Q3 2019 Earnings Call

October 24, 2019

After their 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'd now like to turn the conference over to your host for this call corporate Secretary for a beat Mr. David Lesser. Please go ahead Sir.

Thank you Josh good morning, everyone and welcome to our third 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 Dot Alliance Bernstein Dotcom, Seth Bernstein, our president and CEO , John Weisenseel RCM.

So and Jim Gingrich, our COO.

We will present, our results and take questions. After our prepared remarks some of the information we will be presented today. These forward looking and subject to certain FCC 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 M. DNA of our third quarter 29 seem 10-Q, which we filed earlier this morning.

Under regulation FD management may only address questions on material nature from the investment community any public for so please ask all such questions. During this call now I'll turn it over to so thank you. Good morning. Thank you for joining us today.

Our third quarter results reflect momentum in several key areas of our business.

I'm wide active flows were positive 9.3 billion in the third quarter, bringing year to date active net inflows to 21.6 billion, which translates to about 6.3% active annualized organic growth rate continue on our best year to date in more than a decade.

Closer driven by continued rebound in fixed income and ongoing success with retail active equities.

And then environment of declining fee rate <unk> overall portfolio fee rate continues to be stable.

It's getting into the specifics.

Starting with a firm wide overview on slide four.

Third quarter gross sales of 26.3 billion increased 36% year on year and were down slightly sequentially.

Total Firmwide net flows were positive 8.1 billion versus 1.3 billion in the prior year period and net inflows of 9.5 billion then the second quarter.

Total assets under management of 592.4 billion at quarter end increased 8% year on year, and 2% sequentially, making our highest a U.M. since the financial crisis.

An average or you when was up 7% versus the prior year period and 4% sequentially.

Slide five shows our quarterly flow trend by channel.

Firmwide net inflows are driven by retail and institutional while private wealth flows remain negative for the quarter.

And retail gross sales reached a record 21.1 billion the highest in our retail history and increase versus both prior periods.

Net inflows of 7.4 billion compared to modest inflows in the year ago period and were higher sequentially.

In the bottom left chart you can see institutional gross sales of 2.9 billion, while redemptions were flat.

This resulted in institutional net inflows of $1.5 billion.

In private wealth gross sales of 2.3 billion were down versus the prior year period and from this your second quarter due to softening sales trends caused by clients cautious market sentiment leading to net outflows of 800 million.

Our annualized outflow rate remains below the 20 year average despite volatile markets.

Now, let's turn to investment performance beginning on slide six.

In fixed income or percentage of outperforming assets for the one year period remain flat sequentially, but it's improved relative to recent results.

And our percentage of assets outperforming for the three year period increased to 82% from 63% last quarter.

With a rebound in the percentage of assets outperforming we continue to have high conviction that our global diversified approach will produce the best risk adjusted returns over time, which you can see in our five year track record with 90% of assets outperforming.

In equities, our investment performance was noteworthy was 63% of assets outperforming for the one year, 79% than the three year and 84% for the five year.

Slide seven and eight provide more insight on retail fixed income and equity investment performance.

The fixed income table on slide seven reflects that our long term track records remain compelling.

Performance and our income portfolios has been particularly strong American income its top decile for the one year period and top cortile for the three and five year period.

Operating income its top decile for both the one in five year period and top Cortile for the three year period.

Mortgage income beat its benchmark by 200 to 300 basis points for the one three and five year period, an AB income remains top desktop and three and five year periods and top quartile for the one year period.

Moving on to equities on slide eight.

Our concentrated global global Lowball global core and large cap growth strategies are significant outperformers in fact concentrated global global low ball and global core each top debt so across all time period.

Concentrated U.S. growth is top that's all for the one year and top cortile for the three year and large cap growth. This top cortile for the one in three year and top decile for the five year.

These are impressive breaking even though as we continue to see underperformance in our values emerging market strategies.

Let's move onto our client channels, beginning with retail on slide nine.

We're seeing remarkable results from the years, we spent investing in our retail platform.

Our overall sales of 21.1 $21.1 billion were up 67% year over year and surpasses last quarter is the highest sales quarter and we tell history by 12%.

We also saw sales strengthened across regions during the quarter, including sequentially increases across all regions, except EMEA and year on year sales growth in Asia, ex Japan, U.S. retail EMEA and Latin America.

The top left chart shows the picked up in Asia ex Japan, Industrywide retail Bond fund sales for the 12 month period.

Our third quarter sales of 11.3 billion in the region, where the highest in history, what's more the average fee weighed on our gross sales in the corner is 22% higher than our overall channel average.

Net inflows of 7.4 billion were the highest in 19 years positive for fifth straight quarter and represent our third consecutive quarter exceeding $5 billion.

And our sources of flows are diverse 14 funds attracted net flows of 100 billion or more in the quarter with seven of them fixed income six equity and one multi asset.

And we hit a number of milestones during the quarter as well.

AB retail assets under management of 223 billion at quarter end is again at an all time high.

50 retail offerings have more than $1 billion in assets under management at quarter end, an AB ranks six at a 458 asset managers in us retail active equity net inflows for the quarter and seventh year to date.

Now I'll discuss institutional on slide 10.

We saw substantial pipeline gross and net inflows turned positive for the year to $1 billion gross sales, reaching 2.9 billion and limited client outflows, our institutional pipeline grew from $7.1 billion at the ended the second quarter to 11.6 billion that's up 60.

Sequentially and 47% year on year.

Our pipelines annualized fee based also reached a new high more than $40 million with strong equity in alternatives additions and it was our eighth straight quarter in which we exceeded $30 million as illustrated in the top left chart.

New additions in the third quarter of 6.4 billion included more than 3 billion an active equities are the highest in two years at the average speed of more than twice the channel average.

This is notable considering the industry wide fee rate contraction.

The consulting support is also contributing to the success we're having.

New ratings reported in the second quarter have resulted in three third quarter pipeline ads and we continue to see a steady stream of RFP activity.

And beyond equities, it's important to note that we're seeing success in other areas, including multi asset in alternatives lifetime income strategies cut some alternative solutions middle market direct lending this bodes well for our future revenues.

Moving to private wealth management on slide 11.

Client engagement remains high in the face of softening sales trends.

Third quarter gross sales of 2.3 billion are down 23% sequentially and year on year and the flows were negative outflows of $800 million, but despite volatile markets our annualized output rate remains below the 20 year average.

We're seeing in client engagement as they maintained or long term strategic allocations due to advice that includes volatility tools and alternative strategies.

Our advice model and investment platform continue to resonate with a broader more affluent and high complexity client base.

We've added more than the 1.6 billion a net inflows to our suite of alternative and focus equity services year to date, bringing total deployed and committed assets $10.8 billion at quarter end.

That's the bottom left chart.

We closed our first opportunities on transaction $50 million and commitments with an additional operating plan for the fourth quarter.

Growing our advisor base remains a top priority for us as well we've reached our year end targeted advisor headcount up 5% here today.

I'll finish our business overview with the sell side on slide 12.

Bernstein research continues to feel the effects of a difficult environment as customer activity remained depressed in most geographies revenues of 102 million were near flat year on year end down 4% sequentially. However, excluding our April one acquisition of autonomous research revenues declined 10% year on year.

While disappointing we continue to believe that differentiated offering will ultimately drive client activity.

The integration of autonomous is going well and our cross selling efforts are ramping up more than 100 potential new clients.

We had another strong showing in the institutional investor a Archie survey with 18 top ranked sectors compared to 17 last year Bernstein Research ranked number one for best European Dark pool liquidity out goes in the annual Greenwich Associates Survey.

And we were a finalist in all five electronic trading categories in another respected survey.

We continue to globalize, our research and trading capabilities, a new global emerging markets financial research product was launched and a research said and sales operation has built up this past July in India.

While year to date trends continue to be below our expectations were thoughtfully managing our operations in navigating through a tough environment.

I'll close by highlighting some of our third quarter accomplishments on slide 13.

We continue delivering differentiated returns for clients with our diverse products and we further scale been commercialized our offerings with continued success with our retail active equities franchise and a pickup in fixed income.

We recently established alone and CLL management business, which will leverage the resources and infrastructure of our existing high yield credit business and our middle market direct lending platform.

And we remain focused on expense management in executing our relocation to Nashville, which is on plan to achieve our annual ongoing annual expense savings target. Once the transition is completed in 2024.

I'll also add that we've made great strides so far responsible investing platform and our broader corporate responsibility efforts in this past quarter, we announced a collaboration with Columbia University Earth Institute home to the Lamont already Earth Observatory to create a first of its kind intensive curriculum focused on climate risk and.

Women's.

Im very proud of what we've achieved during the quarter. Despite the presence of some challenges now I'll turn it over to John to review our financial.

Thank you so let's start with the GAAP income statement on slide 16 third quarter GAAP net revenues of 870 million increased 3% from the prior year period.

Operating income of 203 million increase decreased 5% and the 22.6% operating margin decreased by 250 basis points.

Cathy you have 62 cents compared to 68 cents in the third quarter 2018.

As always I'll focus my remarks from here on our adjusted results, which moved the effect of certain items to not to sort of part of our core operating business, we base our distribution to unitholders upon our adjusted results, which we provide in addition to and not a substitute for our GAAP results are sent a GAAP reporting on a reconciliation of GAAP to adjusted results.

On a presentations appendix press release and 10-Q.

Our adjusted financial highlights are included on slide 16.

Third quarter revenues of 727 million were flat to the prior year, while operating income of 200 million and our margin of 27.5% all decrease year on year.

We earned it will distribute to unit holders 63 cents per year per unit compared to 69 cents for last year's third quarter lower performance fees combined with higher compensation and GNS expenses, primarily drove the weaker results.

Revenues operating income and margin all increase from the second quarter, primarily due to higher based investment fees and lower promotion servicing and DNA expenses, we delve into these items in more detail on our adjusted income statement on slide 17.

Beginning with revenues.

Third quarter net revenues of 727 million were flat year on year.

Third quarter based fees increased 6% from the same prior periods due to higher average anywhere across all three distribution channels compared to the third quarter 2018, total average AUM increased 7.2% the portfolio fee rate of 41 basis points has been relatively stable both year on year and sequentially.

Third quarter performance fees of 8 million compared to 41 million in the same prior year period.

As discussed on our previous earnings call last year's third quarter performance fees included 35 million related to two funds financial services opportunities Fund, one and real estate equity fund, one which have either been liquidated or mostly liquidated. That's expected. These two funds did not generate any performance fees and the current years third quarter.

And other drivers the declined versus the prior year period.

Third quarter Bernstein Research services revenues of 102 million were relatively flat year on year and include revenues from the autonomous acquisition, which closed on April 1st.

Excluding autonomous Bernstein research services revenues decreased 10% year on year at 4% sequentially from this year second quarter, primarily due to lower global client activity and trading commissions.

That's my gains of 4 million increased by $2 million versus the same prior period due to higher seed investment gains.

The revenues increased 2 million compared to the same prior period because of higher dividends and interest earned on a broker dealer and seed investments.

Moving to adjusted expenses.

All in our total third quarter operating expenses of 527 million increased 3% year on year.

For the third quarter transition costs related to our Nashville, corporate headquarters relocation totaled 8 million compared to estimated expense savings of 4 million, resulting in a net 4 billion reduction in operating income and about a net one set reduction IPU.

Of the net Fourmillion, approximately 2 million as compensation related with substantially all included in the comp ratio calculation and the remaining 2 million representing increase occupancy costs.

For the 2019 nine months year to date period transition costs totaled 25 million compared to estimate expense savings of 12 million, resulting in a net $13 million reduction in operating income.

That $13 million approximately 8 million as compensation related was substantially all included in the comp ratio calculation and the remaining 5 million representing increase occupancy costs.

Total compensation and benefits expense increased 2% year on year, and higher base salaries, and fringe benefits, which were partially offset by lower incentive compensation.

We accrued compensation at a 48.5% of adjusted net revenues for the third quarter this year compared to 49.5% for the first half of this year.

47.5% for the third quarter 2018.

We plan to revisit our comp ratio and adjust accordingly, as we gain further clarity as to the full years revenue compensation requirements for our business and the transition costs relating to our corporate headquarters relocation.

Given current market conditions, we do not expect the fourth quarter comp ratio to exceed 48.5%.

Third quarter promotion and servicing increased 7% versus the same prior year period due to higher teeny and marketing expenses, resulting from the timing of our client meetings and digital marketing initiatives and the 8% sequential decrease came from lower expected.

Seasonal teeny marketing spend.

Relocation and higher technology expenses relating to our business initiatives, excluding the increase in occupancy DNA would have increased 3% year on year.

Net flows around on the private wealth site.

Mike.

Okay, because you're correct that if you look at our U.S. retail business.

Is actually quite strong.

All I can say it said is that in our wealth management business. We continue to be thrilled with the level of engagement that we're having with the types of clients that we want to have conversations with.

We are seeing exactly what we said, which is some delays in transactions and other liquidity event.

Given some of the turbulence in the market.

And also I think.

Some caution on the part of our clients hits that leaving some of their money in cash.

But.

You know, our overall momentum and excitement that business remains robust and we continued to do the right things move the business in the right direction. So.

Where were.

We're feeling good about how that business is trending.

Okay. That's helpful and then given the announcement on the syndicated loan and the yellow strategy.

I guess on one hand makes some sense just given the demand that we're seeing that area and then.

These like fixed income strain.

But it also seems like fairly competitive and maybe later cycle. So just like why now and how how do you think maybe we'll try to differentiate from a lot of the players out there.

I think that hey, Mike et cetera.

It is it's been a long credit cycle I do think that we have very strong credit skills embedded in both our high yield business and our middle market lending business. We've been looking for the right group looking for the right talent and we have found.

Some really good people, who we have confidence and.

But you know it fits that fills the gap for us in the asset class.

It's a direct extension of our own capabilities.

And I think.

We feel that we are experienced enough in managing closing our own portfolios and others securitized assets that we can manage 12 through what could be more volatile market conditions for spread product.

So I think it's a timing issue, but ultimately we're doing this with a very long perspective in terms of the growth of this business and its place in our lineup and it was really about finding the right talent.

Okay. Thanks, a lot.

Your next question comes from the line of Dan Salmon from Jefferies. Please go ahead.

Yes. Good morning, this is actually James steel filling in for Dan.

So my question just on the fewer it obviously, you mentioned kind of a declining fee environment that.

Continue to see the institutional business come in at higher fees, which is kind of very different from what we're seeing elsewhere in the industry in.

Kind of different to what your existing book of business seems to be doing so just curious as to what might be driving that.

Kind of disconnect.

Sure James's John as we talked about the pipeline is a great example of this so sick over 6 billion added to the pipeline.

This quarter, the institutional pipeline and roughly half of that was equities, which are obviously higher fee rate. Then you on the past when maybe we had a lot of fixed income in the pipeline and when we look at the composition of the pipeline right now, it's very well diversified between <unk> equities and alternatives and multi asset in fixed income in fact equities.

And.

But I think it just to add I think it really speaks to where we came from relative to others. We had a much more fixed income heavy institutional book of business relative to our peers and Thats just reflects and we're seeing the same effects as the rest of the industry absolutely in terms of definitely we're seeing that we'll see pressure on institutional.

And then secondly, just on American income I know that that's been a huge driver of inflows for you guys year to date.

Knowing that that has sort of than a cyclical products in terms of asset gathering just if there is a way for us to think about where we are in the in the cycle.

Well I think Asian, investors, which is where we sell the predominant amount of fat to service.

I have just a very strong demand for yield they just certain income oriented.

Policies policy makers have been cutting rates.

But I mean frankly.

I think has warranted the interest its received.

Great. Thank you.

The proprietary Sn may platform and then using third party. Your estimates can you talk a little bit about how either these might impact of business just from your earnings perspective tactically, but then the board of picture is how you're thinking about.

Your captive strategy in the private client business and is there any risk to that as a result these changes.

Bill I think.

We are focusing on higher well higher complexity clients, which which for some of the anticipating some of the trends that you just called out.

Because the alternative managers have now converted to C Corp, and arguably have enjoyed some very strong multiple expansion can you give us your updated thoughts on the pros and cons are staying as MLP versus converting a C Corp.

Is that we still have that large ownership of OXXO over 665% of the firm and so I.

I think some of the other folks have converted their players is to get included an index and hope that that will help drive increased trading and multiple expansion their stock and with US I don't see us being able to get included index with that large ownership of box so that and for the reason that our tax effective tax rate is sold.

Compared to the others.

So I really don't see that benefit to our unit holder. If you look at it to them on an after tax basis through the conversions. So we're still will still monitor it will still continue to look at it but right now we're seeing an MLP and build set just to clarify access acts equitable.

There are no further questions at this time, Mr. Lesser I turn the call back over to you.

Thank you everyone for participating in our call today feel free to contact Investor relations with any further questions have a great day.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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