MutualFundWire.com: Three Things to Know About Legg Mason's Q1 2014 Earnings

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Friday, August 23, 2013

Three Things to Know About Legg Mason's Q1 2014 Earnings

Legg Mason [profile] recently reported its fiscal first quarter net income of $0.38 a share, up from $0.23 a share in the previous quarter. Its total operating revenues were $670.4 million compared to $667.8 million in the last quarter and $630.7 million in the first quarter of 2012.

Its assets under management were $644.5 billion, down 3 percent from $664.6 billion, and up 2 percent from $631.8 billion as of June 30, 2012. Liquidity and equity outflows totaled $8.7 billion and $0.7 billion respectively and fixed income represented 54 percent of AUM.

MFWire found three important points to note from Legg Mason's Seeking Alpha transcript of the earnings call.

POINT 1: Clearbridge is starting to break into the institutional investor market.

POINT 2: Legg Mason is cutting costs by reducing headcounts by 50 percent from 2,000 to 1,000, and looking to outsource some commodities-based activities to save costs.

POINT 3: Legg Mason is looking for a good non-U.S. manager to acquire. Joe Sullivan says Legg has leverage in pricing because Legg continues to invest in managers once the are acquired.

POINT 1: Clearbridge is starting to break into the institutional investor market.

Jeffrey Hopson: Okay. And then on ClearBridge, other than the closed-end fund costs, can you break down, I guess, retail versus institutional flows there?

Joseph Sullivan, CEO, president and director: I don't know that I have the breakdown between the institutional and retail. What I will tell you is that ClearBridge is continuing and this is one of the things you're kind of hitting on, Jeff. ClearBridge continues to diversify their business and that's really an incredible story. I was talking the other day to Hersh Cowen, who's been there for a long time since it's been ClearBridge and its predecessor firms and Hersh made the comment to me, he said, "I could have never envisioned where we are with ClearBridge today."

In terms of their diversification, they've moved from being just a domestic manager to now accessing the international markets through our global distribution platform. Terrence Murphy, I give him a lot of credit for working to diversify this book of business. They've now become increasingly institutional. Now that's an early stage for them but they are getting wins institutionally. Their business is still -- the preponderance of their business is still retail but they are getting business institutionally.

POINT 2: Legg Mason is cutting costs by reducing headcounts by 50 percent from 2,000 to 1,000, and looking to outsource some commodities-based activities to save costs.

Michael Carrier of Bank of America Merrill Lynch: Maybe, just a question on the cost or the re-engineering. You guys have been focused on cost for quite a few years now. So when you think about some of maybe the efficiencies that you can realize as you go through this process and you look at some of the opportunities that are in front of you on the reinvestment side, what stacks up is some of the more attractive opportunities, where you look at what's going on in the industry, what you haven't be able to do, maybe over the past 3 or 5 years, but you think there's some pretty decent like revenue upside potential?

Peter Hamilton Nachtwey, chief financial officer, principal accounting officer and senior executive vice president: In terms of the cost streamlining that we've been doing, again recall that since the peak of the crisis, we've taken out over $300 million of the cost and reduced our headcount at corporate by 50% going from 2,000 to 1,000. So obviously, that gets at most of the low hanging fruit. Having said that, we've got a pretty complex footprint and we inherited a very complex footprint when we bought the Citi Asset Management business and what we're finding now is there's a lot of surgical opportunities, particularly in processes that touch lots of different departments and different geographies to streamline those and we're also looking at some outsourcing opportunities of things where the things that we do for ourselves have become more commodity based and there's vendors out there that can provide the service.

POINT 3: Legg Mason is looking for a good non-U.S. manager to acquire. Joe Sullivan says Legg has leverage in pricing because Legg continues to invest in managers once the are acquired.

On an equity manager:

Matthew Kelly: Joe, just to follow up on that a little bit in terms of the international affiliates. I'd love to get your thoughts on the buy versus build decision, whether you would -- what you think is important essentially for this affiliate in terms of which regions that they should be able to invest in, where they're located, if that's the most important part for you guys so there's boots on the ground or how you're thinking about that. And if it's potentially you could partner with one of your existing affiliates, such as ClearBridge, to launch such a strategy, if that's potential.

Sullivan: We're not going to do a massive kind of transformational deal but do we go a little bit bigger? What we're looking for, candidly, is a platform, much in the way we have platforms in the U.S. with Brandywine and Western in fixed income, and that's a platform that we can -- we leverage globally, marketing Brandywine and Western globally. With U.S. equities, our predominant efforts, not exclusively, but predominantly we're marketing ClearBridge and Royce. We need, in the alternative space, we're going to be predominantly, at least for now, marketing Permal.

What we need is a good quality non-U.S. equity manager whose brand we can elevate, who we can continue to invest in and cover kind of the gamut in terms of asset class so that would be international equities, it could be global equities, it could be emerging market goodies, could be local equities. Don't really care where they would be headquartered, could be in Europe, could be in Asia, could be in the U.S.

More on acquiring:

Roger Freeman of Barclays Capital: Just back on the strategic topic. Is your preference still to do partnering arrangements or the affiliate type arrangements? I think there had been some discussions, maybe a year plus ago that might be reconsidered as well, taking full ownership or is your requirement that existing owner managers come into the business?

Sullivan: Let me answer what I think you're asking. On the acquisition front, to the extent that we acquire a standalone affiliate, we would look to change our model and not acquire 100%. We would probably end up somewhere in the 75% to 80% area. We want -- we would want to leave some equity within a new franchise that we were to acquire and that's why we're working with our other existing affiliates on creating management equity plans because we just think that's a better model.

As it relates to, and this is something that we are working on, so in addition to kind of working on this non-U.S. equity manager, we are working with literally, I would say, every one of our affiliates at ways to do lift outs or smaller acquisitions that can strengthen their operating franchise and again, I mentioned this earlier, is something that I think is distinguishing. My colleague, Jeff Nattans in M&A, and I were talking the other night. And he said, "Joe, very few people actually continue to invest and put their capital into their affiliates after they acquire them." And I think that's true. See the transcript of Legg Mason's earnings call and the earnings for more on how Legg Mason is doing.

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