Legg Mason Management Discusses Q1 2013 Results - Earnings Call Transcript

Legg Mason (LM)

Q1 2013 Earnings Call

July 27, 2012 8:00 am ET

Executives

Alan F. Magleby - Director of Investor Relations & Communications

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

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

Analysts

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

William R. Katz - Citigroup Inc, Research Division

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

Roger A. Freeman - Barclays Capital, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

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

Craig Siegenthaler - Crédit Suisse AG, Research Division

Matthew Kelley - Morgan Stanley, Research Division

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

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Douglas Sipkin - Susquehanna Financial Group, LLLP, Research Division

Presentation

Operator

Greetings, and welcome to the Legg Mason First Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] As a reminder, this teleconference is being recorded. It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations and Corporate Communications. 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 first fiscal quarter 2013 ended June 30, 2012. 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 in the company's annual report on Form 10-K for the fiscal year ended March 31, 2012, 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 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. And I would like to thank everyone for joining the Legg Mason earnings call.

Legg Mason made significant progress, positioning the firm for long-term growth, even amid valuation retrenchment across global investment markets, which led to a drop in our quarterly revenues. In particular, we believe these kinds of conditions played at the strength of our diversified asset base and to the depth and breadth of our managers' specialized expertise.

In a recent note to clients, Chuck Royce noted that as Europe meets its challenges, and as the U.S. begins to get its own fiscal house in order, which is not likely to happen until after the elections, we should move out of the range-bound equity market to the upside.

Isaac Suede is in China meeting with clients and financial leaders and has restated his belief that they will engineer to a soft landing. He points out that they have already cut rates twice, changed the reserve requirements 3 times, and while the Shanghai index is still lagging, he reminds us, changes are never instantaneous in China, and these equity markets should do much better and could be the harbinger for a wider September improvement.

And in a Barron's profile, ClearBridge's Hersh Cowen continued to emphasize the unprecedented risk premium that high-quality, dividend-paying stocks have relative to bonds and sees growing opportunities in these stocks.

Meanwhile, in fixed income credit markets, where both institutional and retail investors continued to add flows, Western's Steve Walsh took a more cautious tone at the Morningstar Investment Conference recently. He stated that it is nearly impossible to come to a conclusive opinion on how Europe will play out. With the market price for negative outcomes, Western has concluded that staying modestly long spread risks and staying attuned to the changing landscape seems to be the right approach.

Overall, at the corporate level, we continue to manage the business, aware of the current environment, including keeping a close eye on expenses, while investing in areas that will position us for long-term revenue and diversified earnings growth with a near-term focus on organic growth.

Let's start with the highlights to the quarter on Slide 3. On a GAAP basis, we announced a net loss of $9.5 million, which reflects charges related to our very successful debt restructuring and fund launches. Adjusted income was nearly $89 million.

In May, we announced a new capital plan, which is part of our broader efforts to enhance financial flexibility and position Legg Mason for sustained growth. In doing so, we reduced our outstanding debt by $350 million and refinanced debt that was due in 2015 with longer-term maturities. This resulted in a largely noncash charge of $0.32 per share. The quarter includes $800 million raised for ClearBridge's third MLP fund and $200 million in a new Western REIT. Our financial results reflect $0.11 per share in costs related to launching these new products.

Our long-term flow story continues to improve, particularly in the critical area of fixed income. And in the quarter, we bought back the remaining $155 million of the original $1 billion board authorization, and we expect to continue the program under our new authorization throughout the year. We ended the quarter with $800 million in cash.

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