Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended June 30, 2024. Hello, my name is Sully, and I will be your call operator today. As a reminder, this conference is being recorded. And at this time, all participants are in a listen-only mode. And, I would like to turn the conference over to your host, Selene Oh, Chief Communications Officer and Head of Investor Relations for Franklin Resources. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly 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 just 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. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton’s results for the third fiscal quarter of 2024. I’m joined by Matt Nicholls, our CFO and COO; and Adam Spector, our Head of Global Distribution. We’ll answer your questions in a few minutes, but first I’d like to review some highlights from the quarter. During our third quarter, investors continued to be faced with a complex investment landscape due to dynamic financial markets amidst macroeconomic, geopolitical and election uncertainty. Starting with public equity markets. The S&P 500 reached an historic milestone earlier this month, closing above 5,500 for the first time and continuing its streak of strong performance in 2024. Likewise, the Nasdaq 100 also hit record levels surpassing the 20,000 mark. However, we’ve seen a pullback in late July as Big Tech earnings have disappointed and value has outperformed growth stocks month to-date. The two big themes of artificial intelligence and inflation drove growth stocks to outperform value stocks in the first half of the calendar year. AI is impacting companies well beyond mega-cap tech companies. Everyday companies and governments are examining how AI will improve or disrupt their respective operations and business models. Inflationary trends continue to moderate, which is supportive of markets. But, because stock market returns have been so highly concentrated, equity allocations are poised to broaden as we’ve seen in the last few weeks, which could provide a sustained boost to sectors and regions that have been overlooked. This trend will likely create investment opportunities favoring active managers. Meanwhile, on interest rates, consensus estimates currently expect two rate cuts by the Federal Reserve in the remainder of the year, which looks broadly appropriate to us. Recent Fed speak signals greater comfort with the latest progress on disinflation and acknowledges…

Thank you. [Operator Instructions] And, your first question will be from Alex Blostein at Goldman Sachs. Please go ahead.

Hey, good morning. Thank you for taking the question. I was hoping we could start with the Aladdin announcement. I know it’s been sort of speculated for the last couple of quarters, so nice to get it out there. But, can you talk about the operational benefits and both expense, benefits and operating margins ultimately, that you expect the platform to deliver. How long it’s going to take to get fully implemented, etcetera? And as part of that, maybe Matt, you can just hit on the expense items for the rest of the year as well? Thanks.

Yes. Thank you, Alex. Good morning. So, a couple of background points first, why have you done this, what we expect to get out of it. And then, I’ll talk a little bit about the implementation costs and timeline and so on as you’ve asked. So first of all, why we’ve done this? We’ve done this because it unifies our investment management technology across all of our public market businesses which as you know extensive amount of specialist investment managers. This importantly was a decision that was made collectively across all of our specialist investment managers and has taken us no less than 18-months to two-years to make this decision. In terms of the benefits, it brings several things including most of what you’d expect candidly, but most importantly in the form of one platform versus multiple vendors. I’ll just go through a few of the benefits. One, portfolio construction and risk management tools, a single investment book of record, integrated order management systems and connectivity, importantly consistent reporting across the firm and this is good for both clients and for internal reporting purposes. And, it assists in developing cross team, cross specialist investment manager, multi-asset solutions. And, also as you know we’ve been active strategically in the business adding companies over time and with a single platform like this it’s easier to add new business. It’s easier because it’s faster and lower cost to integrate. Thirdly, in terms of implementation costs, so implementation costs are expected to be approximately $100 million over the next three to five years. The peak of these costs will be fiscal ‘26 and ‘27 where we expect about 60% of these expenses to be assumed. Importantly though, we expect to absorb between 50% and 100% of the implementation costs, meaning on a quarterly basis…

Great. Thank you for all of that comprehensive as always.

Thank you, Alex.

Next question will be from Brennan Hawken at UBS. Please go ahead.

Good morning. Thanks for taking my question. Couple questions on Lexington. So, curious on an update about how much of Lexington 10 has been deployed. And then, when we think about the threshold for deployment where Lexington would start to look to kick-off fundraising for the next flagship, where does that typically happen?

Hey, Brandon. So, first of all, Lexington’s fundraising focuses this year, just to cover a little bit of that, has been middle market and co-investment, and that’s gone well. Meanwhile, they’ve been obviously deploying Fund 10. And, basically, the message is that they have been deploying it faster and at higher discounts than historical. So, it’s looking very good. We don’t have a specific date, but it is quite possible that they will enter the market sooner than they anticipated just because of the ability to deploy the capital faster. And, I think we all see it, right, the liquidity that’s needed in the space. They also interestingly, we mentioned it in the opening remarks about their continuation vehicle. So, they have about $6 billion that they’ve done where these GPs have a particular holding that they want to retain, but some of the LPs want liquidity, so they spit it out into a new vehicle. Lexington hired a market leader in that. They actually think that there’s opportunity to even create a fund in that instead of having it be part of, their traditional funds. So, I think that’s going to be another opportunity for Lexington.

And Jenny, the only piece I would add to that is that, while Lexington historically has been focused on the institutional market, there are significant efforts underway, to ensure that they can better tap the Wealth Management channel by offering perpetual vehicles in Wealth Management in both the U.S. and non-U.S. markets, and that’s something we’re very actively engaged in developing.

Thanks for that. And just, Jenny, the discounts that you referred to, we had heard that those discounts have actually begun to narrow. Are they still seeing those wide discounts in the marketplace? Or they --

They are definitely starting to narrow, but they are still seeing, robust discounts versus historical discounts. They’re still better than historical discounts.

Yes. So, still at attractive levels, I guess, even though they’ve narrowed?

Yes.

Thank you.

Thank you. Next question will be from Craig Siegenthaler at The Bank of America. Please go ahead.

Thanks. Good morning, everyone. So, my question is on the $25 billion AUM allocation from Great-West. So, you’re about $5 billion away, after this is reached probably in a few months. Can you talk about the incremental upside to this relationship over time beyond the ‘25?

Adam, do you want to take that?

Yes, sure. So, with any client, I think you see a relationship grows over time. So, the first $25 billion was really something that was more contractually oriented throughout that process. We have been able to meet many Great-West Lifeco executives, as well as, the related power companies. We are in the midst of product development with them. So, the initial allocation has really been based on the types of products that insurance companies generally are interested in. And, I think if you look at most insurance companies, you’ll see significant allocations to some core fixed income as well as a tail that goes to alternatives. That has been the allocation we’ve received so far. But, what we’ve been able to do since acquisition is to work with Great-West, Great-West Lifeco as well as other power companies to develop newer products both for the retirement platform as well as doing things, on a JV venture on the insurance side. So, we are, not at a point yet where we can pinpoint what those will be, but there is significant product development going on, with Great-West, and we think that we will continue to see, the allocations broaden out from the core fixed income that has been the basis of things so far.

The only thing I’d add to that, Adam and Craig is just for context, obviously we’re delighted with the $25 billion arrangement and the $20 billion we’ve got in so far. But, relative to other clients and investment management firms that the Power Group of Companies does business with, it’s still fairly modest candidly. So, we have a way to go with that relationship and we think of this as a multi-year exercise of building the relationship further versus just something has happened as far as a consequence of a transaction. But, I think it’s important to note and obviously we expect this, I mean, the Power Group of Companies have very significant relationships with other investment. That’s going to continue or we’re doing is pitching for our fair share of it.

Thank you, Matthew.

Thank you. Next question will be from Dan Fannon at Jefferies. Please go ahead.

Thanks. Good morning. Matthew, I was hoping you could clarify or expand upon, what you guys are doing to offset the implementation costs, with the new tech projects. So curious, what those initiatives are, if you could be more specific. And, is there some phase in of that, or are those ongoing now so we shouldn’t think about any kind of catch up period between the or mistiming of some of the implementation costs versus the ongoing savings?

Yes. No, I don’t think there should be any mistiming’s, but as I said Dan, these things are quite complex. We’re not underestimating at all the implementation complexity of a project like this with Aladdin. I should say though that we’ve done this is an understatement to say we’ve done extensive planning around this both planning with our partners that’s both over at Aladdin and Deloitte, the consultant that we’ve hired to work with us on implementation. We’ve done extensive due diligence, we’ve built in contingencies and we have very significant resources, at both Aladdin and Deloitte and of course our own team. But, I don’t so I think we’ve done a ton of work to sort of determine, how the implementation expenditures will work. We’ve been extremely focused on this. If there is anything to call out, as I said, I will do that. But we and again, don’t want to jinx ourselves, but we don’t expect that to happen. In terms of how we’re able to absorb it. One of the tangential benefits I’ve referenced in previous calls of acquiring being so acquisitive over the last five years, notwithstanding all the additional work and complexity around acquisitions, it does lead to future opportunities to integrate and to be more effective and efficient across the different platforms and providers we have. A large portion of the savings is going from multiple providers down to one. Of course, we’re going to have other relationships still on the technology side that complement our relationship with Aladdin. But, we’ll have less than that. We also have a much larger scaled relationships. So of course, the pricing benefits that we have are very meaningful in that regard. The amount of resources we have externally from the Aladdin platform and our partners there and Deloitte are more than we could afford ourselves and frankly absorb some of the costs that otherwise we would have, if we were modernizing our own platform, for example. So, it’s all of those things sort of combined. We have multiple middle offices. We have multiple systems. They’re quite complex technologies all good and it works fine just to be clear. But, this is coming boiling down into one platform this way less vendors, more efficiency across our whole firm, which is needed anyway in terms of where the industry is heading is how we’re able to afford to do this in the effective way as I described.

Thank you.

Thank you.

Next question will be from Michael Cyprys of Morgan Stanley. Please go ahead.

Great. Thank you. Just wanted to circle back to the JV that you announced this morning in Japan with SBI. I was just hoping maybe you can remind us of your footprint in Japan today. Certainly, a lot of changes in that market. Just curious how you’re seeing that opportunity set evolving. Where do you see some of the biggest opportunities there in Japan? And how does this, JV help in terms of tapping into the opportunity set in that market? And, maybe you could touch upon what the economics will be and then how you sort of envision this JV working over-time and what success might look like?

Yes. So, I mean, we’ve been in Japan for a long time. Fortunately, Putnam actually has great relationships in Japan. And as a matter of fact, this quarter, I think we had $3.2 billion in net inflows in Japan. Big part of that was institutional business and with Putnam. Japan on the retail side has been a little bit more difficult and it is a market that is beginning to launch ETFs and starting to talk about digital assets. And, honestly the foreign investment shop, it can be difficult to penetrate that. So here with SBI, they have a tremendous reach. I mean, they’re probably the largest digital financial conglomerate. And so it’s I think it’s a 51% owned SBI, 49% Franklin Templeton. And, we’ll be launching joint ETFs. And, as the digital market opens up, we’ll be able to launch products there in the crypto space as well.

And, our footprint now in Japan really is not that different than anywhere else in the marketplace. It’s nice to be able to have a significant local base there. Because of that, we have a strong institutional business. We’ve seen the results of that inflows this quarter. We’ve been able to really accelerate some of the great performance that Putnam has and won some assets there. In the retail space, we have a relationship with a number of different distributors. We also have a very strong insurance business in Japan. The only other thing I would note about SBI is that Japan is not a market that is, always recognized for its innovation, and SBI is an exception to that. It’s one of the first significant firms to really be breaking through on the digital side in terms of client engagement. And, we think partnering with them will allow us to be one of the first asset managers to have more of that direct consumer digital engagement model in Japan. And, the asset base in Japan now is close to $50 billion for us.

Great. Thank you.

Thank you. Next question will be from Brian Bedell at Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. If you just circle back on the ETF strategy, basically $27 billion like you said. But given the very wide range of products you have and strategies you have across the entire complex, what’s the desire to more substantially expand that ETF franchise? Is there an ability to clone more active product or is it more of a two-pronged strategy of doing that and rolling out more passive product? And then if you could just talk about connecting that with the or how easy it is to do that with the new Aladdin platform realizing it’ll take some time, of course.

So, from an ETF standpoint, I mean, actually our largest category of ETFs over 40% is active. And then the next category is passive and then smart beta and then digital. So, our focus on ETFs is as a firm, we view ourselves as vehicle agnostic. So, whatever the market is interested in having us deliver our capabilities, we’ll deliver it in whatever vehicle they’d like. And there is a strong demand of advisors, particularly in the U.S. who are interested in ETFs. I think is driven a lot by the shift to fee based and so it’s been important for us to be able to launch products. I think we have over 100 ETFs today and to be able to launch products that are appropriate. There is there has been some feedback about a concern of launching close between a traditional mutual fund and an ETF, because it can bring suitability issues to the distribution platforms. And so, we like to either look at existing, say, mutual funds and potentially convert them if an ETF is a better way to deliver it or launch some sort of ETF that is a slightly different approach. Now interestingly, we’re getting a lot of demand from Latin America pensions that are interested in our single country ETFs, which are, I believe, the lowest price in the market. And so we’ve been getting good strong flows there. We’re getting flows from Europe as well as Japan. And so it’s really global. Our view is in a lot of these markets ETFs are becoming the vehicle of choice. And so we need to be able to support that. I don’t know if Adam, do you want to add anything to that?

Yeah. I’d add a few things, Jenny. The flow there has been quite strong for us at 3.3 in net flow, this quarter and that’s 7 quarters in a row where we’ve had about a $1 billion or more, in flow. As Jenny said, that flow is coming from a geographically diverse base where we saw about $900 million coming in from EMEA, and about $0.5 billion coming in from the Americas region. I’d also just follow-up with Jenny’s point on being agnostic in terms of vehicles. Our most significant and longest tenured mutual fund, US mutual fund is the income fund. But if we look at the income fund for this quarter just as an example, we saw very slight outflows in the mutual fund, but positive flows in the related SMA, positive flows in the cross border fund, positive flows in the ETF. So, by offering four different vehicle types there, the category for the income strategies in general was net flow positive. And as investor demand becomes more global and shifts away from mutual funds, having multiple vehicles allows us to capture that flow.

And actually I’m just going to say one thing on that. It’s often viewed that ETFs are potentially lower margin and I think that comes out of the history of it being sort of early on passive. Honestly it depends on kind of the strategy in the case of the income fund where we’re having so much success in those other vehicles, the pricing is actually very much in line with what the mutual fund is. And arguably over time, the cost to us will be less with the ETF and the SMA, because you don’t have the transfer agency and the fund administration costs in the same way that you do with the mutual fund. That actually was one of the drivers in our decisions to outsource those things because it allows us as the business shifts to have greater flexibility in the expense supporting the business.

That’s great color. Thank you for all that detail.

Thank you. Next question will be from Ken Worthington at JPMorgan. Please go ahead.

Hi. Thanks for taking the question. As we think about possible extension of duration by investors at the FedEx later this year, which of your fixed income products do you think are best positioned to benefit with better sales? And then along the same line, some of the big flagship Western funds are still struggling with performance and outflows picked up this quarter, both gross and net. What are the issues sort of weighing on those funds?

So, first of all, as if rates go down, I think we probably are guessing two cuts this year. Obviously, cash becomes less interesting as your fixed income allocation and you’re going to probably see people move more into other fixed income. We’ve had two out of our three SIMs in positive net flows in fixed income. As a matter of fact, Franklin’s performance is excellent with 71% of AUM outperforming peers in the one, three, and five year. Brandywine has 92% of their AUM outperforming peers in the five year category. And five out of our top 10 gross selling strategies are in fixed income and that actually includes some of Western strategies. We have positive flows in a lot of different vehicles. So, our cross border with our euro short duration is in positive flows. Our ETFs and fixed income are positive flows. Our retail SMAs are in positive flows, and we have positive flows in our closed end funds. Interest and actually the largest portion of our institutional pipeline is fixed income. And again, that does not include Great-West Life. Interestingly, if you think about passive and how it potentially impacts fixed income, it’s been the areas that passive has actually cannibalized to some extent has really been in that core and core plus space. And so in multi sector, the highly customized munis, Adam help me out on the other strategies. And you’re not seeing that kind of cannibalization from the passive. And then Western as we’ve talked about their positioning has been longer duration. So as rates come down that actually is potentially a benefit as far as the positioning and, we’ve seen it in their kind of one month performance has improved a lot.

Yeah. I would add a few things. We didn’t really talk about the muni franchise in that, Jenny. The muni performance is really strong. We have about 90% of assets, outperforming on the one year period and about 75% outperforming on the three and five. We think we’ll see significant growth in munis, and the fact that we had a strong SMA franchise there as well as mutual funds, it’s really helping us. In terms of, the shift in rates with, a steeper yield curve, we think we will see money coming out of cash into longer term fixed income, which should benefit us. The other thing we’ve seen is that in a market, with fairly tight credit spreads, we see allocations going more and more to managers who have the ability, to be multi sector or multi credit exposures and, to have the ability to allocate across those different sleeves, and that bodes well for us as well as we are very strong in those areas. The final thing I would note, is that our insurance capabilities are highly specialized, and we’ve seen real growth in fixed income coming from insurance specific mandates where the regulatory, reporting compliance aspects of managing those accounts is as or more important than the alpha generation.

And I just to add, one thing on the on cash management because a lot of people look at all the dollars in money market funds and think that that’s going to move out. But our money market funds, Westerns tend to have sovereign wealth and corporate treasurers who aren’t allocating as a temporary in between. As a matter of fact, Western had $2 billion in net flows, which really came from a product that was very competitively priced and attracted money from corporate treasurers. And then actually Franklin’s product, which is a Luxembourg product, had $800 million in flows. I think that was the fastest growing money market fund from some list that I saw, which was really offshore clients who wanted to take advantage of the yields in the U.S. And I think that product now it’s Luxembourg U.S. dollar short term money market fund, and it’s now $1.1 billion in AUM.

Great. Thank you.

Thank you. Next question will be from Bill Katz at TD Cowen. Please go ahead.

Great. Thank you very much for taking the question. So, there’s a lot of ins and outs, to the franchise right now. And just maybe stepping back for a moment, I guess, where I’m struggling a little bit on the storyline is how do you drive both top line and bottom-line growth here? Because when I adjust for where your flows are coming in versus where they’re going out, it would seem to me that the fee rate may go lower. I’m so curious your thoughts on that. And then given now any incremental savings that you think you can do will sort of supplement the growth for the Aladdin platform. It would seem like you’re more of a top line story than a top line plus expense leverage, but then I worry the fee rate might go lower because of the mix. So, how do we think about how do you get revenue growth from here and then how you turn that into operating leverage? Thank you.

So, let’s start and then, Matt, have you kind of jump on to some of the EFR and some of the other things. Look, I think that one of the things that the pivot into adding alternatives obviously, one of the benefits of that is that it’s just a fee even excluding performance fee as it’s based on investment management fee. And this year, we guided to $10 billion to $15 billion. We’re going to end out up close to $15 billion and yet the AUM is pretty flat and that’s really because of inflows plus market is sort of offset by some outflows and really realizations in distributions. But it was a year where we weren’t in the market with a flagship secondary PE fund from Lexington and frankly, real estate’s been really soft. So while, Clari Partners has three of their largest funds that are open ended and there’s perpetual fundraising. There just hasn’t been huge allocations to real estate. So, we hit a couple of those because I do think there’s opportunity for that pipeline to expand. Let me start with real estate. I think there’s a feeling that this market has really bottomed. And that’s driven by two things. One is more clarity on where rates are as well as probably more realistic marks that the bid and ask spreads are coming closer. And in talking to folks at Clarion, think about it. Office it used to be 35% of the index. It’s now down to 17%. So finally, maybe there’s more to go on office as far as dropping in the marks and Clarion only as 8% allocated to office. But you’ve had a huge adjustment in pricing. As a matter of fact, Clarion is seeing RFP volumes go up a little bit. You’re starting…

Yes. I mean, I think Jenny you covered most of it. I mean, there’s differences from last quarter, Bill, on the EFR, for example, the business mix is probably a little bit under 0.1 basis point, Putnam was 0.9. Now a lot of that has to do with the calculation at the EFR itself. But we thought the 0.9 would be a little bit less than that, hence the slight difference from the guide that I gave. The reason why it ended up being as much as 0.9 is because frankly, Putnam is growing faster than we anticipated, is growing faster now, projections every month it’s growing faster than we thought. For perspective, Putnam’s AUM is 23% higher than when we announced transaction or 13% higher than when we closed the transaction. And they’ve been in positive flows every month since both quarters since. So, what that’s meant is because they’re at a lower effective fee rate, the averaging and the calculation, everything, it means that the EFR has come down a bit. If you take that into account and then you take into account previous quarters where we’ve had episodic boosts to EFR such as Lexington’s catch up fees. Our EFR has actually been fairly stable. I mean, it has come down a little bit, but it’s normally by 0.1 here and there. And that as Jenny mentioned is largely due to a little bit of the mix and frankly the growth in ETF, Canvas, SMA solutions. And we expect that group of things to be growing. It’s very hard to have all of the things flowing that we’ve invested in one quarter. One day we will actually get alternatives, ETFs, Canvas, SMA and solutions all coming together at once where we get the fundraising in ops lined up with all those other more organic and more on-going growth areas of those vehicles. When we do that, we’ve got a good shot at it offsetting the areas of shrinkage that you referenced. I’ll also point out that if you take out some of the larger sort of tax or fixed income areas that you’ve pointed to and others have pointed to, we’d be in positive flows in the business right now. So anyway, just to give you a little bit more information on AFR.

And Bill, the final thing I would add is Jenny talked a lot about alternatives. Alternatives and wealth management is something obviously we’re focusing on that I think is very positive from an EFR perspective. And the final thing I would note is that our core sales that and we think about that as sales that are less than $100 million are up at about 14%. That tends to often be higher fee business, and we see very significant continued growth in core sales.

Thank you for the very comprehensive answer.

Thank you. Next question is from Patrick Davitt at Autonomous Research. Please go ahead.

Hey. Good morning, everyone. I have a follow-up on your answer on the Aladdin expense absorption. A lot of what you described sounds like it would have to come through after implementation. So just to clarify, you’re expecting that absorption to be in lock step with the implementation expense. And if so, how do you turn off all of those extra vendor costs if Aladdin isn’t live yet to fill in that capability? Thank you.

It’s inclusive of that. So, there will be periods of time where we’re paying for both Aladdin and we’re paying for other vendors. But the quarterly kind of view or vision that I provided to you includes that assumption. So, we still think that there would be very modest adjustments to or impact to operating income per quarter based on our plan over the next five years. Remember, of course, that portion of the $100 million is capitalized. So that gets spread out over more years, probably something like 50% of it gets capitalized over more years than three to five.

And I could add that we’re not on a uniform technology platform. So, as you migrate certain SIMs over, you retire their systems. And so it is a little bit lockstep as you go along.

Yes. And we have and the other thing is that we the time that we’re implementing Aladdin, we are also implementing other important opportunities across the company that again offset as I mentioned earlier, offset those the sort of the double pay you have to pay across different vendors. And that’s why when you get to the outer years like ‘28, ‘29 and so on, when that gets eliminated, you’re starting talking about $25 million plus of savings.

Thank you.

Thank you.

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

Well, I just want to thank everybody for participating in today’s call. And once again, we’d like to thank our employees for their hard work and dedication, and we look forward to speaking with all of you again next quarter. Take care, everybody.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. You may now disconnect.