Legg Mason (LM)

Q1 2012 Earnings Call

July 28, 2011 9:00 am ET

Executives

Mark Fetting - Chairman, Chief Executive Officer, President and Member of Finance Committee

Peter Nachtwey - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Alan Magleby - Director of Investor Relations & Communications

Analysts

Craig Siegenthaler - Crédit Suisse AG

William Katz - Citigroup Inc

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc.

Michael Kim - Sandler O'Neill + Partners, L.P.

Michael Carrier - Deutsche Bank AG

Macrae Sykes - Gabelli & Company, Inc.

Robert Lee - Keefe, Bruyette, & Woods, Inc.

Marc Irizarry - Goldman Sachs Group Inc.

Daniel Fannon - Jefferies & Company, Inc.

Cynthia Mayer - BofA Merrill Lynch

Roger Freeman - Barclays Capital

Presentation

Operator

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Greetings, and welcome to the Legg Mason First Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Director of Investor Relations for Legg Mason. Thank you, sir. You may begin.

Alan Magleby

Thank you. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the first fiscal quarter 2012 ended June 30, 2011. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements.

For a discussion of these risks and uncertainties, please see Risk Factors and Management's Discussion and Analysis of Financial Conditions and Results of Operations in the company's annual report on Form 10-K for the fiscal year ended March 31, 2011, and in the company's quarterly reports on Form 10-Q.

This morning's call will include remarks from the following speakers: Mr. Mark Fetting, Chairman and CEO; and Mr. Pete Nachtwey, Legg Mason's CFO; who will discuss our financial results. In addition, following a review of the company's quarter, we will then open the call to Q&A.

Now I would like to turn this call over to Mr. Mark Fetting. Mark?

Mark Fetting

Thank you, Alan, and good morning, and welcome to our call. Overall, we are pleased with our results in the quarter. It was a quarter of real progress in most areas, including improved fixed income flows, diligence on expense control and successful implementation of a significant phase of our streamlining effort announced last year.

Let's start with this quarter's highlights on Slide 2. We generated net income of $60 million or $0.40 a share on a GAAP basis, which is up 33% from the fiscal quarter 2011. Importantly, adjusted income, which adds back certain noncash and other expenses is $109 million or $0.73 per share, up 22% year-over-year.

In June, we completed the second and most significant phase of our targeted streamlining cost reductions, and we successfully transitioned most of our shared services activities to our affiliates. The quarter's results also include the cost related to our second successful ClearBridge Energy MLP Fund, which raised approximately $600 million in just a 9-day offering.

In the quarter, Legg Mason reduced the level of long-term net outflows by 28% compared to the prior quarter and 35% compared to the same quarter last year. We experienced fixed income inflows for the first time since December '07, underscoring the momentum being built at Western, as well as positive inflows in the fixed income product at Brandywine and Permal. We continued our active capital management efforts, buying back 6 million shares in the June quarter and reducing our outstanding debt by approximately $100 million.

Slide 3 outlines assets for the quarter, which totaled $663 billion, down 2% from the prior quarter and up 3% year-over-year. The quarterly decline primarily reflects that certain liquidity assets went back to Morgan Stanley Smith Barney. It also reflects the divestiture of Barrett Associates of small wealth manager. As you can see, fixed income assets increased as a percent of AUM, reflecting higher fixed income market, as well as inflows. Equity assets declined slightly as a percent of AUM, reflecting lower market and a pickup in outflows. Average assets were down slightly for the quarter, reflecting the dispositions, while the effective yield improved slightly to just over 36 basis points.

Slide 4 shows net flows for the quarter. As I mentioned earlier, Legg Mason had positive fixed income flows for the first quarter since December '07 and positive liquidity flows excluding the disposition of the liquidity assets to Morgan Stanley. On the fixed income front, both Brandywine and Permal contributed to positive inflows, while Western again saw improvement in their level of outflow. Excluding the loan yield in Asian mandate, which we've highlighted for sometime now, Western had positive flows for the quarter. There was an uptick in equity outflows for the quarter, driven by several large institutional reallocations at Capital Management, Batterymarch and ClearBridge. From an affiliate perspective, Royce, Brandywine and Permal had inflows for the quarter.

Slide 5 shows assets by affiliate in order of their contribution to pretax earnings. First is Western at $447 billion. This is down from $455 billion in the March quarter, primarily driven by the $18 billion disposition of money fund assets. And just a reminder, that there's another $5 billion to be transferred over the next 12 months. Next is Permal at $21 billion with its fifth consecutive quarter of positive net flows even with a previously disclosed restructuring of a single manager that resulted in a drop of $500 million. So they will continue to earn fees with the assets until the end of 2013. Positive flows are driven by continued momentum in the institutional channel, particularly in the U.S. In this channel, Permal has approximately $500 million in unfunded wins, and they are seeing longer-term opportunities in other parts of the world. Canada is one example, and the U.K. is another, where they recently hired the first head of their U.K. institutional business. They're also seeing momentum with high net worth investors in regional banks, particularly in Europe, the Middle East and Singapore. They're also going after opportunities in China, including the hiring of China expert Professor Zhuwi [Zhiwu] Chen to serve as a global advisor. Royce, at $43 billion, had modest positive net inflows offset by market declines in the small cap sector. our efforts with Royce in our international distribution platform continued to show strong results in Europe. Interest is also building in Asia. ClearBridge, at $57 billion, is down slightly, primarily due to rebalancing by clients, including approximately $400 million due to reallocations at a few institutional accounts. This is partially offset by the Energy MLP closed-end fund raise and an insurance sub-advisory mandate in the Aggressive Growth Fund.

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