Legg Mason (LM)

Q2 2012 Earnings Call

October 27, 2011 8:30 am ET


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


Michael Carrier - Deutsche Bank AG, Research Division

Neil Stratton - Buckingham

Cynthia Mayer - BofA Merrill Lynch, Research Division

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

Macrae Sykes - Gabelli & Company, Inc.

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

Roger A. Freeman - Barclays Capital, Research Division



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

Alan F. Magleby

On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the second fiscal quarter 2012 ended September 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 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 mornings call will include remarks from the following Speaker; 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 September 30 quarter. As you know, severe market volatility and continued economic uncertainty pushed many investors to the sidelines this quarter. In the midst of this uncertainty, our focus remain on prudently managing our business while laying the groundwork for earnings leverage into a recovery. To that point, since we announced our streamlining initiatives 6 quarters ago, we have successfully achieved annual run rate savings of over $100 million. In approximately the same period, we deployed about $1 billion of our excess capital in the form of share repurchases, seed investments and dividends. We've also invested the product innovation that we believe will lead to growth down the road.

In August and September, our affiliates, our wholesalers and marketing teams worked tirelessly with clients to help them understand issues like the U.S. downgrade and the subsequent volatility related to the situation in Europe. Headwinds remain, most notably the debt crisis in Europe persistent unemployment and political gridlock in the U.S. and inflation in the emerging economies. However, the markets have rebounded thus far in October. We believe the U.S. problems are solvable, that today's news in Europe is encouraging, that China can engineer a soft landing and that interest rates will remain low in developed markets for the foreseeable future.

So let's shift to our results on Slide 3. Legg Mason reported net income of $56.7 million or $0.39 per GAAP -- per share on a GAAP basis. Adjusted income per diluted share was $0.61. As a reminder, adjusted income is where we add back certain noncash and other expenses, and exclude the tax rate change.

We ended the quarter with assets of $612 billion, largely driven by $33 billion of market depreciation and negative foreign exchange impact. We realized $26 million in transition-related savings, and we repurchased during the quarter approximately 7.5 million shares.

On Slide 4, our assets are broken out by asset class. We ended the quarter with 24% in equity, 58% in fixed income and 18% in liquidity. The decline in equity assets was largely driven by market depreciation.

Slide 5 shows our net flows for the quarter. Fixed income outflows increased from the prior quarter. These resulted from continuing withdrawals in the low-fee sovereign mandate, portfolio rebalancing among institutional clients and a continued move by some clients to passive mandates. Our equity outflows were flat in the quarter, while the industry experienced a significant increase across most categories. To be fair, our prior quarter included some special situation redemptions. And liquidity outflows were approximately $3 billion driven by a redemption from a client to fund their planned capital expenditures.

Slide 6 shows our assets by affiliate. Broadly speaking, we witnessed the retrenchment across the industry as investors avoided risk, and this impacted all of our investment managers. Each remain close to the markets and their clients as we work through the fallout from S&P downgrade of U.S. debt and the continued uncertainty in Europe.

Let's start with Western at $433 billion. We will discuss Western in more detail in the next slide, but broadly speaking, inflows into specialized mandates were more than offset by outflows from the global sovereign mandate we have referenced for some time, and uptick in outflows in core mandates due to rebalancing and several clients shifting to passive strategies.

Read the rest of this transcript for free on seekingalpha.com

If you liked this article you might like

This Portfolio of 14 Stocks Is Crushing the S&P 500

This Portfolio of 14 Stocks Is Crushing the S&P 500

9 Banking Bets, From Main Street to Wall Street

9 Banking Bets, From Main Street to Wall Street

There Is Good and a Lot of Bad in General Electric Earnings

There Is Good and a Lot of Bad in General Electric Earnings

North Korea Is Making These 3 Hot Defense Stocks Look That Much Hotter

North Korea Is Making These 3 Hot Defense Stocks Look That Much Hotter

As Legg Mason Stock Falls One Analyst Sees 22% Upside

As Legg Mason Stock Falls One Analyst Sees 22% Upside