Franklin Resources, Inc. (BEN) Q4 2020 Earnings Report, Transcript and Summary

Welcome to Franklin Resources' Earnings Conference Call for the Quarter and Fiscal Year Ended September 30, 2020. My name is Holly and I'll be your call operator today. Please note the information presented on this conference call is 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 and uncertainties and important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including the risks, the risk factors and MD&A section of Franklin's most recent Form 10-K and 10-Q filings. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to Franklin Resources' President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Hello, and thank you for joining us today to discuss Franklin Templeton's fourth quarter and fiscal year 2020 results. Today, I'm joined by Greg Johnson, our Executive Chairman and Matthew Nicholls, our CFO. We hope that everyone on this call and your loved ones are staying safe and healthy. This year, despite the challenges presented by COVID-19, we made significant progress in moving our business forward, including closing the Legg Mason acquisitions earlier than initially expected. We focused our efforts and investments in key areas that directly support the firm's multiyear strategic plan to maximize organic growth, execute on M&A opportunities, and position Franklin Templeton to capitalize on industry change. The results that we announced this morning reflect a full quarter and fiscal year of Franklin Templeton, but only include two months of the newly combined organization. In that short amount of time and under these extraordinary works from home conditions, we've made remarkable progress becoming one company all ahead of schedule. And the strategic rationale for this powerful combination has only strengthened since we announced the acquisition back in February. We've been able to bring together two especially complimentary platforms in a way that creates a more balanced organization. Our global presence has expanded in key growth markets around the world. We've created an all-weather product offering with a greater range of specialized high-quality investment capabilities, all with an eye toward delivering exceptional client outcomes. It's important to note that the company we have become could not have been realized alone. Together, we have significantly enhanced our ability to meet the needs of clients, advisors and shareholders for many years to come. And client reactions to the acquisition have been consistently positive. We're excited about this integration, not just the strategic benefits, but also for the impressive group of people and leaders it will bring on board. We were pleased to be joined by so many talented professionals from Legg Mason with a 97% acceptance rate of employment offers made to Legg Mason holding company employees. An integral part of our planning efforts has been the frequent and productive conversations we've had with the leaders of each of the specialist investment managers or SIM. We've appointed certain SIM leaders to global or regional leadership roles in different areas of the company to fully reinforce our strong alignment, our shared focus and commitment to each other. We're also pleased to report that our global distribution team is now in place and is already able to cross sell investment products from both organizations across retail and institutional channels globally. Our new more utilized client centric distribution structure is designed to increase end-to-end accountability for regional growth and ensure clients get the most out of their relationships with us. Our specialized investment managers also each retain their strong institutional distribution capabilities. We have focused on preserving the independent investment autonomy of the Sims, while providing them with the opportunity to benefit from Franklin Templeton global infrastructure and investments in technology. In one exception, Franklin Templeton multi asset solutions, and QS investors have combined to form Franklin Templeton investment solutions. This single best in class platform brings together the powerful combination of Franklin Templeton active, fundamental capabilities with QS quantitative skills to customize multi asset portfolios for clients. The team now has more than 120 investment professionals overseeing more than $120 billion in multi asset strategies, creating a sizable solutions business with scale to compete with the largest full-service providers. We're seeing the benefits of adding world class franchises to an already strong set of investment capabilities. We continue to believe that active management will play an increasingly important role in client portfolios. And we're well positioned to capitalize on this. On the performance front, approximately half of mutual fund assets are outperforming their peers over the standard time periods, including over 100 funds raised four or five stars by Morningstar. We also have strong institutional performance, with 63%, 69%, 73% and 84% of assets, beating the applicable benchmarks for the 1, 3, 5 and 10 year periods respectively, most notably in fixed income and alternatives. On the sales front, US fixed income attracted record net outflows of $5.7 billion in the quarter. We're pleased to see strong, long-term net flows from Western Assets, which reached $410 billion in long term assets, and $479 billion in total assets, its highest level on both front in over a decade. Additionally, as of quarter end, Western total assets under management were $12 billion higher than at the time, the acquisition was announced. Western investment performance has been outstanding, our fixed income pipeline across the firm strong, with at least $6 billion of unfunded wins and a significant opportunity pipeline. We recently introduced a new portfolio management team structure for the Franklin municipal bond team to align portfolio managers with common strategies across the platform. We believe this will further enhance investment performance that rebounded this year with 85% of assets ahead of peers for the one-year period, contributing to positive net flows for the year. On a combined basis across the firm, our tax-free fixed income AUM has increased to almost $85 billion. ClearBridge AUM is close to its all-time high standing at $153 billion with strong investment performance and flows in several strategies. Royce and Martin Currie strategy also has strong investment performance, with essentially flat flows for the quarter. Franklin equity group continues to achieve strong performance and attract inflows. Franklin DynaTech funds generated $4.4 billion in net inflows for the year, more than doubling its assets under management to over $18 billion, combined with Franklin growth and Franklin rising dividend funds, the Franklin equity group now has three funds near or above $20 billion of assets under management. In terms of global macro, our performance challenges an attrition from Franklin Templeton and Brandywine global macro strategy persist. These continue to be positioned for more challenging market conditions. These set strategies also made up some ground on peers and the benchmark in the quarter. It's undeniable that with Franklin Templeton, Western and Brandywine, we have a truly unique position and extensive capabilities across global macro strategies. Similarly, Templeton global equity and Franklin mutual security strategies continue to experience outflows, but are well positioned for periods that favor value investing. With the addition of Clarion Partners, along with Benefit Street Partners, and K2 Advisors, the alternative asset class recorded its fifth consecutive quarter of net inflows and now represents $124 billion in assets firm wide. Clarion is experiencing strong investor interest with an inbound queue of over $1 billion. Benefit Street partner price to new CLOs in the quarter totaling $800 million and received additional commitments of approximately $300 million. Momentum in our alternative business continues to build. As investors become more and more cognostic, we're well positioned in the retail SMA segment of the market, where we are now a leading franchise with $103 billion in assets compared to just $6 billion a year ago. And our expanded ETF offering doubled to over $10 billion in AUM this year. We are also planning to expand our closed end fund capabilities. Turning to financial highlights, adjusted operating income increased to $429 million, a 58% increase versus last quarter, or 5% from the prior year, largely reflecting the addition of two months of Legg Mason. We are on track to realize $300 million of gross synergies with 85% of run rate savings expected to be realized by the end of fiscal year 2021. The cost to achieve these savings is expected to be approximately $200 million, which is $150 million less than originally anticipated. And we expect to realize approximately $600 million of cash tax benefits related to the various tax attributes and deductions, which carried forward in the transaction, a 20% increase from our initial estimate. Our strong balance sheet continues to provide us with tremendous flexibility to evolve our business. Earlier this month, we completed a public offering of $750 million aggregate principal senior notes due 2030 issuing at 1.6% coupon and pre funding our intention to call higher coupon junior subordinated notes, which are callable at par in March and September 2021. And finally, I'd like to thank all of our employees for their significant efforts to keep our business operating smoothly during these extraordinary times and for maintaining their laser focus on our clients needs. Now, I'd like to open it up to your questions.

[Operator Instructions] Our first question is going to come from the line of Ken Worthington with J.P. Morgan.

Hi, good morning. Thank you for taking my question. With the integration of Legg well underway, can you talk about the integration of the two distribution networks thus far? I think on the last call, you talked about building more agile in regional distribution organization. So I wanted to hear any updates there. And then you gave a cross selling anecdote in the commentary. And I was hoping you could flesh out kind of how you'd expect cross selling to ramp given the integration, and maybe what products might be most successful, given what you've learned over the last couple of months. Thanks.

Yes, so thanks for the question, Ken. So first thing was a decision to more regionalized. So what does that mean? We wanted to push out more marketing and product and data analytics out to the region. So historically, that was done more centrally. And so now, there's a portion of it that completely controlled by the head of that region. And as you probably know, we talked about some of the SIM head taking on leadership roles. Adam Spector and he is CEO of Brandywine is now Head of Global Distribution. And Julian Ide, who was the Head of Martin Currie is now Head of Europe. And so that's just helpful in ensuring that we understand both how to integrate the global distribution with really how each of the SIM handles their distribution. And so it's helpful having people who come from that perspective. As far as you look at US retail, which is a trillion dollars of our assets, Legg Mason came in with a much stronger footprint in the broker dealer warehouse channel and we were much stronger in the independent channel. We now have $103 billion in SMEs, they were very top three SME provider. And so it was really looking at the capabilities between the two organizations, and figuring out how to, and in some cases, you just have great people on the same covering channel but one has greater penetration than that. And so our distribution team is really a mix of Legg Mason and historic Franklin Templeton people, and it was, we were trying to recognize kind of where those types were. They had strong penetration in the insurance channel. So they're great in the Legg Mason folks. We have spent trying to remember the number, something like 1,200 people have participated in something like 83 webinars that we've done to teach and ensure that there's, like all the sales people have knowledge of each other's products. So we spend a lot of time with that. You saw the anecdotes in the comments. We also had another example, where we had an Israeli institutions were - that never had any distribution in Israel, and ended up getting a mandate for one of the SIM. So this takes a little bit of time, but I can tell you that we are, we felt really good about how it's operating now, and that we found less overlap than they thought we find with distribution when you really got under the covers.

I think I just add one thing to that, which is to say on the institutional side, recognizing how important the institutional distribution is, given the fact that a big portion of Legg Mason and the rationale for our transaction was to grow institutional business, that staying largely exactly as it's organized today at the specialized investment manager level, and that creates a high degree of confidence with clients, the stability and continuity in that area of the business.

And actually, let me add one other thing you asked the question of, how we get more positive flows. As you saw, we had things like the alternatives were actually had been in positive flow; we think there is just huge amount of opportunity for Clarion and BSP and the retail channels and BSP did a small acquisition of REIT and it really what they were doing was acquiring some wholesalers who have expertise in selling alternatives to the RA channel. So we've invested tremendous opportunity for both Clarion and BSP, as well as feedback we've had some warehouses who feel that they may have a heavy concentration in the real estate managers that they have. And they'd like to diversify and clear and coming out of these just tremendous performances as they were overweight and things like industrials, and underweight say retail. Western, obviously continuing its cross-sell capabilities. What we have in the SMA side is the Income Fund is able to be penetrating more than relationships that like Mason has with advisors and sell SMA, we think that's a great opportunity for income funds. And I do have to say that, I think with the Templeton global bond, there is increasingly nervousness around whether - they're very much set up for risk off environment as Brandywine. And we've seen them perform very well in September. And as investors may think of them as sort of an insurance policy right now to any kind of big catalyst of the surprises, whether as an inflation surprises or escalation of US China tensions. And so I think the story is we're doing a better job of getting out their story there, I think we can at least begin to see some reduction in the redemptions. And again, it's kind of positioning that message as insurance.

And our next question will come from the line of Patrick Davitt of Autonomous Research.

Hey, good morning, all. Could you give us the amount of reinvested distributions in the long-term flow numbers so we can better compare it to your public comp?

Yes, we had $2.5 billion of reinvested distributions for the quarter. Those compares to $3.5 billion last quarter, and as you know $3 billion a year ago. Our plan there, by the way, we seem to have caused some confusion here was to call out anything that's unusual around those flows. We decided to get to have a simplified view of flows in terms of the presentation of it. So we had client - so we have client driven activity and client activity out. And given our size and breadth of our business, we thought that made the most sense, but we're not trying to avoid discussing reinvested distributions with anything unusual around it. We were planning to discuss it, for example, the year end, as you know that's often elevated. And we plan to call it out at that time, but that's the number for the quarter is $2.5 billion, $3.5 billion last quarter, as you know $3 billion a year ago.

Perfect, thanks. And on the fee rate guide, is there any kind of money funds do you ever headwind built into that? And through that lens, how much have that started to hit and the most recent quarter? And maybe any view on how it's tracking kind of into the December quarter?

Yes, it's fully included in the projection.

Great. And was it impactful in the last quarter?

Not relative to the size of our business and also given the structure of our rate with Western that has the largest portion of our money market business. We have some protection there on the margin. So it's not big, it's absolutely not material to overall company operation.

Our next question will come from the line of Craig Siegenthaler with Credit Suisse.

Good morning, Jenny, Matthew, hope you're doing well. I wanted to start with M&A. And so just given the pickup in M&A speculation in US asset management, we want to see a Franklin would consider doing another large acquisition over the next 12 months, knowing that you're still in the process of digesting Legg Mason, which probably isn't easy on the organization.

Yes, I think the way that we felt that is that we are absolutely in the flow of what's going on. You're right, there's a tremendous amount of activity in the industry with some interesting opportunities to consider, broadly speaking, I think in many ways, the evolution of the industry, terms of some of the more dramatic ideas are out there, it's just getting started. But we are, we're very, very focused on making sure that we maximize the output from the Legg Mason transaction. I mean, we literally doubled the size of our company from an assets under management perspective, we, every time when we have meetings internally, we peel the onion back, and we realize we've got another opportunity internally either to be more efficient or to work together to produce more revenue. So I think that's our primary focus, but we are in the flow on these things. We're not shut for M&A by any stretch, if there was something tremendously compelling. In particular, on the distribution side, if there was something that helps us with distribution further to what we already have, we're looking at it very carefully, we still have a very strong balance sheet. We're not going to compromise that. We have strong earnings potential; we're not going to compromise that, given the opportunities we've got to use our cash elsewhere internally. But it's fascinating times and we are one of the companies that are quite actively pursuing ideas in the industry and making sure we keep up with the flow of change.

Yes, and I just add that. Exact with Matt, it takes a lot for us to want to take on something else before we digest this one. But you never know. I mean, it was - you're very intentional about keeping, having dry powder in case something else just came up with the bars probably a little bit higher on any big deal. But we've also said that we continue to want to grow our high net worth business. And as Matt said, if there's something that sort of distribution related, which tends to be more on the technology side that we were always looking at those and then we stay in the for the industry, because the industry is changing pretty dramatically.

Thank you. Just as my follow up one flow; we've seen this really strong migration into fixed income in the US. And then you have a much stronger bond business now with the addition of Brandywine and Western. But your flows were a little bit negative in the quarter due to the global bond. Do you expect the bond migration to continue for the industry even though yields are very low? And then if you do think it'll continue, do you think Franklin as a company can start to participate, just as all the pieces start working together?

Yes, I mean, this is Greg, I would say that you really have to separate out between what Western is doing on US fixed income side. We've seen a lot of strength in areas like [Indiscernible] we think that's going to continue as Fed REIT our rates and possibly federal rates go up. So I think that's very positive. Obviously, rates declined, mostly over the period. So any duration and even credit worked very well. And that's really why Western stood out. And it'd be a very strong quarter for flows, if you just looked at our US fixed income, $5.5 billion or so of inflows for the quarter, it just gets masked by what's happening on the global bond side, which really is a category that is very different from the traditional fixed income buyer. And as Jenny said earlier, I look at the categories and any spike in rates, any contraction in spreads and credit, we saw that a little bit, we saw that in September, we may see that continuing a bit. And I think that will help global bond. At the end of the day, any asset category like especially global bond competes with everything else. And the returns when you compare US equities, and just straight US fixed, it doesn't look very attractive. I think it looks pretty attractive, fairly quickly, if you have any kind of move up in rates. And that's really why we think this is a nice balance to the overall portfolio.

Our next question will come from the line of Robert Lee with KBW.

Thanks and good morning, everyone. First question, I find that, maybe --could you comment maybe just - want to understand the tax filing in 26% range, which, I know you mentioned as GAAP compared to kind of like, it was just kind of 22 or so kind of we're expecting initially, should we still expect 22% on adjusted basis or was - do you use 26% as the baseline, you're standing in advance around from there. I mean how we should we think about it.

I'd use 26%, as the baseline, I mean, at the business, our business has changed in terms of, and we've got a greater portion of our business in the US with the higher tax rate. And there are a couple of jurisdictions internationally, where the tax rates have gone up a little bit. So that impacts our overall tax view. So I think I would use 26% with a view that maybe it could be 25%, but only 26% is a good number to put in the model for now. The fourth quarter was confusing, or we had a spike in that rate because of the reasons we mentioned in the prepared remarks, it was just very unusual that spiked it up to 36%.

Great and maybe just going back to the fee rate down to 36 and 38. And kind of fully consolidated basis, do you think you got kind of over, the kind of 2020, fiscal 2021 or is kind of long term. And unlike kind of exit run rate basis, just to be guessed at 38 and change in quarter just in two months of way. Is that --[Multiple Speakers] run rate?

Yes. The 36 to 38 is assuming a full year, so that's the full 12 months combination, if you will, we think that's a good guide based on, obviously, the very significant mix of business change. So with a much bigger fixed income business, and much bigger institutional business growth that lowers the rates versus legacy Franklin Templeton, which brings that down. But at the same time, there is opportunity there in the alternative site where the fee rates are quite a bit higher. And we see some interesting growth opportunities there. So you have global bond being, federal bond higher rate being offset by lower rate, broader fixed income, business core plus institutional, that's what brings it down. And then pressure upwards, if you will, is the growth of the alternative business. So we hope we're on the higher end of it, but we think that's the natural range for the year.

Our next question is going to come from the line of Dan Fannon with Jefferies.

Hi, thanks. So just follow up on one more question just in terms of the assumptions for your guidance. Do the theories assume any level of performance fees? And if so kind of looks the baseline also, as you think about your expense guidance and the fee rate guidance you gave what is the market assumption that you're using, was it flat or are some modest growth?

So we assume flat, we don't assume any market growth in our projections, one. Two, that the fees do not include performance, the average fee rate projection does not include performance fees. We expect our performance fees to actually go up. They were $10 million for this quarter from zero last quarter standalone at fee, we start to enjoy a larger percentage of performance fees from Clarion after April next year. So that provides an opportunity we share 50:500 performance fees with them today, whereas today, we don't get any. It's 50% on our 83% ownership in Clarion. So that's an opportunity to get more performance fee so and in previous times last quarter was unusual, we had no performance fees in Benefits Street. But we expect that to pick up for example, this quarter went from zero to $4 million, we got $6 million from the Legg Mason side. And it wouldn't surprise us to see that go up quite a bit in 2021.

Great, and then, in terms of the known redemption, you called out $3 billion in the prepared comments that we also then highlighted that it was not related to the transaction. So I guess what gives you confidence around that. And then just curious about other potential disruptions that might - we might see or have heard about coming from either just normal course of business or the acquisition.

So as you say just on the, from the Legg Mason standpoint, Legg Mason was in positive flows in September, they have a much bigger institutional business. So you have lumpier redemptions, I think that's going to be more characteristics than we've seen historically, but basically haven't seen redemption related to any of this transaction, the bigger redemption tended to be Franklin Templeton, as we said, that one that we called out was a low fee, sub advisor relationship. There is some where you're seeing sovereign wealth funds in the Middle East redeeming larger numbers for - not for investment performance, not for transaction just because it's sort of what's going on in the market right now. So we are optimistic from the standpoint of integration and how things are going with clients. But you're always going to have, we still have the issues on performance in a couple areas like global macro, obviously value, and the value indexes as it performs 3,200 basis points year-to-date. So there's some people that are just ready to throw in the towel on value, others maybe it's time to that could switch. So those are always going to be, to the extent there on the institutional side a little bit more lumpy.

But as a general matter, obviously, we'd rather have no outflows $12.6 billion, it's not like we're pleased about $12.6 billion of outflows. But when you think about it, the $12.6 billion is very consistent with Franklin Templeton standalone outflows from the previous quarter, and both last quarter and the quarter before that. So the percentage attrition across the firm is come down a lot. And it's driven by exactly the same things that were - that are really market driven, if you think about the positioning of those strategies, and the all-weather point that Jenny is made a few times is an important one in this regard because we do have some very important strategies under the hood here that will do well, if the market starts to get more difficult again. I'd also say that out of our $11.5 billion of sort of unfunded wins that we have, we would expect something like $5 billion or so that come in the December quarter.

Our next question will come from the line of Michael Cyprys with Morgan Stanley.

Good morning. Thanks for taking the question. Just on the multi asset front, you guys have combined QS with the Franklin Templeton multi asset Solutions Group to create the standalone multi asset solution platform. Just hoping you could talk a little bit more about the strategy there. What you're most excited about? How you're thinking about the opportunity set? And then just the follow up there would be just as you look across the organization entirely, where else could it make sense maybe over time to think about bringing together some of the investment teams from Franklin Templeton and like to create similar sort of combined businesses and industry team.

So on QS and SMA, very much a kind of that the teams got together and really thought about it talked about it and said, we could be much stronger together. So this is really kind of organically coming from those teams. Today, that combined organization has 120 investment professionals and $120 billion in assets. So what I think intrigued them on right makes sense for them to come to that get is QS was an institutional kind of quant, they had a strong track record and things like liabilities driven investments, active quants, risk mitigation risk, on the Franklin side, while there was quant capability was much more of really sort of active manager active allocations. And when they - and they have their own outside managers due diligence, so bringing them together, you're really bringing this hybrid of quants, and an active, and think about the way the world's going, whether it's models in retail, if your outcome oriented models in the retail channel, or risk overlay of separately managed accounts, clients are looking for being able to have a conversation, almost like an OCIO type of conversation, as they're trying to think through, how to build their portfolios, how to position their portfolio. And this just gives us tremendous capability around that. And we think that's the way future does.

I would just add, I mean, I think it also from a client service and institutional accounts, having that capability, and just the value-added side of looking at risk overlays, and LDIs opening up new channels like insurance. For us, it just increases the toolbox that we can offer to clients and hopefully deepen the relationships. And I also bring in examples, one example of scale, where you have a large organization, it's bringing all that expertise into one. And then hopefully, leveraging that with clients, we think that's very exciting.

And just to answer the other part of the question about do we see opportunities to bring other groups together, we're not focused on merging products together, and that is not part of this deal. And you just talked to our CIO of global fixed income and CIO at Western. And they have different views on certain the timing on whether or not we'll see inflation or interest rate rise in the long end is that on the curve, and that's what an all-weather product lineup, it is that ability to have different products for different outcomes. And we think that's very healthy. Our distribution team has been selling equities, where arguably two different managers competing in the same category. They - you have to have the best distribution data, they have to be able to discern what the clients looking for, and either deliver up one option, or decide that you're going to answer the RFP with two different options in the same category, was very comfortable with that on the equity side, I can say that now, we just added that capability on the fixed income side.

Our next question will come from the line of Bill Katz with Citigroup.

Okay, thanks very much for taking the question. So I guess I'm not sure Jenny or Matthew, just coming back to your fiscal 2021 expense guidance of $3.7 billion. What kind of sort of G&A assumptions are you playing by plugging into that number, just trying to get a sense of what you think about in terms of normal around travel, entertainment, sort of things that are probably depressed given the COVID-19 backdrop?

Hey, Bill. I hope your son is doing well. So I would say that we built in a sense of, again, maybe this is sort of optimistic for my distractive. But we're building a sense of normalization in the beginning say that in March next year. But we've also built in more in terms of advertising, promotion, these sorts of things that you'd expect us to do as we're, as we breathe, as we've been working on distribution, client franchise. So our G&A, we have forecasted for about $485 million for the year, which is a healthy number and allows us to continue to invest in a number of important things and does allow for travel, to go back to some form of normality after the first annualized quarter next year

Great, that's helpful. And just as a follow up, I noticed you started to repurchase some stock in the quarter. So how do you counterbalance sort of reinvesting back into the business versus the return of cash to investors versus your commentary that it was just the beginning stages of an M&A evolution?

Yes, so you can see, when you look at our balance sheet back, in fact, we, last quarter, we ended at $8.2 billion or so billion on the cash and investments, we now have $5.1 billion cash investments. It's still quite healthy underpinning to give us confidence to use our income. Now income already with just two months of Legg Mason in there is pretty significantly enhanced. So I think what we plan to do at a minimum with respect to share repurchases, and make sure that we offset all of our share grants. And then obviously, we're very focused on the dividend and making, you know our history there. And you can expect that to continue subject to our board approving in December, the capital management policy. And then we have already multiple new requests internally, given the new breath of our firm to consider co investments, seek capital opportunities, other internal growth opportunities, and what I would say is that, as we reach the end either of a quarter or a year even, we then may do some top ups in terms of some additional share repurchases, if we don't feel pressure elsewhere. We also have a higher debt load, as you know, now, and we successfully access the market earlier this month, as Jenny mentioned, and we intend to use the proceeds that to refinance much more expensive notes, we're going to actually save about $30 million on that. But having said that, if rates stay where they are, maybe we just refinance out our notes going forward, and we stay at the current debt load assuming that EBITDA stays about the same because we want to keep our current credit profile intact. But if rates stay where they are, if rates get more expensive for the debt markets aren't as attractive, maybe we delever some as well without cash. So it's really a combination of those things. And the end of the day, if we have capacity to buy that more shares, given our current valuation, we'll do it.

Our next question will come from the line of Alex Blostein with Goldman Sachs.

Hey, thanks, guys. Just a couple of clarification at this point. Matthew on the expense guidance, can you help us with some sensitivity to revenue assumption? So I know you said you guys are assuming generally flat markets in your expense guide for 2021. But if the markets were to be higher, can you help us understand kind of what's the sensitivity to that $3.7 billion with a kind of normalized market returns?

Yes, I think that $3.7 billion and given the fact that's an adjusted number, of course, the GAAP number could be higher or lower, because that includes SMA. But I'd say as an adjusted number, that's a disciplined number, that we have some comfort in that if the markets go up, it'll still be $3.7 billion. That's sort of how I would describe it. If the markets come down, it could come down. But I don't see us going up beyond $3.7 billion.

Yes. And then another question, I guess, around capital management given the devaluation in the stock early in the free cash flow generation of business, can you help us understand the framework around making another acquisition, whether it's something small on a distribution side, or kind of continuously building out the IRA channel to find out what channel versus buying back Franklin stock in this level?

Yes, look, I think it's a great question because obviously the bar for us has to be quite high, given the fact that every dollar we're buying back in our stock is like probably like 6% dividend yield. So we're at quite focused on from that. We won't be doing large stock deals based on our current multiple and dilute. Okay, no, I'm okay. I fixed it. Alex, can you hear me? Okay, so sorry about that. Where were we? I'm sorry. I've lost track of what we were just talking about.

You were answering question about the decision on whether we buy back --.

Oh, yes, the high bar, yes. So we have a high bar for the reasons I just mentioned on our stock. And we're not going to do a large transaction using our stock unless it's for the same kind of multiple. So the way I said is that in wealth management, we think it's a very good use of our cash, because we did two small transactions, they both ended up being the accretive to us in terms of the execution around that little bit of cost savings, revenue growth, it all works out quite well. So in wealth, there'd be much smaller transactions that we use to continue to grow fiduciary trust. It's on the alternative asset side that we have to think. There are some interesting opportunities out there. And that would be where we would use our cash and our stocks so that's how I describe that.

Our next question will come from the line of Chris Harris with Wells Fargo.

Thanks. So you highlighted the momentum you've been seeing in alternatives. But there are some concerns about real estate as an asset class, generally, quickly, commercial real estate. So how is Clarion position to deal with the downturn we're seeing in that particular area?

So Clarion is overweight industrial so that area is done very, very well. If e-commerce demand goes up, Amazon needs more storage. And so it's more demand on cloud and things. And that's an area that they had focused on. And they were really underweight on the commercial real estate. So they are actually performance - is very well positioned right now with their performance.

Okay, and then just one quick one on the expenses. I know, we've got some noise here, because Legg was, its revenue and profit share, and Franklin's more of the traditional model. So if we look at the aggregate expense base, what is the addressable cost base, if you will? In other words, what are these synergies being net of? Because I know we probably shouldn't be looking at the entire expense base when we're considering that.

No, I think you should. I think you should look at it as against the $3.7 billion that we've guided for 2021. I know, it's very early guidance. But I think it's correct to think of that as being addressable.

Our next question will come from the line of Mike Carrier with Bank of America.

Hi. Good morning. Thanks for taking the question. Just two follow up. Given a lot of moving parts with expenses, [Indiscernible] if you have like a fiscal 1Q starting point for the adjusted expense level given 25% of synergies realized by the end of September, and then the full impacted Legg and then any color on just the timing of, when we should expect the 85% during the year.

Yes, so on the only 85%, I'd say we've made good progress so far. I think we mentioned that we already achieved 25% of it by 9/30. We expect to achieve 50% by, yes, we said year end, but that's probably going to be more like the end of January. And then I would say the rest of it or the 35% that's left. We hope to get most of it by June. But there'll be some carefully managed expense reductions on the front office side and particular that we wanted to spend more time executing upon to make sure we make sure we have that continuity and stability around the group that we've discussed. So I think it's fair to say that we, again, we've got the 25% done end of January, we get the 50%, maybe we get 75% by the end of June, and then the rest up to 85% by the end of the fiscal year. In terms of a normalize, in term of - I think, one, maybe it's useful to walk through the revenue and expenses associated with what we bought on from Legg Mason. So Legg Mason two months was about $475 million of revenue. If you include sales and distribution fees, we exclude sales and distribution fees. It's about $415 million, so that sort of annual quarterized, if you will, into about $700 million to $720 million or $2.85 billion on an annualized level in terms of revenue. And the expenses, as you said, it's a bit of a noisy quarter to say the least with all the acquisition related expenses. But if you exclude the non-recurring acquisition related expense items, it was about just the Legg Mason two months was about $350 million inclusive of sales distribution, excluding that it's about $280 million. So I think about it as being, if you include sale and distribution, it's 475 minus 350, equals 125 times six to 750. That's one way of looking at it. If you execute sales and distribution, it's 415 minus 280, 135 times six is 810. So you could look at it as that we're adding to including the cost aids, that are included in those numbers, because remember, in the overlay, we haven't included the additional run rate that we expect to achieve during the years. Maybe I don't know if that helps but if you think about that as being an addition, on top of our business.

Yes, that's helpful and then one just clarification on the fee rate. Just when I look at the quarter, the 38, it seems that was a little lower than expected from the pro forma. And then even with Franklin stand around 50. And then if I think about the alphabet of 36 to 38. If that includes like another month delay, it seems like that's not much of an impact, even relative to the 38. So I wasn't sure if there was just something else either impacting this quarter, we're impacting like the run rate or -

No, nothing in particular, we've modeled it out and we think they're good guide.

Our next question will come from the line of Brian Bedell.

Great, thanks very much. Good morning, guys. Most of my questions has been asked and answered. But just one follow up on the capacity for deals if you're doing them in cash, Matt, like you said, the $5.1 billion in cash and investments, what do you view as cash available for acquisitions within that, and then also additional debt capacity if you actually think about what type of cash level you'd be able to do?

Yes, it's probably, out of the cash, you see it's probably a $ 1 billion that because we're, again, we're quite conservative, we like to make sure we have the SUP, as you know we call it supplemental liquidity. And we intend to keep that in place. So we're disciplined around that. And so that's how we - that's probably what if you are looking for excess cash number that we would consider to be excess, it could be that. In terms of other people would maybe double that number and define it as that but we wouldn't. In terms of debt capacity, our absolute intention and focus is to make sure that we maintain our current credit profile, which is an A2 rating as you know, we just access the debt markets and we're very pleased with writing in that transaction, and we intend to retain that profile and operate the company and our capital structure in a way that's consistent with that. So our debt capacity at that level, we probably have some capacity, we don't intend to push out our limits whatsoever with the rating agencies or with our debt investors, given what we've described to them. So we're quite focused on that. The technical capacity to investment grade is very, very substantial in terms of debt, but we don't intend to use that.

Okay. That's helpful. And then Jenny just if you could talk a little bit about ESG. Obviously, Legg's managers had some good traction, certainly at ClearBridge and also Western and also a few other affiliates. How are you thinking about integrating that through Franklin or are you thinking about centralizing that ESG process and leveraging that across the totality of platforms or leaving the ESG capabilities within the individual managers.

So with respect to ESG, we think that the framework in which you apply ESG is specific to the investment team. But the data, we're a member of [savvy] and trying to get a lot more standardization around the data, we've actually created a centralized database. So I think global macro team, they get 14 different data feeds to build their ESG framework, that data then goes into this centralized ESG database, any of the investment teams are welcome to use it as they built their own framework and model. But we really are working hard with savvy in the industry and Greg participates in the IPI on ESG. And trying to just standardize lot of the information that people look at to build their framework. But to answer your question, we think that it is part of the, fundamental part of the investment process.

Yes. That makes sense. May I ask one more real quick one?

I'll make this little pitch, our Franklin municipal green bond fund is 9% year-to-date, this is our ESG and the main area, and it's like she got demand, great demand pretty nice and grand.

That's great. On that 97% employment acceptance, was that in line with what you were thinking, I guess. And were there any significant non acceptances from either PM or key leaders in that 3%.

So again, that was focused on holding company and distribution. And I think what we set out, we weren't sure what percentage of that makes employees and I think we ended up both on distribution and on the holding company making a lot more like Mason plays. And I think you really - you should see that it's a combination of both groups. And no, there was no specific one that we felt like we really miss, and you we're not talking about investment people.

Our last question for today will come from the line of Patrick Davitt with Autonomous Research.

Hey, yes. Brian has asked my question. So thanks.

Okay, great. Well, listen, I think, I just want to thank everybody for participating in today's call. And just want to leave you guys with one thought, what we knew from the beginning is only been further crystallized as and that is that our two organizations are really incredibly aligned in terms of strategic fit, culture and our shared focus on delivering strong investment results for our clients. And we look forward to continuing to stay at the forefront of our industry and again, keeping that balance sheet flexibility as things evolve, but really providing unparalleled investment choice and service for our clients. So thank you, everybody, for participating and be safe out there.

Thank you for participating on today's conference call. Once again, we do appreciate your participation and you may now disconnect.