Franklin Resources, Inc. (BEN) Earnings Call Transcript & Summary

Welcome to Franklin Resources Conference Call. Hello, my name is Sylvie, and I will be your call operator today. As a reminder, this conference is being recorded. [Operator Instructions] I would now 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 welcome to Franklin Templeton's conference call to discuss the establishment of a long-term strategic relationship with Power Corporation of Canada and Great-West Lifeco, and Franklin Templeton's acquisition of Putnam Investments, which is as the foundation of the partnership. Statements made in this conference call regarding Franklin Resources Power Corporation of Canada, Great-West Lifeco Inc. and Putnam Investments, 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 speak only as of today's date and 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 press release distributed this morning at 7:30 a.m. Eastern Time and in Power Corporation of Canada and Great-West Lifeco Inc.'s recent filings, which are available for viewing at www.sedar.com and in Franklin Resources' recent filings with the Securities and Exchange Commission, including its most recent Form 10-K and 10-Q filings. None of the companies undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Now I would like to turn the call over to our President and CEO, Jenny Johnson.

Thanks, Selene, and good morning, everyone. Joining me for today's call are Matt Nicholls, our CFO and COO; Adam Spector, our Head of Global Distribution; and Terrence Murphy, our Head of Public Markets. Today, we are excited to announce our strategic partnership with Power Corporation and Great-West Lifeco. The Power Group of Companies, including Great-West and IGM Financial are leaders in the global insurance, retirement, asset management and wealth management sectors and have collective assets under management and/or administration of approximately $2.1 trillion. Our partnership with Power and Great-West will be multifaceted. Great-West will provide an initial allocation of an incremental $25 billion in AUM to Franklin Templeton, and this amount is expected to grow meaningfully over time. As another foundation of the partnership, Franklin Templeton will acquire Putnam Investments from Great-West. Putnam is a $136 billion global asset manager, which has outstanding long-term investment performance and complementary investment capabilities and will strengthen our presence in the insurance and retirement sectors in particular. Lastly, a key component of the partnership is that Great-West will become a long-term shareholder of Franklin Resources. We are delighted that Franklin Templeton will be partnering with Power and Great-West and would like to extend a warm welcome to the outstanding team at Putnam. Over the past few years, one of our strategic priorities has been to increase the diversification of our business and increase our relevance in certain key segments of the industry. We have been focused on expanding our investment capabilities, investment vehicles and client segments across geographies to respond to market changes in client demand. While we are always focused on organic priorities, we have stated our interest in distribution-led strategic transactions that would further diversify our business and accelerate growth in key markets. This partnership with Power and Great-West exemplifies this. And most importantly, accomplishes our objective of offering more choice to more clients in important sectors and delivering better outcomes for our clients. Specifically, Power is a global partner that shares a consistent business philosophy of being long-term oriented investors with a client-centric culture and a core belief in active management. The Power Group of Companies holds controlling interest in Great-West, which includes Empower in the U.S. as well as Canada Life and Irish Life across Canada and Europe and IGM Financial, which encompasses subsidiaries Mackenzie Financial and IG Wealth Management. IGM also has investments in Rockefeller Capital Management and China Asset Management Company. Power's leading positions give us access to greater diversity and connectivity in client markets that offer attractive growth potential. Progress such as this enables us to further invest across our business to the benefit of our overall firm and client base. As they partnered power, Franklin Templeton is a leading global asset management firm with $1.4 trillion in AUM across a broad range of investment and distribution capabilities. Franklin Templeton's diverse specialist investment managers and wealth management business are complementary to the Power Group of Companies, and we are excited about the numerous opportunities to collaborate on a global scale. Our acquisition of Putnam is a global asset management firm that has outstanding long-term investment performance and brings complementary styles of investing to our existing capabilities. The addition of Putnam enhances our current business and strengthens our distribution resources, including bolstering our presence in the insurance and retirement markets. And having spent extensive time with the Putnam team, we believe that our 2 organizations are strongly aligned in terms of culture. Matt and I would now like to take you through the specifics of the transactions. You will find the investor presentation posted on the Investor Relations section of franklinresources.com. Turning first to the strategic partnership with Power and Great-West. As part of its diversification strategy, Great-West, the 6th largest insurer in North America will allocate initial $25 billion of AUM to Franklin Templeton's specialist investment managers within 12 months of the closing of the acquisition. This initial commitment expands our existing relationship with an important client and aligns with Franklin Templeton's strategic focus. We expect additional AUM to be contributed over the next several years from across the Power Group of Companies. As we pursue opportunities, we have identified by matching our capabilities with their clients' needs. Now let's turn to Putnam. As mentioned, Putnam is a global asset manager with $136 billion in AUM as of April 2023 and brings complementary investment capabilities with strong investment performance. Greater than 80% of mutual fund assets are in 4- and 5-star rated funds, and Putnam was recently recognized in Barron's Best Fund Families 2022 for strong performance over the 1-, 5- and 10-year periods in particular. Importantly, for us, as I have said, Putnam accelerates Franklin Templeton's growth in the retirement and insurance markets with a strong target date fund offering and highly regarded stable value investment capability. Putnam increases Franklin Templeton's defined contribution AUM to $90 billion. Retirement is an attractive channel known for its stable and growing assets and U.S. corporate DC assets are expected to grow to over $12 trillion by 2027. Putnam will also expand Franklin Templeton's insurance-related assets under management to approximately $150 billion. The insurance segment is a multitrillion-dollar asset base and strategically important to both the traditional and alternative asset management industry. The addition of Putnam will increase our overall AUM to $1.56 trillion and retail assets to $774 billion, excluding the incremental Great-West commitment. Putnam will add further scale and potential for additional efficiencies within Franklin Templeton's mutual fund platform, and we'll facilitate the potential to reposition subscale funds across the combined fund range. Franklin Templeton has a history of successful asset management acquisitions, and we understand the complexity involved in executing a smooth transition to and through closing. We spent extensive time with the key leadership and investment teams of Putnam. And as we have done with prior transactions, we have an execution plan that is focused on continuity, stability and minimizing disruption in investment teams, client relationships and client service. Now I'd like to turn it over to Matt to discuss the specifics of the transaction.

Thank you, Jenny. Amongst other factors, this transaction is structured to maintain Franklin Templeton's financial flexibility and promote our continuing investments in the business. It also protects our strong financial position in the event of continued challenging market conditions. As mentioned, Great-West will become a long-term strategic shareholder. And in this context, Franklin Resources, Inc. will issue 33.3 million shares in upfront consideration at closing plus $100 million in cash, 180 days after closing for 100% of Putnam. At yesterday's closing stock price, this totals $925 million in combined consideration. But the shares issued to Great-West, 26.2 million shares, representing 4.9% ownership are subject to a 5-year lockup and the remaining 7.1 million shares representing 1.3% ownership are subject to a 180-day lockup. Franklin Templeton will also pay up to $375 million in contingent consideration structured from year 3 to year 7 and tied to meaningful revenue growth targets from the strategic partnership. To receive the maximum consideration payable, revenues from the strategic partnership would need to grow to the equivalent of over 30% of Putnam's current annual revenue. From a tax perspective, the transaction is structured to allow Franklin Templeton to step up the tax basis to the acquired asset and create cash tax benefits valued in excess of $100 million on a net present value basis. Turning to the pro forma financial impact. The acquisition of Putnam is expected to add total run rate adjusted operating income of approximately $150 million after the first year post closing, consistent with an approximate 30% operating margin, inclusive of cost synergies. We currently anticipate $55 million to $75 million of non-recurring integration charges. The transaction is expected to be modestly accretive to adjusted EPS by the end of the first year after closing, including cost synergies. Although any incremental share repurchases beyond employee share grant hedges would accelerate this timeline. Given how we have structured this transaction, our balance sheet will continue to be strong with cash and investments projected to remain at approximately current levels of $6.5 billion, with no issuance of new debt associated with the transaction. As mentioned, this maintains our financial flexibility and our capacity to continue pursuing other growth initiatives. We anticipate closing the transaction in the fourth quarter of 2023, subject to customary closing conditions. In closing, we believe this transaction represents a mutually beneficial long-term partnership. It also achieved Franklin Templeton's goal to deliver an even broader range of investment strategies to our clients and accelerates our growth in attractive retirement and insurance markets. We are thrilled to partner with Power and its group of companies, which share our focus on delivering strong investment results to our clients and complements our other key relationships. Before turning this over for questions, Jenny and I would like to thank the leaders of the Power Group of Companies, Great-West and Putnam for their positive engagement with us over the last several months. And now we would like to open the call up to your questions. Operator?

[Operator Instructions] And your first question will be from Ken Worthington at JPMorgan.

Maybe first, as you think about the benefits of the transaction, how much of the benefits for Franklin are being driven by a close relationship with Power Group and Great-West? And how much might be associated with directly owning Putnam? And then ultimately, for this deal to work for the best result for Franklin, how important is it for Power Group to be a good partner? And are the incentives strong enough to drive this best result?

Yes. So look, I -- it's both. It's -- I don't think this deal would get done without the distribution capability and without the fact that Putnam is an amazing investment franchise. You got 4 and 5 star funds and 80% of their assets and funds. So we're excited about the capabilities it brings, but we're also excited about the relationship with Power. And from an alignment standpoint, I mean, Power is primarily paid in Franklin stock and are long-term holders of it. We think they're going to be fantastic strategic partners and holders of our stock. We've already discussed governance framework for ensuring that the partnership is, we're thinking about it long term, so I would say that it is both the asset of Putnam as well as the relationships that we get with the retirement platform like Empower, Great-West from the insurance side as well as the wealth management capabilities that they have, including even a closer relationship with, say, a Rockefeller, which they own 20% of. And it just allows us a seat at the table to be able to talk about the great capabilities that we have.

Ken, I would just add that, if you look at the strategic priorities, as outlined by Power and Great-West Life, it became quite fair to us that they have this tremendous focus on growing wealth insurance retirement collectively and have a history of doing that over the past many years, both organically and inorganically. So that's point number one. Point number two, as Jenny alluded to, the connections between Putnam and Great-West Life and other parts of the Power Group of Companies is pretty embedded. They have a very, very strong long-term relationship. They haven't just owned Putman for a few years. They've owned Putnam for a very long time, and the relationships are very deep and strong across those organizations.

Okay. And then following up, I wanted to dig further into Empower. Can you talk about how you see specifically the relationship between Empower and Franklin developing? Maybe how big is Franklin on the Empower platform today? And to what extent does the transaction enable the potential for Franklin to have a bigger or much bigger footprint on the record keeper over time?

Yes. I mean, I think when we looked at it, Franklin is ranked like 14th largest asset manager on Empower. So as you can imagine, just getting up to our market share would be significant. So we think it's a great opportunity. And the fact that Putnam has really high-performing, stable value and target date funds, which are great ways to get into any planned platform, is going to be really important. About 29%, I think, of Putnam's assets are in the DC space. So we hope that, that connection and that relationship allows Franklin to move up significantly from #14.

Next question will be from Brennan Hawken at UBS.

This is Adam Beatty in for Brennan. Just wanted to ask a little bit more about the wealth management channel. First of all, it looks like you have Rockefeller sized in the deck there, but maybe not IG Wealth Management. So just trying to get a handle on the order of magnitude there. And then further, I guess, to Ken's question about Empower, just how you're planning to use some of the new products as well as Franklin's existing capabilities to go after the wealth channel?

I think IGM Wealth is around -- they're about $86 billion in assets under...

Just in Wealth.

Just in Wealth.

Yes. [ $256 billion. ]

So if that answers your question. What was your other question?

Yes. Just in terms of the strategy and how you're planning to use Franklin's maybe existing capabilities as well as what Putnam obviously brings to go after the Wealth channel?

Yes. I mean, one of the challenges, I think, that Power has had with Putnam and here you have this unbelievably performing investment capabilities. But the challenge has been on the distribution side is distributors are reducing the number of partners that they have. And so it works both ways, right? We can bring Putnam to some of the bigger platforms that they may have been subscale. But also on the Power side, it allows us to sit down and Putnam already has relationships with many of these Power Corporation investments. And we now are having conversations around our capabilities as well as we'll be able to ETFs and SMAs. I mean, so it just opens up the conversation. And again, as I mentioned, the framework around the 2 companies, we have built out a framework around working together to ensure we understand the priorities at a place like Empower, the priorities at IGM and being able to be at the table when they're thinking about what product development they want and what the opportunities and I don't know, Adam, do you want to add anything?

Yes. I would just say that, to me, what's most exciting about this is that the product sets are complementary, and that's really valuable. But where we have our strongest relationships in the Wealth channel, Adam, I think that was your question. We have complementary strength in distribution. So bringing the 2 product sets together with one distribution platform where the legacy firms have different strength is better for both organizations.

That's got it. Very helpful. Appreciate those figures also.

Next question will be from Michael Cyprys at Morgan Stanley.

I wanted to circle back to the $25 billion of flows that you're expecting to get within the first $25 billion within the first 12 months. What sort of strategies is that expected to be allocated into? What sort of fee rate can we expect on those? Are those likely to be more of the higher fee alternatives with 50 basis point type fee rates or higher? Or is that more of like a core fixed income allocation that's more single digits? And then maybe you could speak to how you expect that $25 billion to grow over time in terms of incremental flows? How meaningful could that be? And what's going to drive that?

Yes. So for the first $25 billion, about 2/3 of that is likely to be in core, core-plus investment grade, fixed income-type assets under management. That's lower fee insurance-related general account classic fixed income business. The effective fee rate as a whole, though, is something like 50 -- I'd say mid-teens basis points. It does include a portion of allocation into 2 or even 3 of our specialist investment managers that are in the alternative asset space. That brings the effective fee rate up. In terms of the future, $25 billion is a very promising starting point for the strategic relationship, but the potential to expand beyond that is quite considerable given the breadth of our capabilities and the needs and the growth on the Power Group of Companies side. As Jenny mentioned, we worked extensively on a bottoms-up analysis in terms of the matching of what we can do at Franklin across all of our strategies, alternatives and traditional combined with the needs on their side.