This summary is based on the third quarter fiscal 2009 earnings call conducted by Legg Mason Inc. (LM) on January 28, 2009.
Management:
Chairman and CEO: Mark Fetting
SVP and CFO: Charles Daley
SVP, Finance: Barry Bilson
SVP and Head of Corporate Marketing and Communications: Tim Munoz
Key Investor Issues:
- AUM were $698 billion, down $300 billion from December 31, 2007 and down $144 billion from September 30, 2008.
- Total revenue for the first nine months of 2009 was $2.7 billion, down from $3.6 billion for the period ended December 31, 2007.
- Q3 revenue of $720 million dipped 25% from $966 million in quarter ended September 30, 2008.
Third Quarter Financial Highlights:
There are four significant charges that drove the $1.5 billion loss.
- The sale of Axon at $3.63 a share.
- The additional SIV support which has been an ongoing issue at $1.07 a share.
- A goodwill and other intangible asset impairment charge of $6.03, which is about 60% plus of the total loss.
- The net charges of about $0.16 a share, related to a sublease that involves a major investment bank.
- Excluding the realized loss on the Axon sale from cash income, the company made operating cash income of $72 million.
- Taken against net revenues of about $518 million, this gives a profit margin of almost 14%.
The year 2008 represented daunting economic fundamentals for the asset manager.
- The December quarter was the worst quarter in the equity markets since the crash of 1987.
- The S&P was down 22.6% in 2008 versus 23.2% in the December quarter of 1987.
- The management reported that 2008 was the second worst year in S&P history, outdone only by 1931.
- Unemployment at 7% is remains a challenge and is forecast to reach 9% to 10%.
- The TED over credit spread has narrowed from its high of 463 basis points at October 10th to 106 on the 27th of this month.
Strategic Initiatives:
- The key priority is to focus on the profit margin.
- Approximately 75% of the company’s expenses are variable.
- The company is also focused on enhancing its affiliate and Legg Mason collaboration.
- The management reported ongoing good support between Western and Legg Mason in addressing the SIV issues and building the liquidity business.
- The third initiative is to accelerate global growth and product development.
Individual Managers’ AUM:
- Western ended the quarter with $512 billion assets under management.
- This is about 12% decline from the prior quarter.
- Permal closed with $23 billion AUM, about 35% weaker from the prior quarter.
- ClearBridge ended the quarter $50 billion, down 27% from previous quarter.
- This is consistent with the market in terms of the S&P levels.
- Royce was at $20 billion, a decrease of 28%.
- Legg Mason Capital Management closed Q3 with $15 billion AUM.
- Brandywine and related entities were at $37 billion, a decline of about 14% and Batterymarch at $17 billion.
- PCM ended the quarter at $3 billion, down from $5 billion in the prior quarter.
Western performed well with global sovereign mandates, inflation-linked and municipal bonds.
- The Core and Core Plus remain challenged.
- Private capital management has restructured with Bruce Sherman now singularly focused on investments as the Chief Investment Officer.
- Greg Powers is the new CEO.
- In the Permal, there was a surge in October for redemptions.
- Permal, unlike other affiliates, was able to meet those redemptions.
- Permal introduced a 95 day notice period, which has helped stabilize the situation considerably.
- The management advised that Permal had no exposure on Madoff.
The cash position at December 31 was $2.4 billion, of which $825 million remains restricted for SIV support.
- Cash is down from $3.1 billion at September primarily due to the realized loss on the sale of Axon in December.
- Of the $2.4 billion of cash, $1.8 billion is available for support of SIVs.
- On a pro forma basis, after taking into account the expected tax refund and the net operating loss carry back, the company has $2.2 billion of cash.
- The sale of Axon has strengthened the company’s ability to meet the challenges of SIV exposure.
Investment and securities were $1.1 billion at September 30th.
- The figure includes positions in Axon that had been acquired.
- Investment securities at December 31 declined to $517 million.
- The $517 million is represented by $150 million of remaining SIV that are on the balance sheet, and $361 million of seed capital and assets held in deferred comp plans.
Intangibles and goodwill declined $1.2 billion to $5.3 billion.
