Thank you for standing by, and welcome to the Alliance Bernstein Third Quarter 2023 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 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 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. Karl Sprules, Chief Operating Officer, and Onur Erzan, Head of Global Client Group & 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 two 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 third quarter, equity and fixed income markets pulled back from gains earlier in the year as yields remained volatile, moving higher throughout the quarter and reaching levels last seen pre-global financial crisis. While retail investors continue to sit on the sidelines favoring cash assets offering more than 5%, we believe that flows will eventually migrate back to bonds to supplement equity allocations as investors take advantage of higher yields and position portfolios to beat inflation. Despite these industry-wide headwinds, AB posted organic growth in several key services as we executed on our strategic initiatives. We continue to gain market share in retail, driven by organic growth in both taxable and muni bonds. Our municipal SMA platform reached $20 billion in AUM, growing organically in 12 of the last 13 quarters and having more than doubled over the last five years. Active equity grew 7% annualized and institutional. Our active ETF platform celebrated its one-year anniversary, now at just under $1 billion in assets under management. And we saw net inflows into private markets led by AB CarVal's Clean Energy Platform. Let's get into the specifics, starting with a firm-wide overview on slide four. Gross sales were $25.2 billion, up $5.4 billion or 27% from the year-ago period, and up $2.8 billion or 13% sequentially. Firm-wide active net flows were almost flat, down $100 million. Quarter-end assets under management of $669 billion increased by 9% year-over-year, but were down 3% sequentially. While average assets under management of $690 billion was up 5% year-over-year and up 2% sequentially. Slide five shows our quarterly flow trend by channel. Firm-wide third-quarter net outflows were $1.9 billion. Retail gross sales of $16.9 billion increased 22% year-over-year and 3% sequentially. Net inflows were $1.6 billion,…

Thanks, Seth. Let's start with the gap income statement on slide 13. Third quarter gap net revenues of $1 billion increased 5% from the prior year period. Operating income of $175 million increased 3% and the operating margin of 17.2% decreased by 110 basis points. Included in GAAP operating expenses was a $13 million adjustment reflecting a change in estimate of a contingent payment arrangement as compared with the prior year period. GAAP EPU of $0.50 in the quarter decreased by 11% 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. We base our distribution to unit holders 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 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 $846 million increased 4% versus the prior year period and were up 3% sequentially. Base fees increased by 1% versus the prior year period as 5% higher average AUM was offset by our lower fee rate. The third quarter fee rate of 39.9 basis points decreased 4% year-over-year, driven primarily by mix reflecting organic growth into lower fee rate fixed income products, including money markets. Third quarter performance fees of $28 million increased by $18 million from the prior year period, mainly due to higher fees on private credit services. Given current market conditions, we now see full year 2023 performance fees in line to slightly above the prior year level.…

[Operator Instructions]. Your first question will come from the line of Craig Siegenthaler with Bank of America. Please go ahead.

Thanks. Good morning, Seth.

Good morning.

So your muni's business continues to demonstrate organic growth strength in the quarter. And I think the SMA wrap was really probably one of the bigger factors there. But do you expect muni bond flows to reaccelerate further once the markets get confidence that interest rates have peaked? Because while your flows are really good, industry flows haven't really gotten good yet.

Thanks Craig and good morning. Look I think that the Street generally was too quick to call the turn in rates. So we've seen fixed income continue to trail year-to-date as rates have continued to back up. And so it's certainly understandable to me, why we haven't seen industry flows and muni's or taxable frankly more broadly grow much larger, because for the first time since the financial crisis, holders actually have yield to supplement the diversification. My own way of thinking Craig to hit your point square on is I actually think we should see broader industry positive flows and muni's as rates stay elevated and inflation gets more under control, because frankly, demographically, we have incredible demand from clients for income in their portfolios. They take great comfort and frankly muni credit quality is so high and muni credit decay is so slow. I think it's going to be a winning area. When that exactly happens, when the Fed is actually on pause, we'll see. We think there could be a couple of quarters here or more where the Fed is on hold after their next meeting next month. So I think we're near it, but we're not there yet. I hope that answers your question.

Thanks Seth. And just for my follow-up. One of your peers this morning disclosed that they are going to have large sub advisory redemptions in November December. In addition to it sounds like some negative seasonality. At this point, when you look at your pipeline and think about your conversations, are you seeing any pickup on the redemption side across the business towards year end?

Let me – actually why don't I just turn that over to Onur to answer.

Sure, thanks Seth. The short answer is, no. We don't expect any major sub advisory terminations. At least we are not aware of any major ones. Obviously hard to predict, but that's where we stand right now. I mean if you look at the redemptions to-date, we typically avoided massive large mandate terminations in the institutional more broadly, particularly in the higher fee categories.

Thanks Onur.

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

Hi good morning everyone. Thanks for the question. Seth I was wondering if we could start maybe with your outlook on the alternatives business. You guys have been putting up nice flows there for a number of different reasons. But as you look forward, maybe help us frame what the dry powder in the business is that will turn on these upon deployment. And just zooming out a little bit, what is the trajectory for some of the new initiatives that you guys are unfolding over the next 12 months.

Alex, thanks so much. And I will start, but I'm going to ask Onur to jump in and just add to it. But we continue to see improving opportunities to deploy, just given deteriorating credit market conditions. We see that in our commercial real estate debt business where we continue to have significant dry powder. We see that in PCI, our middle market lending business, where we're seeing new and different opportunities arising. And in CarVal, as I think you may know, we're beginning to start the process for CVF CarVal value 6, which is their flagship fund. We're targeting $2.5 billion. That's the same as what we did last time. We're trying to be cautious just given the headwinds in the fundraising market. But we have considerable dry powder through our three major private credit businesses. But Onur, why don't I let you provide a bit more color.

Thanks Seth. That's great summary. If I were to add a few minor things, we are number one. We are on track to launch our first interval fund out of CarVal, the opportunistic credit interval fund. We expect that to help us both, in our own private wealth channel, as well as in third party channels. So that's going to be a nice addition to our lineup. As you know, we have done non-traded BDC and REIT kind of structures in our private wealth before. But this is the first time we are launching an interval fund, both for our internal and external clients, so excited about that. And then as Seth mentioned, our private alternate UM [ph] continues to grow and we have a significant amount of dry powder. And in this environment as the M&A activity accelerates as the price discovery in real-estate comes to an end, I think we will have plenty of good opportunities in attractive vintages that should help our deployment returns, as well as in certain cases where we have performance fees and carry also those aspects of our revenue structure.

Got you. I'm sorry. And what was that dry powder number again that will turn on upon deployment?

Yeah sure. Our dry powder, if I include all the channels would be around $14 billion.

Got it. Okay great. For my follow-up, I wanted to dig into your active ETF offering. I know it's small, approaching about $1 billion in the context of the firm. It's not huge, but it's been an important driver near term of flows for you guys. So as you sort of think about the forward strategy, Seth, I think you mentioned a couple of new launches as you look out into 2024. What's the vision for the active ETF business and where are you finding the most success? Is that largely distributed through the private wealth business within Alliance Bernstein or you're seeing success with third party channels as well?

Actually, I'm going to pass it to Carl. I'm sorry, I'm going to pass it to Onur, because I think he's closer, but I'm more interested in what you have to say Onur.

Yeah sure. Thanks again Seth. Yeah we're excited about the progress to date of our active ETF business. We had our first anniversary in September and we hit almost $1 billion of AUM, which is a very good launch, which puts us I think one out of five in terms of successful launches in this space. We have multiple paths to success. In our view, it's not only our proprietary channel, private wealth. We have actually got a lot of good wins in third party channels. In terms of the vision, I think the vision is three parts. One, complement our vehicle agnostic strategy with active ETFs, where that vehicle agnostic strategy helps clients. So we touched on muni area in the previous question for instance. So we are complementing our muni SMAs with ETFs. So that definitely is an additive strategy. Helps with our momentum, so definitely that vehicle extension is one part of the strategy. Second part of the strategy is opening new doors. Obviously our area, space is a heavy user of ETFs. Historically they were passive ETF users, but we are seeing more and more interest in the active ETF wrapper from those channels. So that helps us open new doors. And then finally, there's still a broader set of opportunities in institutional, including insurance clients when you achieve certain thresholds in terms of AUM, etc. Given the liquidity of fixed income ETFs for instance, we are quite optimistic about the long term prospects as well. So that's our go-forward strategy and you will see us add products across equities, fixed income and multi assets such as buffer.

And I would just add Alex, while private wealth will increasingly be an important user I think given their needs, the real driver isn't private wealth at the moment. It really is third party, who are looking at it as building blocks for portfolios they are managing.

Awesome. That's great. Thanks for all the color. I appreciate it.

Your next question comes from the line of Dan Fannon with Jefferies. Please go ahead.

Thanks. Good morning. I was hoping to get a bit of a progress report on CarVal. 16 months or so post deal. You mentioned your fundraising environment being a bit difficult. But just in terms of how you had modeled and thought about this business to-date. Where it's been versus kind of those expectations and maybe a little bit more of a look forward over the next kind of 12 months and what we should be anticipating.

Thanks Dan. Let me start and Carl might – Onur might jump in as well. I keep saying Carl just to keep him awake. But look, I think as we have mentioned, while the market, the fundraising market is more challenging as rates have risen. It's certainly also the case that the opportunity set, at least from our advantage point has improved and improved meaningfully. And so we are seeing areas to deploy and sort of beyond – I'll focus on CarVal, but there are also topics that I would like to focus on beyond that. In addition to CarVal's CVF 6, CarVal Value Fund 6, which as I mentioned we target for $2.5 million. We completed the Clean Energy two fund, that was triple the size of the first fund. They were already on the road with it when we closed the acquisition in July of last year. But we're very pleased despite the markets, to have gotten to $1.5 billion, and we're in process of deploying there as well. We also are working with CarVal as Onur alluded to on an interval fund that we think has real application, both within our private wealth channel, but also beyond that, which is a more opportunistic kind of strategy. And CarVal as well along in its mandate with Equitable on a resident mortgage mandate which is – I think it was $750 million in total size. So on balance, I think from a new business perspective it's moving as well as we could expect. But we are mindful of challenges in the fundraising markets, hence our desire to be conservative in our estimates on CVF 6 as we go out of the blocks there. But we're also seeing opportunities in our Euro Cred Secured Income, Secured Income Fund Plus target,…

I mean on the commercial side, the pipeline remains diversified. We have a significant pipeline and again, the extension is very important here. Obviously flagship funds are always important for the economics of the platform, but we are seeing a lot of nice extensions. For instance insurance, we started with Equitable but we are getting a lot of interest from other insurance clients as well. So those kind of extensions are quite additive to our strategy. And then furthermore, obviously you could argue some of the dislocations in the market with the banking crisis earlier in the year, which happened after we closed the transaction. It creates a lot of interesting opportunities for deployments as the banks are looking for partners to create more capital efficiency, and deal with some of the upcoming new capital requirements from Basel and other regulatory bodies. So we see that being another momentum to hopefully will accelerate our deployment in the coming quarters.

Just to finish it up, the pipeline is $3.7 billion for CarVal. Just to put that in context, Dan. So hopefully that answers your question.

Great, that's very helpful. I guess also just thinking about the fee rate at a consolidated level, mix and beta and some of the things that put a little bit more pressure on it to date. The backlog seems like that's additive. So, I guess just thinking about the fee rate and what your outlook is over the kind of next 12 months and how you think that can trend based upon business trends, demand trends and asset flows.

Hey Dan, it's Bill. I mean, we continue to expect the fee rate to be mixed dependent. I mean, we've had experienced organic growth in lower fee products such as money markets, munis, private placements. We are seeing outflows in higher fee active equities. So we're definitely going to be dependent on markets, interest rates, investor risk and return appetite. I mean, but we do have, as we've mentioned a few times, the institutional channel is supported by higher private oils exposure with the pipeline fee rate three times the channel average. I mean, so that's encouraging there, but no specific guidance.

Okay. Thank you.

Your next question will come from the line of John Dunn with Evercore ISI. Please go ahead.

Thank you. You guys talked about potentially a third positive year for private wealth management. Maybe just looking ahead over the next year, can you frame what strategies you think are going to be in demand that could potentially set up a fourth positive year?

Sure, yeah. As you pointed out, John, year-to-date we had healthy organic growth. As the general risk of environment that's played out, obviously some of the flows have concentrated in shorter duration or lower risk strategies, on market funds, direct indexing and alike. It's hard to predict quarter-by-quarter. But if you think about the longer term, we continue to be quite optimistic about our ability to deploy private credit in the channel. As you know, we have around $10 billion of alternatives in our private wealth platform. We have done it for many years. And as we launch new products, as I mentioned earlier, with CarVal, with others, it will help with the growth. And then from a broader perspective, despite all the kind of uncertainties with the economy and everything else, we stayed the course in terms of adding financial advisors to our platform. So year-to-date our financial advisor headcount is up by 4%. So we are taking a through the cycle mindset in terms of investing in client facing resources in our private wealth business. So that should hopefully help us as a catalyst as well.

Got you. And then, we don't always have to talk about passive, but can you remind us what the dynamics of that side are? Is it more tactical for investors and is there a potential for that money to come back relatively quickly?

So on passive, particularly in the core client segments, lower complexity, lower value clients, we have some model portfolios that takes advantage of active passive model portfolios, which is quite common in the industry. I mean, I would say that is much more structural than cyclical. So that I would highlight as nothing new in that regard. I think the real – I think fee acceleration to expect would be money market funds, cash, and some of the direct indexing type money going into higher risk, higher return strategies with higher fees. I think that’s how I would characterize the major migration that would be expected when rates stabilize and when the risk appetite is further back.

But just to give a bit more color, we do have institutional clients who turn to us, whether it's an accommodation or as part of a broader set of actions we're taking on their behalf to provide passive. And it's episodic, so I wouldn't suggest to you there's something imminent there. It's just that it does come and go.

Right. Thanks very much.

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

Terrific. Thanks everyone for joining our call. We appreciate your time today. If you have any additional questions, please feel free to reach out to Investor Relations. Have a great day.