Gregory Eugene Johnson - Chairman, Chief Executive Officer, President and Member of Special Equity Awards Committee Kenneth Allan Lewis - Chief Financial Officer, Principal Financial & Accounting Officer and Executive Vice President.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division Michael Carrier - BofA Merrill Lynch, Research Division Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division William R. Katz - Citigroup Inc, Research Division M.

Patrick Davitt - Autonomous Research LLP Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division Brennan Hawken - UBS Investment Bank, Research Division Christopher Harris - Wells Fargo Securities, LLC, Research Division Brian Bedell - Deutsche Bank AG, Research Division Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division Eric N.

Berg - RBC Capital Markets, LLC, Research Division.

Good morning, and welcome to Franklin Resources' earnings conference call for the quarter ended March 31, 2015. Statements made in this conference call regarding Franklin Resources, Inc. which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements.

These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filings.

[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 I today to discuss second quarter results. Overall, there was a number of positive developments in the quarter, however, much of that was overshadowed by redemption pressure on global bond funds.

Importantly, overall relative investment performance remains strong, and we are encouraged by the continued strength of our institutional and high net worth businesses as well as improved flows in several key areas. I'd now like to open the line for your questions..

[Operator Instructions] Our first question comes from the line of Ken Worthington with JPMorgan..

First, love to flesh out the success you're having on the institutional side. We've seen a number of quarters of success, was hoping to get more detail. So what part of institutional is resonating best with Franklin? So I think last quarter you said it was really non-U.S. institutional wins.

Is it insurance companies? Is it pension and endowment? Again, any better color there? And then what segments are you highlighting to them? And then I guess the last part of this question is, is there anything in the marketplace you see helping your success outside of the additional committed resources?.

I mean, I think it really reflects the effort that we started years ago, and made it a corporate priority, where we felt like the retail side was well-represented across the world and, really, institutional, we didn't have the penetration that we felt we should have.

And as we've said in prior quarters, I mean, most of that has been outside United States. We spent a lot of time developing relationships with sovereign wealth funds. A lot of others have opened up insurance companies, and other areas in certain markets that were not opened to outside managers have opened up.

And with our strong presence in many of those markets, I think that's resulted in sales as well. The area continues to be more fixed income. Templeton still has strong relationships, and we saw some significant Templeton wins in this past quarter. But really, a lot of it has been around the fixed income side, and global ag and emerging markets debt.

And that continues to be where we see the strongest pipeline..

Okay, great. And then the follow-up, just on DCIO.

How big is DCIO for you now? What's the strategy behind the push? And I guess similar to the other one, what products are you highlighting for the channel?.

Well, it -- I don't know what the exact numbers. I'm sure we can get that for you. But for us, we've always felt that the defined contribution, especially an investment-only open architecture, will work in our favor.

It's been relatively closed market for record keepers, and the trend and pressure towards open architecture, it opens up more opportunities for us. And you can take even within the segment the opportunity around target-date funds.

It's very hard to sell your own target-date fund if you're not -- if you don't own the recordkeeping, but the more recent trend of even opening up target-date funds to outside managers within their proprietary product I think is a near-term opportunity and be a near-term focus for us.

So you look across the product line, I think it -- we're well-represented on the equity side. And certainly, with Templeton and global bonds, it's a relatively new area in the investment only. But the majority of the opportunities are always going to be around the equity side and global equity side in the DCIO market..

Your next question comes from the line of Michael Carrier with Bank of America..

Greg, you mentioned on the Global Bond, you're just seeing the redemptions pick up, and I think you mentioned that most of that was being driven outside the U.S.

So just curious, during the quarter, obviously there was a lot of volatility in the market, but was there anything that you would kind of put your finger on in terms of what was driving that? I know in the fourth quarter there was cap gains and stuff that was driving it.

And then from a marketing standpoint, can you just -- what's -- what are the wholesalers doing to try to, I don't know if it's educate or try to get clients to understand what the product is? And when you go through this volatility, how to try to maybe steady some of those redemptions?.

Yes, I mean, I think it is challenging, and part of the challenge is that it's a relatively new category and one that we have such a dominant share in. It's hard to really see how you're doing against peers and what are the expectations of investors. And I think we said last quarter the redemption spiked for the U.S.

fund, and that actually improved significantly quarter-over-quarter. The big spike was in Europe, and really, it's even harder sometimes to get a handle on what the end shareholder is thinking about when much of that is sold through platforms and gatekeepers.

And if we drill down further, we can see specifically the markets where we had very fast and strong growth are the ones that are having higher redemptions. And if talk, as I have talked, to our distribution, they feel that there's a couple of factors working there.

One, there was such a high level of fear in markets like Italy of where the euro was heading, where that market was heading, and a lot of a client's portfolio got put into global bonds. So they think a lot of this is a reallocation now in a more normalized environment where the euro looks stable.

European equities are always going to be the dominant share of any European's portfolio. That really is the trade right now, so a lot of money moving back into European equity.

So we can -- it is specific really, the high-level of redemptions that we're seeing, to those specific markets in Europe that probably had the highest level of concern over where the euro was heading, and we got those quick, large sales is where we're seeing the greatest pressure. And it's I think somewhat challenging from an education standpoint.

For those that feel that they want to get back into equities, that's really what they're going to do with a portion of that portfolio. And from our perspective, a couple of things.

I mean, I think that fund in that market will do better when it's a risk off environment in some ways and certainly when it comes to the euro and European equities, and then if rates rise at some point because it's positioned for that as well. So I think those are 2 of the key areas in turning around the more near-term flows..

comfortable with. IT, I think you're saying 1% to 2% for the year.

And then just occupancy, didn't know if there was anything there or on comp, whether it was in the quarter that was unusual or the go forward?.

I think that the maybe one of the unusual events in the quarter that affected all those line items was FX. So just that alone, while it did not have a significant impact on operating income on the expense side, it did have a decent favorable impact on comps. So that's maybe order of magnitude of $6 million or so.

And then you probably have another maybe $3 million, $4 million in the other expense lines related to FX. So that's one reason we expect expenses to go up. So I think if you look at the comp line, I'm expecting that to go up a little bit, maybe 1% occupancy, yes, I'm expecting that to go up a little bit as well.

And then just to be clear on the information systems and technology line, that guidance is projected 2015 versus projected 2014. So that would imply a pretty big increase next quarter..

Our next question comes from the line of Michael Kim with Sandler O'Neill..

First, just to follow up maybe on, Greg, your comments on DCIO. Just curious to get your thoughts on sort of the recent proposals from the DOL, and any potential issues more broadly or how that might impact your business, if at all..

Yes, I don't think it's going to have a big impact on our business. It's because, again, we're more of the content provider. We're not the point-of-sale person in that. And I think regardless of what happens, they're still going to need DCIO plans. So I don't think that fiduciary standard would have a big impact for us one way or another..

Okay, fair enough. And then maybe one for Ken, just to follow up on the outlook for expenses more broadly. I think last quarter you sort of talked about reserving the right to tap the brakes so to speak, just assuming AUM and revenue growth flattened out.

So just wondering if you've maybe started to rein in some initiatives at this point? Or is it still kind of steady as she goes?.

It's somewhere in between, I would say. We're talking about initiatives, but kind of in the, if you will, the easy-to-cut expenses, things are already in motion to slow that down, slow down hiring a little bit. So that's been communicated throughout the organization and we're seeing some of that come through the income statement.

And we will see that too. But it does take time, and there's always a little bit of a lag to these things. And I guess I'm guiding up on expenses a little bit from decisions that were made in the past, and that will probably come through the next couple of quarters.

But today, we are definitely taking a little bit closer look at expenses and putting a little bit more pressure on cost savings..

Our next question comes from the line of Bill Katz with Citi..

Okay. You called out K2 as having some nice momentum and getting some scale, and then you also mentioned in your prerecorded call that you have a couple of products in the wings.

How quickly do you think those products can come to market? And how quickly do think you might be able to leverage them to add an incremental layer of growth?.

I think they can come to market pretty quickly within probably 3 months or so. And what -- I think the hard part is really getting the first one out there on platforms. And I think that's really where we've made key inroads, is having I think 72 platforms now that that's represented on, so that will make it easier for us to bring the next.

And it really now is starting to get momentum here in the last few months where we're seeing larger trades and more interest, and now it's up to I think $840 million between the 2 funds.

So it's always -- the first few years on a new product are always tough to get going, but this one, I think we are all very optimistic that we can expand that and really start to make a meaningful contribution to flows..

Okay, that's interesting. And then, Ken, just to clarify. I thought I heard in the prerecorded call that G&A would look like last quarter, not this particular quarter, but fiscal first quarter as we look out to the next quarter.

Is that right or wrong? And then just heading back, when you think about the comp dynamics, I think you called out that there was a little bit of a decline for variable compensation due to lower sales.

So sales pickup, is there still operating leverage that can be driven off the comp line looking ahead?.

I think there's a little -- yes, I would agree with that. On the variable comp side, there's -- we have some room there. Regarding the general -- G&A expense, I'm talking about the quarter that ended December. So more like that level versus....

So $90 million, if I recall correctly, somewhere in that ballpark..

Yes, we're in that ballpark. Right..

Our next question comes from the line of Patrick Davitt with Autonomous..

You mentioned the expense benefit from FX but said there wasn't really much impact on operating.

So it's fair to assume then that the negative revenue impact is pretty close to 1-for-1 on the numbers you gave?.

I wouldn't say 1-for-1. I think there was a positive impact on operating income but just wasn't material relative to operating income. It definitely impacted revenue and expenses, but they offset somewhat. Not entirely though..

Okay, good.

And in that vein, is there any one currency or index we could use to better forecast the foreign exchange revaluations in other income?.

Yes, I think in this quarter it was the euro-dollar, which I think is up I believe 13% or something like that. And so in this particular example, we did have -- we have a subsidiary that has a functional currency other than the U.S. dollar that holds U.S. dollars. And so it's just kind of an oddity of the accounting rules.

It does get offset in other comprehensive income, but it does add to the volatility in income statement. So -- and [ph] that was a euro to dollar..

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

First question I have going back to flows. So if I look at the broad franchise, I mean, one of the attributes of you guys is you have a lot of big franchises, whether it's global bonds or equity income or from the Templeton equity strategies, mutual shares.

And I guess one of the challenges you have is some of -- multiples of those, I guess, are suffering through some not even really high rates of redemptions but enough to kind of put them in outflows.

So if you look across those, are there any 1 or 2 that you could look at where right now you're having some flow issues? Maybe it's the Franklin income products, where you feel like you're starting to feel like maybe it's settling down or you feel more optimistic about the ability to kind of get those franchises flowing in the right direction again?.

Yes, I mean, I think it generally will relate to where your shorter term performance, what is driving that, on whether you're going to be optimistic around a turnaround. I think the good news for Mutual Series, which historically has always had exposure to Europe and always benchmarked against the S&P, that's been a real drag.

And they hedge, Templeton doesn't, so their more recent numbers are looking much better on the mutual side. And certainly, Global Discovery is doing well in the global equity side, and I think that will continue to be a near-term driver of flows that we're pretty optimistic about right now.

And then I think the silver lining with Templeton, that because of Templeton's historical philosophy of not hedging the dollar, that's been a significant drag on relative performance as well as on just assets for us. And that, combined with the value discipline of, again, overweighted in Europe, that's been a near-term drag.

And that in the last month or 2, the dollar seems to be leveling here, which is helpful. And then Europe for the first time, as well as all markets outside of the U.S., outperformed the U.S. So maybe that's the beginning of a longer-term trend that from our asset mix would be I think very beneficial.

The other area, hybrid area, for us, you had a little bit of backup in the high-yield bond market that created some fear there.

But again, we feel pretty good about the hybrid and Franklin income flows despite that anytime you have a high weighting of high-yield bonds, you're going to have more energy exposure and that created the shock over the last quarter. And that seems to be a little bit better.

So those are the areas that I think we're more optimistic about in turning flows around. And then you take an area like municipal bonds. It's been under pressure the last few years. That's turned around into positive flows here over the last quarter. Hopefully, we can start to see a pickup there as well..

Great. And maybe going to capital management and the share repurchase. You mentioned that you put in place a, I always forget -- the 10b5-1 program. So is it possible to give some color around that? Kind of maybe size or how you -- the structure of it around strike prices, things like that..

Well I'll try to give you a high level because it's just fairly complicated when you get into the details of the mechanics. But I guess the first question is why did we do it now. And what we were seeing was kind of a reduction in tradable volume for us.

And we felt like this would help us meet our -- we're not changing our capital policies or strategies, but it would help us meet our goals because that was sort of a challenge for us in time.

And so the idea that during the period where we would voluntary block ourselves out from trading, we have this 10b5-1 plan, so it just opens the window up for more trading days for us. And in general about the mechanics, it's -- we try to be more -- buy more when the price is down during that period and buy less when it's up..

Okay. And then maybe one last question. You called out that the high net worth business as being an area of some relative flows and growth. I mean it isn't a business really over the years that has been talked about too much.

So could you maybe refresh us, kind of size it and what you're seeing there in terms of new business flows and maybe if there's any kind of incremental investment or expansion of that, that's taking place?.

I think our goal is to grow that business and make it a more meaningful contributor and get scale from size. And so that -- whether that's through an acquisition or continues organically, that's really -- we know that needs to be bigger. I think we're just pleased, and I wouldn't call it a trend.

It's just a lot of work's been done to get some, I think, major wins with that group, and we want to just highlight that. But it's something you wouldn't just expect to happen every quarter to have $1 billion in net inflows going into that segment, but it's progress in the right direction.

And on a base of $10 billion or $12 billion or $14 billion, wherever it is, today, that's meaningful to that business and important in growing the bottom line..

Our next question comes from the line of Brennan Hawken with UBS..

So question here on the excess debt capital you guys raised. It looked like you raised about $400 million for a -- to pay down $250 million of outstanding notes. Would the excess then be used to boost U.S.

domicile cash and potentially fund some buybacks?.

Yes, that's one [indiscernible], but yes..

Great. And then there's also been chatter -- on the capital front, there's also been chatter on the D.C. out of a potential repatriation holiday.

And could you talk about how you would view a reduction in the tax rate in order to bring some cash back stateside?.

Yes, I think that the devil's always in the details on these things. But clearly, conceptually, if it was advantageous to the shareholders, and from a tax perspective and from a capital management perspective, we would take advantage of any repatriation law that was enacted..

Great, and then last one, quarter-to-date, we've seen emerging markets bounce nicely.

Can you give any color on what you've seen here quarter-to-date, whether or not some of the trends that you noticed sort of and highlighted here in recent months, whether or not that's been continuing and maybe even gotten a little extra fuel as we've seen emerging markets bounce?.

Yes, I mean, I think we're careful about trying to give any kind of indication where we think flows are going this quarter. I think, as I stated, it's helpful to have the stronger performance certainly in areas that have been dragging, like emerging markets.

And I think that will help a lot of our different products, but it's probably too early for that to translate into a shift in flows right now..

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

So year-to-date, your performance fees are tracking down a fair amount relative to last year.

Just wondering if you guys can comment a little bit on that dynamic and maybe what the outlook might look like for the second half?.

Yes, sure. I don't think that we'll have a repeat of last year in the second half of this year. I think what drove most of the performance fee -- the incremental increase in performance fees in 2014 was from K2. And at this point, it doesn't look like that number will repeat itself for the second half of the year..

Okay, follow-up, kind of a bigger picture question. The global macro team, just curious to get your guys expectations for how that team is going to operate.

And if everything goes according to plan, what kind of impact might that have on the franchise?.

Well I think it, hopefully, will result in just better collaboration with the different groups. We've always been a company that has had a lot of autonomy with its investment groups. In the groups, there are different sources, different research organizations for information.

And we just felt like we have such a strong team in place with a team of PhDs and led by Michael Hasenstab, that it makes sense to try to leverage that. And certainly, the other factor of near-term performance with what central banks are doing I think is becoming more important to traditional stock picking that we tend to do.

So it's not something that we're going to push on the groups. It's just a way for us -- for them to have another resource and a view that I think will result in an overall more consistent view for the various different groups in the company. And part of that is thinking about currency when you're looking at global equities.

And whether you decide to hedge or not, that's up to the various groups, but this will be a strong voice and a strong opinion on looking at currencies and how to add alpha through currencies instead of just leaving that up to the individual group. So I think that's where we'll see probably the majority of change..

Our next question comes from the line of Brian Bedell with Deutsche Bank..

Maybe just staying on the theme of global macro team, maybe Greg, if you could talk about the potential to launch new products that are based on some of the global macro research, particularly in alternative, and whether that opens up any new distribution channels.

And then, as you mentioned, this helps create a lot of different ideas and unified research perspective.

Is there any view that you would centralize any type of -- centralizing any type of research, I guess, throughout the firm in terms of pushing that down onto investment mandates?.

Yes, I think it's early to talk about what effect it would have on products. I think the near-term question is when we look and discuss Templeton and the philosophy around not hedging and how that's been so detrimental when you have this kind of move for U.S. investors, a year where the dollar's been up 25% against a basket of currencies.

So I think those are kind of in more near-term discussions. You wouldn't go hedge everything, but you would certainly consider hedging some of the funds or some of the classes of shares for those that want to have that protection and potentially lower volatility.

So I think that's where you'll see the near-term effect on products, but that's still something that we're discussing with the groups.

I think the other part, how does it affect our solutions, our tactical asset allocation, I think all of that we're still working towards coming up with what we think is the most efficient way to leverage all of that expertise we have in-house.

But I think, first and foremost, for that group is they manage close to $200 billion, and that's really where you want the -- their focus to remain..

Okay, great. That's helpful. And then just maybe a question for Ken on the info systems.

Can you talk a little bit more detail about what your -- what the plan is there in terms of what you're working on that's driving the elevated expense in the second half of the year?.

Could you just repeat the question, please?.

Sure, yes. On the info systems expense, so the shift up. And we're up -- we're going to be up 1% to 2% on a year-over-year basis. So the shift up into the second half, if you can talk about, a little bit about what you're doing in that area in terms of project build, and I guess whether that's going to continue into next fiscal year as well..

Yes, this information systems and technology line, it's pretty hard, it's very hard to predict. There's a lot of big projects underway and there's project plans, and sometimes they come in on time, sometimes they get delayed. But we do and have had some fairly big system initiatives underway.

They tend to be more operational in nature, HR systems, fund accounting systems, that kind of thing, and they tend to be multiyear. So I guess the only point I'm trying to make here is the expenses have been lower, and I just didn't want people to think that, that is a good run rate going forward..

Yes, that's fair.

And then maybe just while we're on the topic, is there any thought to ever outsourcing things like fund accounting and some of the administration on the investment side?.

That's something that gets looked at quite -- well I wouldn't say quite frequently, but certainly every couple of years here. And to date, the conclusion has been not to change that.

Although every time we go through that exercise, we do identify ways we can improve our existing structure and systems and processes, which is -- that's a current discussion right now too. And that's part of the technology projects that I'm referencing..

Our next question comes from the line of Douglas Sipkin with Susquehanna..

Two questions, really just kind of follow-ups from some of the things that I've heard.

So just on the new 10b plan, is the assumption that I guess you guys put it in place because you weren't able to achieve your capital return goals previously and this may help that?.

I think it's more that we thought we would have trouble meeting our goals in the future, and this would help that. It was just becoming more and more difficult to meet our goals, that's how I would characterize it..

Okay. And then secondly, just shifting maybe to Global Bond, and I believe you guys touched on it a little bit so -- but just judging by the performance, which has been reasonably fine and obviously looks like it's gotten a little bit better here in April.

What do you think has been the driver of the outflows? Because it feels like it isn't so much performance, maybe some of the headline stuff or macro stuff. I'm just curious what you guys' perspective is because it looks like it's performing reasonably fine..

Well, I would start with the global bonds kind of overshadows good stories underneath, and it's such a unique category. And I think it's fascinating that our 2 best-selling funds are global bonds right now. Last quarter, the Global Bond Fund, Global Total Return was #1 and 2 in gross sales. So there's still plenty of investors that want that exposure.

It's just a -- I think it's just, again, a unique set of -- because you have shareholders throughout Europe that just have a whole different view and came into that with significant portions of their portfolio, that, that creates some near-term disruption. But it's also our best-performing area still and on a consistent basis over time.

So I think that, when you have $4 billion in outflows in one quarter, that's going to overshadow a lot of stories underneath.

So I think the other, as I've said before, I mean, Global Equity with Templeton, just the headwinds there by the dollar and the philosophy of not hedging, that's a pretty strong -- especially on like the Templeton Foreign Fund, creates some strong headwinds in the near term. So I think that that's another area that is somewhat unique.

And then you take other areas, like I've talked about Mutual Series, why that has been a bit of a drag over the last few years but could be -- could turn around fairly quickly. And then areas where our deep value like our -- we've always had such strength with Rising Dividends Fund.

In this kind of market that's more tech-oriented that's going to drag as well, that they tend to be more defensive funds. So some of the funds that we've led with have been a little bit more defensive in this type of market. Now we have growth funds, Franklin Growth Fund has very, a very strong track record across all periods.

We're getting good flows there, but it kind of gets lost, I think, in the story..

Our next question comes from the line of Eric Berg with RBC..

Greg, just one question.

Do you think, broadly speaking, fixed income investors are more willing to stick with the asset class in the past, despite the prospect of higher interest rates, because of the changing nature and the more expansive nature of fixed income investing?.

Well, I think that remains to be seen. I mean, we really haven't had a significant rise. We've had a couple of blips on short term that have kind of moved back quickly. So I think there's always a market for fixed income.

And the difference with fixed income is if rates go up, you attract new investors as they go up, and people that want to lock in liabilities and things, that creates demand in a down market for fixed income. So I think there's always -- there will always be a place for fixed income regardless if it's rising or not.

I think the unconstrained question is one that we will see how that plays out and how those funds really do in a rising-rate environment. And we think our Global Bond Fund with negative duration will do very well in a rising-rate environment. That's what I said earlier. That's probably one of the catalysts to get increased flows back into that area.

So I think there clearly is a concern on investors' parts for rising rates, and that's going to affect people going obviously into lower -- or longer-duration assets right now. But I think there's always clearly a place for fixed income..

Our next question comes from the line of Bill Katz with Citi..

Just a little bit of a modeling follow-up.

Ken, as you look out into the next couple of quarters, can you give us an update of what you're going to have in terms of purging some of the dormant shareholder accounts?.

Oh, yes. We don't -- yes, we probably won't know that till July..

It's too soon. Okay..

That -- you're right, seasonally, that's when that happens..

And it seems that we have no further questions at this time, I'd like to turn the floor back to management for closing remarks..

Well, thank you, everyone, for participating on our call, and we look forward to speaking next quarter. Thank you..

Thank you..

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation..