Legg Mason Corporate Overview June 6, 2017 Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset For internal use only. Not for distribution to the public. For internal use only. Not for distribution to the public.
Important Disclosures Forward-Looking Statements 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, 2017 and in the Company s quarterly reports on Form 10-Q. Non-GAAP Financial Measures This presentation includes non-gaap financial information. This non-gaap information is in addition to, not a substitute for or superior to, measures of financial performance or liquidity determined in accordance with GAAP. The company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances. Page 1
Company Highlights Fiscal Fourth Quarter Net Income $75.9M or $0.76 per diluted share. Results include a net benefit of $9.1M or $0.11 per diluted share related to unusual items Assets Under Management $728B Long-term net inflows $3.9B Fixed Income inflows of $3.5B Equity inflows of $3.1B Alternative outflows of $2.7B Global Distribution quarterly gross and net sales of $23.6B and $5.1B, respectively Retired 2.6M shares for approximately $90M Divested non-strategic managers, LMM LLC and Glouston Capital Partners Recent Developments Precidian filed a registration statement with the SEC for new ETF products utilizing the ActiveShares SM structure and sub-advised by ClearBridge and Royce Legg Mason filed registration statements with the SEC for three fully transparent active ETFs Morningstar raised Legg Mason s "Parent Pillar" rating to Positive from Neutral Announced 27% increase to quarterly dividend Page 2
Legg Mason: Long-term Value Creation Model Enables Organic Growth Through Client Choice Thoughtful Capital Allocation Consistent share repurchases Seven years of dividend increases Capital to seed new products M&A activity enhance product and service offerings Page 3 1. Minority investment (with an option to purchase a majority position) 2. Minority investment
Strategic Transactions 2013-Present Three Priorites Strategic Activity Description Year Focus on Strengthening Core Capabilities Portfolio Rationalization Add Capabilities in High Growth Areas ClearBridge MEP Management Equity Plan 2014 LM Global Distribution Invested in Growth Initiatives 2015 ETF Team Hired Vanguard Team 2015 Royce MEP Management Equity Plan 2017 LMCM Combined w/clearbridge 2013 Esemplia Closed/Wind Down 2013 Private Capital Management Divestiture 2013 LM Australian Equities Combined w/ Martin Currie 2014 LMIC Divestiture 2014 LM Poland Divestiture 2016 LMM Divestiture 2017 Glouston Capital Partners Divestiture 2017 Fauchier Partners Acquisition - Bolt-on for Permal 2013 QS Investors Acquisition - Combined w/ LMGAA and Batterymarch 2014 Martin Currie Acquisition 2014 RARE Infrastructure Acquisition 2015 ivezt Strategic Minority Investment 2015 PKIM Acquisition - Bolt-on for Martin Currie 2015 Precidian Strategic Minority Investment 2016 Clarion Partners Acquisition 2016 EnTrust Acquisition - Merged w/ Permal 2016 Financial Guard Acquisition 2016 Page 4
Strategic M&A: Choice Through Diversification Client Choice Key Drivers Asset Classes and Investment Strategies Needs Identified Multi-Asset Solutions International Equity Strategic Transactions Investment Products and Vehicles Liquid Alternatives Alternative Solutions Illiquid Alternatives Distribution and Client Access Specialized ETFs Strategic Distribution Initiatives Page 5
Expansion of Legg Mason s Investment Capabilities Legg Mason Investment Capabilities Worldwide Product Opportunities 2012 Present Domestic Equity + + Domestic Fixed Income + + Global Fixed Income + + Emerging Market Debt + + Fund of Hedge Funds + + Global/International Equity +/ + Emerging Market Equity +/ + Liquid Alternatives +/ + Solutions/Multi-Asset Class +/ + Smart Beta ETFs + Active ETFs + Other Illiquid Alternatives +/ + Passive + LM Capability +/ LM Capability, but Sub-Scale No LM Capability Page 6
Acquisition-Related Charges and Saves on Plan Charges Related to: Actual F1Q17 Actual F2Q17 Actual F3Q17 Actual F4Q17 FY17 Charges MEP Clarion Partners $15M $15M EnTrustPermal Combination 1 Severance and related charges $15M $7M $4M $2M $28M Real estate related/other $9M $5M ($1M) $13M Subtotal EnTrustPermal $24M $12M $3M $2M $41M Charges related to acquisitions Bankers fees and accounting/legal costs $18M $1M $19M Total $57M $13M $3M $2M $75M Expected saves related to the EnTrustPermal combination approximates $35M 2 in FY18 Page 7 1 F4Q16 charges for EnTrustPermal combination $43M, FY18 and FY19 include charges of $5M and $1M, respectively 2 Current quarter saves approximately $8M, annualized saves $32M. Expect to reach full $35M in annual saves F1Q18
Asset & Revenue Diversification AUM by Domicile: Fixed Income Equity Alternatives Liquidity Total AUM Operating Revenues US 63% 84% 78% 39% 67% 71% Non US 37% 16% 22% 61% 33% 29% AUM by Client Type: Institutional 87% 46% 92% 75% 76% 59% Retail 13% 54% 8% 25% 24% 41% Total AUM 54% 25% 9% 12% 100% Operating Revenues 37% 41% 18% 4% 100% Page 8 Asset data as of March 31, 2017 and operating revenue data for the quarter ended March 31, 2017
Fourth Quarter Overview ($ billions) Page 9 Affiliates ordered by contribution to annual pre-tax earnings less noncontrolling interest Legg Mason ending AUM and Net LT Flows include other entities not shown with AUM totaling $1.3B in ending AUM and Net LT Flows of ($0.1) and ($0.5) for FQ4 and FY2017, respectively
Affiliate Overview Affiliate Description Global Value Investing Pursuing value across fixed income and equity, globally and in the U.S. Historically institutionally focused, the firm has both a boutique s agility and an industry leader s stability and resources since 1986. Private Equity Real Estate A leading real estate investment manager, investing exclusively in real estate strategies across the Americas, providing a wide-range of products and strategies for institutional and individual investors. Quality-focused Equity Global investment manager with over 50 years of experience and long-tenured portfolio managers who build income, high active share, and low volatility portfolios. AUM 1 $69.5B $43.1B $110.6B Business Mix 15% 8% 1% 76% Assets by Strategy (%) Fixed Income Diversity Equity Large Cap Equity Small/Mid Cap Equity 1% 31% 12% 56% Assets by Strategy (%) Core Core Plus Opportunistic Value 24% 11% 65% Assets by Product Type(%) High Active Share Income Solutions Low Volatility Page 10 Note: AUM as of March 31, 2017
Affiliate Overview Affiliate Description Active Equity Specialists An active equity specialist that builds global, stockdriven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships. Global Alternative Funds-of-funds A leading global alternative asset manager specializing in providing investment solutions to public, corporate and multi-employer pension funds, foundations, endowments, sovereign wealth funds, insurance companies, private banks, family offices and high net worth individuals. Quantitative Equity and Multi-asset Manager Applies a diversified, systematic and adaptive approach to its investment discipline to provide consistent, repeatable and risk-managed returns across multiple market environments. AUM $17.8B $19.4B $16.6B* Business Mix 15% 58% 27% Assets by Strategy(%) High Active Share Equity I ncome Absolute Return 48% 48% Assets by Strategy (%) Commigled Funds Liquid Alternatives Strategic Partnerships 29% 14% 20% 37% Assets by Strategy (%) Customized Solutions Global Equities US Equities Liquid Alternatives 4% *Excludes assets subadvised by LM Affiliate managers Page 11 Note: AUM as of March 31, 2017
Affiliate Overview Affiliate Description Specialist in Global Listed Infrastructure Investing One of the largest alternative asset managers in the listed infrastructure asset class category. Small-cap Equity Known for its disciplined, value-oriented approach to managing small-caps. An asset class pioneer, the firm s founder is one of the longest-tenured active managers. Fixed Income One of the world s leading global fixed income managers. Founded in 1971, the firm is known for team management, proprietary research and a long-term fundamental value approach. Western is a globally integrated fixed income manager sourcing ideas and investment solutions across regions, with 120 investment professionals on 5 continents AUM $5.4B $17.8B $426.9B Business Mix 1% 5% Assets by Strategy % Value Yield EM 94% 1% 5% Assets by Strategy % US Equity Rest of World Equity Cash/Equivalents 94% 27% 22% 5% 46% Assets by Strategy % Specialized Taxable Liquidity/Enhanced Cash Broad Portfolio Municipals Page 12 Note: AUM as of March 31, 2017
Legg Mason Global Distribution Model Global Market Retail/Quasi Institutional (Serviced by LMGD) Institutional (Serviced by Affiliates) Intermediated Indirect client access (sub advisory) Examples: broker/dealers, insurance companies, funds-of-funds, discretionary managers Consultant driven Direct client access Examples: sovereign wealth funds, pension funds, corporations Page 13
Legg Mason s Global Distribution Footprint 17 distribution offices in six regions Servicing over 100,000 intermediary clients globally Over 250 client-facing team members Zurich Page 14 As of March 31, 2017
Global Distribution Total Long-Term Assets 1 : $302B Distribution Highlights F4Q17 Gross sales up 21% to $23.6B Net sales of $5.1B vs $1.1B in F3Q17 Positive net sales for last 13 of 14 quarters Quarterly global redemption rate at 25% FY17 Gross sales up 16% to $81.9B Net sales up $14.0B to $12.6B ($ Billions) F4Q17 F3Q17 FY17 FY16 Gross Sales 1 : US $16.3 $13.7 $58.6 $50.2 Int l 7.3 5.8 23.3 20.2 Total $23.6 $19.5 $81.9 $70.4 Net Sales 1 : US $1.5 ($0.9) $ 3.4 ($4.4) Int l 3.6 2.0 9.2 3.0 Total $5.1 $ 1.1 $12.6 ($1.4) 100 80 60 40 20 0 (20) Annual Gross and Net Sales Trends ($B) Gross Sales Net Sales 82.5 70.4 65.2 56.6 50.6 49.0 19.3 (0.6) 2.2 (0.1) (1.4) (2.4) 81.9 12.6 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Top Funds Driving Gross Sales FY17 Western Asset Core Plus Bond Fund Martin Currie Australian High Dividend Equity Fund ClearBridge Large Cap Growth Fund Western Asset Core Bond Fund ClearBridge Aggressive Growth Fund Western Asset Macro Opportunities Bond Fund Western Asset Managed Municipals Fund Western Asset Intermediate-Term Municipals Fund Brandywine Global Opportunities Bond Fund ClearBridge Small Cap Growth Fund Page 15 1 For LMGD, Assets Under Advisement are included in long-term assets, gross sales and net sales. Net sales equals gross sales less redemptions. As of March 31, 2017 long-term assets include $15.9B of AUA. Quarterly AUA gross and net sales for F4Q17 are $2.4B and $1.3B, respectively, and for F3Q17 are $1.7B and $0.9B, respectively
Investment Performance % of Strategy AUM beating Benchmark 1 % of Long-Term U.S. Fund Assets beating Lipper Category Average 2 71% 3 Year 80% 5 Year 63% 3 Year 70% 5 Year 100% 80% 60% 79% 71% 80% 88% 100% 80% 60% 65% 63% 70% 78% 40% 40% 20% 20% 0% 1 Year 3 Year 5 Year 10 Year 0% 1 Year 3 Year 5 Year 10 Year 1 See appendix for details regarding strategy performance 2 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Page 16 Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific fund. Individual fund performance will differ.
Assets Under Management by Asset Class ($ billions) % Mix % Mix % Mix 800 Mar 16 Dec 16 Mar 17 600 $23 3% $73 $72 $71 10% $68 9% $68 $162 24% $161 $168 $169 24% $180 25% $181 % Mix Apr 17 9% 25% 400 200 0 Ending AUM $372 56% $387 $397 $381 54% $394 54% $396 $113 17% $121 $96 $89 12% $86 12% $86 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Apr 17 Liquidity Fixed Income Equity Alternative 54% 12% Long-term $557 $621 $637 $622 $642 $645 Total $670 $742 $733 $710 $728 $731 AUM increased $2.6B or 3% from Mar-17 Long-term outflows of $1.5B Fixed income outflows of $1.0B Equity outflows of $0.6B Alternatives inflows of $0.1B Liquidity outflows of $0.2B Market appreciation was flat and negative FX impact of $0.1B Page 17
Net Flows by Asset Class Quarterly Fixed Income Equity Alternative ($ Billions) 6 4 2 0-2 -4-6 -8-10 3.9 2.8 3.5 0.5 (7.8) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 ($ Billions) 6 4 2 0-2 -4-6 -8-10 3.1 (1.5) (3.0) (4.4) (3.7) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 ($ Billions) 6 4 2 0-2 -4-6 -8-10 (1.0) (0.8) (2.0) (1.6) (2.7) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Enhanced Liquidity $3.6B Core Bond $1.3B Global Opportunistic $1.1B Limited Duration $0.9B Corporate ($2.8B) Municipal ($0.6B) March Quarter Key Drivers by Strategy Equity International $2.1B Small/Mid Cap $1.8B Equity Income $0.2B Large Cap ($0.5B) Small Cap ($0.5B) Real Estate ($1.6B) Hedge Funds ($0.7B) Infrastructure ($0.4B) Total Long-Term Liquidity Total Flows ($ Billions) 10 5 0-5 -10-15 -20-25 -30 3.9 (1.1) (0.3) (4.0) (13.2) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 ($ Billions) 10 5 0-5 -10-15 -20-25 -30 8.0 (3.3) (3.1) (6.9) (25.4) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 ($ Billions) 10 5 0-5 -10-15 -20-25 -30 6.9 0.8 (10.9) (16.5) (25.7) Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Page 18
Financial Highlights Fourth Quarter FY 2017 Net income $75.9M, or $0.76 per diluted share Discrete tax credit of $15.4M or $0.15 per diluted share Gains on sales of non-strategic managers of $4.7M or $0.03 per diluted share Royce MEP non-cash charge of $4.6M or $0.03 per diluted share Corporate severance costs of $2.7M or $0.02 per diluted share Acquisition and transition-related costs of $2.1M or $0.01 per diluted share Non-cash charge for revolving credit facility amendment of $1.6M or $0.01 per diluted share Average AUM $718.9B, up $2.2B Average long-term AUM increased $6.9B compared to prior quarter Operating revenues $723.1M, increased $7.9M or 1.1% from the prior quarter Increase is largely due to higher average long-term AUM and higher pass-through performance fees at Clarion, partially offset by two fewer days Operating expenses $613.2M, up $9.1M or 1.5% from the prior quarter Last quarter included intangible asset impairment charges, partially offset by contingent consideration fair value credits Current quarter includes higher compensation and benefits largely due to seasonal influences, passthrough performance fees at Clarion, a Royce MEP charge, and sales commissions, as well as an increase in other operating expenses Operating income $109.9M, operating margin 15.2% Operating income, as adjusted 1 $122.4M, operating margin, as adjusted 1 20.6% Page 19 1 See Appendix for GAAP reconciliation
Operating Results Fourth Quarter FY 2017 ($ millions, except per share amounts) Mar 17 Qtr Dec 16 Qtr Mar 16 Qtr FY 17 FY 16 Operating Revenues $723.1 $715.2 $619.6 $2,886.9 $2,660.8 Operating Expenses 613.2 604.1 585.6 2,464.7 2,610.0 Operating Income 109.9 111.2 33.9 422.2 50.8 Net Income (Loss) 75.9 51.4 (45.3) 227.3 (25.0) Diluted EPS 0.76 0.50 (0.43) 2.18 (0.25) Operating Margin, as adjusted 1 20.6% 23.9% 5.9% 19.7% 18.6% Effective Tax Rate GAAP 2 12.2% 29.1% n/m 22.7% (30.5%) Page 20 1 See Appendix for GAAP reconciliation 2 Includes the impact of Consolidated Investment Vehicles (CIVs) of (0.4%), 0.0%, and n/m in Mar 17, Dec 16, and Mar 16, respectively and (0.7%) and 23.8% for FY17 and FY16
Operating Revenue Yield 1 Average AUM ($B) $800 $600 $400 $200 3% 3% 3% 3% 4% 10% 8% 10% 10% 26% 26% 26% 25% 24% 23% 22% 23% 24% 39 bps 39 bps 39 bps 38 bps 38 bps 38 bps 38 bps 38 bps 37 bps 51% 53% 53% 54% 55% 53% 53% 54% 54% 42.5 40.0 37.5 Operating Revenue Yield (bps) $- 20% 18% 18% 18% 17% 16% 15% 13% 12% Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 35.0 Liquidity Fixed Income Equity Alternative Operating Revenue Yield Operating Revenue Yield by Asset Class (bps) Alternatives 2 135 133 132 112 110 75 70 68 69 Equity 72 73 71 69 66 67 66 67 68 Fixed Income 29 29 29 28 28 28 27 27 27 Liquidity 7 7 8 9 11 12 11 12 13 Page 21 1 Operating revenue yield = total operating revenues less performance fees divided by average AUM 2 Alternative fee rates declined over the past year due to the acquisitions of RARE, Clarion Partners, and EnTrust Capital in Oct-15, Apr-16, and May-16, respectively, whose products typically earn lower fees than our legacy alternative assets
Operating Expenses $650 $ in Millions $600 $550 $604 ($35) $15 $19 $3 $7 $613 $500 Dec Qtr Intangible Impairment Contingent Consideration Adjs Comp & Benefits Occupancy Other Mar Qtr Total Operating expenses increased $9M from the prior quarter Prior quarter included non-cash impairment of intangible assets, partially offset by contingent consideration credit adjustments Comp & Benefits increased primarily due to seasonal influences, higher compensation from passthrough performance fees at Clarion, Royce MEP charge, sales commissions, and corporate severance costs Occupancy expense increased due to a real estate charge this quarter and a transition-related real estate credit in the prior quarter Other expenses increased primarily due to higher advertising, professional fees and FX losses Page 22
Compensation and Benefits % of % of $ ($ millions) Mar Qtr Net Rev. 1 Dec Qtr Net Rev. 1 Change Salary and incentives $ 261.2 44% $ 264.0 45% $ (2.8) Benefits and payroll taxes 62.4 11% 52.9 9% 9.5 Subtotal Compensation and benefits 323.6 55% 316.9 54% 6.7 Transition-related and severance costs 5.1 1% 4.6 1% 0.5 Royce MEP 4.6 1% - 0% 4.6 Incentives on performance fees subject to clawback 2-0% 2.6 1% (2.6) Clarion pass-through performance fees 8.1 1% 2.3 0% 5.8 MTM deferred comp. and seed investments 5.4 1% 1.5 0% 3.9 Total Compensation and benefits $ 346.8 59% $ 327.9 56% $ 18.9 Salary and incentives decreased $2.8M largely due to increased benefits and payroll taxes and non-compensation expenses at revenue share affiliates, partially offset by higher sales commissions Benefits and payroll taxes increased $9.5M largely due to seasonal compensation influences, $2.7M of which is at revenue share affiliates Transition-related and severance costs includes corporate severance of $2.7M Page 23 1 Net Revenue is equal to Operating Revenues, as Adjusted. See appendix for GAAP reconciliation 2 Estimated by multiplying EntrustPermal s $14.1M of performance fees subject to clawback by the ratio of EnTrustPermal s incentive compensation to total revenue (including performance fees subject to clawback in the December quarter) for the period. Incentives are not subject to clawback
Operating Margin, as Adjusted Average AUM ($B) $800 $700 $600 $500 23.8% 22.6% 24.0% 20.6% 5.9% 11.3% 22.7% 23.9% 20.6% 25% 20% 15% 10% 5% Op Margin, as Adj $400 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 0% Avg AUM Operating Margin, as adjusted March quarter impact of Royce MEP charge, corporate severance costs, and acquisition and transition-related costs totals 1.6% December quarter impact of acquisition and transition-related costs and incentive compensation on performance fees subject to clawback 1 totals 1.0% Page 24 1 See page 15 for description of calculation Note: See Appendix for GAAP reconciliation
Fourth Quarter Earnings Per Share Roll Forward $1.00 $0.90 $0.80 $0.11 $0.76 $0.70 $0.14 ($0.07) $0.08 EPS $0.60 $0.50 $0.50 $0.40 $0.30 $0.20 Dec Qtr EPS Q3 Items Lower Op Earnings 1 Higher MTM, Lower Taxes & Share Repurchase Q4 Items Mar Qtr EPS Operating earnings decreased due to higher operating expenses and two fewer days of revenue, partially offset by higher average long-term AUM Q4 items include discrete tax credits $0.15 and gains on sales of non-strategic managers $0.03, partially offset by Royce MEP charge $0.03, corporate severance costs $0.02, acquisition and transition-related costs $0.01 and charge for revolving credit facility amendment $0.01 Page 25 1 Q3 items include intangible asset impairment charges $0.25 and acquisition and transition-related costs $0.02, partially offset by contingent consideration credits $0.10 and gain on sale of Legg Mason Poland $0.03
Fourth Quarter Adjusted EBITDA Roll Forward Cash Provided By Operating Activities, GAAP Dec 16 Qtr $209.1M Mar 17 Qtr $192.8M $200.0 $ in Millions $175.0 $150.0 $160.3 $0.9 ($15.0) $0.1 $146.3 $125.0 $100.0 Dec 16 Qtr Q3 Items 1 Net Change in Adjusted EBITDA Q4 Items Mar 17 Qtr Net Change in Adjusted EBITDA decreased due to higher operating expenses and two fewer days of revenue, partially offset by higher average long-term AUM Q4 items include acquisition and transition-related costs and corporate severance costs, offset by gains on sales of non-strategic managers Page 26 1 Q3 items include acquisition and transition-related costs and gain on sale of Legg Mason Poland Note: See Appendix for GAAP reconciliation
Significant Tax Benefit $3.3B of Future Income Sheltered FY18 Projected Tax Rates $5 Projected Tax Benefit 50% 40% $4 $3.3B 30% 20% 32% $ in Billions $3 $2 $1.9 $1.3B 10% 7% $1 $1.4 $0.8 0% FY18 $0 Tax Shield $0.5 Tax Benefit GAAP Tax Rate Cash Tax Rate NOL/FTC Purchased Goodwill and intangibles Increase in GAAP tax rate compared to FY17 driven by increased earnings in higher tax jurisdictions and absence of net discrete tax credits Tax benefit from amortizable intangible assets from acquisitions Page 27
An Industry Leader in the Rate of Returning Capital Returned $3.1 Billion since March 2010 Shares Outstanding (M) Annualized Quarterly Dividend Declared (Per Share) 175 150 125 100 163 150 140 125 117 41% reduction since March 2010 111 107 96 $1.25 $1.00 $0.75 $0.50 $0.25 $0.12 Dividend increased 8x from March 2010 rate $0.24 $0.32 $0.44 $0.52 $0.64 $0.80 $0.88 $1.12 75 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 $0.00 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Jun 17 Total Capital Return ($M) $500 $400 $472 $27 $445 $43 $492 $55 $442 $449 $62 $71 $481 $88 $315 $300 $84 $200 $445 $402 $437 $380 $378 $393 $100 $231 $0 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 1 Shares Repurchased Dividends Paid Page 28 1 Share repurchases were suspended in October 2015 while work was progressing on acquisitions. The program resumed in late March 2016 and additional shares were repurchased in F1Q17
Appendix
Appendix Investment Performance % of Strategy AUM beating Benchmark 1 % of Long-Term U.S. Fund Assets beating Lipper Category Average 2 10 Yr 82% 82% 88% 10 Yr 65% 71% 78% 5 Yr 86% 84% 80% 5 Yr 72% 72% 70% 3 Yr 66% 68% 71% 3 Yr 61% 65% 63% 1 Yr 48% 76% 79% 1 Yr 48% 68% 65% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mar 16 Dec 16 Mar 17 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Mar 16 Dec 16 Mar 17 1 See appendix for details regarding strategy performance 2 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific fund. Individual fund performance will differ. Page 30
Appendix Additional Investment Performance Detail % of Strategy AUM Beating Benchmark 1 March 31, 2017 December 31, 2016 March 31, 2016 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year Total (includes liquidity) 79% 71% 80% 76% 68% 84% 48% 66% 86% Equity: Large cap 70% 27% 62% 53% 14% 60% 45% 23% 86% Small cap 35% 19% 19% 59% 19% 38% 70% 19% 30% Total Equity (includes other equity) 58% 33% 61% 53% 25% 62% 51% 32% 74% Fixed Income: US taxable 94% 86% 87% 88% 79% 91% 31% 78% 87% US tax-exempt 100% 100% 100% 100% 100% 100% 100% 0% 100% Global taxable 75% 69% 75% 75% 75% 82% 11% 75% 85% Total Fixed Income 89% 82% 84% 85% 79% 89% 29% 72% 85% Total Alternative 2 45% 84% 88% 43% 84% 89% 20% 42% 55% 1 See appendix for details regarding strategy performance. Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific iiifund. Individual fund performance will differ 2 Alternative assets includes AUM managed by Clarion Partners, EnTrustPermal and RARE Infrastructure Page 31
Appendix Additional Investment Performance Detail % of Long-Term U.S. Fund Assets beating Lipper Category Average 1 March 31, 2017 December 31, 2016 March 31, 2016 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year Total (excludes liquidity) 65% 63% 70% 68% 65% 72% 48% 61% 72% Equity: Large cap 60% 62% 81% 71% 87% 80% 47% 69% 89% Small cap 67% 21% 26% 69% 11% 36% 36% 15% 20% Total Equity (includes other equity) 57% 49% 64% 62% 58% 67% 45% 52% 67% Fixed Income: US taxable 92% 86% 85% 88% 86% 88% 76% 83% 84% US tax-exempt 43% 60% 59% 63% 61% 60% 11% 51% 63% Global taxable 50% 78% 82% 59% 45% 87% 30% 75% 83% Total Fixed Income 75% 79% 78% 76% 73% 79% 51% 73% 78% Total Alternative 2 98% 100% 100% 92% 100% 100% 100% 100% 100% 1 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Past performance is no guarantee of future results. The information shown above does not reflect the iiiiperformance of any specific fund. Individual fund performance will differ 2 Alternative assets includes AUM managed by EnTrustPermal and RARE Infrastructure Page 32
Appendix Strategy Performance For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account. Approximately eighty-eight percent of total AUM is included in strategy AUM as of March 31, 2017, although not all strategies have three, five, and ten year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates. Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net-of-fees, and is compared to the relevant HFRX index. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this presentation, and is not directed toward existing or potential clients of Legg Mason. Page 33
Appendix - Legg Mason Capital Structure 1 Instrument Amount ($M) Maturity 5 Year Sr. Bonds $250 Jul-19 10 Year Sr. Bonds $250 Jul-24 LM s Capital Structure 1 Strategic Advantage 2 Financial Flexibility 10 Year Sr. Bonds $450 Mar-26 30 Year Sr. Bonds $550 Jan-44 40 Year Jr. Sub $250 Mar-56 40 Year Jr. Sub $500 Sep-56 Total Debt $2,250 3 Fortified Balance Sheet $1,000 $800 Debt Maturity $1.3B (56% of total) not due for approx. 30 years $600 $400 $200 $0 $750 $450 $550 $0 $0 $250 $250 2017 2018 2019 2024 2026 2044 2056 Page 34 1 Excludes $500M undrawn Revolver that is due in December 2020
Appendix GAAP Reconciliation Operating Margin, as adjusted 1 Quarters Ended ($ millions) Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Operating Revenues, GAAP basis $ 702.3 $ 708.6 $ 673.1 $ 659.6 $ 619.5 $ 700.2 $ 748.4 $ 715.2 $ 723.1 Plus (less): Pass-through performance fees - - - - - (14.6) (35.8) (2.3) (8.1) Operating revenues eliminated upon consolidation of investment vehicles 0.2 0.1 0.1 0.1 0.1 - - 0.4 0.2 Distribution and servicing expense excluding consolidated investment vehicles (143.5) (149.3) (138.9) (132.9) (124.6) (124.6) (128.9) (123.3) (122.4) Operating Revenues, as Adjusted $ 559.0 $ 559.4 $ 534.3 $ 526.8 $ 495.0 $ 561.0 $ 583.7 $ 590.0 $ 592.8 Operating Income (Loss), GAAP basis $ 128.9 $ 124.5 $ 133.0 $ (240.6) $ 33.9 $ 73.6 $ 127.6 $ 111.2 $ 109.9 Plus (less): Gains (losses) on deferred compensation and seed investments, net 3.1 1.2 (5.5) 2.7 0.3 2.1 5.4 1.5 5.4 Amortization of intangible assets 0.6 0.7 0.7 1.6 2.1 5.7 6.3 7.3 6.9 Impairment of intangible assets - - - 371.0 - - - 35.0 - Contingent consideration fair value adjustments - - - (26.4) (7.0) (18.0) (7.0) (14.5) - Operating income of consolidated investment vehicles, net 0.3 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.2 Operating Income, as Adjusted $ 132.9 $ 126.5 $ 128.3 $ 108.4 $ 29.4 $ 63.5 $ 132.5 $ 140.8 $ 122.4 Operating Margin, GAAP basis 18.4% 17.6% 19.8% (36.5%) 5.5% 10.5% 17.1% 15.5% 15.2% Operating Margin, as Adjusted 23.8% 22.6% 24.0% 20.6% 5.9% 11.3% 22.7% 23.9% 20.6% 1 See explanations for Use of Supplemental Data as Non-GAAP Financial Information in earnings release Page 35
Appendix - GAAP Reconciliation, Adjusted EBITDA 1 Quarters Ended ($ millions) Cash provided by operating activities, GAAP basis Plus (less): Interest expense, net of accretion and amortization March December March 2016 2016 2017 $ 148.1 $ 209.1 $ 192.8 of debt discounts and premiums 14.2 28.5 31.2 Current tax expense (benefit) 10.1 (3.0) 14.4 Net change in assets and liabilities (92.6) (108.2) (55.2) Net change in assets and liabilities of consolidated investment vehicles (4.9) 43.7 (26.3) Net (income) loss attributable to noncontrolling interests 6.9 (13.1) (14.4) Net gains (losses) and earnings on investments (1.3) 2.4 3.6 Net gains (losses) on consolidated investment vehicles (3.8) 1.5 3.4 Other 3.2 (0.6) (3.2) Adjusted EBITDA $ 79.9 $ 160.3 $ 146.3 1 See explanations for Use of Supplemental Data as Non-GAAP Financial Information in earnings release. Page 36
Appendix Calculation of Parent Operating Margin ($ in millions) FY 17 FY 16 GAAP Operating Margin: Operating Revenues $ 2,886.9 $ 2,660.8 Operating Expenses 2,464.7 2,610.0 Operating Income (Loss) 422.2 50.8 GAAP Operating Margin 14.6% 1.9% Parent Operating Margin: Operating Revenues, GAAP Basis $ 2,886.9 $ 2,660.8 Plus (less): CIV Revenue Elimination 0.5 0.3 Pass through performance fees (60.8) Distribution and Servicing Expense 1 (499.1) (544.0) Operating Revenues, as Adjusted 2,327.5 2,117.1 Affiliate Expenses and Noncontrolling Interests (1,344.3) (1,167.1) Parent Revenue $ 983.2 $ 950.0 Parent Expenses Global Distribution 361.3 342.7 Corporate 129.0 145.2 Parent Expenses $ 490.3 $ 487.9 Parent Operating Income $ 492.9 $ 462.1 Parent Operating Margin 50.1% 48.6% 1 FY16 excludes $1.7M in acquisition and transition-related expenses Page 37
Appendix GAAP Reconciliation, Parent Expenses ($ in millions) FY 17 FY 16 Parent expenses $ 490.3 $ 487.9 Plus (less): Affiliate expenses and noncontrolling interests 1,344.3 1,167.1 Affiliate noncontrolling interests (49.1) (4.0) Affiliate Operating Expenses $ 1,295.2 $ 1,163.1 Acquisition and transition-related costs 59.9 51.9 Management equity plan charges 19.8 21.4 Restructuring charges 3.0 Acquisition and transition-related $ 82.7 $ 73.3 Distribution and servicing expense excluding consolidated investment vehicles 1 499.1 544.0 Clarion Performance fee pass-through 60.8 Pass-through expenses $ 559.9 $ 544.0 Gains (losses) on deferred compensation and seed investments, net 14.4 (1.2) Amortization of intangible assets 26.2 5.0 Impairments of intangible assets 35.0 371.0 Contingent consideration fair value adjustments (39.5) (33.4) Operating income of consolidated investment vehicles, net 0.5 0.3 Other $ 36.6 $ 341.7 Operating Expenses, GAAP basis $ 2,464.7 $ 2,610.0 Page 38 1 FY16 exclude $1.7M in acquisition and transition-related expenses
Appendix Non-GAAP Parent Operating Margin Parent Operating Margin is a performance measure calculated by dividing Parent Operating Income by Parent Revenue. Parent Revenue is calculated from our Operating Revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less Distribution and Servicing Expenses, which we use as an approximate measure of revenues that are passed through to third parties, and less affiliates operating expenses and noncontrolling interests, and adjusted for certain affiliate expenses, such as those that arise from acquisitions, related restructurings, MEP issuances and impairment charges. These adjustments include acquisition charges and transition/restructuring charges. We reduce revenues by certain operating expenses of our affiliates to represent the portion of revenues used by the affiliates to pay expenses and thus generating a measure of revenues that accrue to the parent company as profits from our affiliates. Parent Operating Income is calculated as Parent Revenue, less all corporate level expenses, also adjusted to exclude certain expenses such as those that arise from acquisitions, related restructurings, MEP issuances and impairment charges. Our corporate level ( Parent ) expenses consist of the expenses of our centralized distribution operations and other holding company functions. We believe that Parent Operating Margin is a useful assessment of our performance because it provides a measure of the revenues that accrue to the benefit of the parent from affiliates to support parent-level expenses. Legg Mason uses Parent Operating Margin as a measure of management s effectiveness with the portion of revenues or profits it receives from affiliates. Our business model provides our affiliates the ability to operate with autonomy through revenue share and other arrangements. From time-to-time, Legg Mason may adjust its affiliate revenue share arrangements such that the affiliates incur more expenses, or retain more revenues than provided for by their revenue share arrangements. These adjustments appear in affiliate expenses. Non-revenue sharing affiliates are subject to a parent oversight budgeting process. Parent Operating Margin excludes items that have no net impact on Net Income (Loss) Attributable to Legg Mason, Inc. and indicates the operating margin of our Parent operations without the distribution revenues that are passed through to third parties as a direct cost of selling our products, the portion of revenues aligned to the operating expenses incurred by our advisory affiliates, and the impact of the consolidation of certain investment vehicles described above. This measure is not intended to indicate the margin of our business as a whole and is provided in addition to measures applicable to the entire business such as operating margin calculated under GAAP, but is not a substitute for calculations of margins under GAAP, Parent Operating Margin is not comparable to non-gaap performance measures, including measures of adjusted margins of other companies, because Parent Operating Margin is fundamentally different from these measures because it excludes all expenses of our affiliates. Page 39
Appendix - Important Notes The foregoing information about Legg Mason, Inc. is part of a presentation about the company to financial professionals and other market participants. This information is designed to enhance these persons understanding of the company, which offers investment management products and services only through its various subsidiaries. Any information about these products and services is not intended to be an offer or solicitation to investors. All investment products or services are managed by one or more of the company s subsidiaries only, and only such subsidiaries or other authorized persons may make offers or solicitations to investors regarding such products or services in accordance with applicable policies and requirements, including eligibility and other criteria. Past investment performance does not guarantee future results and the investment return and principal value of an investment will fluctuate so that, when an investment is sold, it may be worth more or less than original cost. Current performance may be lower or higher than the performance information noted above. Information about current performance may be obtained from the company s subsidiaries or other authorized persons. Investors should read the relevant disclosure documents carefully before investing. Page 40
Providing Global Investors an Expanding Amount of Choice Products & Vehicles Distribution & Client Access Investment Capabilities A tapestry is not formed from a single thread. It is formed by combining many threads, uniquely and distinctly, into something greater than its parts. Page 41 For internal use only. Not for distribution to the public.