Key questions and answers from the third quarter fiscal 2009 earnings call conducted by Legg Mason Inc. (LM: chart) on January 28, 2009.
Jeff Hopson (Stifel Nicolaus):
In terms of Permal, is there a pipeline of funds waiting with that 90 days and what would you think has been the behavior at the margin change in terms of what those clients are trying to do?
Mark Fetting: Clearly, October leading to mid-November redemption was the surge. Things have stabilized significantly since then. Permal's overall performance compared quite favorably and so their performance story on a relative basis is a strong one. It is in the context of a market concern that continues to be difficult.
The fact that there was no Madoff exposure and has never been is a very important fact that's helped but it's less a redemption issue now and more of an acknowledgment that sales going forward for the near term will be tougher than normal.
William Katz (Buckingham Research):
Was any of the identified cost savings that you raised the guidance on recorded in the quarter ended in December?
Mark Fetting: Yes. There's $108 million of run-rate in the quarter ended December.
C.J. Daley: On a run-rate basis, we'll be at 135 and so the message is that in the December quarter, you didn't see a full quarter's run-rate on a normalized basis because we still have a portion of that to realize in the March quarter.
Barry Bilson: When you're looking at the narrative in the release, looking at this quarter versus last quarter, there is a reference that there are declines in the corporate cost base of approximately $50 million. That is a reflection of the profitability enhancement process, but it is, in addition, reflective of some of the 'Recovery' of prior period bonus monies.
We didn't identify and say, 'a corporate reduction enforced expense', because, in the big picture, that was negated or slightly more than negated.
Dan Fannon (Jeffries & Co.):
The $77 billion in outflows is a substantial number. Can you give a sense of the institutional pipeline across-the-board and the conversations in terms of Western, how they're going with their current customers and how we should think about those metrics going forward in terms of new mandates?
Mark Fetting: If you look at it on a calendar year basis of 2008, the rebalancing issue was considerable and we looked at some data that said maybe as much as 80% of the 12 month outflow was tied to the rebalancing piece. To the extent that's paused a bit very recently it has been reported, it does gives an opportunity for you to get in front of clients and work through.
Western specifically, on the quarter and quarter plus, there continue to be some performance issues that are challenging. That would be in the domestic area and the global area out of the London desk but their pipeline of opportunities is still a reasonable one. Their win rate is not what you would normally want to see or we have normally been able to achieve but we hope to pick up with the performance side.
On our other equity managers, it's really across-the-board. Batterymarch has been out getting some business, as has Brandywine on their equity side. ClearBridge is less of an institutional manager and so it wouldn't be quite as relevant.
Roger Freeman (Barclays Capital):
Outflows were about 9% across the entire AUM base bar some of the more unusual things. What would you say the outflow across everything else would have been, either on a dollar basis or on a percentage basis?
Mark Fetting: When you start to do that, you're down to Western, which is our largest manager in AUM. As a result, that percentage is not as troublesome as the one that you said in aggregate.
Marc Irizarry (Goldman Sachs):
In terms of the core margin, we calculate that we're coming out about 26%. How should we think about the margin going forward with what looks like another 5% or so off the cost base already?
Mark Fetting: That's the key metric, both that and on a cash basis. We've charged the management team to really stay focused on our ability to take costs out, both at the affiliate level because of the self-correcting piece and the corporate level. You can assume that we're going to continue to make progress as it relates to how this market continues to hammer all of us in the business. That will be the swing factor. If the markets went up and AUM's come back up, revenues will come back up and that will help us to the extent they drive it further down, it will effectively stall things.
Craig Siegenthaler (Credit Suisse):
There are a few unusual items you've pointed out concerning compensation expense. What is the add-back to expenses we should think about in terms of if there's any deferred compensation? Could you also define the SIV number and any unusually low bonus accruals?
Barry Bilson: The comp that you're looking at is an appropriate level to be viewing on this revenue base, that while there was some restructured costs, there was also some recovery of prior quarters' bonus net-net-net, probably a plus of a few $5 million.
Relative to the SIV side, there is levels of compensation adjust that is in this quarter, was in last quarter and will be in the foreseeable quarters. Hence you really don't need to be modifying anything there. The deferred compensation piece is one that you do need to factor through. It does move and can move substantially this quarter; remember, you've got the income or expense in non-operating with an identical amount in comp and benefits. That number this quarter was $40 million. That number last quarter was $23 million and so depending on what you would presume, assumes environments for gain or loss would alter your comp line but it has no impact on your pre-tax.
