FRANKLIN RESOURCES INC Q4 FY2024 earnings call

• Business Diversification: Expanded business over years, adding capabilities to serve clients across market conditions. Clients view Franklin as a trusted partner for comprehensive investment needs.
• Acquisitions: Acquisition of Putnam Investments exceeded expectations, with AUM growing 21% to $180 billion since January. Enhanced presence in retirement and insurance markets.
• Growth Areas: ETF AUM grew 89% with positive net flows for 12 quarters. Canvas AUM increased 94% to $10 billion. Aim to scale ETF and Canvas assets over five years. Private Wealth Management business of Fiduciary Trust International aims to double.
• Investments in Technology: Invested in AI, blockchain, and digital wealth. Partnership with Microsoft to develop financial AI platform. Launched Bitcoin and Ethereum ETFs.
• Performance: Mutual fund and composite investment performance improved in certain periods. Long-term net outflows were $32.6 billion for fiscal 2024, but excluding Western Asset, long-term net inflows were $16 billion.

Investment Management: Over the past five years, Franklin has diversified AUM via organic growth and acquisitions. Acquired specialist investment managers now represent 64% of AUM and 55% of adjusted operating revenue. In fiscal 2024, mutual fund and composite investment performance improved in certain periods. Putnam Investments, acquired in January, has seen AUM grow 21% to $180 billion, enhancing presence in retirement and insurance markets. Distribution: Significant growth in retail SMAs, ETFs, and Canvas AUM. ETF AUM grew 89% in the year with positive net flows for 12 consecutive quarters. Canvas AUM increased 94% to $10 billion. Goal is to scale ETF AUM by 3x and Canvas assets by 5x over five years. Private Wealth Management: Fiduciary Trust International has AUM of $39 billion, doubled since 2019, with 98% client retention. Aim to double this business through organic growth and acquisitions. Digital and technology: Invested in AI, blockchain, and digital wealth. Partnership with Microsoft to build financial AI platform. Launched Bitcoin and Ethereum ETFs. Alternatives: Private markets fund raised $14.8 billion in fiscal 2024. Lexington closed flagship fund with $22.7 billion, Benefit Street Partners closed private credit and special situations funds, Clarion Partners AUM stable despite real estate weakness.

• Next Fiscal Quarter: Assumes flat markets. Expected EFR in mid-37 basis point area, slightly higher than prior quarter excluding adjusted performance fees. Compensation and benefits expected at $860 million (includes $50 million performance fees). IS&T guided to $155 million to $160 million (inclusive of $4 million higher spend for Gen AI and investment management platform). Occupancy expected flat between $78 million and $80 million. G&A expense expected in $180 million area. Fiscal 2025 GAAP tax rate expected in 24% to 26% range.
• October Flows: Excluding Western Asset, slight long-term net outflows expected for October. Western's long-term net outflows in October expected to be $18 billion.

• Western Asset Investigation: Ongoing investigations by DOJ, SEC, CFTC into tax trade allocations by former Co-CIO Ken Leech. Led to significant long-term net outflows from Western Asset, impacting revenue and operating income. Western's revenue run rate declined by about 20% due to outflows, affecting Franklin's overall revenue and operating income.
• Market Volatility: Uncertainty in labor market, inflation, and Fed rate cuts may impact market conditions, affecting investment performance and client flows.

Q: Bill Katz asked about revamping economic relationships with Western and impact of Western overhang on gross sales.

A: Jenny Johnson noted Western outflows are focused on certain strategies, not impacting other Franklin strategies much. Matt Nicholls explained Western's revenue contribution and ongoing efforts to adjust economic arrangements. Adam Spector mentioned institutional flows have doubled ex-Western in fiscal 2024.

Q: Benjamin Budish asked about $100 billion fundraising in private markets over five years.

A: Jenny Johnson said 2024 private markets fund raised $14.8 billion, with 2025 expected to be between $13 billion and $20 billion, driven by real estate, secondaries, private credit, and ventures. Expect to hit $100 billion over five years through growth of existing managers and new offerings.

Q: Dan Fannon asked about core expense growth and Western dynamics.

A: Matt Nicholls said expenses would be similar to last fiscal year excluding performance fees and Western impact, with careful expense management and initiatives to manage revenue reductions. One quarter of Putnam expenses is ~$125 million.

Q: Michael Cyprys asked about revenue, operating income, EPS in 5 years and Western's contribution.

A: Matt Nicholls said Western contributes ~8-9% to adjusted operating revenues. Franklin aims for low single-digit growth overall, with growth in areas like ETFs, Canvas, alternatives. Jenny Johnson added on international growth and local capabilities in markets.

Q: John Dunn asked about doubling private wealth management and appetite for firms to join.

A: Matt Nicholls said Fiduciary Trust International has a strong platform with 98% client retention, and intention to focus on attracting teams to join the platform to double the business through organic growth and acquisitions.