Thank you for standing by and welcome to the AllianceBernstein Third Quarter 2022 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. 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, operator. Good morning, everyone and welcome to our third quarter 2022 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. With us today to discuss the company’s results for the quarter are Seth Bernstein, our President and CEO; Kate Burke, COO and CFO; and Onur Erzan, Head of Global Client Group and Private Wealth. Bill Siemers, Controller and Chief Accounting Officer, will join us for questions after our prepared remarks. Some of the information we will 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 beginning on Slide 2 of our presentation. You can also find our Safe Harbor language in the MD&A of our 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 will turn it over to Seth.

Good morning and thank you for joining us today. Financial market conditions continue to be challenging in the third quarter as investors reacted to both rising geopolitical stresses and further rate increases in the face of accelerating inflation. Other than investing in cash in certain commodities, investors have experienced negative returns year-to-date. We were not immune to industry-wide pressures as we saw outflows from active equity and taxable fixed income, particularly in September when global stock markets declined by 9% or more. In the quarter, we continued to generate organic growth in alternatives and municipals. Our realized fee rate improved by 7% year-over-year, driven by the addition of CarVal and an improving asset mix as higher fee active equities and alternatives grew organically on a trailing 12-month basis. Our institutional pipeline grew to a record $24.7 billion, up $14.5 billion sequentially, driven by the addition of a $7.5 billion target date mandate, $4.6 billion of CarVal commitments and an additional diversified mandates. Let’s get into the specifics, starting with a firm-wide overview on Slide 4. Gross sales were $19.8 billion, down $12.5 billion or 39% from the year ago, reflecting much lower global retail demand as risk aversion prevailed in the face of volatile markets. Firm-wide active net outflows were $7.8 billion or $6.1 billion, excluding AXA redemptions. Quarter end assets under management of $613 billion declined 17% versus the prior year and 5% sequentially. An average AUM of $654 billion was down 13% year-over-year and 5% sequentially. Slide 5 shows our quarterly flow trend by channel. Firm-wide, third quarter net outflows were $10.5 billion or $6.6 billion, excluding AXA redemptions. Retail gross sales of $13.8 billion continued to moderate from 2021’s robust levels and we saw net outflows of $5 billion or $2.8 billion, excluding AXA’s $2.2 billion in…

Thanks, Seth. It’s a pleasure to be with you today to share with you the key strengths that differentiate our global distribution platform known as the client group within AB. Integrated across sales, marketing, product, and client service functions, this includes both our Institutional and Retail distribution teams. The key points I wish to leave you with today are the following. We enjoy very strong global access with distinct capabilities across six unique pillars. We have delivered profitable growth across asset classes, geographies and vehicles. Building on this growth, we are investing in several high-growth conviction areas, including augmenting use of data and technology. Organic opportunities include the large insurance markets. And our platform in conjunction with our partner, Equitable is structured to deliver continued organic and inorganic growth going forward. Starting with Slide 13, we had a wide global platform responsible for over $0.5 trillion of AUM across six continents, split relatively evenly between Institutional and Retail with local presence in all major asset management geographies across APAC, EMEA and Latin America in addition to the U.S. We have regional expertise and local coverage, key elements that enable us to deliver complete solutions to clients. For example, we have a strong competitively advantaged position in Asia-Pacific, having built local businesses over several decades. Supported by strong long-term investment performance from our tenured experienced investment teams, our global distribution platform has driven sustained organic growth in recent years, well in excess of the peer group. Active equities and alternatives and multi-asset offerings led the way. Within fixed income, the fixed-income strategies in the U.S. also have outgrown the peers. In active equities, we have grown organically by over 4% annualized over both the 3 and 5-year period or nearly 10 percentage points above the peer group average. And in alternatives…

Thanks, Onur. Let’s start with the GAAP income statement on Slide 23. Third quarter GAAP net revenues of $1 billion decreased 10% from the prior year period. Operating income of $170 million decreased 39% and operating margin of 18.3% decreased by 740 basis points. GAAP EPU of $0.56 in the quarter decreased by 37% year-over-year. As a reminder, this was the first quarter, including CarVal, which added $12 billion of AUM at approximately a 1% fee rate and margins consistent with our mature private alternatives businesses. The deal remains slightly accretive to adjusted earnings in the second half of 2022 and the full year 2023. I’ll focus my remarks from here on our adjusted results, which removes 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 a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and 10-Q. Our adjusted financial highlights are shown on Slide 24, which I’ll touch on as we walk through the P&L shown on Slide 25. On Slide 25, beginning with revenues. Net revenues of $814 million decreased 8% versus the prior year period and were flat sequentially. Base fees decreased 7% versus the prior year period as 13% lower average AUM was driven by market declines. The third quarter fee rate of 41.4 basis points was up 7% year-over-year driven by the addition of higher fee rate CarVal based fees and by asset mix and up 5% sequentially. Third quarter performance fees of $10 million declined by $8 million from the prior year period. Given current markets, we now see full year 2022 performance…

Thank you. [Operator Instructions] And our first question will come from Craig Siegenthaler from Bank of America. Your line is open.

Good morning, Seth.

Good morning, Craig.

So my first one is on the potential for large client reallocations next year. And this actually might be a good one for Onur given that he joined us today. But with interest rates expected to stabilize next year, can you talk about any pent-up demand from both retail and institutional investors to reallocate back into fixed income? And also kind of a second parter, do you think your softer 1-year invest performance in fixed income could limit your ability to win these reallocations? Or will there be more focus on the longer-term track records?

So let me start, and then I’m going to ask Onur to add in where I’m missing stuff. But look, we – as rates have risen and yields have become pretty attractive, particularly in credit, we are seeing smatterings of interest, both Retail and Institutional. For example, AIP, American income actually had positive flows in the third quarter, which I think is an indication of people beginning to see value in credit. So I do see the potential for more allocations, whether that happens in the fourth quarter or the first quarter, harder to say. I probably would suspect it would be after the end of the year as we’re getting close to the end now. I think with regard to performance, look, there has been deterioration in the fixed income performance. But our clients recognize that in risk-off environments, we tend to underperform just given our heavy allocations to carry the – heavy allocation to credit generally. And we had a weird situation this year, which I hope doesn’t reoccur and frankly hasn’t in October, which is we’ve had rates and credit deteriorating at the same time. Typically, they have a negative correlation to one another. So the barbell we utilize in a number of our retail strategies tend to be hedged for that kind of event. This has been an unusual period. So I don’t know that October’s trend will continue, but that’s a more normalized behavior. So it’s possible. Why don’t you add in, Onur?

Absolutely. Stabilization of rates at a higher level will be, in general, a positive for us. If I were to comment on specific channels and products in addition to what Seth mentioned, I would highlight a couple of other areas. One of our high-growth areas, as I highlighted in my remarks, is tax exempt Muni strategies. Definitely, that category will have some momentum, and that should help us both grow market share and expand the platform. And then in terms of taxable fixed income, we believe that should help us with our Asia franchise, given a large part of our retail taxable fixed income is Asia kind of centric. And then it’s a much lower scale, but LatAm retail is in other geography that was depressed this year, should benefit from that. On the Institutional side, definitely, there will be some reallocations and definitely can help us in a couple of channels, both in insurance and pension plans. That being said, I think being precise about the timing is very hard. So we don’t know when the rates will stabilize precisely and at what level. And that uncertainty will create, I think, some lack of precision in the timing.

Thank you. And just as my follow-up, I wondered if you had any insight into tax loss harvesting activity just given it’s been such a bad year for both equities and bonds. And I guess this would happen in the fourth quarter, and it would impact equities and taxable fixed income, but any perspective on any kind of near-term flow headwinds that would be appreciated.

Absolutely. We have been seeing that. Obviously, the fourth quarter is where you see the bulk of the tax plus harvesting activity. It tends to be temporary. So that’s the good news. But given the declines in the indices and given tax exempt and Muni indices are not immune from that, we definitely see some elevated tax loss harvesting. But that being said, as I mentioned, in most of the cases, that’s a very temporary move, and that will be, in my opinion, more than offset by future flows. Again, timing is hard to predict. On a net basis, they are positive, in the short-term, that will create definitely some pressure.

Thank you, Onur.

Thank you. And our next question will come from Alexander Blostein from Goldman Sachs. Your line is open.

Hi, good morning, everybody. Thank you for taking the question. I wanted to – Onur, I wanted to start with the question for you around the insurance business. You highlighted that working with other insurance companies outside of Equitable is an opportunity you see for AllianceBernstein and obviously, with a more expanded products, including CarVal, you guys are – should be well positioned to do that. So maybe just expand on how you’re going about the strategy, what vehicles and products you’re likely to utilize? And as you think about the relationship with Equitable, is that a tailwind or is it that headwind, right? Because at the end of the day, having a large insurance company and working with them side by side gives you a unique sort of knowledge base and perhaps a competitive advantage, but at the same time, they have a large equity stake in you. So which one of these things kind of went out?

No, great questions. Let me start from the end and make my way through the beginning. Obviously, we think about the insurance opportunity on a global basis, and we think about it across insurance sub-sectors, life insurance, property and casualty and health. The good news is the space that Equitable participates in and a leader in is only a portion of the market and that U.S. life market is quite concentrated, particularly if you focus on large annuity providers. Obviously, we would be always sensitive to any perceived conflicts. But that is only a handful of insurers and that doesn’t necessarily reduce the appeal of the opportunity or the size of the addressable market. In terms of how we are pursuing this opportunity, as I mentioned in my remarks, we created insurance dedicated capabilities from the back so that the insurance dedicated services will help us to be very catered to a liability-driven investor audience, which is different. And then when it comes to products and services, as you highlighted, we will leverage both our alternatives platform, particularly private credits, not only AB CarVal, but the broader lending capabilities. Real estate lending being another one, which had good strength in terms of fundings in the third quarter, both U.S. CRED and European CRED. And then finally, we are definitely working on a number of structures that makes our solutions more capital efficient for insurance balance sheets. And we have a pipeline of product opportunities that’s coming. So, watch us in the insurance space. It’s a long-term strategy, but we will continue to focus on.

Great. That’s very helpful. Thanks. And then my second question is around CarVal, I just was hoping to get to this a little bit more given it’s been under the AllianceBernstein umbrella for a couple of months now. So, I guess one specific question related to the $4.6 billion in commitments that you highlighted in the pipeline, which products are those? And how should we think about translating that into fee growth? Do they bill and commit it or deployed? And if it isn’t deployed, I guess how are they thinking about the opportunities for putting capital to work in this environment?

Sure. That will be diverse across several different strategies. It includes the flagship credit value. It includes the clean energy strategies and then some of the more bespoke other add-on services as well, emerging markets, etcetera. In terms of the funding period, we will see. We have seen some fundings in all of these kind of strategies, but obviously, it will depend on the timing. We don’t have a clear sense for how the market environment will impact that. It’s a little bit of a different thing for AB CarVal because the opportunistic distress, as you know, can be countercyclical. So, it’s very hard for us to be very precise. But particularly in some of the strategies like clean energy, etcetera, we expect more fundings.

Great. Thanks so much.

Thank you. One moment for our next please. And our next question will come from Bill Katz from Credit Suisse. Your line is open.

Okay. Thank you very much for taking the question this morning and the active discussion. I hope this is more of a qualification, not count as a question. But part one is, just in terms of the incremental pickup in the fee rate both in the institutional channel as well as overall. I am guessing it’s just a weighted average impact of CarVal, but are there any sort of catch-up fees underneath that? And the broader question is, as you think about your overall pipeline, which grew nicely, what’s happening in terms of the deployment of that? Is that a couple of quarters as normally the case, or is that getting elongated in any way? And I was just wondering if you could answer Alex’ question in terms of when do you pay fees on the $4 billion? Thank you.

Well, thanks for the question. I will start on the fee rate side. Look, overall, I would just say we have confidence that over the long – over time, our fee rate is going to continue to work its way higher. What we saw here during the quarter is that we experienced a positive fee rate in all three channels. That improvement was largely driven by a favorable mix to – with alternatives. So, CarVal played a part in that, but was not all of it as well as continued relative inactive equities and outflows in some of our relative fixed income businesses. So, our view, and when you look at the institutional pipeline, is that you are going to – we are going to get at that 3x level that Seth mentioned in terms of the active pipeline fee rate versus our institutional average. We expect that, that will be supportive over time. But we do also highlight that there could be volatility when we have those larger low-fee DC mandates. This pipeline does include that $7.5 billion targeted mandate that was added in the third quarter. And as that one works its way through, that, that will ultimately show up in the quarterly rate.

Okay. Just a follow-up to that. If you could just answer a question in turn, sorry to belabor it. But just the pipeline itself in terms of the sort of timing in terms of deployment, just given what seems to be a bit of a slowdown in decision-making. And then on the CarVal, the $4 billion, are those paid – base fee rates paid on committed capital, deployed capital and is there an opportunity for any performance fees?

Yes. In terms of the timing, as said, and Kate mentioned, the remarks, we typically take a 9-month to 12-month view. When we look at the nature of the pipeline, we are optimistic about the fourth quarter, but it’s hard to be certain. So, there is definitely uncertainty. In terms of the CarVal products, all of the CarVal products tend to have performance fees. And that’s why you need to factor in both the management fees and the performance fees. There was another question in terms of the nature of the funding, etcetera, I guess it will depend on the underlying asset class in terms of the deployments. For instance, we will work with Equitable on the U.S. residential mortgages. As you know, that was one of the synergies with Equitable. That’s the $750 million. So, we have basically high kind of certainty on that, but it will again get deployed based on the market opportunities. So, those are a few highlights I would give you in terms of the nature of that. And it’s a pretty diverse pipeline. One thing I haven’t mentioned in my previous remarks is also the kind of the CLO part of the overall platform.

But Bill, just to be clear, the fees kick in on funding for the most part.

Okay. Terrific. I think there still will be a lot of questions here. Thank you.

Thank you. One moment for our next question please. And our next question will come from John Dunn from Evercore ISI. Your line is open.

Alright. Maybe just to extend a little bit, the global distribution piece. Can you give us the state of the conversations of advisers in each of the different major regional intermediary market?

Nature of the advisers in terms of how the nature of our distribution partnerships that – interpret the question?

Trying to get it more like how the conversations are differing in each of the major intermediary market.

By region, so the color by region. Yes. So, let me try to tackle that by geography. U.S. retail, we touched on it. Obviously, the tax loss harvesting and thinking about the asset reallocation is a big trend. We continue to see our continued interest in short-term duration, taxable fixed income as well as muni strategies and then some advisors actually find the entry point for the equity strategy is attractive. Again, it varies slightly by distribution platform. So, it would vary. And then alternatives is, I think a secular trend that said, I think we have seen a little bit of slowdown looking at the markets. In Asia-Pac, given some of the challenges also with the Chinese equity market, etcetera, it has been a tough market environment. Majority of Asia retail tends to be income-oriented. It is ex-Japan. Definitely, that interest kind of continues, but there is a little bit of a wait and see to make sure the rates stabilize before people jump back into very attractive yield towards kind of strategies. Japan, obviously, the yen weakness kind of drives interest in U.S. denominated assets. We definitely benefited from that in addition to our strong presence in equities in Japan. And although it slowed down on a relative basis, I think the interest seems to be still relatively strong in Japan. EMEA and Lat-Am probably are the most challenged kind of geographies. EMEA given the proximity to Russia-Ukraine situation, etcetera, I think it has been – sales levels have been more depressed. And I don’t think there has been a major kind of team that I would call out at the product level other than a little bit of the depressed risk-off kind of environment and not to mention some of the government changes, that’s centrally in multiple markets like UK and Italy. Lat-Am similar, a lot of changes in administration, risk-off environments. And given those are also high emerging markets and fixed income buyers, I think they have been on the sidelines. So, all-in-all, global trend is typically risk off, stay on sidelines, stay on the short end of the duration curve and provides or stay liquids or have dry powder, that’s how I would characterize.

Very helpful. And then can you just talk about the outlook for replenishment of the unfunded pipeline? And what’s your – are you at a point now where you guys can maintain a higher level relative to the past?

I mean that’s very difficult to predict, but we believe in the strength of our client franchise and the capabilities we highlighted in my presentation. There are a lot of large U.S. pension plans. I mean can be another retirement mandates is very possible. But very hard to give a very precise number. What I can tell you is that given the product mix we have and the fee levels that Kate have highlighted, I think the revenue contribution will definitely be attractive to our starting point, particularly outside retirement, but it’s hard to be very precise on the AUM.

Thanks very much.

Thank you. One moment for our next question please. And we will take our next question from Dan Fannon from Jefferies. Your line is open.

Thanks. Good morning. Was hoping to talk a little bit more about CarVal and the performance that they have been generating and thinking about it in some of their flagship strategies, if you could help kind of put some numbers around that or rankings to kind of get a sense of how that’s tracking? And then again, the future kind of pipeline and opportunity, maybe the biggest buckets that you see in terms of future fundraising in terms of styles that would be helpful as well.

Well, let me start. And Onur may jump in again. But they have raised roughly $2 billion – a little over $2 billion since our announcement or actually since our closing. And so we are very pleased with that – I am sorry, since announcement. And so we are very pleased with the pace, although as Onur alluded to, it’s got to be a more challenging market generally out there just given the volatility that the world is seeing. We have been out marketing our energy opportunities fund to a pretty broad reception, and it’s really the first time we are utilizing the AB institutional sales force as part of that. So far, that’s been beneficial to us. We have gotten more looks than CarVal had experienced in the past, but it’s still early days in that process. We are also kind of setting up for their more distressed strategies as we move forward. There is interest in doing it. And I think that’s important. And it’s the traditional strength of the firm and the order performance has continued to be in line and/or outperforming most of their competitors. So, I think I am balanced, the story is good there. I think finally, just to recognize that the mandate with Equitable on resi mortgages is in the process of being funded. And further, that opens the way for more opportunities with our insurance clients. So, on balance, it’s early, but we are pretty favorable on where we stand.

Yes. The only add is the retail angle. Historically, AB CarVal has been more geared towards the institutional channel. I think one of the synergies we really like in the combination is our ability to go deeper into retail and high worth net channels. A, through our proprietary private wealth channel, but also more broadly through our intermediary partners. We are working on a couple of more retail high net worth oriented products, leveraging our product structuring expertise, BDCs, REITs internal funds. And we will test the market with those kind of extensions. So, that opens yet another venue, which wouldn’t be captured in the institutional pipeline typically. So, we are optimistic about the long-term prospects there.

Great. Thanks for taking my question.

Thank you. And we do have time for one more question. And we will take our last question from Bill Katz from Credit Suisse. Your line is open.

Excellent. Thanks so much for taking the questions. So two, can you give me a sense of where you are in terms of alternative penetration into your wealth management platform today? And where do you think that, that ratio can get to? And then just given your commentary about all the growth initiatives as you look ahead, one of the themes coming out of this quarter certainly is the challenge of balancing lower revenues against sort of ongoing spend. How should we be thinking about expense growth rate into 2023? Thank you.

Yes. Thanks Bill. Let me take the alt penetration question. To confirm, you are interested alt penetration, our private wealth channel, right.

Yes.

Yes. Absolutely. Our alternatives platform in the private wealth channel currently represents roughly 10% of the AUM. We had very strong momentum even without any fundings to CarVal. So, year-to-date, the alternative raises have been up 95%, and 45% of our AUM is with the accounts that have private alternative exposure. So, I think it’s a very solid story for two reasons. One, we demonstrated that we can offer alternatives as part of our asset allocation to our client base. And as we add more larger accounts, if you look at the inflows, net flows, more than three quarters comes from 20-plus million accounts, which tend to be higher buyers of alternatives. And given there is still runway with the clients that didn’t invest in alternatives and 10% being probably lower than what you could think about as steady state, there is a lot of runway there. In some of the third-party channels, some of the third-parties advocate for asset locations up to 30% into alternatives. So, if you can think about that, the runway is quite significant.

And just to clarify, I had said energy opportunities, I meant clean energy with regard to CarVal.

And one quick clarification on my side on the performance fees. Majority of the CarVal strategies have performance fees, it might not be 100%.

So then I will just follow-up quickly on the balance between our strategic investments and our expense management. So, we are going to continue on the path of trying to be very disciplined overall in our discretionary spending and cost base while continuing to sort of balance those strategic initiatives and capitalizing on our existing strengths. And then we are looking more is on the margin of where we can reduce spending in the near-term without jeopardizing those long-term goals. So, we have a number of technology investments, for example, underway to support our growth initiatives in terms of supporting our infrastructure, such as in the insurance space. As Onur was talking about, or the muni SMAs, multi-asset offerings, ETF launches. All of those, we think are good long-term capabilities. And so we are going to continue to support that. But we have always maintained a very strong cost discipline and looked also to try to leverage automation of things like moving our systems to the public cloud. So, for the full year, we are going to continue to target a G&A number in the mid-single digits. And then on the promotion and servicing side, you have seen us have some discipline there. We do expect it to continue to decline sequentially here in the second half of the year as compared to the first, but above still prior year high – or prior year because of the pandemic impact. And ultimately, as we look ahead, it’s going to be and through the year-end about balancing those priorities as well as rewarding and retaining that – both that talent team – the talented teams that we have. So, I think that that’s the best answer I can give you that we are going to continue to be very disciplined in our approach, but we are not going to be shortsighted in supporting our longer term initiatives.

Perfect. Thanks so much.

Thank you. There are no further questions at this time. Mr. Griffin, I will turn the call back over to you. End of Q&A:

Thank you everyone for joining us today in our conference call. Feel free to reach out to Investor Relations with any further questions, and have a great day.