Thank you for standing by and welcome to the AllianceBernstein Second Quarter 2023 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be 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 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 second quarter 2023 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; and Bill Siemers, Interim CFO, Controller and Chief Accounting Officer. Karl Sprules, Chief Operating Officer; and Onur Erzan, Head of Global Client Group and Private Wealth 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 10-Q, which we filed yesterday. 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. In the second quarter, equity markets continued to rebound with the bulk of the gains in June led by a small number of large U.S. technology companies. Government bond yields rose amidst generally higher rates and a significant drop in market volatility. We generated net inflows two of three months in the quarter led by U.S. retail and our global fixed income platform, both growing at 9% annualized organically. Our municipal SMA platform continued to gain market share growing for the 11th of the last 12 quarters. Our institutional pipeline grew to $14.4 billion, up 10% sequentially reflecting several active equity wins and our private market AUM ended the quarter at $61 billion, up 13% year-over-year apples-to-apples, as still in CarVal had been owned last June 30 and up 5% sequentially. During the quarter, Equitable Holdings made its second $10 billion commitment to grow this platform in the coming years. Let's get into the specifics, starting with a firm-wide overview on Slide 4. Gross sales were $22.4 billion, down $1.5 billion or 6% from the year ago period. Firm-wide active net outflows were $4 billion, reflecting $6 billion of pre-announced low fee redemptions early in the quarter. Net flows were positive in both May and June. Quarter end assets under management of $692 billion increased by 7% year-over-year and were up 2% sequentially. And average assets under management of $678 billion, was down 1% year-over-year and up 2% sequentially. Slide 5 shows our quarterly flow trend by channel. Firm-wide second quarter net outflows were $4 billion or a positive $2.2 billion, excluding pre-announced low-fee redemptions of $6.2 billion. Retail growth sales of $16.5 billion declined 5% year-over-year and slightly sequentially. Net outflows were $700 million despite strong demand for taxable and…

Thanks, Seth. Let's start with a GAAP income statement on Slide 13. Second quarter GAAP net revenues of $1 billion, increased 4% from the prior year period. Operating income of $189 million decreased 2% and operating margin of 18.4% decreased by 420 basis points. GAAP EPU of $0.53 in the quarter decreased by 23% year-over-year. 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. Our adjusted results now reflect interest expense below the operating income line, whereas previously interest expense was above the operating income line. This was done to improve the comparability of our adjusted operating margins with our peer group. 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-Q. Our adjusted financial highlights are shown on Slide 14, which I'll touch on as we talk through the P&L shown on Slide 15. On Slide 15, beginning with revenues. Net revenues of $823 million increased 1% versus the prior year period and were down 1% sequentially. Base fees were flat versus the prior year period as 2% lower average AUM was offset by a higher fee rate. The second quarter fee rate of 40.0 basis points increased 2% year-over-year, driven primarily by the addition of higher fee rate carve-out base fees. Sequentially the fee rate was down less than 1%. As we experienced unfavorable mix shift in a risk-off environment with net inflows in lower fee rate fixed income AUM including money markets. Looking forward, we expect the fee rate to improve sequentially based on…

[Operator Instructions]. Our first question comes from the line of Daniel Fannon with Jefferies. Please go ahead.

Thanks. Good morning. Wanted to follow-up on the longer-term margin outlook as you highlighted at the Investor Day. And maybe if you could bifurcate the segments that, that are going to contribute to that. And as I think about the timeframe given even the quarter push-out of Bernstein as well as I believe most of the national savings should be done by next year. Shouldn't we really see this kind of transition closer to the 2024 and 2025 as we just think about the natural evolution of those things flowing through your income statement?

Hey, Dan, it's Bill. Yes, just to -- there's definitely a timing difference there and that's what when we said that in the Investor Day that these are end targets by 2027, but yes, the Bernstein pickup of 200 basis points to 250 basis points now that's not going to be fully realized next year. So there'll only be a piece of that next year according to when we close. But then going forward in 2025 and beyond that, that would take effect. As to the relocation of 100 basis points to 150 basis points, the most of the Nashville is done. We're still fitting that out, but primarily the big pickup there is all predicated on the New York move when we get out of 1345 and go to Hudson Yard. And so that's going to happen in the fourth quarter of 2024. So again, same thing, it's going to be 2025 forward. And then the Private Wealth and growth investments I mean should start slowly taking effect as soon as we can this year into next year and all that, but we can't really say when exactly that's going to be fully realized.

Understood. Okay. That's helpful. And then following-up on your comments on the fee rate outlook, I think you said near-term, some improvement in clearly beta is going to help with the flow through of end of period versus average, but as you look at the backlog, you look at kind of investor trends with fixed income potentially being a bigger source of flows with higher rates, even as your kind of private markets business picks up. Do you still -- is there as those trends that that change and investor dynamics shift, do you still see kind of a longer-term fee rate backdrop being constructive if we see more of that fixed income demand pickup?

I mean, currently we're seeing, we think we'll modestly improve throughout the year. I mean that's in based on the pipeline split between higher fee active equities and alternatives. Right now the pipeline's at 59 bps, which is about 3x higher than the normal fee rate in the institutional channel. I mean, but at the same time you have to worry about it's all on timing of the fundings there could be a funding in there of low fee custom target date mandate, which definitely has lower fees. I mean, so it -- there is risk in there that is not -- it's not all perfect of active equities and alternatives. Anybody want to add anything further there?

Yes. Yes. Thanks, Bill. It's Onur. I'll add two minor points. Number one, in fixed income, obviously we have a strong Asia taxable fixed income franchise in retail that tends to be pretty high fees in the about 50 basis points level for American Income and definitely even higher for global high yield. So within fixed income, we participate in high peak categories, particularly in Asia. So that should be a factor then, number one. Number two, as you might have followed, our U.S. retail continues to grow at a very high organic rate. So even though we might be adding at times lower fee assets like muni SMAs on an overall basis, it lifts the overall revenue. So we are very pleased with the net revenue additions in U.S. retail, which comes through very high organic growth rate. So that's the other overlay I would that.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead. Alex, your line may be on mute. Your next question will come from the line of Craig Siegenthaler with Bank of America. Please go ahead.

Good morning, Seth. Hope you and the team are doing well.

Thank you, Craig.

So I got a bond question for you. The Fed is still raising rates and this looks like it's partially delaying the recovery and bond flows, although yours have been improving. So if the Fed needs to keep raising rates, how do you then think about the bond reallocation trend in the second half and any commentary across channel or product including tax force, munis and vehicle be helpful too?

Okay. Thank you, Craig, for the question. In my view, we're much closer to the end than to the beginning, of course, stating the obvious in the Fed's cycle. And as Wednesday's comments from Chair Powell, I think indicated. And so I do think people are increasingly confident we're seeing interest not just from Asian on investors, Asian retail investors to begin to reallocate back, and it's been pretty consistent for us for a while now. But we're also seeing interestingly, public institutional demand as well and we're seeing it even in the insurance pace where we see opportunities for them to extend duration and credit. But that being said, Craig, to your point, if we should have a nasty surprise with subsequent inflation readings and the Fed needs to continue raising that will put off that bonds are back by one or more quarters. But actually just given the trends in the economic reporting that we've seen of late, it seems less likely that that's the risk we're facing. I guess one final point I'd raise, I may turn it over to Onur to add if he had some comments. We continue to see muni interest by U.S. retail much strong, not as strong as it was in the first quarter, but continues positive and strong for us, and performance is quite good there. And remember, we really haven't seen as an industry strong muni demand for a long time. And I do think that continues because the thirst for income is really unquenchable.

Yes. Thanks, Seth. It's Onur again. I'll just add obviously market share gains matter. As Seth pointed out, we continue to gain market share in segments of fixed income, particularly tax exempt in U.S. retail. And our expansion of vehicles should only help that both on the different flavors of SMAs, particularly the customized SMAs and tax exempt that has strong distribution followership, as well as the growing range of ETFs, which are off to a very good start, as Seth mentioned in his remarks. So for instance, in fixed income, we expect to end the year with a larger number of fixed income ETFs, even greater than the three fixed income ETFs we have today. So that will help with the vehicle expansion as well.

Thanks, Onur. For my follow-up, I just want to go a little deeper on the muni side because you are gaining lots of share there and industry flows are still a little negative, but you're putting up really impressive organic growth. So what factors are really driving that delta and how sustainable do you think these share gains are into 2024?

Absolutely. So we believe we have structural strengths and advantages. This is supported by a number of factors, number one, we invested significantly in our fixed income technology all the way from trading onto the backend portfolio construction. So as a result, we believe we have a differentiated set of technologies that makes our SMA platform very competitive. On back of those technical capabilities and strength that's recognized by the markets, we have been expanding our distribution relationships, not only in our traditional distribution partners in the national wires as well as regional broker dealers, but there's definitely growing uptake from RIAs, which is definitely a high growth channel for us. And as I mentioned, adding more vehicles like ETFs will only accelerate that opening new doors in channels like RIA. So feeling quite good about our structural strengths and expanding capabilities to continue to drive market share. Again, it's hard to be very precise in terms of a quarter of two. I'm very bullish on the long-term prospects. I don't have any reasons to believe the next two quarters will be weaker but hard to be very precise on the exact quarter dynamics.

I think I would also add, Craig, that maybe turning weakness into a strength while our investment performance in munis is superb at nearly all of it is four or five star rated. The fact is we were quite underpenetrated in the muni mutual fund space, and it's there where you're seeing structurally much less interest with the advent of ETFs. And I think frankly, more importantly as wealthier people tend to be the buyers, the advent and growth, widespread growth of separately managed accounts, which we manage in a predominantly automated fashion. And I think it's really provided a competitive advantage for us.

[Operator Instructions]. Our next question will come from the line of John Dunn with Evercore ISI. Please go ahead.

Thanks. Good morning. You talked about in the retail channel, U.S. equity is doing well. Can you kind of frame maybe if there's any difference between overseas redemptions is that going to continue going forward, or what was that kind of one-time?

I can take on that John. Hi, Onur again. In terms of the retail equity strength, it goes back to some of the investments we are making across different vehicles. I touched on already SMAs and ETFs. But another structural strength category for us has been CITs, where we increasingly deploy commingled investment trust kind of structures with our retail partners, which is a very a persistence business with typically low redemption rates, given the high duration of defined contribution assets in retail. So that is definitely contributing to some of the momentum in retail. Overseas, again, very broad. It's hard to generalize. I think the one geography that lost a little bit of momentum particularly in the first quarter was Japan. We picked up more sales momentum in the second quarter. So like it'll depend on a lot of different factors, what happens with the currency. Obviously it matters as well as some of the broader equity market outlook. But definitely structural strengths in U.S. retail with the vehicles. And if you look at the institutional pipeline as we talked about, institutional pipeline has a healthy equity composition and then pre-pipeline, we are definitely having a lot of good dialogue on the institutional side with a wide range of equity strategies as well. So that's I think how I would summarize the outlook.

Got you. And then just thinking about the second half for Private Wealth, you talked about munis. Can you kind of frame what other products you think are going to potentially drive positive flows in the back half of the year?

Sure. We have a very good first half in terms of alternatives in our Private Wealth channel. As you know, we have been using alternatives particularly private credit, private equity secondaries, real estate in our client portfolios for a long time. So we will have new strategies that we launch in our Private Wealth channel. For instance, our new interval fund that we will launch out of the CarVal platform will be available in the second quarter. So that will be one example and we'll continue to see flows into our evergreen vehicles as well, whether it's our real estate REIT product or the private credit BDC those are a few examples. We saw continued interest in our direct indexing platform. We call it PAT [ph] we exceeded $3 billion in assets in that platform in Private Wealth. So that is a good tax management capability given the increase in the equity markets that will continue to be a handy and useful strategy. So I'm bullish about that in the second half of the year. And then we continuously adding our ETFs into our platform and definitely that will be another kind of expansion of the platform. So all in all, starting with July, we see good interest from our clients. The big obviously unknown is how fast we can convert some of the money market and fund assets to higher yielding strategies. We have taken action on the money market pricing as well, so that's good news. But obviously whatever you do outside money market funds is even higher yielding from a revenue perspective. So that's the other backdrop here.

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

Oh, hey guys, good morning. Sorry for phone issues earlier. The institutional pipeline continues to build pretty strongly, and obviously the fee rate has been very robust as we've seen for the last couple of quarters with the market getting a little bit on stronger footing and kind of the rally broadening out a little bit. How are you thinking about the timing of institutions funding this pipeline? Should we expect that to accelerate a little bit over the next 12 months? And maybe some color in terms of which strategies are likely to hit first would be helpful. Thanks.

Why don't I start? But Onur, I think is probably better positioned to give specific color on it. It was up, the pipeline was up about $1.3 billion quarter -- in the quarter and we funded about $1.2 billion Alex, which I think is important because we continue to see realizations there, which have been helpful. And it very much is comprised, well, it's across the firm, but really all to predominate with -- certainly with respect to the fee rate of not the actual AUM involved in it. We continue to see fundings moving forward there, while it had slowed earlier in the year, we're beginning to see people funding on a pretty consistent basis. CarVal is just or is about to complete its Clean Energy Fund. It's imminent, it's -- I think it's triple the size of their original fund. This is their second and we're launching either their flagship fund, credit fund, fix now, and that's about a year. So those will be coming on slowly as they find opportunities to invest that money. But perhaps Onur, you could give some additional color.

No, absolutely. Number one, again, to be factual, in July, we funded that, that one large kind of mandate that we had talked about. So definitely that was deployed very quickly over $1 billion mandate in equities. So that is a good sign to your point, Alex. In terms of the broader pipeline, I mean in general I think it's going to move ahead with like normal speed, I would say. I don't see anything that is particularly accelerated or slowing down. A good chunk of the pipeline is also alternatives with Equitable again, that's moving ahead with the commitments we have, which also Equitable made public in their Investor Day as we are well aware. So all in all, I think we are making good progress with the pipeline. So there are no speed bumps that I can see. And July I think has a couple of good data points that suggest that institutional investors are moving ahead with their equity commitments and funding them.

Great. Thank you, Onur. For the follow-up, you mentioned Equitable actually I was going to go there next. So super encouraging obviously to get that $10 billion commitment from them for sort of the next tranche or the partnership. Can you spend a couple of minutes on maybe how they're thinking about allocating the $10 billion and also about what timeframe you're -- you realistically think that could be deployed through the AllianceBernstein franchise? Thanks.

Yes. To be specific and my team will correct me if I'm wrong, but I think the Equitable and its Investor Day cited through 2027, I believe was their timeframe. And that is predicated on them growing their general account as well. We have been in active conversations about new structured credit strategies, for example, and new areas of investment that pick up our both CarVal as well as our middle market lending group and others they continue to be quite supportive in our commercial real estate debt area where we see obviously a much more interesting buyer's market to play in. And so it -- they will be very methodical and they will roll out progressively over the next several years. So it's hard for me to gauge because it's not only the timing of getting it through their approval process and setting up the structure, but it's also the team's finding opportunities to deploy it. And finally, of course there's a private placement debt element of that, which is investment grade principally which has always been a part of our mix, and will continue to be part of what Equitable is interesting in doing, given their very strong quality orientation for the GA.

And there are no further questions at this time. Mr. Griffin, I turn the call back over to you.

Perfect. Thank you, everyone for joining us today. We appreciate your time. If you have any additional questions, please reach out to Investor Relations and have a great day.