Franklin Resources, Inc.

Welcome to Franklin Resources Earnings Conference Call for the quarter and fiscal year end at September 30, 2020. My name is Holly, and I'll be your call operator today. Please note the information presented on this conference call is preliminary. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 risks the risk factors, and MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. At this time, all participants are in a listen-only mode. If you would like to ask a question at that time, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Franklin Resources President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Hello, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2020 results. Today, I'm joined by Greg Johnson, our Executive Chairman, and Matthew Nichols, our CFO. We hope that everyone on this call and your loved ones are staying safe and healthy. This year, despite the challenges presented by COVID-19, we made significant progress in moving our business forward, including closing the Legg Mason acquisition earlier than initially expected. We focused our efforts and investments in key areas that directly support the firm's multi-year strategic plan to maximize organic growth, execute on M&A opportunities, and position Franklin Templeton to capitalize on industry change. The results that we announced this morning reflect a full quarter and fiscal year of Franklin Templeton, but only include two months of the newly combined organization. In that short amount of time and under these extraordinary work-from-home conditions, we've made remarkable progress becoming one company all ahead of schedule. And the strategic rationale for this powerful combination has only strengthened since we announced the acquisition back in February. We've been able to bring together two especially complementary platforms in a way that creates a more balanced organization. Our global presence has expanded in key growth markets around the world, and we have created an all-weather product offering with a greater range of specialized, high-quality investment capabilities, all with an eye toward delivering exceptional client outcomes. It's important to note that the company we have become could not have been realized alone. Together, we have significantly enhanced our ability to meet the needs of clients, advisors, and shareholders for many years to come. And client reaction to the acquisition has been consistently positive. We're excited about this integration, not just for the strategic benefits, but also for the impressive group of people and leaders we're bringing on board. We were pleased to be joined by so many talented professionals from Legg Mason with a 97% acceptance rate of employment offers made to Legg Mason holding company employees. An integral part of our planning effort has been the frequent and productive conversations we've had with the leaders of each of the specialist investment managers, or SIMs. We've appointed certain SIM leaders to global or regional leadership roles in different areas of the company to fully reinforce our strong alignment, our shared focus, and commitment to each other. We're also pleased to report that our global distribution team is now in place and is already able to cross-sell investment products from both organizations across retail and institutional channels globally. Our new and centralized client-centric distribution structure is designed to increase end-to-end accountability for regional growth and ensure clients get the most out of their relationships with us. Our specialized investment managers also each retain their strong institutional distribution capabilities. We have focused on preserving the independent investment autonomy of the SINs while providing them with the opportunity to benefit from Franklin Templeton's global infrastructure and investments in technology. In one exception, Franklin Templeton's multi-asset solutions and QS investors have combined to form Franklin Templeton Investment Solutions. This single Best-in-class platform brings together the powerful combination of Franklin Publica's active, fundamental capabilities with QS quantitative skills to customize multi-asset portfolios for our clients. The team now has more than 120 investment professionals overseeing more than $120 billion in multi-asset strategies. creating a sizable solutions business with scale to compete with the largest full-service providers. We're seeing the benefits of adding world-class franchises to an already strong set of investment capabilities. We continue to believe that active management will play an increasingly important role in client portfolios, and we are well positioned to capitalize on this. On the performance front, approximately half of mutual fund assets are outperforming their peers over the standard time period, including over 100 funds rated 4 or 5 stars by Morningstar. We also have strong institutional performance with 63%, 69%, 73%, and 84% of assets beating the applicable benchmark for the 1, 3, 5, and 10-year periods, respectively. most notably in fixed income and alternatives. On the sales front, U.S. fixed income attracted record net flows of $5.7 billion in the quarter. We're pleased to see strong long-term net flows from Western assets, which reached $410 billion in long-term assets and $479 billion in total assets, its highest level on both fronts in over a decade. Additionally, as of quarter end, Western's total assets under management were $12 billion higher than at the time the acquisition was announced. Western's investment performance has been outstanding. Our fixed income pipeline across the firm is strong with at least $6 billion of unfunded wins and a significant opportunity pipeline. We recently introduced a new portfolio management team structure for the Franklin municipal bond team to align portfolio managers with common strategies across the platform. We believe this will further enhance investment performance that rebounded this year with 85% of assets ahead of peers for the one year period contributing to positive net flows for the year. On a combined basis across the firm, Our tax-free fixed income AUM has increased to almost $85 billion. ClearBridge AUM is close to its all-time high, standing at $153 billion, with strong investment performance and flows in several strategies. Royce and Martin Curry's strategies also have strong investment performance, with essentially flat flows for the quarter. Franklin Equity Group continues to achieve strong performance performance and attract inflows. Franklin Dynatech Fund generated $4.4 billion in net inflows per year, more than doubling its assets under management to over $18 billion. Combined with Franklin Growth and Franklin Rising Dividend Funds, the Franklin Equity Group now has three funds near or above $20 billion of assets under management. In terms of global macro, all performance challenges and attrition from Franklin Templeton and Brandywine global macro strategies persist. These continue to be positioned for more challenging market conditions. These strategies also made up some ground on peers and the benchmark in the quarter. It's undeniable. that with Franklin Tepliton, Western, and Brandywine, we have a truly unique position and extensive capabilities across global macro strategies. Similarly, Tepliton Global Equity and Franklin Mutual Series strategies continue to experience outflows but are well positioned for periods that favor value investing. With the addition of Clarion partners along with Benefit Street partners and K2 advisors, The alternative asset class recorded its fifth consecutive quarter of net inflows and now represents $124 billion in assets firm-wide. Clarion is experiencing strong investor interest with an inbound Q of over $1 billion. Benefit Street Partners priced two new CLOs in the quarter totaling $800 million and received additional commitments of approximately $300 million. Momentum in our alternative business continues to build. As investors become more and more vehicle agnostic, we are well positioned in the retail FMA segment of the market where we are now a leading franchise with 103 billion in assets compared to just 6 billion a year ago. And our expanded ETF offering doubled to over 10 billion in AUM this year. We are also planning to expand our closed-end fund capabilities. Turning to financial highlights, adjusted operating income increased to $429 million, a 58% increase versus last quarter, or 5% from the prior year, largely reflecting the addition of two months of leg mason. We are on track to realize $300 million of growth synergies, with 85% of run rate savings expected to be realized by the end of fiscal year 2021. The cost to achieve these savings is expected to be approximately $200 million, which is $150 million less than originally anticipated. And we expect to realize approximately $600 million of cash tax benefits related to the various tax attributes and deductions which carried forward in the transaction a 20% increase from our initial estimate. Our strong balance sheet continues to provide us with tremendous flexibility to evolve our business. Earlier this month, we completed the public offering of 750 million aggregate principal senior notes due 2030, issuing at a 1.6% coupon, and pre-funded our intention to call higher coupon junior subordinated notes, which are callable at FAR in March and September 2021. And finally, I'd like to thank all of our employees for their significant efforts to keep our business operating smoothly during these extraordinary times and for maintaining their laser focus on our clients' needs. Now, I'd like to open it up to your questions. Operator?

Thank you, Ms. Johnson. As a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. Again, star 1 for questions. To remove yourself from the queue, press the pound key. And our first question is going to come from the line of Ken Worthington with J.P. Morgan.

Hi, good morning. Thank you for taking my question. With the integration of Leg Well underway, can you talk about the integration of the two distribution networks thus far? I think on the last call you talked about building a more agile and regional distribution organization, so I wanted to hear any updates there. And then you gave a cross-selling anecdote in the commentary, and I was hoping you could flesh out kind of how you'd expect cross-selling to ramp given the integration and maybe what products might be most successful given what you've learned over the last couple of months. Thanks.

Yeah, thanks for the question, Ken. So the first thing was a decision to more regionalize. So what does that mean? We wanted to push out more marketing and product and data analytics out to the regions. Historically, that was done more centrally. And so now there is a portion of it that's completely controlled by the head of that region. And as you probably know, we talked about some of the teams had taken on leadership roles Adam Spector, who's CEO of Brandywine, is now head of global distribution. And Julie and I, who was head of Martin Curry, is now head of Europe for us. And so that's just helpful in ensuring that we understand both how to integrate the global distribution with really how each of the SIMs handles their distribution. And so it's helpful having people who come from that perspective. As far as you look at U.S. retail, which is a trillion dollars of our assets. LightMason came in with a much stronger footprint in the broker dealer wire house channel, and we were much stronger in the independent channel. You know, we now have $103 billion in SMAs. They were very top three SMA providers. And so it was really looking at the capabilities between the two organizations and figuring out how to, and in some cases you just had, you know, great people covering the same channel, but one had greater penetration in that. And so our distribution team is really a mix of, leg mason and historic Franklin Templeton people, and it was, you know, trying to recognize kind of where those ranks were. They had, you know, strong penetration, say, in the insurance channel. So, you know, there we'd bring in the leg mason folks. We have spent, I'm trying to remember the number, something like, you know, 1,200 people have participated in something like 83 webinars that we've done to teach and ensure that all the salespeople have knowledge of each other's products. So we've spent a lot of time with that. You saw the anecdote in the comments. We also had another example where we had an Israeli institution where Legg never had any distribution in Israel and ended up winning a mandate for one of the SIMs. So, you know, this takes a little bit of time, but I can tell you that we feel really good about how it's operating now and that we found less overlap than we thought we'd find with distribution when you really got under the covers.

Great. Thank you very much. I think I just have one thing to that. which is to say on the institutional side, recognizing how important the institutional distribution is, given the fact that a big portion of like Mason, the rationale for our transaction was to grow institutional business. That's staying largely exactly as it's organized today at the specialized investment manager level. And that creates a high degree of confidence with clients and stability and continuity in that area of the business.

And actually, let me add one other thing. You asked the question of how do we get to, you know, more positive flows. As you saw, we had, you know, things like the alternatives were actually have been in positive flows. We think there is just a huge amount of opportunity for Clarion and BSP and the retail channels. And BSP did a small acquisition of REIT. And really what they were doing was acquiring some wholesalers who have expertise in selling alternatives to the RIA channel. So we think that's a tremendous opportunity for both Clarion and BSP, as well as feedback we've had from wirehouses who feel that they may have a heavy concentration in the real estate managers that they have, and they'd like to diversify. And Clarion coming out of this just has tremendous performance as they were overweight in things like industrials and utilities. and underweight retail. Western, obviously, continuing cross-sell capabilities. You know, we have in the SMA side is the income fund is able to be, you know, penetrating more of the relationships that, like, Mason has with advisors and sell SMAs. We think that's going to be a great opportunity for our income fund. And I do have to say that I think with the Templeton Global Bond, you know, there is increasingly nervousness around, you know, whether they're very much set up for a risk-off environment, as is Brandywine. And we've seen them perform very well in September. And as investors, you know, may think of them as almost an insurance policy right now to any kind of big catalyst of the surprise, whether it's an inflation surprise or escalation of U.S.-China tensions. And so I think, you know, their stories, we're doing a better job of getting out their stories there. I think we could at least begin to see some reduction in the redemptions. And, again, it's kind of positioning that message as an insurance.

Great. Thank you very much.

And our next question will come from the line of Patrick Divitt with Autonomous Research.

Hey, good morning, all. Could you give us the amount of reinvested distributions in the long-term flow numbers so we can better compare it to your public comps?

Yeah, I think that we're at – sorry, go ahead, Matt.

Okay. Yeah, so we had $2.5 billion of reinvested distributions for the quarter. That compares to $3.5 billion last quarter and, as you know, $3 billion a year ago. Our plan there, by the way, we seem to have caused some confusion here, was to call out anything that's unusual around those flows. We decided to have a simplified view of flows in terms of the presentation of it. So we have client-driven activity in, client activity out. And given our size and breadth of our business, we thought that made the most sense. But we're not trying to avoid discussing reinvested distributions with anything unusual around it, we have planned to discuss it. For example, at year end, as you know, that's often elevated, and we've planned to call it out at that time. But that's the number for the quarter. It's $2.5 billion, $3.5 billion last quarter, as you know, and $3 billion a year ago.

Perfect.

Thanks.

And on the fee rate guide, is there any kind of money fund fee you ever had when built into that? And through that lens, how much has that started to hit in the most recent quarter and maybe any view on how it's tracking kind of into the December quarter?

Yes, it's fully included in the projection.

Great. And was it impactful in the last quarter?

Not relative to the size of our business. And also, given the structure of our arrangement with Western, it has the largest portion of our of our money market business, we have some protection there on the margin. So it's not a big, it's absolutely not material at all to our overall company operation. Great. Thank you. Thank you.

And our next question will come from the line of Craig Siegenthaler with Credit Suisse.

Hey, good morning, Jenny, Matthew. Hope you're both doing well.

Morning.

I wanted to start with M&A. And so just given the pickup in M&A speculation in U.S. asset management, we want to see if Franklin would consider doing another large acquisition over the next 12 months, knowing that you're still in the process of digesting like Mason, which probably isn't easy on the organization.

Yeah, I think the way that we answer that is that we are absolutely in the flow of what's going on. You're right, there's a tremendous amount of activity in the industry with some interesting opportunities to consider. Broadly speaking, I think in many ways, the evolution of the industry in terms of some of the more dramatic ideas that are out there is just getting started. But we're very, very focused on... making sure that we maximize the output from the Legg Mason transaction. I mean, we literally doubled the size of our company from an assets and a management perspective. Every time when we have meetings internally, we pull the onion back and we realize we've got another opportunity internally either to be more efficient or to work together to produce more revenue. So I think that that's our primary focus. But we are in the flow on these things. We're not shut for M&A by any stretch if there was something tremendously compelling. In particular, on the distribution side, if there was something that helped us with distribution further to what we already have, we'll look at it very carefully. We still have a very strong balance sheet. We're not going to compromise that. We have strong earnings potential. We're not going to compromise that given the the opportunities we've got to use our cash elsewhere internally. But, you know, it's fascinating times, and, you know, we are one of the companies that is quite actively pursuing ideas in the industry and making sure we keep up with the flow of change.

Yeah, and I just add that exactly as Matt, you know, it would take a lot for us to want to take on something else before we've digest this one, but you never know. I mean, we were very intentional about keeping a, you know, having dry powder in case something else just came up. But the bar is probably a little bit higher on any big deals. But we've also said, you know, that we continue to do, we want to grow our high net worth business. And as Matt said, if there's something that's sort of distribution related, which tends to be more on the technology side that we're always looking at those. And then we stay in the flow in the industry because we think the industry is changing pretty dramatically.

Thank you. Just as my follow-up on flows, we've seen this really strong migration into fixed income in the U.S. And then you have a much stronger bond business now with the addition of Brainy Wine and Western. But your flows were a little bit negative in the quarter due to global bond. Do you expect the bond migration to continue for the industry, even though yields are very low? And then if you do think it'll continue, do you think Franklin as a company can start to participate just as all the pieces start working together?

Yeah, I mean, this is Greg. I would say that you really have to separate out between what Western's doing on the U.S. fixed income side We've seen a lot of strength in areas like munis. We think that's going to continue as state rates and possibly federal rates go up, so I think that's very positive. Obviously, rates declined mostly over the period, so any duration and even credit worked very well, and that's really why Western stood out. it would be a very strong quarter for flows if you just looked at our U.S. fixed income at $5.5 billion or so of inflows for the quarter. It just gets masked by what is happening on the global bond side, which really is a category that is very different from the traditional fixed income buyer. And as Jenny said earlier, I look at the categories and any spike in rates, uh... any could you know any uh... contraction in spread and and credit we saw that a little bit you know we saw that uh... in september we may see that continuing a bit uh... and and i think that will help uh... global bond at the end of the day any after category like especially global bond competes with everything else and and you know the returns when you compare u.s equities and and just straight u.s fixed it doesn't look very attract i think you can look pretty attractive fairly quickly if you have any kind of move up in rates, and that's really why we think this is a nice balance to the overall portfolio.

Thank you, Greg. Thanks.

And our next question will come from the line of Robert Lee for DBW.

Thanks, everyone. First question, hi, Matt. Can you kind of maybe just some I want to understand the tax guidance in the 26% rate, which I know you mentioned GAAP, compared to kind of, I believe, kind of the 22 or so that kind of we're expecting. Should we still expect 22% on an adjusted basis, or should we use 26 as the baseline, understanding that that's around from there? I mean, how should we think of that?

I'd use 26 as the baseline. I mean, at the business level, Our business has changed in terms of, you know, we've got a greater portion of our business in the U.S., a higher tax rate, and there are a couple of jurisdictions internationally where the tax rates have gone up a little bit, so that impacts our overall tax view. So I think I would use 26% with a view that, you know, maybe it could be 25%, but I think 26% is a is a good number to put in the model for now. The fourth quarter was confusing. We had a spike in that rate because of the reasons we mentioned in the prepared remarks. It was just very unusual that it spiked it up to 36% Great. And maybe just going back to the fee rate guide.

So the 36 to 38 on a fully consolidated basis Are you thinking that kind of over, you know, kind of for fiscal 2021 or kind of longer term and on like kind of an exit run rate basis, you know, adjusted, I guess, to 38 and change in the quarter, you know, adjusted to two months of lag. Is that, you know, is that going to be the run rate?

Yeah, the 36 to 38 is assuming a full year. So that's the full 12-month combination, if you will. So we think that's a good guy based on, obviously, the very significant mix of business change, so with a much bigger fixed income business and much bigger institutional business, both that lower fee rates versus legacy frank in Templeton, which brings that down significantly. But at the same time, you know, there is opportunity there in the alternative side where the fee rate's quite a bit higher and we see some interesting growth opportunities there. So you have, you know, global bond being, global bond higher rate being offset by lower rate, broader fixed income, business core core plus, institutional. That's what brings it down. And then pressure upwards, if you will, is the growth of the alternative business. So we hope we're on the higher end of it, but we think that's the natural range for the year. Thank you.

I appreciate you taking my question. Thank you, Rob.

Our next question is going to come from the line of Dan Fannin with Jefferies.

Thanks. Just to follow up on one more question, just in terms of the assumptions for your guidance, Do the fee rates assume any level of performance fees? And if so, kind of what's the baseline? Also, as you think about your expense guidance and the fee rate guidance you gave, what is the market assumption that you're using? Is it flat? Is there some modest growth?

So we assume flat. We don't assume any market growth in our projections. One, two, that the fees do not include performance with the average fee rate. projection does not include performance fees. We expect our performance fees to actually go up. They were $10 million for this quarter from zero last quarter standalone FT. We start to enjoy a larger percentage of performance fees from Clarion after April next year. So that provides an opportunity. We share 50-50. performance fees with them today, whereas today we don't get any. It's 50% on our 83% ownership in Clarion. So that's an opportunity to get more performance fees. And in previous times, last quarter was unusual. We had no performance fees from Benefit Street, but we expect that to pick up. For example, this quarter it went from $0 to $4 million. We got $6 million from the Lake Mason side and Yeah, it wouldn't surprise us to see that go up quite a bit in 2021.

Great. And then in terms of the known redemptions, you called out $3 billion in the prepared comments, but you also then highlighted that it was not related to the transaction. So, I guess, what gives you confidence around that? And then, just curious about other potential disruptions that you might see or have heard about coming from either just normal course of business or the acquisition?

So I have to say just from the Legg Mason standpoint, Legg Mason was in positive flow since September. They have a much bigger institutional business, so you have lumpier redemptions. I think that's going to be more characteristic than we've seen historically. But we basically haven't seen redemptions related to any of this transaction. The bigger redemptions have tended to be, you know, Franklin Templeton, as we said, that one that we called out was a low-fee, sub-advised relationship. There are some where you're seeing sovereign wealth funds in the Middle East who are redeeming larger numbers for not for investment performance, not for a transaction, just because it's sort of what's going on in the market right now. So we are optimistic from the standpoint of the integration and how things are going with clients. But you're always going to have, we still have the issues on performance in a couple areas like global macro, obviously value. The value index has underperformed 3,200 basis points year to date. So there are some people that are just ready to throw in the towel on value. Others are thinking maybe it's time to you know, that that could switch. So those are always going to be, you know, to the extent they're on the institutional side, a little bit more lumpy.

But as a general matter, obviously, we'd rather have no outflows at $12.6 billion. It's not like we're pleased about $12.6 billion of outflows. But when you think about it, you know, the $12.6 billion is very consistent with fracking temps and standalone outflows from the previous quarter outflows. and both last quarter and the quarter before that. So the percentage attrition across the firm has come down a lot, and it's driven by exactly the same things that are really market-driven, if you think about the positioning of those strategies. And the all-weather point that Jenny's made a few times is an important one in this regard, because we do have some very important strategies under the hood here that that will do well if the market starts to get more difficult again. I'd also say that out of our $11.5 billion of sort of unfunded wins that we have, we would expect something like $5 billion or so of that to come in in the December quarter.

Great.

Thank you.

Thank you.

And our next question will come from the line of Michael Sipris with Morgan Stanley.

Hey, good morning. Thanks for taking the question. Just on the multi-asset front, you guys have combined QS with the Franklin Templeton multi-asset solutions group to create the standalone multi-asset solutions platform. Just hoping you could talk a little bit more about the strategy there, what you're most excited about, how you're thinking about the opportunity sets. And then just the follow-up there would be just as you look across the organization entirely, you know, where else could it make sense maybe over time to think about bringing together some of the investment teams from Frankel Templeton and Legg to create a similar sort of combined businesses and investment teams?

So, you know, in the QS and FDMAS, you know, very much a – the teams got together and really thought about it, talked about it, and said we could be much stronger together. So this is really kind of organically coming from those teams. You know, today that combined organization has 120 investment professionals and $120 billion in assets. But what I think intrigued them on why it made sense for them to come together is QS, you know, was an institutional kind of quant manager. They had a strong track record in things like liabilities of an investment, active quant, risk mitigation, where it's On the Franklin side, while there was quant capability, it was much more of really sort of active manager, active allocation. And they have their own outside managers to build it. So in bringing them together, you're really bringing this hybrid of kind of quant and active. when you think about the way the world's going, whether it's models in retail, you know, Alcamoria models in the retail channel or risk overlay of separately managed accounts, you know, clients are looking for being able to have a conversation almost like an OCIO type of conversation as they're trying to think through, you know, how to build their portfolios, how to position their portfolio. And this just gives us tremendous capability around that. And we think that that's sort of the way the future goes.

And I would just add, I mean, I think it also from a client service and institutional accounts, having that capability and just the value added side of, you know, looking at risk overlays and LDIs opening up new channels like insurance. For us, it just increases the toolbox that we can offer to clients and hopefully deepen the relationships. And I also think it's an example, it's the one example of scale, you know, where you have a large organization, it's bringing all that expertise into one and then hopefully, you know, leveraging that with clients. We think that's, you know, very exciting.

And just to answer your other part of the question about do we see opportunities to bring other groups together, we are not focused on merging products together. That is not part of this deal. As a matter of fact, you know, you talked to our CIO of Global Fixed Income and CIO of Western, and they have different views on sort of the timing on whether or not we'll see inflation or interest rates rise in the long end of this year. you know, on the curve. And that's what an all-weather product lineup is, is that ability to have different products for different outcomes. And we think that's very healthy. Our distribution team has been selling equities where, you know, arguably two different managers compete in the same category. You have to have the best distribution team because they have to be able to discern what the client's looking for and either deliver up one option or decide that you're going to answer the RFP with two different options in the same category. We've been very comfortable with that on the equity side. I can say that now we've just added that capability on the fixed income side.

Great. Thank you. Excellent.

And our next question will come from the line of Bill Katz with Citigroup.

Okay, thanks very much for taking the question. So I guess I'm not sure, Jenny, about yourself. Just coming back to your fiscal 21 expense guidance of $3.7 billion, what kind of sort of G&A assumptions are you plugging into that number? Just trying to get a sense of what you think about in terms of normal around travel, entertainment, sort of things that are probably depressed given the COVID-19 backdrop.

In 2021, I'm going to get down, but I'm going to get back to Matt.

Hey, Bill. Hope your son is doing well. So I would say that we've built in a sense of, again, maybe this is sort of optimistic from my perspective, but we're building a sense of normalization in, you know, beginning, say, in March next year. But we've also built in, you know, more in terms of advertising, promotion, these sorts of things that you'd expect us to do as we've been working on our distribution and client franchise. So, you know, our G&A we have forecasted for about $485 million for the year, which is a healthy number and – allows us to continue to invest in a number of important things and does allow for travel to go back to some form of normality after the first annualized quarter next year.

Great. That's helpful. And just as a follow-up, I noticed you started to repurchase some stock in the quarter. So how do you counterbalance sort of reinvesting back into the business versus the return of cash to investors versus your commentary that was just the beginning stages of an M&A evolution?

Yeah, so you can see, you know, when you look at our balance sheet, in fact, we Last quarter we ended at $8.2 or so billion in cash investments. We now have $5.1 billion in cash investments. It's still quite healthy underpinning to give us confidence to use our income. Our income already with just two months of leg mason in there is pretty significantly enhanced. So I think what we plan to do at a minimum with respect to share repurchase is make sure that we offset all of our share grants. And then obviously we're very focused on the dividend and you know our history there and you can expect that to continue subject to our board approving in December the capital management policy. And then we have already multiple new requests internally, given the new breadth of our firm, to consider co-investments, see capital opportunities, other internal growth opportunities. And what I would say is that as we reach the end, either of a quarter or of a year even, we then may – do some top-ups in terms of some additional share repurchases if we don't feel pressure elsewhere. We also have a higher debt load, as you know now, and we successfully accessed the market earlier this month, as Jenny mentioned, and we intend to use the proceeds there to refinance much more expensive notes. We're going to actually save about $30 million on that. But having said that, if rates stay where they are, maybe we just refinance our notes going forward, and we stay at the current debt load, assuming that our EBITDA stays about the same, because we want to keep our current credit profile intact. But if rates stay where they are, if rates get more expensive or the debt market is not as attractive, maybe we de-lever some as well with our cash. So it's really a combination of those things. And at the end of the day, if we have capacity to buy back more shares, given our current valuation, we'll do it.

Thank you.

Thank you.

Thank you. Our next question will come from the line of Alex Blastein with Goldman Sachs.

Hey, thanks, guys. Just a couple of clarifications at this point. So, Matthew, on the expense guidance, can you help us with some sensitivity to, you know, revenue assumptions? So, I know you said you guys are assuming generally flat markets in your expense guide for 21. But if the markets were to be higher, can you help us understand kind of what's the sensitivity to that 3.7 with a kind of normalized market returns?

Yeah, I think that $3.7 billion, given the fact that's an adjusted number, of course, the gap number could be higher or lower because that includes S&D. But I'd say as an adjusted number, that's a disciplined number, that we have some comfort in that, that if the markets go up, it'll still be $3.7 billion. That's sort of how I would describe it. If the markets come down, it could come down. But I don't see us going up beyond $3.7 billion.

Yeah. And just another question, I guess, around capital management. Given the valuation on the stock currently and the free cash flow generation of the businesses, Can you help us understand the framework around making another acquisition, whether it's something small on the distribution side or continuously building out the RIA channel, the high network channel, versus buying back Franklin stock at the level?

Yeah, yeah. Look, I think it's a great question because obviously the bar for us has to be quite high given the fact that every dollar we're buying back of our stock is like buying back 6% dividend yield. So we're quite focused on that. We won't be doing large stock deals based on our current multiple and dilute –

Matt, I think you're on mute. I think you just muted yourself.

Hello?

Matt, go ahead.

Greg and Jenny, can you mute? Ladies and gentlemen, stand by. Okay. No, I'm okay. I fixed it.

Alex, can you hear me? Yep, all good. Okay, sorry about that. Where were we? I'm sorry, I've lost track of where we were. what we were just talking about.

You're answering the question about the decision on whether we buy back.

Oh, yeah, yeah, yeah. But the high bar, yes, yes. So, yeah, we have a high bar for the reasons I just mentioned on our stock. And we're not going to do a large transaction using our stock unless it's for the same kind of multiple. So the way I would say it is that in wealth management, we think it's a very good use of our cash because we did two smaller transactions. They both ended up being accreted to us in terms of the execution around that, you know, a little bit of cost savings, revenue growth, it all works out quite well. So in wealth, there'd be much smaller transactions that we use to continue to grow fiduciary trust. It's on the alternative asset side that we have to think, you know, there are some interesting opportunities out there, and that would be where we would use our cash and not our stock. So that's how I'd describe that. All right. Great. Thank you.

Thank you.

And our next question will come from the line of Chris Harris with Wells Fargo.

Thanks. So you highlighted the momentum you've been seeing in alternatives, but there are some concerns about real estate as an asset class generally, particularly commercial real estate. So how is Clarion positioned to deal with the downturn we're seeing in that particular area?

So Clarion is overweight industrial. So that area is done very, very well. As e-commerce demand goes up, Amazon needs more storage. And so there's more demand on cloud and things. And that's an area that they have focused on. And they were really underweight on the commercial real estate. So they actually perform very, very well positioned right now with their performance.

Okay, and then just one quick one on the expenses. I know we've got some noise here because, you know, lag was revenue and profit share, and Franklin's more of the traditional model. So if we look at the aggregate expense base, what is the addressable cost base, if you will? In other words, what are these synergies being met of? Because I know we probably shouldn't be looking at the entire expense base when we're considering that.

No, no, I think you should. I think you should look at it against the $3.7 billion that we've guided for 2021. I know it's very early guidance, but I think it's correct to think of that as being addressable.

Okay. Thank you.

Thank you.

Our next question will come from the line of Mike Carrier with Bank of America.

Good morning. Thanks for taking the question. Just two follow-ups to that. Given a lot of moving parts with expenses, I'm not sure if you have like a fiscal 1Q starting point for the adjusted expense level, given that 25% of synergies realized by the end of September and then the full impact of leg, and then any color on just the timing of, you know, when we should expect the 85% during the year.

Yeah, so on the 85%, I'd say we've made good progress so far. I think we mentioned that we already achieved 25% of it by 9.30. We expect to achieve 50% by, yeah, we said year-end, but that's probably going to be more like the end of January. And then I would say the rest of it, or the 35% that's left, We hope to get most of it by June, but there'll be some carefully managed expense reductions on the front office side in particular that we've wanted to spend more time executing upon to make sure we have that continuity and stability around the group that we've discussed. So I think it's fair to say that we Again, we've got the 25% done. End of January, we get the 50%. Maybe 75% by the end of June, and then the rest up to 85% by the end of our fiscal year. In terms of the normalized tax, I think maybe it's useful to walk through the revenue and expenses associated with what we bought on from Legg Mason. So, you know, Legg Mason two months was about $475 million of revenue. If you include sales and distribution fees, if you exclude sales and distribution fees, it's about $415 million. So that sort of quarterizes, if you will, into about $700 to $720 or $2.85 billion on an annualized level in terms of revenue. And the expenses, as you said, it's a bit of a noisy quarter, to say the least, with all the acquisition-related expenses. But if you exclude the non-recurring acquisition-related expense items, it was about just the Lake Mason two months was about $350 million inclusive of sales and distribution. Excluding that, it's about $280 million. million. So I think about it as being if you include sales and distribution, it's 475 minus 350 equals 125 times 6. 750, that's one way of looking at it. If you execute sales and distribution, it's 415 minus 280 is 135 times 6 is 810. So you could look at it as that we're adding to Franklin, including the cost saves. that aren't included in those numbers. Because remember, in the overlay, we haven't included the additional run rate that we expect to achieve during the year. So maybe, I don't know whether that helps, but if you think about that as being an addition on top of our business.

Yeah, that's helpful. And then one is clarification on the fee rate. Just when I look at the quarter, the 38, it seemed like that was a little lower than expected from, like, the pro formas. And then even with Franklin standing around 50. And then if I think about the outlook at a 36 to 38, if that includes, like, another month of leg, it seems like that's not much of an impact, you know, relative to the 38. So I wasn't sure if there was just, you know, something else either impacting this order, you know, or impacting, like, the run rate or the outlook.

No, nothing in particular. We've modeled it out, and we think they're good guides. Okay. Thanks a lot. Thank you.

Thank you. Our next question will come from the line of Brian Beadle.

Great. Thanks very much. Good morning, guys. Most of my questions have been asked and answered, but just one follow-up on the capacity for deals if you're doing them in cash, Matt, like you said. The I know it's $5.1 billion in cash and investments. What do you view as cash available for acquisitions within that? And then also additional debt capacity, if you should think about, you know, what type of cash level you'd be able to do?

Yeah, it's probably, you know, out of the cash you see, it's probably a billion dollars. Because, again, we're quite conservative. We like to... make sure we have the sup as you know we call it supplemental liquidity and and we intend to keep that in place so we're disciplined around around that um and so you know that that's how we uh that's probably what if you if you if you're looking for an excess cash number that we would consider to be excess it would be that in terms of um In terms of, you know, other people would maybe double that number and define it as that, but we wouldn't. In terms of debt capacity, you know, our absolute intention and focus is to make sure that we maintain our current credit profile, which is an A2 rating. As you know, we just accessed the debt markets, and we're very pleased with our rating and that transaction, and we intend to retain that profile and operate the company and our capital structure in a way that's consistent with that. So our debt capacity at that level, we probably have some capacity, but we don't intend to push our limits whatsoever with the rate agencies or with our debt investors, given what we've described to them. So we're quite focused on that. The technical capacity to investment grade is very, very substantial in terms of debt, but we don't intend to use that. Okay, that's helpful.

And then, Jenny, just to talk a little bit about ESG. Obviously, your legs managers had some good traction, certainly at ClearBridge and also Western and also a few other affiliates. How are you thinking about integrating that through Franklin? Are you thinking about centralizing that ESG process and leveraging that across the totality of platforms or leaving the ESG capabilities within the individual managers?

So with respect to ESG, we think that the framework in which you apply ESG is specific to the investment team. But the data, we're a member of SASB and trying to get a lot more standardization around the data. We've actually created a centralized ESG database So as various teams, you take our global macro team, they get 14 different data feeds to build their ESG framework. That data then goes into this centralized ESG database. Any of the investment teams are welcome to use it as they build their own framework and model. But, you know, we really are working hard with Stasi and the industry, and Greg participates in the ICI on ESG and trying to just, standardize a lot of the information that people look at to measure, to build their framework. But to answer your question, we think that it is fundamentally part of the investment process.

All right. Yep. May I speak to one more quick one?

Yeah. Today, I'm going to take this little pitch. Our Franklin Municipal Green Bond Fund is the ninth percentile year-to-date, which is our ESG and the main area. We figure she's got a great demand for these. Go ahead.

That's great. On that 97% employment acceptance, was that in line with what you were thinking, I guess, and were there any significant non-acceptances from either PMs or key leaders in that 3%?

So, again, that was the focus on holding company and distribution. And I think when we set out, we weren't sure what percentage of the Legg Mason employees. And I think we ended up both on distribution and on the holding company picking a lot more Legg Mason employees. And I think you really would see that it's a combination of both groups. And, no, there was no, you know, specific one that we, you know, felt like we really missed. And you were not talking about investment people.

Right. Okay. Great. Thank you. So, Jenny, I think – oh, sorry.

Yeah. Go ahead.

I apologize. Our last question for the day will come from the line of Patrick David with Autonomous Research.

Hey, Patrick. Hey, yeah, that was – Brian just asked my question, so thanks. Okay, great.

Well, listen, I think, you know, I just want to thank everybody for participating in today's call. And just want to leave you guys with one thought. You know, what we knew from the beginning has only been further crystallized as, you know, and that is that our two organizations are really incredibly aligned in terms of strategic fit, culture, and our shared focus on delivering strong investment results for our clients. We look forward to continuing to stay at the forefront of our industry and, again, keeping that balance sheet flexibility as things evolve, but really providing unparalleled investment choice and service to our clients. So thank you, everybody, for participating, and be safe out there.

Thank you for participating on today's conference call. Once again, we do appreciate your participation, and you may now disconnect.