Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended December 31, 2024. Hello, my name is Matt, 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. Thank you. 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 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. Now, I would like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Welcome and thank you for joining us to discuss Franklin Templeton's -- fiscal quarter results. I'm here with Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We'll answer your questions shortly, but first I will review the quarter's highlights. Over the past few months, I've traveled across Europe, the Middle East and Asia, and met with key clients ranging from wealth clients to institutions and sovereign wealth funds to other large asset owners. What's clear to me from these conversations is that clients want deeper relationships with fewer asset managers that can meet more of their needs. As one of the few global asset managers with extensive public and private market strategies, we believe we are well-positioned to be a trusted advisor to our clients around the world. In recent years, we have intentionally diversified our company across specialist investment managers, asset classes, vehicles and geographies to benefit a broad range of clients through various market conditions and cycles. Ever since we opened our first offices outside of North America 40 years ago, our global presence and perspective has been a strategic advantage, enabling us to reach new investors. Today, our global footprint includes offices in over 30 countries, serving clients in over 150, and represents approximately $475 billion in assets under management. During our first fiscal quarter, market volatility ticked higher with geopolitical uncertainty, the U.S. Presidential election, central bank actions, and inflation. Starting with public equity markets, global equities fell by about 1% during the quarter, while the S&P 500 posted a total return of 2.4%, and the NASDAQ 100 notched a 5% gain. The U.S. equity markets saw positive returns while other regions like Europe, the U.K., Japan, China and emerging markets faced pressure in part due to…

Great. Thank you. [Operator Instructions] Our first question here is from Alex Blostein from Goldman Sachs. Please go ahead.

Hey, good morning, everybody. Thank you for taking the question. Since there is only one per person for now, maybe we will start with Western. Appreciate the update on AUM and obviously outflows in January continues to be obviously a pretty challenging picture, but can you help us frame the operating income and management fee contribution from Western, kind of where that stands today? And I guess more importantly, I know it is going to be hard to ring fence where this whole thing ultimately ends up in terms of size, but what is kind of the strategic vision for Western, however much smaller it gets from here? So I know you talked about integrating some of the selected corporate functions. What kind of savings do you anticipate from that and just maybe help us think about what Western could look like over the next couple of quarters as things settle down?

Thanks, Alex. I'll address a little bit on the strategic side and then turn over to Matt on kind of the financial framing. Look, our model has always been that we support the independence of the investment teams and we integrate kind of the rest of the business at the center. And obviously we've done a lot of acquisitions over the past 5 years, and it takes time to do that. And as you know, Western was independent. But that's what the initiative is, is to basically maintain the independence of that investment team and things like fund accounting, even the technology and other areas. And we're looking at all this to integrate it into the broader firm so that we get greater scale, we can make investments in things like AI and data. And so it's really a natural evolution of that, and that work is underway. And, Matt, you want to talk about the impact?

Yes, yes. Good morning, Alex. So, in terms of financial impact of Western, I'll mention a couple of things, then put it into context, talking about the annual impact through '25 and then into '26. I think that's probably the most useful way of looking at it. So, in terms of financial impact, if you run rate the current revenue impact of Western outflows of approximately $120 billion, this is from August through to the end of January, it equates to about 30% of Western's full year '24 adjusted revenue. That equates to about 3% -- 3% of Franklin's full year '24 adjusted revenue. The run rate remaining revenue of Western equates to about a 6% of Franklin's adjusted revenue. The impact on operating income will obviously be greater, as I mentioned in the last quarter, for a period of time, given that expenses need to catch up with revenue declines, and we're being, as Jenny mentioned, supportive, methodical, but that shouldn't be confused with not being disciplined. We're being super disciplined about how we tackle this. Top of mind, though, is to ensure continued excellence in terms of client experience with Western and obviously all of Franklin. So specifically, as Jenny mentioned, Franklin Resources is assisting significantly by accelerating the end of our 5-year autonomous agreement with Western, which expires in July this year. This will enable us to implement the integration of certain corporate functions that Jenny referenced that will result in Western being able to capture the benefits of a much larger scaled asset management operation, while again, as Jenny mentioned, retaining investment team autonomy. I think in terms of the sort of margin impact, it's important to look at the year. We do expect our expenses for the year to be, if you normalize for a…

I'm just going to add one other thing, Alex, because you asked about kind of strategic. Having nothing to do with the issues at Western at the moment, we remiss in not acknowledging just how much the fixed income landscape has changed, and that that may then trigger kind of a look over time at how you're structured. So what do I mean by that? Let's face it, banks don't play the same traditional role. They're not obviously lending in the same way that they used to. If you talk to private credit managers, often their number one focus is sourcing of deals as opposed to just raising money. So if you think about that function becoming more important in private credit, you can imagine as you're building those sourcing relationships, like BSP has a lot of relationships with middle market companies and obviously sponsored firms, IPO or PE firms. As you build that, you can see how that evolves in the conversation becomes, well, if you want to do private, this is what the structure looks like. If you want to do traditional fixed income, this is what it looks like. And so that is something that we are thinking about. That is not a, there's no kind of organizational impacts or things in '25 and maybe not even in '26, but it is something that we are -- as we look at ourselves as -- somewhere around a $500 billion fixed income manager with all these different groups, what should the right structure ultimately be.

Great. Yes, that's really helpful detail. Thank you both.

Thank you.

Our next question is from Dan Fannon from Jefferies. Please go ahead.

Thanks, good morning. So a lot there in the first response. So just to follow-up, just to make sure I understand, the 200 to 250 of additional savings, that is going to be beyond the flat, including Putnam for fiscal 2025. So as we think about 2026, you'll have natural growth plus that savings that should be for the full year.

Right. But -- it's correct, but if you -- if we have flat markets from today, we're not going to increase our expenses for 2025. It would be flat to down a little bit. So the 250 is incremental to that for 2026. And we would expect to have a full 250 for 2026. In other words, the work to achieve those cost savings, from a run rate perspective, we would expect that to be starting in October 1 in earnest.

Great. That's helpful. And then just in a similar kind of vein, is there any other affiliate like Western that is not on a profit share as you go through this integration? Or are there other integrations of smaller affiliates or recent deals that could be part of that improvement in efficiency?

The only one that is -- Matt, you could talk about the financial impact, but the only one that still, first of all, the ALTs [ph] managers, you don’t get the same kind of scale by integration. The legal department in the ALTs [ph] manager is a deal team, not usually sort of a 40-act kind of team. And so there is not -- those are really pretty standalone. As far as the traditional managers, Royce is still pretty independent and runs a lot of their own operations, but they're really the last one. All the others, they all look a little bit different but have had, either have been integrated or at various levels of integration that's happening.

Yes, look, when we acquired Legg Mason, we quite purposely agreed to various levels of autonomy over set periods of time because it's not possible to integrate and consolidate operations in a quick, methodical way that we believe is safe and sound. So, essentially, we had a set timeline over a period of 5 years over which these various operational scale initiatives were planned. At the end of the day, Western was the last one on the list because they're so big and scaled themselves with their own autonomous, independent operation. That's the way it worked. However, looking forward, you could think of our company in a much more simplistic way. On the public market side, we're going to have one scaled operation supporting a series of investment teams, some of which have their own brands because they're synonymous with a certain style of investing and what our clients demand from us. And then the second part of the company is the alternative asset businesses that require very specialized operations to support them. And so that's basically the way to look at it. You have the liquid sort of public markets business on the one hand, enjoying the scaled operation on a global level, and then you have the alternative asset groups on the other.

Great. Thank you.

The next question is from Michael Cypress from Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking the question. I just wanted to ask about Putnam. I think it's been about a year since you guys have closed the transaction there. I was hoping maybe you could just update us on the progress, the synergies there, the flow picture seems to be perhaps a lot better than people may have thought, perhaps [indiscernible] as well. So just curious if you could update us on that as well as the strategic partnership that you have with Great-West and the scope for additional growth and flows there.

Yes, why don't I do the first one, then Jenny and Adam will do the partnership with Great-West Life. I mean, I'll say it's not very often when you say an asset management land when you do strategic transactions, they're quite complicated. Human capital issues happen and you do your best when you enter into transactions and it's never perfect by any stretch. But the partner acquisition for us has really been like the definition of a home run in many ways, both in terms of flows. The flow trajectory has been very significant. I think for the 12 months since we closed the transaction, I think the net new flows excluding reinvested dividends is something like $15 billion approximately, and that's not the exact number, it's $12 billion, $15 billion. It's been a $1 billion a month pretty much, net new flows. The performance has been outstanding. The team and the team fit culturally, importantly, has been a very good fit with the rest of Franklin and culturally they're an incredibly disciplined team that have been through a lot together and it meshed very, very well with Franklin. And it's sort of a great combination where you've got an example of where when you've got something that really performs well, with a team that's gelled well together, combined with very powerful global distribution, what those two things, when they come together, can create, that's what we've done. In terms of the financial impact of the transaction, we had announced about 100, we were going to go from pretty much zero margin to 30% margin, which would have been $150 million of operating income on a 12-month level. We're certainly a little bit ahead of that. We're probably $25 million or more ahead of that, $175 million, $180 million. Obviously, we're not reporting independent teams this way, but obviously, it's only been 12 months, so we can -- little bit more, so we can give you that context. So we're delighted with the team, delighted with the performance, and very pleased both financially and how it's worked for our customers and from a distribution and product perspective. But Adam and Jenny, I think you want to comment on the rest of it.

Yes. Thank you. I would say that the great thing about Putnam is it shows really what can happen when we bring in a tremendous investment team that didn't necessarily have scaled distribution together with scaled distribution. And that's really what's happened. Their performance has remained really, really quite good. I think they have 89% outperforming in the 1-year, 91, 89, and 90, with 87% of their assets four stars or better. So, really strong performance. But with scaled distribution, if you take a look at this quarter versus a year ago, gross is up over 2x and their net is up over 7x and they had $13.6 billion of flow in the first quarter. So just really strong results. The core sales there is also what's really important. If we take a look how much the regular sales and mutual fund sales are growing, that's what's driving things significantly. You also asked, I think, about the partnership with the Power Group. That's going quite well. We have a deep, embedded relationship with Empower where we're building some new products together and seeing significant interest generated in some smaller plan retirement products. We are beginning to build out with them outside of the U.S. We have a good general account relationship. And then the other thing that Putnam really brought us was significant expertise in the retirement channel where we have a very scaled team who specialize in retirement, but importantly, also the right retirement products now with the a target date suite that's about $18 billion, and a stable value product that's about $17 billion with really stellar performance.

And I think -- sorry, one other thing we should have added, and I know Jenny's going to comment on the Great West Life, the broader relationship, is it's not just about the -- Putnam has been terrific, but it's also helped with our work and strategic work around our other key teams in equities, Franklin Equity Group, Franklin Mutual Series, ClearBridge, these are all tremendous teams in and of themselves. And while they operate autonomously, because we don't want to interfere with the various styles of investing, there's a benefit internally of sharing success stories and how things are working, how we can do better overall as a company across the firm, widely speaking, certainly, and how we get access to meetings and things like that with various high profile companies and such. So I think that's also a benefit to the company.

Yes, and I'll just say, look, it's a reminder that if you -- we always talk about there's 3x the money in motion across active managers than going into passive. If you're a good performing active -- a top-performing active manager, you're going to see flows, and they've just demonstrated that, number one. Number two, when you have moments like DeepSeek, it reminds you why diversification matters and you're seeing more and more people on the institutional side talk about a desire to get back into more active management. And so that's important. And then just two other points. As Adam talked about the growth sales and the benefits of true scale, that since the acquisition, Putnam's quarterly growth sales are up 68%, just to emphasize that number. And then it is not just in their open and mutual funds, it's a diverse across all vehicles, including their ETF has had great flows as well.

Great. Thanks so much for the color there and congrats on the success with Putnam.

Thank you.

Thank you.

The next question is from Bill Katz from TD Cowen. Please go ahead.

Okay. Thank you very much. I just want to clarify the guidance on expenses. Just, Matt, if you could just reiterate the '26, what I think I heard was you'd be flat to '25 if you strip out market action, performance fees, and pre-synergies. And so that would be an incremental 2 to 2.50 down. A, is that correct? And then against that, what is the revenue contribution you're assuming for WAMCO? You mentioned, I think, about 6% residual exposure on the website. Are you assuming zero contribution or some component of that? Thank you.

No, certainly not zero. But we're not going to also estimate where we see the 6% going. We're obviously working very hard with Western and its clients. They're working very hard with their clients on their current business, which is diversified across multiple fixed income strategies. Obviously, what we're going to do, as we've committed to do with you as a community and obviously with our investors, is to make sure we're transparent as much as we can in terms of the progress we're making. Each month when we highlight our AUM, we will include a summary and an update on Western, so you'll be able to see what direction that 6% is going in. We've given you the effective fee rate, so you'll be able to calculate it on a month-to-month basis as we progress through the situation. You were right on the expense guidance. It is -- think about the guide for 2025 being roughly flat, excluding performance fees, because you don't know where performance fees are going to be, obviously, in 2025. So normalize it. Performance fees and the extra quarter of Putnam, and then minus $250 million from that -- $200 million to $250 million from that to get to the margin expansion that we expect.

Okay. Thank you.

Thanks, Bill.

The next question is from Brennan Hawken from UBS. Please go ahead.

Good morning. Thanks for taking my question. Matthew, I'd just like to ask about that last point you just made, the $200 million to $250 million, is that coming out of the full year and will that ramp through the year? Yes, okay.

Yes, so we expect -- by run rate, what I meant is on day one of our fiscal 2026. We expect to be in a position where we are achieving those expense reductions for the full year 2026. So by the time we get to the end of 2026, we expect expenses to be lower by that amount, $200 million to $250 million. And obviously as we work through 2025, we will provide you with updates on that. So that's what we expect for 2026.

Okay. So, the $200 million to $250 million is the exit rate of the fiscal year '26, and we'll see the progress of that through the year of 2026.

Yes, but by the time you get to the end of 2026, it will be $200 million, $250 million lower expenses versus 2025.

On a run rate basis.

That's the way you should look at it, yes.

Got it. Okay. So then just two more related sort of to clarify. If you could, please, maybe I know you said flat for the full year, but if you could maybe clarify, starting point and what number we should be thinking about. And then it's my sense that this is rather large, especially vis-à-vis Western. So is this a -- these efficiency efforts, do they transcend the whole organization, or are they focused in any particular areas?

So on that front, then I'll give -- I think you're asking for quarterly guidance. I'll give you that, too, in a second, because I want to make sure that you have the updates for the quarter. It transcends more than just Western. We're taking this as an opportunity to review the overall company. We were frankly already doing that, as we've announced, and as you're used to us doing each year. For example, in the last 12 months, we've added almost 1,000 people to Franklin and because, obviously, through a major acquisition. And we've also invested heavily in new sales efforts across, we now have 90 people in alternative asset management, wealth management channel coverage, for example. We have dozens of new sales people in ETFs, specialized sales force. We've added significant resources across our distribution, this is why I think you're seeing the increase in sales across the organization. While we've done that, the reason why our expenses have remained under control is because or remained relatively flat is because we're taking expenses out on a continuous effort to manage our margin as best we can. Now, sometimes you're going to go through some courses where it's a bit lower and then we expect it to go higher, which is why we provided the 5-year look because that's where we see things going when we're out 5 years. But I think we haven't witnessed in this industry as much strategic dialogue and change going on within just asset management in years. And we're right at the forefront of that. We are doing our very best to invest heavily in the business but while retaining the best margin we can get. So I'd say in terms of the $250 million, I agree with you, it's a large number and…

Okay. Thanks for that clarity.

Thank you, Brennan.

The next question is from Ben Budish from Barclays. Please go ahead.

Hi. Good morning. Thank you for taking the question. Maybe moving over to the Alternative side, during the prepared remarks, Jenny, you talked about wealth fundraising growing to 20% to 30% of total capital raises. I'm just curious, how do you see that unfolding? What's the sort of cadence? It sounds like you've obviously talked about investing a lot in distribution. There are new products in the market. Is this predicated on more sort of semi-liquid democratized vehicles or retail participation in drawdown funds? So just curious if you could provide some more color on those expectations. Thank you.

Sure, I'll start and then Adam, feel free to add in. So, remember when Lexington raised Fund 10, which they closed at I think $22.7 billion, 20% of it came from the wealth channel. So we've demonstrated the ability to actually, even on the traditional types of vehicles to actually be pretty successful in the wealth channel. And again, that was years of working to build out and learning. I think the good news is our DNA actually is in the wealth channel, and so learning actually how to then bring alternatives And today we have 90 people who are just dedicated to Alternatives in wealth kind of across the globe to support all our distribution teams. And then most recently, so we -- I think I mentioned in the opening remarks, the three, we call them like cornerstone perpetual products. And so, we have three perpetual products that cover real estate debt, secondaries and just real estate equity that are almost a $1 billion. In January, we had a period of time of kind of fundraising, but I'm not sure the word's closed, but sort of had our first, we raised funds with a couple of partners and had a secondary perpetual fund. So we first launched it. We had to cap it at $900 million. It actually could have been bigger because the difference between the institutional channel and the wealth channel, the institutional channel you can call capital as you need it and the wealth channel people make investments. And we were concerned about cash drag. We wanted to be respectful of the pace in which we could do the secondary deals. And so that fund will continue to fundraise this quarter. So in January, it raised $900 million. So that was actually accumulation of a couple…

Sure. I would add a few things. To your point about draw downs versus perpetual, we think they both play a place in the wealth management channel, and there's a difference between a regional broker-dealer and a large global private bank. So, we'll see different products play different roles. But the fact is, as Jenny said, we now have three scale, the perpetual vehicles that are each roughly about a $1 billion in the private debt space, in the real estate and in the secondary space. That allows us to constantly be in market, talking to our partners. That puts us in a very different position and allows us to be more effective when we do come to market with the drawdown fund. And as she said, we're doing that not just in the U.S., but in EMEA, in the Middle East, in Asia, and seeing success around the world. We've also invested significantly, not only in the 90 people in that team that's focused on selling, but also in our educational resources. And we find that the more time we spend educating people on the benefits of Alternatives, the better off we are. We also think that as we grow in Alternatives, we want to make sure that we can service that business well. So again, one of the things we've been doing is cutting expenses where we can. We've reinvested in building out an investor services team so that we can make sure that we really service all the business as it's coming in. We're finally, I would say, working better with major distributors to co-develop products. So instead of launching a product on our own, we're bringing it with a major partner at scale at the right time on their calendar, and we're planning those launches a year in advance, and that's helped us tremendously as well.

And you didn't ask the question, but I'll throw in just, we are reiterating we had given guidance last quarter that we thought we'd raise $13 billion to $20 billion in Alternatives this year, and that the higher end was dependent on Lexington's Fund 11 basically having its first close in September. So just to give an update on that, Lexington Fund 10 has committed 75% of their funds, and that's usually kind of a trigger when you start thinking about the next fund. They would anticipate a first close sometime in the fall. Again, if it happens in September, it happens in this year, if it happens October or November, it falls into next year. And so that's where it's dependent kind of on whether we hit that higher range of $20 billion. This quarter, we raised $6 billion Alternatives. Of that $6 billion, $4.3 billion was in private markets. So that's the part that is counted towards the $13 billion to $20 billion range. And again, that does not include that $900 million that was raised in Lexington because that will be counted this quarter, $900 million in the perpetual.

All right. Appreciate all the responses. Thank you very much.

Our next question is from Patrick Davitt from Autonomous Research. Please go ahead.

Hey, good morning, everyone.

Hi, Patrick.

If I remember correctly, I don't think you include VA [ph] wins, insurance VA wins in your unfunded balance. And there were a few very large reported VA wins that I think funded in the quarter. Could you give us an idea of how much that added to the quarterly flows? And secondly, if there's still more to come from those wins, and then higher level, it seems that most of the large active managers in our coverage have been losing large VA mandates. So, maybe give some high-level thoughts on why you think Franklin is bucking that trend. Thank you.

Well, I think you probably refer -- go ahead, Adam. Sorry, go ahead.

I was just saying, in general, one of the things we're trying to do is to become a more important partner to fewer players. And I think that's true, Patrick, in every segment we serve, whether it's DB, DC, insurance. And a number of the wins we've had have come from significantly expanded relationships with insurance companies who have multiple managers, and they might have several dozen managers and they want to shrink that to maybe three, four, five or six managers, but they need to do that with a firm that can cover all of the major asset classes and support them in the field and sell. There are very few firms who can do that with the right expertise. We're one of them. So when we see that consolidation, we tend to be on the winning side of it. It was definitely true this quarter, and we've got a number of similar conversations in place right now, and that's very much part of our strategy is to win in those consolidation deals.

And I think the big one, Adam, was venerable, and I'm trying to remember, did it fund this quarter, or I think it was September or October, but yes, that has funded, but we continue to have more conversations with these partners. And there's a couple others that we haven't disclosed the details about potentially, as Adam said, doing more, because they are trying to reduce the number of firms that they work with and requiring more of those firms. So they want a breadth of capability. They want education. They want -- so things like our academy become very important in this space. And they like the expertise, specific expertise on insurance. So we think there'll be more to come there.

Okay, thank you.

Thank you. This concludes today's question-and-answer session. I'd now like to turn the call over to Jenny Johnson, Franklin's President and CEO for final comments.

Well, I just want to thank everybody for attending the call. And, again, we're a people business. We're only as good as our folks at Franklin Templeton who work hard every day to serve our clients. And so I just want to thank them for all their hard work and dedication. And we look forward to speaking with all of you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.