Thank you for standing by and welcome to the AllianceBernstein Third Quarter 2017 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay for 1 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, Jack. Good morning, everyone and welcome to our third quarter 2017 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 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 would 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 third quarter 2017 Form 10-Q 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 are also live tweeting today’s earnings call. You can follow us on Twitter using our handle @AB_insights. Now, I will turn it over to Seth.

Good morning and thank you for joining us. I am pleased to report that AllianceBernstein extended its strong momentum in the third quarter. After nearly 6 months here, it’s clear to me that AllianceBernstein’s long-term strategy is working. Our services continue to offer very competitive and differentiated return streams that our clients can’t replicate for themselves. And we are making progress commercializing the diverse and relevant product suite we spent years building out, all while maintaining a relentless focus on integrating technology to increase our productivity and reduce costs throughout the firm. Now, we are seeing the impact of those years of hard work in our results, which include year-to-date active net inflows of $13.5 billion, which is an annualized organic growth rate of 4%. Outstanding track records across a broad set of offerings in fixed income equities and alternatives, a more balanced mix of business in all of our client channels and the highest estimated fee base in our institutional pipeline at quarter end that we have seen since we started tracking this number 5 years ago. And finally in those same 5 years, AllianceBernstein added more than 600 basis points to its adjusted operating margin. This was through an improving revenue mix and rigorous ongoing expense reductions. Consequently, I am confident of the strategic direction of the firm and proud to be a part of its future. So, let’s get into the specifics. Beginning with the firm-wide overview on Slide 3, we again generated $20 billion in total gross sales for the quarter consistent with both prior comparable periods. Total net inflows of $4.5 billion represents $4.9 billion in active inflows partially offset by $400 million of passive outflows, that’s comparable to last quarter’s $4.7 billion and it’s a big improvement from the $15.3 billion in the outflows…

Thank you, Seth. Let’s start with the GAAP income statement on Slide 14. In the third quarter, GAAP net revenues of $812 million increased 9% from the prior year period. Operating income of $162 million decreased 12% and our 17.9% operating margin was 480 basis points lower. The primary drivers of the decline in operating income and margin were higher other G&A expenses due to non-recurring items, higher real estate write-offs and lower contingent payment reversals. GAAP EPU was $0.46 versus $0.52 in the third quarter of 2016. As always, I will focus my remarks from here on our adjusted results, which removed certain items that we do not consider part of our core operating business. We based 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-Q. Our adjusted financial highlights are on Slide 15. Compared to the same prior year period, third quarter revenues of $660 million increased 8%, operating income of $165 million increased 11%, and our margin of 25% increased 80 basis points. We earned and will distribute to our unitholders $0.51 per unit, up 13% from $0.45 for last year’s third quarter. Higher base fees combined with the lower comp ratio for the compensation accrual primarily throughout the year-over-year improvement, to a three non-recurring items which reduced our third quarter operating income by more than $16 million and EPU by $0.06 after accounting for the compensation effect. First, we took a $20 million charge to establish a reserve for payment we plan to make to a third-party vendor as a result of the early termination of an outsourcing contract for our trade…

Thank you. [Operator Instructions] Your first question comes from the line of Michael Carrier with Bank of America. Your line is open.

Thanks, guys. John, maybe first one just on given some of the adjustments in the quarter and where the margin is and then your commentary on the comp ratio. I just wanted to get an update when you look at kind of the trends in the business and how you guys are controlling the cost structure, maybe an update on where margins can head if you continue to see good healthy organic growth. Fees are heading in the right direction in some of the initiatives that you guys have going on, on the expense side to lower some of the G&A line and the comp line. Just maybe an update there, because we have kind of been stuck in this kind of low, mid margin range and it seems like you have got more potential here?

Sure. Michael, as we have always said, there is operating leverage in the business as AUM moves higher, the markets move higher, the flows move higher, we should see more and more drop to the bottom line. So this quarter as I mentioned, the incremental margin was 35%, but we did have those non-recurring items and we strip it out we are at 45%. So, I think on the upside as revenues, if revenues continue to increase, we should be looking for incremental margins in the 40% to 45% range. And when you look at the different expense lines, the G&A, promotion and servicing, over the longer haul, I think we should be looking for those to grow in line with inflation.

Okay, that’s helpful. And then as a follow-up Seth, just on, I guess both on the pipeline in the flow trends and fee rates, just want a couple of questions on that, but when I look at the pipeline on the institutional side, it seems like there is a lot of momentum and not only on that lower fee mandate, but also on the equity in the alternative side. And then just wanted to get an update on like the FlexFee series, what kind of traction you are seeing in the distribution channels and if I think about the fee rate over the next year or so, are you still seeing the demand where the fee trends can continue to be on the net positive versus I think in a lot of the areas of the industry we are kind of seeing the other trend?

Thanks Mike. Yes, let me take it in churn and I think Jim or John might chime in sort of the long questions. So, I missed some of it, don’t be offended just ask again. We are seeing a better tone to our pipeline than we have in the recent past. And it’s certainly the mix is improving and we are seeing that not just in the U.S., but outside the United States as well. So, there is potential absolutely for better mix to continue as we move forward. But of course, that’s contingent on client activity and overall market conditions as you know. With regard to FlexFee fund series, couple of points there, where conversations are ongoing with our major distributors, I think they are going well. We are at sort of working up to beginning in earnest at the beginning of the first quarter to begin the process of marketing the funds and it will be our focus for the first half of 2018. We think there is significant potential here to gather additional assets. We think it realigns claim expectation of share of excess returns that managers are taking versus what they our clients are keeping. We think is a credible alternative to those who are incredibly fee conscious today. I don’t think that’s going away. So, I think it fits nicely into buying patterns that we are seeing evident in the border marketplace, but I might have missed part of your question. So, just could you repeat what I missed?

No, you did all. So, thanks for the answers.

Your next question comes from the line of Bill Katz with Citi.

Okay. Thank you very much. Good morning, everyone. I appreciate taking the questions. First question is just a big picture question, Seth, as you have sort of now spent 6 months at the helm as you mentioned the business in great shape. If I look at your gross sales overall, they have been relatively flattish in this $20 billion range and you highlighted a number of favorable things going on both across and within each of the segments. How do you think about better leveraging that through this system side, so I think both the volume versus margin discussion, I know you answered in the incremental margin, but is there maybe a strategic move here to maybe accelerate marketing and/or understanding to potentially capture some of the opportunity here?

It’s certainly and I think I said this in my last call with you guys at the end of the second quarter. I certainly think the build-out of the product suite is essentially done. That doesn’t mean we wouldn’t be opportunistic if we found another great idea internally or economically in a team to go and capitalize on that. This firm made what I think was an astute painful decision to downsize its distribution capabilities several years ago as it had much less to sell and has redeployed. And we need to rebalance that. We are doing that distribution I think is the single largest investment they are making. And our expectations on what we are beginning to see whether it’s in our private client channel, whether it’s in our retail and institutional is a much higher volume with throughput by our individual sales teams. So, I don’t know John or Jim if you want to add to that.

I guess what I would add is Bill, we are very conscious going back to comments that John made earlier about where we fit from a margin standpoint. And so as we move forward, there is a balance that we are striking between investments in various parts of our business and managing the business for the long-haul as well as ensuring that we continue to manage our cost structure. So, as Seth indicated, the company made some financial investments in our investment capabilities over the course of the last 5 years, a number of those investments are starting to season, which helps to contribute to bringing the compensation ratio down. Now, we may choose to reinvest a portion of that back into the business to the extent that we see opportunities to accelerate growth, but that’s to be determined.

Okay, thank you. And then just as a follow-up you had so highlight that the FlexFee and just sort of two-part question for that. Number one, how do you think about some of the operational risk given the potential for a variable fee structure just listening to comp and maybe capital? And then the second question is let’s say that this is actually does take off? How do you think about the back book in terms of cannibalization of pricing to your legacy platform?

Well, let me take the second part of it first. I think we have thought a lot about the risk of cannibalization. We don’t think it’s significant. First and maybe stating the most obvious thing moving out of one fund into another is a taxable med for our clients. And while I don’t know the positions by service, I bet there are number of embedded gains there that would cause people to hesitate at least at the moment. But that said, we have targeted this service or these fees to clients who are very fee focused and are willing give up a larger piece of the upside as performance continues to improve. We think there are different shades of client out there. And so they will choose what they want to choose with respect to the funds, but frankly, we think that’s broadly where the market is going. So, we might as well start there and we think we have more benefit than we have potentially to lose in that regard. From an operating perspective and a risk perspective, we are very conscious of not creating incentives for portfolio managers to do things in order to hit specific targets. So, we spend quite a lot of time and effort in our risk and monitoring to ensure that we are within our own internal guidelines as we think about risk taking amongst our portfolio management teams. And operationally and maybe I will prefer Jim on this, we thought through the complexities of the operational matters here, but we are striking the math everyday and calculating our performance daily. So, that should guard against some of the potential risks there, but Jim?

Yes, I really don’t have much to add to what Seth just said. From a P&L standpoint, Bill, we have got $2.5 billion plus in revenue, talking about Flex funds, I think if we find ourselves gathering significant assets that’s going to be good problem, not a bad problem, I think we will have a much better handle on this sometime in the first half of next year as to what the trajectory looks like, but look at the end of the day we think this is the right thing to do, it’s right thing for clients, it creates the right incentives for managers and it’s where the – it’s a direction that the industry needs to begin to move towards.

And Bill, it’s John. I would just add that again this is – it’s going to take a while to ramp these up. We just seeded them when the process is getting them on distributor platforms. But when you think about 2018, this I would not expect to have a material impact at all either positive or negative on our P&L.

Okay. Thank you very much taking the questions.

Your next question comes from line of Robert Lee with KBW. Your line is open.

Great. Thank you and good morning, everyone. I guess, my first question would be on the targeted services and committed assets, I mean you pointed out in the presentation, it’s growing pretty dramatically last year to $6 billion. I guess a couple things run that. Number one, is that entire $6 billion in AUM or is that really just the commitments that haven’t really been rundown yet. And since that business, those strategies are focused on your wealth management clients, what’s the thought about maybe institutionalizing that in the sense of starting to roll it out to a broader base of institutional investors?

On to your first question, it’s a combination of both AUM and committed. And your observation is a good one, we are in the process of rolling out a number of these services to our institutional client base. So for example, our middle-market lending services is one of the products that fits in our institutional pipeline, but has been a very large success within our private wealth business, similarly global research insights, which is a concentrated equity service that has been part of our targeted services. Also, it’s fitting today in our institutional pipeline. So, there is considerable opportunity both in terms of some of our equity services as well as our alternative suite of products to extend the success that we are seeing in target services into the institutional world.

Great. And then maybe as a follow-up and just curious I mean, obviously, Seth, when you came on board, there were a lot of governance changes with the board and obviously, Axa has talked about spinning out their U.S. business with you as I guess part of that. I am just curious from your perspective, is that having or as Axa U.S. marches toward its eventual IPO, I assume sometime next year, how is that do you think impacting or not AB in terms of maybe some of the strategic initiatives you are undertaking and maybe the speed at which they are being undertaken? Maybe it’s making you do them sooner versus later. I am just trying to get a sense of how that maybe impacting some of the strategic decision-making?

Thanks, Rob. I think that what we have tried to do as a general principle is to focus the firm on its day-to-day business and the obligations arising from what Axa is doing and as you know we are in a quiet period, so we are not at liberty to disclose much information in that regard other than what Axa has itself disclosed, but internally we have limited the people involved to those who have to be involved perspective planning and coordination on the finance side, on the strategy side and so forth as you might imagine. When we talk about our own initiatives internally, everything we have done and we talked about including our location strategy was in the works here and had nothing to do with Axa and its own agenda. What we do know and I think it’s just worth reinforcing is that Axa intends to remain a very significant user of our services. They will continue to provide the seed which has been a really important contributor to the future of this firm given how many of these new services that have been developed over the last 5 to 7 years have been now begun is the first part of your question we are alluding to whether it was in alternatives or in equities. So, we don’t anticipate that relationship to change. But on balance, the initiatives that we are taking I think it’s fair to say all of them have been internally generated by the management team against our own priorities rather than those at Axa has focused on. I mean, I can’t – it is worth noting that Axa is very supportive of those and has been apprised of everything we are doing, but on balance everything that is done here has really been generated internally.

Great. I appreciate the color.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

Good morning. This is Ryan Bailey filling in on Alex’s behalf. Thank you for taking our questions. So, I guess first of all I was wondering – I appreciate the color on the expense savings from the flow consolidation at the New York City office. I was wondering if you could expand on whether there are some further opportunities there. And I think there were a couple of media articles that suggested that you might be looking to relocate employees out of New York?

Yes, let me start, but I think John might add to that or Jim. We have disclosed to our people internally that we have been looking at our location strategy for a while. It’s no secret that after compensation, occupancy has been I think our largest single expense. I would also say and I think quite importantly it’s our conviction that in the future larger firms are going to source talent where we think there are deep pools of that talent to seek and/or to obtain. And as this industry changes, investment talent is not the only traffic we are looking for whether it’s technology and operations and marketing and sales. And so I think you will find it is the case and will be increasingly the case that firms are less centralized in their operations given what technology allows us to do going forward than they happened today. I think something like 55% of our total employees are in the New York metropolitan area. New York will always remain a principal location for us. It’s part of our D&A as someone said to me and I think that’s absolutely right, but we are looking at other locations outside the New York metropolitan area. We haven’t decided what groups would move. We haven’t finalized on a location. And consequently, we don’t really have anything to provide you with regard to additional color, including the timing of that transition, but we are absolutely looking at it and it could have a meaningful impact on improving our expenses over time, but its early days. We have just wanted to share with our people internally what we were thinking about.

I would just add a couple of things. One is, as Seth noted, occupancy is a big cost for us. As you noted, we are taking and have taken a whole series of steps to try and optimize the space that we use, the way we have space configured today is not the way we would, if we could clean sheet it, it can figure that space from a work standpoint. So, there are steps that we have taken as you noted in New York, but there are also steps that we have taken in other parts of the world. Our Hong Kong office just moved into new space in the past couple of weeks. Our Boston office was just reconfigured. Our Tokyo office has been recently downsized. So, there is a series of actions that we have taken and we will continue to take going forward around the world to both optimize our work environment, create a better work experience for our people as well as hopefully over time bring our occupancy expense down.

Got it. Thank you. And then I guess just a follow-up on the FlexFee’s questions, I was wondering what the feedback has been like from portfolio managers and analysts. Are they expecting that they will have to change their investment thought process at all in response to the new structures? Any color there would be great?

Yes, before we launched this, there was considerable work done both on the product design and give and take from the portfolio teams. We don’t anticipate for the services the six services that we have identified any changes in the way that we are managing those portfolios. I think part of the appeal is to give distributors an analog to what they are familiar with and comfortable with today. So, we really consciously designed it in a way that we were giving our distributor clients a choice.

Got it. Thank you very much.

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

Thanks. Good morning, Seth, John, Jim, Andrea. Hope you guys are well? Just starting on expenses, so given that changes have already been made to the Boston, Tokyo, New York, Hong Kong offices, are there still sizable expense redundancies remaining over the next few years ort are they very marginal at this point?

No, at this point, Craig, it’s John, those are marginal. Again, back to Seth and Jim’s comments though, we do have 55% or so of our employees in New York City and New York City is expensive real estate. So, as we look for a new location, obviously, that is part of the analysis, but again way too early, we don’t know where, when, who would go or anything of that nature.

Got it. And then just as my follow-up, recently there have been more AB funds added to the major U.S. financial supermarkets like Schwab and Fidelity. Can you just provide us an update on the front and how those funds are doing in terms of flows?

I don’t – Craig, I don’t have anything in front of me that would tell me specifically on those platforms, how those funds are performing. What I can tell you is that is reflected in this quarter’s flows is that our flows – our aggregate flows in U.S. retail were quite strong in the quarter. That gives momentum that has continued to build over the course of the year. So, if I look at the type of business that we are doing in the RIA space that is also up significantly year-on-year which would suggest that your observation is a good one, but I don’t have those numbers in front of me. I am sure, John can get back to you.

Yes, we will do that.

Alright. Thanks for taking my questions.

You do have a follow-up from Bill Katz with Citi. Your line is open.

Okay, thanks so much. Just coming back to the margin discussion one more time. So as you think through the synergies from the residual occupancy moves you have already made plus what you might be able to do in terms of relocating, how does that play into sort of your incremental margin outlook as you look out assuming that the revenue continued to build at a reasonable clip?

Sure. Bill, it’s John. So, again going back currently how we currently know if revenues continue to rise, we would be looking at a incremental margin somewhere in the range of 40% to 45% when you strip out non-recurring items, perhaps maybe a little bit higher than more towards the 45% level, but again I think longer term we would have to come back and revisit this once we finalize or get more information in terms of what our longer term plans are on the occupancy side, but again we are still very much in the early stages now just on the investigation side.

Can I just clarify one question to you the statement you just made, is that assuming the future move or not assuming?

No, not assuming.

Okay, perfect. Thank you very much taking the extra questions.

Your next follow-up is from Robert Lee with KBW. Your line is open.

Great, thanks for taking my follow up. I guess I am curious and you kind of hinted at it or talked about it somewhat in terms of the fee structure in a lot of your pipeline. But do you have kind of the net revenue contribution of what flows are – were this quarter or year-to-date? And particularly as you get to next year and you introduced the FlexFee more broadly? I mean, that kind of mix could be increasingly important. So, maybe just trying to get some color about how the contribution of flows has been contributing to revenues and trying to quantify that in some way?

Rob, it’s John. We typically do not specify the actual revenue coming from a particular quarter’s close. I will tell you though that the past two quarters have definitely been among the strongest contributions we have seen in recent quarters as far as the flows to revenue. And the reason for that is a lot of these flows are very centered in terms of retail and a lot of them in terms of the be higher fee, retail high-yield products.

Look, actually, our average fee rate is up about a basis point from where we were a year ago. And as John said, that’s a combination of both the flows as well as the mix across channels. On a go forward basis, if we are successful in what we are endeavoring to do from building out our alternative suite as well as continuing to grow our footprint in retail. That’s not an unreasonable expectation in terms of continued kind of enhancement in the overall mix of the company.

Great. And if I could just maybe one follow-up, I am curious about, I don’t know if you have done this work, but if you were to you look at some of your FlexFee funds and maybe map them across to maybe an existing traditional fund and if you had applied the FlexFee structure to those funds and their outperformance. I mean, do you have a sense of if it would have been kind of neutral to revenues, better or worse, just trying to get a sense if we kind of looked at it kind of going back, how you kind of think the impacts would have been?

As you can imagine, we have looked at that. I don’t think if we were to – if we were to had FlexFees in place back to comment that John made earlier, I don’t think it would have had a material impact on our results that we have reported.

Yes. I think, it’s John, Rob, I just wanted to reemphasize too again as you start to think about 2018, because I am sure folks will start to do that probably sooner rather than later. Again, I wouldn’t really focus too much on the impact of this in 2018, because again this is a longer term venture here. We have to see how these products ramp up and it’s going to take quite sometime for us to – I think to see that.

Great. Thanks for taking my follow-ups.

[Operator Instructions] Your next follow-up is from Michael Carrier with Bank of America. Your line is open.

Thanks, guys. Just one on MiFID II, you said I think you mentioned some – the potential, maybe market share gains on the sell side business. I guess also on the buy side part of the business, how are you guys thinking of navigating this regulation, whether it’s over in Europe or globally over ‘18/19 over the coming years?

Like many of our competitors, we are going to be absorbing to reach for its costs related to the research consumed in Europe for services that fall within MiFID II and we will do that as it becomes effective next year. We don’t think the amounts involved there are material from a cost perspective to the firm. It’s certainly conceivable that – and I am speculating here that we are going to have to continue to be looking at this for a long time, because it’s possible it comes back to the U.S. And so we need to think about it and respond proactively at that time.

Okay, thanks a lot.

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

Thank you everyone for participating in our conference call today. Feel free to follow-up with Investor Relations if any further questions you might have. Have a great day.