Welcome to the AB Fourth Quarter 2016 Earnings Review. [Operator Instructions]. 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, Jack. Hello and welcome to our fourth quarter 2016 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website, www.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial 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 1 of our presentation. You can also find our Safe Harbor language in the MD&A of our 2016 Form 10-K 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. We also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights. Now let me turn it over to Peter.

Good morning, everyone and thanks for joining our call this morning. By now, you have heard about the challenges that all asset managers faced in 2016. We were certainly affected as well. Let's go through the numbers though beginning with the firmwide overview on slide 3. While total gross sales of $73 billion were down 3% in 2016, momentum picked up in the second half and gross sales of $39.2 billion increased 16% sequentially. Full-year 2016 net flows of negative $9.8 billion include the two lumpy redemptions we reported in the third quarter, a $7.6 billion redemption of a portfolio of alternative assets that we had been managing for a large institutional client at a low fee and a $6.7 billion outflow resulting from the conclusion of our Rhode Island college-bound 529 relationship. Excluding these two flows, annual net flows would have been a positive $4.5 billion. Fourth quarter net flows of negative $100 million improved year-on-year from negative $2.5 billion. Full-year average AUM was essentially flat, though fourth quarter average AUM was up 2.5% year-on-year. As we reported last week, January AUM increased 2% from December to $489 billion on market appreciation, net flows to institutions, slight net flows to retail, partially offset by private wealth net outflows. Now let's dive into the quarterly flows which you can see on slide 4. Institutional gross sales of $6.7 billion for the quarter were our highest since the second quarter of 2015, mostly due to higher-than-average fundings and passthrough activity. Net flows of $1.8 billion returned to positive territory in the quarter. Retail gross sales of $10.3 billion were up 27% year-on-year, but down 16% sequentially and net flows were negative $1.5 billion. In private wealth, net flows were negative $400 million, in part due to increased post-election charitable giving at…

Thank you, Peter. Now let's start with the GAAP income statement on slide 14. Fourth quarter GAAP net revenues of $786 million increased 8% from the prior-year period. Operating income of $222 million increased 30% and the 27.4% operating margin was 410 basis points higher. GAAP EPU of $0.77 compared to $0.52 in the fourth quarter of 2015. As always, I will focus my 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 unitholders 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-K. Our adjusted financial highlights are included on slide 15. Fourth quarter revenues of $662 million, operating income of $209 million and our margin of 31.6% all increased versus the same prior-year period. We earned and will distribute to our unitholders $0.67 per unit compared to $0.50 for last year's fourth quarter. Higher base, performance fees and Bernstein Research revenues and lower non-compensation expenses primarily drove the improvement. For the year, although revenues decreased $55 million to $2.469 billion, operating income increased by $5 million to $624 million and operating margin increased by 80 basis points to 25.3%. Adjusted EPU increased to $1.89 from the prior year's $1.84. Lower base fees, Bernstein Research revenues primarily drove the decline in revenues and diligent expense management drove our continued margin expansion. We delve into these items in more detail on our adjusted income statement on slide 16. Beginning with revenues, fourth quarter net revenues rose 9% versus the same period of the prior year and full-year net revenues declined 2%.…

[Operator Instructions]. Your first question comes from the line of William Katz with Citigroup. Your line is open.

Appreciate all the comments around the momentum in each of the business lines, but let me switch back and look at the gross sales [indiscernible]. What strategies as you look into 2017 can maybe beef up both the gross sales and hopefully the net sales as well?

I'm not sure I got all of your question there; you broke up a little. Let me just repeat it back. Are you asking what strategies do we think in 2017 will accelerate and increase our gross sales? Well, I think it's probably more of the same, meaning that the equity and fixed income franchises have very strong performance. Yes, 2016 equity performance was more challenged, but the three and five-year records are quite strong and as you know, many equity managers were challenged in 2016. So I think that, in equities, I think we will continue to see our concentrated services grow. I think we will see our core services grow, our strategic core services grow and our U.S. large cap growth service and our small cap services which are also having strong numbers. And I would take special note though of emerging markets where we haven't seen positive flow, but our emerging market equity services, whether that's emerging market growth, whether it's EMA, emerging market value, Next 50 which is Frontier, all have had very strong performance in a difficult three to five-year time period in emerging and should the industry flows begin to notice that emerging might accelerate, we would expect to see some pretty interesting flows in that emerging market platform. As it relates to fixed income, our traditional long term strong performers are persistent. U.S. high yield, global high yield, all the muni platform, muni SMA has been very strong. High-yield muni or high income muni has been strong. American Income last year was particularly strong and no reason to see that lagging. So I think that we will see a repeat performance in the places where we've been strong.

Okay. My follow-up is I guess you guys [indiscernible]. If U.S. tax reform were to play out this year or next year, how do you think about the MLP structure versus potentially converting to a C-Corp?

Well, I think that there's much unknown there and the principal issue is going to be what is the ultimate tax rate. The tax rate would have to get pretty low for us to see it as advantageous to flip to a C-Corp. I do think -- so I think that seems unlikely, but, of course, I'm guessing along with the rest of the United States of America as to what will happen in corporate taxes, but it seems unlikely the rate would get that low. I do think though what it does say about the stability of our own structure is that if the tax rate changes as we expect don't impact our own structure, I think there is little reason to believe that the structure is going to have to be adjusted in the future. So it becomes, in my judgment, as stable as whatever the U.S. corporate tax, the C-Corp tax rate is and the differences are not going to be very great and so any discount that may exist between us and C-Corps I think starts to evaporate.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse. Your line is open.

This is Ari Ghosh filling in for Craig. Could you update us on some of the new mutual fund structures that you are working on, including I believe a new structure with a variable management fee that toggles with performance? And then just more broadly if you can comment on overall fee pressures that you are seeing and if you've lowered the management fee or expense caps on existing funds. Thanks.

So let me take the second question first. The answer is yes we have made some adjustments to existing mutual funds to lower those fees. I don't know the percentages. They are not huge, but they are not immaterial either. As to the first question, we have filed six funds with the SEC. As they are at the SEC, we can't discuss much in detail about them. Of course, you are free to read the information, but I would say, in general, that we're trying to do something different and say to clients, if we don't perform, we don't expect to be paid much more than 5 basis points and if we do perform, subject to all the limitations in those documents, we would expect that clients would be happy to pay us and that that is a pretty competitive offering to the passive world.

And then just maybe a quick follow-up on the fixed income comments. Could you give us a quick update on what early trends look like in U.S. retail and maybe even in Asia? Are flow trends holding up in early 2017?

Well, we don't comment on the flows month by month. I think we put out the January numbers and so I think I would go back to Bill's question of what we think are going to be strong in 2017 and I think that's a continuation of what we've seen in 2016.

Your next question comes from the line of Michael Carrier with Bank of America. Your line is open.

John, maybe just on expenses. Obviously, it was a good year in terms of you managing the expense base. I just wanted to get some sense -- I know you mentioned the comp ratio below the 50%. Obviously, this quarter came in a lot lower than that. So I just wanted to get a sense of is there some true-up this quarter for the full year. And then on the non-comp, anything that we should be thinking about for 2017 versus maybe the full-year run rate that we saw in 2016?

Sure. Mike, I will start first on the compensation, the comp ratio. It happens -- typically, as we start out the year, we're accruing at a 50% comp ratio and it is really not until we get into the fourth quarter where we really get a feel for where revenues are going to come in for the full year, as well as our actual compensation needs. As we get into the fourth, quarter we're building the comp pools from the ground up and that is there for -- we were able to actually adjust down the ratio in the fourth quarter, but meet our compensation objectives for the full year. And I would expect that trend to continue this year as well. On the non-comp side, let's start with G&A expenses and they came in at $412 million for the year; they were down 2%. They did have some one-time benefits in there. I mentioned the $3 million reversal of the legal reserve. That flowed through there. We also had some positive foreign exchange translation benefits for the full year as well. So these types of things we don't expect them to reoccur next year. We also faced some headwinds in G&A in terms of occupancy expense. Our lease here at our New York City headquarters, we actually have shortened the lease for accounting purposes down by five years from 2029 to 2024. We had an option to extend the lease; that's why we had the accounting out to 2029, but we decided not to exercise that. So that's going to increase the leasehold amortization expense, so there will be some upward pressure on G&A. I would expect it to grow at somewhat above the inflation rate this year. In terms of the promotion servicing expenses, they were down 7% for the year, largely driven by declines in marketing, T&E. Those types of expenses, you can expect them to increase from quarter-to quarter going forward as we launch different customer promotion programs, have different customer conferences and we will do that as we see a return on those investments. So those types of expenses I think are more in the cost-containment mode now as opposed to the reduction mode. I would expect promotion servicing to increase somewhat in line with inflation or maybe slightly above.

Okay. And then just as a follow-up on the performance fees, so obviously a strong quarter. When we think about the products that you guys have launched over the past five years, just wanted to get a sense on maybe the percentage of AUM that can generate performance fees and if we should expect that given the performance track record, that that could be more significant going forward?

I think the actual disclosure in the 10-K -- and again, I am just doing this from memory -- but I think somewhere around 10% of our AUM has performance fees attached to it. The ones that really threw off -- the performance fees, I mentioned three strategies. Two of them -- securitized assets, private credit -- obviously are fixed income-based. They actually have a hurdle rate on the portfolio and they were above that hurdle rate as far as yield and then they are earning a performance fee, a percentage above that. And the third one was an equity strategy which as well it basically has an upside potential as far as the percentage of the returns that it produces as well. So those are really what drove the numbers this quarter as well as for this year.

Your next question comes from the line of Surinder Thind with Jefferies. Your line is open.

Just talking a little bit about flow trends here. So in 4Q, you guys saw a quarter-over quarter pickup in institutional gross sales, but a decline in the retail gross sales. Any additional color on this dynamic?

Well, I would say that fourth quarter industry retail was very challenging and so I think that we might have slightly outperformed the industry. I haven't done the numbers, but I think we look like the rest of the world. I think we have--

But I guess maybe more just in terms of the divergence between the two. It seemed like there was a pretty significant divergence at a broader level, not necessarily just you guys.

I'm not sure I've got a good answer, Surinder; I really don't.

I think with respect to retail, we had a very strong third quarter in Asia and we continue to have a strong quarter in Asia in 4Q, just not as strong and institutional -- again, institutional is tough because the fundings can be very lumpy. We had a number of large fundings that came in in 4Q.

Fair enough. And then maybe just some quick thoughts on the broader industry at this point. It seems like you guys are well-positioned for growth, but when you look across the world, it just seems to be all of the discussion is around passive and the momentum that passive has. We look at ETFs and they basically had three months of record inflows at this point. Would you agree or disagree with the statement that active management is in a period of crisis at this point and then is there anything that can be done to stem the tide towards passive?

I think crisis might be slightly elevated in terms of its emotional content, but I do think we've been very consistent on saying that this active passive shift has a lot of structural elements to it, is not cyclical and there needs to be changes in particular active equity management in order to offset that flow. There is no doubt -- there is just no doubt that investors have felt more comfortable with what is perceived to be low cost and safe passive investing versus choosing active managers at higher fees and suffering on average, because that's what the average numbers show, underperformance net of a fee. I think that what we have done over the last five years is deliver products with higher active shares, more concentration, we believe higher probability of outperforming the fees and as has been noted earlier, we're changing the revenue structure. And as I said, I can't comment on those funds because they are in registration with the SEC, but that's a material change that if others were to follow would change the way in which investors would look at fees and would look at performance net of fees. But I don't think that the active/passive shift is going to materially change until the active industry changes what it does.

And then maybe just one quick follow-up here. It seems like FX movements in general were elevated again in 4Q. Any color on the impact it had on your AUM and maybe your revenues and expenses and how the setup is into 2017?

Sure. We don't break out the impact of FX from the markets on our AUM; it's always bundled inside of that. So it just flows through the performance numbers that we report. As far as the actual P&L, when we talk about translating from nonfunctional currencies into functional currencies and what goes through the P&L, as I mentioned for the quarter, it was flat; for the year, it was a slight benefit, as I had mentioned earlier. And we try to hedge out that risk and we've been fairly successful at doing that.

[Operator Instructions]. Your next question comes from the line of Robert Lee with KBW. Your line is open.

Peter, could you maybe just talk a little bit about the Ramius business that you acquired, your vision for its role within Bernstein and where do you see the opportunity with that? I think some of your peers have acquired or invested in I will call it quantitative or factor type managers and it seems ultimately in some cases it was a prelude to trying to launch an ETF business. I'm not sure that's where you are going with it, but can you maybe talk a little bit about your vision for that?

Sure. I think we were very attracted to the talent in Ramius. I think that that team has shown that they are at the cutting edge of thinking about factor-based investing in an even more advanced way than you find in most shops in terms of types of factors they are looking at, some structural factors, not just the traditional factors. They also were and are continuing to be particularly good at helping clients understand where their exposures are and what exposures can be replicated with higher liquidity and lower fees and that that is particularly attractive to clients who are looking to optimize their fee budget and to create the best return for the most liquidity. And I think this is a team that has shown a demonstrated track record in achieving that and that's basically the business opportunity that we see in the short run. Now that could be expanded into -- and that's almost entirely in institutional business. That could be expanded into more of a retail business by packaging those activities and some of those more interesting factors into a retail type product which ultimately could be an ETF, but that's further down the line if we were to go in that direction. I think our primary focus on the Ramius team is the additional insights it gives us into factors and changes in research around factors and in helping large institutional clients make their portfolios much more efficient from a fee point of view, a liquidity point of view and a return point of view.

And maybe as a follow-up question, can you talk a little bit about institutional RFP activity maybe around the election and maybe early in the year. Just maybe some color. Did you see a lot of institutions boldly step away from the process or slow it down and then maybe subsequently as the year started kind of seen it maybe pick up or you find institutions are still going slow and looking at making changes?

Well, that's sort of a touchy-feely thing, so I will give you a touchy-feely response. I do think that the U.S. election slowed down some decision-making late in 2016 and I would say that discussion activity, RFP activity, communication activity between consultants and institutional clients has picked up in December and through January. I think it's hard to take those things to the bank. As Jim mentioned, the institutional stuff is tricky. That was the point of Surinder's comment. It's very difficult to project here. I think that we've got a little bit more confidence in our feelings about retail flows because we can see them every day, but institutionally it is challenging. I do have a more optimistic view of the institutional marketplace in 2017 than we had in 2016, but I think that's AB's view given our performance, the breadth of our product and the longer track records that we now have for many of the new things, including things like Ramius that we didn't have before and so the level of activity, interest, communication between us and institutions on non-traditional product and newer things we've been doing has continued to escalate and I think we see that. That may be a little different than what the market sees.

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

Thanks, everybody, for participating in our conference call today. Feel free to follow up with Investor Relations during the day with any follow-up you may have. Thank you.