Welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Ended September 30, 2024. Hello, my name is Shamali, 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. And, I would like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Good morning and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are 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 risk factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. With that, I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Hello everyone and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2024 results. On today's call, I'm joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. As presented in our fiscal year executive commentary, I will comment on the evolution of our business over the past several years as well as highlights from our fourth quarter and fiscal 2024. After that, Matt will review our financial results, and then we'd be happy to answer your questions. The investor presentation has a new format, includes information that will only be presented annually. In recent years, we have expanded our business in an intentional way, adding a wide range of capabilities to help clients achieve their investment goals through a variety of market conditions and cycles. As I've traveled the world meeting with clients and investors, I've seen firsthand that they recognize and appreciate the many steps we have taken to further diversify our business and position Franklin Templeton to succeed over the long-term. Our clients view us as a trusted partner with the ability to fulfill their comprehensive investment needs across public and private markets in investment vehicles of their choice. They appreciate our ability to customize their capabilities and meet their needs through innovative delivery and solutions. Franklin Templeton leverages the talent of our multiple specialist investment managers to deliver expertise to our clients across a wide range of investment styles and asset classes. Our investment teams benefit from Franklin Templeton's deep resources and scale with centralized investments in distribution, marketing, data, and innovative technologies like blockchain and artificial intelligence. Furthermore, our model benefits our corporate shareholders with no single specialist investment manager at our firm contributing more than 10% of adjusted operating…

Thank you, Jenny. Turning to the financial results for the fourth quarter. Ending AUM reached $1.68 trillion, reflecting an increase of 2% from the prior quarter, and average AUM was $1.67 trillion, also a 2% increase from the prior quarter. Adjusted operating revenues increased by 4% to $1.7 billion from the prior quarter due to higher average AUM and higher adjusted performance fees. Adjusted performance fees were $72 million, compared to $57 million in the prior quarter. This quarter's adjusted effective fee rate, which excludes performance fees, stayed relatively flat at 37.4 basis points compared to 37.5 basis points in the prior quarter. Our adjusted operating expenses were $1.3 billion, an increase of 3% from the prior quarter due to higher incentive compensation, advertising and professional fees. This quarter, we realized $38 million of Putnam-related cost savings, representing $6 million of incremental cost savings from the prior quarter. As a result, adjusted operating income increased 6% from the prior quarter to $452 million. And adjusted operating margin increased to 26.3% from 25.7%. Fourth quarter adjusted net income and adjusted diluted earnings per share decreased by 3% and 2% from the prior quarter to $315 million and $0.59, respectively primarily due to a higher tax rate from discrete tax expenses in the current quarter and foreign exchange losses, partially offset by higher operating income. As of September 30th, we impaired the intangible asset related to certain mutual fund contracts managed by Western Asset and recognized a $389.2 million non-cash charge in our GAAP results, primarily due to the decreased AUM resulting from net client outflows and lower discounted future cash flows generated from these management contracts. Turning to fiscal year 2024. Ending AUM was $1.68 trillion, reflecting an increase of 22% from the prior year, while average AUM increased 12% to…

Thank you. [Operator Instructions] And our first question comes from the line of Bill Katz with TD Cowen. Please proceed with your question.

Okay. Thank you very much for taking the question this morning. I appreciate that you can't speak particularly to WAMCO. I certainly understand that. I guess I'm intrigued by your commentary of potentially revamping some of the economic relationships with the franchise. I was wondering if you could potentially flesh that out a little bit. And then separately, I'm wondering whether or not the WAMCO overhang is affecting gross sales in any of the segments. It's not clear from what you're sharing, but I'm sort of wondering at the margin, what you're hearing on the institutional side, in particular, given the ongoing investigation? Thank you.

Great. Thanks, Bill. So, so far, the outflows even within Western, I think it's like 72% are focused on essentially core, core plus and macro ops. So even within Western, it's pretty focused on those strategies. They're about $90 billion today. Since Ken received as well notice, Western's had outflows of $53.6 billion. So there are some instances at Western where clients who were in other strategies just didn't -- we were concerned about the headline risk and did actually redeem. But I think it's been fairly controlled there. And we have not seen it really flow over into the other Franklin strategies. It's definitely part of the conversations, but it hasn't had a tremendous impact on the other strategies. Matt, I'll have you kind of answer the question around how we're approaching and thinking about the economic relationship. And to remind you, Bill, the relationship with Western is pretty unique. I always say you can't do hostile acquisitions in the asset management business because it's all about the people and their investment process. And Western was fairly unique for us in this five year autonomous arrangement that we had. But obviously, in light of current situations that we're just having a conversation around how we should think about that. Our model in general is we always apply common sense. It's slightly different. There's no exact one size fits all. Even today, Templeton and Mutual Series, which were acquired in the '90s have slightly different models with us. For example, one insists on the trading folks, their traders to be on their desk others use our global trading platform. So we always try to have a practical approach. But Matt, do you want to take kind of the specific conversations around it?

Yeah. Yeah. Okay. Thank you. Thanks, Jenny. Thanks, Bill. So maybe I think your question gets to a couple of things. First of all, economic arrangements but also economics related to the situation through Western. So perhaps for perspective, I'll just start by saying that the press tends to report that Western Asset is our largest specialist investment manager, but that's just by AUM. I think you know that, Bill, along with everybody else that covers us. But obviously, a much more important measure, the key measure, of course, is financial contribution of the business. And so I think it's worthwhile going through this a little bit and explain that, for example, in terms of adjusted operating revenue on a run rate basis, Western is probably something like our fifth or sixth largest specialist investment manager. And on the impact so far, if you run rate the $53 billion of outflows that Western has experienced since August, Western's annualized revenues would be expected to be declining by about 20% so far. That's just the Western revenue, which equates to about 2% decline at the Franklin Resources level. Obviously, operating income impact will initially be higher, this is to your point on margin, will initially be higher because expenses are not able to be reduced at the same rate as revenue. But importantly, at Franklin Resources, we have areas that can help achieve some of the offsets over time such as, as we talked about on this call, the addition of Putnam, growth in alternative assets, ETFs, SMAs, Canvas, our large equities business, our other fixed income SIMs, international and so on in addition to the expense discipline and other levers that we have. But look, this doesn't mean for a second that this is not important to us. It's very important to us. Western has hundreds of hardworking long-term employees with families, a strong investment team with a long-term track record. As Jenny has mentioned, together with producing good investment outcomes for clients, it's a team approach. And under CIO, Mike Buchanan, they're very focused on investment performance and client service. Our north star, if you will, has always been to achieve sustainable growth across our whole company. And Western is important to this, and this has certainly been a dent in that progress as you can see from the results we're highlighting today. But as Jenny said, this is exactly why we're working with Western management on providing assistance where possible, in particular, keeping the investment team in a good place while management works through this. So in summary, the economic arrangement that we have with Western over these five years, that's going to have to be adjusted to accommodate a decline in the revenue and the operating income, and that's what we're working through right now.

And Bill, I would add one thing you asked about institutional flows in general. We have really worked hard over the last two years to build better relationships with institutions around the globe. If you take a look at where we were last year, ex-Western last fiscal year, we raised $2.2 billion in the institutional channel. This year, that net number more than doubled to $5.6 billion. So we're feeling actually quite positive about the trajectory of that institutional business.

Thank you.

Thank you. Our next question comes from the line of Benjamin Budish with Barclays. Please proceed with your question.

Hi. Good morning and thank you for taking the question. I wanted to ask about one of your five-year target, the $100 billion of fundraising across private markets. Could you unpack that a little bit? Just how much do you expect to come from, say, cross-selling across the investment managers you've acquired over the last several years? How much is predicated on future M&A? How much do you think will come from the retail versus wealth channel? Any more details around that target would be appreciated. Thank you.

Sure. So let me start. The focus on that is actually from our existing managers, and just to give you a perspective on the growth that we've had since we acquired BSP, they doubled in size. Clarion's up just under 40%. Lexington, I think we've only owned them for about two years, and they're up a little under 30%. So we've been successful in growing those, and our projections of the $100 billion comes from really looking at what those opportunities are. Just to give you a little guidance for 2025. So last year, in 2024, we gave a range of $10 billion to $15 billion in sales and achieved $14.8 billion. This year, we're saying, we think it will be between $13 billion and $20 billion in gross sales. And that comes from real estate, secondaries, private credit and ventures, so all those are bottoms up build to net. And the reason the range is fairly large is, it will really depend on whether Lexington is able to do a first close of their flagship once they decide on the timing of their Lexington flagship 11 Fund. So far, Fund 10, they've been able to deploy it faster and at higher discounts than historical levels. So we're hopeful that we'll be in the market and do a first close. But that's obviously a big portion of that number. It also depends on real estate coming back in favor. We think the signs are all showing that the winter of real estate may be over and that we should see things picking back up next calendar year. And we have some, I think, a really diverse set of offerings that are coming out in the market. So not only does Lexington have their flagship fund, but we think continuation vehicles…

All right. Thank you very much. Appreciate it.

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Thanks. Good morning. Matt, I wanted to follow-up just on the context of fiscal 2025 and just the outlook for expenses. I know there's a lot of moving parts with the Western dynamics. But could you talk about core expense growth and either contextualize with or without Western in terms of what legal or unknowns might come through to think about the growth in the expense base for the core business?

Yeah. Morning, Dan. So look, obviously, it's super early for the year. I gave guidance on call -- on our, sorry, prepared remarks for the quarter. But if I think through the year, if you normalize for a full year of Putnam and exclude performance fees and with the same caveats I gave in my prepared remarks around the Western situation, we would expect expenses to be quite similar to the last fiscal year. In general, we would expect revenue loss from Western to be made up from other areas of growth that justifies that expense base. Obviously, if we experience a decline in any part of our business, well, that will be offset by very careful expense management. We have a number of initiatives going on, as we've already highlighted, across our investment management platform, operations, certain levels of integration. All that help participate in our ability to pull certain levers to manage either expected or unexpected reductions in revenue or increase in investments that we need to make across the business. So again, I'd say just very carefully and cautiously, all else remaining equal and normalizing for a full year of Putnam excluding performance fees that plus the caveats I gave on my prepared remarks that we would expect our expenses to be substantially similar to the last fiscal year that we just closed. And I think that's the best way of looking at it right now, so expense growth remaining very much in check.

Great. That's helpful. But just to clarify, what would be one quarter of Putnam just to think so we can kind of normalize for the 9 to 12 months to kind of get to a dollar amount?

One quarter of Putnam expenses will be -- wait 1 second, like $125 million.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Hey, good morning. Thanks for taking the question and thanks for the new PowerPoint deck presentation disclosure there across. Appreciate that. Just as we think about your targets and objectives over the next 5 years, just curious what that would translate into in terms of revenue, operating income and EPS in 5 years' time? And what sort of growth might that be when you sort of pull it all together? And then if maybe you could just remind us, how much Western contributes to AUM revenues and operating income today. Thank you.

Yes. I mean, Western's contribution is probably right now on a run rate basis, around 9% -- 8%, 9% of our adjusted operating revenues. In terms of operating income, it's a little bit more than that. But as I mentioned a moment ago, it's moved to being much closer to it. So we're working through those things as we speak, as I mentioned earlier and as Jenny touched on. In terms of our organic growth trajectory, what we're hoping to achieve is to get into the low single digits growth on average as a business. We're obviously not there now because of some of the issues we're working through on the Western side that we've been very transparent about. But also, look, the -- you know, Mike, better than most the industry trends. And when you look at where we were five years ago and where we are today, we're a much more balanced business. I mean five years ago, a very large portion of our business was in mutual funds retail distribution in the United States. We're extremely different business now, but we still have to work through achieving scale in the areas of investment. So we've talked about ETFs. We talked about Canvas. We talked about alternative assets. We talked about other areas of the firm that we're growing. A number of these things aren't really scaled yet to the degree that we expect them to be, given the investment we're putting in. That's why we put a five-year timeline on some of these things because it takes time to get there. Once we get there, we think it's very reasonable that notwithstanding some of the areas of shrinkage that we could be a low single digit growth business overall, the whole -- including the whole franchise. And obviously, they're taking out the Western situations getting through that and normalizing our revenue as it was before that and then looking at the areas of growth versus the areas of shrinkage and the overall business that we have under the hood here. But I don't know whether, Jenny, do you want to add anything to that?

Well, I was just going to say -- no, I think you hit it right, but just one additional. Without Western's outflows, I think our organic growth rate runs at about 1.3%. And when you do the kind of acquisitions that we've done and you really try to put together a best athlete team, the reality is it takes time for distribution to settle in. Because even if you take, say, the best salesperson in a region, you're actually breaking relationships with some other people. So it takes time. And even with Putnam, we took on a lot of the Putnam team, and so part of this is kind of digesting that. And then as Matt said, you take our ETFs. We've talked about how over the last eight quarters, we had $1 billion. But actually, in the last two quarters, our ETFs had over $3 billion in net flows. And they're up 88%, but there's still only $31 billion. So that's a fast-growing important area. We think we have a great team, great products. We were not late to the active ETF game. So we think we have good opportunities there. And then I look at it and say, if you think about the big trends that are so important, the fact that that we have the breadth of capabilities in the private markets as well as the capabilities we have on the traditional market, I don't think there's another asset manager that has that same kind of capability. And then you combine it with the fact that we have $500 billion sourced from clients outside the United States, we sell over $80 billion outside the US, which is tremendous. It takes decades to build those kind of relationships and reputation in various markets. And then one thing that…

And Jenny, the only thing I would add to that is it's starting a little earlier. We now are building scale in a lot of areas that you mentioned, especially in things like private markets in the wealth channel, we started with institutional quality managers. We built up all specialists to cover that channel. That team is now 85 people strong, not only in the U.S. but in EMEA, in APAC and in the Americas. And when we go to market in those channels, we've learned it's important to come in scale. So, now we have evergreen products in real estate, in private credit, in secondaries. And all of those products are coming with scale, which will really allow us to accelerate our efforts in that channel.

Yes. And actually, you just reminded me just one last thing is that we mentioned it in the opening comments, but like the Franklin equity team has been doing late-stage venture in their mutual funds for over a decade. It actually is really a complicated thing to do. And so our ability, as the world starts to converge with public and private products, our ability to do that with the capabilities, I think of it as the ingredients we have as a firm, I think, are really tremendous.

Great. Thanks so much for all the color.

Thanks Mike.

Thank you. Our next question comes from the line of John Dunn with Evercore ISI. Please proceed with your question.

Hi thanks. Maybe just a quick one on wanting to double in the private wealth management. Has there been a kind of change? Or could you describe the appetite for firms to join your platform? And how aggressive do you think you'll be over the next several years?

Yes, I think you think about -- sure. Where we first started was with [indiscernible], a Clarion product. And we just had a very few partners in that space for that evergreen. We're now up to over 20 partners there. So, we see that we're able to onboard to far more platforms, and that's really helping us. The other thing we've been able to do in that that channel is to co-develop products with our wealth management partners, which means we have a little more backing, and we're able to get in the calendar earlier. That was bigger a lesson for us as well as getting on the calendar early. And finally, I would say, scale. In the mutual fund world, you can start smaller, work your way up. What we found in the private asset area was that it was important to come to market with scale from the beginning to be able to offer a diversified product. And that requires really sourcing significant AUM at the very beginning of the launch and we've been able to do all of those things. So, feel good about the launch of our evergreen in the wealth management channel. And Matthew, do you want to add anything there?

Yes, the only thing I'll add is I think part of John's question may have been about Fiduciary trust and our growth targets as it relates to our own wealth management business. And what I'd say, John, is in that front -- on that front, Fiduciary is a full-scale platform. It's a great business. It's grown quite nicely over the last several years. And as we focus so much on building out our asset management business, we haven't really turned much attention to what else we could do with that very valuable platform that we have. So our intention is, as Jenny mentioned in her prepared remarks, is to capitalize on that business that we have and spend more time attracting teams to join that platform. When we've done that, we've been quite successful doing it. And the teams have done well on the platform and grown and help the overall business growth. So what we need to do is over the next year or two really focus on how we can turn that into a natural sort of strategic operation, if you will, in terms of having people on the team, bringing new teams over and join the platform so we can grow that out.

Got it. Thanks very much.

It's got all the resources that any wealth manager would need to offer their clients.

Got it. Thanks.

Thank you.

Thank you. And this concludes today's Q&A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.

Great. Well, everybody, thanks for participating in today's call. And I just, again, want to thank all of the Franklin Templeton employees for all their hard work and dedication as well as the Western employees, who are particularly working hard and focusing on their clients and delivering continuing improving and very good performance despite all the distractions. And I just will say, we look forward to speaking to you next quarter. Thanks, everybody.

Thank you. This concludes today's teleconference call. You may now disconnect.