Q4 2024 Franklin Resources Inc Earnings Call
[music].
Welcome to Franklin Resources earnings Conference call for the quarter and fiscal year ended September 32024, Hello. My name is <unk> and I will be your call operator today.
As a reminder, this conference is being recorded and at this time all participants are in a listen only mode. I would now like to turn the conference over to your host Selene, Oh, Chief Communications Officer, and head of Investor Relations for Franklin Resources, you may begin.
Selene Oh: Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary.
<unk> made on this conference call regarding Franklin Resources, Inc, which are not historical facts are forward looking statements.
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 you got from 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.
Selene Oh: So as you can muster, including in the risk factors and the MD&A sections of Franklin's. Most recent Form 10-K, 10-Q filings with that I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer. Thank you Julie Hello, everyone and thank you for joining us today to discuss Franklin Templeton sport.
Selene Oh: In fiscal year 2024 results.
On today's call I'm joined by Matt Nicholls, our CFO, and COO and Adam sector, our head of global distribution.
As presented in our fiscal year executive commentary I will comment on the evolution of our business over the past several years as well as highlights from our fourth quarter and fiscal 2024.
Selene Oh: After that Matt will review, our financial results and then we'd be happy to answer your questions.
The Investor presentation is a new format includes information that will only be presented annually.
Selene Oh: In recent years, we've expanded our business.
Shouldn't weigh adding a wide range of capabilities to help clients achieve their investment goals through a variety of market conditions and cycles.
As I've traveled the world meeting with clients and investors I've seen firsthand that they recognize and appreciate the many steps we've taken to further diversify our business and position Franklin Templeton to succeed over the long term.
Our clients view us as a trusted partner with your ability to fulfill their comprehensive investment needs across public and private markets and investment vehicles with their choice.
Selene Oh: They appreciate our ability to customize their capabilities and meet their needs through innovative delivery and solutions.
Franklin Templeton Leverages, the talent of our multiple specialist investment managers to deliver expertise to our clients across a wide range of investment styles and asset classes.
Selene Oh: Our investment teams benefit from Franklin Templeton deep resources and scale with centralized investments in distribution and marketing data and innovative technologies like blockchain and artificial intelligence.
Furthermore, the diversity of our model benefits or corporate shareholders with no single specialist investment manager at our firm contributing more than 10% of adjusted operating revenue.
And most of our specialist investment managers are diversified within themselves as well.
Selene Oh: Most recently, we have been investing in AI blockchain and other important areas relevant to the future of the industry that will benefit our teams and clients.
Now turning to the Investor presentation, beginning on slide seven and eight it's notable how much Franklin Templeton has evolved its business over the past five years, and where we our focus going forward.
Selene Oh: Over the past five years, we have increased and accelerated the diversification of our AUM via organic growth and targeted acquisitions into higher growth areas of client demand.
Selene Oh: Since the beginning of 'twenty 19, we've completed significant acquisitions in areas of growth and to position the firm to offer more choice to more clients in more places and those acquired specialist investment managers now represent 64%.
Selene Oh: And a U N and 55% of adjusted operating revenue.
Selene Oh: In that period, our institutional AUM increased from 25% to 45% and we are now well balanced between institutional and wealth management.
Selene Oh: We have made great strides across a number of key focus areas for the company.
Turning to slide nine and starting with investment management.
Selene Oh: We have now a full spectrum of investment capabilities to help clients meet their varied financial goals.
Selene Oh: This year the acquisition of Putnam investments added strong capabilities, such as target date and stable value, which are important in the retirement and insurance channels.
Selene Oh: And we demonstrated the power of Franklin Templeton's distribution, which led to a $11 billion in net flows into Putnam products.
Selene Oh: This is an example of combining outperforming investment performance with powerful distribution resources.
Our focus is on continuing to improve investment performance as well optimizing the range of our investment product offerings.
Selene Oh: We're also in a position to leverage the breadth of our investment capabilities across both public and private markets and we see opportunity as these markets begin to converge for example, Franklin has been putting late stage venture into mutual funds for over a decade and Franklin's global allocation.
Selene Oh: When fund includes private credit strategies.
Selene Oh: As you can leading manager of alternative assets with approximately 250 billion and EUR.
Selene Oh: The upper key capabilities, including alternative credit.
Selene Oh: Secondary private equity real estate hedge funds adventure.
Selene Oh: Since fiscal year 2019 alternative asset AUM has increased by over five times through three sizable acquisitions and organic growth.
Selene Oh: I'm proud to note that since becoming part of Franklin Templeton each alternative specialist investment manager has expanded and diversified across strategies vehicles and clients.
Specifically on the role of alternatives in wealth management.
Wealth management channel has approximately only 5% of AUM allocated towards alternatives, but depending on the clients' liquidity needs. It can be much higher institutions. For example had been allocating up to 40% for years.
Selene Oh: Our global distribution footprint Investor Education platform and dedicated alternatives specialist team combined with our breadth of investment capabilities make us a relevant force in the wealth management channel.
Selene Oh: This year, we're pleased that we establish the alternatives by Franklin Templeton brand in the wealth management channel in the U S and look to broaden it in EMEA and Asia.
Selene Oh: Over the next five years, our goal is to fund raise at least 100 billion across private markets and look to add additional capabilities for instance in infrastructure as well as to globalize certain strategies.
Selene Oh: Next turning to distribution, we were one of the most comprehensive global asset managers with clients in over 150 countries.
Selene Oh: Offering clients a diverse range of investment vehicles is not just beneficial but essential in today's marketplace, where last five years, we've seen meaningful growth in retail SMA and both Etfs and custom indexing AUM has grown by over three times in particular.
Selene Oh: Fiscal year growth accelerated in retail SMA, ETF, and Kansas, AUN, each reaching record highs.
Selene Oh: Our ETF business grew by 89% in the year with positive net flows for the 12th consecutive quarter with net flows at or exceeding 1 billion for eight consecutive quarters and in fact in the last two quarters that number has been over 3 billion each.
Selene Oh: Total asset stand at 31 billion across active and index strategies for just zero a few years ago.
Selene Oh: Canvas AUM increased by 94% from the prior year to $10 billion and has generated positive net inflows in every quarter since its acquisition in 2021, we.
Selene Oh: We increased the number of partner firms by almost 70% from one year ago.
Selene Oh: Over the next five years, we're looking to scale E. T. S. H O M by three times and Kansas assets by five times.
Selene Oh: Today, we are a leading provider of retail SMA is with 145 billion in assets, an increase of 29% from the prior year.
Selene Oh: Going forward, we are focused on expanding our product offerings. For example, we launched a retail SMA variant of our flagship Franklin income fund and launched tax managed options strategies utilizing canvas.
Selene Oh: Investment solutions, a U M almost doubled in size to 89 billion from the prior year with the addition of tier two and Putnam as target date funds and two organic growth.
Selene Oh: Franklin Templeton investment solutions will remain a critical component of our growth strategy by leveraging our capabilities across public and private asset classes to deliver customized solutions to meet our clients' demands.
Selene Oh: The next five years, we aim to more than double our solutions platform.
Selene Oh: Additionally, our breadth and depth of investment capabilities engagement capital resources and value added services positions us well as a valuable partner. This year, we've been delighted to establish new multibillion dollar relationships with clients in each of our regions and.
Selene Oh: Chick partnerships will remain an important aspect of growth in the future.
Selene Oh: Turning to slide 10.
Selene Oh: Two other important growth areas, our private wealth management and digital and technology.
Selene Oh: And the private wealth management segment Fiduciary Trust International has a clear opportunity due to the unprecedented intergenerational transfer of wealth.
Selene Oh: This will be the largest wealth transfer in history with 84 trillion set the path from older generations to their errors through 'twenty 45.
Selene Oh: 53 trillion will transfer from households in the baby Boomer generation.
Selene Oh: Fiduciary is a fully integrated wealth platform with investment Advisory Trust and estate planning tax planning and custody services and has an impressive client retention rate of approximately 98%.
Selene Oh: Since 2019 fiduciary double to take.
Reaching an all time highest 39 billion and had positive net flows annually for the past three years.
Selene Oh: Going forward, we look to double the size of this business through organic investments and targeted acquisitions. This represents both a standalone opportunity by owning a wealth manager and also a broader distribution opportunity.
Selene Oh: Investing in innovation and cutting edge technologies continues to be of strategic importance for the firm.
Selene Oh: We have made important investments in value added services, including technology and digital well in order to be on the forefront of innovation in areas increasingly important to our clients and operations.
Selene Oh: In addition, as early adopters of artificial intelligence Franklin Templeton is working to responsibly employee AI to boost productivity and deliver greater value to clients and make our investment processes and operations more efficient.
Selene Oh: A great example is our partnership with Microsoft that was announced last quarter. We are working collaboratively to build an advanced financial AI platform that will help embed artificial intelligence into our sales and marketing processes, creating more personalized support for our clients.
Selene Oh: And the digital asset space, we continue to look for new ways to leverage blockchain technology. For example, when we launched the first U S registered fun to use a public blockchain to process transactions and record share ownership in 2021, and this year, we launched Franklin Bitcoin Etfs.
Selene Oh: And frankly, the cerium Etfs, making it easier for clients to access investment opportunities with our digital asset solutions looking forward. There are many more exciting advancements that are underway in this space.
Selene Oh: Matt will cover capital management operational integration and expense management shortly.
Selene Oh: Turning to the market performance during our fiscal year global equities rose by more than 30%, while global bonds increased by nearly 12%.
Selene Oh: Throughout much of the year large caps outperformed small caps driven by top technology and communication services firm with growth stocks exceeding value stocks.
Selene Oh: Investor enthusiasm around artificial intelligence was the major theme over the past 12 months moderating inflation and declining bond yields helped the magnificent seven stocks advanced 53%, while the broader technology sector notched a 52% gain.
Selene Oh: And our first quarter. There was also a corresponding shift in equity market leadership beyond the magnificent seven.
Selene Oh: That's only two of the seven stocks in this group have meaningfully outperformed the S&P year to date through October.
Selene Oh: Broader market participation is encouraging for active managers.
Selene Oh: Eight of the 11 sectors outpaced the broader S&P 500 during the quarter, which is two sectors technology and communication services have outperformed over part of nine months. Both previous winners were laggards in the most recent quarter.
Selene Oh: Investors focus has shifted from inflation to concerns about the durability of the global economic expansion and by extension the outlook for corporate profits.
Selene Oh: While the salaries or his decision to cut interest rates by 50 basis points in mid September makes a soft landing in 2025 more likely.
Selene Oh: The markets push for deeper monetary easing may elevate volatility in the coming quarters.
Selene Oh: The market expects the fed to cut rates again this week and this seems like a reasonable assumption recent fed speak signals greater comfort with the latest progress on disinflation.
Selene Oh: However, uncertainty on the outlook for the labor market as it is difficult to disentangle, the temporary impact of strike actions and hurricanes from the most recent week jobs data.
Selene Oh: As the fed's rate cutting cycle proceeds we expect traditional fixed income sectors to take their place as a primary source for yield as cash begins to look less attractive.
Selene Oh: While spreads are tight at their current levels, we are not anticipating a sharp deceleration in activity and our fixed income managers continue to find opportunities and attractive yields.
Selene Oh: Meanwhile, in private markets, our specialist investment managers continued to see strong investment opportunities in alternative credit secondary private equity and select real estate segments and demand for differentiated expertise is that a premium as these markets continue to gain interest for example, we're excited by opportunities and altered.
Selene Oh: A credit, particularly in real estate debt, where BSP manages $8 billion and given the need for liquidity in private equity, we see strong interest in secondary private equity at Lexington.
Selene Oh: Turning now to fiscal 'twenty 'twenty four result in terms of investment performance Mutual fund investment performance improved in the one three and 10 year periods from the prior year composite investment performance improved in the five and 10 year and stayed essentially flat in the three year period from the.
Selene Oh: Prior year.
Selene Oh: And flows long term net outflows were $32 6 billion for the fiscal year and reinvested distributions were $20 7 billion.
Selene Oh: Excluding western asset management long term net inflows were 16 billion compared to net outflows of $5 2 billion in the prior year.
Selene Oh: We saw 25% increase in long term inflows from the prior year to 319 billion. We're pleased to see that gross sales have improved across all asset classes in public markets as well as across every region and in both retail and institutional distribution channels from a re.
Selene Oh: Regional perspective, our international business continues to grow and we have seen continued momentum with positive long term net flows for the year and a U M. Surpassing 500 billion gross sales in the U S increased by 31% EMEA up by 23% APAC by 19% in the Americas.
Selene Oh: By 24%.
Selene Oh: And for my client type perspective, retail sales improved 27% and institutional sales increased by 21%.
Selene Oh: From an asset class perspective, turning to alternatives on slide 12 in fiscal year 'twenty 'twenty four private markets fund raised $14 8 billion in line with our targets.
Selene Oh: Lexington closed its flagship fund with $22 7 billion in total capital commitments raised primarily in 'twenty, two and 23 ranking among the largest funds raised to date in the global secondary private equity market and with approximately 20% raised it in the wealth channel.
Selene Oh: Benefit Street partners closed its flagship private credit fund and its special situations fund with $4 7 billion and $850 million in total capital commitments raised respectively with each fund exceeding targets.
Selene Oh: Clarion partners AUM remained stable despite weakness in the real estate sector in the year. We believe that there is increasing sentiment that worst is behind US for example, the OTC benchmark turned positive and there is the beginning of a pickup in transaction volume strengthening confidence for.
Selene Oh: For transactions in fiscal year 2025.
Selene Oh: Going forward, we are well positioned in the sector with minimal office exposure of 7% and well performing products and strong sectors, such as industrial multifamily and life science.
Selene Oh: In addition, we're excited about new areas of growth that include European Logistics fund and investing in new alternative strategies in the U S, including self storage student housing medical and senior living property types.
Speaker Change: Turning to public markets multi asset net flows were <unk> 8 billion driven by positive net flows in the Franklin income fund canvas and Franklin Templeton investment solutions and.
Selene Oh: On Slide 18, you can see equity sales improved each quarter. This year and grew 53% year over year, excluding reinvested distributions. In addition, fixed income long term inflows increased year over year by 26%.
Selene Oh: Now turning to western asset as you are aware, we launched an internal investigation focusing on certain pass trade allocation of treasury derivatives by former co CIO, Ken Leech in select Western asset managed strategies.
Selene Oh: The Doj FCC and CFT C are conducting parallel investigations and those investigations are ongoing.
Selene Oh: On August 21st we announced that Ken Leech was on a leave of absence.
Selene Oh: Following receipt of a wells notice from the SEC.
Selene Oh: We take this matter extremely seriously and are fully cooperating with the government.
Selene Oh: Since the announcement of the investigations.
Selene Oh: Western asset has experienced significantly higher net outflows of 37 billion in the fourth quarter and 49 billion for the fiscal year.
Selene Oh: However, today the western team of more than 100 highly experienced investment professionals led by Mike Buchanan, who was promoted to sole CIO from co CIO continues to manage approximately 330 billion in AUM across 88 marketed.
Selene Oh: Strategies.
Selene Oh: The team continues to focus on investment performance and providing leading client service.
Selene Oh: Mike has been with western nearly two decades and has over three decades of industry experience.
Selene Oh: Since the beginning of the investigations westerns assets trading policies have been reviewed by third party experts.
Selene Oh: Per this review despite being aligned with industry standards Western has further enhanced its trading policies and practices. In addition, Franklin resources is working with Western's management team to explore ways to assist western asset including adjustments to.
Selene Oh: Make arrangements operational and revenue synergies.
Selene Oh: This may entail changes that are similar to what we have successfully implemented with our other public market specialist investment managers, while maintaining investment process independents.
Selene Oh: And I'm sure that you understand with an ongoing investigation, we are unable to provide any further information or dress questions on this matter at this time.
Selene Oh: Aside from Western asset, we think it's important to highlight the breadth of our fixed income investment management expertise, including Franklin Templeton fixed income.
Selene Oh: Randy one global and Templeton global macro which have non correlated investment philosophies.
Selene Oh: As of September 30th these specialists investment teams managed an aggregate 266 billion in fixed income assets and generated positive net flows of $6 4 billion in fiscal year <unk>.
Selene Oh: Furthermore, Franklin Templeton fixed income comprised the largest component of our won but not yet funded pipeline.
Selene Oh: Speaking of the pipeline this quarter, our institutional pipeline of won but unfunded mandates was $15 8 billion, while new wins replenished our fundings. The 2 billion decrease from the prior quarter included a change in value and a client mandate at western and the pipeline remains diversified.
Selene Oh: By asset class and across our specialist investment managers.
Selene Oh: Finally, this year, we acquired Putnam investments, which has exceeded our expectations since closing on January 1st Putnam's AUM has grown 21% to 180 billion Putnam continues to deliver a strong track record of investment performance. The transaction also enhanced our presence in.
Selene Oh: Retirement and insurance markets with a AUM in these channels at 645 billion.
Selene Oh: Let me wrap up by saying, we take pride in the efforts we've made over the past few years to further grow and diversify our business. We have navigated challenges created new opportunities and upheld the high standards that have defined us for over 75 years.
Selene Oh: Finally, I would like to thank our employees around the world for their unwavering dedication and commitment to always putting our clients first it's their hard work that is the driving force behind our success now.
Selene Oh: Now I'd like to turn the call over to our CFO and COO, Matt Nicholls, who will review our financial results for the fiscal quarter and year, Matt over to you.
Matt Nicholls: Thank you Jenny.
Matt Nicholls: Turning to financial results for the fourth quarter.
Matt Nicholls: Ending AUM reached 1.68 trillion, reflecting an increase of 2% from the prior quarter and average AUR was 1.67 trillion also a 2% increase from the prior quarter.
Selene Oh: Adjusted operating revenues increased by 4% to $1 7 billion from the prior quarter due to higher average AUM and higher adjusted performance fees.
Selene Oh: Adjusted performance space was $72 million compared to $57 million in the prior quarter.
Selene Oh: This quarters adjusted effective fee rate, which excludes performance fees stayed relatively flat at 37.4 basis points compared to 37 five basis points in the prior quarter.
Selene Oh: Our adjusted operating expenses were $1 3 billion.
Selene Oh: An increase of 3% from the prior quarter due to higher incentive compensation advertising and professional fees.
Selene Oh: This quarter, we realized $38 million of putting related cost savings, representing 6 million of incremental cost savings from the prior quarter.
Selene Oh: As a result, adjusted operating income increased 6% from the prior quarter to $452 million and adjusted operating margin increased to 26, 3% from 25, 7%.
Selene Oh: Fourth quarter, adjusted net income and adjusted diluted earnings per share decreased by 3% and 2% from the prior quarter to $315 million.59, respectively, primarily due to a higher tax rate from discrete tax expenses in the current quarter and foreign exchange.
Selene Oh: Change losses, partially offset by higher operating income.
Selene Oh: As of September 30th we impaired the intangible asset related to certain mutual fund contracts managed by western asset.
Selene Oh: And recognized a 389.2 million non cash charge.
Selene Oh: GAAP results, primarily due to the decreased.
Selene Oh: Resulting from net client outflows and lower discounted future cash flows generated from these management contracts.
Selene Oh: Turning to fiscal year 'twenty 'twenty four.
Selene Oh: Ending AUM was 1.68 trillion, reflecting an increase of 22% from the prior year, while average AUM increased.
Selene Oh: 12% to 1.57 trillion.
Selene Oh: Our fiscal year reflects nine months of Putnam financials.
Selene Oh: Adjusted operating revenues of 6.6 billion increased by 8% from the prior year, primarily due to Putnam and higher average AUM, partially offset by lower performance fees.
Selene Oh: Adjusted performance fees of 293 million decreased from $383 million in the prior year.
Selene Oh: The adjusted effective fee rate, which excludes performance fees was 38.3 basis points compared to 39.5 basis points in the prior year.
Selene Oh: Drivers of the decrease included the impact of 0.3 basis points from the transaction related investment management fees, and 0.2 basis points catch up fees and secondary private equity last year.
Selene Oh: And 0.1 basis points from the addition of Putnam this year.
Selene Oh: Our adjusted operating expenses were $4 9 billion and.
Selene Oh: An increase of 13% from the prior year, primarily due to nine months of Putnam higher incentive compensation double rent related to the consolidation of our New York City office space and higher legal fees, primarily due to the western asset matter.
Selene Oh: In addition.
Selene Oh: As anticipated over $150 million of annual run rate cost saves related to Putnam were achieved by year end.
Selene Oh: This led to fiscal year adjusted operating income of $1 7 billion, a decrease of 6% from the prior year.
Selene Oh: Adjusted operating margin was 26, 1% compared to 29.9% in the prior year.
Selene Oh: Compared to the prior fiscal year adjusted net income declined by 4% to $1 3 billion and adjusted diluted earnings per share was $2 39 sets a decline of 8%.
Selene Oh: The decreases were primarily due to the decline in operating income and a higher tax rate, partially offset by higher investment income.
Selene Oh: From a capital management perspective, we returned $946 million to shareholders through dividends and share repurchases funded acquisitions and pay down of $250 million senior note in July.
Selene Oh: Stepping back as we look over the last five years, we've delivered a predictable capital management policy and prioritize returning capital to our shareholders totaling over $4 billion.
Selene Oh: Including 3 billion in dividends and $1 1 billion in share repurchases.
Selene Oh: Our dividend, which has increased every year since 1981 has grown at a compound annual growth rate of approximately 4%.
Selene Oh: Our balance sheet provides flexibility to invest in the growth of our business organically and inorganically.
Selene Oh: We have co investments in C capital of $2 4 billion to developed and scale new products.
Selene Oh: Additionally, the acquisitions, we've made since 2019 represent 55% of our just that operating revenue and meaningfully contribute to our operating cash flow.
Selene Oh: Importantly, these investments provide new sources of growth and relevance to our clients.
Selene Oh: In addition, while continuing to invest in long term growth initiatives. We also continue to strengthen the foundation of our business through disciplined expense management and operational efficiencies, especially given the ongoing transformation of our industry.
Selene Oh: Over the last five years, we've created operational efficiencies both at the enterprise level as well as broader efforts to enhance synergies across our specialist investment managers. For example, we've outsourced our fund administration and our global transfer agency.
Selene Oh: In addition, we have achieved targeted cost savings ahead of schedule as seen in our acquisitions of Legg Mason at Putnam.
Selene Oh: Looking ahead, we plan to further simplify our firm wide operations, including the previously announced unification of our investment management technology on a single platform across our public market specialist investment managers.
Selene Oh: Before I turn to guidance a brief update on preliminary October flows.
Selene Oh: As we will announce next week and I'm up the a M reporting Franklin expects to report slight long term net outflows for October excluding western asset.
Selene Oh: Western's long term net outflows in October are expected to be $18 billion.
Selene Oh: For Western this follows long term net outflows of $7 7 billion in August and 27.9 billion in September.
Selene Oh: As previously announced excluding Western Franklin had $5 7 billion in long term net inflows in the fourth quarter.
Selene Oh: Turning to guidance for the next fiscal quarter.
Selene Oh: Guidance assumes flat markets is based on our best estimates as of today and does not include the impact of any possible future developments from the west and investigations.
Selene Oh: We expect how F ought to be in the mid 37 basis point area, but slightly higher than this past quarter, excluding adjusted performance fees.
Selene Oh: We expect compensation and benefits to be $860 million. This assumes $50 million of performance fees.
Selene Oh: Please also note that this includes $45 million annual accelerated deferred compensation.
Selene Oh: The prior year quarter included $41 million of such accelerated deferred compensation.
Selene Oh: So I S. T. We're guiding to 155 to 160 million inclusive of 4 million higher spend for Gen AI and our investment management platform.
Selene Oh: We expect occupancy to be flat between 78, and $80 million inclusive of double rent related to our transition to a more efficient and unified space in New York City.
Selene Oh: As previously explained the double rent will begin to phase out in the second half of fiscal year 2025.
Selene Oh: G&A expense is expected to be in the 180 million area and includes slightly higher legal fees.
Selene Oh: In terms of our GAAP tax rate, we expect fiscal 'twenty to 'twenty five to stay in the same range of 24% to 26%, but note that our first quarter typically has a higher tax rate due to discrete items related to deferred compensation vesting.
Selene Oh: And now we would like to open the call for questions operator.
Selene Oh: Thank you.
Speaker Change: I ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue.
Speaker Change: If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Speaker Change: We ask that you limit yourself to one question to allow for additional participants on the call. This morning.
Speaker Change: Okay.
Selene Oh: Yeah.
Selene Oh: Okay.
Speaker Change: And our first question.
Speaker Change: Uh huh.
Speaker Change: Our first question comes from the line of Bill Katz with TD Cowen.
Selene Oh: Please proceed with your question.
Bill Katz: Okay. Thank you very much for taking the question. This morning I appreciate that you can't speak, particularly to Wempco I certainly understand that I.
Selene Oh: I guess, what I'm intrigued by your commentary potentially revamping some of the economic relationships with the franchise.
Selene Oh: Just wondering if you could potentially flesh that out a little bit and then separately I'm wondering is whether or not the wempco overhang is affecting gross sales than any other segments. It's not clear from what you're sharing but I'm sort of wondering at the margin. What are you hearing on the institutional side in particular given.
Selene Oh: Given the ongoing investigation. Thank you.
Speaker Change: Great. Thanks, Phil.
Speaker Change: You know so so so far the outflows even within western I think its like 72%.
Speaker Change: <unk> are focused on essentially core core plus and macro op. So even within western it's pretty pretty focused on on those strategies there at 90 billion today.
Speaker Change: <unk> received as well as notice you know western's had outflows of $53 6 billion. So we.
Speaker Change: There are some instances at western wear clients, who were in other strategies just didn't.
Speaker Change: We're concerned about the headline risk and did actually redeem them, but I think it's been fairly.
Speaker Change: It's fairly controlled there and we have not seen it.
Speaker Change: Really flow over into the other Franklin strategies, it's definitely part of the conversations but it hasn't had.
Speaker Change: A tremendous impact on the other strategies.
Speaker Change: But I'll I'll have you kind of answered the question around how we're approaching them thinking about.
Speaker Change: The economic relationship some idea you know.
Selene Oh: Belt that the.
Selene Oh: <unk> relationship with Western is pretty unique I always say you can't do you can't do a hostile acquisitions in the asset management business, because it's all about the people and their investment process and western was fairly unique for us in this five year autonomous arrangement that we had but obviously in light of current.
Selene Oh: <unk>, we're just having a conversation around how we should think about that our model in general is we always apply common sense. It's a slightly different there's no exact one size fits all even today Templeton mutual series, which were acquired in in the nineties.
Selene Oh: Slightly different models with US you know for example, one insists on the trading up.
So their traders to be on their desk, either us or our global trading platform. So we always try to have a practical approach, but Matt you want a you want to take kind of the specific conversations around it.
Matt Nicholls: Yeah, Yeah. Okay. Thank you. Thanks, Tony Thanks, Bill So maybe I I think I think your question gets to a couple of things first of all economic arrangements, but also economics related to the situation the western separate aster perspective, I'll, just start by saying that the.
See the press tends to report that Westwood asset is our largest specialist investment manager, but that's just by a U M. I think you know that they'll along with everybody else that covers us.
Selene Oh: But I don't see a much more important measure are the key measure of course is financial contribution of the business and so I think it's worth going through this little a bit and explain that for example in terms of adjusted operating revenue on a run rate basis, Western is probably something like fifth or sixth.
Selene Oh: The largest specialists investment manager and and on the impact so far.
Selene Oh: If you run rate the $53 billion of outflows that western has experienced since August western annualized revenues would be expected to be declining by about 20%. So far that's just the western revenue, which equates to about 2% decline.
Selene Oh: At the Franklin resources level, obviously operating income impact will initially be higher this is to your point on margin will initially be higher because expenses are not able to be reduced at the same rate as revenue, but importantly, a franklin resources, we have areas that can help achieve some of the offsets over time, such as as we've talked about on this.
Selene Oh: The addition of Putnam growth in alternative assets Etfs S M as canvas, our large equities business, while the fixed income Sims international and so on in addition to the expense discipline at all the levers that we have but look this doesn't mean for a second this is not important to us it's very important to.
Selene Oh: Us.
Selene Oh: Western has hundreds of hardworking long term employees with families are strong investment team with a long term track record as Janice mentioned together with producing good investment outcomes for clients. It's a team approach and I'm the CIO, Mike Buchanan, they're very focused on investment performance and client.
Selene Oh: Service.
Selene Oh: Our North Star. If you will has always been to achieve sustainable growth across our whole company and Westin is important to this and this has certainly been a dent in that progress as you can see from the results where they were highlighting today.
Selene Oh: But as Jenny said this is exactly why we're working with western management, providing assistance where possible in particular, keeping the investment team and a good place well management walks through that so in summary, yes.
Selene Oh: Economic the economic arrangement that we have with western over these five years, that's going to have to be adjusted to accommodate a decline in the revenue and the operating income and that's what we're working through right now.
Selene Oh: And Bill I would add one thing you asked about institutional flows in general.
Selene Oh: We have really worked hard over the last few years to build better relationships with institutions around the globe.
Selene Oh: If you take a look at where we were last year ex Western last fiscal year, we raised $2 $2 billion in the institutional channel. This year that number more than doubled to 5.6. So we're feeling actually quite positive about the trajectory of that institutional business.
Speaker Change: Thank you.
Selene Oh: Thank you.
Speaker Change: Our next question comes from the line of Benjamin <unk> with Barclays. Please proceed with your question.
Hi, good morning, and thank you for taking the question.
Benjamin: I wanted to ask about one of your five year targets. The 100 billion of fundraising across private markets could you unpack that a little bit just how much do you expect to come from say cross selling across the the investment managers you've acquired in the last several years, how much is predicated on future M&A. How much do you think will come from the the retail versus wealth channel any any more details around that target would be appreciated. Thank you.
Selene Oh: Sure.
Speaker Change: So let me start the focus on that is is actually from our existing managers, so and just to give you a perspective on the growth that we've had since we acquired BSP they've doubled in size Clariant is up just under 40% Lexington I think we've only owned them for about two years and they're up.
Selene Oh: A little under 30% so yeah.
Selene Oh: We've been successful in growing those and our projections are of the 100 billion comes from really looking at what those opportunities are.
Selene Oh: Just to give you a little guidance for 'twenty fives, So last year and 24, we gave a range of 10 to 15 billion in sales and achieved $14 eight.
Selene Oh: This year, we're saying we think it'll be between 13 and 20 billion in gross sales and that comes from real estate secondaries private credit and venture. So all of those are kind of bottoms up built in that and the reason the ranges. It's fairly large is it will really depend on.
Selene Oh: You know, whether Lexington is able to do a first close of their flagship you know once once they decide on the timing of their Lexington flagship, but 11 fund.
Selene Oh: So far fun time, they've been able to deploy it deploy it faster and higher discounts at historical levels.
Selene Oh: So we're hopeful that there'll be in the market and do a first close but that's obviously a big portion of that number it also.
Selene Oh: It depends on you know real estate coming back in favor. We think the signs are all showing that the the the winter of real estate, maybe over that we should see things picking back up next step.
Selene Oh: Next calendar year.
Selene Oh: And we have some I think a really diverse set of offerings that are coming out in the market. So not only does lexington up their flagship funds, but we think continuation vehicles are going to be more and more important.
Selene Oh: Area, we're launching a perpetual vehicle in the in the wealth channel, which is something very new we think that opens up a lot of opportunities they've obviously been doing their co invest in middle market. So Lexington is going to have a lot more offerings in market. We're also launching our real estate debt fund.
Selene Oh: If you look at private credit Theres, probably a lot of areas that people would say private credit is getting pretty tight and some of the spreads but.
Selene Oh: But it happens to be the P. S. P has a real expertise in real estate debt. They have about 10 billion or 9 billion that they managed here today and we think.
Selene Oh: With the regional banks pulling back in this area that that's going to be a really interesting opportunity. It's unclear, whether it's gonna be part of the real estate portfolio allocation or the private credit allocation.
Selene Oh: But we think that has a lot of great demand there so.
Selene Oh: If you think about just in 'twenty five that that ranges from 13 to 20 billion, we feel comfortable in the projection over the next five years to hit that $100 billion number.
Speaker Change: Alright, Thank you very much appreciate it.
Selene Oh: Hmm.
Speaker Change: Thank you and our next question.
Speaker Change: Okay. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Dan Fannon: Thanks, Good morning, Matt wanted to follow up just on the context of this year, our fiscal 2025 and just the outlook for expenses I know theres a lot of moving parts with the western dynamics, but could you talk about kind of core expense growth in either contextualized with or without western in terms of what legal or unknowns might come through to think about it.
Speaker Change: Growth in the expense base for the core business.
Speaker Change: Yeah. Good morning so.
Selene Oh: So.
Speaker Change: Look I'll say, it's super early for the Yeah, I gave guidance on the call.
Speaker Change: My prepared remarks for the call too, but if I think through the year. If you normalized for full year of Putnam.
Selene Oh: And exclude performance fees and with the same caveats I gave in my prepared remarks around the west coast situation.
Selene Oh: We would expect expect expenses to be quite similar to the last fiscal year.
Selene Oh: You know in general.
Selene Oh: We would expect revenue loss from western to be made up from other areas of growth that justifies that expense base, obviously, if we experience.
Selene Oh: You know a decline in that.
Selene Oh: In any part of our business well that'll be offset by the very careful expense management.
Selene Oh: A number of initiatives going on as we've already highlighted across our investment management platform operations certainly levels of integration all the help participate in and our ability to pull certain levers to manage.
Selene Oh: Either expected or unexpected.
Selene Oh: <unk> and revenue or increase in investments that we need to make across the across the business. So again, I'd say, just very carefully and cautiously all else remaining equal.
Speaker Change: Yeah, and and normalizing for full year of Putnam, excluding performance fees that.
Selene Oh: Plus the caveats I gave all of my prepared remarks that we would expect expenses to be substantially similar all similar to to the last fiscal year that we've just closed.
Selene Oh: And I think that's that's the best way of looking at it right now so expense expense growth remaining very much in check.
Speaker Change: Great. That's helpful, but just to clarify what would be one quarter of Putnam just the thing. So we can kind of normalize for the nine to 12 months.
Speaker Change: Kind of get to a low dollar amount.
Speaker Change: One culture Putnam expenses would be.
Speaker Change: Wait one second.
Speaker Change: Uh huh.
Speaker Change: Like a $125 million.
Selene Oh: Yeah.
Speaker Change: Great. Thank you.
Selene Oh: Thank you.
Selene Oh: Thank you.
Speaker Change: Our next question comes from the line of Michael Cyprus with Morgan Stanley. Please proceed with your question.
Michael Cyprus: Oh, Hey, good morning, Thanks for taking the question and thanks for the the new Powerpoint deck presentation disclosure there across I appreciate that just as we think about your targets and objectives over the next five years I'm just curious what that would translate into in terms of revenue operating income and EPS and in five years' time, and what sort of growth.
Selene Oh: Might that be when you sort of pull it all together and then if maybe you could just remind us how much western contributes to a AUM revenues and operating income today. Thank you.
Speaker Change: Yes, I mean, our western contribution is.
Speaker Change: Probably right now on a run rate basis around 9% eight 5% about.
Selene Oh: Adjusted operating revenues.
Selene Oh:
Selene Oh: In terms of the in terms of operating income, it's a it's a little bit more than that but as I mentioned a moment ago. It's it's it's moved to being much closer to it.
Selene Oh: So we're working through those those things as we speak as I had mentioned earlier and as Jennie touched on.
Selene Oh: In terms of about Oh got it gross.
Selene Oh: Trajectory you know what.
Selene Oh: Hoping to achieve is to get into the year.
Selene Oh: The low single digits growth on average as a business.
Selene Oh: We're obviously not there now because of some of the issues were working through on the western side, we've been very transparent about that.
Selene Oh: But also let's see you you know like better than both the the industry trends.
Selene Oh: And when you look at where we were five years ago, and where we are today, we're a much more balanced business I mean five years ago.
Selene Oh: Very large portion of our business was in mutual funds retail distribution in the United States, we're extremely different business now, but we still have to work through them achieving scale in the areas of investment so we've talked about.
Speaker Change: Yes, we talked about canvas you've talked about alternative assets are moving.
Selene Oh: Talked about all the other areas of the firm that were growing a number of these things aren't really scaled yet to the degree that we expect them to be given the investment we're putting in and that's why we put a five year timeline on some of these things because it takes time to get there once we get there we think it's very reasonable that notwithstanding some of the areas of shrinkage that we could be eight.
Selene Oh: Low single digit growth business overall, the whole clean.
Selene Oh: The whole franchise, they don't see that's taking out the west and situations getting through that and normalizing our revenue as it was before that.
Selene Oh: And then looking at the areas of growth versus the areas of shrinkage in the overall business that we have on the under the under the Hood here, but I don't know what the journey you want to add anything to that.
Speaker Change: Just going to say no I think you you hit it right, but just wanted to say you know without western outflows I think our organic growth rate runs at about 1.3% and you know when you do the kind of acquisitions that we've done and you really try to put together a best athlete team. The reality is it takes.
Selene Oh: Time for distribution to settle in because even if you take say the best.
Selene Oh: Salesperson in a region youre actually breaking relationships with some other people. So it takes time in and even with Putnam, we took on a lot of the.
Selene Oh: Team and so part of this is kind of digesting that and then as Matt said you know you you take our Etfs.
Selene Oh: We've we we talked about how over the last.
Selene Oh: Eight quarters, we had $1 billion, but actually in the last two quarters our Etfs.
Selene Oh: <unk> had over $3 billion in net net flows and they're up 88%, but theres still you know only 31 Billy.
Selene Oh: Billions so.
Selene Oh: That's a fast growing important area. We think we have a great team great products, we were not late to the active Etfs a game.
Selene Oh: So we think we have good opportunities there and then I look at it and say you know if you think about the big trends that are so important. The fact that we have the breadth of capabilities in the private markets as well as the capabilities that we have in the traditional markets I don't think there's another asset manager that has that same kind of capability and then you combine.
Selene Oh: With the fact that we have 500 billion sourced from clients outside the United States, we sell over 80 billion outside the U S. A you know which is.
Selene Oh: It is tremendous it takes decades to build those kind of relationships and reputation in various markets and then one thing that I think people don't fully understand is we're pretty unusual and unique in the local asset management capability to go into any market and 80% flows tend to go into domestic products.
Selene Oh: India, we were the first foreign manager, but we launched domestic products.
Selene Oh: In India, we are viewed as a local player competing against local asset managers.
Selene Oh: And this year, we raised our largest equity fund there with.
Selene Oh: With that and we haven't done it in 15 years.
Selene Oh: Mexico Middle East and the Middle East we've been there for 25 years, but interestingly, we're actually one of the largest Islamic finance managers at global asset.
Selene Oh: But managers you know for sure in soup Cook.
Selene Oh: And so as the middle East becomes more and more important we can serve both global products as well as local capabilities and then we also have local asset management in places like Canada. The UK, Australia. So again, if you're a global provider you tend to go with global products, but we believe also focused on this our ability to.
Selene Oh: Deliver local and we think international when you look at the demographics of.
Speaker Change: The emerging economies are to be considered as a local player in these markets. That's really powerful so I just wanted to add that on top of Matt's points.
Selene Oh: And Jen anything only thing I would add to that is it's starting a little earlier, we know are building scale and audit areas that you mentioned, especially in things like private markets in the wealth channel. We started with institutional quality managers, we built up all specialists to cover that channel that team is now 85 people strong not only in the U S.
Selene Oh: But in EMEA in APAC and in the Americas and when we go to market in those channels. We've learned it's important to come and scale. So now we have evergreen products in real estate in private credit.
In secondaries and all of those products are coming with scale, which will really allow us to accelerate our efforts in that channel.
Speaker Change: Yeah, and that's great you just reminded me just one last thing is that you know well we mentioned it in the opening comments, but you know like the Franklin equity team has been doing late stage venture in their mutual funds for over a decade. It actually really a complicated thing to do and so our ability as the world starts to converge with public and private products.
Selene Oh: Our ability to do that with the capabilities I think of it as the ingredients we have as a firm I think R. R.
Selene Oh: So really tremendous.
Speaker Change: Great. Thanks, Thanks, so much for all the color.
Speaker Change: Thank you. Our next question comes from the line of John Dunn with Evercore ISI. Please proceed with your question.
Selene Oh: Yeah.
John Dunn: Alright. Thanks.
John Dunn: Just a quick one on wanting to double in the private wealth management has there been any kind of change or could you describe the appetite for firms to join your platform and and how aggressive do you think you'll be over the next several years.
Speaker Change: Yeah, I'm going to make you think about.
Selene Oh: Chart, where we first started was with CP IRAK say Aw Clarion product.
Selene Oh: And we just had a very few partners in that space for that Evergreen, we're now up to over 20 partners there.
Selene Oh: So we see that we're able to onboard to far more platforms and that's really helping us. The other thing we've been able to do in that channel is to co develop a product with our wealth management partners, which means that we have a little more backing and we're able to get into calendar earlier that was the bigger of a lesson for us as well as getting on the calendar early in <unk>.
Selene Oh: Finally, I would say scale in.
Selene Oh: In the mutual fund World.
Selene Oh: You can start smaller work your way up what we found in the private asset area was that it was important to come to market with scale from the beginning to be able to offer a diversified product and that requires really sourcing significant AUM.
Selene Oh: At the very beginning of the launch and we've been able to do all of those things. So feel good about the launch of our evergreens in the wealth management channel and Matthew do you want to add anything there.
Speaker Change: Yeah. The only thing I'll add is I think part of Johns question May have been about fiduciary trust and Oh growth targets as it relates to our own wealth management business.
And what I'd say John is it in that in that front on that front.
Speaker Change: <unk>.
Selene Oh: Yeah fiduciary is a full scale platform, it's a great business, it's grown quite nicely.
Selene Oh: Over the last several years and as we focus so much on building out our asset management business, we haven't really turned much attention to what else we could do with that very valuable platform that we have so I always mention is as Jenny mentioned in her prepared remarks is to capitalize on.
Selene Oh: That business that we have.
Selene Oh: And spend more time.
Selene Oh: <unk> teams, which are that platform.
Selene Oh: When we've done that.
Selene Oh: We've been quite successful at doing it and the teams have done well on the platform and grown and help the overall business grows so what we need to do is over the next year or two really focus on how we can turn that into a natural sort of strategic operation. If you will in terms of having people on the team.
Selene Oh: <unk>, bringing new teams over to join the platform. So we can grow that out.
Speaker Change: Got it thanks very much.
Speaker Change: So it's got all the resources that any wealth manager would need to offer their clients.
Speaker Change: Got it thanks.
Selene Oh: Thank you.
Speaker Change: Thank you and this concludes today's Q&A session I would now like to hand, the call back over to Jenny Johnson Franklin President and CEO for final comments.
Jenny Johnson: Great well everybody thanks for participating in today's call.
Jenny Johnson: And I, just again want to thank all of the Franklin Templeton employees for all their hard work and dedication.
Jenny Johnson: Well, it's the western employees, who are in particularly working hard and focused on their clients and delivering Uh huh.
Jenny Johnson: Continuing improving and very good performance.
Jenny Johnson: Despite all the distractions.
Jenny Johnson: And I guess I will say, we look forward to speaking to you next quarter. Thanks, everybody.
Jenny Johnson: Yeah.
Speaker Change: Thank you. This concludes today's teleconference conference call you may now disconnect.
Jenny Johnson: Hum.
Selene Oh: Yeah.
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