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.