversed that based on the momentum we have in the business. This quarter all other aspects of expenses of absolutely in line or below where we expected to be so we haven't taken to put off the gas in terms of pressurizing those areas that we think.
We have a leverage.
Of course, what's going to be a little bit a complicated going into the fourth quarter is the addition of Legg Mason.
And you've noticed that Legg Mason has also reduced <unk> expenses by hundred million. So you know Legg Mason is reduced by hundred million were reducing by between 130 250, we're doing another 300 million around the deal. So we're talking it up with the 500 550 million of cost reductions on a run rate base.
Yes, it's quite substantial however, yeah. The more we've looked at the combination that the company and what we can do without these stabilizing things, we do see some or some additional potential saving opportunities across the.
Operations area, but it varies <unk> all the so the support functions of the fun. In addition to the cash tax benefit in the capital structure points as I've mentioned too.
Okay. That's helpful. And then just so all of the flows to.
As you saw some good strain in the U.S. equity in the music you mentioned on international.
Equity.
It's still in the challenge on some of that yeah. It looks like it's driven by performance just wanted to get your thoughts line are you certainly see you any Megan Ruby trends on that I just.
It's still going to be you, mostly defeated by you buy performance improvement.
Yes, some of that.
The trajectory.
Well actually that the on international side in our our technology funds and just the Franklin growth funds are getting a lot more attention and traction. So we're seeing good uplift in sales.
On those strategies.
HM we.
You know that we've seen reduced redemptions as you're saying you know slightly less redemptions and things like the global macro strategies and so overall theres been a net sales improvement I would say you know July we got hit with a large billion.
In dollar redemption in in a institutional accounts in global equity, but otherwise you taking that out you've sort of seen the same you know a improvement in it trend in that sales.
Yeah I think also the point told me you know, it's about 20 largest funds being a post inflows is a very important long. It's just the fact for US is that we have a couple of.
Strategies that are so large that it tends to dominate the story, but the reality is is that a lot about buttons are actually doing very well that just smaller, but they're getting bigger and bigger incrementally since making a difference if for example, dyna Tac.
You know only last year, we've been talking about that fund. It was 70 $678 billion now with 15 billion. So that's becoming a bigger Paul the story that we can tell on the flow front.
Actually I suppose things get larger and then we have legg mason's much longest larger strategies. It helps a matters that the story a little bit around some of the larger things that have been.
Not that they're not bad things that just out of favor things, which is where the performance reflects out that so and the plugs. So.
But even on those large things a point we want it's really important for this quarter is that the redemptions have fallen quite significantly on those things.
And I would just add the technology fund the number three cross border fun and that's really a a new category for us that that up you can see how quickly it's accelerating inflows and could pretty quickly offset some of the headwinds you have on the.
Global equity side with the deeper value.
Lines as well as the global bond, which are very defensively positioned then you know, what's really going to take it a downturn in the market for those to see any kind of swing from where they are today inflows.
Got it thanks a lot.
Thanks, Mike.
And your next question comes from line of Glenn Schorr from Evercore. Your line is now open.
Oh, Thanks, maybe that's a good lead and I want to do a little ask a little more on global International body segment.
Part of it it's a product that the environment, where people's preferences away from that category and then there's some performance issues. So maybe if you could help us.
Differentiate between what you think is the Cisco component.
People avoiding the category and then maybe importantly, what's the what's the ideal backdrop for that strategy that we can anticipate a turn in client preferences. Thanks.
Yeah. I mean this is Greg I think the backdrop. If you look at where that you know the global macro strategies I'm really accelerated and flows was was after the last crisis and having a 10 year period against equities that you know was the flat decade versus that that product I think was the number one selling fund of its kind.
So you know the backdrop is is a more of a risk off environment, where are you can lower the risk in a portfolio. That's really how we talk about it today you know non correlated kind of asset class that doesn't have the same kind of risk that your equities and fixed income has and and that's really how its position. So.
You know I think today when you have markets that continue to be extremely strong and it's a risk off environment people really don't pay a lot of attention to the global fixed a category when when things get a little shaky, you'll you'll start to see renewed interest there I think that's really the kid and I think today, it's half asset.
Glassware, you know if people are allocating a percentage of it too.
Regardless, where where before it was a relatively very small asset class.
But to Greg's point, if you just look at apparel categories. Global Bond is you know that go fix is not a big flow category right now.
But I think Glenn and I must say thank you.
Sorry for Glenn I think enough. What are your question is what are what portion of the flows are Joel.
The client base Bulent global macro is attributed to just not risk management.
Client base, and it's very hard to bifurcate that but it's probably a decent foundation that the assets under management. We now have in that category is because it's been so long.
These are long relationships now is to do with exactly that that fact, it's around risk management and having some downside protection in a in a market that's.
You know being quite a quite lumpy.
Great guys, just one quickie on benefit.
Yeah.
Oh, sorry, I thought I was getting cut a benefit street just curious on how they performed in this crazy backdrop, where they're at some of their capital raise is what opportunities you guys see a on the private credit try. Thanks, yeah. So in that in the numbers for or last quarter. They.
They they called about.
Well the called about 500 million in capital deployed 400, and the other 100 million there they have coming in so so that was in there then they they raised actually a CLL, which will be reflected it closed in June but won't be reflected until July numbers, a 400 million.
They have a second siloed that closed in August. So also will show in this quarter. So that's 800 million to see Olos. They also raised there they're about to her first close a 400 million in a dislocation fun.
And what was somewhat unique there is lot of that was raised by our Australia institutional team a benefit Street had been trying Australia is a very sophisticated market and had been tried for a long time to break into that market interest, we're not able to do it. So the combination of our team would benefit Street.
It's just a great opportunity in addition to that they raised another 50 million into their senior opportunities fund, which they they'll close with 700 million in commitments again these are commitments.
So it it you know it's dependent on the drying up capital, but that was raised by our institutional a team in a in Hong Kong and and China. So.
I'm, a big piece of that so I think they've they've had good.
We've had good opportunities as people see the you know that the importance of having the you know in active manager in this space and the experience they have around the distressed side, but they also had to have a write down on some other BDC.
Both because of having to take down some leverage as well as you know some distressed assets at it and they actually have then you write down there but to that that was kind of their their troubling part, but on the other hand, they've had really good traction on the on the sales inflows.
I would just add that if we look at our pipeline on the institutional side. It's it's our greatest opportunity and we're still very optimistic on strong organic growth coming in the rest the year.
Thanks for all that I appreciate it.
Thank you.
Your next question comes from line as Ken Worthington JP Morgan.
Your line is now open.
Hi, Thanks for taking my question on you announced new leadership in distribution with the appointment of Adams Specter as global head.
Maybe talk about what Adams vision is for Franklin distribution for the combined companies what his mandate maybe in terms of deliverables and any changes or adjustment you envision that she'll make to comp or structure.
To kind of achieve he's in management's longer term goals.
So well first of all we did a really a global search on this positioning had an unbelievable candidates as I think people in the industry, where particularly attracted to understanding the opportunities of a 1.4 trillion dollar manager with an emphasis on on the active side, a and ended up you're picking out.
For for several reasons. One is you just we've just been very impressed as we've worked with him with his both is actually made on service business and practical business approach to things as well as his experience and you know, we we talk to clients and you'd really been in a distribution role.
Within Brandywine the the way, we're thinking about approaching distribution is much more regional and trying to build a more agile organization. So while historically Franklin Templeton had kept many functions like product and marketing.
And even data analytics to be centralized we are distributing that out more into the regions to provide a little bit more flexibility.
And yet still have a central group for those things it'll be central so that's kind of Adams.
And our vision around how to do that Weve evaluated you know as you can imagine bringing.
The Legg Mason team together in the Franklin team together really evaluate it how we're looking at.
Pay for distribution and trying to figure out what the the optimal approaches.
And and so we've been a process and that may vary a little bit by region depending on.
What's what's what's appropriate so you know all of that there's been tremendous amount of work in the process, leading up to atoms announcement in really restructuring this and.
The.
Let's see five real leadership positions.
Reporting and to add them actually it will be six there there will be there two that are Franklin Templeton two that are Legg Mason.
One that's on determined whether it's coming from internal or external and one that will be an external higher. So we're also really excited that we've been able to bring together leadership both organizations.
And as we over over the next.
Month, or so make announcements around that you'll see that it's a real combination the two organizations.
I think I think one other point to make on Adam.
Ken is.
In addition to being Hardy qualified for this position.
He has existing relationships across very important parts of the a combined organization, including all the investment organizations that are going to become part of Franklin Templeton and that could that can be that can introduce additional efficiency efficiencies in of itself both relationship wise the fact that.
Talk strategically together so many years.
And Adams knowledge of our company is come up to.
Pizza Bossier He's vision on combining these things and how we work together in a collaborative fashion across all the investment groups. You know, it's very impressive and exciting for us to have that Buda hit the ground running as opposed to have to worry about you know.
Although our integration of cultures and things so.
Very good.
Great. Thank you.
Thank you.
Your next question comes on line as Craig Siegenthaler from Credit Suisse. Your line is now open.
Hey, good morning, everyone I'm, sorry, it was nice to see the rebound in U.S. equity flows this quarter and also strong traction in your dine attacking technology funds outside of these two funds can you talk about if you're seeing stronger underlying demand across the industry for U.S. active equity or any green shoots route.
Massive justice clients are looking to navigate a less certain future here.
Yes. It did you say, we you know we do have some sector funder utility fund our U.S. Gabby.
I guess, it's fixed income biotech, there's a couple of underlying sector funds that have performed well and so you're seeing kind of interest symptomatic. We rolled out symptomatic GTF said that are managed by Matt Moberg or does the Dyna Tac fund and seeing a little bit attraction those although very very early on.
So again, the emphasis has tended to be in within the Franklin group and that that group has always had a lot of strong sector funds and so to the extent that there has been good performance there you're seeing seeing traction.
Yeah, and I would just add I mean, I think in this cobot world that you know the theme around technology and how many of these trends are accelerating you know as people work from home use more technology that that certainly from the advisor they want to get more exposure to their clients to the sector. So you're really seeing.
You know tremendous growth on the backup obviously, a tremendous performance you know and one that I as I said earlier, we're very optimistic on our positioning and because you know Franklin is had such a long discreet in this area right in the heart of Silicon Valley that we think we're in a unique position to capitalize on that.
Thanks, and I'm just as my follow up how do you think investor allocations and you can comment across institutional retail, which is bigger field will change for fixed income just given that we have is very low interest rate environment here, it's reduce future return potential across the asset class on many to sell.
Thats, a pretty close to zero and if bond allocations do change or reduce.
Do you expect to see stronger demand in other segments or maybe other segments and high yield credit segments and I'm thinking also the pride that I like we manage over kind of a tree.
[laughter], so funny I'm, just I'm looking at kind of a flow chart that it tracks Morningstar categories and I think at at the top.
Eight.
Categories. It looks to me like seven of them are our bond categories and one is a stock category.
And I and the reason I actually have the report in front of the interest one interesting data point, which is.
That that Legg Mason has six four or five rated funds.
And in the top eight categories and we have zero rated in the four or five stars. So just bringing that combination and this is a retail focus I want to emphasize the benefit of what we've always said is so important strategically which is a broad product breadth. So that you always have things that are in favor.
With a diversified distribution channel and so that combination of bringing in the Legg Mason with our strong retail we think will be a real benefit but to answer. Your original question about the bond flows you definitely see.
Even in this low rate environment, you know, it's an emphasis whether that stays there how much would that moving where people just things that rates. You know had come down you know remains to be keno, Greg if you want to I mean.
I think I think it one if you look at the institutional world, It's very hard to get away from bonds and fixed income and a fiduciary. That's running that you know you can maybe put a little more risk on a portfolio, but you certainly can't walk away from bonds, even in a low rate environment, but I would say you know the bigger trend is D is important.
It is you know like like what BSP offers like what Clarion has with real estate I think all these alternative categories in a zero rate environment becomes very important.
Supplemental kind of income providers to your traditional.
Uh Huh government type securities. So I think it just it just accelerates a lot of what's already happening.
On the alternative side not being that much more important for both institutions and retail investors and I'll just add on Muni I mean, you know in this cobot environment were governments or states have had to increase their spend to support their economies internally you know the does that translate I think many people think thats kind of trends.
Right into higher taxes in states and.
We think that that one is that's going to bring you know continue to have demanded beauty and two is gonna be all the more reason why do you want an active muni manager who is selecting you know what those opportunities are.
Thank you Gerry.
Your next question comes on line of Chris Harris from Wells Fargo. Your line is now open.
Yeah, Thanks coming back to the Legg Mason synergies are you guys now, saying 270 million on a net basis and that would be up from 200 million previously do I have that correct.
Yes.
Yes, what we what we Didnt, what we didn't want to move away from Chris was that was the notion that a portion of.
The savings that we create comes transaction.
It gonna be earmarked for reinvesting in the company that is really important.
Part of our statement, but obviously since we made the statement about reinvesting $100 million back into the business you know the market's changed in this most stressing the industry. So we are appropriately adjusting that yeah, I'm I'm still convinced we're going to invest the amount that we reinvest the amount that we talked about we're just going to get it from other play.
Cases.
Across the organization, but it tons of looking at the 300 gross and what portion of that will be reallocated. If you will.
We don't the to 17 that was is appropriate guide.
And we feel very we felt that is.
That is a minimum so.
To sum yeah that was good that was gonna do my follow up it you noted earlier.
A question you had mentioned the opportunity to maybe do more with a with a cost beyond what's already been identified maybe you can elaborate on what you might happen.
Yeah, I mean, I don't think we want to get into the different components now because we're not even the single company yet, but it's just though feel of walking through this.
Well have opportunities.
Both on the investment side, obviously is going to be a a demand reinvesting capital into the company, but on the on the cost frontier. We've been very conservative in this transaction. We we're incredibly focused on client retention and so far in this deal.
Again, we gotta look closely on Friday, but so far in the run up to transaction. We we virtually have no redemptions as a consequence for the transaction itself. Maybe this is one in Asia, but it's very very small.
So we're very focused on that.
But there are various projects going on around the integration of the functions for instance.
That.
Show the certain things, we're doing in high cost areas that could be moved to low cost areas. As you know we have a big business for Big Centre in India, and Poland. So we have potential there and there are certain things that we may.
Choose to outsource down the line, we've we've we announced an outsourcing last year as you know, we're executing that we're going to save 100 million over 10 years.
In that regard so picked up more of these types of things to to work through but to announce today guide guidance on that I think would be a wouldn't be a good idea. So but the point would make you got the minimum the to 70 that we see a good opportunity to future we've got other synergies.
On the cost side that I've mentioned already around the capital structure around cash taxes execution costs, they're going to be lower.
We think those things out up to be very substantial amounts of money that can be reinvested or used to to buy back shares and so.
Got it thank you.
Thanks, Chris.
Your next question comes through line of Brennan Hawkins from you B.S. Your line is now open.
Good morning, Thanks for taking my question.
I wanted to touch on the high.
Touch on the theory pressure this quarter.
So.
Just curious about maybe some of the source I think you touched on in your.
Prepared remarks, there was some mix, but also some.
Some waivers.
Which included India, but you knew about India last quarter. When you gave us the expectation. So was was there some incremental or additional fee waivers that you. Maybe you had an expected previously maybe benefits Street, we hear about silos deferring.
He is on a BOE see tests failing so was that a car a contributing factor as well maybe if you could break that down a bit that'd be helpful. Yeah sure Brent so.
The North 0.9 basis point reduction from non-GAAP basis, that's going from that's going down to a 49.7.
Basis points.
Effective fee rate about.
No 0.24 basis points is attributed to India.
About no 0.21 basis points is attributed to fee waivers to answer your question, specifically and about no 0.23 basis points is because of regional shift between AMEA and the U.S.
We have some all the moving.
Movements within the fee rates around business mix, more generally which make up the other 20% of the no 0.9 basis points, but that that the.
Yeah that sort of trying to break it down a little bit for that for you we don't see.
See things would be different when we merge with the like make some we don't see.
But the change in the in the point to 1.25 basis points.
The wave is India is what it is not what change until we are.
Until we have real rebuilt the credit business.
In India with piece that can be charge, so that sort of a a mainstay but that that really gives you little bit more component as Asian, it wouldn't surprise us if we saw the the fee rate.
Staying where it is or even ticking up slightly in the next quarter.
Based on some.
Movement wealth management some of the some other things that we see coming on in the pipeline.
Okay. Thank you for that matter, that's very helpful and that fee waiver impact was my supposition that it might be added benefit street and some of the.
COO feed deferrals.
We're hearing about from that market is that related there and is that as bad as it can get where is it just bad as bad as you suspect in like a I'm actually not aware of that I I will have to come back to you on that.
None of us are.
A book would come back to you on that I heard it although we haven't heard any any anything on that front.
Okay. Thank you.
Thank you.
Your next question comes from the line of Bill Katz from Citigroup. Your line is now open.
Okay. Thank you very much so as you look at the core business.
Ex Legg Mason appreciate all the updated synergy expectations.
How are you thinking about core expense growth year on year for 2021.
So for 2021.
Yes about just frac consumption standalone.
Correct.
We expect expense to be flat.
Two hour reduction.
So no growth.
Okay, and then just going back to seal those you're one of the few managers is actually offered up the ability to actually get some slows down in this kind of backdrop, what does the specifically that you're seeing the opportunity is it just the markets themselves firming is there some unique distribution opportunity that a benefit street or Franklin offers and maybe what location you're seeing those in.
So you know I think that these were relationships that.
Benefits Street had.
The majority of the equity able purchased by U.S. investors.
Well known Japanese investor that purchase the high percentage lay notes.
They had to new investors that that you came in on the CLL platform.
So I.
I'd say that this is as much about the deep relationships that benefit Street has had I mean, it was really BSP, who raised this through their their team.
I know that on the second Siloed included some issue restrictions.
You around like controversial weapons and tobacco one thing.
But you need to be.
Well known relationships that they've they've had in but also a couple of a new one the joint.
Okay and this one clarifying that you had mentioned about flows I have a few speaking specifically to the global equity footprint or overall you admit she had one sort of billion dollar mandate coming out in July we said rest of the business was sort of improving was that the global equity segment or was that overall to the for.
That was the billion dollar mandate that came out with a global equity.
What I was saying is that you take out that billion dollars and you kind of see our.
Progressively improving the income fund did have some some increased redemptions in in July.
But otherwise you see the trend of improving flows.
Okay. Thank you.
Your next question comes from the line of Robert Lee from KBW. Your line is now open.
Great. Thanks, Good morning, Thanks for taking my questions.
It's the first one is.
Yes.
No understanding that.
Oh this is keeping well there, but you can use independent dealer thing.
I'm just curious is funded transaction.
He is changing.
The lead revenue shares.
Give me kind of retention.
They should be affiliates, that's or any change.
Actual relationships at all.
No Rob we did see any change.
In the structure of the rights with we have with the.
Specialists investment managers is we call them, which is consistent with what we call out investment teams and Tony Franklin Templeton.
The the revenue shares as we've described them different schools that are accretive to our company because we're eliminating the holding company. So it takes out those costs and means that revenue shows make sense to US you know over time, there may be some things that are adopted.
Based on need of a of the these investment groups.
Or desire to to two uptick the collaboration across the group, but this is there's nothing needs to be falls.
To to to make.
The coordination across the group were very effectively as we described.
Right and as a follow up.
Serious about Advisorengine I noticed any acquisition.
But you have had some of your peers.
Also.
Investment.
Adviser.
Process, possibly platforms lots of midway.
Okay.
You may be up there's some kind of where you.
You can have success there.
I personally plus or minus body of Blackrock someone in lighting.
Taking a standout in.
Gain much momentum so how do you feel like Keith.
He is working helped drive.
Close.
Yeah, I mean, we already through fiduciary have.
You know kind of a high touch custody business for our A's and so part of pretty sure strategy is figuring out how to add additional tools just to that segment and you know advisorengine has the possibility of doing that but also you know as you're having the independent.
Our A's they they're being pushed you know as the world's gone more and more towards fee base to be more wealth manager. So what does that mean it means you're not just doing investment management quiet seeing every month it they're paying you'll see the clients are demanding more financial planning education for errors.
Tax efficiency and so.
Part of the other piece of Advisorengine actually was a CRM tool.
That has.
I think that 1200, 10% of the our market Covenant Ari firms.
And I think 12000 or 13000 users.
That that allow us to communicate with those and build deeper relationships because again, there are difficult to communicate with in some ways because it's a very fragmented market. So it's a tool that we can be able to support their business again, mindshare and Ah you know build relationships with and so that's how we see at it.
It's it's so it's just one tool in the toolbox to build the deeper relationships with that growing channel.
I think the other thing Rob on the visor engines to say that we've already investing millions of dollars a yet in this type of area and.
And now we have is a terrific team.
Thank you focused on it almost like you know entrepreneurial type way, which is tremendous for our company for our wealth business for us It management business and technology investment.
Area and all those things combined mean that frankly owning advisorengine is increased efficiencies for us in terms of investing in.
Some of the future of distribution.
I didn't know if I can ask maybe one quick follow up on distribution. So.
Understanding that.
Buying the distributions are real Bonnie.
Function.
To minimize disruption but.
We have seen in transit transactions, where.
Alright.
That's it.
Oh sailors marketing people lose focus sales for fall off.
What are your peers I guess, that's algae issues around modeling there.
Horses, so how do you.
And then mizer avoid that are you actually A.H. some short term disruption sales, how you're thinking about.
Couple of quarters so.
Sure.
I mean, you know I think that's why Tim to match, what we're talking about capturing the synergies.
You know this is the series.
Much faster, we caught a much faster on the holding company side because that doesn't have the client.
Implication and that were a bit slower on the distribution side, because we're being very very careful on any client facing individual. So that's that's one piece of this and just ensuring.
That there that we minimize any disruption there and then number two what's a little bit unique in this transaction is again much at the institutional sales base sits in the affiliates and they're not part of this integration. So nothing's changed there in our special specialize investment management groups.
And so that's a little different than I think you see in other transactions that's unique to this.
Yeah, I also think brought in certain cases rachi, adding.
Adding a greater emphasis on.
Client coverage and how we monitor that manages and.
I think I'll focus on making sure that client service remains top notch and that the intensity of coverage and calling remains exactly where it should be I mean, yeah. The fact that we've worked through this transaction that we haven't have won in person meeting between announcing the transaction close I think that sort of tells you what you can get done.
Remotely and and I think Oh collective cells group and sales teams.
Incredibly energized.
As a function this transaction by having more things to talk about.
More connections across different relationships, it's a really powerful thing and of course, you have destructions, but.
Management team was put in place really quickly.
Very you know.
Very good decisions were made quickly in that regard not right away helps retain.
The most talented people across the across the organization. So we hope that we're taking the right steps to minimize any disruption talking about.
Great. Thank you so much thanks for taking my questions well.
Your next question comes on line of Alex Blostein from Goldman Sachs. Your line is now open.
Great Thanks, and good morning.
A quick follow up expenses, so I guess based on the revenue run rate for Franklin Standalone and averaging effects of the time in the markets etcetera in the flow trends I mean, it looks like the 2021 revenues could decline so relative to 2020. So some as you maybe a little more color or why with core Ben expenses be flat in that.
Scenario or we should really take that in conjunction with opportunities on net cost savings from the transactions, especially being above the $270 million number.
Yeah.
No no no modeling we have when we look at the momentum we have across half of our large is almost talk not exactly.
Almost half of our strategy is of which a number of growth really quite significantly over the past 18 months alone.
We think that.
Some of these things can start.
Offsetting the outflows we have from how large is strategies.
And then when you combine that with the fact redemptions for and Rudy frankly quite significantly in particular internationally I think in certain places the lowest in a decade for example.
We feel that it's appropriate.
That.
<unk>.
<unk> expense, providing expense guidance for 21 is very tough.
Right now because of the because of what we're going through in terms of transaction, but to US right now based on what we see across the firm and the opportunities.
And where we think we need to pay.
We think it's appropriate to to say that we won't be anything worse than flat. It doesn't mean, we won't be better than that.
I think right now read or we're not ready in the in the business we've given guidance.
You know 18 months at Oklahoma.
As of this and then the to 70 I I think as I alluded to already yeah, we're going to be you know.
A much larger company with a much larger cost base.
But our number one focus is im sorry to keep repeat here, but its continuity and stability of the franchise and making sure we retain as much should the this weekend and then focus on the growth engines.
That doesn't mean, we won't be more efficient in all the functions were going to we've worked very hard than that but you have to sort of bed down a bit.
And see what other opportunities may exist to improve upon the to 70, our feeling is.
There's a good shot there will be but we're not going to position talk about that but now so I.
Got it got it okay I'll make sense, so essentially predicated on maybe a little bit better revenue outlook, then what maybe consensus baking in for you guys. Okay next time.
My second question back to the some of the dynamics in fixed income markets.
And just building on the earlier discussion around the impact of lower interest rates. So I guess wouldn't the low rate environment, just essentially increase clients sensitivity to fees.
Especially given the pass a fixed income products out there a fraction of what would act of instruction. Today are you seeing some of these pressures already showing up in client conversations today and more importantly, I guess how are you positioning in both the legacy Franklin line up and Legg Mason line up to more effectively compete with lower cost options.
As that potentially becomes more pronounced so I mean, what are the things I would say and then I'll.
Greg jump in here too [laughter].
The to think that passive isn't necessarily a good way to do fixed income management.
You know, it's just the concept of let me increase my investment to the company that's taking on more debt. That's it that's a challenge.
And so you know as I mentioned on the Muneeza to think that all states are gonna be equally equal in their creditworthiness and that you should just apply you know a passive approach to that I think is a dangerous thing and you know we see it you look at what the cold. It environment is one of the reasons, we you know.
Shifted a bit in some of our multi asset solutions to some of the more conservative companies is just you know how long does this thing go on and you know who's going to be able to sustain themselves through it and so I think probably no more no time greater than now for an active.
Approach to thinking about fixed income and you're right. You know were environment, where scale is going to matter because it's going to be pressure on fees. It's going to continue to be that case, and so scale is going to be important and you're gonna have to adjust to fees, but I think there's a danger to just assuming that they had a passive approach to fixed income as a good thing and Craig you want to.
Yeah.
I think it really you know when we look at the logic of the Lake deal in Western standing out as obviously the largest.
And and really a leader in fixed income amongst the very small peer group and I would say the pressure on fees has been there it's real.
It will continue to be but I think the net result, we looked down X number of years is gonna be you know two or three large fixed income players that maybe at a lower fee rate, but a lot of the a smaller ones are not going to survive under that and you know what we would lose in fees hopefully you pick up in market share.
And I think the flexibility we have with a broad array capabilities between benefits Street in the others is that we have the full fixed income spectrum available and I think you'll see more tactical allocations and flexibility to move across different categories, you know to gain ehealth and fixed income and we think we're extremely well positioned.
To benefit from that train that trend along with you know unconstrained portfolios and just giving a broader mandate for the active managers and I look at our lineup and I think it's probably the best in the industry for that.
And also we have we have obviously added substantially.
It doesn't completely hedge out the pressure on.
These of course, but we do have a much larger portion of higher fee.
Harder to commoditize.
Assets under management now as a combined company I think we have 125 billion roughly of alternative assets.
Which are in a high fee categories and it's important not to just think of western as being a little low fee fixed income and western has some very important.
Alternative credit businesses, alongside benefit Street, and and like fire, another rid of say side and.
For us we have okay to a few other things when you combine that that group together and you think of.
How significant we off from an alternative asset perspective, you know with we're getting ourselves on the map in that regard and actually while expanding your question, but his Matt touched on it I mean, I think that the opportunity on Clarion into retail channel is it's massive because.
We've talked to some distributors they they they feel that they are highly concentrated with a couple of managers.
And it happens to be at Clarion also has very very good performance because they were overweight industrials and underweight retail coming you know, we think coming out of this thing, but again, that's where it is combination of having a broader line up with a real diverse.
Distribution base is going to bring a lot of strength and so we think that that's that higher fee products has just tremendous opportunity.
Taking our retail channel.
Great. Thank you for all of each other.
Your next question comes on line of Brian, but down from Deutsche Bank. Your line is now open.
Great. Thanks, Good morning folks trying to clarify a couple of things that.
And they've got some of the gentleness first of all in the core expenses.
I think that's implying 2.1 billion for Franklin stands alone and 2020, if you can just.
If you can tell me, if that's right or not and then I think Matt you said.
Earlier, you talked about the retention.
Packages being much less expensive than initially thought.
Just can you clarify that was I think you said from 350 million expectations cancer around.
100 million and if there was there now concluded and is that still us I think initially you thought it was a four to seven year vesting schedule.
Just to clarify those fronts.
Okay. That's a different matter you were talking about the Brian So the the retention mechanisms in place not to not connected with the 200 million I mentioned most of it because the 200 million I mentioned, a moment ago with is the cost of achieving the $300 million in savings so that.
That's the cost of the basically the cost of the head count reductions the termination payment severance payments and and.
And other costs related to the downsize either the company.
That's what that is the piece youre talking about the share grants that were rewarded the time to transaction. They remain the same number of shares the only thing that's changes to share prices come down a bit since.
Since.
We announced the transaction, we will very likely hedge that position.
We have to discussion with our board made from this year and we talk about capital management. So.
That that's the two different things to be care about the terms will be a 2010 to 2020 cost base, yes, that's exactly right I, maybe a little bit lower than 2.1 billion.
She went on yet based on the 130.
Were 150, and then I guess just.
In terms of.
But the cost saves and then and then the <unk> the attrition expectation. So far attrition has been great. Like you said very little attrition, maybe if you could just give us some perspective on your updated thoughts on what attrition levels might be.
Thank you.
Yeah for the first year or two and then on the cost stateside.
Sounds like obviously most of it's coming from the holding company in other overlapping operation, but are you doing anything.
Structurally within the affiliates on the cost side I know that was hurt.
Do you win when like did their cost saving program or is that more of a longer term upside to the extent the affiliates want to rationalize their own internal cost, yes. So sorry, that's quite a lot of questions I apologize if I don't get them all but let's go through so the starting the last one from my memory books that way.
So the last one bust.
The as I mentioned, a moment ago to get the efficiencies we to get out of this transaction.
We we don't need the affiliates to change anything they're doing well the investment organization. So that's somewhat but having said that.
You know that that given bracken tub buttons.
Capacity to provide a various functions.
Two different policy organization is candidly with respect to a frenzy that basin is quite a bit larger and greater than like masons. It means that the investment groups of overall company has quite a bit of confidence in our ability to to help so.
Down the line you know, we property will do more with the investment organizations when.
When they're ready and when when were ready.
Right now we got to me all things going on to worry about that but that they probably will be some efficiencies in there. So that is little bit the synergy tablets. If you if you will.
That's that's last question what was your other question the other one.
On the.
Our the your conversations with gatekeepers and decisions in better so far you have updated.
On deal related attrition like make some assets person.
Yes, I mean, the deal the deal I think as Ginny mentioned earlier due to the structure of the transaction. The fact that we there's zero changes in terms of client coverage at the.
At the investment organizationally affiliate level.
It means we have sort of in much more embedded stability in terms of client coverage and clients pool. So so far the client retention has been very high and were very very focused on on that.
We we like to believe we can continue along.
Those lines so right now the client attrition that we've had its been very minimal and walk country in Asia with one of the bus.
Organizations and.
We hope it remains that way so we're more focused on revenue synergies.
Going forward.
Okay, great. Thank you.
Thank you.
There are no further questions I will turn the call back over the presenters.
Well I just want to again, thank everybody for for joining the call today and again, you know and this time, just hope everybody staying healthy and say.
So thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you participating you may now disconnect.
[music].