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Executives

Alan F. Magleby - Director of Investor Relations & Communications

Joseph A. Sullivan - Interim Chief Executive Officer and Head of Global Distribution

Peter H. Nachtwey - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Analysts

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

William R. Katz - Citigroup Inc, Research Division

Macrae Sykes - Gabelli & Company, Inc.

Cynthia Mayer - BofA Merrill Lynch, Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Matthew Kelley - Morgan Stanley, Research Division

Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division

Legg Mason (LM) Q2 2013 Earnings Call October 26, 2012 8:00 AM ET

Operator

Greetings, and welcome to the Legg Mason Second Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] As a reminder, this teleconference is being recorded.

It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations and Corporate Communications. Mr. Magleby, you may begin.

Alan F. Magleby

Thank you. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2013 second quarter ended September 30, 2012. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those that were discussed in the statements. For a discussion of these risks and uncertainties, please see risk factors and management's discussion and analysis of financial condition and results of operations in the company's annual report on Form 10-K for the fiscal year ended March 31, 2012, and in the company's quarterly reports on Form 10-Q.

This morning's call will include remarks from the following speakers: Mr. Joseph Sullivan, Legg Mason's interim CEO; and Mr. Pete Nachtwey, Legg Mason's CFO, who will discuss our financial results. In addition, following our review of the company's quarter, we will then open the call to Q&A.

Now I would like to turn this call over to Mr. Joseph Sullivan. Joe?

Joseph A. Sullivan

Alan, thank you. And good morning, everyone. I do appreciate your interest in Legg Mason and in taking time this morning to participate in our fiscal 2013 second quarter earnings call. I am very pleased to be serving Legg Mason and our investors as interim CEO, and I want to tell you upfront what I'm committed to: demonstrating continued and substantial progress on our turnaround that has been underway for some time, building upon our many competitive strengths, and applying the lessons that we've learned over the past few years, while at the same time, being open to new and fresh ideas that target growth. I recognize that real challenges remain. However, I also want to convey very clearly that we are moving in the right direction.

Now before we get into our results for our quarter, I thought I'd take a few minutes to tell you a little bit about my background for those of you who don't know me, and especially about my approach as CEO during this interim period.

I've been in the financial services industry for my entire career, more than 30 years now, holding prior executive roles in various capital markets businesses at Legg Mason Wood Walker, Stifel, Nicolaus, Dain Bosworth and Piper Jaffray. I rejoined Legg Mason in the fall of 2008 as Chief Administrative Officer, and after leading the organizational restructuring that we announced in May 2010, have overseen the company's Global Distribution efforts for the past 21 months.

I've been the interim CEO of Legg Mason for about 1 month now. Our Non-executive Chairman, Alan Reed, and I, have agreed that we must continue the momentum of our turnaround, even as the CEO search process takes place.

We must capitalize on the strengths of Legg Mason's diversified multi-manager model and build on the substantial progress that we've made with regards to expense reduction, balance sheet improvement and positioning the company for top line growth.

And while I am intimately familiar with the company, I am also willing to challenge the status quo, an approach that I think will be critical as we take a fresh look at our strategy during this interim period. So with that, let's move onto our results for the quarter.

As we announced this morning, Legg Mason reported fiscal second quarter net income of $81 million, or $0.60 per diluted share, and adjusted income of $100 million, or $0.75 per diluted share. This does represent an improvement in earnings, though our flow story remains mixed. And Pete will provide more color on these results in just a few minutes.

In addition, we repurchased $90 million, or 3.6 million shares in the quarter, representing over 2.5% of our outstanding shares. Following that repurchase, we now have 132 million shares outstanding.

Our AUM by affiliate and in the order of their contribution to this quarter's earnings is shown on Slide 4. Let's begin with Western Asset, with $459 billion in AUM, up 3% from last quarter. AUM results were driven by both improving markets and overall inflows. While long-term outflows were $4.4 billion in total, it's really important to understand the drivers of those flows. We experienced outflows in 3 low-fee mandates, including $1.7 billion related to the global sovereign mandate that we have highlighted for some time, as well as the total of $3.1 billion in liquidity-like accounts that we've previously referenced in our AUM releases.

And finally, the quarter also included a $750 million redemption related to the PPIP program. Western has successfully concluded its PPIP program in the current month, which will result in an additional redemption of $1.1 billion in the coming December quarter. As you can see, excluding those 3 low-fee outflows, and the PPIP redemption, long-term flows were positive for the quarter.

Western continues to see interest in specialized mandates globally, particularly in emerging markets, high-yield and local-currency-denominated mandates. Those specialized mandates continue to reflect higher fees than the mandates that terminated in the quarter.

In the quarter, we added retail share classes and other enhancements to the Western branded funds in the U.S. With the share class enhancements and the strength of the investment performance of those funds, we see a wonderful opportunity to more aggressively market those funds in the retail, institutional and retirement distribution channels.

We recently conducted a sales planning session for our U.S. distribution team with our Western colleagues that was highly productive. And our wholesalers are in the field, sourcing opportunities to both attract new cash from the sidelines and take market share from well-known fixed income competitors in the retail-oriented channels.

The pipeline and RFP activity for Western remains solid, reflecting their continued strong investment performance and strengthening consultant recommendations. Won but not yet funded mandates at quarter end were $1.8 billion, over half of which are in higher-fee, specialized mandates.

And finally, Western raised over $300 million in a secondary offering for Western Asset Mortgage Capital Corporation, a REIT focused on agency MBS, which brings the total fund AUM in the REIT to $500 million. Though this raise was announced in the September quarter, the funding occurred in early October and will appear in our October AUM.

Now, let's move onto Royce, with $36 billion in AUM. Assets were up slightly in the quarter due to market appreciation, partially offset by increased outflows. These outflows largely reflect the industry trends in active small cap equities, a sector that has been under pressure recently. As is always the case, Royce is actively engaged with their clients and distribution partners amidst these sector headwinds. Recent market trends are broadly emphasizing mega caps and defensive stocks within the small cap sector. And while Royce's 1 and 3-year numbers are challenged, the company's performance for the quarter strengthened. Royce has managed through many challenging cycles over their 35-year history, and they remain vigilant to be well positioned for long-term opportunities in the sector.

Next, ClearBridge, at $59 billion in AUM, is up 5%, driven by market performance. It is important to point out that outflows at ClearBridge have moderated significantly, and September marked their second best quarter in terms of flows, since our acquisition of them in 2005. Only last quarter, which included the third ClearBridge Energy MLP closed-end fund, was a better quarter.

ClearBridge continues to make real progress, with a sharpened focus on 3 competitive strategies: income solutions, concentrated portfolios and low volatility. The company ended the quarter with $1.3 billion in unfunded wins and has a meaningful increase in search activity in their institutional business.

And finally, ClearBridge also announced the promotion of Scott Glasser, the co-CIO with Hersh Cohen. Scott and Hersh were partners on the 4-star Appreciation strategy for 15 years. Scott has been an important mentor to many of the firm's portfolio managers, playing a key role in building the future generation of the investment team at ClearBridge.

Next, Permal, with $17 billion of AUM, has seen outflows in the global high net worth sector, partially offset by institutional wins. Permal continues to enjoy a valuable leadership position in the fund of hedge funds space. We see continued opportunities there and in alternatives more broadly, as the industry trends towards consolidation, customization and convergence, all of which should benefit Permal over time. Permal is one of the larger managers in their space and already has a robust managed account platform capable of customization. Longer term, we are working with Permal to create products that offer clients exposure to alternatives more broadly.

Permal ended the quarter with $300 million in won but not yet funded mandates in the institutional sector. As the global intermediated high net worth sector continues to be soft across the industry, Permal has seen its business mix shift towards both institution and sovereign wealth funds.

In the U.S., both institutional and retail channels offer meaningful opportunity. And Permal is also building a pipeline of business for European and Japanese institutions and will soon open an office in Shanghai, China.

Next, we see Brandywine ending the quarter with $41 billion in AUM, driven by improving markets as well as net positive flows for the quarter. Brandywine is emerging as a formidable manager whose top-down strategies in fixed income are complementary to our overall mix. Strong performance in fixed income funds drove positive flows in both the institutional channel and the U.S. retail, as well as cross-border funds. Brandywine has over $400 million in unfunded wins, including several with potential additional upside over the next 12 months.

And finally, Batterymarch, at $14.6 billion in AUM, is down from last quarter. Long-only active managers continue to be under pressure from a flow perspective. Batterymarch has experienced a handful of meaningful institutional redemptions during the quarter, a trend that has carried over into October. Looking forward, interest in Batterymarch's managed volatility capabilities remains robust, with a number of significant opportunities on the horizon.

So let's talk a little bit about investment performance, as shown on Slide 5. We are quite pleased that overall investment performance remains strong amid volatile equity markets. For the critical 3-year period, 83% of strategy assets beat benchmarks, while more than 79% of strategy assets beat benchmarks over all relevant periods.

Let's move on now to look at our Global Distribution platform. Slide 6 shows that our global retail distribution platform services $224 billion in long-term AUM, sourced from retail and quasi-institutional clients in the Americas, Europe, Asia and Australia.

Retail assets are very attractive from both a margin and a persistent fee standpoint. Today, we have a broad suite of products across equity, fixed income and alternatives, and among all of our affiliates.

Continued strong investment performance and emphasis on new product development and continued improvement in productivity and market share will be important drivers of our growth in the retail space. Globally, our distribution platform has been in net inflows for 8 of the past 11 quarters. As you can see in the upper right of this chart, we enjoyed the second best quarter for flows over the past 11 quarters, even without the benefit of a closed-end fund or other special product launch. Our international team was again a key contributor to our overall positive flows, with over $2 billion of net inflow. These international results were led by our Japan team, with strong inflows into Australian bond and equity income products, as well as emerging market debt.

The U.S. team had a solid second quarter, with nearly breakeven flows. Inflows were led by municipal products, Brandywine's global bond fund, and several of Western's taxable products, including Core Plus, high income and total-return funds.

In the U.S., we won approximately $1 billion during the quarter in new mandates, specifically into Western products across our sub-advisory/DCIO and wealth management channels. These results follow on the heels of the best net flows in U.S. distribution in over 5 years that we had last quarter.

Looking forward, we are working with clients and our affiliate partners to develop a strong product pipeline in the income, specialized solutions and alternative sectors. Since 2008, we have launched new products, working with our affiliates, both in the U.S. and internationally, which today represent a total of $22 billion in AUM.

The lower left corner highlights the diversity of gross sales for first half of fiscal 2013. And as you can see, our sales are diversified across our affiliates and the geographies where we have an established presence.

In the bottom right corner, we show gross sales versus persistency rates, which speaks to the expected longevity of client assets within our retail platform.

We have seen our gross sales trend higher in recent quarters while simultaneously maintaining strong levels of asset retention, which is exactly the kind of progress we expect to continue.

And now I will turn it over to Pete to review this quarter's financial results. Pete?

Peter H. Nachtwey

Thanks, Joe. As Joe noted, we generated GAAP earnings of $81 million, or $0.60 per diluted share, and adjusted income of $100 million, or $0.75 per diluted share. This quarter, our GAAP EPS benefited from an $18 million U.K. tax adjustment, as well as the positive impacts from the capital plan we launched in the June quarter, which resulted in reduced GAAP interest expense and lowered our share count.

Our lower share count reflects both our repurchase activity in the prior quarter, where we finalized repurchases under our May 2010 board authorization, and this quarter's repurchases under the new $1 billion authorization.

Now let's turn to Slide 7 to review the financial highlights for the quarter. Net income was $81 million, or $0.60 per diluted share. Adjusted income, which, again, excludes the U.K. tax benefit, was $100 million for the quarter, or $0.75 per diluted share, with the increase from last quarter's $88.6 million level resulting from the fund launch costs, which reduced last quarter's results.

Operating revenues were up 1.5% over the prior quarter due to higher advisory fees from 1 additional day in the quarter, an increase in average AUM and a modest increase in performance fees. This quarter's performance fees were largely driven by Western, Brandywine and Permal.

While impossible to predict with precision, we anticipate next quarter's performance fees to be in the mid-$40 million range. This will be largely driven by a one-time fee, as well as some seasonal and calendar year-end fees. Operating expenses increased 1%, reflecting higher mark-to-market gains on deferred comp and seed investments, which increased comp expense but are offset in other non-operating income and expenses. These in turn were partly offset by lower distribution and servicing expenses, and I'll provide a little more color on operating expenses later.

Moving onto Slide 8. The only other item to highlight here is our effective income tax rate, which was 17% on a GAAP basis, reflecting the U.K. tax adjustment of $18 million in the quarter. The tax outlook for the next quarter is for a return to our normalized effective rate of 34% to 36%.

Slide 9 is a roll forward from fiscal Q1's loss of $0.07 per share to this quarter's earnings per share of $0.60. The fiscal Q1 items, totaling $0.46, include debt extinguishment cost, fund launch costs and mark-to-market losses on seed investments.

The key items this quarter include a $0.02 increase from operations, $0.13 related to the U.K. tax adjustment and $0.02 related to mark-to-market gains on seed investments. The final contributor is a $0.04 benefit resulting from the new capital plan, reflecting both lower GAAP interest expense and reduced average shares outstanding.

Turning to Slide 10, our assets under management increased 3%, driven by market appreciation of nearly $21 billion. Given the majority of the market pickup came late in the quarter, our average AUM is up only $4 billion from the June quarter. But if markets hold, this bodes well for the December quarter. This quarter's AUM also included a disposition of $2 billion, reflecting the last of the liquidity AUM to be transferred to Morgan Stanley Wealth Management.

Long-term flows on Slide 11 deteriorated from the prior quarter due in part to a pickup in equity outflows, consistent with an industry-wide acceleration in U.S. active equity outflows. Fixed income flows went from slight inflows last quarter to outflows this quarter. This was largely due to a $3.1 billion in liquidity-like low-fee accounts that we called out in our July and August AUM releases, as well as $1.7 billion in ongoing redemptions related to the low fee, global sovereign mandate. In addition, there was a $750 million redemption related to Western Asset's PPIP program. We will see an additional $1.1 billion redemption in fiscal Q3 following the successful completion of the PPIP program. We are also anticipating several large redemptions in October in equity AUM totaling about $2 billion.

Finally, we highlighted on this slide that we had fixed income fund inflows of $1.7 billion. This marks the 13th straight quarter of fixed income fund inflows, and September was the second best quarter for those inflows from the last 2 years.

Slide 12 shows the advisory fee trend with this quarter's rate basically in line with the June quarter.

Operating expenses on Slide 13 increased 1%, largely due to higher comp expenses, which I will detail in a moment. You can see that a number of the other expense categories declined relative to the last quarter, including distribution and servicing expenses, which were down $25 million, principally due to $23 million in fund launch costs last quarter. Communications and technology expense declined $1.8 million, reflecting renegotiated vendor contracts and lower consulting expenses. Occupancy expense declined $3 million due to a reduction in lease reserves related to office space held for sub lease. And finally, other expenses increased $3 million from fiscal Q1 due to annual director fees and higher affiliate-related legal fees, both partially offset by lower T&E expenses.

Turning to Slide 14. Total comp and benefits increased 12%, primarily due to 3 items: first, higher mark-to-market on deferred comp and seed investments, with a related offset in non-operating income; second, net revenue increases, resulting in upticks in our affiliates compensation pools; and finally, due to management transition costs. As you can see, the comp and benefit to net revenue ratio, excluding the mark-to-market on deferred comp and the management transition cost, was 55%, which is at the high end of our 54% to 55% guidance. This compares with 58% last quarter, which was impacted by fund launch costs.

Management transition costs reflect the CEO transition and separation agreement and related executive retention awards, which will vest in 18 months, although the expense will be taken ratably over this period.

Slide 15 highlights the operating margin as adjusted, which increased to 21.2%, up from last quarter's 16.9%. Recall that last quarter's expenses included the impact of the 2 fund launches. These combined to reduce last quarter's adjusted operating margin by 4%.

On Slide 16, our cash taxes are under 10%, compared to a significantly higher GAAP tax rate, as this slide highlights. This low cash tax rate allows for both additional investment in the business and return of capital to shareholders. This is an area we will continue to highlight as we believe it is important for investors to fully appreciate the significantly lower level of cash taxes we pay. Specifically, this lower level of cash taxes results from our NOL carryforward and our ability to amortize our goodwill and indefinite-lived intangibles for tax purposes. When you translate our effective tax rate into dollars, on the right side of the schedule, you see that over time, we will realize a positive cash impact of $1.5 billion.

I will wrap up on Slide 17, which reflects the key highlights of our new capital plan, which we executed in the first fiscal quarter. In the upper left side corner, you will note that we ended the quarter with a cash balance of nearly $900 million, up from $800 million last quarter. We must remember, our first quarter is typically our annual low point due to our fiscal year bonus payments in May.

In the upper right, we've summarized our share repurchases over the last several years. In conjunction with last quarter's capital plan, we announced a new $1 billion board stock repurchase authorization. And in the second fiscal quarter, we repurchased $90 million of stock or 3.6 million shares under that new authorization.

You should note, these share repurchases began mid-quarter, so they are not fully reflected in our average diluted share count. Thus, the average shares will be 2.1 million lower at the end of December before any additional share repurchases this quarter.

The bottom left provides a comparison of the new debt maturity schedule versus our prior debt structure. The benefits from our debt restructuring include delevering the balance sheet, laddering out our debt maturities, diversifying our sources of debt capital from both new banks and bond investors, and locking in rates in this historically low environment. Additionally, we reduced our GAAP interest expense by $36 million annually. Overall, these transactions greatly enhance our financial flexibility, in addition to the positive impact on our financial results, which you can see in our fiscal second quarter.

Thanks for your time and attention, and now I'll turn it back to Joe.

Joseph A. Sullivan

Thanks, Pete. Before I close, I'd also like to speak to 2 questions that I'm sure are on the minds of many listening in today: the search for our permanent CEO and the status of our standstill agreement with Trian. As for the CEO search process, it is well underway. You may have read that the search committee of the board has hired Korn/Ferry, and they have already completed preliminary qualifications interviews with key constituencies, including board members, various of our affiliate CEOs, and members of the Executive team. There is no stated timeframe for completion of the search, but realistically, it could take several months.

And now let me update you as to the status of our standstill agreement with Trian. When Nelson Peltz, the CEO and founding partner of Trian, joined our board 3 years ago, we knew very little about his intentions with respect to the sizable investment that Trian had made in Legg Mason. Therefore, we negotiated a standstill agreement in an effort to set expectations for both Legg Mason and Trian. Now, with 3 years of experience working with him, we found Nelson to be a constructive member of the board and we're comfortable working with him and the team at Trian. The standstill is set to expire on November 15. If there is an update, we'll let you know, but our goal is to continue to work with all members of our board to drive shareholder value.

And finally, let me return to that on which I am most focused. I want to be clear that Legg Mason has a solid foundation, significant strengths that I think we sometimes under-appreciate. And we need to continue to build upon those strengths. We have a set of distinct, highly-performing investment affiliates, diversified by asset class in U.S. equities, global fixed income and alternatives.

As a truly global firm, we are also well diversified, with nearly 40% of our assets under management generated by non-U.S. clients. We enjoy broad client and channel diversification across both global retail distribution and our affiliate businesses, with the institutional retail client mix running at approximately 70-30. We continue to have strong investment performance, with over 79% of marketed strategies beating benchmarks over all relevant periods.

Many of our affiliates have made truly remarkable improvements in their investment performance since the depths of the crisis.

We have a strong and flexible balance sheet and a robust cash position while we returned a significant amount of capital to shareholders over the last few years. And with our new capital plan implemented, we will balance investing in our core business and returning capital to shareholders appropriately. The key for us now is to stay focused and build on the momentum in areas where we are making progress while proactively addressing the issues and areas where we face challenges.

So let me conclude by spending just a few minutes on where we must focus our attention. First and foremost, we need to grow, both institutionally and in retail. And that means not just flowing the outflows, but turning them into consistent inflows. In retail, we will continue to evolve our sales model to capture the opportunities that we see in the marketplace, both in the U.S. and international. Our goal there is to expand our client penetration to improve our sales productivity and increase persistency in asset retention.

Our investment performance warrants more consistent institutional inflows. Our affiliate partners have made progress, and we will do all that we can to support their efforts in growing our institutional business.

We are working on existing products that are underperforming or are subscale, and we are engaged with affiliates that for a variety of reasons may be challenged.

Longer term, we will ensure that we have the right mix of products and investment strategies across geographies, asset classes and distribution channels. With a focus on improving our operating margin, we will continue to review our streamlined operating model and build upon the progress we've already made. We will continually look for opportunities to develop a higher level of efficiency and effectiveness across all business functions. Quite frankly, in an increasingly competitive environment, operating efficiency is an imperative.

So I recognize that the status quo is not an option. We are reviewing and evaluating our current business strategy with our affiliate leadership and our board, and we are prepared to modify it as appropriate. Quite simply, we are focused on additional opportunities to grow revenues, to expand margins, and to improve earnings leverage across the organization, all with the intent of increasing long-term shareholder value.

And with that, let me open it up to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Dan Fannon with Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess, Joe, just to start, given your background, and kind of building on your commentary that you just gave, I guess how do you view kind of the current cost structure that you kind of led the streamlining, I guess? As you think about where you are now, is there more to do or is it more just kind of focusing on and kind of continuing what you've already done, I guess? And that's from the expense -- more focused on the expense side.

Joseph A. Sullivan

I think the answer to that is obviously, we've done an awful lot of work over the last few years like streamlining our model and really reigning in our cost. And we've been vigilant about that. But as I mentioned at the end of my comments, my view is that operating efficiency is an ongoing imperative. The business is increasingly competitive for everyone. And so if we're going to be -- if we're going to be relevant and competitive in the marketplace, we have to keep an eye on our cost structure and operating efficiencies. One of the things that I did recently in a Townhall, as we were talking about the transition, was I received a question basically asking, "So we'll keep our heads down. We'll keep focused. It's business as usual." And I said no, it's got to be business better than usual. And that means both on the distribution side and raising assets and increasing our growth, but also to all of our business leaders on looking at how they do their business, how they run their various operating units and looking for ways to be better than usual. So we're going to be -- it's got to be part of our DNA and part of our corporate culture that we constantly evolve and review our cost structure and look for opportunities to be more efficient. So I don't have anything for you today in terms of specifics, but I have challenged the organization everywhere to continue to look for additional efficiencies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Great. That's helpful. And I guess looking at Permal in particular. If you could update us on just kind of the performance in the more recent time period. Asset levels there continued to kind of dip a bit. So maybe we want to get a sense of the outlook maybe for performance fees or when you think those might actually return at a higher level. And then, kind of maybe the mix of -- I mean, where we are still with high net worth in Europe versus the overall institutional mix.

Peter H. Nachtwey

I'll deal with the first one then probably hand it to Sully on the mix of business. But performance fees, again, they continue to be one of the key affiliates in that regard. However, as we've said before, one of their biggest funds is still slightly below their high watermark, although they've recovered up to a point where we still see probably by the end of the calendar year getting back into positive performance fees for them on that fund. And Joe, on the mix.

Joseph A. Sullivan

Yes. Dan, I think on the mix, one of the things that is very encouraging is that really the high net worth, the intermediated high net worth business has been under pressure for some time. But Permal has really done, I think, a tremendous job in evolving their business model over the last few years to really move into the institutional space, which has offset some of the pressure on them from outflows in the intermediated high net worth space. And then they're growing as well. They're building out in Europe. They're building in Japan, and I mentioned opening in China. And then also within the U.S. looking at other ways to bring alternatives into the retail space in the U.S. And we've recently launched a 1099 fund with them that we think will have some great opportunity long term. So I think they've made good progress on that front.

Operator

Our next question is from Michael Kim with Sandler O'Neill.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

First, just kind of big picture. Assuming the incoming CEO and the board remain committed to the affiliate model, can you just talk a little bit more about some of the specific options you're thinking about in terms of ramping up your growth? And then more broadly, what are the kind of key benefits in terms of the firm's holding company structure that you guys bring to the table?

Joseph A. Sullivan

First of all, let me be very clear, and I think the board has also been very clear about this, that we are committed to the affiliate model. We do believe that, that model really drives, over the long term, better investment performance for investors and for clients. We do need to grow, and I mentioned that very clearly. We've been improving and we've been getting better, but we've still been challenged on the flow standpoint. But we need to grow. And one of the ways we do that, and this is really the work that we're engaged with the board right now, with the board with our affiliates in really sharpening our strategy and sharpening the focus around growth, looking at where we have gaps in our product lineup, where we have -- where we need new talent or new affiliates in terms of strategies, where the flows are going globally. So in order to grow, we need to build upon what we have and where we have strategies and performance, where flows are going and we need to ramp that up. But we also need to add where we don't, and we are working with our affiliates in that regard, and the board.

Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division

Okay. That's helpful. And then second, just on the equity side, the $2 billion of redemptions that you referenced. Can you just give us a bit more color in terms of where the redemptions are coming from? So I assume some of that involved maybe Batterymarch, just given your earlier comments. But any other discussion in terms of which affiliates or strategies are in the mix and then maybe any data or color in terms of related fee rates?

Joseph A. Sullivan

I'll let Pete speak to the fee rates. But as it relates to flows and redemptions on the equity side really, you're right. Batterymarch has been under a little bit of pressure recently. And also Royce. That's where we've seen the pressure on the equity flow side. On the positive side, ClearBridge has actually seen their redemption rates and their flows at the best we've seen in years. So it balances a little bit. Pete, on the fee side?

Peter H. Nachtwey

Yes. Good question, Michael. On the fee side, we're kind of -- we're about 34 bps, as you saw on the slide. And the equity outflows, obviously, negatively impact that on -- that we're talking about. On the other hand, in the fixed income area we've been getting more in specialized products that are driving up the fee rates on fixed income along with retail flows on the fixed income side, where the fees are a bit higher. And then in addition, ClearBridge on the equity side, they are doing really well in the equity income space, which also carries a little bit higher fees. So they're balancing each other out right now.

Operator

Our next question is from Rob Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

I just have a quick question, and I guess mainly is for Pete. On compensation, I guess this quarter, excluding the transition cost and the mark-to-market, you kind of suggest you came in towards the high end of your range. So as we look forward, any color you could provide on how you expect that to evolve. You think it's going to kind of stay stuck at the high end or should we expect that maybe to migrate down a little bit?

Peter H. Nachtwey

Sure. Good question. Keep in mind, our comp ratio is highly impacted by the nature of our revenue share agreements with the affiliates. So to the extent that revenues are increasing and they're controlling costs, the comp ratio could be slightly higher. The more important number that we focus on are the revenues to the parent coming from the affiliates, and there we've got a very leverageable model at corporate. So we really don't expect a significant amount of variable costs for the revenues that come to corporate.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Maybe a follow-up question. I mean, I know you don't breaking it out separately, but in that regard, is there -- possibly to get a sense of you're looking at comp and maybe in particular, what portion of that is really mainly attributable to the holding company and not the affiliate?

Peter H. Nachtwey

Yes. We haven't broken that out in the past. I think, again, looking at our kind of affiliate rev share model, if you assume that on average the affiliate share of the revenues is somewhere between 50% to 60%, that gives you a sense of how much of that could go to comp, again, it's assuming they're controlling their costs.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

All right, great. And one last quick question, if I can. Just curious, the Q4 pop [ph] in the performance fee, I'm assuming that that's going to be related to the PPIP.

Peter H. Nachtwey

Well, we don't break -- good question on fees. So keep in mind, December is a little bit of a seasonality impact in terms of annual fees locking, although we do have annual fees that are locked in and other quarters. But the calendar year tends to be a bit higher, and then it will be the one-time PPIP, although for any client don't disclose specifics around fee arrangements. So I think were it not for those 2 factors, we'd envision being about the run we've been for the last few quarters.

Operator

Our next question is from Roger Freeman with Barclays.

Roger A. Freeman - Barclays Capital, Research Division

If I'm not [indiscernible] how do you attract a CEO without Trian signing up for a new standstill agreement if that doesn't happen by November 15, what happens if Nelson's terms expire?

Joseph A. Sullivan

Roger, you're breaking up a little bit. But as it relates to how we attract a CEO, candidly, I don't think I'm the best one to be talking about that. I think that's really the board, and I don't mean to be -- I don't mean to divert from the question. But I think the board -- that's the board's responsibility, the search committee of the board and the board's responsibility. Obviously, the presence of Trian and Nelson is well known. Nelson's board term will not expire until the summer. So the standstill doesn't impact that. And I think it's well known that Trian is a member and Nelson is a member of our board, and as I said, has been a productive member of our board. So that will be a factor in anyone's consideration for the position, I would guess.

Peter H. Nachtwey

And maybe I can jump in on that one a bit, Joe, because I'm the one member of the Executive Committee that actually had to make a decision to join Legg Mason during Nelson's tenure since I joined back at the beginning of 2011. And I can tell you that the overall composition of the board, including Nelson, was actually something that was attractive from my standpoint, as I looked at both the quality of the board and what they bring to the business, and then also knowing that they would've done some pretty serious analysis around the financial prospects of the company before making an investment. So it's definitely depending on how you want to view it. It's either glass half-full or half-empty, but I think there's a pretty strong argument for glass half-full approach here.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Sorry for the bad connection. What were the board's -- how many executives were involved in the retention agreement and what's the total amount over the 18 months?

Peter H. Nachtwey

Total numbers, so all the named, and then there were a couple of others. The total amount is $8.5 million.

Joseph A. Sullivan

And I think it was 6 people in total, 5?

Peter H. Nachtwey

I've got all the names. So it's 7. I think there were 7, actually. But again the dollar amount, which I think is most important from your guy's standpoint, is $8.5 million.

Operator

Our next question is from William Katz from Citi.

William R. Katz - Citigroup Inc, Research Division

Just sort of coming back to the tension between margins, which has continued to be flat, versus the pursuit of growth. Could you talk about which is the greater priority and can you win at both? And within that, it seems to me like you might be considering selling or shuttering some of the underperforming products and so forth. Are there any -- are the key affiliates that you list in the press release, are these the ones that you're going with on a go-forward basis or could some of these also be available for sale or divestment [ph]?

Joseph A. Sullivan

So, Bill, let me just answer or start. And then maybe, Pete, if you have anything you want to add, you can. But I don't think we have to choose between margins or growth. I don't think we can. It is a balance all the time, obviously, and there are times when we need to make investments that could modestly impact our margins. But again, our margins have not been acceptable, and I get that. We all get that. And that's really why we have this kind of increased focus on opportunities for efficiency. We've got -- and by the way, even if we're growing and when we get back to growing and when we get back to doing better from a financial performance, we still need to be diligent and focused on efficiency. So we make sure that we continue to push on our margins. But we also have to grow. And I think Pete mentioned earlier, we have a leveragable model. And so once we get into growth, and Pete can talk about that a little bit, if he wants, we do have the opportunity from margin expansion. I think as to your other question about sort of selling or shuttering affiliates, what I would say is, at various times, some of our affiliates are struggling for a variety of reasons more than others. And over time, we have worked with them, in some cases supporting them. In other cases, we have divested, where it's made sense, if an affiliate's been challenged from a scale perspective or whatever. In some cases, we've divested some of the smaller managers over the last year or 2. We don't make a lot of big fanfare about it and trumpet it broadly. But if it makes sense from a strategic standpoint for us and for the affiliate, we've done that. In other cases, we have merged affiliates, so with that a couple of years ago with one of our affiliates, Global Currents, into ClearBridge. And so these are things that we have done in the past and we're going to be open to doing in the future. As it relates to sort of our core affiliates, we feel good about our core affiliates being in the spaces that we need to be in, whether it be in equities, whether it be in global fixed, whether it be in alternatives. We do have gaps, and that's where we need to focus on filling those gaps. We need to make sure that we're getting the kind of flows and sales for the core affiliates that are performing well, and then we need to look to add in the spaces where we don't. Pete, do you want to say anything about margins or the leveragability of the model?

Peter H. Nachtwey

Sure. I think I can add a little bit to that, though I think you said it well, Joe. But keep in mind, investments for growth in our business tend to end up on the P&L versus other industries that if you build a new plant, that goes on a balance sheet. For us, we launch new funds, we bring on new fund teams that are going to help our growth going forward, they do negatively impact the P&L. So Bill, you're spot on to point out there's tension between the 2. However, we do think we can do both. And as Sully said, we're taking a really hard look constantly at the cost structure and seeing what we can do to free up dollars to invest for future growth.

Operator

[Operator Instructions] Our next question is from Mac Sykes with Gabelli & Company.

Macrae Sykes - Gabelli & Company, Inc.

Can you provide some more color on how you're improving operations there? I mean, what has changed in the last 6 months versus 1.5 years ago?

Joseph A. Sullivan

Are you speaking specifically to distribution?

Macrae Sykes - Gabelli & Company, Inc.

Yes.

Joseph A. Sullivan

I think we've really focused over the last 18 months or so on our delivery model. We've put a lot more people in the field. If you remember, we did a reorganization within distribution about just over a year ago, where we eliminated some layers of management and we really repurposed those dollars to more feet on the street. We increased the number of people in client-facing positions by almost 50%. And so we're starting to see the benefits of that. We also introduced a different delivery model, something we call the cross-channel sales, which is really not a hybrid sales structure. People like to call it a hybrid sales structure, but it's really an enhanced structure that's a little bit more between a hybrid and your traditional external sales. And so we're getting some leverage out of that. So I think there's just -- the team has settled. We've put more feet on the street, and we're getting -- realizing the benefits of it. In the international side, we're continuing with new products, particularly in Japan, for example, where we've evolved our product lineup there and added to it in income products that are particularly -- we're having particular success with our Japanese office. So we've seen real good progress in the last 18 months.

Operator

Our next question is from Cynthia Mayer with BofA Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Joe, I think in the past, you've mentioned an interest in expanding the sales force a little bit. And I know that you've switched the, as you say, the cross-selling and some of the ways in which you compensate. But just in terms of the absolute size or do have an interest in that or do you think, focused on efficiency, you'd stay with what you have?

Joseph A. Sullivan

I think it's both, Cynthia. I think we can be -- and our team knows this. We've got a good and solid team. We've added people over the last 18 months. We can be more productive with our existing sales force, and I believe that we will. And in particular, as I mentioned, with the recent enhancements in the Western share classes, I think that's going to -- I think we've got tremendous, opportunity with that. That's new for us. So we've got a lot of products. We've had enhancements with Western share class. We expect to grow our market share and our productivity with existing sales resources and our sales force. At the same time, we need to expand and increase our penetration. And I think to do that in some respects, we may need to look at increasing. And a lot of our competitors are. As you know, there are some that -- almost all of our major competitors are expanding their sales forces. I think one of the large competitors who recently did a combination referred to have -- putting an army out in the field. Well, if we're going to win, we're going to have to beat an army with an army. And so I don't want to suggest a huge ramp up in cost there, but I think we will have a bias towards increasing our sales people and our sales resources as opposed to the other way around.

Operator

Our next question is from Jeff Hopson with Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

So Joe, I assume you've met with the affiliates, and I'm curious if you could share any of the feedback you've gotten. Do you think there's any distractions here in the short term? And then, in terms of -- beyond just progress from here, what would you say are the specific 1 or 2 things that you'll be focusing on in what -- I guess as an interim period here?

Joseph A. Sullivan

Jeff, I think what we're focused on very specifically and this does involve our affiliates. So you're right, I have met on more than one occasion with all of our major affiliates. I think we all see this as an opportunity to come together and really focus on either affirming or modifying our strategy for growth. And our affiliate leadership needs to be a key part of that and will be a key part of that, and we'll do it in conjunction, obviously, with the board. And that is the major focus. Now some of it is what can we do with them in terms of supporting them and helping them and working better together with them and them having input on where we're taking this company going forward. And then what else do we need to add? I think it's clear. We've been talking about it. I kind of hate to talk about the notion of acquisitions and all that because we've talked about it and haven't really done it. But the reality is, and we've talked with the board about this even this week, that we have gaps. Where we have gaps that our existing affiliates can fill in terms of introducing new products and new strategies, we'll do that. But where we don't have the capabilities, we need to add those. And so we clearly have a gap in international and global equity, and we need to fill that, and likely we need to fill it through acquisition. So the key is working and partnering with our affiliates in really affirming, crafting, kind of modifying as necessary our strategy going forward, where we're all aligned and we're all on the same page.

Operator

Our next question is from Chris Harris with Wells Fargo Securities.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

A few quick ones on Western. Can you guys share with us what the revenue impact was this quarter from the low fee outflows?

Peter H. Nachtwey

They're very de minimis because, obviously, they're low fees. I don't have a number I can quantify for you right off the top of my head, Chris, but it's not a big number.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Okay. I guess if you add back these outflows, it looks like you guys did about 2% growth there. And just wondering, given recent trends you're seeing and excluding the PPIP outflow, is that a growth rate you guys feel comfortable with achieving over the next several quarters?

Peter H. Nachtwey

Well, I think, Chris, what I would say is, we do see Western making good progress. We talked about their pipeline and their increase in RFPs, which has been healthy. And then on the retail side with the share classes, we think on the retail side that we ought to see good growth in that. So I do know that I want to put the number around what we think -- what we think our growth rate would be. But even here in October we've seen a pickup in fund flows related to Western. So really think between the retail side, with these new share classes and also with what Western is doing on the institutional side, its pipeline and its RFP activity, it feels like we're making some good progress.

Operator

Our next question is from Matt Kelly with Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

I just wanted to ask, in your conversations with ratings agencies, what are they looking for in terms of the -- at this point in your progress, the turnaround of the flows and the buybacks and cost-cutting? What are they most focused on when they think about turning their company around?

Joseph A. Sullivan

We've got constructive dialogue with both the agencies who follow us, both S&P and Moody's. And I'd say they're focused on the same thing that we are and I think probably you are, which is getting us returned to positive flows and what are we doing to invest in the business, both in terms of possible new affiliates, but also new products and seeding of products that we do to foster growth going forward. And I think in general, they're -- they've been relatively pleased with our progress over the last year because they also would like to see us streamline the model and making sure that we're running things as efficiently as possible to generate the cash that we're generating.

Matthew Kelley - Morgan Stanley, Research Division

Okay, great. And then one follow-up for me. It's more of a kind of positioning question. Just as we hear more about institutions going more and more towards the barbell approach and alternatives and passes, how do you view the affiliate structure that you have set up? In that context, where do you think the -- I know you've been asked this a number of different ways, but within that construct, where do you think there's opportunity to add to the model? Where would you not be interested?

Joseph A. Sullivan

Well, specifically, in areas, I would say, the areas where we need to add in terms of acquisitions, we've talked about this, is international and global equity, and then also in alternative strategies. But we can -- so we've said that before, we are focused on that right now because for us to grow, we have to grow where the flows are going. And clearly, flows are going in those areas, and we have some capacity. So I don't want to suggest that we don't have any on that end of the barbell. We don't. If you look at what Western has done over the last few years in really evolving their business to more of the specialized mandate, I mean that's consistent, I think, with this barbell approach that you suggest. So we have at Western, at other of our affiliates, Brandywine, and I would say even ClearBridge to a certain extent, all of our affiliates are evolving, and that's one of the things that I think is most comforting or most -- that I feel best about is that our affiliates have not stood still. They have evolved their model to where the business is going. That said, there are gaps that we just can't fill without an acquisition, so we have to do both.

Operator

We only have time for one more question. The question is from Doug Sipkin with Susquehanna Financial.

Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division

So I just wanted to chime in a little bit just sort of the buyback philosophy. I'm listening to the call, and I hear talk about needing to improve, not improve, but I would say, expand the sales force. I heard you guys mention a couple of times expanding, maybe doing an acquisition on the affiliate side. Given that, and in the face of obviously 3 -- I would say 3 of your 6 core affiliates are struggling in their equity managers, and right now you are getting a tailwind with the stock market, it almost seems like the money would be better spent hoarding and trying to identify an opportunity to improve the flows, which I think is -- I think that the long-term key to this turnaround is you guys improving the flows and having the cash ready to roll and even if it's a big acquisition. So I'm just trying to reconcile that with the consistent aggressive buyback stance that you guys continue to take.

Peter H. Nachtwey

Good question, Doug. Maybe I'll take the first part of that, which is kind of the cash we have on the balance sheet and our cash projections going forward. And then Sully can weigh in, in terms of how we think about deploying that from a business standpoint. But keep in mind, you'll see in the Q that we've -- our balance sheet cash has gotten back up to $900 million. That's despite buying back $90 million of stock over the last quarter. And as we talk about often, our cash low point is June -- second quarter every year because that's when we pay bonuses. So we'll ramp up from the $900 million going forward, assuming the market stay roughly in line with our recent trajectory. So we've got $550 million of excess cash on the balance sheet. We think of that, we need $350 million to kind of run the business, regulatory capital, et cetera. So $550 million cash on the balance sheet, and then EBITDA that's approaching $600 million. We're generating a lot more cash on a go-forward basis. So we think we've got plenty of resources to be able to both invest with our affiliates across the various kind of growth options that are day-to-day. And then acquisitions, as we've said, if there was a real good acquisition opportunity on the horizon, then we might slow down the buyback. But I think, bottom line is we can do both here. So, Joe.

Joseph A. Sullivan

And I think, yes -- Doug, it is a good question. And it's always about balance. So we will continue to pursue our capital plan and our share repurchase. But at the same time, we have to be willing to invest internally and organically, either and in our affiliates or in our distribution model or whatever we have to be prepared to invest, where we think it makes sense and where we can get a return. And also look to potentially do an acquisition. And remember, we didn't speak to, but there's multiple ways to finance an acquisition. So it is through cash. It's also through equity potentially. But it's also through debt. And with debt at historically low rates, that can be a potential component of an acquisition going forward. So we have to balance. And you're absolutely right, we have to do both.

Peter H. Nachtwey

NYes, Joe is right to point out the debt side. One thing not to forget from our liquidity standpoint is we have $500 million of an undrawn revolver as well. So a very good question.

Operator

Thank you. That concludes our question-and-answer session. And I would like to turn the floor back over to Mr. Sullivan for closing comments.

Joseph A. Sullivan

Thank you, operator. So I'd like to thank everyone once again for your interest in Legg Mason. But before we close, I would like to especially thank my colleagues at Legg Mason and at our affiliates for their support, their professionalism and their continued dedication to delivering for our clients during this transition. I do appreciate your time today, and I look forward to updating you on our next earnings call. Thank you.

Operator

This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines at this time.

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