Hello, and good afternoon, everyone. I'm Greg Johnson, CEO, along with Ken Lewis, our CFO.

Today, we report a strong quarter of results highlighted by solid relative investment performance and net inflows into the organization. Hopefully, you've had a chance to listen to the commentary or take a look at the 10-Q that were made available earlier today.

We'd now like to open it up to your questions.

First, maybe just focusing on the equity funds business here in the U.S. Seems like you've got a number of income-oriented funds that continue to be in demand, but at the same time, some redemptions from some Mutual Series and Templeton Global Funds.

So just curious if retail risk appetites do start to pickup at some point down the road, how do you view your positioning in that type of environment just from a flow perspective?

Yes, I think the sentiment obviously, and you've seen the flows for equities for the industry continues to probably be the biggest challenge the industry faces, and we certainly are not an exception there. I think you're right.

I mean, anything with a yield and certainly looking at equity funds for us, rising dividend was our top fund and continues to be very attractive in this kind of environment. The global equities with Templeton, you mentioned the Mutual Series fund, and that had a large redemption or a -- due to one of the platforms switching I think about $750 million.

So I think when equity funds return, we feel like we're in pretty good shape because the growth funds have excellent performance. It's just -- our focus has been to get on as many platforms as possible, and when retirement flows come back, we're in a much better position than we were in the last cycle, but when that happens I think is everybody's guess right now.

Okay, and then maybe a question for Ken. You mentioned on the prerecorded call that you expect comp and IT and maybe occupancy cost to tick up just given some hiring and seasonality.

So has your thinking on spending more broadly changed at all just given kind of the ongoing market volatility? Or are you still focused on building out the franchise and so margins will likely, mostly be a function of kind of the level and mix of AUM?

Well, certainly, market conditions have caused us to rethink a little bit. But there's usually a decent lag between when we make a decision to change our expense or spending habits and what you actually see in the results.

So I think that it's reasonable to expect -- you mentioned compensations -- reasonable to expect things like compensation to go up, not a lot in the short term but a little bit. And there are some seasonalities in some of the spends that we see in advertising and technology too.

But we're clearly, as we think towards 2013, we're mindful of the current market environment and proceeding cautiously I would say.

Just curious, Greg, you'd mentioned on the call and in the prepared remarks some -- that the Institutional business, you saw some added traction there, particularly for demand for emerging markets products. But is it possible, is my first question, maybe to get a little bit more color on kind of geographically, where you're seeing that pickup and any color you can provide kind of on I guess I'll call a pipeline or how you feel about kind of is that business staying or continuing to accelerate?

Well, it's always hard. I mean, I think trying to get a sense of institutional flows and looking, they tend to be lumpy and we've stated that we continue to see strong opportunities in Global Bond Plus and emerging markets debt, and that certainly has been the case.

And I don't think there's any -- I think, most of the big wins in the last quarter were in the United States versus outside. But I again, I wouldn't draw anything from that.

And I think the pipeline continues to look good. We had one of our largest wins during the quarter that should fund in August.

So I think that bodes well for institutional flows going forward. But again, I don't think it -- I wouldn't draw a run rate or anything from that number.

They tend to be very lumpy and it's been an emphasis of the firm to continue to build that. And I think that we feel like we're doing a better job on that front.

Okay. Great, and then maybe just one follow-up question.

You have I guess, there's the $300-odd million of debt that comes due in the next couple of quarters; I forget exactly when. Just kind of curious since so much of your excess capital and cash generation is outside the U.S., I mean, how are you thinking of, at this point, given low borrowing cost, dealing with that, which if we -- because if you just use available cash to pay that down, that may -- or would that affect in the short term, share repurchase or are you thinking that just given the debt environment maybe just roll it over and keep buying back stock?

Yes. So clearly, the focus is going to be to kind of continue our capital management practices, and I think we made some points on that regard in the prepared remarks.

Yes, it hasn't escaped our attention that the debt markets are attractive and it's reasonable to think of something that we'd be looking at in the future.

I was hoping to quickly start with a modeling question. I know you had some -- you called out the performance fees this quarter.

Anything seasonal in there and how your performance is stacking up, so we can kind of gauge where to expect that going forward?

Yes. Unfortunately, I wouldn't call it seasonal and there's nothing that we know of today that would make us think there's anything significant coming.

But they are happening with getting performance fees on a more frequent basis so I guess that's fair to say that's a secular trend. But I can't really help you much there on the modeling front with performance fees.

Okay, and then a little bit of a bigger question -- bigger-picture question for you. What's your view on the role of ETFs in target date funds?

I saw some press recently about some funds increasingly using them. Just curious where you guys stand in terms of ETFs overall versus mutual funds and ETFs -- the usage of them in targeted funds.

Yes, I mean, with pressure on expense ratios in a more difficult equity environment that the use of the ETFs, especially in target date funds, is to get that market alpha and especially against large-cap, value large-cap growth U.S. funds.

They're going to be more vulnerable, the active ones that were traditionally used in those retirement plans. So we think that's a natural trend and one that should continue.

I mean, any area that has pressure on expenses and where the active versus passive question is openly debated, you'll see probably a growth on the passive side.

Before I ask my specific questions, can you just quantify the win in August? Was that equity fixed income?

It wasn't clear from your commentary.

It was equity, a Canadian equity fund.

Okay. My 2 questions are number one, looks like you had I think, coming up in this upcoming quarter, about 4 million shareholder accounts that you're going to be I guess, closing out due to dormancy.

I just want to -- the question is, that seems like a very high number to me relative to the account base. Can you give a little bit more detail behind that?

Is it a situation where you have a good success of opening up accounts and not getting good follow-through or is there something else at play here? Just again, it feels like a very large number to me.

Yes, I don't think there's anything noteworthy in terms of trends there. Keep in mind that when accounts close, it stays on the book for a year.

So that might be clouding the perception of timing. So this is when the year is up and this is when they get purged.

So to that end, I would expect the shareholding servicing fee to be slightly down next quarter, but nothing really noteworthy in terms of underlying trends relative to the business.

Okay. That's helpful.

And then the second question is just around capital management again. What are your latest thoughts between use of special dividend versus potentially increasing your quarterly payout?

Latest thoughts are probably the same thoughts as we had last quarter on that. It's clearly top of mind for the board.

We kind of start engaging those conversations in the fall and the board kind of makes its determination in the December quarter. A lot of things go into that, as I mentioned earlier.

We're looking at the competitive environment, the current tax environment and the total shareholder return and our historical payout ratios.

Just looking at the impact here from the CSIP accounting going on Slide 18, and I'm just wondering, like, if you look at the impact to revenue sequentially and expenses sequentially, you sort of have a $14 million increase in operating income, largely GAAP I believe, not really much of a cash change. I'm wondering is this accurate?

Also, how do you see this trending into the fourth quarter? I know there's a lot of moving pieces there, but also, was there any offsetting adjustment for this in nonoperating, so more of a neutral impact to total EPS?

Yes. Give me a minute.

So I was looking at Slide 18 under SIP and VIE related adjustments heading.

Yes. So clearly, there was a net $17 million on earnings, but when I looked at the 3 quarters accumulative amount, that number is only $1 million or less than $1 million.

So kind of on a year-to-date basis, not that material overall. But there was a $5 million -- or a $4.9 million impact in operating income.

Then a negative $47 million on nonoperating income and that was offset by the noncontrolling interest. So that's how you get to the net $17 million.

It really -- all of this is driven essentially by mark-to-mark on our trading investments and our consolidated products. So a lot of it's unrealized and it swings back and forth in the quarter.

We look at it to make sure that -- well, we look at it from an evaluation of whether we need to enhance our disclosures and perhaps even do non-GAAP disclosures going forward. But at this point, the conclusion is that it really is immaterial over the long term, and on an annual basis, it hasn't been material.

Ken, good color. My only follow-up would be is if you had a quarter this quarter, fourth quarter, let's say the markets were up a nice 2%, wouldn't you see a decline in your operating income, all else being equal, as the operating revenue and operating expenses sort of normalize?

Just because, just looking at the sequential change here, it looks like operating income would go down a little bit. And the impact you mentioned on nonoperating, that's really this trading loss here, which is always going to be quite volatile, right?

Correct, correct, correct. Yes, I don't think I could predict that it would go down or up really.

The line items -- you might see a little bit less dividend interest income, or interest expense but that could be offset by the unrealized.

I wanted to follow up on Rob Lee's question on the balance sheet maybe said a little bit differently. Assuming you had a good use for the cash, how comfortable are you in terms of taking on more debt.

Like, you obviously have capacity, but you've acted conservatively in the past. You have $1 billion of debt today, you've had $1 billion in the past.

Would you be willing to take on another $1 billion or $2 billion of debt given the demand on the business as it exists today and the characteristics of the board? Like, I guess what I'm try to get at, is the board so conservative that they would really not feel comfortable with putting on that kind of leverage on the balance sheet?

I don't want to speak for the board, but I think that if there's a good use of the proceeds and it's for the long-term benefit of the shareholders and the business, they would be open to it. I mean clearly, their leverage is relatively small relative to some of our peers and I think even for our rating, it's reasonable.

So I think they'd be open to any reasonable request as long as there was -- the use of the proceeds was in the best interest of the company. So no bias against having that, I guess.

Okay, perfect. And then to beat the dead horse on Global Bond, returned and performance bounced back.

You got modest redemptions. Anything that you see leading to the redemptions given the actually, really good returns?

No, I think the -- I mean obviously, redemptions were a lot better this quarter than they were in the prior quarter when they had the headwinds on relative performance. So they both continue to be our top-selling, gross-selling funds.

So I think they're still very attractive out there in the marketplace, but I think the question is always out there, how are they sold in terms of volatility and you probably had some investors in there that just didn't expect that kind of volatility. And those would be the ones that you'd expect to see redeem, but I think we're still getting a lot of attention, both on the institutional and retail side.

It continues to be a great way to diversify from the heightened sense of currency risk that's out there for anybody holding one currency. So we're still getting a lot of interest, and I think as the relative numbers pick up and the short-term numbers improve, I think that'll help just the net flow numbers.

You're not selling it any differently and you're not emphasizing the Global Total Return Bond Fund? There's nothing -- no pointing the wholesalers in a different direction?

Well, I think they've always been talking, I mean, I think the Global Total Return Fund and that was the #1 seller on a net basis and so obviously, they are talking about that. I think they have been talking about that.

It was just the global bond was kind of the known story with just a sovereign debt in it and we think that's going to continue with the diversifying with the total return fund. But we're really talking still about both just as the other's gotten bigger, I think it's just gotten a broader audience to sell outside of the U.S.

and I think that'll continue.

A question on distribution. I know there's not a lot of evidence in your results, but could you comment on any pressure you're feeling in terms of wire house distribution costs?

And maybe speak specifically to what advantages Franklin has in negotiating with its distribution partners, especially relative to your other mutual fund competitors. Several have been saying that wire house has been really playing hardball in this stuff.

Well, I think that pressure will always be there and the more you concentrate distribution, the more that pressure will increase. So we've seen that but I think the other side of it for us, there's a limitation by prospectus on what we can pay out on revenue sharing or marketing support so that does limit what we can do.

So that helps us, and I think also when you're a certain size too, you have just a little bit more leverage like the distributor has a little bit more leverage on others. So that pressure is there.

I don't think it's going to result in any meaningful changes to our margins here in the short run, but something we obviously watch very closely. But again, nothing that I think would cause us concern right now.

Okay, and then regarding the 2020 Vision equity company, I imagine it's a little too soon to say whether you're getting any real traction with that, but I was wondering if you could help us just think about it. I mean, have you had success in the past affecting broad changes in investor or advisor psychology with those types of educational campaigns and what's your confidence this thing could work?

Well, yes, it's a challenge. You're into a strong headwind but when it does turn, having that whether -- I mentioned earlier, whether it's a shelf space in retirement plans and that's really been our focus.

And then just creating an awareness of what Franklin offers on the equity side especially with the strong performance around some of the growth funds. I think that does put us in a relatively strong position.

Just at the end of the day, these are tools for the advisor, it strengthens our partnership with them. Turning sentiment I think is a big challenge but giving advisors the right tools to maybe that investor is sitting on the fence and push them over, obviously, is what we are trying to do.

So there's really no way I think, to measure can one group go out and market and change sentiment. But when things do turn, if you're there with the right awareness and the right tools with the advisors, I think you're going to benefit, and we have been picking up market share on the domestic equity front and I think when it does turn, that's just going to put us on a much stronger position.

Just one quick follow-up.

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Performance is still very good but the 1-year performance has slipped, I wouldn't say across the board but in more than a few...

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Just curious as it starts to leak a little bit into the 3-year if you've done any attribution in house [ph], kind of see how you're positioned and if any remedy is necessary, just kind of work through again recognizing that the long-term performance still looks very good.

Yes, I think there's not much you can do. I mean, as you know, I mean, in the short run, you're going to underperform and give them pockets.

And I think the point that I would always make is how quickly the markets move and underperformance turns to outperforming your peers. So look at the last quarter where Franklin income fund at $60-some-odd billion moved from lower to first quartile that quickly and that's going to affect all of the time periods as well.

So if I look across the fund family and say, "All right, where have we had weakness?" and we'd say, "We're kind of positioned for more of the risk on macro view of the world," where, if Europe holds together and the euro holds together, that's going to benefit our relative short-term performance numbers.

And we think those are the kind of bets that we need to make as an active manager. So in the short run, markets, you can always look silly and the markets can underperform, but we try to look at -- understand the reasons of attribution and we feel very comfortable in the areas that are lagging.

But to try to change gears because of a 1-year number and worrying about a 3-year I think that, that really is something we wouldn't do.

So some of your competitors have actually started to talk a little bit about the current quarter and how July has seen a significant snapback given what the market has done and that has translated into pretty solid flows. So can you talk a little bit what you've seen so far?

Or at least tell us that it's fairly similar to what we've heard from other guys?

I mean, we try not to talk about the current quarter. I would stick with that position for us, and this quarter did start out very choppy.

It's had a little bit of a rebound lately, but the markets have not been on a complete upward trajectory since the beginning. So I would rather not speculate on where for us other than to say that, remember, the big portion of our net inflows this quarter were from institutional wins, and that's always an uncertainty whether you can maintain that level of inflows going forward.

Right. That's fair enough.

I figure I'd try. And then just one specific question.

I think in your prepared remarks, you talked about strength in Hybrid. So when I look at the numbers in the model, I think it was 1% organic growth, which was a little bit of a deceleration from the last couple of quarters.

So just want to perhaps reconcile that when you saw or talk about strength, maybe you were talking about a particular area. And then maybe what was offsetting that during the quarter, just to get to that number, which is still positive obviously, but a little bit slower than last quarter's.

Yes, I think that's a good question. It really comes down to the lag in performance of the income fund that had a -- was lagging on the short term and during the quarter, actually has done very well and moved back into the first quartile.

So you'd expect to see a little bit more momentum then from that pick up in performance. And I would look at the whole quarter and say there wasn't any real significant moves in performance except that one fund.

And it's a large fund; it's been a driver for us for a lot of years. So I think that, that's a good indicator on Hybrid going forward.

I think, Greg, on your prepared comments, you talked about penetration of institutional distribution channels. And I was wondering if you could elaborate on that and see kind of where the momentum is and whether it's through consultants or other intermediaries.

Well, I think the point that we were making is this is an area that we have dedicated more resources into building better relationships, and part of it is just the trend of platform selling and how that's certainly even more important outside of the U.S. So we needed to make sure we had the right structure in place to service that model.

So I don't think there's any really significant changes to call out between retail or institutional or even consultant driven. I look -- again, I was looking, I have it right in front of me, the new accounts and some -- actually this quarter, more were consultant driven than in the past, where in the past, we seem to have the bigger ones come directly from some of the sovereign wealth that may or may not use a consultant.

But this was more of the traditional wins but very small number to look at. So again, I just don't -- I wouldn't draw any conclusion from that.

Okay, and then I guess, Ken, a question on the sales and distribution margin. You called out the AUM being the biggest factor in terms of the movement and also sales activity, and the question is, I guess, does the type of sale make a difference in terms of the impact to the P&L, like a CCAB product versus the U.S.

version? Does that have any economic variance?

It has -- it's a factor in the line items but not on the overall profitability of the company. So the asset-based component of the revenue is probably about 2/3 of the whole line item, and then on the expense side, it's about maybe a little bit higher like 70% of the total expense.

And that has to do with the geography of where the product's being sold. So outside the U.S.

just generally speaking, you have a little bit higher investment management fee. Part of that is, call it earmarked or allocated to cover distribution expenses.

So that's why you would see a little bit more on the distribution expense side for the non-U.S. products.

But overall, it tends to wash out and doesn't impact the overall profitability of the company.

Yes, this is just more of a general question in regards to, say, the fixed-income side with total bond. In your conversation with the wholesalers and the advisors, are you guys getting any sort of sense as to what the key thing is that's keeping them from selling the fund?

I mean, the performance has dramatically improved this year through the first 6 months. I mean there's been a few spotty months here and there, but is there a feeling from what you're hearing from them as to what the big inhibitor is to get people back on board and potentially get the flows from this side of the business back, not necessary to what we were seeing '10, and '11, but somewhere closer to that.

I mean, this past quarter was pretty good but just being able to sort of see that growth vehicle back online.

Well, again I talked about this a little bit early in the call and if you look at the gross numbers, it's very much online as far as the interest level. It's just the redemptions are higher, which obviously is putting pressure on the net number.

And to me, the only answer is that some money goes in there thinking they're buying a better yielding money fund and all of a sudden, they see that volatility that you're going to get from currencies and they're rethinking that strategy and moved out. So it was a relatively new product on the retail side and I think it's a little bit of a learning curve, and we think a healthy one where people understand the risks and the volatility and you're going to have some shake out.

Maybe that first net inflow number is not a sustainable number in a more -- an environment where they have that track record of more volatility.

Okay, and then are you seeing some decent traction on the institutional side of the business with the different fixed-income strategies that are being put in place on that side?

Yes, we are. We had numerous significant wins in both emerging market debt and Global Bond Plus, and we continue to see a decent pipeline there as well.

So you mentioned a bunch of new platform wins over the last year on the equity side and being positioned for growth and I'm just wondering if you can mention specifically which products are really getting the wins in terms of equity products.

Franklin Growth Fund is probably the one that stands out. It's a large -- it's one of our flagship funds, and it's had excellent performance and we've really -- we've spent the last 5 years or so really trying to build out its presence on retirement platforms and measured by how many we're getting on, not necessarily what kind of flows that we're getting.

And that's -- we've seen a marked improvement in that in the market share for the Franklin growth fund. The rising dividend fund continues to be very popular as well.

But those would be the 2 that I think that stand out for us in that area.

Okay, and maybe just a follow-up modeling question. Last couple of years, you've had a pretty substantial uptick in IT expense in the fourth quarter, and you mentioned that you expect it to be a bit higher.

But I'm just wondering if you can sort of compare it to the last few years where it was like a 20% jump.

Yes, I think there have been prior years where that's jumped pretty high but it kind of depends on where we are on the market cycle. I don't expect it to jump up that high but certainly, I think it's like 10% would be reasonable.

Okay, well, thank you, everyone, for participating on the call today and we look forward to speaking next quarter. Thank you.