Gregory Eugene Johnson - Chief Executive Officer, President, and Director
Kenneth Allan Lewis - Chief Financial Officer, Principal Accounting officer and Executive Vice President
Franklin Resources (BEN) Q2 2012 Pre Recorded Earnings Call May 2, 2012 ET
Welcome to the Franklin Resources Earnings Commentary for the quarter ended March 31, 2012.
Statements made in this commentary regarding Franklin Resources Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, 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 Factors and MD&A sections of Franklin's most recent Form 10-K and 10-Q filing. This commentary was prerecorded.
Gregory Eugene Johnson
Hello, and welcome to the second quarter earnings commentary. I'm Greg Johnson, CEO; along with Ken Lewis, our CFO.
The March quarter got off to a strong start for us as increased sales activity and the market tailwind led to increased assets under management. Net new flows turned positive again this quarter, driven by the increase in sales, with long-term flows positive across all investment objectives for the first time in nearly 3 years. Most importantly, long-term relative investment performance remained strong across the firm. Net income also rebounded, and quarterly earnings per share of $2.32 reached a record high.
Relative investment performance for the U.S. fund range is highlighted on Slide 6. Of course, this is specific to a subset of our overall business, and we encourage you to take a look at the broader performance summary in our 10-Q, which was also filed this morning.
Overall, U.S. relative performance rankings were little changed from December as improving fixed income performance was offset by weaker equity performance. The biggest detractor from equity performance rankings was the Franklin Income Fund, which represents 53% of Franklin equity assets. The fund underperformed its Lipper peer group average by about 80 basis points for the 1-year period, or 66 percentile, due to its traditional overweighting in utility and energy sectors that underperformed the broad market in the quarter. Importantly, long-term performance remains outstanding.
Fixed-income performance improved across-the-board, although the strong year-to-date rebound in Templeton Global Bond's performance has not yet fully turned the one-year number.
Assets under management increased 8% for the quarter to $726 billion. Monthly AUM increased 5%.
Turning to Slide 9. The mix of AUM by investment objective and sales region was little changed since December. Strong equity markets and fund performance added $51 billion to assets under management this quarter. Long-term sales increased 27% to $48.5 billion while total redemptions fell 19%, although redemptions were really little changed if you exclude last quarter's large advisory account closure.
As illustrated on Slides 11 and 12, flow trends improved in the U.S. and internationally and across investment objectives. U.S. long-term sales increased 19% due to an overall improvement in sales across a number of strategies, particularly U.S. equity, hybrid and fixed income.
International long-term sales increased 37% from last quarter, due primarily to improved sales of our cross-border CCAB range where market demand for regional emerging market strategies and global fixed income continued.
We continue to promote equity investing in the U.S. and internationally through a number of ongoing campaigns, and we are pleased to see that long-term sales in U.S. equity grew 32% for the quarter. The top-selling U.S.-registered fund in this category was Franklin Rising Dividends Fund. This fund has been included in a number of our equity campaigns. Internationally, our U.S. heritage makes us a natural candidate to invest in U.S. equity.
The top-selling U.S. equity fund in our cross-border range was the CCAB U.S. Opportunities Fund.
In the cross-border market, demand for regional emerging market strategies continues. CCAB Templeton Asian Growth Fund was the top-selling equity fund for the quarter, generating $1.2 billion in net new flows. Interest in this fund is diversified by distributor with the Americas and Europe regions generating the majority of net new flows. We've also seen a return to positive net new flows for the European sales region this quarter, led by strong flows in Italy and Germany.
On the institutional side, we continue to see flows into global and U.S. equity strategies, particularly from international clients. We've also been successful securing locally managed mandates from institutional clients investing in Latin America and India. Global fixed-income strategies also continued to attract institutional flows.
In the hybrid category, U.S.-based Franklin Income Fund's long-term sales grew 36% for the quarter, resulting in $1.2 billion in net new flows for one of our most popular funds. Advisors with clients seeking higher yields in the current market environment have looked to the Franklin Income Fund, a fund with a history of generating income for over 60 years.
In the interest of yield, we also have seen increasing sales in our high-yield U.S. fixed-income funds in both the U.S. and cross-border markets. Interest in our tax-free, fixed-income funds continued its upward trend with long-term sales up 36% for the quarter. Tax-free, fixed-income, long-term sales for the quarter are the highest we've seen since the fourth quarter of fiscal year 2009.
Long-term sales in the global fixed-income category increased 28% following last quarter's sharp decline. The U.S.-based and CCAB-based Templeton Global Bond funds remained our top-selling funds this quarter. Redemptions declined in the U.S.-based fund, returning the fund to positive new flows for the quarter. Redemptions increased slightly in a CCAB fund due to a number of distributor platforms reducing their model allocations, holding the fund in net redemptions for the second quarter.
On a positive note, long-term sales of the CCAB Templeton Global Total Return Fund grew over 60%, making this fund the third top-selling fund for the quarter. We continue to provide portfolio manager perspective for these global fixed-income funds to keep financial advisors and distributors up-to-date.
A global bond retention campaign initiated at the end of last quarter internationally remains under way, and advisors have ordered more than 16,000 copies of a straight talk on global bonds flyer in the U.S.
And now I'll turn it over to Ken for operating results.
Kenneth Allan Lewis
Thanks, Greg. The strong rebound in assets under management and cost management efforts translated into improved earnings this quarter. Operating income was $617 million, a small decrease from last quarter, but net income increased 5% to $503 million.
Earnings per share of $2.32 was a quarterly record and rose 3% higher year-over-year despite flat year-over-year net income due to the net decrease in shares outstanding.
Investment management fees increased 5% from the prior quarter, consistent with the increase in average assets under management, a fairly stable effective fee rate, but this was partially offset by one less day in the quarter.
Sales and distribution fees increased 12%. The asset-based component, which makes up about 2/3 of this line, increased about 4%, and that's consistent with the increase in average assets under management and the number of days in the period. The sales-based component increased about 30% due to the strong increase in commissionable sales in the quarter, particularly in the United States.
Other net revenue was $10 million. The decrease from the prior quarter was mostly due to nonrecurring items of about $14 million, primarily related to the wind-down of our auto finance business and an accrual adjustment in our private equity business.
As a reminder, we began consolidating certain private equity sponsored investment products this fiscal year, and as a result, we expect this line item to be higher than it was in 2011.
Operating expenses increased 11%, which was more than the increase in revenue for the quarter. 3/4 of the increase in expense was due to sales, distribution and marketing expense that increased by $85 million. Almost half of the increase was related to higher sales and consistent with the increase in the sales component of sales and distribution fee revenue.
The asset-based component increased $43.5 million. The asset-based expense growth typically outpaces revenue growth during the March quarter due to the relationship between revenue and expense as revenue is primarily earned based on the number of days in the quarter while expenses accrue on a monthly basis. Also included in this expense was $9 million of nonrecurring items.
Compensation and benefits increased to $323 million, reflecting the annual merit increases and higher payroll taxes, as expected. But most of the increase from last quarter was due to higher variable compensation, including commissions to employees due to increased sales.
The information systems, technology and occupancy expense lines were in the range we expected. General, administrative and other expense increased $3.3 million, and while there are a number of moving parts in this line, the biggest driver of the increase was $6.2 million of expense related to the consolidation of sponsored products versus only $4.6 million last quarter.
Other income, net of noncontrolling interest, was $77.7 million this quarter, reflecting the strong market backdrop of the quarter. Two factors drove the increase from last quarter. First, equity method investments increased $16.6 million, but that was partially offset by other components such as lower dividend and interest income and available-for-sale investment gains.
The second factor was higher gains in our seed portfolio reflected in trading investments, consolidated sponsored investment products. In the case of these seed investments on a net basis, we generally retain more of the gains and losses compared with noncurrent investments of consolidated sponsored investment products and variable interest entities as we generally have higher ownership in the former.
Turning to Slide 19. The effective tax rate for the year-to-date period was 29.1%, a small increase from last quarter, resulting in a 29.3% effective tax rate for the quarter.
The operating margin for the quarter was 34.3%. Cash and investments totaled $9.3 billion at March 31. However, that figure includes $1.5 billion of consolidated investments related to sponsored investment products and variable interest entities.
Debt outstanding, net of liabilities related to those items, remained essentially unchanged at $1 billion.
We repurchased another 1.1 million shares this quarter, decreasing shares outstanding 3% year-over-year.
And that concludes our commentary on second quarter results. As always, if you have any questions or would like clarifications on our comments, please contact Investor Relations or Corporate Communications before the live call today. Their contact information is located in the presentation and the press release. Thank you.
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