Good afternoon, and welcome to Franklin Resources Earnings Conference Call for the quarter ended December 31, 2014. My name is Lorraine, and I will be your conference operator today. Statements made in this conference call regarding Franklin Resources Inc., which are not historical facts, are forward-looking statements within the meaning of 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 MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. [Operator Instructions]. The company asks that you limit questions to one initial and one follow-up question. [Operator Instructions] Now, I would like to turn the call over to Franklin Resources' CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Hello and thank you for joining Ken Lewis, our CFO and myself for this quarter's conference call. Financial results and relative investment performance remained solid. The institutional business had one of its best flow quarters and fiduciaries secured one of its largest new wealth management relationships in firm's history. Although net flows were weaker, retail clients showed an increased interest in key products within our U.S. equity tax-free fixed income and global bond franchises. Now, at this time, I would like to open it up for questions.

[Operator Instructions] Our first question comes from Michael Carrier from Bank of America. Please go ahead.

First question just on the flows in the quarter and then in the outlook. I think on he recorded call, you just mentioned that your institutional is really strong. Then in December you had a spike for a couple of reasons on the retail side. I do not know if you could give any color on how significant that spike was in December, just to kind of get a better run rate axe some of the volatility that we saw around whether it is global bond fund or just the market new environment.

Right, I think, we felt like it is certainly worth discussing. We did not try to go back and quantify because of the difficulty with omnibus, but what happened with the Templeton Global Bond funds is we had a $0.60 special dividend rate at year end and there is not a warning for that kind of a currency dividend and it kind of got the market a little bit off guard and we saw a real spike in redemptions. Also, it's hard to quantify, because many of the omnibus accounts track that as a redemption and then reinvest it. We think it is somewhere in the $1 billion range potential overstatement of redemptions, but we didn't want to adjust any numbers. We just kind of went the number that we had, but we know that that December number is higher and as we have said January is a more normalized redemption rate.

Okay. That's helpful. Then, Ken, maybe a couple of things to clarify on some of the expense guidance that you gave, so first just on the comp, I think you mentioned 2% higher in the next quarter. Just wanted to find out if that excludes or includes the $8 million Darby comp related number. Then just two other items that seemed a little bit lower were the shareholder service revenue and the other revenues. I think, other revenues you said this could be at the higher end, so just wanted to get some color on what's driving that.

Sure. The 2% is our estimate of the absolute reported number, which includes the Darby. Other revenue, we are forecasting that to be lower, because basically because of the bank no longer have that banking business, but the other items that is unpredictable that goes through that line relates to consolidated SIPs. Excluding that, we do think the run rate for other revenue is going to be lower going forward. On shareholder servicing, we think that this is probably about a good run rate for shareholder servicing going forward.

Okay. All right. Thanks a lot.

The shareholder accounts have been stable and increasing.

Thank you. Our next question comes from Luke Montgomery from Bernstein Research. Please go ahead.

Good morning. Thank you. Just first on the special dividend, obviously, that is appreciated by some investors, but it was about half, what you did a couple of years ago. I know the tax and legislative environments were different then, but if you could give us a little insight as to the discussion with the board on the size of the special and really how that intersects with where you are and your cash flexibility and the U.S. cash balance.

Sure. Very robust discussion, at the Board Meeting in December, dividend is very much a Board decision. One of the factors that they looked at they felt like it was appropriate to target returning 50% of current year's earnings to shareholders through dividends and share repurchases. They looked back at 2014, they saw that we that goal, so that was a key influencer on doing a special and the size of the special dividend. Essentially, as I mentioned in the pre-recorded remarks, I am targeting 100% of the U.S. cash flow seem like a reasonable objective at that time and that was factored into their decision.

Okay. Helpful. Thanks. Then I was hoping that you could update us on your latest thoughts around liquidating in the emerging-market portfolios. I think that Templeton Global Bond fund keeps about 15% of total AUM in cash, and I realize also that management liquidity is a quarter of what your PMs do, but does Michael continue to believe that cash level is sufficient? If you could comment on the potential for selling, because there have been some new less than favorable articles in the press that cite the large percentage of certain countries' sovereign debt that you guys are on and how you will be positioned if those drop in value and the fund expenses more redemptions or redemptions.

I think, obviously, that is something that all of our portfolio managers monitoring and take very seriously looking at liquidity and cash and I think we just felt like some of the coverage, looking at fixed income fund like an equity fund and trying to look at the turnover and extrapolate that for liquidity doesn't really give you the whole picture, so I think the combination of the high cash positions along with the very low duration and maturities of securities that happened within a very short period in the fund, those two factors alone and then sometimes the flexibility of working directly with Central banks and selling positions creates liquidity that is not always measured, so there's many sources of liquidity that I feel like that area is probably one of the best as far as the liquidity, but it continues I think because of the nature of some of the holdings and a 2.2% position in Ukraine gets a lot of focus with the headlines right now. I think they feel comfortable, the team, and I think we feel pretty comfortable with liquidity there.

Great. Thanks a lot. I appreciate it.

Thank you.

Okay. Thank you. Our next question comes from Michael Kim from Sandler O'Neill. Please go ahead.

Hi, guys. Good morning. First, as you highlighted earlier, just looking at sort of the relative returns across some of your bigger flagship funds. The three year numbers generally remained strong, but some of the funds have been underperforming a bit over shorter timeframe, so just wondering how you are thinking about where you see the biggest organic growth opportunities, particularly assuming the markets remained choppy and risk appetite remained sort of lackluster.

I think there are pockets of the strong even on a shorter term basis and some of the Franklin funds, Franklin growth fund, another fund that we started a few years back, our focused equity fund was doing very well, so that is kind of gaining traction. I think, looking at the short-term relative underperformance. There is no question that the strong U.S. dollar has taken its toll certainly on Templeton that has a longer term approach and doesn't hedge against the dollar, so this kind of unprecedented move does create headwinds for certainly that area. The other big one that moved just slightly into the bottom, the third quartile would be the Franklin income fund. Again, very consistent with how those funds run with high yield bonds some of the volatility during the quarter in that area. Then also, high yield bonds tend to have a larger percentage in energy and oil that had an impact as well, so that is just slight in the third and does have a big short-term effect on our numbers and it is nothing unusual there. I think, some of the good stories in areas of continued growth, the Franklin, the India fund, which is in our SICAV, had a very strong quarter in-flows and that is up I think about 45% for the year, so that continues to do well. Then the institutional opportunities, I think we fell like the pipeline is as strong as ever in categories still, global equities, emerging markets debt and we continue to see opportunity for growth there. Tax-free has come back to slightly positive flows for the quarter and it has take while to get there, but again we think that that is well positioned and has good relative performance to hopefully get some organic growth.

Got it. That is helpful. Then maybe just a follow-up for Ken. Beyond some of the more specific line item guidance that you referenced, any just sort of broader thoughts on expense growth looking out to the New Year, particularly given sort of the step-up in market volatility and at some point do you maybe start to pull back on some discretionary spending and just curious where you might have some of that flexibility.

I think, history can show you that, we have a fair amount of flexibility and controlling the expenses and certainly with revenue levels where they are, it is something that is top of mind so we are talking about that I think you will see the expense levels that or you see the expense growth start to level out going out a few quarters as we tapped the brakes on expenses, but that does take a little bit of time to work through the system too, but certainly we are thinking about going back on the expenses.

Great. Thanks for taking my questions.

Thank you. Our next question comes from Ken Worthington from JPMorgan. Please go ahead.

Hi. Good morning. Greg, just one kind of big picture question, so as you look out over the next three years what drives Franklin to the next level of growth? I would say Templeton brought in that big level kind of pre-tech bubble, and I think it was income series post-tech and global bond franchise post credit crisis. You have got different initiatives, different regions, different products that also seem like maybe they have potential, so kind of let us know what you are most excited about and what at least has the opportunity to be the focus for Franklin over the next couple of years.

I think it is hard just to look at one area and say that is going to drive organic growth like global bonds or like Templeton had. I think they are all hopefully, we would like to see is a very diversified organic growth with all those areas and I still think the strength around the hybrid area, the balanced area still continues to be good grower and good potential for organic growth. The tax-free has had a tough run, but there is no reason why in a stable rate environment, we can't get growth back there. If you look at the global bond, I would still argue that the performance continues to be very consistent. It is an alternative category. While it is the 800 pound gorilla in its category, it still has very low penetration for the average retail owner. I think in a sideways, with auto market, that stands out as a very good alternative. You look at one area for us just this year, which shows I think the strength of our distribution and product line and where opportunities we didn't talk about a year ago, but with the yen devaluation in Japan, we have seen our global bond funds really take off in that market and that is at the very early stages. We are just this quarter we had over $1.3 billion in flows into global bond and that's a new channel for us. I think it is hard just to call out any one area. The K2 fund continues to grow. We think that is a nice one and the alternatives we just kicked it up in the cross-border area and we are getting a lot of interest there. As we talked about the institutional initiative, I mean, if organic gets somewhat lost in the numbers, but $4 billion in-flows coming outside of the U.S. into institutional net is again a very significant growth number that we think is getting better and better, so that would be a few.

Okay. Greta. Thanks very much.

Thanks.

Thank you. Our next question comes from Bill Katz from Citigroup. Please go ahead.

Okay. Thanks. Good morning. I appreciate thinking the question just sort of following up on growth may be a little more tactical in nature. as I run my eye across some of your gross sales dynamics, yes, there is a little improvement, sequentially, but when you look on a longer-term basis now last couple years you seem to be sort of a relatively down to flattish type of backdrop. What specifically, what might you be targeting in terms of growth initiatives to try and capitalize the net flow dynamics sort of adjusting for the spike in redemptions towards the end of the year. Just trying to see what gets the nets going at this point.

We do target organic growth rates, but I mean at the end of the day, you look at where the opportunities are with the specific products in different markets and position, and $50 billion in gross sales a quarter is a pretty strong accomplishment for a distribution, but when redemptions, the pressures of volatility and movement, even in this last quarter there were a lot of our European growth funds, which tends to attract a little bit faster money and added $1.2 billion in net redemptions, which put a lot of pressure on the equity flows. Then you look our Asia growth fund and another one that reversed from a positive quarter to a negative, which was about $1 billion difference quarter-over-quarter, so you hope you can reduce those and get back to steady, but I think its volatility in specific pockets and a lot of headwinds, certainly with currencies in emerging markets, those create pressure and make it just harder to get that organic growth. I think it is difficult to sit here and say, well, this is where it is going to happen or not. I think, again, the focus is going to be on delivering performance, consistent returns. Then hopefully the rest takes care of itself. I know that is [ph] exactly answering the question. As I said before, a more diversified mix and strong performance is really what we can control and hopefully that organic growth takes care of itself.

Okay. That is helpful. I just want to follow-up. Second question is, just as you mentioned the global bond fund is low in sort of early stages of retail opportunity, when you step back and you think about sort of franchise risk. I do not mean to use that term to lightly, one of the lessons I think we have learned with concentration, it cuts both ways. When it looks good, it looks good. When it hurts, it goes bad pretty quickly. How are you thinking about that just given the size of the aggregate portfolio? You used a word 800-pound gorilla in your response to prior question. How you think about that sort of letting that business continue to grow versus thinking about what might be some franchise risk if there was a problem with building that going more deeply.

Well, I think it is like any business. You want to make sure you watch carefully the risks in the larger portfolios and where assets are concentrated. I think, we do a pretty good job. Also, whether you would consider closing something that is more related to investment performance and liquidity than it would be to the risk to Franklin Templeton, but I think we do have still a very well diversified asset base. If you look at every category, where we have investment management, I would still put it up there against anybody in the industry, so I think like any business you make sure you watch carefully those larger concentrations with assets, and I think we do a pretty good job of that. I think from a growth standpoint, it still has potential to grow, because sovereign debt is large and getting larger.

Okay. Thanks for taking my questions.

Okay. Thank you. Our next question comes from Brian Bedell from Deutsche Bank. Please go ahead. Brian, your line is now open.

Can you hear me?

Yes.

Yes. Okay. Great. Hi, good morning. Greg, if you can talk a little bit of more about some of the differences between what you are seeing in sales demand in Europe versus the U.S. for really the global and international equity products. Just trying to get a sense of that tempo as we come into the first quarter, again, more on the sales side versus the redemption side?

Yes. I think the press, it is a little bit different. Our mix in certainly Europe and Asia versus the U.S. and the big drivers for us, tend to be that Asia growth fund, which is sold in all over Europe as well as Asia. You do tend to see more volatility in both gross and redemptions and that is more of a sector-oriented norm, more the platform-driven model and that is really what has put a lot of pressure on the global equity outflows for the quarter, where you had volatility in the currencies as well as emerging markets, they are having a relatively weak quarter against the rest. Europe, obviously, it was, a lot of money moving into it a quarter or two ago and now it seems to be the reverse and probably the same in Asia, but the good news again is that when those markets rebound you will see the sentiment change. I think for the U.S. it is more of a steady state for us and I think the challenge has been, more recently we had a strong rebound in Templeton performance, but again the value approach, the overweighting in Europe and the exposure to the U.S. dollar is going to create some retail headwinds for us in the near-term, but you just have never seen this kind of markets where the S&P has had such strength against the MSCI. I think for the year, what was about 13%, 14% return for the S&P versus 3% for the rest of the world and minus 5 for emerging markets, so that I think tells a little bit of the story right there.

Then maybe just adding to that on the fee mix shift, obviously if you had the worst fee mix shift coming into the December quarter, as we move into 1Q, I guess, first of all was there anything unusual that changed that. Then second of all, I guess, would you see that trend continuing into the quarter given some of the dynamics of what has happened most recently coming into quarter end?

Right. I mean, the only maybe unusual thing would be that we had less performance fees. I think that was the delta quarter-to-quarter was maybe like $10 million less of performance fees.

Okay.

…so you factor that in, but excluding that, asset under management mix shifts relatively away from global equity to U.S. in percentage terms or relative terms than you are going to see that decline, so it is really a factor of assets under management shift, then maybe also but to a lesser degree, the mix between retail and institutional.

Right, and you are seeing greater strength in institutional right now. Is that correct?

We have seen that. Yes. We have seen that last couple of quarters, so that is reflected in the decrease in the effective fee rate.

Right, Okay. Great. Thanks very much for taking my questions.

Thank you. Our next question comes from Robert Lee from KBW. Please go ahead.

Thanks. Good morning. Maybe just want to go back to the balance sheet a little bit. I understand, clearly, the desire to return 50% of cash flow, I guess to U.S. earnings, and that drove the special dividend, but can you maybe talked a little bit about kind of how may be they thought of it that versus a step up in share repurchase, particularly since as you guys rightly point out over the years you have actually done a good job of driving down the share count over time, so I am just trying get a sense of that dynamic. Then maybe the second part of that would be, I know you have some debt that comes due in a couple of quarters. In the past, I think the only reason you really put even leverage on the balance sheet was to fund some specials and share repurchases, so given the capacity you have for additional borrowings and kind of what may be the appetite you can put a little bit more leverage on to step ups some share repurchase going forward.

Sure. Greg, just talk about the S&P up last year, and the board have the benefit of hindsight looking back and seeing that the share repurchases were not maybe at levels they were previously. Since we are opportunistic that was clearly understood and justified in their minds, so they said this would be a good way to top that up and meet our objectives. Going forward, it does not change really our strategy going forward in any material way, so we will continue to be opportunistic in share repurchases. If there is a significant pullback in the market, we will step it up and vice versa, so that will continue. Regarding the debt, the other thing that is kind of in the back of folk people's minds is, the whole discussion about tax reform and there is recent news and talk about a potential building introduced regarding repatriation for infrastructure, so we are keeping an eye on that and that may change the view of the board and the view of management in terms of share repurchases or dividends, so we will wait and see on that. In terms of the debt, you are right. I do not think there will be any significant change in our overall debt position, which I guess implies that we are leaning toward refinancing it, but that decision has not been made yet. We will probably talk more about that next quarter.

All right, great, then I have question maybe actually look at the DCIO business. I mean that has, I think, been a good business for you guys over time, but certainly the DC business has been changing a lot the last several years with growth target date more pressure on plan sponsors in terms of fee disclosures and all kinds of things, so can you may be talk a little bit about how kind of the changes are reshuffling in that space and kind of what the current strategy is or any thoughts on, are you going after kind of an open architecture target date, just trying to get a sense of how you are viewing that market segment?

Well, I think you have kind a hit on the big changes. For us, going after open architecture target dates is kind of a difficult road, because there is really limited access to do that. I think what has happened part of the reason why U.S. domestic equity and large cap and traditional core funds continues to struggle. As a standalone fund, it is just hard to get access and you are going to have to get access through a target date fund. In the past, you could get on the platform as a standalone independent fund. Today that is very difficult, so target date, especially where you have proprietary client contribution plans continue to be I think I am appropriate way for individuals to get a better diversified portfolio that changes over time. For us, I think the net effect is that you have more specialized funds, which are still accessible or still in demand on those platforms, but it is just going to be harder and harder to get say the Franklin growth fund get distribution in a DCIO plan versus other types of products that could be a small cap or could be a global bond ones that are viewed as separate from the core holdings. I think that the net effect, I mean, DCIO is still very attractive channel of growth for us certainly versus defined benefit. We put a lot of resources into it and we have seen incremental growth there, but I think the target date area is just hard for an independent asset manager do well versus people that have the proprietary plans.

Great. Thank you for taking my question.

Thank you. Our next question comes from Brennan Hawken from UBS. Please go ahead.

Yes. Good morning. A quick question on the global equity sales, it seems on a gross basis, and the trend has been pretty steadily downward in that and for those products. Can you help us understand what is driving that and what efforts are being made in order reverse that trend?

I think as I have mentioned, I mean it is just this kind of strength of the dollar has created headwinds for Templeton and then Europe more recently, so I think we are always looking at ways to strengthen the process and diversify and look at risks. Those are the things that we are doing, but as I said earlier what are you focused on, you are focused on investment performance delivering long-term results and that is really what we are trying to do there, but I think we are more sensitive now to the difficulties and just one factor, which has been the strong dollar and looking at whether or not you would hedge those or kind of things you can do going forward. Those are the kind of things we are going to look at, but as we have seen in the past the short-term numbers can turn pretty quickly and general consensus is the dollar continues to run, but who knows. I mean that can turn too and that all of a sudden short-term relative performance looks fine, but I would agree with your assessment, that is an area where we have lost share and one that we are very focused on right now.

Okay. If we think about it on the constant dollar basis, what would those numbers look like on the gross sale side?

Yes. Again, I just do not really look at, we study the market share numbers and I just do not have that in front of me what the gross sales for the global equity looks likes over time.

Okay. Thanks.

Try to get it.

Thank you. Our next question comes from Greggory Warren from Morningstar. Please go ahead.

Yes. Good morning guys. Thanks for taking the question. I know we touched on this a little bit sort of the near-term performances issues, so I am not going to go down that path. I was just kind of curious when you think about sort of the global international bond portfolio, I know you have talked about the fact that it is negatively correlated to U.S. interest rate. We should see better performance out of that platform as rate start to rise. Do you think you face a deferred headwind sort of that investor mindset that they should not be buying fixed-income funds when rates are rising?

Yes. I think there are some absolute some truth to that, and I think certainly and that is why we debate even health advisers place it in the portfolios to say, this is part of their fixed income and it is almost we would argue it should be an alternative or global macro or something other, because the duration exposure is so low and it is part of the redemptions that we saw when rates rose earlier was exactly that that people to say we were going to lower exposure to fixed income, so you do a risk there. I also think that the market will differentiate fixed income once you have a real rising rate environment and you look at returns and this will stand out something that holds up very well in a rising rate environment. I think that will be the bigger driver over time. If you do well in the rising rate environment, there is not going to be many places to go and hopefully that is where you get some attention and growth.

Okay. Good, on that front. I guess my other question relates sort of to where we are looking at expenses and margins for the year. I think you noted in the pre-record call and also a little bit here, but our compensation expenses might be a bit higher this year than it was last year and try to make up for another in the P&L, but is the assumption that margins won't be significantly better than they were last year, there we are not going to see sort of expansion of margins. Is that sort of a takeaway we should have from that?

I think it is revenue story as much as it is an expense story. We have seen assets under management level declined last two quarters. That is eventually going to reflect itself in the growth rate of revenue year-over-year. When we have some flexibility on expense side, and we will react to that, so it is really challenging to say what the margins will be the same or different from year-over-year. I think the best guidance I can give you is to look back to see what happened in 2008, 2009, 2010, and some of the actions we took back then to see what flexibility we have.

Well, I hope it doesn't get that bad.

That's a worst case scenario.

Okay.

Which I think we reacted pretty well there.

Yes. It was fantastic. We have gone through that period. Thanks for taking my question overall. I will get back you if I have anymore.

Okay. Thanks.

Thanks.

Thank you. Our next question comes from Eric Berg from RBC Capital Markets. Please go ahead.

Thanks very much. Good morning it is Eric Berg from RBC. Greg, it seem like a number of your competitors, your direct competitors are reporting strong flows in fixed income despite the prospects for rising interest rates whether it is in passive strategies or in active strategies that are less than traditional, unconstrained total return. There are a number of competitors that I could cite that that are reporting solidly positive fixed-income flows. I have sort of had one question with two related parts. How are you feeling about your over all around the world fixed-income flows and what are the prospects near-term?

Well, I think the fixed-income picture, while there is certainly a consensus that rates are going up, the other consensus is not within the next year, so fixed-income has performed extremely well and those with the longer duration have done even better. Then you have had a little bit of dislocation in the marketplace as we know and that created some movement. I am sure there is one firm that is not enjoying large fixed-income flows right now. That has resulted in some other ones having very strong in-flows. I think, we have very strong funds in those areas, we have seen growth not to the level that the other more institutional-oriented players that matchup take a little bit better as far as what the consultants are going to drive and we are getting some of that opportunity, but probably not to the level of a couple of others. I still think that is a good opportunity for us and one that, again, we have seen incremental growth and positive flows, but I think not to the level that the couple of other names have and that is really what you are speaking to and I would still think that I would put that in the list of still a growth opportunities for us, we have funds, we have strong records in that area and sometime it just get pushing up between the two or three more obvious names there institutional markets.

Thank you.

Thank you. I am showing no further questions at this time.

Okay. Well, thank you everybody for participating on the call and we will look forward to speaking next quarter. Thanks.

Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.