Welcome to the Franklin Resources Earnings Conference Call for the quarter ended June 30, 2025. Hello. My name is Maria, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Selene 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 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'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Welcome, everyone, and thank you for joining us today as we review Franklin Templeton's third 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 momentarily, but before we do that, I'd like to highlight some key developments and themes from the quarter. Over the past few years, Franklin Templeton continues to evolve into one of the world's largest and most diversified investment managers with a full spectrum of capabilities across public and private markets. At the core of this evolution is our commitment to being a trusted partner for what's ahead, helping clients navigate the complexity of global markets with confidence and experience. from individual investors and financial professionals to institutions, we are focused on delivering customized solutions to achieve their long-term financial goals. We do this by leveraging the breadth and depth of our specialist investment teams who bring differentiated expertise. And we offer our strategies through a broad range of investment vehicles from mutual funds and ETFs to SMAs and private fund structures. As more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles and regions. We believe our business is well suited to meet that demand. In today's fast-moving and interconnected investment landscape. Franklin Templeton's global reach is increasingly important. Our capabilities span U.S. and international markets, including emerging markets, positioning us to meet evolving client needs as they allocate and reallocate across regions and through market cycles. Almost 40 years ago, we opened our first office outside of North America in Taiwan, and we are one of the first global firms to build local asset management capabilities. We currently operate in over 30 countries and our clients are located in over 150…

[Operator Instructions] Our first question comes from Glenn Schorr with Evercore.

Wants guess, private credit in general. I like what you've done with Apera, and it seems like dedicated for European direct lending. The bigger picture question is, how do you integrate -- have you grow organically? And then how do you integrate something like a pair into the broader private credit platform? And can these products and strategy stand alone? Or do you need to have that fully integrated across all asset classes, solutions throughout private credit. I'm just trying to think about where you're building towards.

Yes. Thanks, Glenn. I mean, first of all, remember that we also acquired Alcentra, and I think that has gone very well. It reports up under BSP reporting into [ David Manalo ]. And they're big CLO managers, it's really grown our CLO capabilities. We don't want to be viewed as an asset manager that just acquires and has these things stand alone. If you look at what we think our real growth story and opportunity, it's the integration of these things. And so there will be parts of Apera that will be stand-alone. They have -- they just raised a $2.9 billion fund. But they will also, through sourcing, leverage the broader part of the organization, leverage it for distribution. And so we really are looking when we close Apera as a single $90 billion private credit manager as opposed to BSP Alcentra and Apera. And they've got broad capabilities. And honestly, what's happening in private credit is sort of your more core type private credits becoming a little bit more commoditized. And so having that expertise and say, like middle market direct lending, which Apera is, or asset-backed or real estate debt, those are really, really important, and you want to be able to globalize that kind of expertise. But the answer is we really think of it as 1 private credit group.

Our next question comes from Bill Katz with TD Cowen.

Maybe a sort of a big picture question for you. I think you've been at the sort of the vanguard of tokenization. I was sort of curious to think beyond maybe just the short-termism of whether or not it helps a specific asset class. How do you see this shifting the potential economic value proposition with the distribution partners?

Let me answer that in a -- we think that it will fundamentally change the rails of the financial system. So why do we think that? Let me just use our tokenized money market fund as an example. So we launched this in 2021. We are still the only asset manager in the world who provides digitally native exposure on-chain as opposed to shadowing on to -- from your old system shadowing onto the blockchain. That gives us a lot of additional capability that enhances what we can do for clients with that single product. So I'm going to start kind of small and then go broader. So we just launched intraday yield. If you hold our Benji money market fund, you will see what you earned that day, and it will be posted to your account that same day. if you use the Benji product as collateral and you only hold it for 4 hours and 32 minutes, you're going to get 4 hours and 32 minutes of yield. So it's really because blockchain is so efficient that it enables those enhanced services. When we say -- and when the SEC approved that product, they had us run, and we were still running the transfer agency in-house. They had us run a parallel process. And we were astonished even by the difference in cost to actually run transactions on chain versus on the old transfer agency system. And so if you take that more broadly, there's going to be tremendous amount of opportunities. What does blockchain do? Does 3 things. It has a source of truth of ownership. It has the ability to execute smart contracts, and it has a payment mechanism. So why is that important? If you think about the players in the financial system, there's all…

All right. Yes, it's great. That's great. A lot to think about what all this going on. Just stepping back now, I'm really encouraged to see the buyback step up a little bit this quarter. One of the pushbacks we're getting on the story is sort of some uncertainty around where you might stand in the conversation with the regulators on any potential financial settlement with WAM. It's certainly great to see clients stabilizing on the attrition side. How do we think about where you might be sitting in terms of those conversations with the regulators, how you might reserve if at all, for a potential charge? And then how are you thinking about capital deployment on the other side of that?

So I'll start and then Matt can jump in on anything I don't cover. Look, first of all, I want to reiterate the strength of our fixed income franchise. We -- the Franklin's fixed income is probably the largest SIM in our institutional one but unfunded pipeline. And that would have been unheard of 5 years ago. They just didn't have the institutional capabilities. We've been in positive flows with the Franklin Fixed Income and Brandywine for multiple quarters now. So they've really been able to pick up a lot of the slack there from Western. And so that's obviously really important. Western has -- is also still in positive gross sales. So they have -- and their gross sales have actually increased and their performance, and that's been something we've said all along that's been really important to us to try to insulate the investment team as much as we can from the distraction of everything going on to ensure they can focus on clients. And their 1-, 3- and 5-year numbers are in like the 90th -- close to the 90th or around the 90th percentile for 1, 3 and 5 years, beating the composite benchmark. So their performance is really good. And then we've gone from what was $37 billion in outflows, net outflows, I think, in December to June was, I think, $4.1 billion and July is $3 billion. So the story there is improving and there's some amount of stabilization on some of that. But the reality is with the government, we don't control the pace of that. And so we are obviously continuing to cooperate with the government. As a reminder, Western is about just under 6% of our revenues. And today, we have -- well, I'll let Matt address anything on reserves or anything else you want to add to that?

No, maybe I'll just say there's nothing to report on reserves at this time. And then to answer Bill's other question about capital management priorities in the context of this situation and just in general, I'll just reiterate, Bill, obviously, you're very familiar with this. Our priorities are obviously, the dividend, organic growth strategy as we -- Jenny's talked a lot about the various areas that are growing, alternative assets, ETFs, Canvas, multi-asset solutions. We've invested very heavily in each of those areas, and they're the areas that are growing. We're focused on repurchasing employee share grants. As you just noted, that's what we managed to do some of that in the last quarter. We've also been servicing our debt. We delevered by another $100 million in the quarter. We also made the last acquisition- related payment of $100 million related to the Lexington acquisition. We're being conservative about around debt. Just in case we want to pay down the $450 million of debt that comes due next year, but we're probably more likely not accessing the debt capital markets between now and then assuming the markets are in good shape. And then, of course, we look at opportunistic share repurchases and acquisitions. The market is very, very active as we've talked openly about.

Our next question comes from Alex Blostein with Goldman Sachs.

Great. I wanted to get your guys' thoughts on the outlook for private markets growth for Franklin over the next 12 months. And a bit of a 2-parter, but I guess, one, I was hoping to get a more wholesome update, I guess, on the wealth channel, nice traction with Flex products, both U.S. and non-U.S. I think you guys have BSP as well with a real estate debt fund as well. But talk to us a little bit about how that's tracking? Where do you see that going and what else you're planning on launching that could be needle moving there over the next kind of 12 months? And then similarly, maybe just update us on the institutional outlook with the Lexington flagship fund coming up here in the next few months.

Sure. So we said at the beginning of the year that we thought that our alts fundraising would be in the range of $13 billion to $20 billion, and the higher end of that range would be dependent on a first close of [ Lex ] flagship Fund XI if it happened in September. So that isn't going to happen. They are just now kicking off in the market. And so there probably won't be a first close until either December or early 2026. But we're sitting here today after 3 quarters halfway right in the middle of that range of $15.7 billion. We think we'll end the year around $18.5 billion. Of that, so far, the $15.7 million 25% has been raised in the wealth channel. And if you look at our current assets, it's about 10% of the assets are in the wealth channel. So that's a really good sign. Now we went out with a limited number of distributors when we first launched Flex. I think we've added something like 16 now internationally. -- we're -- the Flex and the Flex International, we're seeing about $150 million to $200 million a month coming in, in that particular perpetual product. And we're continuing to add distributors. So there's a lot of opportunity as far as additional distributors to increase that number. We also launched a perpetual real estate debt fund with BSP. That one is really just with 1 wire house in the U.S. And it's got some traction. We actually have seen a lot of good momentum in July on that, but we are launching internationally with -- relative with a global distributor that we think will also help that one tick up. But today, we've got 3 perpetual products for real estate, real estate and private…

And Jenny, I'll top that as we've invested in headcount, both in Europe and Asia, most recently, we're adding head count to the 90 that Jenny mentioned specialists.

Great. And then Matt, I was hoping you can update us also on the expense guidance just as you kind of progress here towards the end of the fiscal year? And any early thoughts for fiscal 2026 for you guys?

Sure. Thanks, Alex. I'll go through the fiscal fourth quarter and annual guide. Before I do that, though, I just want to reiterate Jenny's point on July monthly AUM as she had in her prepared remarks. It's early, as Jenny mentioned, particularly given the fact that it was month end just yesterday, we have formally announced the preliminary July AUM and flows next week, but we expect Western Asset long-term net outflows to be approximately $3 billion for the month of July and an AUM for Western Asset to be approximately $236 billion. Excluding Western Asset, we expect long-term net inflows of approximately $3 billion for the month. So combined, we expect to be slightly flat to slightly positive, let's say, for the month, inclusive of Western Asset or EUR 3 billion positive, excluding Western Asset. In terms of the quarter, the effective fee rate for the quarter -- for next quarter to about fourth quarter guidance, now we expect to be in the high 37s. To be clear, the reason why our effective fee rate was about 0.5 lower than where we guided, about 80% of that difference was attributed to the calculation of EFR, which was basically the daily average AUM is 1% lower than the simple monthly average AUM, so that impacted our EFR by about 0.4 basis points. And that explains the difference between the guide that we gave versus where we came out. But we expect that to snap back into the high 37s again in the fourth quarter. The comp and benefits we expect to be $860 million to $870 million. That assumes though about $100 million of performance fees. This is elevated versus our usual guide of $50 million we expect an elevated performance fee quarter of around $100 million. Please note though…

Our next question comes from Dan Fannon with Jefferies.

Great. I apologize, just to clarify, Matt, what you just kind of went through. So for fiscal '26, I understand you have $200 million of savings going into the year, but did you give a number for fiscal '26 expenses?

We didn't give a notional number, but you can basically -- if you take fiscal '25 guidance that I just gave, and you could take $200 million of that. That's where we'd expect to be, except for the information I just provided on Apera. And if we grow faster in alternative asset management, in particular, because the placement fees and distribution expenses can add up in the short term. which will, of course, be offset by higher revenues in the longer term. And we'll obviously highlight those if and when they happen.

Understood. And that includes -- that's assuming flat AUM from now and no performance fees. Is that correct, right?

Yes. Yes. It excludes performance recently from both sides. So it excludes performance fees from 2025, and it excludes it from the '26 sort of summary that we gave.

Great. Okay. And then just on the fee rates, and I understand there were a lot of moving parts in terms of this quarter. But if I look just over the last year and your asset mix, you have equities up substantially in terms of its AUM, fixed income down. So that mix shift is more positive, but your fee rate is essentially flat year-over-year. So can you talk about -- obviously, alternative is also a source of growth, but that AUM in general, is flat. So as we think about the underlying trends beyond that, like are there other things that are putting pressure on the fee rate that would otherwise make it so that number isn't higher as the mix continues to move towards higher fee assets because I'm just surprised in aggregate, if you were to tell me AUM mix today versus where it was a year ago that the fee rate isn't higher.

Yes. I mean it's a really interesting question because when we look at our fee rate, just being stable, because if you exclude some of the episodic events that create upside to the EFR during various quarters, like, for example, if we have catch-up fees related to Lexington fund, that can spike the EFR up to 39 basis points, something like that or even higher that happened in different quarters. If you take that out of the equation and you normalize it over a period of time, we've been relatively stable. The reason why we're stable is because we've had offsets to the lower fee businesses or where we've had to lower fees to be competitive in certain -- in particular, certain large institutional opportunities for the firm. So we often think to ourselves that it's a fairly reasonably decent position to be in to keep it relatively stable versus going down. The product mix, if you will, quarter-over-quarter, for example, in this quarter that we're reporting now, only about 20% or 25% of the fee difference is attributed to the product mix. But we'll say the same thing. We've had higher growth areas across Canvas, ETFs, some of the larger institutional mandates that have lower fees. That's where we've been growing to offset the pressure on those lower fees we've had inflows into alternative assets. But then on the alternative asset side, we've had higher distributions and realizations that have offset some of that. But gradually, we're seeing some more momentum across all the areas that Jenny referenced in her remarks, that is certainly seeing a tick up in AUM on the alternative asset side. But when we look at the overall picture, we see a situation where we just have relative stability in EFR versus any big increases or any -- certainly any pressure on the downside. And we do our best, obviously, to give you the breakdown and be as transparent as we can as we go through quarter-over-quarter. This quarter, by the way, another point to mention is that something like 0.2 of the difference was just the weakening dollar, so it was an FX-related matter. It's not even anything to do with the fundamental product shift or fee pressures or anything like that. It was just FX.

Our next question comes from Ken Worthington, JPMorgan Chase & Co.

Jenny, I wanted to dig deeper, maybe follow up on Bill's question earlier on digital blockchain technology, really permeating the traditional asset management business. So you were early, you're innovative, you're a leader, but it doesn't always seem to translate into obvious economic success. And I recognize it's early, but if we step back and look forward where do you see the likely opportunities for Franklin to translate your early insights and investments in digital blockchain technology into economic success that maybe we as outsiders can see?

Yes. So we've built an ecosystem in there. As I mentioned on the Benji platform, we actually got a patent on our wallet. Right now, you download it from the Apple Store, but we really have designed it because we think it could be white labeled by others. And right now, that wallet can -- and the Benji app or the Benji token can operate actually across chain on 8 different blockchains. So as the traditional distributors, start to think about how they have to deal with the crypto world and the tokenization world. They're going to look for partners, we think, that will help them to navigate it, and we've built this infrastructure to do it. So that's how we're thinking about translate. Now today, we actually manage reserves for 4 stablecoin providers. Everybody is aware of Circle in USDC because it's the big elephant in the room, but there's actually other ones. We were just selected by the first state who is issuing their own stablecoin to manage that stablecoin. So today, there's been kind of a parallel world between the crypto world and the traditional finance world. And now as you get clarity around regulation like the Genius Act, you're starting to see firms be more comfortable being able to dip their toe into it. And that's where we think we can be a really important partner because, again, this -- the infrastructure that we've built, we've been building since, I think, 2018 is -- it's not going to be an easy one for people to catch up quickly. And so our ability to really private label that and have it integrated in others -- in their client platforms. Just imagine if you're a distributor, you've got your clients who are holding their crypto assets, some portion of them, probably the younger ones, are holding their assets over at Coinbase. Wouldn't you like to be able to move that over into a wallet that's integrated on your system so you can provide an entire view of the clients' investment opportunities, and that's the kind of infrastructure that we've built.

Great. And maybe just a follow-up there because that's pretty interesting. Any conversations with these other companies to white label your technology and what you're doing? Or is it just basically the Genius Act and some of the other regulation is so real time that we haven't gotten there yet?

We are having conversations. A lot of the early conversations actually were on the international side and have been on the international side, partly because they had more clarity on regulation. But now with the Genius Act, we're actually having conversations with distributors in the U.S. as well.

Our next question comes from Brian Bedell with Deutsche Bank.

Most have been asked and answered, and thanks for all the commentary on the tokenization Jenny. It was really, really good color. Maybe switching topics to the 401(k) theme and the private markets and 401(k) theme. Obviously, you guys have a really well- rounded private lineup. What is your, I guess, desire or your plans to potentially integrate private and public products? You could most likely do this yourself and then go after the 401(k) market. And if you could just remind us again your presence in defined contribution and in target date products? And how do you see that? Or do you think you need to partner?

Yes. So today, we have about $428 billion in retirement. About $120 billion of that is in defined contribution. As a reminder, just when the acquisition of Putnam gave us much more scale in target date and stable value. So that's enabling us to be a bigger player there. We have -- we launched a partnership. So to answer your question about partnership versus doing it our own, we're open to both. We want to do both. And so we actually, last year, did a partnership with Apollo and launched a -- we were handling the real estate portion. I think they're doing the private credit on a platform. Look, it's gotten traction with some of the smaller plans, but the reality of the DC space is an incredibly litigious space. And in the absence of clarity around legislation, you're probably going to be -- it's going to be a slower uptake. Having said that, we announced Empower is very focused on this. They're doing an adviser managed account solutions through Morningstar, and we're a participant in that program. So they know that there's opportunity. And just to put this in scale, like DB plans, half of the assets that we have about $160 billion in defined benefit, half of that's in alternatives. So it's a real missed opportunity. But unfortunately, the DC space of probably all areas of asset management is the most litigious when it comes to fees. And so it makes the fiduciaries really hesitate until they get like a DOL safe harbor or something. So good opportunity, but there is just kind of the realities of it. I think it's going to be slower uptake. But we're really well positioned. They're actually already there. And we will have -- our target dates will have private markets. We're building those models now probably by the first half of 2026, we will launch those. And it's just a matter of what's the uptake. And I don't know, Adam, is there anything else, sorry.

Yes. I mean just to put a little context on that, the target date fund is now about $19 billion. So it's pretty substantial. A lot of that came through the Putnam acquisition. And we think that's really important because 1/3 of DC AUM is going into the QDII space -- or QDII -- and having that target date has really helped us there. We've got about $2 billion now in the sales pipeline that we think will close shortly in that space. I'm talking there about the sales pipeline, not our institutional won but unfunded pipeline, but that's up quite substantially as well to about $24 billion, which is a $4 billion increase quarter-over-quarter. So strong growth on that institutional side, but core sales is also accelerating quite nicely, up about 22% over the average of the last 8 quarters and up 10% over the same period year-to-date last year. So strong growth both in the core market, of course, where the DC retirement would fall as well as in the institutional markets.

Our next question comes from Michael Cyprys with Morgan Stanley.

Just a question on non-U.S. allocations, just given the shifting trade policy, geopolitical uncertainty and heightened volatility. Just curious what you're seeing from your U.S. clients and non-U.S. clients in terms of potential and evolving interest for non-U.S. strategies and scope for potentially shifting allocations away from the U.S. Curious what you're hearing to what extent do you think this might play out? And maybe you could speak to some of your non-U.S. strategies that might be best placed to capture what could be potentially money in motion.

Sure. I'll take that. Yes. We have absolutely seen that over the last quarter, but I want to distinguish between what was driving those changes. From a client perspective, we don't see that as kind of a political statement, but rather an investment opportunity statement as there just seems to be growing interest and growing upside in markets outside of the U.S. So particularly, we've seen growth in our emerging markets equity strategies, international and global equity as well as value as opposed to growth as people tend to, in times like this, like to rebalance their portfolios and a lot of people are overallocated in large cap growth. On the fixed income side, what we've seen is movements into areas like short term, of course, but also global bond, EM, high yield and some multi-sector products as well. In the U.S. there was a general flow out of equities for both us and the industry. But outside of the U.S., there's an attractiveness to equity, especially in domestic markets in Europe and Asia. They're seeing more upside in their markets domestically versus the U.S., especially if there's going to be a weaker dollar, which I think is a call many are making. So we're seeing a lot of growth in non-U.S. equity and fixed income in both niche and kind of more broad global products.

This concludes today's question-and-answer session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO, for final comments.

Okay. Well, thank you, everybody, for joining us today. And once again, we're a people business, and I want to thank our employees for their continued hard work and dedication. And we look forward to speaking with you again next quarter. Thanks, everybody. Enjoy the rest of your summer.

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