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Legg Mason Inc (LM) Q4 2019 Earnings Call Transcript

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Legg Mason Inc (NYSE: LM)
Q4 2019 Earnings Call
May. 13, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Legg Mason Fourth Quarter and Fiscal Year End 2019 Earnings Call. My name is Richard and I'll be your operator for today's conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) Please note that this conference call is being recorded.

It is now my pleasure to introduce your host, Alan Magleby, Head of Investor Relations. Thank you, Mr. Magleby. You may begin.

Alan Magleby -- Head of Investor Relations

Thank you, Richard. On behalf of Legg Mason, I would like to welcome you to our conference call to discuss operating results for the fiscal 2019 fourth quarter and the fiscal year ended March 31, 2019.

This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. For a discussion of these risks and uncertainties, please see Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and in the Company's subsequent filings with the Securities and Exchange Commission.

During today's call, we may discuss non-GAAP financial information. Reconciliations of non-GAAP financial information to the comparable GAAP financial information can be found in the press release and in the presentation we issued this afternoon, which is available in the Investor Relations section of our website. The Company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances.

Today's call will include remarks from Mr. Joe Sullivan, Legg Mason's Chairman and CEO; and Mr. Pete Nachtwey, Legg Mason's CFO, who will discuss our financial results. In addition, following a review of the Company's quarter, we will then open the call to Q&A.

Now, I would like to turn this call over to Mr. Joe Sullivan. Joe?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Thanks, Alan, and good evening. As always, we appreciate your continued interest in Legg Mason. And with me again tonight is our CFO, Pete Nachtwey, as we review our performance for the fourth fiscal quarter ended March 31st.

Starting at a high level, I'm pleased to say that we are continuing to make significant progress, meeting evolving client demand by expanding client choice through the diversification of our business across investment strategies, vehicles and distribution access. This has been our strategy for some time now and I like our progress. This quarter's performance highlights those efforts as well as the important headway we are making in continuing to build a better Legg Mason through a multi-faceted approach, which I will discuss in further detail.

We netted breakeven long-term flows this quarter, reflecting positive inflows across our alternatives and fixed income businesses, offset by net equity outflows. Further, this morning, we reported $1.2 billion of positive long-term net flows in April, which is our third straight month of inflows. Legg Mason's global retail distribution platform was a solid performer in the quarter, generating positive net sales to result both higher sales and lower redemptions.

Our AUM ended the quarter at $758 billion, up from $727 billion at December 31. We also refined our plans during the quarter for our global business platform, as part of a broader strategic restructuring program that will position the Company to drive improving overall margins and profitability. And we continue to thoughtfully allocate our capital in a number of ways, most notably with our Board approving a double-digit increase in our quarterly dividend as we prepared to delever by repaying $250 million of our public debt in July.

We are building a better Legg Mason for our many constituencies by executing against four key drivers of value creation, specifically, further leveraging centralized retail distribution to grow, developing the potential of our investments and M&A agenda to provide investors with greater choice, more effectively managing costs to improve profitability, and prudently managing the Company's balance sheet, while thoughtfully returning capital to shareholders.

So, let's start now with where I know you have particular interest, improving profitability by more effectively managing costs. In our third quarter earnings call, we announced a plan to create a global business platform, inclusive of shared services at corporate and certain of our affiliates. We originally projected that plan could deliver $90 million to $110 million of annual run rate savings by the end of calendar year 2022 or just over three years. Since that announcement, our plans have evolved to focus primarily on our corporate operating platform as part of a broader corporate restructuring. Simply stated, our focus is on making our existing corporate global business platform more efficient and effective. And while we no longer plan to combine affiliate operations into the global business platform, our affiliates will have the opportunity to benefit from leveraging Legg Mason's resources, capabilities and streamlined operating platform to the extent it makes sense for them to do so.

We have also expanded the areas included in our cost savings from our global business platform to include broader Legg Mason corporate and distribution functions as well as efficiency initiatives at certain smaller affiliates that operate outside of revenue sharing arrangements. While there is much work to be done, we now have increased visibility into and have gained even greater confidence in our ability to deliver $100 million or more of annual savings now within two years. And we have moved from planning to implementation, and are showing immediate progress.

Specifically, we expect to have achieved 35% of targeted savings on a run rate basis by the end of this quarter and 75% or more of targeted run rate savings by this fiscal year-end. Pete will walk you through more detail of our progress on this restructuring momentarily. But while operating with a high degree of efficiency is essential, our value creation strategy will not be limited to simply managing costs, as we must continue to position ourselves to drive sustainable growth. Balancing both demands will require that as we reduce our spend, we must simultaneously prioritize our resources to those areas that enable us to better deliver differentiated investment strategies, vehicles and especially access for our clients, with greater investments in the client experience, sales enablement and data and analytics. Data and analytics are driving insights across our business and increasing efficiencies, enhancing effectiveness and ultimately enabling us to provide our clients with a much more unique client experience.

While we are creating greater efficiency by reducing costs, we are also prioritizing existing resources, all to better deliver for our clients. Now, a second aspect of strengthening Legg Mason is the continued improvement of our relative position in the retail channel by leveraging our centralized retail distribution platform. This platform is an important asset of Legg Mason, continuing to provide a tremendous growth opportunity for us. We see meaningful progress in our diversification strategy.

In addition to growing market share in some of our core businesses, more diversified flows are becoming an increasing source of business resilience. For example, our global business distribution platform saw a significant rebound in business from last quarter, with gross sales in Q4 up an impressive 22% on a sequential basis. Both higher gross sales and a meaningful slowing in redemption rates were key contributors to the solid positive net sales for the quarter. But we also continued to benefit from vehicle choice with mutual funds, separately managed accounts, collective investment trusts and exchange-traded funds, all generating positive net sales for the quarter through our distribution platform. This diversification of choice in vehicles continues to be a differentiator for us and a driver of growth and persistency in various channels.

Our third key area of focus is developing the potential of our investment and M&A agenda. Clarion Partners acquired in 2016 is a wonderful example of building a better Legg Mason. Clarion continues to grow organically, posting positive net flows in 11 of the past 12 quarters. And just last month, we worked with and supported Clarion in acquiring a majority stake in Gramercy Europe, a real estate manager specializing in pan-European logistics and industrial assets.

Gramercy is a strong strategic addition for Clarion, adding to the company's already robust $16 billion, 700 property portfolio of logistics assets. As a result of this bolt-on acquisition, Clarion expects more exciting opportunities to expand both products and clients by leveraging this new European platform. Further, we are partnering with Clarion to reach more clients across the globe by launching a bespoke funds structure in Asia and Switzerland, with a global private banking client and developing an offering for US retail to be launched later this year.

We also worked recently with RARE and ClearBridge to formalize an agreement between them to pursue operational efficiencies and enhanced growth opportunities for both of their businesses. On another front, you may recall that we made a minority investment in 2018 in Quantifeed, a leading provider of digital wealth management solutions in Asia, which works closely with leading financial institutions in the APAC region. More recently, we're pleased to see additional interest in Quantifeed solutions in Australia, Japan and China.

And finally, we are collaborating with Quantifeed on the possibility of QS, providing asset allocation services and our other affiliates acting as potential fulfillment managers on the platform.

And finally, also in April, we were very pleased that the SEC issued notice of its intention to permit the use of Precidian Investments' ActiveShares semi-transparent ETF methodology. We believe that ActiveShares has the potential over time to transform how investors access the active investment strategies of asset managers. Following SEC and exchange approvals, investors will be able to invest in actively managed ETFs that do not disclose individual holdings on a daily basis, yet trade and operate in a manner that is similar to traditional ETFs. The Precidian team has seen a strong increase in interest from prospective ActiveShares' licensees, since the SEC announcement on April 8th, building on an already impressive list of signed licensees.

To put that licensing interest into perspective, signed licensees represent AUMs with about a quarter of the addressable active equity mutual fund market captured by their strategies. Subject to SEC and exchange listing approval, we expect ClearBridge to offer its first active ETF using ActiveShares sometime later this year. And so, I'd like to congratulate Dan McCabe and the entire Precidian team for their dedication and persistence in pursuing ActiveShare.

A final key driver of building a better Legg Mason is the effective management of Legg Mason's balance sheet, while thoughtfully returning capital to shareholders. As previously disclosed, we committed to delever our balance sheet, and to that end, we are preparing to pay off $250 million in notes maturing in July. We were very pleased to see S&P Global Ratings raise our ratings outlook from positive -- to positive, excuse me, from stable, while affirming our BBB senior debt rating. And consistent with our commitment to return capital to shareholders, our Board approved an 18% increase in our annual dividend to $1.60 per share, our 10th straight year of increasing our dividend.

From effective cost management, to thoughtful resource prioritization, to leveraging our global distribution platform, to effective capital allocation, Legg Mason is streamlining its operations, while positioning for growth to better meet the needs of our clients and deliver value for our shareholders.

And with that, I'd like to turn it over to Pete.

Peter H. Nachtwey -- Chief Financial Officer

Thanks, Joe.

Let's turn to our highlights on slide two. Legg Mason reported net income of $50 million or $0.56 per share. These results included strategic restructuring and affiliate charges, with the latter, including the Royce management equity plan, non-cash charge, which we signaled last quarter. These charges combined to reduce earnings by $0.14 per share. As Joe reiterated, we expect our strategic restructuring to realize $100 million or more in savings. We estimate our costs to achieve these savings to be in the $130 million to $150 million range. I will provide details behind the timing and geography of both savings and costs in a moment.

Moving on to AUM, our quarter-end assets under management were $758 billion. Long-term net flows were breakeven in the quarter, where alternative inflows were $900 million and fixed income inflows were $100 million. These were offset by equity outflows of $1 billion. Additionally, it's important to note the flow trends across all three asset classes improved from the December quarter. And as Joe noted, with the release of our April numbers today, we have seen positive flows in each of last three months.

Gross sales were strong across our global distribution platform with positive net sales of $2.5 billion compared to $6.5 billion of net redemptions in the December quarter. As for investment performance, 78% and 74% of AUM beat benchmarks for the three- and five-year periods respectively, and 63% and 72% of AUM beat Lipper Category Averages for the same periods. From a capital management standpoint, as Joe noted, the Board approved an 18% increase in our dividend, again, the 10th straight year of double-digit increases. And finally, S&P upgraded our credit outlook to positive, as they continue to see us making progress on both our delevering plan and overall business performance, while on the M&A front, Clarion acquired a majority stake in European real estate business.

Now, let's take a look at our affiliates on slide three. As previously noted, our long-term net flows were breakeven for the quarter. More importantly, six of our nine affiliates generated positive net long-term flows for the quarter and seven of nine saw improved flows from the last quarter. Unfunded wins and committed uncalled capital were down slightly from the prior quarter, primarily reflecting fixed income fundings. You may recall, we had over $2 billion in fixed income outflows in January, but these were more than offset by inflows in February and March and fixed income primarily at Western.

Turning to slide four, you can see the mix of our unfunded wins and committed uncalled capital remains diverse, with approximately 40% coming from each of fixed income and alternatives and roughly 20% from equities. Furthermore, the $4.5 billion of unfunded wins in fixed income are spread across multiple flagship strategies with a similar diversification story holding true for the $2.3 billion in equities. Finally, on the alternatives front, we are very pleased that our unfunded wins and committed uncalled capital remained strong at a combined $5.1 billion.

Slide five highlights our global distribution platform, showing our gross sales increased 22% for the quarter on a sequential basis. At the same time, redemption rates meaningfully declined, and as a result, we saw positive net sales of $2.5 billion for the quarter, representing a favorable quarter-over-quarter swing of $9 billion, led by the US. In fact, our US mutual fund net sales were the best since December of 2014 and we saw market share gains across both taxable fixed income and international equities.

Moving to slide six, as I stated earlier, fiscal fourth quarter net income totaled $0.56 per share with a combination of strategic restructuring and affiliate charges reducing earnings per share by $0.14. Operating revenues decreased by $12 million or 2%, driven by two fewer days in the quarter, partially offset by non-pass-through or NPT performance fees, which came in higher than the prior quarter in our forecast. We estimate that next quarter, NPT and pass-through performance fees will be approximately $5 million each.

Operating expenses decreased, as last quarter included certain non-cash impairment charges. Excluding those charges, expenses were up 7% on a sequential basis, primarily due to the increase in mark-to-market on deferred comp and seed, which is offset in non-operating income and expense. Our adjusted operating margin was 17.1% for the fourth quarter versus 21.1% in the prior quarter. This primarily reflects a step-up in strategic restructuring and affiliate charges as well as seasonal compensation factors. Finally, our GAAP tax rate came in at 27%, in line with expectations, while our cash tax rate was only 7% for the quarter. We believe that cash tax rate will be in the single-digits until approximately fiscal 2024.

On slide seven, you can see the AUM increased due to market appreciation, as long-term flows were breakeven for the quarter and liquidity outflows totaled $8 billion. The operating revenue yield came in at 37 basis points, in line with last quarter as a modest increase in alternative advisory yields was offset by a slight drop in equity yields.

Operating expenses on slide eight decreased by $327 million, largely reflecting the prior quarter's impairment charges. Excluding those charges, expenses were up $38 million due to higher comp and benefits from mark-to-market and seasonal impacts. Increases in the strategic restructuring and other expense categories were offset by lower distribution and servicing expenses, reflecting two fewer days in the quarter.

Turning to slide nine, our comp ratio for the quarter was 55%, in line with our forecasted range, driven by seasonal factors and stepped up commissions on higher LMGD sales. Total comp and benefits increased by $39 million, with $27 million of that stemming from higher mark-to-market on deferred comp and seed. In addition, we saw increased comp and benefits related to strategic restructuring costs, affiliate charges and the Royce management equity plan. Next quarter, we expect our comp ratio to increase to 56%, reflecting a typical pickup in seasonal expenses related to our annual compensation cycle, and in line with the comp ratio in last year's first fiscal quarter.

On slide 10, our operating margin as adjusted decreased primarily due to higher seasonal comp factors and higher professional fees. This resulted in a 1.9% margin reduction. In addition to strategic restructuring and affiliate charges further reduced our margin by 3.1%. And recall that last quarter's restructuring charges reduced the margin in the December quarter by 1%. We would expect next quarter's margin, excluding the strategic restructuring costs, but including expected saves, to improve due to increased revenues from higher average AUM, more than offsetting the impact of higher seasonal comp. But please keep in mind, our higher revenue expectation is based on our ending April AUM levels, which we released this morning. And assuming markets remain flat to up for the remainder of the quarter, and we'll have to see how that plays out, given the frothiness in the markets over the last week or so.

Another way to look at our margins is to look at the parent-only view on slide 11. We provide this externally on an annual basis, as it shows a more direct view of the revenues available for us to manage for the benefit of shareholders under our multi-affiliate model. In this presentation, we eliminate the revenues, the pass-through to our affiliates to either fund their operations or go into their management team's bonus pools. Conversely, the revenues we retain at the parent level are what we manage for the benefit of shareholders. And remember, that most costs at the parent level do not vary directly with revenues, providing us with significant operating leverage. Relative to the prior year, the parent margin declined primarily due to a drop in revenues, as a result of lower non-pass-through performance fees and lower average operating revenue yields for both equity and alternative assets as well as a modest 2% increase in parent expenses.

Slide 12 is a roll forward from fiscal Q3's net loss of $2.55 per share to this quarter's earnings per share of $0.56. Last quarter's results included the non-cash impairment charges, net discrete expenses and other tax items and restructuring costs. This quarter's results reflect $0.05 and lower operating earnings due to seasonal comp factors and increased other operating expenses. Non-operating earnings were $0.02 higher, reflecting mark-to-market on seed investments, not offsetting compensation. And lastly, fiscal Q4 items included the strategic restructuring and affiliate charges, which totaled $0.14.

Slide 13 calls out the savings and associated costs related to the strategic restructuring. We have provided the details to align with our P&L, so you can reflect the savings more accurately in your models.

As you can see, our savings target has been refined to $100 million or more. And we've maintained our cost to achieve at a range of $130 million to $150 million. Importantly, we've moved from planning to implementation, as demonstrated in part by the modest saves we had this quarter, which accelerate in fiscal Q1, which as Joe noted 35% in expected run rate savings being achieved by June 30th. As Joe also noted, we expect run rate saves of over 75% by fiscal year-end. In terms of cost to achieve these savings, we had $9 million this quarter and we are expecting an additional $30 million next quarter. The remaining of fiscal year 2000 -- remainder of fiscal year 2020, we are anticipating total cost of $45 million to $55 million, with additional costs of approximately $45 million to $55 million in fiscal '21.

I also want to highlight that although our communications and technology expenses are expected to decline as part of this program, approximately $10 million, this is effectively a net number from reducing our businesses' usual expenses, while continuing to invest in leading edge technology capabilities. Specifically, the actions driving our savings in this area are primarily from streamlining our workforce, increased use of outsourcing, transitioning to more efficient and lower cost cloud-based platforms and rationalizing our application and licensing structures. This reduction in our day-to-day costs in turn will allow us to continue to invest in strategic technology initiatives to focus on growth and efficiencies, like data and analytics and sales force tools. And remember, in addition to these parent level investments, our affiliates continue to invest in advanced technologies to support their investment platforms and client experience.

I'll wrap up on slide 14, which provide some color on our plans for new non-GAAP measures. After reviewing peer disclosures, along with discussions with external advisors and our Board, we have decided to start disclosing new non-GAAP earnings and non-GAAP EPS results. The items listed on the slide include regularly recurring items, like adding back amortization, adjusting for gains and losses on our investments, not offsetting comp, along with tax impacts from non-GAAP adjustments and other items. You can also see a list of episodic items, and I would highlight one that will occur next quarter and for the next several years, which is the charges for our strategic restructuring. Disclosure of these non-GAAP measures will begin next quarter, with the start of our fiscal year, and we would expect going forward that consensus estimates in First Call, Bloomberg and so on will reflect these non-GAAP measures.

With that, let me turn it back over to Joe for his closing comments.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Thanks, Pete. I'd simply like to close with the following. We have made headway on four key drivers of building a better Legg Mason. First, fully leveraging centralized retail distribution to continue to grow in a market that values breadth of capabilities and ease of access. Secondly, developing the potential of our investment in M&A agenda, by supporting bolt-on acquisitions such as Gramercy Europe, investing in innovative firms such as Precidian and Quantifeed and bringing our newer affiliates to market in the retail channel as quickly as possible. Third , we're effectively managing costs through our commitment to $100 million or more in saves over two years, targeting, as we've said, 75% or more in run rate savings by this fiscal year-end. And finally, by prudently managing the Company's balance sheet delevering by $250 million next quarter, while thoughtfully returning capital to shareholders, having just announced an 18% increase in our annual dividend to $1.60 per share.

We have seen progress in each of these critical components to execute on our broader strategy as well as on our mission of investing to improve lives. And now, as we move into Q&A, I'd like to welcome Rick Genoni, Legg Mason's Global Head of ETFs, who is joining Pete and me this evening to help with your more specific or detailed technical questions around ActiveShares or Precidian.

And with that, Richard, I think we'd like to take questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Thank you. Our first question online comes from Chris Harris from Wells Fargo.

Chris Harris -- Wells Fargo -- Analyst

Yeah. Thanks guys. My question is on the strategic restructuring. Wondering, if you could talk a little bit about the original affiliate plan and exactly what didn't work exactly as planned with it? And just hoping you could elaborate on whether it's just lack of affiliate buy-in or if the answer is a bit more complicated than that. And then related, credit cost sharing initiative with the affiliates an opportunity down the line for Legg Mason or should we be completely not thinking about that this time?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

So as I mentioned in my comments, Chris, the plans that we announced to create a global business platform inclusive of shared services at corporate and certain operations at a number of our affiliates did evolve. And that was based on feedback that we got some before, but also after we announced last quarter. And that -- those plans really have evolved to being largely focused on achieving the cost saves from our corporate operating platform. And again, that was just really a function of -- and as we talked about on the last earnings call, we announced the design of a global business platform, but we had to really go deeper at that point within, not only Legg Mason, but also our affiliates to see where that -- if and where that made sense to do so. We've evolved it to a way -- in a way that allows our affiliates too still participate, where it makes sense for them to do so in sharing costs and leveraging the platform that we already have. We have a global business platform in existence today. We're just making it significantly more efficient and effective and leverageable for -- on the part of our affiliates. We're always open to ongoing ideas and I think the affiliates are as well to things that makes sense for them to do to leverage and look to reduce costs and we have a number of a different initiatives continuing under way right now to that end.

Chris Harris -- Wells Fargo -- Analyst

Very good. Thank you.

Operator

And thank you. Our next question online comes from Mr. Robert Lee from KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great, thanks. Thanks for taking my question. I guess, maybe -- and just wanted to ask a little bit about capital management. How are you thinking of this? I mean, you obviously raised the dividend by a pretty hefty amount. Can you just -- where do you kind of put share repurchase or restarting that within kind of the mix going forward? Obviously, you have to pay for the restructuring, but how do you think of that within the mix? And maybe as part of that, you have the option now that -- to buy in the remainder of the Precidian. I mean, how does that kind of play into at least over the near-term, your thoughts around capital management?

Peter H. Nachtwey -- Chief Financial Officer

Thanks, Rob. And maybe, I'll -- this is Pete, I'll take the first stab and Joe may want to add some things. But we're -- what we're looking at -- that as Joe mentioned, the big priority is paying off the debt in July. Good news there is once we pay that off, we don't have another debt payment until 2024. But the one we've got coming up is sizable at $250 million. We've got the restructuring costs to fund and then we also have the dividend. And there's a few things that add up, like what you're mentioning in terms of Precidian option and anyone individually is all that material, but there is a number of those types of things. So what we've consistently said is that this is going to more or less conveniently fall into when we typically look at capital planning with our Board, which is typically in the fall, actually with the -- starting with the finance committee. And then that leads us into a conversation with the full Board in the first calendar quarter of the year in 2020. So I think wouldn't really look for any material new news until then and it's really difficult to predict, because we want to see what the market looks like, what our stock price look like -- looks like and what other opportunities are. But we've also said, we're not building cash on the balance sheet.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Yeah. And I think that's just what I would reinforce, Rob, that we don't intend to sit on large amounts of cash. As Pete said, we don't have another principal payment, we do have interest payments along the way reduced after we pay off the $250 million, but we have interest payments along the way, but we don't have another principal payment for five years. And look, we always look at what we need for CapEx and we look at what we need for seed and things like that, but -- and we will just evaluate it as we go, once we get done with paying the expenses related to this margin improvement.

Robert Lee -- KBW -- Analyst

Thank you.

Operator

Thank you. Our next question online comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. Just a follow-up on prepared remarks regarding the M&A agenda. Is the expectation that following up on the Clarion acquisition of Gramercy Europe that there could be potentially some additional opportunities for M&A down line within that example like bolt-on capability? Or -- just want to get a little bit more color around that. Thanks.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Thanks, Ken. I think that will be the predominance. Looking for opportunities that are -- that augment or enhance our existing affiliates I think will be the bulk of our M&A agenda or add unique kind of capabilities similar to the investments we've made and Precidian, the investments we've made and the investment we made in Quantifeed, where we're investing in digital solutions. We do see a number of those opportunities. And if we -- and we think those are interesting and new ways to think about accessing the retail channel. But as far as the investment side of the equation goes, we're always open and we're talking frequently with our affiliates about opportunities for bolt-ins or to add or improve the capabilities that they have. So I would say that's going to be the predominance of our M&A agenda for now.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great, thank you very much.

Operator

Thank you. Our next question online comes from Bill Katz from Citi. Please go ahead.

Bill Katz -- Citi -- Analyst

Okay. Thanks very much. I do want to start with the Precidian news, so thanks for providing that, so I want to talk about that. Just sort of wondering, if you could talk a little bit about the product efficacy, how the pricing might differ from the active space and how you sort of see it competing if at all relative to the passive business?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Okay. So Bill, I'm sorry, you were a little bit fuzzy there. You said how is pricing relative to active strategies or -- and passive.

Bill Katz -- Citi -- Analyst

Yes. I'm sorry. I'm -- yes, I -- yes, I apologize, I'm travelling, so bad connection. So yes, exactly right.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Okay. I'll let Rick speak to that.

Rick Genoni -- Managing Director and Head of ETF Product Management

Yeah. So the pricing on any ActiveShare -- sorry, the pricing on any ActiveShare product will be based on several factors, certainly looking at where other actively managed products are. The licensing fee rate of ActiveShares certainly will be baked into any costs tied to any product that a manager offers. Those licensing fees are expected to be in line with index licensing fees in the market.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

And Precidian, just to be clear, Rick, Precidian doesn't dictate the pricing. Those are -- those pricing decisions are made by the managers. Correct?

Rick Genoni -- Managing Director and Head of ETF Product Management

Correct.

Bill Katz -- Citi -- Analyst

Okay. Just as a follow-up, just in terms of the pipeline, that did go down, you had good sales on the retail side. Just sort of wondering, if you could talk about maybe some color on why you're seeing better traction on the retail side than on the institutional side. And what it is -- it -- is it products or performance, is it just initiatives? Wondering, if you can give a little more detail of why that has slipped the last couple of quarters?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

No, I don't think there's anything I can point to specifically, Bill. I think that on the pipeline and the unfunded wins, what we saw -- and I don't think this is unexpected. So we saw a little bit of a drop off after the fourth calendar quarter. So a little bit of a drop-off in the change in the value of awards or mandates that we had won and I think there were some reallocations within that. You saw a lot of volatility and turbulence in that quarter and I think that changed, particularly on the institutional side, why -- or changed some of those allocations. But we haven't seen anything, our -- we continue to have a very strong pipeline of opportunities. And I would say, about a third to 40% of those or so are in late stage and so that's encouraging. So we feel -- we continue to feel good. It's going to be up and down. We're going to have times on that pipeline, both unfunded wins and committed and uncalled capital. Those things are going to pop up at various times. We don't control the timing of when decisions are made. And there are going to -- we had a very good replenishment of that -- of the amount of unfunded wins that was -- that actually funded in the fourth calendar quarter -- fiscal quarter. We had a very healthy replenishment there, but we did have some other offsets. So it's -- but nothing that you can really tie to, not performance or anything else specific that I can point to.

Bill Katz -- Citi -- Analyst

Thank you.

Operator

Thank you. Our next question online comes from Mac Sykes from G. Research. Please go ahead.

Mac Sykes -- G. Research -- Analyst

Good evening, gentlemen.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Hi, Mac.

Mac Sykes -- G. Research -- Analyst

Can you talk a little bit about the potential tax benefits of using the Precidian ETF versus traditional mutual funds? And would you expect those benefits to be a big driver of demand going forward in terms of mutual fund convergence to those ETF products?

Rick Genoni -- Managing Director and Head of ETF Product Management

Sure, Mac. This is Rick. One of the critical things is that ActiveShares is an ETF and the factors that drive these products going forward are often driven by the strategy and the client type. For passively managed products, the underlying index methodology and fees are often viewed as the top two drivers by strategists. But for actively managed products, fees and track record are areas of focus. And nearly 9 out of 10 people though say that tax management is one of the key factors that they're looking at. And this makes sense as in 2018 over three quarters of all equity mutual funds paid capital gains and 83% of those had capital gains above 2%. The use of an AP rep in ActiveShares allows the in-kind feature that drives tax management in ETFs to stay fully intact. And given the capital gains that are built into future -- into mutual funds certainly post the GFC run up, we would think there's probably less money that will move from mutual funds over to ActiveShares near-term, but rather see the education that clients have around the benefits of the ETF driving new cash flow into the structure going forward.

Mac Sykes -- G. Research -- Analyst

And just a follow-up, I understand that there is a couple more applications out there as well. What was it about Precidian's application that got an approval ahead of the other ones? And are the other ones an open platform similar to Precidian in terms of offering a license to other firms?

Rick Genoni -- Managing Director and Head of ETF Product Management

It's hard to comment on where the SEC is with the proxy structures, which is what really all the other products are. But we're certainly happy with where are we -- where we are in this process and hope that our order will be granted shortly.

Mac Sykes -- G. Research -- Analyst

Thank you.

Operator

Thank you. Our next question online comes from Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks. Good evening, Joe, Pete.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Hey, Craig.

Craig Siegenthaler -- Credit Suisse -- Analyst

Just coming back to the strategic restructuring for a minute. Now that the initiative has evolved, so it's a 100% coming from the center, how can we get comfortable that this will not have an impact on flows in the future just because $100 million seems like a really big number?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

It is a big number and I think that's an important -- a really important question, Craig. I said, look, we believe that the -- everyone in the industry, but certainly we need to become more effective and efficient. And we can't let our need to find ways to be more efficient, become an excuse for not growing. As we are reducing our spend, we're challenging everybody in the Organization to continue to prioritize our existing resources and point them toward ways that enable us to differentiate with clients, whether that be through investment strategies or vehicles or access. There's -- it's a large Organization and sometimes you have to kind of do something dramatic like this to get people to think a little bit differently. We continue to invest, notwithstanding cutting costs and creating a distinctive client experience for our clients to advance sales enablement and to embrace data and analytics, as I've talked about. These are foundational to most aspects of our business. So, we will be able to continue to see new products. We do believe we'll be able to invest in small bolt-on acquisitions or at the right time top-up our ownership in Precidian, for example. We will work with clients to continue to invest, develop new investment strategies. We'll be able to invest in vehicle choice to meet their needs. We will continue -- we will be able to continue to do it to service our clients and we believe continue to grow. But we have to learn to do it in a different way and that's what we've challenged our troops to do. And as difficult as it is, I candidly have founded very inspiring to see how our team has challenged itself to think differently and look at things differently from a cost perspective and find different ways to do things. So I'm confident that we can continue to do -- we've -- frankly, we've touched -- most of the costs that we've gone after have been away from the distribution side. That's not to say we couldn't become more efficient in distribution and that's what we're challenging them to do as well.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you, Joe.

Operator

Thank you. Our next question online comes from Brian Bedell from Deutsche Bank. Please go ahead.

Brian Bedell -- Deutsche Bank -- Analyst

Great, thanks. Good evening, guys. Maybe back to the restructuring. On the cost saves to $100 million, should we be thinking of that as a total net number in terms of if there's opportunities to reinvest some of those saves in other growth initiatives? And then, how might that impact the operating margins longer-term versus that $100 million total cost saves?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

So, Brian, just very simply because we've talked -- we talked about this quite a bit. I want to make it very clear that we've committed to a $100 million or more in savings achieved over the next two years and we do expect that to flow to the bottom line. Now, I'd say that and I want you to hear that, but as always with any of our profitability and our operating margin, if we see something that makes some sense for us to invest then we'll consider that and we're not saying we won't invest anymore, we're continuing to invest, even as we're cutting costs, we're continuing to invest. If anything is material in that sense, that would impact that $100 million that you expect to see, we'll let you know.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. No, that's very clear. And then just back to the affiliates that are -- that have a chance to participate down the road. Can you just give us an example of maybe one or two main type of systems that as you implement this in the plan, they may come in and begin to use it and then can that be sort of even more accretive to the cost saves that you've outlined?

Peter H. Nachtwey -- Chief Financial Officer

Sure, Brian. This is Pete. There's actually a couple of things that are in flight right now as we speak and it's not just all systems and processes, we're looking at space in a couple of the key geographies we operate in, particularly in New York and London, where today we have five or six offices in each one of those cities, which creates a huge amount of inefficiency as you can imagine and people want to come together and face off against landlords as one tenant. We've also been working on the common financial platform, which we've talked about quite a bit and are starting the implementation of that. We've done some things around procure -- centralized -- centralization of procurement, we're also looking at HR systems enhancements across just about every one of the affiliates and the parent, that also can have significant savings. So we're going to look at each one of these episodically in strong partnership with the affiliates to find out what makes sense and where does it make time -- where does it make the most sense to invest, not just dollars, but the sweat equity that it takes to drive some of these changes.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

I think -- Brian, I think you may be surprised at how much activity there is that is going on within the firm in terms of continued collaboration and looking for opportunities, create efficiency and savings. And I think the big difference is rather than where we had visioned a quarter ago at creating a new platform, where everybody was all-in on everything, we basically said, no, we're going to take this back, we're going to make our existing global operating platform more efficient, more effective and then make it available on a menu-ed basis, one that makes sense for both the affiliate and for us, so that we can both realize benefits from them joining that. And it's not compelled, it's at their option and where it makes sense for them to do so, but more on a menu-ed basis. And I think people would be surprised. Pete just mentioned three, but in almost every area of Legg Mason, I would say -- just thinking, but I think -- is that fair, Pete? Almost every area, there is some uptake from various affiliates. The reality is different affiliates have different needs and different -- and a different appetite to share different functions. And so, we're just -- we're open to that and it's available.

Peter H. Nachtwey -- Chief Financial Officer

Yeah. And we're looking at things that -- like in the real estate end that their identities are really important to them and to their clients. So how do we do things that follow the Hippocratic Oath as well and first do no harm? But there's a lot of opportunities and a lot of activity, as Joe said.

Brian Bedell -- Deutsche Bank -- Analyst

So, down the road, it is possible that we could see some update to this number, if more affiliates join certain things. We certainly don't want to commit to that now, but down the road, we could see this number get revised upward possibly?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Well, it's not going to be revised downward, let's put it that way. (Multiple Speakers) If there are opportunities, we'll take them up on it. And I think as we've said, away from sort of the broad affiliate question, we see a $100 million or more that we can get over the next two years. And then beyond that, we'll see what happens and we will keep you apprised on a quarterly basis if we think that there's some things happening that would lift that, but we're not there today.

Brian Bedell -- Deutsche Bank -- Analyst

Yeah. Totally makes sense. Thank you.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Thanks, Brian.

Operator

Our next question online comes from Glenn Schorr from Evercore. Please go ahead.

Glenn Schorr -- Evercore -- Analyst

Hi, thanks very much.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Hey, Glenn.

Glenn Schorr -- Evercore -- Analyst

Two quickies on flows, both should be easy. Hello. One on the equity front, bucking the trend of what's going on. You noted the $600 million or so in inflows on large cap and another $900 in unfunded wins. So the question there is a little -- asking for a little more color on anything on more specific strategy, type of client and fees around that because you're taking the money, where everybody is losing. And the other one, I might as well just ask it together, is just big picture. In any other point in our lives, if you have a market that was up like strong double-digits and there was retirement flow season, you'd expect the industry and any big participant to have a lot of inflows. I know it's not just you, but it's -- and I know we're coming off an awful fourth quarter, but maybe that's the answer. But could you talk about what you think got delayed in terms of client activity? Is it something that we can catch up on or is it just a lost opportunity because huge market usually followed with pretty good flow performance? Anyway, sorry for the two.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Yeah. I think Glenn on the second question, I mean, I think investor confidence was quite rattled coming out of the fourth calendar quarter, the December quarter. I think clients were kind of very rattled by what transpired. We have seen, particularly for example internationally and in Europe in particular, a move back into the passive side a little bit there. And so I think that between a bit of a lack of conviction on the part of investors, and I know the market came roaring back, but I'm not sure you saw it in the flows, but I think the -- I think there is just a lack of conviction coming out of that. We saw on the other hand in our business a pretty significant rebound in sales. We saw our sales, which were soft in the fourth calendar quarter up and rebound by about 22%. That's the largest quarter-over-quarter increase in sales that we've ever seen in the retail channel. So we felt pretty good about our performance, but I think overall there still is a confidence factor on the part of the average investor. I think as it relates to for us what we saw in the equity side, we saw good interest really across the board at ClearBridge, with their large cap equity, their small cap business as well and equity international, and that was really a winner for us, the equity international space -- international equity space is one which was actually an outflow during the quarter, but we were an inflow there. So we felt pretty good about that. We did struggle a bit with all cap at ClearBridge, large cap at Brandywine was out for us in the quarter and then Royce and QS were out a bit as well. But I think overall, we feel pretty good about our relative performance and -- I think that's it.

Glenn Schorr -- Evercore -- Analyst

Okay. Thanks, Joe.

Operator

Thank you. Our next question online comes from Patrick Davitt from Autonomous Research.

Patrick Davitt -- Autonomous Research -- Analyst

Hey. Good evening. Thanks. So as we think about kind of level setting with your new adjusted earnings reporting all of the kind of new adjustments, I'm getting to something kind of in the 73% to 75% range, but I just want to make sure that's where you guys are in terms of the run rate, if we were to put 4Q with -- in that new framework.

Peter H. Nachtwey -- Chief Financial Officer

Yeah. Actually, when you kind of normalize out all that, which we're not allowed to do and put in filings unfortunately. But in terms of the kind of things that can be adjusting for, that sounds like the way to go. And Alan, on the stuff that's out there that's public, can help you work through it, but that sounds like really difficult.

Patrick Davitt -- Autonomous Research -- Analyst

Thanks.

Peter H. Nachtwey -- Chief Financial Officer

And obviously, (inaudible) keep in mind performance fees is -- are one of the biggest things that can just balance out our earnings per share number around the wide quarter-to-quarter.

Patrick Davitt -- Autonomous Research -- Analyst

Right. Okay, thanks. And then on the modeling, it looks like the net distribution margin improved pretty significantly, largely driven on the expense side. Could you walk through the moving parts there? Is that a run rate or something more idiosyncratic to the quarter?

Peter H. Nachtwey -- Chief Financial Officer

You're looking at distribution, looking at our total distribution in terms of the expenses or?

Patrick Davitt -- Autonomous Research -- Analyst

Yeah. The expense going down to $99 million from $109 million, but it doesn't look like the revenue side came down accordingly, which usually happens when that happens?

Peter H. Nachtwey -- Chief Financial Officer

Yeah. I think it's just really more of a mix. We also had a couple of less days in the quarter and it's someone that probably impacted the (inaudible).

Patrick Davitt -- Autonomous Research -- Analyst

Okay, thank you.

Peter H. Nachtwey -- Chief Financial Officer

Yeah. There's nothing big happening there.

Patrick Davitt -- Autonomous Research -- Analyst

Cool.

Operator

Thank you. Our next question online comes from Michael Cyprys from Morgan Stanley.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good evening. Thanks for taking the question. Just wanted to follow up on capital management. We saw the nice dividend increase in the quarter, looks like around mid-50s, dividend payout ratio that's crept up in recent years. I guess, just curious how you're thinking about what the right dividend payout ratio should be for Legg Mason, how that thinking has evolved? And once you get through the one-time payment, the debt payments, restructuring, just how you're thinking about intended uses of capital. I guess, should we expect any sort of buybacks, timeframe around that and how to think about the intended uses of your capital between buybacks, dividends, et cetera? How much is needed to reinvest back in the business here?

Peter H. Nachtwey -- Chief Financial Officer

Well, first on the dividend. We look at it on a number of different metrics, both the payout ratio and the yield, we pay a lot of attention as to what others in the peer group are doing and quite frankly talking to a number of our investors in terms of what they prioritize. So we think our payout ratio on GAAP earnings can definitely be higher than the peer group because of the amortization we have of intangibles and so forth. We also think it'd be higher because of the benefits of the tax shield. So -- and again, keep in mind that the yield number has gone up quite a bit just because of the drop in the whole peer group's stock price. So as we're looking at it, we're kind of looking ahead and saying, OK, where do we want to be in terms of where we hope to the stocks should get to because we only increase the dividend once a year and we want to make sure that as we get through the year hopefully get some benefit from the market for the things that we're doing on the cost front that that yield, we still want that to be one that's more or less leglating (ph). And the rest of the things, Michael, pretty much what we said before, there is a lot of factors we go through. We go through this in depth with the finance committee first of our Board, which has some of the deepest financial experts that are on our Board and look at all the different opportunities, the risks and certainly look at it from a shareholder-friendliness standpoint that we want to be viewed as a firm that's doing the right thing in terms of returning capital to shareholders.

Michael Cyprys -- Morgan Stanley -- Analyst

Great, thank you. And just a quick follow-up on the ActiveShares, Precidian. Just hoping you could talk a little bit about the degree of tax efficiency in the structure compared ETFs that are in the marketplace today. I guess, on what situation could holders be allocated capital gains? How frequently do you expect that to occur? And I think you mentioned 75% of mutual funds had allocated capital gains last year. I guess, what would you think the comparable number would be on the ActiveShares?

Rick Genoni -- Managing Director and Head of ETF Product Management

This is Rick. So again, ActiveShares is an ETF. And so the trading that we will see in this product should happen in kind, rather than in cash. And that trading will happen through the AP rep. So yes, roughly three quarters of mutual fund -- equity mutual funds last year had a capital gain and a large portion of those had a gain over 2%. And so we would expect the ActiveShare ETF to be able to help manage that down, but I can't put a number on how much we can manage down through that. The ActiveShares structure will manage those capital gains through a pro rata slice of the fund rather than choosing individual stocks that is looking to manage capital gains out of. So that's the structure that we will use, but certainly this structure will help to manage those capital gains and it's a structure that you, of course, don't have today with mutual funds.

Michael Cyprys -- Morgan Stanley -- Analyst

Right. And if it's successful in your view, where would you think it could be in a couple of years time in terms of managing down the capital gains, if it's not 75%, is it a third, is it less than that?

Rick Genoni -- Managing Director and Head of ETF Product Management

Yeah. I'm sorry -- yeah, sorry, I just can't put a number on that.

Michael Cyprys -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

And thank you. We only have time for one more question. Question is from Mr. Robert Lee from KBW.

Robert Lee -- KBW -- Analyst

Great, thanks for taking my follow-up. Actually question maybe going back to the new earnings metrics. So I guess, two quick ones. First, since extra Alan wants more work, will we be getting any kind of recast historic earnings, so we can kind of see what comps would look like? And when we're doing the tax adjustment in this, you mentioned 7% cash tax rate could be single-digits in the next five years. So you're going to capture the full impact of the NOL through the new adjusted net income or is it just going to be the tax deductible goodwill?

Peter H. Nachtwey -- Chief Financial Officer

Yeah. So in terms of the -- when you will start seeing this on the June quarter and then we'll be providing it for all the periods that are presented from a P&L standpoint. It's one of the reasons why we wanted to wait until a new fiscal year to make that claim. So you'll be able to see it back in terms of both comparable quarters and comparable years. Unfortunately, we can't -- we would love to get that kind of a normalized cash tax rate, but that is something that very, very specifically, through a lot of both rules and interpretations, et cetera, the SEC does not allow us to do. So we'll still be adjusting things based on the GAAP rate, but we'll be providing as much information as we can to help you guys figure out an appropriate value for the shield as we're going to be using it. So we'll still be providing plenty of color around that, just not adjusting for it specifically in the non-GAAP measure.

Robert Lee -- KBW -- Analyst

Okay. So you won't be -- the tax deductible goodwill, that benefit will not be flowing through. Okay. Okay. Also, a quick follow-up on global distribution. Just it looked clearly, it was up a lot, but it does look like the non-US portion gross sales have been certainly down from peak and kind of running more flat for the last several quarters. Can you maybe -- anything specific that may be influencing where it's running now versus where it had been at least over the past couple of years?

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Yeah. I would say -- excuse me, Rob. I would say, I wouldn't read too much into it, other than, thank goodness for the diversification of our business, whether it be by affiliate -- with the affiliates by geography, by vehicle. We saw a significant uptick in our business in Europe in the last year to two years, a lot of that driven by success with Macro Ops out of Western. There were some -- a little bit of a performance softness there that slowed things down a little bit, but we saw Japan be more resilient. We saw -- we're seeing our LatAm business be more resilient. We're seeing our Australian business be more resilient. The US came back strongly. So -- but I wouldn't read anything too much into that. I think as I mentioned earlier, what we've seen following kind of a really choppy fourth calendar quarter was some flows moving a little bit more from active to passive in Europe, but I really think it -- if you think about it, our first quarter, as I mentioned a couple of times, we saw 22% quarter-over-quarter increase in sales, which was the largest on record, the largest reversal of trend in net flows on record. So we had a really, really strong quarter, but not every single piston in the engine was firing. And so -- but that's OK because that's why our business has been able to be resilient because we're diversified as well as we are. So I think that's a good story and I understand looking for some holes in it, but we're always going to have some geographies, there's some strategies or some vehicles that are out of favor. That's why we like having a lot of chips on a lot of different numbers and colors.

Robert Lee -- KBW -- Analyst

Great. Thanks for taking my follow-ups.

Joseph A. Sullivan -- Chairman and Chief Executive Officer

You bet. So I think Richard, we're done with Q&A, and I'd just like to close here. Actually, I'd like to close, as I always like to do at the end of each fiscal year, by thanking and applauding my colleagues at both the affiliates and Legg Mason for their ongoing collaboration, for their focus on clients and shareholders and our -- and on our communities. And all of which has helped us, I think, to collectively win many of the recognition and awards that you would see on slide 15, so I want to offer my congratulations to all of the affiliates and within Legg Mason's on a job well done. I would like to thank all of you for joining us this evening and I do look forward to updating you further on our progress next quarter. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect your lines at this time.

Duration: 64 minutes

Call participants:

Alan Magleby -- Head of Investor Relations

Joseph A. Sullivan -- Chairman and Chief Executive Officer

Peter H. Nachtwey -- Chief Financial Officer

Rick Genoni -- Managing Director and Head of ETF Product Management

Chris Harris -- Wells Fargo -- Analyst

Robert Lee -- KBW -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Bill Katz -- Citi -- Analyst

Mac Sykes -- G. Research -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Brian Bedell -- Deutsche Bank -- Analyst

Glenn Schorr -- Evercore -- Analyst

Patrick Davitt -- Autonomous Research -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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