Thank you for standing by and welcome to the AllianceBernstein Fourth Quarter 2020 Earnings Review. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay for one week. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead.

Thank you, Natalia. Good morning everyone and welcome to our fourth quarter 2020 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the Investor Relations section of our Web site, www.alliancebernstein.com. Seth Bernstein, our President and CEO; and Ali Dibadj, Head of Finance and Strategy will present our results. Kate Burke, our COO, will join us for questions after our prepared remarks. Some of the information we'll 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 2 of our presentation. You can also find our Safe Harbor language in the MD&A of our 2020 10-Q, which we filed earlier this morning. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now, I'll turn it over to Seth.

Good morning and thank you for joining us today. 2020 forced all of us to face unexpected challenges unparalleled in both scope and scale. While the impact of COVID-19’s civil unrest and depressed economic activity continued to reverberate today, the initial onset and subsequent reaction shaped the year unlike any other. I'm proud to say that at AllianceBernstein, we learned from these challenges, grew as an organization and emerged even stronger than when we started the year. We acted first to ensure the health and safety of our employees, enabling us to be fully invested with our clients and their needs through volatile dynamic market conditions. We also meaningfully stepped up our focus and commitment to practicing true corporate responsibility, improving diversity and inclusion in our Board and operating committee and adopted key commitments to ESG and racial equity, all while continuing to invest in the health and well being of the communities in which we are a part. In 2020, we made progress on several strategic growth initiatives including initiating our European Commercial Real Estate Debt and CLO private alternatives platforms, both in partnership with Equitable, building our onshore presence in China and further broadening our Asian footprint which we’ve recently received six prestigious awards in Asia Asset Management 2021 Best of the Best, launching six new multi-asset products, expanding our ESG leadership and capabilities rooted in our distinct strength in fundamental research, and executing our national headquarters relocation which remains on track with our new office building opening next quarter, and was modestly accretive to earnings in 2020. Our long-term investment performance remained solid with our talented teams continuing to generate idiosyncratic returns that can't be replicated. For the year, we posted active organic growth of 3% net of expected AXA redemptions while expanding our margins to meet…

Thanks, Seth. Let's start with the GAAP income statement on Slide 14. Fourth quarter GAAP net revenues of $1.1 billion increased 8% from the prior year period, operating income of $302 million increased 13% and operating margin of 28.4% increased by 200 basis points. GAAP EPU of $0.97 in the quarter increased by 15% year-over-year. For the full year, GAAP net revenues of $3.7 billion increased 5%, operating income of $907 million rose 10% and operating margin of 24.6% increased by 200 basis points. Full year GAAP EPU of $2.88 increased by 16% year-over-year. As always, I'll focus my 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 unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are in our presentation appendix, press release and 10-K. Our adjusted financials are included on Slide 15. Fourth quarter revenues of $880 million increased by 8%, operating income of $301 million increased by 14% and operating margin of 34.2% increased by 190 basis points. We earned and will distribute to our unitholders $0.97 per unit, up 14% as compared to $0.85 for the last year's fourth quarter. Higher base and performance fees as well as higher Bernstein Research revenues, coupled with lower promotion and servicing and lower G&A expenses drove the stronger results. For the year, revenues increased 5% to $3 billion, operating income increased 14% to $918 million and operating margin increased 260 basis points to 30.1%, meeting our previously stated 2020 adjusted operating margin target of 30%. Adjusted EPU increased by 15% to $2.91 from the prior year’s $2.52.…

Thank you, Ali. Turning to Slide 18. Our 2020 results reflect good progress as we continue to focus on the dimensions we’ve previously outlined. Firstly, we drove 3% active organic growth, ex the AXA outflows, based on differentiated investment performance. Over the last five years, we've generated average active organic growth of 2% with active equities accelerating in recent years. We expanded our suite of higher fee alternatives, including entry into both the CLO market and the European Commercial Real Estate Debt market. We continue to enjoy invaluable support from Equitable for these and future growth plans, given their strong mutual interest in growing our yield enhancing longer dated alternative strategies. While spending was reduced due to COVID 19 related travel and meeting restrictions, we drove strong incremental margin growth in 2020 expanding margins year-over-year with G&A of less than 2%. As a partnership, we have a durably low tax rate. And we're paying a distribution of $2.91 per unit for a full year, a robust yield of 7% in a low rate environment. We'll keep you updated on further progress on these initiatives throughout 2021. With that, we're pleased to take your questions.

[Operator Instructions]. Your first response is from Mike Carrier. Please go ahead.

Good morning and thanks for taking the questions. I guess first on flows. The institutional flows in the pipeline look great. Obviously retail and private while feel a bit weaker. Curious what drove maybe the outflows in those channels, if there was any seasonality in the fourth quarter? And then probably more importantly, just how you see that trending ahead if there was anything more unusual in the recent periods?

Hi, Mike. It’s Seth. Thank you for the questions. I think the issues are less seasonal. With respect to non-Japan, Asia, there has been less interest in fixed income as we have been highlighting earlier on, whether it was dollar weakness, whether it's the expectation of higher rates going forward, but also there is a competing bid for our clients’ money onshore in equities, in particular, which has been a real source of interest for them. But I would say, in Asia more generally, we've done much better than we have done in historical periods of redemptions, because we have better balance, particularly with the growth of retail equity positive flows in Japan. So it's actually been a pretty balanced story for us there. And we've had much stronger results in the U.S. So that's helped offset in retail. Just switching over to private client, I think there were issues that were frankly more idiosyncratic to that channel for us, specifically the services they used underperformed. They had a number of underperforming services earlier on in the year that have clawed back performance. So the outflows have abated for the most part and we're seeing a bit of a change in trend. That's favorable, but we'll see. So I think until and when there's more confidence around U.S. rates, and frankly as rates rise, as you know, the appeal of fixed income becomes a lot higher. As someone said to me yesterday, it would be great if we got to 150 tenure [ph] quickly. I think we're just going to be watching as the market evolves.

Okay, great. And then, Ali, just on the non-comp expenses, historically, you guys grew like G&A somewhere around inflation. So just want to see, one, is that kind of the same outlook or are there any kind of new investments that are needed? And then in terms of the COVID costs, I wasn't sure if you said it was 50 million in '20? And if so, just roughly what do you think that normalizes like post COVID? Meaning, do you expect some changes in behavior that can reduce maybe that run rate level over the longer term?

Yes. Thanks, Mike. It’s Ali. So taking it step by step. First, in terms of our non-profit expenses, we continue to expect that to grow in line with inflation and we'll manage it to do so. But there will be a ramp up in occupancy expenses because of Nashville, and that's something that we've talked about before. So inflation plus a little bit is how I think about it, given headquarters and given that we took the sort of occupancy at the end of last year and we'll continue to build that out and hopefully occupy that over the course of this year. But no major change for what we said before in that area at all. There are places we're going to invest for sure, but we want to handle it within that guidance. In terms of the COVID savings, yes, you're correct. So $50 million, rough math, it ain't perfect, but is our estimate of what we think the impact was in 2020. We are already seeing some of that ramp back up. So, for example, we're a global hubs institution, we're seeing some of that ramp back up in Asia, as an example. And then a lot of that obviously was driven by T&R expenses being lower, from meetings being lower, those types of things. And we all hope that as the pandemic subsides, we get to meet our clients more face to face, we get to meet each other face to face much more and that will ramp back up. Look, we don't know, right, just as well you do exactly when that's going to happen and how that's going to happen. We're certainly thinking about doing things somewhat differently. But I wouldn't anticipate that we get to save the majority of that at all.

Got it. Okay, makes sense. Thanks a lot.

Thank you. Your response is from Craig Siegenthaler. Please go ahead.

Thanks. Good morning, everyone. Can you guys hear me?

Yes, Craig. We can hear you.

All right. Good morning. I want to start with your strategic partnership with Equitable. Can you remind us what the current mix of product at Equitable is now? And also can you help us size the potential AUM opportunity to AB from the future rotation into Alton private credit as they look to enhance your portfolio?

Sure. Look, they've been absolutely critical, as you know, and before them AXA, in helping us facilitate the development of our new businesses. So the CLO business that we just launched in October, it was a $405 million deal. And then the European Commercial Real Estate group, which we have just formed last year, recruited, they're really the cornerstone investor in both of those transactions. So they continue to be critical to our growth plans and have really been a very easy partner to work with. Just to give you some background, at the end of last year, we had about just shy of 130 billion with them, which is about 19% of our assets. The majority of that’s institutional, which is really fixed income, high grade fixed income for the most part, not entirely, but as you know, that's really for the general account. They are looking to increase the yield on that portfolio. And in that, there is an opportunity for us to further penetrate and build. You need to talk to them specifically about what their plans are, but we see the opportunity in terms of AUM for us more than several billion dollars in terms of incremental AUM that will flow over time and hopefully more than that, that would arise from that. But we really look to them principally to help us as the cornerstone investor to get the services launched and as continuing investors for those that make sense for them, like PCI, which is our middle market lending business, U.S. Commercial Real Estate Debt, both of which they're quite significantly invested in. I hope that answers your question.

No, that was great, Seth. And I just had a follow up on the Alts business. I was looking for some commentary on your bigger platforms like Arya, real estate, debt, which you kind of just hit on and then also private credit. But what does the fundraising pipeline look like across these businesses? Do you have any kind of key product holes you're looking to fill? And also can you comment on investing performance too in these businesses?

Sure. Let me be -- I'm going to be a little more general and we can follow up later with specifics, Mark, unless you have them at hand. We have a pretty significant pipeline ahead of us we're in. We already had a close in our fourth U.S. Commercial Real Estate Debt offering and we're planning I think a second larger close. We're looking for around over $2 billion in that total raise is my thought, but Mark will clarify for me if that's incorrect. PCI continues to have fundraising needs, which are launching this year as is European Commercial Real Estate Debt. So on all of them, we have what I think are significant fundraising expectations this year. With regard to Arya, which you didn't bring up, but I just thought I would bring up in connection with this, which as you know is our multi-pad long/short manager which has had really good performance. They too see funding opportunities this year, both for the main fund and some more specific funds under that umbrella, like Asturias which is a TMT fund, which has had very strong performance. So we see opportunities there as well. Sorry, there was a second part of your question?

So invested performance was --

Sorry --

And then the first part was fundraising.

Yes, so I’ve tried to answer in multi-billions of dollars of fundraising for this year for our private credit products, as I broadly laid out to you. With respect to performance, look, all credit, particularly non-investment grade credit got hit fairly hard in the March-April timeframe when the bottom fell out. We've seen really good recoveries both in PCI or middle market lending business, and stability in our U.S. Commercial Real Estate business. I think the U.S. Commercial Real Estate credit marketplace is going to take years to work out generally. We feel we're in a very good competitive position. But there are challenges certainly in that space. But all-in-all, I think our performance has been quite competitive.

Great. Seth, thanks for taking my questions.

Thank you. Your next response is from John Dunn. Please go ahead.

Good morning. The tax alpha strategies should be winners over the next few years. And it's small for you guys, but growing like a weed. How are you selling that? And what do you think maybe it could look like down the road size wise?

Look, we have focused it initially on our private client business where the need is most acute. As you've said, it has been growing like a weed. Philosophically, for us, it's important that our clients recognize that we are flexible and want to move where they are with regard to how they want to build their core portfolios. And our view is that customized indexing and SMA format is a very fast growing opportunity for us and I think for others. And so we are looking at other indices to be thinking about whether ESG oriented, more challenging globally, but there are still a lot of opportunities there. It's hard for me to put a number on it. But we think we have the technology, we think we have the talent to do that and do it in a thoughtful manner.

Got you. And then a little more on ESG. How do you guys differentiate it on that? What are some of the largest strategies that are in the 2.5 billion? And particularly what products are private wealth manager in that channel, what are they gravitating to?

Yes. Look, I think there's an enormous amount of talk about ESG. I think it's very important to get into the weeds of what it really means. So I'm glad you asked the question that way. Look, we think that evaluating companies on a variety of different lenses, especially understanding what are the sort of costs of strategies that are not properly incorporated into the discount rate that we're valuing those companies is a dangerous place to be. And so we have long developed internally a number of tools, whether it's in credit or in fixed -- in equities, where we are sharing data among analysts across asset classes in order to identify and frankly properly price the risk we see in the broader portfolios. And so I would tell you, nearly 80% of our AUM today, and it's 600 billion and something currently is managed using ESG integration. However, we have $16 billion in what we call portfolios for purpose. Those are funds that have a specific mandate with specific ESG targets and goals and reporting. These, some would call them double bottom line kinds of investments where we feel obliged to actually be measuring impact to our activism through the company's own strategy in reducing whatever negative externality we're focused on, usually carbon but not necessarily. More and more focused on governance related matters. And it's been growing incredibly rapidly. So the portfolios for purpose, for example, which I just mentioned, about 16 billion, has increased about 60% year-over-year. And so I think that's important in the context of our overall AUM growth of roughly 10. So just to give you a sense, when you look at what the private client group is interested in and what are some of our larger strategies, I’d highlight our sustainable global thematic, our sustainable U.S. thematic strategies are very big, our municipal -- our muni impact strategy, and our newly launched manage volatility green alpha. It's tiny, but it's gotten a lot of interesting press and I think there's real momentum there. So I don't know if I answered your question fully, but I hope you can tell we're pretty excited that with a focus on fundamental research, we think we have an unusual perspective to bring to the table.

That’s great. Thanks very much.

Thank you. Your next response is from Robert Lee. Please go ahead.

Hi. Good morning. Thanks for taking my questions. I guess maybe kind of similar to -- I'm just trying to get a sense of have you seen any – as you hear into year any kind of shifts in the RFP activity? I don't know, maybe more specifically there's -- are you seeing more interest in value away from growth and equities just trying to get a sense of kind of any subtleties maybe with the institution investor base may be focused on right now?

Hi, Rob. It’s Seth. Let me just make a couple of comments there. Yes, we are seeing -- we're certainly seeing growth in ESG focused searches, that's for sure and I should have added that in my prior answer. But you reminded me of that. Active equities is like 40% odd of our pipeline from an earnings perspective. Certainly seeing more interest in value and we've won some value business in the fourth quarter, which is very hard, which I think reflects our commitment to sticking to our knitting and being a deep value manager when a lot of people have abandoned that space. So yes, we do see some. I should also tell you on the lower feed side, we've seen more interest in our customized retirement solutions as well. So while certainly the fee base and the average fee rate has been much higher in our pipeline and in our underlying book, we are seeing some lower fees as well. It doesn't change that significantly the mix yet, but we are seeing a lot of interest there.

Great. And just a quick follow up on the achievement on the comp ratios. I just want to make sure I heard it right. You suggest we use targeting, not targeting -- the guidance, was it 48.5 over the first half of the year? I may have missed that.

Yes. Rob, it’s 48.5 and we give it quarterly. So it's for Q1. But what we've learned is people often key off of that and think about the rest of the year from a comp ratio perspective. And we just want to make sure given performance fees, for example, has become a much bigger piece of our business, but there may be some fluctuations up or down on that as well as fringe benefits, right? So something that's in our comp ratio is fringe benefits and that's impacted by if somebody’s going to the doctor or not, and during COVID times, maybe fewer people. And if that releases a little bit, maybe people will go more to the doctor and that will impact our fringe. So we just want to make sure that people understand that the directionality isn't always going to be down certainly in a year like this. The 48.5% is what we're guiding to for now, correct.

All right, great. And this is also -- usually you have 1Q seasonality as it relates to payroll costs and things like that.

Correct. We are clearly reporting that.

Okay, all right. Those are my questions. Thanks so much.

[Operator Instructions]. There are no further questions at this time. Mr. Griffin, I'll turn it back over to you.

Okay. Thank you, Natalia. Thank you everybody for participating in our conference call today. Please feel free to contact Investor Relations with any further questions. And we wish you a great day. Goodbye.