Thank you for standing by and welcome to the AllianceBernstein Third Quarter 2018 earnings review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay for one week. I would now like to turn the call 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 2018 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the investor relations section of our website, www.alliancebernstein.com. Seth Bernstein, our President and CEO, John Weisenseel, 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 would 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 third quarter 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’ll turn it over to Seth.

Thank you, Andrea. Good morning. Our third quarter performance demonstrated once again that our relentless focus on long term growth strategy is paying off. We’re maintaining strong momentum with clients across our business, which is translating to organic growth in both our fee rate and assets. Our portfolio fee rate increased by nearly 2% year-on-year, thanks largely to continued growth in higher fee alternatives and active equities. And equity net flows of 2.9 billion drove our total active net inflows of 2.5 billion. Essentially, flat active -- essentially flat active fixed income net flows during the quarter represented a $5.5 billion improvement from the prior quarter. These are very strong results in challenging times. Let's get into the specifics. Starting with a firm wide overview on slide 3. Gross sales of 19.3 billion in the third quarter were down slightly year-on-year and up slightly sequentially. Client activity remained robust in active equities and alternatives and taxable fixed income sales improved markedly in both institutional and retail. Firm wide net inflows were 1.3 billion due to the strength in both retail and institutional active equities. Total active inflows of $2.5 billion well exceeded passive outflows of 1.2 billion. Both quarter end and average assets under management were up sequentially and year-on-year in the third quarter. Sequential growth came from both net inflows and markets, while the year-on-year increase was from markets alone. Slide 4 gives more detail on our flows by channel. Here, you can see the sequential improvement in our flows, especially in institutional where we had one large second quarter redemption. We returned to positive net flows in our retail business and we logged our seventh straight net flow positive quarter in private client where gross sales have been consistently strong and our asset redemption rate remains at a…

Thank you, Seth. Let's start with the GAAP income statement on slide 14. Third quarter GAAP net revenues of 850 million increased 5% from the prior year period. Operating income of 214 million increased 32% and the 25.1% operating margin increased by 720 basis points. Operating expenses in the prior year period were negatively impacted by a non-recurring charge to terminate an outsourcing vendor contract and real estate write-offs. GAAP EPU of $0.68 compared to $0.46 in the third quarter of 2017. As always, I’ll focus our remarks from here on our adjusted results, which remove the effect 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 provide in addition to and not a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in presentation’s appendix, press release and 10-Q. Our adjusted financial highlights are included on slide 15. Third quarter revenues of 727 million, operating income of 216 million and our margin of 29.7% all increased both sequentially and year-on-year. We earned or distribute to our unit holders $0.69 per unit compared to $0.51 for last year's third quarter. Higher base and performance fees combined with lower non-compensation expenses in the third quarter this year primarily drove the improvement versus both prior periods. Lower compensation expenses also contributed to the sequential improvement in results. We delve into these items in more detail on our adjusted income statement on slide 16. Beginning with revenues, third quarter net revenues of 727 million increased 10% year-on-year. Third quarter base fees increased 6% from the same prior period due to higher average AUM across the retail and private wealth distribution channels and higher fee rate realization, reflecting a…

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

It’s actually [indiscernible] filling for Mike. Just wanted a quick question on the active equity inflows. Obviously, very strong and particularly really shrunk compared to your competitors. So just given some of the slippage in the performance of the volatile markets and kind of maybe what you're seeing in 4Q, do you think this pace of inflows we’re seeing in the active equity is sustainable?

Look, it's always hard to forecast flows. I think that one of the things that we find really encouraging is the breadth of flows. I mean Seth mention that a good chunk of it was coming from large cap growth, but there are another eight services, where we saw net flows greater than 100 million during the quarter. So, performance certainly does have an impact on flows. There's no doubt about that, as do capital markets. That said, the long term track records remain really solid. The support that we have from consultants is terrific and the breadth that we're seeing in terms of the momentum is very encouraging. So, I'll leave it at that.

And then maybe just one on the $0.04 for 2018, the headwind on EPU due to the transition costs. Just, how much of that was in 3Q. I know, you mentioned 4 million. So I guess, just trying to figure out how much is left up for the $0.04 for the fourth quarter?

Well, I can let you calculate that, but you should assume it's probably more than double what we've booked to date and it makes sense because a lot of that transition cost is actually over a lot being comped and so we started staffing up in Nashville in July and so that really just got underway during the third quarter. So right now, we have -- you can see our headcount is up year-to-date and most of that is due to this overlapping compensation of headcount. And so, we're going to have a full quarter impact of that now in the fourth quarter, where in the third quarter, it was only a partial quarter.

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

So one of your peers has announced a relatively sizable transaction. As you think about your business model, it certainly seems like on a de novo basis, there's a ton of momentum, but how are you thinking about sort of maybe capital allocation from here. Do you need to scale a bit more or is it just sort of stay focused on the core business, so your thoughts on the implications of what sort of learning early [indiscernible].

I think it's fair to say that we like the cards we have. We think that the pace in the underlying business is strong. And we don't feel that we need additional scale to have penetration with the distributors who are critical to our success. Our acquisition criteria has, I think, been quite consistent. We look all the time. We want -- we look at something complimentary to our existing business. We want to plug new products and services into our global distribution network and scale it. We're looking for a firm or a team we want to look and identify one where the culture and investment philosophy align with our own. We want to make sure that the deal is structured to align with the interests of the people who are joining with the people who are here and our unit holders and we look forward to be accretive fairly quickly. So I don't feel that we have any pressing need from a competitive position to change our path and so we -- while we continue to be opportunistic, I don't think anything has changed in that regard.

Okay. And as my follow-up question is just to come back to the question on equity, is maybe setting back more broadly, the industry itself is really struggling for unit growth. Yet, you’re one of the more of the refreshing stories in the space. It might be too hard to simplify across geographies and distribution challenge, but is there any commonality here of why you’re being so successful in terms of both the gross and net sales, particularly in higher impact active equity and alternative, particularly with the active equity with the industry really struggles overall.

I think, look, because you follow this for a long time, we set out with respect to equities to build a very differentiated and diverse platform. I think that's why per my earlier comment, you're seeing pretty broad based momentum. Similarly, if I think about the overall platform, we’ve said about to diversify that as well. So you're seeing strength across a range of our alternative products as well from a momentum standpoint. Then it feels to replicate because you look at it and the strength is pretty broad based geographically. You saw that -- certainly if you look at our Asia Pacific flows, they're much more diverse today than they were several years ago. So this I think is a result of things we've been talking about for a long time.

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

I'm just curious, I mean, would it be possible to translate the kind of the organic growth into kind of more of an organic revenue growth. Obviously, better fee rate, growing higher fee services faster, but if we were to look at this quarter, would we be thinking that the organic revenue growth rate was closer to 1% or 2% or how would you frame that?

I think you think about it as John mentioned that the fee rate growth is about 2% year-on-year and then you had about 2.5 billion in active equity flows offset by some passive outflows and just do the arithmetic on that, because the revenue growth is ultimately going to be a function of what’s happening with both fee rate and your net flows.

Great. And then maybe a follow up question on the private wealth business, you highlighted that you’re starting to see some growth in advisor headcount or stopped shrinking and have third class I guess for this year. I know, it usually takes several years to get new relationship managers, kind of up to production so to speak or relatively full or production. So, is there any kind of sense as you’ve started this over the last couple of years that if we look ahead to like, you'd expect come 2020, 2021 that you'd start having a broader range of relationship managers hitting kind of their -- starting to their stride and that could kind of at least sustain or maybe enhance the growth of that business?

Well, that's certainly our hope and expectation. We hire dedicated recruiters into our private client area and have revamped our training programs and development programs within it in order to make it a more appealing career path and it's early days and look, I'm really delighted with the 7% growth that I think we're posting this year. But, as you pointed out, Rob, it's kind of a three or five year, really, five year kind of period of time before people hit their stride and so for this to have a really meaningful impact, it's going to take time.

Your next question comes from line of Dan Fannon with Jefferies.

Yeah. Hi. This is James Steele filling in for Dan Fannon. Thanks for taking my question. I saw that the flexi funds are getting some industry recognition, specifically the wealth management award. Just curious if this has translated into any broader industry adoption and then maybe just a general update on how efforts are coming along there.

Yeah. I mean, it's continuing to grow at the pace we hoped it would. We are -- we have a large number of distributors now out there supporting it and we were really appreciative of the recognition, but as I think we've said before, this will take years to develop and mature, but we're happy with the pace that we have experienced so far.

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

Given KKR’s recent success, I just wanted to see if the firm has taken a look at converting to C-Corp and I wanted to see if you have an estimate of what tax leakage would be to our conversion?

Sure. Craig, it’s John. We definitely have taken a good look at this and at the current time, we've decided that we have no plans to move forward with converting and really for a number of reasons. One, with our current partnership structure, we actually have a payout ratio of over 100% in terms of, we pay out all of our earnings as well as we buy back the units that we issued to employees for stock-based compensation. The combined effective tax rate of both the private partnership and the public partnership is way below 10% compared to the corporate rate of 21%. And once you convert to a C-Corp, you can't go back. So if rates change, obviously, you could be in a precarious position. It's not clear to me either that if you convert that it necessarily increases liquidity of the stock as well, because we have a limited float outstanding, we have a large majority owner and we have high employee ownership as well. And similarly too, if there is leakage in this, if you do convert and the multiple expansion that would be required would be quite high just to avoid destroying shareholder value. So we'll continue to monitor it, but right now, we don't plan to convert.

And then just as my follow-up, in Europe, where research and trading are now unbundled. How has the trading operation been performing on a standalone basis and is your agency trading operation profitable at this point?

So in answer to the last question, trading for us is quite profitable. Look, I think, we are fortunate, not just in Europe, but throughout the world to have a very robust and well regarded trading operation, particularly on the electronic side, but also in iTouch. So as you know, many counterparties that we deal with want to deal with people on a global basis. And the fact that we have that global footprint I think has benefited us, including in Europe. So, the growth on the electronics side is quite good and iTouch is hanging in there as well. And we've seen that post MiFID. Yeah.

[Operator Instructions] Your next question comes from line of Bill Katz with Citi.

Thank you for taking the follow-up questions. Just a couple of them. John, you just mentioned the charges associated with the headquarters migration, is that a GAAP number or is that a non-GAAP number. I just want to refresh my memory. And then will you continue to break that out, so we can sort of see what the core trends are?

Sure. Bill, the answer to your second question is yes. We will continue to break it out and supply to all of you each quarter and keep you abreast of our progress. The first question is, it's treated both the same for GAAP and adjusted. So, it's a charge for both the GAAP results and the adjusted results.

Okay. And then couple of broader questions, if I could still take some time. So staying with the Bernstein business for a moment, now, you had mentioned a 2% to 4% drop this year versus last year due to timing recognition of revenues. Is that just what it is, so we would expect that could bounce back some time in ’19 and then the broader question is, there's been some discussion about potentially scaling that business more, so if you feel like you were at scale, in the sell side business, as you are in the asset management business or with acquisitions be something of consideration as well?

Why don’t -- this is John. I'll take the first question and I'll leave the second question to either Jim or Seth. But in terms of what's happening here with the unbundling of the research payments, it's actually, for most of us, we're getting paid in arrears. So it's just -- it's pushing out the revenue recognition and that's our estimate as far as the impact on this year, 2% to 4% decline. But I think we have to get through a full cycle of this before we can see, if there's any impact on the business besides that.

With respect to the sell side overall, I think consistent with all of our businesses, we continue to invest in sell side and see opportunities, particularly in Asia. We're in the process of opening an office in India and so, look, we will be selective in terms of our investments, but where we see opportunity, we’ll continue to pursue them as we have in the past.

And just one final one, thanks for your patience for taking all of them this morning. Just in high net worth, you were considering to call out the high net worth within the private wealth overall and sort of private kind of role. I was wondering if you could just sort of expand on the focus on that element of the business. Is it just more profitable, faster growth, higher fees, just trying to get a sense of the magnitude and the focus on it?

Well, it has been much faster growth for us. As we indicated, it's tripled the growth rate of the rest of business. They've also, as a group, been much more open to the targeted services that we've offered up, whether it was alts or in equities. So their willingness or ability to understand and the size of their appetite has been very appealing in terms of expanding those relationships. A lot of clients with that kind of money have a manager already and so it is a really powerful way of entering into new relationships, when you're offering a service that they haven't seen before or works within the portfolio that they've created. The fee rates are certainly not higher at the larger size, but it has been a particularly productive area for us and one that we want to pursue, because obviously it has a greater scaling opportunity.

I think, if you look at the industry, it's no secret that the ultra-high net worth part of the market is the faster growing part of the market and in addition to the investments that we've made in alternatives and focused equities, which are particularly relevant for that part of the market, it also dovetails nicely with what we've done in terms of wealth planning, wealth transfer, charitable giving, things of that sort where we have an opportunity to build a relationship with the family that is truly broad based and that's why I think, you see not only our success in bringing those types of families into the firm but also keeping them in the firm as well.

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

Thank you, everyone for participating in our conference call today. Investor Relations is available all day should you have any follow-up. Thanks and have a great day.