Franklin Resources, Inc.

Welcome to the Franklin Resources Conference call for the quarter end June 30th, 2022. Hello, my name is Donyell and I will be your call operator today. As a reminder, this conference is being recorded and at this time all participants are in listening 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 our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc., which are not historical facts or forward-looking statements, was in 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 third fiscal quarter results. Matthew Nichols, our CFO and COO, and Adam Spector, our Head of Global Distribution, are on the call with me. Since January, macroeconomic and geopolitical factors have contributed to global financial markets experiencing a period of volatility not witnessed in decades, with substantial drawdowns in both equities and fixed income markets. These declines have challenged investor sentiment and industry flows, particularly in fixed income. While our assets under management and flows were impacted by these industry-wide pressures, We continue to benefit from a diversified mix of assets. As investors look to reposition their portfolios, we've seen interest in our alternative and multi-asset strategies, which both experienced strong net inflows during the quarter. In addition, notwithstanding flow pressures in fixed income, investor interest remains robust across the asset class. Over the past few years, we've been very deliberate in transforming our company by expanding our investment capabilities and deepening our presence in key markets and channels. This diversification combined with our financial flexibility serves us well across market cycles and is creating broader sources of revenue, positioning our company for future success. This quarter, We continue to make progress building our alternative asset business, which is less correlated to public markets and a source of increasing client demand. We now have specialist investment managers that represent a meaningful portion of the key alternative categories. On April 1st, we closed the acquisition of Lexington Partners, a leader in secondary private equity where current markets create further interesting opportunities. At the end of May, we announced the acquisition of Alcentra and we're pleased to welcome the Alcentra team to Franklin Templeton. This acquisition was an opportunity for us to enter the European alternative credit sector at meaningful scale and globalize our current U.S. alternative credit business, Benefit Street Partners. As one of the largest European credit and private debt managers, Alcentra has approximately $38 billion in AUM with global expertise across a broad array of credit strategies. Given the current challenging market conditions, we are pleased to have carefully structured the transaction to help mitigate risk. Alcentra has a strong team that will benefit from the scale, stability, and cultural alignment of being part of a combined alternative credit specialist investment manager led by Benefit Street Partners' long-tenured and experienced senior management team. Pro forma for Alcentra's AUM, our alternative credit AUM doubles to approximately $77 billion, and our aggregate alternative AUM increases to over $260 billion representing 19% of our AUM and an even higher percentage of our adjusted revenues. As mentioned, this quarter's market environment challenged industry flows. And while we continue to benefit from a diversified mix of assets, we had third quarter long-term net outflows of $19.8 billion. fiscal year to date long-term net outflows were 7.4 billion this quarter's continued market dislocation rising rain environment and the need for inflation hedging has heightened investor interest in alternatives our net inflows increased to 2.1 billion this quarter and included outflows in certain liquid alternative strategies our three largest alternative managers benefit street partners Clarion Partners, and Lexington Partners each had net inflows with a combined total of $4 billion. Fundraising momentum in this area continues. Our multi-asset net inflows were $1.6 billion, which represented the fourth consecutive positive quarter for the asset class. In this broad market sell-off environment where investors are focused on income-generating strategies, we benefited from having strong income funds managed for yield with notable investment track records and customization strategies. The first half of 2022 saw the worst fixed income net outflows for the U.S. mutual fund industry since 2000, with six consecutive months of net outflows. While high interest in the asset class continued to be strong and our fixed income inflows increased by 6% from the prior quarter, net outflows were $14.3 billion, primarily due to certain U.S. taxable and muni strategies. We benefited from having a broad range of fixed income strategies with non-correlated investment philosophies, including net flows into taxable U.S. income, multi-sector bond, corporate and enhanced liquidity strategies. Equity net outflows were $9.2 billion. This quarter, the risk-off environment impacted investor sentiment on certain growth strategies, which were partially offset by positive net flows into infrastructure, emerging markets, and sector-specific equity strategies. Consistent with what we've learned throughout our 75-year history, we've been front and center with our clients to help them navigate this period of high market volatility, rising rates and inflation, and fears of recession. In this period of uncertainty, the importance of thought leadership and active engagement have increased. Clients are looking to us to provide them with investment solutions focused on income, inflation hedged, alternative and customization strategies as they look to rebalance their portfolios and reallocate risk across a variety of asset classes. Last year, we shifted to a regionally focused sales model to meet the varying demands of our global business, shifting decision-making and resources closer to our clients. This quarter, we saw the benefits of geographical diversification outside the U.S. with improving net sales trends in EMEA and positive net flows in the Americas. Net flows for non-U.S. regions improved by 79% fiscal year-to-date from the year-ago period. Touching briefly on our financial results, which reflect the acquisition of Lexington Partners, adjusted revenues were $1.6 billion relatively flat from the prior quarter and a decrease of 3% from the prior year quarter. Our adjusted effective free rate increased to 39.5 basis points compared to 38.5 basis points the prior quarter. Expenses were flat quarter over quarter and a 1% improvement from the prior year quarter. Adjusted operating income was $567 million for the quarter, a decrease of 2% from the prior quarter, and a decline of 6% from the prior year quarter. Our balance sheet position remains strong with total cash investments in excess of $6 billion after upfront cash consideration of almost $1 billion was paid for the acquisition of Lexington. Let me wrap up by saying that over the past several years, we've significantly diversified the firm to serve more clients across a broader range of investment strategies and with deep expertise and specialization in both public and private markets through more vehicles across geographies. Although the current market landscape presents challenges for the investment industry and our firm within it, we are proud of the progress that we have made to date to help our clients in both good and challenging market conditions. Finally, I'd like to thank our dedicated employees whose hard work and commitment help people all over the world achieve the most important financial milestones of their lives. Now let's turn it over to your questions. Operator?