Legg Mason (LM)

Q3 2012 Earnings Call

January 27, 2012 8:30 am ET

Executives

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

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

Alan F. Magleby - Director of Investor Relations & Communications

Analysts

Matthew Kelley - Morgan Stanley, Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Macrae Sykes - Gabelli & Company, Inc.

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

Steven M. Truong - Barclays Capital, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

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

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

Presentation

Operator

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Greetings, and welcome to the Legg Mason Third Quarter Fiscal Year 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations and Corporate Communications. Thank you, Mr. Magleby, you may begin.

Alan F. Magleby

Thank you. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the third fiscal quarter 2012 ended December 31, 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 condition and results of operations and 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 the 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 Raymond Fetting

Thank you, Alan. Good morning, and welcome to our call for the December 31 quarter. Our results for the quarter reflected the effect of 2011's second half market turmoil, which impacted our asset and revenue levels. Even so, our core business fundamentals held up well, particularly when you add back the considerable transition costs this quarter, which largely concludes our streamlining initiative.

Our flow picture improved for the period as performance across our key affiliates remain strong and our distribution teams work closely with them to build momentum. By the end of the period, we had completed the 18 months streamlining that we announced in May 2010, on time and on budget. We are now realizing our targeted $140 million in annual cost savings. We could not have done this without the tireless efforts of our employees, and we thank them for the successful execution of this ambitious initiative.

In addition, we enter the new calendar year with a balance sheet that remains strong and flexible with year-over-year cash levels almost flat, even after the return of $0.5 billion to shareholders over the past 12 months. This financial strength not only allows us to deploy capital opportunistically, but it also allows us to confidently invest in growing the business in new products and segments. Earlier this month, we held an investment forum for clients, FAs and media in New York with senior investment professionals from Western, Permal, ClearBridge and Royce.

We had over 1,000 participants accessing the webcast or dialing in on the phone with more attending in person. One of the central questions of the discussion was what will it take to get investors back into the markets, particularly the equity markets. Our panelists agree that most advisers and retail investors will need to see a sustained rise in equity prices for some period of time. In this regard, we are encouraged by January's good start.

In the meantime, our managers continue to see value in the market whether that be yields on high-quality equities that are the most attractive relative to bonds since the mid-'50s or non-treasury sectors of the bond markets, such as munis, credit and high yield.

So now let's shift to our results on Slide 3. For the quarter, Legg Mason reported net income of $28 million and adjusted income of nearly $77 million. Results were impacted by higher transition-related charges, lower average AUM, which drove lower revenues, as well as lower performance fees.

Importantly, we completed our restructuring on time and on budget. We had $26 million in cost savings this quarter, and we achieved our goal of $35 million in the current quarter or $140 million on an annualized basis. We ended the quarter in a position of strength with $1.2 billion of cash on our balance sheet, which we expect to use to both investing growth and as appropriate, return to shareholders.

On Slide 4, we see our Assets Under Management by asset class. We ended the quarter with $627 billion, up sequentially driven by market appreciation and reduced outflows both overall and for long-term assets. By asset class, we had 25% of our assets in equity, 56% in fixed income and 19% in liquidity.

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