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Tuesday, April 30, 2013

Three Things to Know from Legg's Earnings

Reported by Tommy Fernandez

It was a rough year for Legg Mason [profile].

It lost one chief executive, Mark Fetting, who resigned in October. It struggled for five months to name a successor, ultimately naming Joe Sullivan in February.

It also reported a net loss for fiscal year 2013, which ended on March 31, 2013, of $353.3 million, or $2.65 per diluted share, as compared to net income of $220.8 million, or $1.54 per diluted share for fiscal year 2012.

However, Sullivan and his colleagues were adamant about the viability of Legg's business model and investing vision. Their arguments can be found, and the rest of Legg's financial figures can be found by perusing the SeekingAlpha transcript of the conference call as well as the company's own earnings materials.

First, the basics. The company reported a net income of $29.2 million, or 23 cents per diluted share, as compared with a net loss of $453.9 million, or $3.45 per diluted share, in the previous quarter, and net income of $76.1 million, or $0.54 per diluted share, in the fourth quarter of fiscal 2012. Included in this quarter's results were $52.8 million, or $0.27 per diluted share, of real estate related losses driven by an initiative to reduce space requirements.  Last quarter's results include $734.0 million, or $3.86 per diluted share, in non-cash impairment charges related to intangible assets. 

For the fourth quarter, operating revenues were $667.8 million, down 1 percent from $673.9 million in the prior quarter and up 3 percent from $648.6 million in the fourth quarter of fiscal 2012. 

There were a number of interesting points made by Sullivan and company over what is up for Legg. Three of them include.

POINT 1: They Have Faith in What Legg Mason is About
POINT 2: The Power of Four
POINT 3: Legg is Open to Some Deals
Now to drill down into these points.

POINT 1: They Have Faith in What Legg Mason is About
Sullivan had these things to say, at various points in the call, about Legg's investing philosophy and business model.

Legg Mason's competitive advantage is the combination of both our independent investment affiliates and the ability to leverage their expertise through our global distribution platform. We do this broadly and effectively across channels and geographies, and we see meaningful opportunity to grow our retail market share from here.

Many of the very best investment managers in this industry place a high value on a business model that affords them maximum investment and operational independence and autonomy. Ours is just such a business model, and we believe that it promotes innovation and an entrepreneurial mindset that, over time, can lead to superior long-term investment performance.

Now while our commitment to this model is clear, we recognize that it can always be improved. To that end, we are working with our investment affiliate partners to improve and optimize both our portfolio of investment products and capabilities and how they are distributed.

POINT 2: The Power of Four
Sullivan outlined four strategic focuses for this year: product lineup, investment performance, distribution and operating efficiency.

He outlined his plans for these in this way:

Before we go to Q&A, let me reflect on our 4 key operating priorities for creating shareholder value, how we performed against them in 2013 and how we intend to execute on them in the coming year.

First is ensuring that our affiliate investment managers have a lineup of relevant products in high investor demand categories. In 2013, we and our affiliates made progress on this priority through product innovation, and together, we launched more than 20 new products that raised more than $3 billion in assets under management. Where there was an opportunity to do so, we built on the strong investment capabilities of our existing managers, like the MLP franchise that we enjoy with ClearBridge Investments. Likewise, Western extended its investment expertise in credit and MBS through the creation of a mortgage REIT and the structuring of a CLO. We acquired Fauchier Partners, which expanded both Permal's investment landscape and institutional distribution, a transaction that we expect to be a model for strengthening the various capabilities of other affiliates in the coming years.

It is important to note that we've had a number of interesting conversations in recent months about similar types of opportunities, and we are accelerating our efforts to capitalize on those opportunities. And we will continue to rationalize subscale, underperforming or nonstrategic affiliates and products as we have done in the past.

Our second key operating priority is compelling investment performance, which is obviously critical to our success. Our investment affiliates and we, along with them, are very committed to constantly reviewing investment performance in both good and difficult times, understanding, of course, that from time to time, some strategies will be periodically challenged and lag their benchmarks. In fiscal 2013, I am proud of the fact that our overall strategy performance improved year-over-year versus benchmark and over multiple time periods, and a number of specific products won acknowledgment from industry sources.

At the corporate level, we continued to pursue ways to help our affiliates attract and retain key talent, with an eye on sustaining and improving investment performance. To that end, we created an equity plan for Permal's key leadership, and we are in discussions with other key affiliates about similar equity plans. Done well, affiliate level equity plans, like the Permal plan, can help strengthen our affiliates for long-term success and help create greater alignment with Legg Mason and our shareholders.

Our third operating priority is delivering world-class distribution. And as I outlined previously, we believe it to be a key growth driver for our business. Quite simply, our focus from here is on expanding market share, improving our sales productivity and increasing persistency in asset retention and doing so, in collaboration with our affiliate partners.

Our fourth priority is continuing to drive operating efficiency. Focusing on a highly competitive cost structure will help drive margin expansion and earnings over the long-term, enable us to be more nimble in our decision making and provide more capital to invest in our business and return to shareholders.

POINT 3: Legg is Open to Some Deals
In response to an analyst's question, Sullivan had this to say about Legg's appetite for deals.

Well, clearly, and we've stated it for quite a while, we're very interested in adding a non-U.S. equity capability. It is a gap in our product lineup. It's something that's essential that we need to bring in to our internal business. Away from that though, Michael, we are seeing a number of smaller potential opportunities of companies similar to Fauchier, where they may be subscale, they may be a good quality company, but given sort of operating and revenue -- or operating and regulatory pressures and costs associated with those, these companies are looking to join up with a larger partner. And you've seen that not just with us. You've seen some of our competitors add, particularly in the fund of hedge fund space, over the last 3 or 4 months. So we're not the only ones seeing it, others are as well. But there are a number of good opportunities, smaller opportunities, that I think are complimentary adds to our existing affiliate lineups and products. So between additional bolt-ins and complimentary adds in terms of talent and capability, and then candidly a non-U.S. equity capability that would likely be larger. And look, anything of that nature, a non-U.S. equity is in very high demand, and then obviously anything of a quality with good quality would be also even in greater demand. So you have to balance pricing with that -- availability and pricing and all of that kind of stuff. But the good news is, since the Fauchier transaction, it demonstrated to the marketplace that we're back in the game of M&A. And I can tell you, Jeff Nattans is probably busier than he's been in a number of years, dealing with bankers and opportunities that are out there. So we're excited about it.

the SeekingAlpha transcript of the conference call as well as the company's own earnings materials

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