Franklin Resources, Inc.

Resources Earnings Conference call for the quarter ended March 31st, 2021. Hello, my name is Denise, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Celine Oh, Head of Investor Relations for Franklin Resources. You may begin.

Good morning, and thank you for joining us today to discuss your quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements, were 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 just described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. Now, I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer. Thank you, Celine.

Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's second quarter results. Greg Johnson, our executive chairman, Matt Nichols, our CFO, and Adam Spector, our head of global distribution, are also on the call with me today. We hope that everyone is well. We continue to operate our business effectively with over 95% of our employees working from home. Broadly speaking, we are planning for a return to office in September, though our approach will be flexible and shaped by local requirements and the status of the pandemic in the countries where we do business. We are encouraged by the number of vaccines that are now being distributed worldwide. Those rollout rates obviously vary by country. The progress is very promising. Having said that, we have been deeply concerned by the suffering that has resulted from the surge in cases in India and other parts of the world. Our thoughts go out to our employees and clients who have been personally impacted by this terrible disease. Turning now to our second fiscal quarter, today we are pleased to report financial results that reflect our continued progress with revenue growth and margin expansion resulting in a 6% increase in adjusted operating income to $581 million. Our financial flexibility remains strong with cash and investments of $6.2 billion at March 31st, net of $250 million of debt paid down in the quarter. After only two quarters as a combined company, we're experiencing organic growth in a number of key areas. We're now a more robust and diversified active management business, and we're encouraged and excited by our collective potential. Our merger has created a differentiated global firm which balances scale and specialization and which we believe offers expanded opportunities for our stockholders, clients, and employees, as well as the financial professionals with whom we partner. Turning to performance, we're seeing an improvement in performance across a broad base of investment strategies from the prior quarter. More than two-thirds of our strategy composites outperformed their respective benchmarks and for the four key time periods. The number of our mutual funds rated four or five stars by Morningstar increased to over 140 funds this quarter. Turning next to distribution highlights, we're encouraged by the positive results of our new sales initiative and efforts to deepen relationships. More clients purchased both legacy Franklin Templeton and legacy Legg Mason strategies as demonstrated by our larger wins during this quarter. Our expanded distribution efforts drove an increase in gross sales of 32% from the prior quarter across a broad array of funds, vehicles, and asset classes led by U.S. retail. Long-term inflows increased by 15.9 billion, or 19% quarter-over-quarter, to 99.4 billion, excluding reinvested distributions. Second quarter long-term debt outflows improved to $4.2 billion compared to $4.5 billion in the prior quarter. Importantly, if you exclude reinvested distributions, net outflows improved by over $10 billion. Our sales momentum continued with positive net flows in the Benefit Street Partners, Clarion Partners, ClearBridge, Fiduciary Trust International, Franklin Equity Group, Franklin Templeton Fixed Income, Martin Curry, Royce, and Western Asset. As we said on previous calls, the firm has been focused on expanding our alternative platform, and this quarter we did. Alternative strategies grew by $4 billion to $131 billion in assets under management, with contributions from real estate, private credit, and retail alternatives. Clarion Partners and Benefit Street Partners both reached record AUM levels, and K2 alternative strategies also contributed to positive net flows. Fixed income inflows increased by 27 percent to $53.5 billion from the prior quarter due to positive contributions from a diverse group of fixed income strategies, including core bond, core plus, and corporate. We are pleased that Western assets experienced net inflows of almost $10 billion in the quarter, its highest level in over a decade. Equity inflows were $32.4 billion, consistent with the prior quarter, excluding reinvested distributions. We continue to see strong interest in our thematic equity strategies, and while it's still early days, we're seeing progress and increased interest in our value strategies. As of this quarter's end, our institutional pipeline has increased with a combined total of one but unfunded mandate of $13 billion and is diversified across all asset classes. Aside from our specific results for the quarter, we are also pleased to release our corporate social responsibility report in April. We established clear goals and priorities for fiscal year 2021, ESG investing key among them, and we continue to make important strides to keep our diversity inclusion efforts at the forefront. Before we open it up to questions, I'd like to thank our outstanding teams around the globe. They continue to do extraordinary work every day on behalf of our clients and firm, and they've done so this past year under challenging circumstances. I am grateful for everything they do. Now your questions. Operator?