AllianceBernstein Holding L.P. Units

Thank you for standing by, and welcome to the Alliance Bernstein Fourth Quarter 2018 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question and answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay for one week. I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AB, Ms. Andrea Prochniak. Please go ahead.

Thank you, Jessica. Good morning, everyone, and welcome to our fourth quarter 2018 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the investor relations section of our website, www.alliancebernstein.com. Seth Bernstein, our president and CEO, John Weisenfield, our CSO, and Jim Gingrich, our COO, will present our results and take questions after our prepared remarks. Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the safe harbor language on slide one of our presentation. You can also find our safe harbor language in the MD&A of our 2018 10-K, which we filed this morning. Under Regulation SE, management may only address questions of a material nature from the investment community in a public forum. So please ask all such questions during this call. We're also live tweeting today's earnings call. You can follow us on Twitter using our handle at AD underscore insights. Now I'll turn it over to Seth.

Good morning. Thank you for joining us today. Despite the impact of year-end market dislocation on both industry flows and assets, we maintain strong underlying momentum across our business in 2018. and further strengthened our competitive position. Our full year results reflects the differentiation of our revitalized active equity platform, which attracted $10.8 billion in net new flows, and our ability to continue scaling and commercializing our business. Our sales mix across channels was our most diverse in years. And finally, our results reflect our ongoing commitment to disciplined expense management, as demonstrated by the 140 basis point expansion in our adjusted operating margin in 2018 to 29.1%. Now let's get into the specifics. Starting with a firm-wide overview on slide three, annual gross sales of $93.8 billion in 2018 were up $15 billion, or 19%. About $10 billion of the increase came from first quarter CRS fundings. The rest was from robust client activity, particularly in active equities. Total firm-wide net flows were negative $8.1 billion for the year. We experienced two large CRS redemptions totaling $14 billion in the first half and significant annual outflows from both institutional and retail fixed income products. Because of these net outflows and the steep fourth quarter market decline, We finished 2018 with lower assets under management. However, average AUM was up due to our first three quarters of strong market performance. We also reported January 2019 AUM this morning. We were pleased to see the markets rebound during the month and a return to positive net flows in our retail and private wealth channels, though these were eclipsed by outflows from institutions which resulted in total firm net outflows for the month. Slide four shows our quarterly flow trend by channel. The left side charts show the outsized impact of lumpy CRS sales and redemptions on firm-wide institutional flows in the first half of the year. On the right, you can see the spike in fourth quarter retail redemptions due to the market correction. In private wealth, fourth quarter outflows were caused by several one-off factors, including year-end tax-related trading. Slide five is our annual flows view. Again, the left side chart shows the net effect of this year's lumpy CRF activity, predominantly in our institutional channel. Net outflows totaled $10 billion from institutions and $8 billion overall. The right side chart tells a more positive story. Despite the fourth quarter rout in the markets, our retail net flows were essentially flat in 2018, and our private wealth net flows were positive for the third consecutive year. Now let's turn to investment performance beginning on slide six. Clearly, our near-term fixed income performance has been challenged. Given our broad portfolio exposure to emerging market debt, we were hard hit by the sustained downturn there. We've also had difficulty recovering from some early duration calls and experienced some negative currency impact as well. However, our three- and five-year track records remain quite strong, with 90% and 89% of assets outperforming, respectively. In equities, our investment performance bounced back in the fourth quarter as large strategies like strategic equities and large-cap growth returned to outperformance. Our percentage of outperforming active equity strategies increased for every time period, to 71% for the one year, 62% for the three-year, and 83% for the five-year. Slides 7 and 8 provide more insight on retail fixed income and equity investment performance. The fixed income table on slide 7 reflects the impact of our emerging market exposure on one-year fund performance. EM debt and high yield were most affected, though long-term track records remain in the top two quartiles. Our income portfolios are holding up well. European income is top half for one year, top quartile for the three-year, and top decile for the five-year. Mortgage income remains at first percentile for the one-year and increased sequentially to 13th for the three-year. And AP income remains top decile for three- and five-year periods. In equities on slide 8, our emerging markets, concentrated international growth, and international value equities funds continue to underperform. Yet every other fund on this slide ranks in the top two quartiles across all time periods. These include concentrated global, global low vol, global core, and large cap growth, which are all top quartile. Solid long-term track records like these were a major driver of our outstanding 2018 active equity flows. Let's move on to our client channels, beginning with retail on slide nine. We continue to invest in reshaping the firm's retail product offerings to better serve our clients. Our business is stronger and more diversified, and we have become more adept at both anticipating client needs and innovating on a timely basis to meet them. The cumulative effect of this methodical long-term strategy is evident in our 2018 retail business mix and results. The top left chart shows our success in reducing our dependence on volatile Asia ex-Japan fixed income markets. We've taken our share of fixed income gross sales from three-quarters of total global sales two years ago to 41% today. In Asia ex-Japan, fixed income has gone from 89% of gross sales in 2016 to 53%. Our positive mixed shift is clear from the bottom left chart. Of the 25 funds that attracted net flows of $100 million or more in 2018, 19 of them were equity, alternative, or multi-asset services. and half of those funds have been launched, relaunched, or redesigned in the past decade. We are particularly proud of how our combination of relevance and outperformance in active equities has attracted inflows. Our full-year retail active equity gross sales of $25 billion were up 72%, and our active equity net flows increased to $8 billion from $2.8 billion. That's in a year where total outflows from U.S. active equity mutual funds increased by 33% to nearly $260 billion. And we keep innovating for clients. Today, we have partnerships with 13 distributors for our various Flexi funds, which have total AUM of $145 million, excluding seed capital. Momentum continues to build as we educate the marketplace about this new mutual fund pricing structure. Now we'll talk about institutional on slide 10. Here, as in retail, we're experiencing the benefits today of the years we spent both rebuilding our active equity franchise and diversifying it to the most promising long-term growth areas. The top left chart shows how active equity gross sales of $7.3 billion more than doubled in 2018. They were our highest in a decade. and our active equity net flows of $4.4 billion were positive for the first time since 2007. This represents a 13% organic growth rate against the steep industry-wide contraction. The revenue associated with our growth sales was up 54%, reflecting our makeshift toward higher-fee active equities, alternatives, and multi-asset services. These services represented 85% of our $9.7 billion year-end pipeline This bodes well for our future revenues and fee rate. In fact, $2.2 billion, or 60%, of our new pipeline ads in the fourth quarter alone were in active equity strategies. The balance included alternative and multi-asset, like commercial real estate debt, custom alternative solutions, and multi-manager fund of funds. As a result, our pipeline annualized fee base exceeded $30 million for the fifth consecutive quarter. Moving to private wealth management on slide 11. Gross sales of $11.7 billion were our highest in 10 years, and that's excluding inflows from our very successful first half option advantage launch. As I mentioned earlier, net flows were positive for the third consecutive year, despite the fourth quarter spike in net outflows. We added $2.4 billion in commitments to our suite of alternative and focused equity services, bringing the total to $9.1 billion at year-end. That's the bottom left chart. We launched a new BDC for qualified private clients. And we're in the process of partnering with Abbott Capital, a leader in private equity investing, to add a fund-to-funds offering. As we expand our higher net worth client base, advisor productivity is rising. Advisor productivity has grown at a 7% compound annual rate in the years since we began offering alt and focused equity services. And our average relationship size has increased by 6% just in the last year. What's more, after two years of flat to negative headcount growth, we increased our advisor base by 6% in 2018. And we'll keep growing with the spring 2019 openings, of our 19th U.S. Private Wealth Office in Nashville, an exciting next step for AB. I'll finish our business overview with the sell side on slide 12. In a year when this industry faced one of its most disruptive events ever with the MIFID II transition and commissions continued to decline, I'm impressed by our resilience. Bernstein Research Revenues were down just 2% in 2018. Fourth quarter revenues increased 11% sequentially, thanks to both the spike in U.S. volume and volatility shown on the bottom left chart, and robust year-end research payments. As I've said many times, now more than ever, sell-side research providers must deliver a differentiated offering to stay on clients' lists. That's our goal in acquiring autonomous research. Autonomous adds a preeminent research franchise in financial services and fintech to our platform. areas where we've historically been underrepresented. It's a step change for us in both the U.S. and Europe in terms of analysts and stocks under coverage in a huge category by market cap. It also allows us to focus resources on new analyst hires in other promising areas around the world. In the fourth quarter alone, we hired six new analysts in the U.S., Europe, and India, where we are building our Mumbai office. Research Excellence is our firm's brand, and we're focused on successfully navigating this next phase of the evolution of this business. I'll close by highlighting some of our 2018 accomplishments on slide 13. 2018 was a year of progress for AB in every part of our long-term growth strategy. We continue to deliver for clients with our diverse products. We further scaled and commercialized our offering set with particular momentum in active equities. And we stayed vigilant on expenses, making our seventh straight year of margin expansion. We're proud of these accomplishments and well aware of the challenges we face going forward. Coming into 2019, our asset base is lower and the revenue outlook is uncertain. At the same time, we have the right strategy, business mix, talent, and global footprint to continue delivering for our clients, which is our primary goal in any market environment. Now I'll turn it over to John to review our financials.