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Legg Mason Inc (NYSE:LM)
Q2 2020 Earnings Call
Oct 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Legg Mason's Second Fiscal Quarter 2020 Earnings Call. My name is Ash and I will be your operator for today's conference call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

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

Alan F. Magleby -- Managing Director and Head of Investor Relations

Thank you Ash. On behalf of Legg Mason I would like to welcome you to our conference call to discuss operating results for the fiscal 2020 second quarter ended September 30 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 2019 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 -- Chief Executive Officer

Thanks Al. Good evening and welcome and thank you for joining us as we review Legg Mason's results for our second fiscal quarter of 2020. As usual CFO Peter Nachtwey is joining me. I plan to cover three topics deceiving: First I want to share my perspective with a high-level look at the quarter. Next I want to discuss how we think about creating value for clients and shareholders and then finally I'd like to provide you with a sense of our mindset going forward. So let's start with the quarter. Legg Mason delivered strong results in a volatile quarter for the markets. Long-term flows were essentially flat at about $200 million in the quarter or about equates to roughly 1/10 of 1% on an annualized basis. And while we're never happy with outflows of any magnitude these results seem to compare favorably within the context of the industry. Our AUM revenues margin and earnings per share were all up nicely quarter-over-quarter. Overall the mix of our business helped us as inflows into alternatives largely offset outflows in equities and modest outflows in fixed income. Our affiliates saw inflows in the retail channel offset some outflows and rebalancing on the institutional side.

And finally notwithstanding some pockets of underperformance our affiliates continued to deliver strong overall investment performance for our clients. So again all-in-all I'd say it was a very good quarter. Now let me share how we plan to continue creating value for our clients and shareholders with some specific examples of each. We believe that we create value in three ways through first the thoughtful diversification of our business which leads to two critical outcomes expanding choice for clients while delivering a greater resiliency of results for shareholders. Second the efficient execution of our strategic restructuring which positions us to deliver greater margins for shareholders and have greater investment capital if and as we see opportunity. And then third by capitalizing on our investments which further position us for future growth. So let's drill down a bit on the intentional diversification of our business across investment strategies vehicles and client access which is fundamental to our strategy and where we saw further progress this quarter. Starting with investment strategy diversification. In equities the broader availability of Martin Currie's emerging market equity strategy in the U.S. contributed inflows in the quarter and these inflows do not include a large U.S. institutional win of approximately $500 million in that strategy that funded this month. In addition as part of our ongoing collaboration with global banking partners we launched three new fixed income products in Asia Europe and Latin America solving for the strong demand for income and which have raised approximately $1.6 billion this past year. And on October 16 we announced the launch of our first commercial real estate-focused fund designed for individual investors. The Clarion Partners Real Estate Income Fund or CPREIF will bring Clarion's nearly four decades of expertise in private real estate to the broader U.S. retail market through Legg Mason for the first time.

We are also seeing growing market demand for packaged third-party model solutions as financial advisors seek new ways to simplify their practices lower costs and help manage overall risk in client portfolios. It is in these models that we are leveraging the portfolio construction expertise of QS Investors to bring to market several multi-asset portfolios. These models are often comprised of active and passive investments utilizing Legg Mason funds Legg Mason ETFs as well as third-party ETFs within an SMA vehicle. and we expect to see continued interest in outsourcing asset allocation and portfolio construction to model providers across our retail channels. Next our vehicle diversification continues to enable us to play both offense and defense in this very competitive and dynamic market. As we have previously shared only about 50% or so of our gross U.S. retail sales are in mutual fund vehicles and yet this quarter we bucked broader industry trends generating positive net sales in U.S. mutual funds. At the same time we also saw positive net sales in our SMA ETF and Collective Investment Trust or CIT vehicles. Now I want to stop and focus for a moment on CITs. Our current AUM in CITs stands at $6.4 billion up from $3.4 billion in September of 2018. This growth in AUM was driven largely by both net new sales of approximately $850 million and $2 billion of transfers from other vehicles. So this story exemplifies the power of how vehicle choice enables us to play both offense and defense. Offering our investment strategies across multiple vehicles both enhances client acquisition and promotes client retention.

And lastly we saw broader channel diversification this quarter with new drivers of gross and net sales in three channels with strong results where we continue to make good progress the wealth management independent and retirement channels in the U.S. Of particular note is the record performance of our U.S. Wealth Management team both in gross and net sales as well as our record start to the fiscal year by our retirement team. Further internationally our Australia team posted its 13th consecutive quarter of net positive sales reflecting the thoughtful allocation of resources within distribution which has enabled us to increase our business and market share in these growth channels and in this region. Now I'd like to update you on the second wave we are creating value through our strategic restructuring. I am pleased to say that we are making very good progress on these efforts. We continue to project total savings of $100 million or more. We are realizing those savings a bit ahead of the schedule and we have narrowed the range of our restructuring costs to between $125 million and $135 million. Again good solid progress against this commitment. And now let me turn to the third way that we're creating value capitalizing on our investments. While some investments are they investments in relationships or products or technologies will yield more immediate results others will represent longer-term growth opportunities for us. So let's look at some examples of more immediate opportunities. In June we announced a strategic alliance with Actinver Mexico's largest private bank in terms of number of clients which marked our first retail distribution effort in that country. Actinver very quickly introduced three local funds using models provided by ClearBridge Martin Currie and Western and we have been pleased to see nearly $100 million flow into these funds since June.

And looking ahead we remain extremely excited by the industry's interest in Active Shares. The SEC approved semi-transparent active ETF structure. We believe this structure is an evolution in ETFs and a potential revolution in active management. 12 firms have licensed the technology through Precisian 30 more are in various stages of contract execution and the first product launch is likely to happen sometime early next year. And finally we also announced that we are partnering with Cathay Financial Holdings and Quantified a digital wealth manager in which we own a minority investment to introduce theme-based investment solutions to investors in Taiwan. And we have also facilitated a relationship between Quantifeed and one of our larger Japanese clients. So let me close now with some thoughts about how we think about where we are going. This industry continues to change and be challenged on a variety of fronts. The allure to investors of passive strategies relentless pressure on pricing ongoing increases in the necessary investments and technology distribution and marketing this change is as relentless as it is certain. Winning in the future requires a mindset of finding opportunity and change rather than being overwhelmed by it. Winning requires being agile trying new approaches and being willing to take risks. Winning means recognizing the shifting landscape and not simply identifying what clients want today but anticipating what they will expect tomorrow. Winning is about being prepared to serve clients as they want to be served and not as we are currently prepared to serve them.

This is the mindset that we try and employ every day. This is why we are creating new investment strategies for investors like CPREIF to deliver greater risk adjusted returns in a low-rate and likely lower return world. This is why we have invested in new vehicle technologies like Precidian's ActiveShares which could potentially revolutionize active investing. And this is why we are establishing new and deeper partnerships with clients around the world including partners such as our recent agreement with Actinver in Mexico and investing in different technologies and portals such as Quantifeed and Embark to give clients access to our investment strategies in the manner in which they in choose to receive them. Change is threatening but only if you don't change. Change also represents a great opportunity but only if you don't embrace change quickly. We are committed to continuing to turn change upside down to find the opportunity the change affords.

And with that I'll turn it over to Pete.

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Thanks Joe. Good evening everyone. I'll start off with the highlights on Slide 2. Legg Mason reported GAAP net income of $67 million and adjusted net income of $86 million or $0.95 per share. We also made meaningful progress on our strategic restructuring efforts where we continue to project at least $100 million of annualized savings. Moving on to AUM. At quarter end we stood at $782 billion. And as Joe noted overall flows for the quarter were basically flat with $2.4 billion of alternative inflows being offset by equity and fixed income outflows. Gross sales were strong across our global distribution platform at $22.4 billion while net sales remain positive at $2.6 billion despite a challenging macro backdrop. And looking forward investment performance remains strong with 79% and 82% of strategy AUM beating benchmarks for the three and five-year periods. While for the Lipper category averages 66% and 71% of AUM beat peers for the same periods. Now let's look at our affiliates on Slide 3. Five of our nine affiliates generated positive long-term flows for the quarter including all three alternative managers and two of our equity managers. Unfunded wins and committed uncalled capital were down from the prior quarter primarily reflecting a significant funding at EnTrust Global and we remain encouraged by our overall pipeline of opportunities which remains very robust.

Turning to Slide four you can see the asset class mix of our unfunded wins and committed uncalled capital remains diverse with 47% coming from fixed income 33% from alternatives and 20% from equities. Furthermore the underlying mix of the unfunded wins and uncalled capital within each asset class remains well-diversified across products and strategies. Slide five highlights our global distribution platform. Notably gross sales were basically level on a sequential basis despite what is typically a slower quarter seasonally and we are very pleased to be up 29% from the same quarter last year. Our overall redemption rate ticked up reflecting a significant transfer of assets from a mutual fund to a CIT. However net sales remained solidly positive and while they declined on a sequential basis to $2.6 billion of inflows in fiscal Q2. This still represented an improvement of $4 billion versus the net redemptions in the same quarter last year. And looking at the full first half of fiscal 2020 LMGD saw record gross sales while net sales at $6.6 billion were the third best start ever for the first half of the fiscal year. Moving to Slide six. Since I already highlighted our bottom line earnings I'll move on to operating revenues which increased by $38 million or 5% quarter-over-quarter. This was driven by an increase in performance fees as well as higher average AUM and one additional day in the quarter. These were partially offset by a modest decline in the operating revenue yield. This quarter we realized $13 million of non-pass-through performance fees which was $9 million above our forecast as a result of fees related to a certain Clarion post-deal AUM client.

And as a reminder we are now just about 18 months away from Legg Mason participating in a majority of Clarion's performance fee earning AUM. For next quarter we estimate non-pass-through performance fees of $5 million to $10 million and pass-through performance fees at approximately $5 million. Our adjusted operating margin was 25% for the second fiscal quarter versus 21.6% in the prior quarter. This reflects lower seasonal compensation higher revenues and the impact of realized cost savings. Finally our GAAP tax rate came in at 27% which includes the impact of certain discrete tax items while our cash tax rate was only 7% for the quarter. And for your adjusted earnings models we expect next quarter's tax rates to remain in the range of 27% to 28%. On Slide seven you can see that AUM increased due to market appreciation which was partially offset by liquidity outflows negative FX and slight long-term outflows and realizations. Our operating revenue yield of 36 basis points was down slightly but within our forecasted range reflecting reduced alternative and equity revenue yields and higher average fixed income assets. But importantly the drop was primarily driven by changes in asset mix and rounding as opposed to any changes in pricing. Specifically the alternative revenue yield reflects a lower fee rate associated with a funding of a significant institutional mandate. Also affiliate mix plays a part here with Clarion contributing an increasing share of our overall alternative AUM at the somewhat lower fee rates applicable to core real estate private equity. The equity fee rate decline continues to reflect lower fee institutional fundings and the ongoing shift to lower fee vehicles as well as the affiliate mix. Operating expenses on Slide eight decreased by $3 million on a sequential basis primarily due to a $13 million decrease in restructuring charges.

Excluding those charges expenses were up $10 million due to higher compensation on higher net revenues partially offset by seasonal compensation factors during the prior quarter savings from our strategic restructuring and lower mark-to-market impacts on seed and deferred compensation benefits. Turning to Slide nine. Our comp ratio for the quarter was 55% down from the prior quarter and in line with our forecast. Salary incentives and benefits decreased as expected due to seasonal compensation factors in the prior quarter and the savings from our strategic restructuring. These were partially offset by higher compensation on increased net revenues. Next quarter we expect our comp ratio to decrease to a range of 53% to 55% reflecting additional savings from our strategic restructuring. As shown on Slide 10 our adjusted operating margin increased primarily due to seasonal comp higher net revenues and strategic restructuring phase. Slide 11 is a roll forward from fiscal Q1s adjusted EPS of $0.75 to this quarter's $0.95. The EPS improvement reflects $0.07 from higher net revenues $0.05 of lower seasonal comp and $0.04 in additional restructuring savings. We also had another $0.04 positive impact reflecting lower confidence in T&E expenses in the quarter which were partially offset by the impact from higher shares outstanding and taxes. On Slide 12 we have updated the schedule depicting savings and associated costs related to our strategic restructuring program. As a reminder we have arranged the columns to mere the time periods in your models while the line items provide the details that you need for each period.

As you can see on the far right in the fiscal 2021 column our savings target remains a $100 million or more while our costs to achieve these savings are in the range of $125 million to $135 million. Fiscal Q2 we reported $15 million of savings with cumulative savings realized now at $29 million. We expect to realize an additional $19 million savings in fiscal Q3 followed by another $22 million in fiscal Q4. This will bring our cumulative savings to approximately $70 million by the end of fiscal 2020. We have now achieved run rate saves of 58% and project to capture over 90% of run rate saves by the end of this fiscal year. But please note these are still projections so actual line item results may differ especially due to rounding. In terms of cost to achieve these savings we had $16 million this quarter and we are expecting an additional $21 million in fiscal Q3. For the full fiscal year we are anticipating costs of $80 million to $85 million with additional costs of approximately $35 million to $40 million in fiscal 2021.

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

Joseph A. Sullivan -- Chief Executive Officer

Thanks Pete. In closing we have been executing on the strategy that we have put forth for some time now yet remaining agile enough to evolve and pivot as the industry change requires. Like everyone in our industry and particularly other active managers we continue to be impacted by a wide array of factors. But executing on our plan still enables us to adapt to and thrive in a changing landscape. We are diversifying our business which makes us a more attractive partner for our clients and despite the changes and challenges of our industry provides a certain degree of resiliency to our results for our shareholders. We are delivering on our restructuring plans while controlling costs and thoughtfully managing the balance sheet and we are finding opportunity in change as we continue to work to bring our existing investments to fruition while pursuing new investments to further develop opportunities that will pay off over the longer-term.

And with that Ash we'll open it up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Robert Lee from KBW. Please proceed with your question.

Robert Lee -- KBW -- Analyst

Great. Thanks. Thanks for taking my questions. First thanks for the updated for the new GAAP and non-GAAP reconciliation in the appendix. It's very helpful. So thanks for doing that. I guess maybe the first question I'd have is I mean now that you--on capital management I'll start there. As you've moved past paying down the debt obviously you got to fund the cost saves as we kind of start getting toward the latter part of this year. Could you maybe update us on current thinking what the priority will be whether going back to the share repurchase? Should we expect that next year? And then maybe a second part of that is related now that Mr. Peltz has been and his representatives have been on the Board at least a few months. Is there anything you could update us on what his priorities are or what his thinking maybe since he has joined?

Joseph A. Sullivan -- Chief Executive Officer

Sure. Thanks Rob. First of all on capital management I would say there's not really any update. We've been fairly consistent about how we think about our excess cash. We think of it as discretionary cash that we have following our use for capex for tax obligations for dividends and debt service and for other requirements like seed capital. So we look at those things first and then we think about how we utilize that excess cash. Currently our focus is on having paid off the $250 million of senior notes back in July. We now look at it and we recognize that we have some expenses related to this restructuring. So that's going to take priority. But we also need to go on a go-forward to spend some more time with our Board to think through once we get through that how we're going to prioritize the capital allocation. So we haven't finalized that yet. We're going to use our excess cash right now to support and facilitate this corporate restructuring. But as soon as we have some greater visibility on what we'll do with that discretionary or excess cash after that we'll let you know.

As it relates to Nelson Ed and Trian it's really the same story. We never really speak for them. I think from what they have said publicly they see what we see which is the opportunity and frankly the need for us as a company to operate more efficiently and obviously we're already on that path with our strategic restructuring. And so we will continue with kind of a relentless focus on cost management. And then in addition to operating more efficiently we need to continue to find ways to operate more effectively with our clients to drive growth. And beyond that that's what we're focused on with them and with our entire board right now.

Robert Lee -- KBW -- Analyst

Thanks for taking my question.

Joseph A. Sullivan -- Chief Executive Officer

Sure.

Operator

Our next question is from Bill Katz from Citi. Your line is open. Please go ahead.

Bill Katz -- Citigroup -- Analyst

Okay. Thank you very much for taking the questions this evening. So I appreciate that you have sort of accelerated the percentage of savings it looks like from 80% plus to now over 90%. But when I look at the actual dollars and I apologize if I misinterpreted the data it looks like it's about similar from last quarter's guidance. So how does that math foot and does that imply maybe some deeper underlying investment spend as an offset?

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. Actually I think Bill probably the one thing to focus on is what's the run rate at the end of the quarter--at the end of the period like for example at 930 we have got a number of people that are going to be leaving or generate additional savings in the next quarter. That's in our run rate at the end of the fiscal Q2 but it's not in our actual fiscal Q2 savings. And so the same thing impacting the out quarters here. So maybe Al can walk you through the math if needed after the call. But it's the delta between kind of run rate versus what's actually in the quarter.

Joseph A. Sullivan -- Chief Executive Officer

It's timing.

Bill Katz -- Citigroup -- Analyst

Okay. So exit level versus what you did during the quarter?

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Correct. Yep. You got it.

Bill Katz -- Citigroup -- Analyst

Okay. That's very helpful. And then Joe maybe big picture maybe this ties in with your choice and discussion on pricing. You've had some changes in the U.S. and one of the major distributors in UBS in terms of what they're thinking about doing on the SMA footprint. You've been a pretty big generator of SMA growth just generally speaking. How do you sort of see that segment of the business sort of evolving from here? And then where do you think you are in terms of the fee compression on the business with--maybe some focus on the equity side or behalf?

Joseph A. Sullivan -- Chief Executive Officer

Sure. So you raised the announcement last week from UBS and obviously they're a good partner of ours and we are working closely with them to try to further understand the details of how this program new program is going to work for clients for asset managers. And so there's still work to be done on that. But as we think about it based on what we understand at this point we think about this development in a couple of ways. First it really reinforces how critical it is and how critical it remains really for us to deliver and all managers to deliver very differentiated investment strategies. It's really increasingly clear that undifferentiated investment strategies will be subject to intense pricing pressure and frankly a risk of outflow to passive. Secondly but when we kind of turn the challenge of the change upside down a little bit and we look at the opportunity as you know we have a leadership position in retail SMAs which does--I think position us to turn this into an opportunity by taking market share. It's really our breadth of strategies and the infrastructure to support them. That has created a certain degree of scale that really allows us to favorably compete and grow in the space. So we're going to look at it as an opportunity. Now admittedly we may see and we will likely see over time pressure on those rates. And we're seeing that across the patch and in every aspect of our business every firm is seeing impact on pricing.

But we have been able to hold it off a little bit by bringing more differentiated strategies like CPREIF that development--that's a strategy that's highly differentiated and where we are able to kind of to maintain or hold pricing a little bit better than frankly in more general market or core type strategies.

Operator

Our next question is from Mac Sykes from Gabelli. Your line is open. Please proceed with your question.

Mac Sykes -- G. Research -- Analyst

Good evening everyone. I actually have two questions and I'll just ask them together. First how should we think about the magnitude of AUM and total funds expected to launch in the first wave of the Precidian vehicle? And then my second question is about what is the capacity with the new Clarion product? Thanks.

Joseph A. Sullivan -- Chief Executive Officer

I think as it relates to the Precidian it's hard to say what the magnitude of launches are. We know we have been working with all of our licensees and partnering with them to prepare them to be able to launch. We need to get through some operational and kind of work streams to get that up to speed. But we do expect our first launch will be in--probably the early part of 2020 we think that'll likely be with American Century and we will likely have a Legg Mason launch that follows that fairly quickly. But how quickly other firms--from what we hear people are pretty excited about it and anxious to bring to come to market with these. But we'll just have to wait and see. It's hard to predict how quickly that happens. As far as capacity Pete do you

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. Joe because I've actually been working with Clarion guys on this a good bit and as well as some of our distribution partners. Effectively what a number of the large retail distribution partners in the high net worth area are talking about the need they perceive to get clients about a 5% allocation in real estate from less than 1% today. So the opportunity set is massive and there's very few competitors out there. So some good competitors Blackstone has done a great job. Starwood Brookfield and if you look at the trajectory I think the last numbers I saw Blackstone was raising something north of $100 million a month in their similar product. Now obviously they've got a bit of ahead start on us but in terms of opportunity here it's a very large one. But it's going to take some time to get on the platforms and get it up and running.

Joseph A. Sullivan -- Chief Executive Officer

So Mac just to follow-on a little bit with Precidian because obviously I highlighted earlier we're pretty excited about that. And as I mentioned we have executed agreements with 12 licensees and that represents something over 25% or so of the U.S. equity mutual fund assets in the marketplace. And there's 30 plus contracts that are outstanding and that are in various stages of execution. I alluded to or mentioned that we expect our first ActiveShares ETF launch to be some time in early 2020. But just to give you a kind of a sense for what's going on there's really what I would call three categories of work that are under way to bring ActiveShares to launch. And the first are really just various filings that are really applicable to any new ETF coming to market whether it's a passive or whether it's active or semi-transparent filing such as 19b-4. That's the first kind of piece of work that's under way with respect to this. The second category of work is really a work that's related specifically to ActiveShares such as Reg M or Reg show type filings. And the good news on those work streams those ActiveShares specific filings is that the approvals once attained can be then leveraged by other licensees in their filings going forward. So that's a highly efficient opportunity there.

And then finally as I alluded to there are a variety of legal and operational work streams that are being completed in preparation for going live next year. And as I said Precidian is really actively working with all licensees and helping them to come to market. And for those who are so interested you can find details around some of those operational work streams and legal work streams can be found on activeshares.com. But there's really a lot of momentum building around ActiveShares and we're excited about that. In just the last month Precidian has participated in seven different industry conferences and then co-hosted very successful licensee event with the CBOE. That was attended by more than a hundred of our attendees. So a lot of activity and a lot of momentum and a lot of enthusiasm around ActiveShares and we'll keep you posted as things move forward.

Mac Sykes -- G. Research -- Analyst

Thank you.

Operator

Our next question is from Kenneth Lee from RBC Capital Markets. Please proceed with your question.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Thanks for taking the question. Just a follow-up on that in terms of the Precidian and the filing templates as well the work streams that are going on right now. Is the thinking that there's a lot of initial work that needs to be done since it's a relatively new product. But then presumably once the first few initial products launch we could see perhaps an elevated tempo of product introductions simply because they can sort of leverage off the existing filing that they have been done previously? Thanks.

Joseph A. Sullivan -- Chief Executive Officer

I think that's exactly right. As I said there is a fair amount of plumbing that kind of needs to be put in place operational type plumbing that needs to be put in place. So I think that's exactly right. I think they'll get into the market and as people get comfortable with how they trade that will encourage people to come to market with more as well. And then the SEC has recently made the exemptive relief process easier as well. So all of those things speak exactly Ken to what you're saying which is as we get through the first few launches things should be able to move much quicker.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. And just a quick follow-up. Could you provide any color around some of the outflows being seen within QS Investors? I mean it sounds there's a lot of potential growth opportunity there. Just wondering whether there's any kind of a particular outflows that you want to call out there. Thanks.

Joseph A. Sullivan -- Chief Executive Officer

Actually the outflows that QS has realized don't really over the last several years have been more related to the legacy active business the quant business the active U.S. equity quant business that they brought when we acquired them and that we merged in through better emerge. That's been the business that's been under the most pressure. They did lose a little bit through a recent merger and acquisition in the industry. Don't need to go into detail on that but that was one where that mandate was brought in-house. But where they are actually most active is as I mentioned in creating models and solution-based types of products where they're actually doing quite well and getting a great positioning on various platforms. So really the outflows are related to more legacy business. Again quant equity business that's just been under pressure frankly.

Operator

Our next question is from Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Craig Siegenthaler -- Credit Suisse -- Analyst

Hey. Good evening Joe Pete.

Joseph A. Sullivan -- Chief Executive Officer

Hi Craig.

Craig Siegenthaler -- Credit Suisse -- Analyst

I have a CFO question for Pete here first. So with debt now I think $2 billion following the $250 million repayment this quarter what is the updated excess cash level to use in the net debt calc? Because I don't think you put out a balance sheet yet for fiscal 2Q.

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. Well typically we talk about kind of a minimum cash level $250 million which is regulatory capital and then call it roughly a month of kind of working capital expenses. But we also got capex dividend all those kinds of things that we need to play in there. So whatever you see is putting out I'd kind of take $250 million off of that and that's what we have got to play with but then keep in mind we have got to find capex taxes interest dividends etc. so. Is that get to what you need?

Craig Siegenthaler -- Credit Suisse -- Analyst

And one more step though where does this put the net debt-to-EBITDA ratio now and any thoughts on how this could trend just given the elevated cash charges over the next year?

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. I think we see this getting down to like below 2x by the end of the calendar year on adjusted EBITDA. And again each of the agencies calculates a little bit differently. We ought to be getting below that bright line which I know is something that people have been watching. And then depending on--I don't think you see this building a ton of cash going forward. But to the extent that we have got excess cash on the balance sheet we'll definitely get credit for that in calculating the leverage ratio.

Craig Siegenthaler -- Credit Suisse -- Analyst

Great. Thanks Pete.

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Sure. Thanks.

Operator

Our next question is from Daniel Fannon from Jefferies. Please proceed with your question.

Daniel Fannon -- Jefferies -- Analyst

Hi. Thanks. My questions on fixed income. Looking at your guys performance as well as kind of the category as a whole I guess I would seeing that Western has-- should or could be doing potentially even better than it is. And so I was curious if there is any capacity constraints there or if there is something from a distribution perspective that you guys are focused on to potentially accelerate kind of the sales environment. And then also if you could update us on Brandywine which is seeing some outflows and kind of what's going on there?

Joseph A. Sullivan -- Chief Executive Officer

Sure. So let's talk about Western for a minute. I think about it in a couple of ways. First of all when I think of Western kind of three words come to mind first is demand second is performance and third is share. Right now as you know the demand for fixed income is strong broadly and globally. So that's a good thing. Western has terrific investment performance especially in the largest broad market strategies. And in fact Western is taking taxable market share particularly in certain of our retail channels. On the institutional side they continue to report a pretty high level of institutional activity. And then we have seen a nice pickup in their fundings last quarter as well as their unfunded wins. So we feel pretty good about how they're positioned. We did see some redemptions on the institutional side during the quarter. Some related to some M&A activity with certain clients. Some related to reallocation out of fixed income actually into equities. And that was actually a transfer into ClearBridge. So that was not a great news for Western but good news for ClearBridge.

Their long-term assets as you might imagine at Western are really the highest levels since the financial crisis. So they've continued to deliver great performance. I think we do--they believe there's opportunity for them to continue to grow on both the retail and institutional side. And so we feel pretty good about them. I think on--as it relates to Brandywine Brandywine's had some shorter-term performance challenges which I think has slowed down subscriptions a little bit for them but their long-term investment performance is still quite--really quite strong. And so we have seen this before a little bit with them where their performance can be more volatile but the long-term performance is strong and that bodes well. By the way you asked me about capacity as it relates to Western. I don't think generally they have significant capacity constraints with respect with the exception maybe of one strategy which would be their macro op strategy which is their unconstrained strategy which has done quite well and managed by Ken. They do have some capacity constraints there but they're plenty-- they're quite a ways away at this point in time from being concerned about that.

Operator

Our next question is from Brian Bedell from Deutsche Bank. Please proceed with your question.

Brian Bedell -- Deutsche Bank. -- Analyst

Great. Thanks. Good evening folks. Maybe just go back to the Precidian side obviously the launch getting pushed back a little bit here is the holdup on the operational plumbing is that more from the market infrastructure for the ETF vehicle? So this would be the market makers authorized participant the accounting agent or is it more from internal side in terms of getting the legal documents lined up the plans internally at the managers that are planning to launch the ETFs?

Joseph A. Sullivan -- Chief Executive Officer

Yes. Look I wouldn't characterize it Brian as being pushed back. I think it's just part of the process and some of these things take time. They do remain sort of discrete approvals and filings that need to be made with the regulators and we don't control the timing on those. There is some plumbing that is to get done but it's not material and we don't think of it is being pushed back. We just think of it as part of the process. So we feel good about how things are moving forward.

Brian Bedell -- Deutsche Bank. -- Analyst

Okay. And then just the--and the timing of your just review the timing of your option to buy the majority stake when does that expire?

Joseph A. Sullivan -- Chief Executive Officer

Yes. So we need to notify them that we are going to be exercising that increase by mid-January and then there's a nine-month due diligence period that follows before we actually formally exercise it or have to formally exercise it.

Brian Bedell -- Deutsche Bank. -- Analyst

Okay great. And then maybe just if you could comment on flows in October the $500 million win is from Martin Currie. Maybe just any other update on flows to-date?

Joseph A. Sullivan -- Chief Executive Officer

Brian you've gotten three questions in here. Nicely done Brian. You're going to take over Bill Katz here. I said that with a smile Bill by the way. This is so for October but Ash cut Brian off now. As always though I caveat this as much as I can because we still have more than a week to go to finalize our numbers. So it's likely that some month end subscriptions or redemptions which are scheduled will come in and can take our names or can take our numbers up or down from here. But at the moment it's looking like we're going to have a pretty good month with inflows at this point in all three asset classes. So we feel pretty good about it.

Operator

Our next question is from Michael Carrier from Bank of America Merrill Lynch. Please proceed with your question.

Mike Carrier -- Bank of America Merrill Lynchc -- Analyst

Thanks for taking the questions.

Joseph A. Sullivan -- Chief Executive Officer

Hey Mike.

Mike Carrier -- Bank of America Merrill Lynchc -- Analyst

Hi. Just given the strength that you're seeing in alternatives I guess just any color on the drivers and are there any like larger fundraisings that are under way that are contributing to the strain?

Joseph A. Sullivan -- Chief Executive Officer

So I think Pete referenced the fact that a EnTrust had a nice significant win that funded in the quarter and we continue to see them having success and really having evolved their business away from the kind of traditional fund-of-hedge fund business and that the redemptions in that business are decreasing and being reduced simply because the amount of assets. In part because the amount of assets are much fewer than they used to be. But they're seeing EnTrust a significant interest in their Blue Ocean strategy their direct lending maritime business. They're continuing to see very strong interest in their co-investment strategies. So they've really pivoted and evolved that business and they continue to see good interest there. Clarion has been a rock. I think they've been--I should have it in front of me but I think its 12 straight quarters or something of 12 or 13 straight quarters of inflows for us. I think they've been an inflow every quarter since we have acquired them. But one they continue to see great interest in their align property fund and align investment trust.

And so Clarion's just been a consistent grower for us. Clarion or RARE after some choppiness in the first few years we are starting to see interest in the liquid infrastructure with RARE pickup and we have had some success with particularly in Europe with our fund there in Europe. But we're also going to be relaunching an income fund here in the U.S. shortly. I don't think we have quite yet but I think at shortly. So we have just kind of feel good across all three of those companies within our alternatives class.

Mike Carrier -- Bank of America Merrill Lynchc -- Analyst

Okay. That's helpful. And then just to follow-up you mentioned vehicles of choice and including the model portfolios. How do you think about like fee rates with more growth in those areas and then in SMAs we know your scale and model portfolios a little bit less visible. So how do you think about maybe the incremental margins as well in that part of the business?

Joseph A. Sullivan -- Chief Executive Officer

So I think as it relates to fee rates. I mean I just think we should just kind of concede that fee rates are going to be under pressure whether you're talking about SMAs. You're talking about mutual funds whatever every aspect of our business there are pressures related to fee rates. I think what we have described before though is that as it relates to SMAs for example the persistency of those assets for us historically has been longer. So ultimately the margin even though the fee rates are lower on the retail SMA than the mutual fund with the persistency extending out a bit the profitability of those and the margin of those are actually as attractive as our mutual fund business. But again I think we just need to take as given that we're going to be under pressure whether it be retail or institutional almost in every aspect of our business. Now that said it goes back to what I said earlier about the more you can create differentiated strategies you can push back on pricing pressure. But when those strategies are not differentiated then you're going to be under even greater pressure.

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

And Mike I might expand on kind of the margin and operating leverage point because it's one of the reasons that we have been putting out the parent margins on an annual basis so you can see that. I think particularly now with the streamlining at corporate we're capturing any revenue that comes up to the parent. We're capturing 85% to 95% of that in the operating margin. So it's not that we're willing to take business at any price but those dollars that are coming up the parent are pretty profitable.

Operator

Our next question is from Chris Harris from Wells Fargo. Please proceed with your question.

Chris Harris -- Wells Fargo -- Analyst

Thanks guys.

Joseph A. Sullivan -- Chief Executive Officer

Hi Chris.

Chris Harris -- Wells Fargo -- Analyst

A couple on your performance fees Pete I think you said it but I missed it. What percent of Clarion's performance fees we will be receiving? I believe in the beginning of fiscal 2022 and then once you do start receiving those how is that going to impact other line items on your income statement like your comp ratio and non-controlling interest?

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. Good questions Chris. And actually you didn't miss it because I didn't give you a percentage. So it's one of those that still--changing mix of well again if you go back to the deal that we constructed with Clarion is they kept the performance fees on pre-closing AUM. And then after five years which is coming up as you've pointed out in the summer of 2021 we will start participating in the performance fees on all the commingled funds in a new AUM that's come into the separate accounts. But if that--we know it will be the majority but exactly how much it's tough to predict because that just a constantly changing mix of AUM. And then in terms of how it impacts the P&L when we get out there the split with the team will be 50-50 which is pretty much standard in the market. So 50% of the performance fees will go to the team and comp 50% will go to the bottom line of which we get 82%.

Joseph A. Sullivan -- Chief Executive Officer

And we didn't pay anything for those. Peter Nachtwey Exactly. None of that was pricing or put it into the EBITDA that we priced the deal under.

Chris Harris -- Wells Fargo -- Analyst

Thank you.

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Sure.

Operator

Our next question is from Patrick Davitt with Autonomous Research. Please proceed with your question.

Patrick Davitt -- Autonomous Research. -- Analyst

Good evening guys. I have a question on the CIT discussion. Obviously we have seen this--a bigger impact to this at other firms but I think the first time you've called it out so pointedly. So I guess could you speak to the overall economics of the shift like this to you assuming there is a lower management fee but is there an offset on the expense side which is something we have heard from those that have a little bit more scale than you do? And then within that theme could you update us on the total kind of DC AUM pool as we think about the amount of AUM that could transfer?

Joseph A. Sullivan -- Chief Executive Officer

Look I think--first of all typically fee rates are lower on CITs and expenses are lower as well. I wouldn't say they're significantly lower on the expense side but they're somewhat lower. We view that--again that's playing defense. Look if we don't have these vehicles we run the risk of losing the assets all together. And so we're going to--where appropriate and where clients are pressing. And where it's appropriate for them we're going to look to move them into the vehicles that they need or that they want. And obviously persistency of many of these situations is increased particularly in the retirement channel. Our retirement channel is one that is growing. We haven't really looked at how much of that business our current business in the DCIO spaces is likely to move but it's not something that we see as being imminent but we think it's just a--over time it's something that we can at least offer to defend assets that may not be under pressure from a performance standpoint but maybe just from a vehicle perspective. And so we're not necessarily encouraging it but we're there and prepared to deal with it if and as it comes.

Patrick Davitt -- Autonomous Research. -- Analyst

Great. Thank you. That's all I have.

Joseph A. Sullivan -- Chief Executive Officer

Okay.

Operator

Our next question is from Michael Cyprys from Morgan Stanley. Please proceed with your question.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey good evening. Thanks for taking the question. Just first question for Pete just maybe on the comp ratio guide of 53% to 55% next quarter. I guess just how much of that is driven by the lower performance fees that you guys are guiding to? And how should we be thinking about that the comp ratio guiding into next year? And then related to that the operating margin 25% in the quarter is that--how sustainable is that from here as we look out?

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Yes. Well I think the 53% to 55% being in that range some that's going to be impacted by the performance fees but some of it's also impacted by our strategic restructuring costs. On the margin front we're really pleased to see the uptick and some of it was seasonal factors and some of it was it was helpful in the market but a good bit of it was coming from the strategic restructuring. And in next quarter we're probably going to be about the same zip code from a margin standpoint because we don't have that much more of the savings coming online in the quarter and we have got a little bit of what we call BAU or business as usual costs that will uptick next quarter. But after that we see the remaining of those main of those savings should be positively impacting the margin.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. And just on the strategic repositioning of the cost base. I just hope you can update us on some of the actions you guys are taking to cut costs specifically such as automating certain tasks. How you guys are thinking about that? Outsourcing certain services extracting greater savings from vendors if you could just give us a sense in terms of some of the actions you guys are taking will take and how and where specifically you guys are thinking about really cutting costs? Peter Nachtwey Yes. I'll just--that could pretty much everything you said Michael is that that's in the list. I mean we're still continuing our partnership with IBM on the--give them a little commercial on outsource procurement. We just had a call today with--that frankly gave me goosebumps after a 40-plus year career not many things give me goosebumps but we're going to be going live with our common financial platform over the weekend with a number of our affiliates for the first time. And it's been a multiyear project. So there's just been a lot of stuff and pretty much everybody around the organization is looking at ways to come in and do their job faster better smarter and whether we can do that through just stop doing things automating them artificial intelligence and robots outsourcing. We're looking at all that stuff and it's having an impact. I mean we're not immune to the pricing pressures. We think we can hold serve pretty well there better maybe than others but we're not immune to it. On the other hand there is a lot of opportunity if you're taking advantage of it to control costs.

Joseph A. Sullivan -- Chief Executive Officer

And Michael we have worked at things. It's been tough because we have focused on looking at things that are kind of nice to have that we have enjoyed over the years and they're not necessarily need to have. So we have had to make some tough choices on that as well so.

Operator

We have time for one more question and that question is from Bill Katz from Citi. Please proceed with your question.

Bill Katz -- Citigroup -- Analyst

Joe I'm almost scared to ask but I will anyway. And thank you for your indulgence. So a little bit of narrow question but I'm sort of curious. In your charges this quarter it was about $3.5 million other professional fee item not associated with the implementation costs. I'm so curious could you talk about what is behind that charge?

Joseph A. Sullivan -- Chief Executive Officer

Yes. There's just--a number of things from a board structure and legal structure things that are not part of what we're putting out there in terms of the $100 million of sales. But there are costs that we have incurred but they're behind us and we don't see them occurring.

Bill Katz -- Citigroup -- Analyst

Okay. But it doesn't affect go-forward strategy I guess the underlying question?

Joseph A. Sullivan -- Chief Executive Officer

No not at all.

Bill Katz -- Citigroup -- Analyst

Okay. Thank you. Got you. Thank you very much.

Operator

Thank you. That concludes our question-and-answer session. And I would now like to turn the call over to Mr. Sullivan.

Joseph A. Sullivan -- Chief Executive Officer

Thank you Ash. And thanks to all of you for joining us this evening. We're pleased with our progress this quarter on a number of fronts but not satisfied. As we know so much more is available to us as we capitalize on the opportunity that change brings. I also want to thank my affiliate and Legg Mason colleagues as always for their continued focus every day on our clients.

And with that we look forward to updating you on our progress again next quarter and I wish you a very good evening. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Alan F. Magleby -- Managing Director and Head of Investor Relations

Joseph A. Sullivan -- Chief Executive Officer

Peter H. Nachtwey -- Chief Financial Officer, Senior Executive Vice President

Robert Lee -- KBW -- Analyst

Bill Katz -- Citigroup -- Analyst

Mac Sykes -- G. Research -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Daniel Fannon -- Jefferies -- Analyst

Brian Bedell -- Deutsche Bank. -- Analyst

Mike Carrier -- Bank of America Merrill Lynchc -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Patrick Davitt -- Autonomous Research. -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

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