Welcome to the Franklin Resources Earnings Conference Call for the quarter ending June 30, 2020. My name is Joanne, and I will be your call operator today. During this conference call, statements made regarding Franklin Resources, Inc. that are not historical facts are considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements carry various known and unknown risks, uncertainties, and other significant factors that might result in actual outcomes differing substantially from those anticipated in the forward-looking statements. A detailed discussion of these risks and uncertainties can be found in Franklin's recent filings with the Securities and Exchange Commission, particularly in the risks and factors outlined in the MD&A section of Franklin's most recent Form 10-K and 10-Q filings. Currently, all participants are in a listen-only mode. This conference is being recorded. I would now like to turn the call over to Franklin Resources' President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Hello and thank you for joining us today to discuss Franklin Templeton's Third Fiscal Quarter Results. Today, I'm joined by Greg Johnson, our Executive Chairman; and Matthew Nicholls, our CFO. We hope that everyone on this call and your loved ones are staying safe and healthy. We're pleased to announce that our landmark acquisition of Legg Mason is expected to close this Friday, ahead of our original schedule. The strategic rationale for this powerful combination has only strengthened since we announced the acquisition in February. It will unlock growth opportunities, driven by greater scale, diversification and balance across investment strategies, distribution channels and geographies. Significant work has been completed as we near day one, including having announced the leadership teams for our corporate functions and global distribution groups. Financial markets stabilized during the quarter, with growth stocks outperforming value stocks by the widest margin on record over the past two quarters, which impacted some of our flagship funds. On the positive side, we have seen strong performance and momentum in several key asset classes, most notably in our municipal bond and U.S. equity strategies. Flow trends continued to improve across all investment objectives this quarter. Flows into U.S. equity and fixed income strategies turned positive with eight of our largest 20 funds generating positive net flows year-to-date. We continue to believe that active management will play an increasingly important role in client portfolios, and we are well positioned to capitalize on this. Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business. Finally, I'd like to thank all of our employees for their significant effort to keep our business operating at the highest level to assist our clients and help them achieve their financial goals. Now I'd like to open it up for all your questions.

Thanks. My first question, I guess, is on the updated integration targets for Legg Mason. You talked about, I guess, 40% lower integration and execution costs. I'm curious as to what's driving that. And then also just in terms of faster-than-expected synergies, how do you ensure that it's not too disruptive to the business as you're combining these entities to impact flows in kind of the normal course of business?

Yes, thanks Dan. It's Matthew, I'll take that. So the latter part of the question, which is about the execution around the synergy realizations. As we outlined in the prepared remarks, we're talking about being able to realize 25% of these savings in the first 60 days, 50% by the end of the year and 85% by the end of – within 12 months of closing the transaction. We're quite confident that the two work streams that we've organized: one, around the holding company functions; the other around distribution, were organized in a way where the first part, we think can execute pretty quickly. We think that about 65% to 70% of those savings can be achieved within 60 days on a run rate basis. And then the rest of it around distribution will be at a slower pace to manage exactly the risk that you talked about around client management, product and marketing coverage across all what we think of those as sort of being the front end of the business. So we're being very careful and methodical in how we execute upon that over the 12 months that we're talking about here. The other thing to mention is that the reductions on that front-end side of things are quite modest relative to the size of this transaction. I think we indicated between a 10% and 15% reduction across our combined sales business or sales group. So that, I think, is an important indicator of being quite careful about how we manage the execution.

Well, I'll just add to that. I mean, this is – it's what makes it complicated and makes it simpler in some ways, which is the structure of Legg Mason with the independent investment teams. And so we, right out of the gate, said that we had no intention of disrupting any of that. So as long as the investment teams aren't disrupted and we're slow and methodical on the distribution, making sure that we're first and foremost focused on no impact on clients, we think that goes much smoother. If you take a transaction where you're trying to combine investment teams, that's where I think you get into a lot of trouble.

Yes. So the structure, at the end, itself helps. And I think in terms of the execution costs, that, in other words, is how much we're having to pay things like extension payments, severance payments and other sort of structural arrangements around the execution of the transaction. When we announced the transaction, we had estimated that to be about $350 million. We now think it's close to $200 million. And that's really no more complicated than based on a person-by-person, group-by-group analysis on all of the data that we now have that we didn't have at the time we made the announcement. And we're able to retain a lot more folks than we thought at lower cost than we anticipated. So that's the reason for the lower execution costs.

Thank you.

Good morning, everyone. Thanks. First question on the kind of new guidance on the cash tax benefit and refinancing. First, are you planning to include the $500 million cash tax benefit in your reported adjusted EPS? And then does the combination of that tax benefit and the refinancing, had that already factored into your guidance of high 20s cash EPS accretion? Or should we consider it incremental?

It's incremental, and it's actually below the line. So in a way, it's just the equivalent of us having more cash on our balance sheet. The way we've modeled it is in the first three years. I would say we'd probably get half of the $500 million, and I'd say 25%, 25%, 50%. And the way to think of it is that we have that additional cash where we could invest in the business, buy back shares or pay down debt. In terms of $20 million to $25 million, just to be clear, that is not delevering the capital structure, that is lower interest payments on about $750 million of debt that is quite high cost on Legg Mason's balance sheet that we intend to refinance in the first quarter or the first half, let's call it, of 2021.

Great. And that's incremental as well to the high point?

Yes. Yes, incremental. We didn't have either of those in our accretion estimates. Correct.

Great. My follow up, the outflow trend for the income fund looks like it's starting to accelerate a bit more after the recent underperformance. I know you've talked in the past about that being more sticky given the yield focus of the investors. But do you have any updated thoughts on that potential stickiness relative to the Global Bond Fund experienced when they had similarly bad performance?

Yes. I mean, the income fund, again is always rated lower in its category because it's managed for yield as opposed to the total return. And there are retirees that just love the nature of that product, and there's not as many competitors directly in that space. But it has had some underperformance here, and it is impacting it. But we still – it's been here for 70 years because it does exactly what it's supposed to do, which is generate that stable income.

Thank you.

Good morning, thanks for taking the question. Can you first, on the expenses. Matt, you mentioned similar guidance in the 5% to 7%. Because we've shifted a little bit in terms of the adjusted, I just want to make sure from the comparable period of what that base is. And then as you're thinking through the year, whether that's exact range and then the longer term, you've mentioned some other sort of expense initiatives. The flip side is you're also probably looking at investments in your range just given the late transaction. Just wanted to get an update on your thoughts on some of those longer-term opportunities on the expense side?

Yes, thanks Mike. So I think the way to look at it is that the base is about $2.225 billion. So that's our non-GAAP 2019 base and 2019 full expenses. And we expect to reduce that by between $130 million and $150 million, which is between 5% and 7%. And that guidance remains exactly the same, notwithstanding the fact that we increased our comp accruals this quarter. We adjusted our comp accruals upwards to reflect the momentum in our business this quarter, and it, obviously reflects more of where we ended the quarter versus where we started the quarter. Last quarter, before that, the second quarter, we had been quite aggressive in our reductions in comp accruals, frankly, based on exactly where we were at, in very significant uncertainty across the market and in the industry. So we did what we thought was the appropriate thing to do there. And frankly, we've reversed that based on the momentum we have in the business this quarter. All other aspects of expenses are absolutely in line or below where we expect it to be, so we haven't taken the foot off the gas in terms of pressurizing those areas we think we have leverage. Of course, what's going to be a little complicated going into the fourth quarter is the addition of Legg Mason, and you've noticed that Legg Mason has also reduced our expenses by $100 million. So Legg Mason is reduced by $100 million, we're reducing by between $130 million and $150 million. We're doing another $300 million around the deal, so we're talking upwards of $500 million to $550 million of cost reductions on a run rate basis. It's quite substantial. However, the more we've looked at the combination, the company and what we can do without destabilizing things, we do see some additional potential saving opportunities across the operations area, finance area, all the support functions of the firm in addition to the cash tax benefit and the capital structure points that I've mentioned to you.

Okay, that’s helpful. And then just a follow up on the flows. So you saw some good strength on the U.S. equity and in the meetings that you mentioned. International, both on the equity and fixed income side, still a bit challenged. Some of that looks like it's driven by performance. I just wanted to get your thoughts on, are you starting to see any like improving trends on that front? Or is it still going to be mostly dictated by performance improvement? And then we can see some of the trajectory change?

Well, I'd say that the – on the international side, our technology funds and just the Franklin Growth Funds are getting a lot more attention and traction. So we're seeing good uplift in sales on those strategies. We – we've seen reduced redemptions as you're seeing slightly less redemptions in things like the global macro strategies. And so overall, there's been a net sales improvement. I would say, July, we got hit with a large $1 billion redemption in institutional accounts and global equity. But otherwise, taking that out, you've sort of seen the same improvement in a trend in net sales.

Yes. I think, also, the point on the eight of our 20 largest funds being positive inflows is a very important one. It's just the fact for us is that we have a couple of strategies that are so large, it tends to dominate the story. But the reality is that a lot of our funds are actually doing very well. They're just smaller, but they're getting bigger and bigger incrementally. So it's making a difference. So for example, DynaTech where, only last year, we were talking about that fund. It was $6 billion, $7 billion, $8 billion. Now it's $15 billion, so it's becoming a bigger part of the story that we can tell on the flow front. Gradually, as those things get larger, and then we add Legg Mason's much larger strategies, it helps manage the story a little bit around some of the larger things that have been – they're not bad things. They're just out of favor things, which is where the performance reflects up that so – and the flow. So – but even on those larger things, the point we want – that's really important for this quarter is that the redemptions have fallen quite significantly on those things.

And I would just add, the technology fund is the number three cross-border fund. And that's really a new category for us that you can see how quickly it's accelerating in flows and could pretty quickly offset some of the headwinds you have on the global equity side with the deeper value fund as well as the global bond, which are very defensively positioned. And it's really going to take a downturn in the market for those to see any kind of swing from where they are today in flows.

Got it, thanks a lot.

Thanks Mike.

Thanks. Maybe that's a good lead in. I want to do a little – ask a little more on global international bond segment. Part of it is the product of the environment, where people's preferences away from that category. And then there's some performance issues there. So maybe if you could help us differentiate between what you think is the cyclical component of people avoiding the category. And then maybe, importantly, what's the ideal backdrop for that strategy that we can anticipate a turn in client preferences? Thanks.

Yes, I mean – this is Greg. And I think the backdrop, if you look at where that – the global macro strategy is really accelerated in flows was after the last crisis and having a 10-year period against equities that was the flat decade versus that product, I think, was the number one selling fund of its kind. So the backdrop is more of a risk-off environment where you can lower the risk in a portfolio. That's really how we talk about it today. Non-correlated kind of asset class that doesn't have the same kind of risk that your equities and fixed income has, and that's really how it's positioned. So I think today, when you have markets that continue to be extremely strong, and it's a risk-off environment, people really don't pay a lot of attention to the global fixed category. When things get a little shaky, you'll start to see renewed interest there. I think that's really the key. And I think today, it's an asset class where people are allocating a percentage of it to, regardless where before, it was a relatively very small asset class.

But to Greg's point, if you just look at the full categories, global bond is – that global fix is not a big flow category right now.

I think, Glenn, sorry, but Glenn. I think another part of your question is what portion of the flows surge or the client base of the global macro is attributed to just that risk management client base, and it's very hard to bifurcate that. But it's probably a decent foundation of the assets under management we now have in that category is because it's been so long, these are long relationships now is to do with exactly that fact. It's around risk management and having some downside protection in a market that's being quite lofty.

Great, can I ask one quickie on Benefit?

Yes.

Sorry. I thought I was being cut. Benefit Street. Just curious on how they've performed in this crazy backdrop, where they're at in some of their capital raises, what opportunities you guys see on the private credit side? Thanks.

Yes. So in the numbers for last quarter, they called about – well, they called up $500 million in capital, deployed $400 million, the other $100 million there, they have coming in. So that was in there. Then they raised actually a CLO, which won't be reflected. It closed in June but won't be reflected until July numbers of $400 million, and they have a second CLO that'll close in August, so also will show in this quarter. So that's $800 million in two CLOs. They also raised, and they're about to have a first close of $400 million in a dislocation fund. And what was somewhat unique there is a lot of that was raised by our Australia institutional team. Benefit Street had been trying, Australia is a very sophisticated market, and have been trying for a long time to break into that market and just were not able to do it. So the combination of our team with Benefit Street was just a great opportunity. In addition to that, they raised another $50 million into their senior opportunities fund, which they'll close with $700 million in commitments. Again, these are commitments. So it's dependent on the drawing of capital. But that was raised by our institutional team in Hong Kong and China, so a piece of that. So I think they've had good opportunities as people see the importance of having the – an active manager in this space and the experience they have around the distressed side. But they also had to have a write-down on some of their BDC, both because of having to take down some leverage as well as some distressed assets in it. They don't actually have an AUM write-down there. But so that was kind of their troubling part. But on the other hand, they've had really good traction on the sales and flows.

I would just add that if we look at our pipeline, on the institutional side, it's our greatest opportunity, and we're still very optimistic on strong organic growth coming into the rest of the year. Thanks for all that. I appreciate it.

Hi, thanks for taking my question. You announced new leadership in distribution with the appointment of Adam Spector as Global Head. Maybe talk about what Adam's vision is for Franklin distribution for the combined companies, what his mandate may be in terms of deliverables and any changes or adjustments you envision that he'll make to comp or structure to kind of achieve his and management's longer-term goals?

Well, first of all, we did – really, a global search on this position and had unbelievable candidates as people in the industry were particularly attracted to understanding the opportunities of a $1.4 trillion manager with an emphasis on the active side, and ended up picking Adam for several reasons. One is we've just been very impressed as we've worked with him with his – both his acumen on sort of business and practical business approach to things as well as his experience. And we talk to clients, and he's really been in a distribution role within Brandywine. The way we're thinking about approaching distribution is much more regional and trying to build a more agile organization. So while historically, Franklin Templeton had kept many functions, like product and marketing and even data analytics to be centralized, we are distributing that out more into the regions to provide a little bit more flexibility, and yet still have a central group for those things that'll be central. So that's kind of Adam's and our vision around how to do that. We will evaluate it, as you can imagine, bringing the Legg Mason team together and the Franklin team together, really evaluate it, how we're looking at pay for distribution and trying to figure out what the optimal approach is. And so we've been in process – and that may vary a little bit by region depending on what's appropriate. So all of that – there's been tremendous amount of work in the process leading up to Adam's announcement in really restructuring this. And of the, let's see, five real leadership positions reporting into Adam, actually, there'll be six, there are – there are two that are Franklin Templeton, two that are Legg Mason, one that's undetermined whether it's coming from internal or external and one that will be an external hire. So we're also really excited that we've been able to bring together leadership from both organizations. And as we, over the next month or so, make announcements around that, you'll see that it's a real combination, the two organizations.

I think one other point to make on Adam, Ken is, Adam, in addition to being highly qualified for this position, he has existing relationships across very important parts of the combined organization, including all the investment organizations that are going to become part of Franklin Templeton. And that can be – that can infuse additional efficiencies in and of itself. But relationship-wise, the fact they've worked strategically together for so many years, and Adam's knowledge of our company has come up to speed so fast, his vision on combining these things and how we work together in a collaborative fashion across all the investment groups. It's very impressive and exciting for us to have that, being able to hit the ground running as opposed to have to worry about other integration of cultures and things. So very good.

Hey, good morning, everyone. It was nice to see the rebound in U.S. equity flows this quarter and also strong traction in your DynaTech and technology funds. Outside of these two funds, can you talk about if you're seeing stronger underlying demand across the industry for U.S. active equity or any green shoots relative to passive just as clients are looking to navigate a less certain future here?

Yes. It's interesting, we do have some sector funds or utility fund, our U.S. – well, I guess that's fixed income, biotech. There's a couple of underlying sector funds that have performed well. And so as you're seeing kind of interest in thematic, we rolled out some thematic ETFs that are managed by Matt Moberg, who does the DynaTech fund and seeing a little bit of traction in those, although very, very early on. So again, the emphasis has tended to be in – within the Franklin group and that group has always had a lot of strong sector funds. And so to the extent that there's been good performance there, you're seeing traction.

Yes. And I would just add, I mean, I think in this COVID world that the theme around technology and how many of these trends are accelerating as people work from home, use more technology that certainly from the adviser, they want to get more exposure to their clients to this sector. So you're really seeing, I think, tremendous growth on the back of, obviously, tremendous performance. And one that, as I said earlier, we're very optimistic on our positioning. And because Franklin has had such a long history in this area, right in the heart of Silicon Valley, that we think we're in a unique position to capitalize on that.

Great. Thanks, good morning. Just a quick follow-up on expenses. So I guess, based on the revenue run rate for Franklin, stand-alone and averaging effect of the timing of the market, etc., and the flow trends. I mean it looks like the 2021 revenues could decline still relative to 2022. So Matthew, maybe a little more color of why would core BEN expenses be flat in that scenario or we should really take that in conjunction with opportunities on net cost savings from the transaction, potentially being above the $270 million number.

Yes. In our modeling, we have – when we look at the momentum we have across half of our large – it's almost half, not exactly half but almost half of our strategies, of which a number have grown really quite significantly over the past 18 months alone. We think that some of these things can start better offsetting the outflows we have from our largest strategies. And then when you combine that with the fact redemptions have fallen really, frankly, quite significantly, in particular, internationally, I think, in certain places, the lowest in a decade, for example. We feel that it's appropriate that our expense – providing expense guidance for 2021 is very tough right now because of what we're going through in terms of the transaction. But to us, right now, based on what we see across the firm and the opportunities and where we think we need to pay, we think it's appropriate to say that we won't be anything worse than flat. It doesn't mean that we won't be better than that. But I think right now, we're not really in the business of giving guidance 18 months ahead or 12 months ahead, whatever, as a business. And then the $270 million, I think, as I've alluded to already, we're going to be a much larger company with a much larger cost base. But our number one focus is – sorry to keep repeating it, but it's continuity and stability of the franchise and making sure we retain as much of the business we can and then focus on the growth engines. That doesn't mean we won't be more efficient in all the functions. We're going to – we'll work very hard on that. But you have to sort of bend down a bit and see what other opportunities may exist to improve upon the $270 million. Our feeling is there's a good shot, there will be, but we're not in a position to talk about that right now.

Great. Thanks, good morning folks. I just wanted to clarify a couple of things that I might have missed some of the detail on this. First of all, on the core expenses, I think that's implying $2.1 billion for Franklin stand-alone in 2020. If you can just – if you can tell me if that's right or not. And then I think, Matt, you said earlier, you talked about the retention packages being much less expensive than initially. So just, can you clarify if that was – I think you said from $350 million expectations down to around $200 million and if those are now concluded? And is that so as – I think initially, you thought it was a four to seven year vesting schedule. Can you just clarify those please?

Okay. That's a different matter you were talking about there, Brian. So the retention mechanisms in place are not connected with the $200 million that I mentioned a moment ago. The $200 million I mentioned a moment ago is the cost of achieving the $300 million in savings. So that's the cost of the – basically, the cost of the headcount reductions, the termination payments, severance payments and other costs related to the downsizing of the company. That's what that is. The piece you're talking about, the share grants that were awarded at the time of the transaction, they remained the same number of shares. The only thing that's changed is the share price has come down a bit since we announced the transaction. We will very likely hedge that position when we have the discussion with our Board later on this year, and we talk about capital management. So that's – they are two different things, to be clear about that. In terms of the 2020 cost base, yes, that's exactly right. It may be a little bit lower than $2.1 billion.

Great. And then just in terms of both the cost saves and then the attrition expectation. So far, attrition has been great, like you said, very little attrition. Maybe if you could just give us some perspective on your updated thoughts on what attrition levels might be from the deal for the first year or two. And then on the cost save side, it sounds like, obviously, most of it's coming from the holding company and other overlapping operations. But are you doing anything structurally within the affiliates on the cost side? I know that was hard to do when Legg did their cost-saving program. Or is that more of a longer-term upside to the extent the affiliates want to rationalize their own internal costs?

Yes. So sorry, there's quite a lot of questions there. I apologize if I don't get them all, but let's go through. So starting the last one first. My memory works that way. So the last one first. The – as I mentioned a moment ago, to get the efficiencies, we need to get out of this transaction, we don't need the affiliates to change anything that they're doing or the investment organization. So that's somewhat – but having said that, given Franklin Templeton's capacity to provide various functions to different parts of the organization is candidly, with all respect to our friends at Legg Mason, is quite a bit larger and greater than Legg Mason's. It means that the investment groups of our overall company has quite a bit of confidence in our ability to help. So down the line, we probably will do more with the investment organizations when they're ready and when we're ready. Right now, we've got too many other things going on to worry about that, but – and there probably will be some efficiencies in there. So that is a little bit of a synergy tail, if you will. What – that's the last question. What was your other question? The other one?

It was on the – your conversations with gatekeepers and your decisions have been better so far. You have updated thoughts on deal-related attrition on that Legg Mason from assets perspective?

Yes. I mean the deal, I think, as Jenny mentioned earlier, due to the structure of the transaction, the fact that we – there's zero changes in terms of client coverage at the investment organization or affiliate level, it means we have sort of a much more embedded stability in terms of client coverage and client support. So, so far, the client retention has been very high, and we're very, very focused on that. We like to believe we can continue along those lines. So right now, the client attrition that we've had has been very minimal in one country in Asia, with one of the investment organizations. And we hope that remains that way. So we're more focused on revenue synergies there going forward.

Well, I just want to, again, thank everybody for joining the call today. And again, in this time, just hope everybody is staying healthy and safe. So thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.