AllianceBernstein Holding L.P. Units

Thank you for standing by, and welcome to the Alliance Bernstein First Quarter 2019 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 your host for the call, the Head of Investor Relations for AB, Ms. Hallie Eldner. Please go ahead.

Thank you, Jack. Good morning, everyone, and welcome to our first quarter 2019 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 Wiesenseel, our CFO, 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 first quarter 2019 10Q, which we filed this morning. Under Regulation FD, 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. Now, I'll turn it over to Seth.

Thank you, Hallie. Good morning, and thank you for joining us today. We maintained strong underlying momentum in many areas of our business in the fourth quarter. Our results reflect continued success of our revitalized active equity platform, which attracted $1 billion in net new flows and a rebound in Asia X Japan taxable fixed income flows. Firm-wide active flows were positive $2.2 billion, translating to a 2% active annualized organic growth rate. And while adjusted revenues, operating income, and margin were lower year on year, we remained focused on expense management. Now let's get into the specifics, starting with a firm-wide overview on slide three. First quarter gross sales of $23.1 billion declined 32% from last year's first quarter sales of $34.1 billion. which included $10.1 billion of CRS funding and $1.3 billion of sales related to option advantage and private wealth. Excluding these lumpy fundings, growth sales were slightly higher year over year. On a sequential basis, firm-wide growth sales increased 9%. Total firm-wide net flows were positive $1.1 billion and represent our third straight quarter of net inflows. The strong market recovery in the quarter and net inflows increased total assets under management to $554.7 billion at quarter end. That's an increase of 1% year on year and 7% sequentially. Average AUM was down 4% versus the prior year period, but increased 1% versus the fourth quarter of 2018. Slide four shows our quarterly flow trend by channel. On the right side of the chart, you can see that firm-wide flows were driven by retail and private wealth. In retail, gross sales of $16.4 billion increased versus both prior periods, and net inflows of $5.3 billion increased significantly, driven by a resurgence in fixed income in Asia ex-Japan region and continued positive active equity flows. In private wealth, both growth sales and redemptions improved sequentially. leading to positive net flows of $500 million. In the bottom left chart, you can see the institutional funding slowed, and we were hit hard with redemptions, largely in taxable fixed income, due to a variety of factors and decisions made by our clients during the market dislocation in the prior quarter. This resulted in institutional net outflows of 4.7 billion. Now let's turn to investment performance, beginning on slide five. Our near-term fixed income performance has been challenged, though we saw some improvement in the one-year number this quarter as year-to-date performance has been generally quite good. More importantly, our three- and five-year track records remain strong, with 85% and 90% of our assets outperforming, respectively. In equities, our investment performance was solid, with 64% of assets outperforming for the one year, 59% for the three-year, and 87% for the five-year. Slide six and seven provide more insight on retail fixed income and equity investment performance. The fixed income table on slide six reflects our near-term performance challenges, but also shows that long-term track records remain compelling. Performance in our income portfolios have been particularly strong. American income is top decile for the one year and top quartile for the five years. European income is top quartile for the one and three year periods and top decile for five year. Mortgage income remains top quartile for the three and five year periods. And AB income remains top decile for the three and five year periods. What's more, every eligible fund on this page was top half for the five year period. In equities, on slide seven, why we've seen our most notable underperformance in our value and emerging market strategies. Our concentrated growth, low vol, global core, large cap growth, and small and mid-cap strategies have been notable performers. Solid long-term track records like these have been a major driver of our continued active equity net inflows. Let's move on to our client channels beginning with retail on slide eight. We've spent years investing in our retail product offerings to better serve clients so that our business is more diversified and less reliant on a single offering. And while we've been successful reducing our leverage to the Asia X Japan fixed income market, the outlook for a steadier rate environment attracted those investors back to the market. The top left chart shows the resurgence in industry-wide retail bond fund sales in the region. Industry sales for just January and February were up in all three categories compared to the entire fourth quarter. The rebound in sales positively affected our overall sales and flows in the quarter. AB's Asia X Japan sales were up 18% year-on-year and more than doubled versus the fourth quarter of 2018. Because of the increased diversity of our offering, we also saw noteworthy sales strength in other regions during the quarter. including sequential and year-on-year sales growth in U.S. retail, which had its best sales quarter since the second quarter of 2007, and sequential increases in EMEA and Latin America. Channel net inflows of $5.3 billion were our best in 19 years. And our sources of flows are diverse. Thirteen funds attracted net flows of $100 million or more in the first quarter, with seven of them fixed income and six of them active equity. American income portfolio and global high yield were each net flow positive during the quarter. The first time we've seen that since the third quarter of 2017. Our innovation efforts are paying off too. Today, 14 retail services launched since 2009 have a billion or more in assets under management. and we continue to educate the marketplace on flex fee. Clients both understand and are embracing this concept thanks to continued outreach and success of new digital tools that help calculate fees. We added $100 million in assets during the quarter to bring our total external assets to $240 million, all before these funds hit their three-year track records. Now I'll talk about institutional on slide nine. Like in retail, we're seeing the benefits today of years we've spent rebuilding our active equity franchise. The top left chart shows continued active equity sales and flow momentum. Active equity gross sales of $2.2 billion represent our seventh straight billion-dollar-plus equity sales quarter, and our active equity net flows of $900 million were positive for the fifth straight quarter. This is impressive, especially considering the industry-wide contraction. While total channel sales were down versus both prior periods and $4.7 billion of net outflows increased driven by taxable fixed income redemptions, we're encouraged by our quarter end pipeline of $11.4 billion, an 18% increase versus the fourth quarter. Our actively managed pipeline of $9.7 billion, which excludes CRS, is the highest it's been since tracking began more than seven years ago. This bodes well for our future revenues and fee rate. In fact, 50% of our $4.2 billion in new pipeline ads in the first quarter were in active equity strategies. Plus, ads in taxable munis, emerging markets debt, REA partners, and U.S. Treasury short duration resulted in the pipeline's annualized fee base exceeding $30 million for the sixth consecutive quarter. Moving to private wealth management on slide 10. After the volatility of the fourth quarter, the value of our advice came through for our clients as both sales and redemptions improved. Excluding inflows from last year's first quarter option advantage launch, Growth sales of $3.3 billion were our best first quarter sales in 10-plus years. And net flows returned to positive territory with $500 million. We continued to make progress appealing to a broader and more affluent client base and added $700 million in commitments to our suite of alternative and focused equity services during the quarter, bringing total deployed and committed assets to $9.8 billion at quarter end. That's the bottom left chart. Clients are increasingly attracted to our responsible and impact investing portfolio offerings. Assets in a diverse array of responsible equity and fixed income services totaled $1.9 billion at quarter end, a 23% increase since year end. We're seeing strong client engagement as well, with the number of client meetings up 5% compared to the first quarter of 2018. and we've had a positive response to our Women in Wealth content campaign, podcast, and microsite, plus traction with other focused Bernstein Insight podcasts, including The Pulse and Inspired Investing. I'll finish our business overview with the sell side on slide 11. After holding up well in 2018 as the industry adopted to the implementation of MIFID II, Bernstein Research had a challenging first quarter, as did many of our peers in the equity trading business. Revenues of $90 million were down 21% year on year and 22% sequentially, driven by significantly lower client trading volumes across all three regions and lower volatility in the U.S., shown on the bottom left chart. While disappointing, we're playing the long game in this business and know that a differentiated offering was what will ultimately drive client activity. We continued building our offering in other promising areas around the world, particularly in Asia. In the first quarter, we launched on three new sectors, hired a new Asia quant analyst, and hired and promoted three analysts to cover China A shares. And we added access to three new dark pools in Japan and expect Indian trading to go live later this year. While not a first quarter event, we closed our acquisition of Autonomous Research on April 1. We're now covering approximately 230 financial stocks across the US and Europe and added 26 analysts globally. I'll close by highlighting some of our first quarter accomplishments on slide 12. We continue to deliver differentiated returns for our clients with our diverse products. and we further scaled and commercialized our offering with momentum in active equities and in diverse regions. We remain focused on expense management and executing our relocation to Nashville. We're proud of what we've achieved during the quarter despite the presence of some headwinds. Now I'll turn it over to John to review our financials.

Thank you, Seth. Let's start with the GAAP income statement on slide 14. First quarter GAAP net revenues of $795 million decreased 8% from the prior year period. Operating income of $168 million decreased 25%, and the 19.9% operating margin decreased by 310 basis points. GAAP EPU of 49 cents compared to 60 cents in the first quarter of 2018. As always, I'll focus our remarks from here on our adjusted results which remove the effects of certain items that are not considered part of our core operating business. We base our distribution to unit holders upon our adjusted results, which we provide in addition to, and not as substitutes for, our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation's appendix, press release, and 10-Q. Our adjusted financial highlights are included on slide 15. First quarter revenues of $658 million operating income of $159 million, and a margin of 24.1%, all decreased year-on-year. We earned and will distribute to our unit holders $0.49 per unit compared to $0.73 for last year's first quarter. Lower base, performance fees, and Bernstein Research Services revenues primarily drove the weaker financial results. Revenue, operating income, and margin decreased for the fourth quarter of 2018 due to lower performance fees, Bernstein Research Services revenues, and the usual first quarter sequential increase in our compensation accrual. As discussed on our previous earnings call, our adjusted financial results for the first quarter of 2018 included $78 million of performance fee revenues, $35 million of operating income, and $0.13 EPU related to the Real Estate Equity Fund 1, which is in the process of liquidation. We delve into these items in more detail on our adjusted income statement on slide 16. Beginning with revenues, first quarter net revenues of $658 million decreased 16% year-on-year. First quarter base fees decreased 4% from the same prior year period due to lower average AUM across all three distribution channels. Compared to the first quarter of 2018, total average AUM decreased 3.2% and the portfolio fee rate of 41.2 basis points was essentially flat year-on-year. First quarter performance fees of $4 million compared to $84 million in the same prior year period, which included the $78 million from the real estate equity fund discussed earlier. So excluding the real estate fund, performance fees would have been only slightly lower year-on-year. First quarter revenues for Bernstein Research Services decreased 21% year-on-year on lower revenues in the US, Europe, and Asia. primarily due to significantly lower client trading volumes across all three regions. A stronger US dollar also contributed to the decline in Europe. Investment gains of $4 million increased by $1 million year-on-year on higher seed investment gains. Other revenues increased 23% compared to the same prior period because of higher dividends and interest earned on our broker-dealer investments. Interest expense increased $8 million for the first quarter year-on-year from higher interest paid on broker-dealer customer balances due to the higher interest rates. Moving to adjusted expenses. All in, our total first quarter operating expenses of $499 million decreased 9% year-on-year. Total compensation of benefits expenses decreased 13% year-on-year, driven by lower incentive compensation, which was partially offset by higher base compensation, fringe benefits, and other employment costs. As discussed on last quarter's call, We accrued compensation at a 49.5% of adjusted net revenues for the first quarter of this year compared to 48.5% for the same period of the prior year and 45.2% for last year's fourth quarter. Transition costs related to our Nashville corporate headquarters relocation totaled $7 million for the first quarter. That's about a $0.03 reduction in EPU, of which approximately $6 million were compensation related and included in the comp ratio calculation, with the remaining $1 million representing increased occupancy costs. We currently plan to continue accruing compensation at a 49.5% ratio in the second quarter, with the option to adjust accordingly throughout the remainder of the year if market conditions change. First quarter promotion and servicing decreased 7% versus the same prior year period due to lower Bernstein Research Services trade execution expenses on lower global client trading activity and lower transfer fees. The 18% sequential decrease from last year's fourth quarter was due to lower marketing, T&E, trade execution, and transfer fees. G&A increased 5% versus the first quarter of the prior year due to increased trading errors and mutual fund proxy solicitation fees related to the contemplated sale by the OXA Group of its entire ownership interest in Equitable Holdings. The investment management contracts for our 40 Act mutual funds require us to obtain fundholder approval when there is a change of control of our parent company. Excluding these proxy solicitation fees, G&A would have been approximately flat year on year. First quarter operating income of $159 million decreased 32% from the prior year as revenue decreased more than expenses. If we exclude the $35 million of operating income contributed in the first quarter of last year by the real estate fund in liquidation, the $7 million of transition expenses, and mutual fund proxy solicitation fees discussed earlier, then the operating income would have decreased by 15% year-on-year, primarily due to the lower base fees and Bernstein Research Services revenues. First quarter operating margin of 24.1% was down 600 basis points year-on-year. Excluding the impact of the real estate performance fees, transition expenses, and proxy solicitation fees, the operating margin declined 250 basis points versus the prior year's first quarter. The sequential decline from last year's fourth quarter was due primarily to the higher comp ratio. You may have noticed that our first quarter adjusted operating income was $9 million lower than our GAAP operating income. This difference is primarily due to the deconsolidation of certain seed investments in our adjusted which we had consolidated for GAAP reporting. Consolidating these results increased GAAP operating income, but did not affect net income or EPU. All of the non-GAAP adjustments are outlined in the appendix of this presentation. The first quarter effective tax rate for Alliance Bernstein LP was 5.3% about as expected. Finally, our Nashville corporate headquarters relocation continues to proceed according to plan, and there is currently no change to the guidance which we provided during our last earnings call. We still anticipate that the largest reduction in EPU during the transition period could be approximately 7 cents in 2019 and expect to achieve breakeven or possibly a slight increase in EPU by 2021. And with that, Seth, Jim, and I are pleased to answer your questions.

Certainly. If you'd like to ask a question, please press star 1. To withdraw your question, please press the pound key. Please limit your initial questions to 2. in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue to ask follow-up questions. Your first question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Your line is open.

All right, thanks and good morning. So maybe just the first question on the Bernstein Research Services. So, you know, when I look at the decline, whether it's year over year, you know, or quarter over quarter, it makes sense what you said in terms of the volumes and the volatility. But it seems maybe a little bit weaker. So I'm just trying to figure out if there was anything in terms of mix. I think in the past you guys mentioned sometimes timing of research payments are a bit off. So just any color on if that was it or if there was anything else that weighed on the results of the quarter.

Michael, it is true that particularly when you look from fourth quarter into first quarter that you have a research timing issue and there's some modest issues year over year, but as John said, the biggest issue by far is just the slowdown that we've seen in terms of overall market trading volumes.

Okay, got it. And then, John, maybe just on the pre-tax margin, so I think if you back out the adjustments And, you know, if we look at the year-over-year, it seems like the adjusted margin, you know, is still in, you know, maybe that 27%, 28%, you know, range. So I just wanted to, you know, if I think about 2Q, like, going forward, you know, all else equal given where, you know, markets are, is that, you know, where you'd expect, you know, like the margin, you know, to rebound? And I think you guys had a target, you know, or an expectation in 2020, you know, being around that 30%. You know, obviously 24 versus 30 seems wide, but if the adjusted 27, 28, you know, that's not too far. So just wanted to get an update, you know, on the outlook for the margin.

Sure. Michael, it's John. I think you did a great job at summarizing where we think probably the second quarter and so comes in in terms of from a margin perspective when we don't have those one-time items in there. We still have the margin target of 30%. However, we don't think it's likely that with the markets currently where they are right now that we'd hit it in 2020. When we came up with the margin target, we were assuming markets that were more favorable than where we currently are at. But that still is our target, and we still do believe it is achievable.

Okay. Thanks a lot. Your next question comes from the line of Bill Katz with Citi. Your line is open.

Okay, thank you very much for taking the question this morning. Just coming back to G&A for a moment, so thank you for sort of qualifying the impact of the proxy voting, but you also had trade and error within the sort of prepared commentary or at least the press release. Maybe it's just my lack of familiarity with that line, but it seems like that was sort of some new verbiage. So was there an added pressure point on G&A, or maybe the better way to ask the question is stripping out the noise, what's a reasonable run rate for G&A?

Sure. So Bill, it's John. The reason why I did mention errors, we have errors, trading errors, every quarter typically. It just deals with managing clients' money and their portfolios. The reason why I called it out this quarter, it was particularly higher than normal. And so if we had a normalized rate of error for this quarter, our G&A actually would have been down slightly. And I think when you're looking out into the future, As we said, both on the promotion servicing and the G&A, the non-comp expenses, our goal is to try to keep them, their rate of growth, at roughly the rate of inflation.

Okay. That's helpful. And then just a couple more from me. So just in terms of flows, certainly appreciate all the detail in the supplement. They just sort of zone in on sort of the area of weakness. I apologize for focusing on that. But if you look on the institutional business, sort of as we expect it based on your monthly AUM leases, but any color you can provide on sort of the dynamics within the fixed income bucket of AUM where there is some weakness obviously offset by good equity and alternative mandates and good mix underneath that. But just what are you seeing incrementally around fixed income? Because the industry itself seems like it's – I guess the question is, is it interesting to you guys? Is it something that's broader? Because you're really not seeing that on the retail side, in the U.S. at least.

Bill, the outflows that we had were really, I think, attributable to a number of factors, but performance has been a contributing factor, as has been the cost of hedging in specific situations, as well as portfolio decisions on the part of clients. But it is... It was largely concentrated in things like IG and so forth, so that's where we sit.

Bill and Seth, but I just would add that not necessarily as much in this quarter, but in prior quarters where we saw institutional outflows, those were a number of non-U.S. clients who were hedged into dollars, and that has been a broader industry phenomenon. Got you.

John, I just mentioned that in this particular quarter, a large contributor to the institutional outflows was that we had two large outflows from one client, and they were acquired, which led to them taking back the mandate.

Can you size those?

It would just say it's large.

Okay, I'll get it.

How about approximately half of the institutional outflow number?

Okay, that's very helpful. Okay, I'll get back in the queue. Thank you.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open. Alex Blostein, your line is open. Your next question comes from the line of Robert Lee with KBW. Your line is open.

Great. Thank you. Thanks for taking my questions this morning. I guess my first question would be just kind of more high level. I mean, as AXA kind of separates itself from Equitable and you had to go through proxy, what are your current expectations? Do you see any change in Equitable's relationship with AB? How are you currently thinking about that possibly evolving over the next several years? And then maybe as a follow-up, you've seen in the alternative space partnerships start converting to C-Corps. Those who have done it have experienced broadening investor bases. Is that impacting your thinking on possibly changing your public entity to a C-Corp?

Rob, it's Seth. I'll ask John to answer the C-Corp conversion question. But with respect to the relationship with Equitable, just a couple of observations. First, since the IPO in the second quarter of last year, there have been two subsequent offerings by AXA. AXA's ownership, I think, is now around 48.3% of Equitable. And that's what triggered, you didn't ask it this way, but just to be clear, that's what triggered changes in our board and in their board composition as per their shareholder agreement with AXA. I don't see any changes in our relationship with Equitable. We're working more closely with them on different initiatives. They seem to be content with their holdings as they stand today. And I think it's really status quo.

Rob, it's John. On the second question, the C-Corp question, we've done the analysis. It's actually a very complex analysis looking at if we did convert, what would be the benefits or the adverse effect on both the firm and the unit holders. At this juncture, we do not currently have plans to convert for several reasons. One is, the first is the tax leakage. We have such a low effective tax rate compared to the corporate 21% tax rate that there's very large tax leakage if we converted, and our PE multiple after conversion would have to increase by, in percentage terms, low to mid double-digit terms in order to just avoid destroying shareholder value. The second reason is that a current partnership structure allows us to pay out all of our earnings, as well as it allows us to buy back any units we issue to employees for stock-based comp to offset the EPU dilution. And this leads us to a payout ratio that's well in excess of 100%. A dividend yield is typically 8% to 9%, and we just don't see any corporate structures with payout ratios on those orders of those magnitudes. The third reason is that even if we did convert, it would not necessarily increase our float because we still have the large majority owner. We also have the large employee ownership. With that large majority owner, it's not even clear that we even would be allowed to be included in an index. And then the fourth reason is once you convert, That's it. So if the tax law is changed and the corporate rate is increased, it's over. So for those reasons, we'll continue to monitor it and monitor the folks that did convert. But for us, it just doesn't seem to make sense at this particular point in time.

Thank you. I'll get back in the queue. Thanks for taking my question.

Your next question comes from the line of Dan Fanning with Jefferies. Your line is open.

Good morning. This is James Steele filling in for Dan. I just had a question on the institutional channel again. It looks like the pipeline keeps building up. Gross sales have kind of stayed the same over the past few quarters. So I just hope for any insight on when maybe we might see some of the gross flows pick up just given the pipeline trend.

Obviously, gross sales is influenced by, as you point out, by how much of that pipeline actually funds in the quarter. Our anticipation, given indications from clients, is that we'll see a pickup in fundings here in the second quarter.

Okay, that helps. And then just as my follow-up, now that Autonomous is closed, I think that you guys initially give maybe slightly accretive by 2020. Just wanted to know if that's changed or if there's any new color on that deal.

No, no change. We still expect it to be accretive in 2020. Great, thank you.

Again, if you'd like to ask a question, please press star 1 on your telephone keypad. Your next question comes from the line of Bill Katz with Citi.

Okay, at the Okay, thanks for taking the extra questions. So just coming back to the sell-side business, so to the extent that we sort of stay in this depressed period of volatility, maybe given what's going on with the interest rate policy, who knows, any remedial actions you can take to potentially offset any sort of the bottom-line pressure? Or maybe another way to think about that is can you bifurcate the margin of the asset management business versus the sell-side business so we could try and ring fence the pressure?

Bill, the – You know, all of our businesses, including the sell side, we run, you know, from a P&L standpoint. So as you might imagine, the leadership of that business has already taken a series of steps and may take continued steps to address the fall off in revenue, be that headcount or compensation related, as well as discretionary expenses.

And Phil, it's John. So the second question, you know, we only report as one segment, so we cannot break out the sell side separately.

Right. And just one follow-up for me, just coming back to your margin target of around 30% or so. Certainly appreciate the market's had a tremendous decline to the end of the year, but similarly, we're off to a pretty strong start year date. What is the biggest delta that is maybe truncating some of that margin improvement into 2020 and Um, can you give us some sort of an update timeframe where you think you can get to that level?

So Bill, again, it's John. I think what we've said is, um, right now, if we had, you know, flat markets where they are currently, um, you know, we would not expect to, uh, to get to 30% by 2020, um, in terms of, you know, flexing the markets. I mean, you can see what our, our fixed income AUM is and our equity AUM. Um, and I think if you run scenarios off of there, you'd be able to see where you think it may be reasonable that we hit that target, depending upon what your market assumptions are.

And I would just add, Bill, I mean, look, we've always said that we need revenue growth to drive margin improvement. Last year we came in at $2.9 billion or so in revenue, and we were – obviously high 20s in terms of margins. So I think, look, you should just, absent some of the structural things that we're doing with our cost structure with respect that will come out of, for example, out of the Nashville move, you should just think about the revenue level that we would need to achieve to, you know, see further margin improvement off of last year's numbers. Okay. Thank you very much.

There are no further questions at this time. I would now like to turn the call back over to the presenters.

Thank you everyone for participating in our call. Feel free to reach out to Investor Relations if you have any further questions. Have a great day.