Q4 2020 Franklin Resources Inc Earnings Call
Please note the information presented on this conference call is preliminary.
It's made on 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 995. These forward looking statements involve a number of known and unknown risks uncertainties and other important factors that could cause actual.
Results to differ materially from any future results expressed or implied by such forward looking statements. These and other risks uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk there.
Risk factors and Mdna sections of Franklin's most recent form 10-K and 10-Q filings.
At this time all participants are in a listen only mode.
I would like to ask a question at that time. Please press star one on your telephone keypad. The confirmation code will indicate your line is in the question queue if that.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference call is being recorded at this time I would like to turn the call over to Franklin resources, President and CEO Jennie Johnson Mr. Johnson you may begin.
Hello, and thank you for joining us today to discuss Franklin Templeton fourth quarter fiscal year 2020 with.
Today I'm joined by Greg Johnson, our executive Chairman and back to Nichols, our CFO we.
We hope that everyone on this call and your loved ones are staying safe and healthy.
This year, despite the challenges presented by corporate Knights team, we made significant progress in moving.
Our business forward, including closing a legg Mason acquisition earlier than initially expected.
We focused our efforts and investments in key areas that directly supports the firm's multi year strategic plan to maximize organic growth execute on M&A opportunities and position Frank's themselves and to capitalize on industry change.
The results, we announced this morning reflect its fourth quarter and fiscal year of Franklin Templeton.
Only include two months of the newly combined organization.
In that short amount of time and under these extraordinary work from home conditions, We've made remarkable progress becoming one company all ahead of schedule.
And the strategic rationale for this powerful combination has only strengthened since we announced the acquisition back in February.
We've been able to bring together two especially complimentary platform in a way that creates a more balanced organization.
Our global presence has expanded in key growth markets around the world.
We have created all weather product offering with a greater range, especially high quality investment capabilities, all with an eye toward delivering exceptional client outcomes.
It's important to note that the company, we have become could not have been realized football together, we significantly enhanced our ability to meet the needs of clients advisors and shareholders for many years to come in quite reaction to the acquisition has been consistently positive.
Excited about this integration not just the strategic benefits, but also for the impressive group of people and leaders were bringing on board.
We're pleased to be joined by so many talented professionals from Legg Mason with a 97% acceptance rate of employment offers me Legg Mason holding company employees.
An integral part of our planning effort has been a pretty quick and productive conversations we've had with the leaders of each of the specialist investment managers for Sim.
We get certain symbol leaders, the global or regional leadership roles in different areas of the company to fully reinforced for strong alignment.
Shared focus and commitment to each other.
We're also pleased to report that our global distribution team is now in place and it's already able to cross sell investment products from both organizations across retail and institutional channels globally.
Our new [laughter] Hyatt centric distribution structure is designed to increase and accountability for regional growth and ensure quite get the most out of their relationships with us.
Our specialized investment manager also teach retain their strong institutional distribution capabilities, we have focused on preserving the independent investment autonomy of the fans, while providing them with the opportunity to benefit from Franklin Templeton global infrastructure and investments in technology.
Geez.
In one exception.
That's helpful and multi asset solutions and Qs investors have combined to form.
A couple of good investment solutions.
[laughter] ankles best in class platform brings together the powerful combination of Franklin Templeton active.
Fundamental capabilities with Qs quantitative skills to customized multi asset portfolios for clients.
The team now has more than 120 investment professionals overseeing more than 120 billion and multi asset strategies, creating a sizeable solutions business with scale to compete with the largest full service providers.
We're seeing the benefits of adding world class franchises alright.
Already strong set of investment capabilities.
We continue to believe that active management will play an increasingly important role in client portfolios and we are well positioned to capitalize on this.
On the performance from approximately half of mutual fund assets are outperforming their peers over the standard time periods, including over 100 funds raised four or five stars by Morningstar.
We also have strong institutional performance with 63% 69%.
83% and 84% of assets, beating the applicable benchmarks for the 135 and 10 year periods, respectively, most notably in fixed income and alternative.
The sales from U.S. fixed income attracted record net flows of 5.7 billion in the quarter were pleased to see strong long term net flows.
Western assets, which reached 410 billion in long term assets and 479 billion in total assets.
This level on both fronts in over a decade.
Additionally, as of coronary westra.
Western total assets under management were 12 billion higher than at the time the acquisition was about.
A strict investment performance has been outstanding.
Our fixed income pipeline across the firm's along with at least 6 billion of unfunded wins and the significant opportunity pipeline.
We recently introduced a new portfolio management team structure for the Franklin Municipal bond team to line portfolio managers with common strategies across the platform.
We believe this will further enhance investment performance rebounded this year with 85% of assets ahead of peers for the one year period contributed to positive net flows for the year.
On a combined basis across the firm or tax free fixed income you has increased to almost 85 billion.
Clearbridge J U M is close to all time highs family get 153 billion with strong investment performance and flows in several strategies.
Rois and Martin Currie strategies also have strong investment performance with essentially flat flows for the quarter.
Franklin equity group continues to achieve strong performance and attract inflows Franklin Datatech funds generated 4.4 billion in net inflows for the year more than doubling its assets under management over 18 billion combined with Franklin growth and prices rising dividends.
On the Franklin equity group now has three funds near or above 20 billion of assets under management.
In terms of global macro well performance challenges and attrition from Franklin Templeton and Brandywine global macro strategies persist.
These continued to be positioned for more challenging market conditions. These.
These strategies.
Also make up some ground on peers and the benchmark in the quarter and.
Undeniable dealt with Franklin Templeton, Western and Brandywine, we have a truly unique position an extensive capabilities across global macro strategies.
Similarly.
In global equity and Franklin Mutual series strategies continue to experience outflows, but are well positioned for a period that favre value investing.
With the addition of Clarion partners, along with benefit Street partners and Kate to advisors, the alternative asset class recorded.
<unk> consecutive quarter of net inflows and now represents 124 billion in assets wide.
Clariant is expressing strong interest with an inbound to over one day benefits.
Benefit Street partners price to do feel most of the quarter totaling 800 million and received additional commitments of approximately 300 million momentum in our alternatives business continues to build.
As investors become more and more vehicles Nostix, we're well positioned in the retail at the May segment of the market, where we are now leading franchise with 103 billion in assets compared to just 6 billion a year ago.
And our expanded yes offerings doubled over 10 billion in AIU and this year. We're also planning to expand our closed end funds capabilities.
Turning to financial highlights.
Adjusted operating income increased to 429 million, a 58% increase versus last quarter or 5% from the prior year largely reflecting the addition of two months of Legg Mason.
We're on track to realize 300 million of gross synergies with 85% run rate savings expected to be realized by the end of fiscal year 2021.
The cost to achieve these savings is expected to be approximately 200 million, which is 150 million less than originally anticipated.
We expect to realize approximately 600 million of cash tax benefits related to the various tax attributes and deductions, which carried forward in the transaction a 20% increase from our initial estimates.
Our strong balance sheet continues to provide us with tremendous flexibility to evolve our business.
Earlier this month, we completed the public offering of 750 million aggregate principal senior notes due 2030 <unk>.
Issuing at a 1.6% coupon and prefunding, our attention to call higher coupon junior subordinated notes, which are callable at par in March and September 2021.
And finally I'd like to thank all of our employees for their significant efforts to keep our business operating smoothly. During these extraordinary times and for maintaining their laser focus on our clients needs.
Now I'd like to open it up to your questions operator.
Thank you Mr. Johnson as a reminder, if he would like to ask a question. Please press Star then one on your telephone keypad again star one for questions to remove yourself from the queue press the pound key.
And our first question is going to come from the line of Ken Worthington with JP Morgan.
Hi, Good morning. Thank you for taking my question with the integration of leg well underway can you talk about the integration of the two distribution networks. Thus far I think on the last call you talked about building a more agile in regional distribution organization. So I wanted to hear any updates there and then you gave a cross selling and.
During the commentary and I was hoping you could flush out kind of how you would expect cross selling to ramp.
Given the integration and maybe what products might be most successful given what you've learned over the last couple of months. Thanks.
Yes. Thanks for the question got so first thing was a decision to more regionalized. So what does that mean, we wanted to push out more marketing and product and data analytics out to the region's historically that was done more centrally and so now there's there's a portion of it that you know completes.
Controlled by the head of that region.
And as you probably know we talked about some of the Tim said, taking on leadership roles. Adam sector. He was CEO Brandywine is now head of global distribution and Julian I, who heads.
Head of Martin Currie is now ahead of Europe for Us.
And so that is helpful and ensuring that we understand both how to integrate the global distribution with with really how each of the Sims handles their distributions was helpful. Having people who come from that perspective.
As far as you look at U.S. retail, which is a trillion dollars of our assets.
Like me, who came in with a much stronger footprint in the broker dealer warehouse channel and we were much stronger in the independent channel you know they we now have 103 billion estimate they were very top three S. A big provider I. It. So it was really looking at the capabilities between the two organizations.
Hi, good at figuring out how to do it in some cases you you said you know great people in that same covering the same channel, but one had greater penetration in that and so our distribution team is really a mix of legg.
Legg Mason and and historic Franklin Templeton people and it was you know trying to recognize kind of where those strikes or are they you know strong penetration in the insurance channel. So you know that there are we britain into like the folks we have spent.
I remember the numbers something like.
While bunker people that participated in something like 83, Webinars that we've done to teach and ensure that they are they all the sales people have knowledge of.
Each other products. So we spend a lot of time with that you saw the anecdotally in the comments. We also had another example, where we had an Israeli institution.
Well like never had any distribution in Israel and ended up winning a mandate for one of them up. So you know it takes a little bit of time, but I can tell you that we are or we feel really good about how its operating now and that found less overlap than we thought we'd find a with distribution when you really got under the covers.
Great. Thank you very much.
Yeah, just to add one thing to that which is to say on the institutional side recognizing how important the institutional distribution is a given the fact that a big portion of that makes them. The rationale for a transaction was to grow institutional business that staying largely it's exactly as its organized today at the specialized.
Investment manager level and that creates a high degree of confidence clients, the stability and continuity in that area of the business.
And actually let me add one other thing you asked the question of how do we get paid you know.
More positive flows.
As you saw we had you know things like the alternatives were actually have been positive positive flows. We think there is just huge amount of opportunity.
For Clarion and B S P and the retail channels and.
Yes, he BSP did a small acquisition of a read.
It really what they were doing was acquiring a sub salt wholesalers, who have expertise in selling alternatives to DRA channel. So we think that's a tremendous opportunity for both sorry to be a b as well as.
Feedback we've had from Wirehouses and feel that they may have a heavy concentration in the real estate managers that they have and they'd like to diversify and Clarion coming out. It is just a tremendous performance as they were overweight and things like industrials and.
And in underweight say retail Webster.
Western obviously, continuing a cross sell capabilities you know with me we have.
In the estimate side is the income fund is able to be you know penetrating more of the relationships that that Legg Mason has with advisors and sell it for me. If you think that's going to be great opportunity for income fund.
And I I do have to say that.
I think with the Templeton Global Bond you don't there.
Bracingly nervousness around.
So whether they're very much.
So that's off environment and that's it.
Brandywine and feed them perform very well in September.
And as investors you know basic it's almost an insurance policy right now any kind of big catalyst a bit surprised by this inflation surprise or escalation of U.S. tried it fetches.
And so I think you know the story, we're doing a better job of getting out their story. There I think we could at least get to see some reduction in the redemptions and again its kind of positioning that message says they yeah as an insurance.
Great. Thank you very much.
And our next question will come from the line of Patrick Davitt with Autonomous research.
Oh, Hey, good morning, all.
[laughter].
Could you give us the amount of reinvested this the distributions and in the long term flow number. So we can better compare to your public comps yeah.
Yeah.
So.
Russia, Yes, if we had $2.5 billion of reinvested distributions for the quarter that compares to 3.5 billion last quarter and as you know 3 billion.
A year ago.
No.
On their body weight. So we seem to have caused some confusion here was to call out anything that's unusual around those close we decided to get type a simplified view of flows in terms of the presentation of it. So we had clients. So we have client driven activity in client activity out.
And and given our size and breadth that business, we thought that made the most sense, but we're not trying to avoid discussing reinvested distributions with anything unusual around that we plan to discuss it picks up at year end as you know that's often elevated.
We plan to call it out at that time, but that's the number for the quarter was 2.5 billion.
3.5 billion law school through as you know 3000, a year ago.
Perfect. Thanks, and on the the fee rate guide is there any kind of money funds do you ever had wouldn't built into that.
Through that lens, how much has that started to hit and the most recent quarter and maybe any view on how it's tracking kind of into the December quarter. Yes. It's fully included in the in that projection.
Great and.
And was it an impactful in the last quarter.
No no relative to the size about about business and also given the.
Trucks for Oh arrangement with a with west than it has the largest portion about.
Money market business, we have some protection there on the margin so it's.
It's it's not a it's not a big it's not a big.
Absolutely not material to overall company operation.
Thank you.
Thank you.
And our next question will come from the line of Craig Siegenthaler with credit Suisse.
Hi, Good morning, Jenny not do you hope your boat doing well one thing I wanted to start with M&A and so just given the pickup in M&A speculation in U.S. asset management, we want to see a Franklin would consider doing another large acquisition over the next 12 months knowing.
That you're still in the process of digesting Legg Mason, which probably isn't easy on the organization.
Yeah, I think the way that we sell to that is that we are absolutely in the flow of whats going on you're right. There's a tremendous amount of activity in the industry with some interesting opportunities to.
To consider but broadly speaking I think in many ways. The evolution of the industry tubs of some of the more dramatic ideas are out there is just getting started but we are with very very focused on.
Making sure we maximize the output from the Legg Mason transaction I mean, we literally doubled the size of a company with assets under management perspective.
We every time when we have.
I have meetings internally, we we've told the on your Bakken, we realize we've got another opportunity internally.
In total either to be more efficient tool to work together to produce more revenue. So I think that that's our primary focus but but we are in the flow and these things were not shopped for M&A by any stretch if there was something tremendously compelling.
In particular on the distribution side, if there was something that helped us with distribution further to what we already have when we look at it very carefully we set a very strong balance sheet, we're not going to compromise that we have strong earnings potential we're not going to compromise that given the the options should we go to a use of cash elsewhere.
Internally, but you know, especially during times and you know we all one of its one of the companies that.
It is quite a quite actively pursuing.
Ah ideas in the industry and making sure we keep up with the with the flow change yeah.
Yeah.
Exactly that it would take to take a lot for us to want to take on something else before we thought that yes. This one but you never know I mean, it was very intentional about keeping a.
Uh huh.
No happy having dry powder.
In case something else just came up with the board probably little bit higher on any big deals, but we've also said that.
We continue to want to grow or high net worth business.
And as Matt said, if there's something that sort of distribution related.
Tends to be more on the technology side.
What we look at those and then what we see in the flooring industry because it's like the industry is changing pretty.
Pretty dramatically.
Thank you Joe.
As my follow up on flows we've seen is really strong migration into fixed income in the U.S.
And then you have a much stronger bond business now with the addition of Brandywine and Western Opera. Your flows were a little bit negative in the quarter due to global bond do you expect the bond migration to continue for the industry, even though yields are very low and then if you do think it'll continue do you think Franklin as a company can start to participate.
I just as all the pieces start working together.
Yeah I mean, this is Greg I would say that.
You really have to separate out between you know what western's doing on U.S. U.S. fixed income side, we've seen a lot of strength in areas like Muni you know, we think that's going to continue it stayed rig rates and possibly federal rates go up so I think that's very positive.
Yeah, obviously rates declined mostly over over the period. So you know any any duration and even credit worked very well and that's really why western stood out and yes. It would be a very strong quarter for flows. If you just looked at our U.S. fixed income that you know five and.
<unk> billion or so of inflows for the quarter. It just gets masked by what is happening on the global bond side, which really is you know a category.
That is very different from the traditional fixed income buyer and as Jay said earlier, you know I I look at the the categories and any spike in rate.
Any could you know any country.
Contraction in spreads and credit we saw that a little bit you know we saw that in September we may see that continuing a bit and I think that will help a global bond at the end of the day any asset category like especially global bond competes with everything else and and you know the returns when you compare you.
S equities and just straight U.S. fixed it doesn't look very attractive I think you can look pretty attractive fairly quickly. If you have any kind of move up in rates and that's really why we think this is a nice balanced because the overall portfolio.
Thank you Greg Thanks.
And our next question will come from the line up Robert Lee would they be W.
Thanks. Good morning, everyone. You got from first question Hi, Matt.
It would be kind of maybe just.
Wanted to understand the tax side and.
26% range.
You mentioned gasoline parents and kind of as we've kind of the 22 years, so that kinda give inspecting industry, we still expect 22% revenue that's the basis yours.
We used 26 is the baseline understanding that that's around there I mean, how should we think of that.
I'd use 26 is the baseline I mean the business.
Our business has changed in terms of you know we've got we've got a greater portion of our business in the U.S. higher tax rate and there are a couple of jurisdictions internationally, where the tax rates have gone up a little bit so that impacts our overall tax view, so I think I would use 26%.
With a view that.
Yeah, maybe it could be 25, but I think 26 is a is a good or a good number to put in the model for the fourth quarter was confusing Oh, good <unk> <unk>, we had a spike in in that rate or because of the reasons. We mentioned in the prepared remarks. It was just very unusual.
But it up to 36.
76 cents.
Great and maybe just going back to one of the few rate hikes.
You know the 36 to 38 fully all databases.
Are you thinking that kind of over you know it's kind of it's when he is from 2021 kind of along as for women on like kind of the.
They run rate basis, you know just the biggest 38 and change in the quarter.
Too much like that.
Hello.
Yeah, Yeah, yeah, they've done some great.
Yeah. The 36 to 38 is a is assuming a full yeah.
That's the full <unk>.
You know 12 months combination if you will we think that's a good guy based on obviously, the the very significant mix of business.
Change so we must take a fixed income business.
And much bigger institutional business close that lower fee rates versus legacy Franklin Templeton, which brings that down.
But at the same time, you know there is opportunity there in the alternative side, where the fee rates quite a bit higher and we see some interesting growth.
Oh for sure in two steps so you have a global.
Global bond being sort of a button high rate being offset by lower rate for all the fixed income business school plus institutional vessel.
That's what brings it down and then and then pressure upwards if you will.
Is the is the growth of the alternative business a week.
We hope were on the higher end of it but we think that's the that's the natural range for the year.
Okay. Thank you.
Taking my question.
Sure.
Our next question is going to come from the line of Dan Fannon with Jefferies.
Hi, Thanks, just follow up on one more question just in terms of the assumptions for your guidance.
The fee rates assume any level of performance fees and if so kind of what's the baseline also as you think about your expense guidance and the fee rate guidance you gave what does the market assumption.
Using a flat because there are some modest growth.
So we assume flat, we don't assume any market growth.
You know projections Wong too that the fees do not include performance. The average fee rate projection does not include performance fees.
We expect our performance fees to actually go up a they would stay with 10 million for this.
This call to from zero last quarter Standalone.
I see.
We stopped to.
Enjoy a larger percentage of performance fees from Clarion often April next year. So that provides an opportunity if we shut 50 50.
Performance fees with them today, whereas today, we we don't get any.
It's 50% on an 83%.
ER ownership.
In Clarion, so that's an opportunity to get more performance fee, so and in previous times last quarter was unusual we had no performance fees benefit Street, but we expect that to pick up for example, this quarter. It went from zero to 4 million, we got 6 million from.
From that like makes inside and.
It wouldn't surprise us to see that come up quite a bit.
2021.
Great and then in terms of we've known redemptions you called out 3 billion in the prepared comments, but you also want to highlight it but it was not related to the transaction. So I guess, what gives you confidence around that and then.
Just curious about other you know potential disruptions that might you might.
C or heard about coming from either just normal course of business or the acquisition.
So I actually said just on the from the Legg Mason simply Legg Mason was in positive flows in September.
You know they have a much bigger institutional business. So you have lumpier redemptions I think that's going to be more characteristic than we've seen historically, but.
You know basically haven't seen redemptions related any.
This transaction the bigger gets and it should be you know frankly, and as we said that one that we called out was a low fee sub advised relationship. There are some where you are seeing you know sovereign wealth funds in the middle east or redeeming Uh huh.
Larger numbers or you know not not for investment performance suffered transaction just because it's sort of what's going on in the market right now.
So we are optimistic.
From the standpoint of integration and how things are going with clients up but you're always going to have we still have that no issues on our performance in a couple areas like global macro obviously value the value indexes underperform.
3200 basis points year to date. So there are some people that are just ready to throw in the talent value or others working maybe tied to you know that that could switch. So those are always going to be you know to the extent there on the institutional side, a little bit more lumpy.
But as a general matter, obviously, we'd rather have no outflows 12.6 billion. Its not like were pleased about 12.6 billion of outflows, but.
When you think about it you know the 12.6 billion is is very consistent with Frac and Thompson standalone outflows from the previous quarter.
And and both last quarter and the quarter before that so the essentially attrition across the fund is has come down a lot and it's driven by exactly the same thing.
But with that said it really market driven if you think about positioning of those strategies and and yes.
The old whether point the Chinese made a few times is an important one in this regard because yeah. We do have some very important strategies under the hood here that that will do well if the market.
Starts to get more difficult again, I'd also say that out of our 11.5.
Billion of some sort.
Sort of unfunded wins that we have.
We would expect something like 5 billion also that come in in the December quarter.
Great. Thank you.
Thank you.
And our next question will come from the line of Michael suppress with Morgan Stanley.
Hey, good morning, Thanks for taking the question just on the multi asset front you guys have combined Q.S. with the Franklin Templeton multi asset solutions group to create a the standalone a multi asset solutions platform, just hoping you could talk a little bit more about the strategy. There you know what you're most excited about how you're thinking about the opportunity set and.
Then just a follow up there would be just as you look across the organization entirely you know where else could it make sense, maybe over time to think about bringing together.
Some of the investment teams from Franklin Templeton and and leg to create a similar sort of combined.
This isn't and that investment teams.
So you know in the Qs and ft at Matt.
Yeah, very much a kind of the team's got together and really.
What about it talks about it and said we can be much stronger together.
Kind of organically coming from it seems like you know today that combined organization has 120 investment professionals and 120 billion in assets, but what what I think.
Why it makes sense for them to come to that yet it's too as you know with an institutional kind of quantity orders are they how do they have a strong track record in things like liability driven investment active risk mitigation works on the Franklin side, while there was what capability was much more club revenue sort of active managers are active out.
And Ah.
<unk>.
When they it and they have their own outside.
Yes.
Bringing it all together you really bring in but this hybrid of kind of watch and an active and you think about the way the world going whether its models in retail fuel outcome oriented model and it is.
The retail channel or risk overlay of a separately managed accounts.
Quite for looking for being able to have a conversation with like an oh CIO type of conversation as they're trying to think through you know how to build their portfolios has positioned the portfolio and this just gives a tremendous capability around.
Around that and we think that that's necessarily the feature.
Yes.
Yeah, I would just add I mean, I think it it also from a client service and institutional accounts, having that capability and just the value added side of you know the.
The you to looking at a risk overlays and an L.D. eyes opening up new channels like insurance it for us It just increases the toolbox that we can offer.
The clients and hopefully deepen the relationships and.
I also think it's examples. One example of scale you know where you have a large organization, it's bringing all that expertise into one and then hopefully you know leveraging that with clients. We think that's very exciting.
And just to answer your other part of the question about do we see opportunities to bring other groups you Gotta. We're we're now focused on working products because that is not part of this deal was not act.
You know you talked to our.
The I O a global fixed income and.
Western and they have different views on for the timing on whether or not we'll see inflation or interest rate rise on the long end is that that.
No on the curve and that wasn't all weather product line up that ability to have different products for different outcomes and we think that's very healthy art distribution team has been selling equities, where you know are usually two different managers compete in the same category.
They you have to have the best distribution needs that they have to be able to earn wasn't quite what the board and either live or up one option for decide that you're going to answer the R. P with different options in the same category, we're very comfortable with that on the equity side I can say that now because it added that capability on the fixed income side.
Great. Thank you.
Thanks, Mike.
And our next question will come from the line of Bill Katz with Citigroup.
Okay. Thanks, very much for taking the other question. So I guess I'm not sure Jenny myself I'm just coming back to your fiscal 21 expense guidance was 3.7 billion, what kind of sort of GE and a assumptions are you playing well plugging into that number just trying to get a sense.
Oh, what you're thinking about in terms of normal around travel entertainment sort of things that are probably depressed given the COVID-19 backdrop.
Good for you anyway.
But that's a bad [laughter], Hey, Phil Hope.
I'd focus on is doing well that your v. the so.
So I would say that we built in a sense of again, maybe this is sort of optimistic from my perspective, but we're building a sense of normalization or in you know beginning say that that in March next year.
But weve also built and you know more in terms of advertising promotion diesel so things that you'd expect us to do is where as we agree that is we've been working on distribution client franchise.
So you know out DNA, we have forecasted for about 485 million for the year, which is a healthy number and and you know allows us to continue to invest in a number of important things and does allow for travel.
To go back to some form of normality author.
After the first.
Annualized core connection.
Great. That's helpful and just as a follow up I know she started to repurchase some stock in the quarter. So how do you counter balance sort of reinvesting back into the business versus the return of cash to investors versus your commentary that was just the beginning stages of an M&A evolution.
Yes. So you can see you know when you look at our balance sheet, but we.
You know loss last quarter, we ended at a <unk> 0.2 also <unk> billion on the cash investments. We now have 5.1 billion cash investments, it's still quite healthy underpinning to give us confidence to to use Oh income no income already with just two months of like Mason in there.
Yeah pretty significant the a in pumps.
So I think what we planned to do at a minimum with respect to share repurchases and make sure that we offset all of our share grants.
And then obviously, we were very focused on the dividend to making you know our history. There and you can expect that to continue subject to our board approving in December the Cup from Ashford policy.
And then we have 40 multiple new requests internally given the new breadth of alpha to consider a co investments see capital opportunities.
You know Oh, the other internal growth.
<unk> <unk> <unk>.
What I would say that as we reach the end.
Either a quarter or a year even.
We we then may do a decent top ups in terms of some additional share repurchases. If we don't feel pressure elsewhere. We also have a higher debt load as you no.
No and we successfully accessed the market.
Earlier this month as Jenny mentioned and we intend to use the proceeds that to refinance much more expensive notes were going to actually say about $30 million will not.
But having said that you know.
If if rates stay where they are maybe we just refinanced so notes.
Going forward and we stay at the current that load assuming that EBITDA stays about the same.
Because we want to keep our current credit profile is intact.
But if rates stay where they are if if rates get more expensive for that that box on those attractive maybe we de lever some as well without cash. So it's really a combination of those things and the end of the day, if we have capacity to buy back more shares given the current valuation what we'll do it.
Thank you.
Thank you.
Thank you. Our next question will come from the line of Alex Blostein with Goldman Sachs.
Hey, Thanks, guys just a couple of clarification at this point.
On the expense guidance can you help us with some sensitivity to you know revenue assumption. So I know you said you guys are assuming generally flat markets in your expenses guide for 21.
But if the markets were to be higher can you help us understand kind of what's the sensitivity to that 3.7, where they've got a normalized market returns yeah.
Yeah, I think the 3.7 billion given the fact, that's an adjusted number of course, the GAAP number could be higher or lower because that includes SMB, but I'd say it is an adjusted number that's a.
A disciplined number that we have some some.
Comfort in that that if the markets go up it will still be 3.7 billion.
Yes, so that that's sort of how I would describe it if the markets come down it could come down, but I don't see us going up beyond the 3.7 billion yeah.
Yeah and to now the question I guess around capital management, a given the.
The valuation in the stock currently in a free cash flow generation of the business can you help us understand the framework around making another acquisition, whether it's something small on a distribution side or kind of continuously building out the IRA channel the high net worth channel versus buying back Franklin stock at these levels.
Yeah, Yeah look I think it's a great question, because obviously that the fall for us has to be quite high given the fact that you know every dollar we're playing basketball talk is like going back 6% dividend yield. So we were we're quite focused on from a we.
We won't be doing a large stock deals based on our current multiple and dilute.
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Matt I think you're on you.
I think you said you know yourself.
Hello.
[laughter], Matt go ahead, Greg a jetty contribute.
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[noise], ladies and gentlemen standby.
Okay, No I I'm, Okay, a fix it Alex can you hear me.
Yep Okay.
Okay. So sorry, sorry about that went well we I'm sorry, I've lost track of what we were.
What we were just talking about your question about the decision on whether we buy back Oh, yes, but the high ball, yes, yes. So yeah, we have a high bar for the reasons I just mentioned on a well stocked and we're not going to do a you know a.
Last transaction using our stock unless it's for the same kind of multiple so the wed said is that in wealth management. We think it's a very good use of our cash because you know we did two small transactions. They both ended up being accretive to us in terms of the execution.
Around that give us a little bit of cost savings revenue growth. It all works out quite well, so im well that'd be much smaller transactions that we used to continue to grow to growth fiduciary Trust.
It's on the alternative asset side that we have to think you know there there are some interesting opportunities out there and that would be where we would use out of cash and stock. So.
That's got described already great. Thank you.
Thank you.
And our next question will come from the line of Chris Harris with Wells Fargo.
Thanks, So you highlighted the momentum you've been seeing in alternatives.
But there are some concerns about real estate as an asset class generally, particularly commercial real estate.
So how's clarion position to deal with the downturn, we're seeing in that particular area.
The Purion is overweight industrial so that that area is done very very well yeah.
Yeah. It goes up.
Yeah, Amazon needs more storage and so and there's more demand on cloud and things and that's an area that they've focused on.
And they were really underway on the commercial real estate. So they actually performed very very well positioned right now with the performance.
Okay, and then just one quick one on the expenses I know, we've got some noise here because.
You know leg was was as revenue and profit share and frankly its more of the traditional model. So if we look at the aggregate expense base. What is what is the the addressable cost base. If you will in other words, what are these synergies being net of.
Because I know you probably shouldn't be looking at the entire expense base work more considering that.
No no I think you should I think you should look at it is that against the $3.7 billion that we've guided for 2021 I know, it's very early guidance.
But I think it's I think it's correct to think of that as.
As that's being addressable.
Okay. Thank you.
Thank you.
Our next question will come from the line of Mike carrier with Bank of America.
Good morning, Thanks for taking the question.
Q a follow up to.
And then given a lot of moving parts with expenses I'm not sure. If you have like a physical once you start the job.
Given the 25% of synergies realized.
By the end of September and then the full impact of Lake and then any color on just the timing of when we should expect that the 85% during.
Yes, so the on the 85% I'd say, we've we've made good progress. So far I think we mentioned we already achieved 25% of it by 930, we expect to achieve 50% by yeah. We said year end, but it's probably going to be more like the yes.
As of January and and then I would I would say the the the rest of it well that's still the 35 cents left we hope to get most of that by June.
But there will be some carefully managed expense reductions on the the front office side in particular that we wanted to spend more time X.
Executing upon to.
To make sure we make sure we have that continuity and stability around the group that we've discussed so I.
I think it's fair to say that we.
Again, we've got 25% end of January we get 50%.
Maybe week, 75% by the end of June and then the rest.
Up to 85% by the end of the.
The school Ah yes.
In terms of the normalized that doesn't know what I mean, I think one of the maybe it's useful to to walk through.
The revenue and expenses associated with what we bought on from Legg Mason So.
Legg Mason two months.
It was about $475 million of revenue.
If you include sales and distribution fees, you execute sales and distribution fees. Its about 415 million, so that sort of annual cost.
Course rises if you went into about 700 and so.
$700 million to $720 million or 2.85 billion on an annualized level in terms of revenue.
And the expenses you said it's bit of a noisy.
Quoted to say the least with all the acquisition rates expenses, but if you exclude the nonrecurring acquisition related expense items.
It was about just the Legg Mason two months was about 350 million inclusive of a self distribution excluding that its about 280 million.
So I think about it as being you know the if you include selling distribution. Its full 75 minus 350 equals 125 times six 750, that's a good one way of looking at it if you execute sales and distribution. Its full 15 minus two Eightys 135 times six is a 10.
So you could look at it is that we're adding to Frank.
Including that the cost saves that aren't included in those numbers because remember in the overlay.
We havent included.
The additional run rate that we expect to achieve during the yes, maybe there were that helps but do you think about that as being an addition.
On top of our I'm.
I'll talk about.
Business.
Yeah. That's helpful. And then one just clarification on the fee rate.
When I look at the quarter. It is a 38 it seems like that was a little lower than expected from like the pro Formas and then even with Franklin Standalone around 50.
And then if I think about the outlook in a 36 to 38 if that includes like another month delay. It seems like that's not much of an impact relative to the 38. So I wasn't sure. If there was just you or something else either impact this quarter.
Impacting like the run rate.
No nothing in particular, we've we've modeled it out and we think that that good God.
Okay. Thanks, a lot.
Thank you.
Thank you. Our next question will come from the line of Brian beat all.
Great. Thanks, very much good morning good.
Just one follow up most of my questions have been asked and answered, but just one follow up on the see capacity for deals if you're doing them in in Kashmir like he said.
The.
Yeah, you said it was 5.1 billion in cash and investments what do you what do you view as.
Cash available for acquisitions within that and then also additional debt capacity if you.
We should think about you know what type of cash level youd be able to do.
Yeah. It's it's probably you know out of the cash you see it's probably a billion dollars that because again, where we're quite conservative we like to.
Make sure we have to something as you know we call that supplemental liquidity and and we intend to keep that in place with with discipline to right.
Around that.
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And so.
Yeah that that's how we that's probably what if you.
If you if you're looking for an excess cash number that we would consider to be excess it if you would be that in terms of Intel.
In terms of you know other people would maybe double that number of differences that but that we would.
In terms of debt capacity.
Yep, Oh, Oh, Oh absolute intention and focus is to make sure that we maintain a current credit profile, which is a two rating as you know we just access to the debt markets in which we're very pleased with our a rating in that transaction, we intend to.
Retain that profiling and operate the company and our capital structure in a way that's consistent with with that so.
Debt capacity at that level, we probably have some capacity, we don't intend to push.
Oh.
Limits whatsoever with the rating agencies, all without that investors given what we've described to them. So we're quite folks on that the technical capacity to investment grade is very very good start for the types of debt, but we we don't intend to use that.
Okay. That's helpful. And then Jenny just if you could talk a little bit about U.S.G., I'm, obviously legs or managers had some good traction certainly at Clearbridge and author Western and also a few other affiliates.
Hi, how are you thinking about integrating that through Franklin are you thinking about centralizing that he or she process and leveraging that across the totality of platforms were leaving those the U.S.G. capabilities.
Within the within the individual managers.
So with with.
With respect to issue, we think that the framework in which you apply.
Yes, she is specific to the investment team, but the data you know we're we're.
A member savvy and and you're trying to get a lot more standardization around the data we've actually created a centralized database.
At very cheap pick our global macro team they get 14 different data feed to build their east she framework that data that goes into that.
<unk> U.S.T. database any of the investment teams are welcome views it as they brought their own framework and model.
But you know, we really are working hard with Betsy in the industry and Greg participates in the eye and you see it trying to just.
Standardize a lot be information that people look that back or not.
They're they're framework, but yet your question, we think that it is part of the fundamental part of the investment process.
Oh no that then it meant we then one more quick one yes.
Hi, Kevin.
I think this little pitch, our Franklin municipal Green bond funds. It's nice that's out year to date, which is why you see the main area because you got a great demand pretty.
Hey.
No no no that's great.
97% unemployment acceptance with was that in line with what you were thinking I guess.
And were there any.
It's again non acceptances from either P., Andrew key leaders in that 3%.
So again that was a focus on holding company a distribution, but and I think what we set out we weren't sure what percentage of let me simply I think we ended up both distribution and on the holding company, making a lot more like they simply said that he really.
See that it's a it's a combination of both groups and.
No there was no.
Just a quick one bit we yeah.
I felt like we know that and and you were not talking about a dozen people.
Okay, great. Thank you.
So generally I think oh.
Oh, sorry.
Yeah good.
I apologize I last question for the day will come from the line of Patrick David with Autonomous research.
Hi, Patrick.
Yes that was Brian just asked my question. So thanks again, okay, great well listen I think yeah, I just want to thank everybody for participating in todays call I.
Just wanted to leave you guys with one thought what we knew from the beginning is only been further crystallize as you know and that is that our two organizations are really incredibly tight in terms of strategic fit culture, and our shared focus on delivering strong investment results for our clients and we look forward to continue that.
Stay at the forefront of our industry and again, keeping that balance sheet flexibility as things evolve, but really providing unparalleled investment choice and service to our clients. So thank you everybody for participating and and be safe out there.
Thank you for participating on today's conference call. Once again, we do appreciate your participation and you may now disconnect.
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