And welcome to the AB fourth quarter 2014 earnings review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded, and will be available for replay for one week. I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AB, Ms. Andrea Prochniak. Please go ahead.

Thank you, Chris. Hello, and welcome to our fourth quarter 2014 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.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after our prepared remarks. Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the Safe Harbor language on Slide 1 of our presentation. You can also find our Safe Harbor language in the MD&A of our 2014 Form 10-K, which we filed this morning. Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum. So please ask all such questions during this call. We're also live tweeting today's earnings call. You can follow us on Twitter using our new handle @AB_insights. Now, I'll turn the call over to Peter.

Thanks, Andrea, and thank you all for joining us today. So let's begin with a firm-wide overview on Slide 3. In fourth quarter oil dropped significantly and volatility increased in both equity and fixed income markets. Our gross sales of $15.2 billion were $3.6 billion below the third quarter. As a result, net flows were negative $1.6 billion in the quarter versus positive $2.8 billion in the prior quarter. By asset class, flows in the quarter were negative $2.5 billion from active equities, $900 million to active fixed income and $600 million to other assets, mostly alternatives and multi-asset services. For the year, we had net inflows of $5.1 billion, our first positive net flow year since the financial crisis, with significant flow improvement in each client channel. By asset class, flows for the year were negative $4.7 billion from active equities, $7.8 billion positive to active fixed income and $4.2 billion positive to other. And as we reported in our January AUM release this morning, our total net flows were positive for the month. Now, let's move on to Slide 4, which tracks our quarterly flow trends across channels. Gross sales were down, redemptions were up and net flows were negative across all three channels of our client groups in the fourth quarter. Institutional gross sales of $4.7 billion were down 19% sequentially and 15% year-on-year, sequential declines in the Americas, Japan and Australia, more than offset increases in EMEA and Asia x Japan. Institutional redemptions rose 67% sequentially, resulting in net outflows of $300 million. At the same time, redemptions were less than half those of the same prior-year quarter and net flows improved by $5.3 billion. In retail, gross sales fell by $2.4 billion or 21% sequentially with a 70% of the decline coming from our global…

Thank you, Peter. As always, I'll focus primarily on our adjusted results in my remarks today. Our standard GAAP reporting is included in this presentation's appendix, our press release and our 10-K. Let's start with the highlights on Slide 15. Fourth quarter adjusted revenues increased sequentially, primarily due to higher performance fees and Bernstein Research revenues. For the year, revenues increased due to an increase in base fees, resulting from higher average AUM and higher Bernstein Research revenues. Our adjusted operating margin in the fourth quarter improved to 27.9% from 23.8% in the third quarter. The 2014 full year adjusted operating margin increased l0 basis points to 24.2%. Adjusted earnings per unit were $0.57 for the quarter versus $0.45 in the third quarter. For the full year, adjusted earnings per unit increased 4% to $1.86 from $1.78 in 2013. Now, I'll review the quarterly GAAP to adjusted operating metrics reconciliation on Slide 16. Fourth quarter adjusted operating income was $8 million lower than GAAP operating income, primarily due to the exclusion from net revenues of $3 million of investment gains related to the 90% non-controlling interest in the venture capital fund from and the exclusion of the $4 million reduction in contingent payment arrangements that was recorded as a reduction to GAAP expenses. We reduced our estimated contingent payment liability relating to our 2010 acquisition of the Sun America's alternative investment group based on lower projected revenue sharing payments. In addition, we excluded $1 million of credits realized when we trued-up of our real estate sublease assumptions during the quarter as well as $1 million of acquisition-related expenses from operating expenses. Slide 17 provides the full year GAAP to adjusted reconciliation. 2014 adjusted operating income was $1 million lower than GAAP operating income, primarily due to the net effect of…

[Operator Instructions] Your first question is from Tom Whitehead with Morgan Stanley.

My question is on the margin. And if you think about the comp ratio holding at 50, and a lot of the spending you're doing and are expected to continue to do on the brand, and with new fund launches and kind of the marketing side of the business looks to be increasing as well. Can you maybe elaborate on sort of where the operating leverage comes from, if we continue to see a topline increase like we've had over the past few years?

I think our anticipation is that if we can grow our topline, you're going to see operating leverage throughout the P&L, and that would include on the promotion and servicing line and G&A lines as well as on the compensation line.

I would just add, because the question may come up later that the brand, which you mentioned, which we've been investing over the last few years is really quite small in terms of dollar amount, and it's not going to have anywhere even insignificant effect on the P&L.

I would just add that a lot of that brand expense is already actually behind us. And I think if you look at the margin change from the third to the fourth quarter was up 410 basis points. 200 basis points of that is due to the comp ratio, but excluding that, the margin still increased 110 basis points.

And then my follow-up is on M&A. I guess, broadly can you just comment on what you're seeing in terms of opportunity and pricing. You've spoken in the past about WP Stewart and CPH, are there any plans for bolting teams on to there to get those to scale? And maybe you talked about the active share equity products, any holes there that you might be looking to fill?

Well, we made some additions this year in addition to CPH. We brought on a team in the direct lending space, in the infrastructure space, to mention two. And so I think that when we see opportunities, we're going to continue to act. I would anticipate that whatever we do would be consistent with these six or seven things we've done over the last few years, where we've either bought teams in or bought businesses that we think we can scale over time attractively, economically and accretively to the unitholders. And also teams that work well within the firm and that have a lot of synergies for research point of view and all the kinds of services that our clients want, so expect us to continue to do that. I think in terms of the opportunity set, I wouldn't say that it's really changed much. The opportunity set seems to be consistent over the last few years. There is lots of reasons why firms want to change their ownership or to become part of a large organization. Those teams still seem to be relevant.

With regards to the active share equity products in particular, any comments there?

Well, I think we're trying to make a very clear point that, number one, high-conviction portfolios in large cap space can produce alpha, and in fact over long periods of time have produced alpha. Secondly, the alpha they've produced is significantly in excess of lower-conviction portfolios or highly-diversified portfolios. And third is that the more and more passive investments that investors hold, the bigger their challenge is to actually create alpha for their ultimate constituencies and that allocating capital to high-conviction equity strategies can resolve some of that risk.

Your next question is from Bill Katz with Citi.

Just on the discussion on direct lending and infrastructure and real estate, that seems to be a sort of mega theme that's playing out among the pure-play alterative managers, and I think it's a nice quite story for you guys. Could you just sort of size in aggregate those three buckets of AUM and where you might be in the asset rates versus deployment cycle for those businesses? Just sort of curious to how much growth there is filled for any for those businesses?

Well, look there are some rules that inhibit us saying a lot of specific things about private placements, but in the real estate space we have three different funds, if you will. Our First fund that was in the opportunity side of the business that was raised, closed, and deployed. We have a second fund that has been raised and that is a significantly more successful fund in terms of size than the first one. And we've also raised an asset in excess of the opportunity fund in the debt size. So we're talking about multiple billions of dollars in real estate that is run by that team. In the middle-market lending business and in the infrastructure business, we're also talking about funds of the billion dollar or so size and we're deploying that, those funds are not fully deployed yet, but we're ramping up that deployment, so that gives you a sense of where that is. I would say, fund raising has been robust in all three of those places.

I think if you, Bill, if you look at our other segment, which includes alternatives and our CRS business, the $4 billion that positive flows year-to-date is largely composed of alternatives in the form of long-short equities, and then as Peter mentioned real estate, other types of private credit as well fund to funds.

I think great disclosure. That would be very helpful as well just to attract those dynamics. The second question is related to, today you announced January AUM, looks like it was a nice flow recovery story. And just maybe I was going through that too quickly, but it looks like you had a very strong institutional fixed income month, sort of wondering if you could speak to the dynamics behind that? Is that some wins you got from PIMCO? Is that just sort of funding of your pipeline sequentially? And so wondering what may have happened in early part of the year.

I think, Bill, the lumpiness in the fixed income or the inconsistency in fixed income, I'll put it that way, is derived largely from the '12, '13 experience where we had a very fast ramp up in Asia in the Global High Income of portfolios and then a reversal of that. Although, net over that two year time period the flows have been quite positive. So if they had come in on a pro rata basis, we would have had a smoother process of growth. So rest of the fixed income and for that matter equity wins have been sort of a constant drumbeat of success. Now, constant in the sense of over a yearly basis, not necessarily constant quarter-to-quarter, that's why they sometimes are lumpy in that sense. What I am really saying to you is that January's wins don't reflect any big unique opportunity. I think as it relates to competitive flows, we're winning our share of that competitive business in the institutional space, as it becomes available. And as you know, we are a global bond player and a global credit player, and so to the extent that institutions are rotating out of exposure to large domestic fixed income players, that's an opportunity for us to capture that rotation out of domestic into global, as investors think about the fact that maybe global exposure is more efficient than domestic. And that continues to be a theme for us and will be a theme for us for actually I think a long time to come. That's really what's driving January. And frankly, we expect that to last all through 2015 and beyond. It won't be month-by-month, so it will be lumpy, but I think over the year, there will be persistency to it.

I would just say that the insurance industry has a real challenge right now, as they look to deploy money, Bill, about how they're going to generate returns. And I think our fixed income platform has been very well-positioned to benefit from that challenge that they have.

Jim makes a good point. It's really worth talking about. And not to give a plug to Bernstein's Research, but there is a very interesting Bernstein Research piece that's out. I don't remember the author about the Pan-European insurance issues. And there is $7 trillion of European insurance assets that are being deployed in a declining rate environment in Europe, and in some cases, as you know negative rates. And where will those assets go and how will they achieve returns, given the regulatory constraints that regulators have placed on insurance companies, which really prohibit them from being in the equities business.

Your next question is from Mike Carrier with Bank of America.

I guess the first question just on the net flows. If I look over the past couple of quarters, you guys have made good progress, particularly on the redemption rate. Your sales have ticked down a bit over the past few quarters, somewhat of an industry trend. But I just wanted to get your outlook, when you look at the performance now that you have, if you look at the diversified set of products, do you think going into '15 and '16 that the net flow improvement will be driven by an increase in sales or do you think you can still have some ways to go on improving the redemption rate?

I think our anticipation or expectation is that gross sales will grow. Redemption rates will stay reasonably constant. We don't expect them to fall much lower, and that the net increase i.e. the net flows will be driven as you point out from basically sales.

And then just real quick, just given the $10 billion win that you guys have on the CRS side, just want to get a sense on fee rates in that business versus margins, meaning if you have scale in the business the margins can still be pretty attractive, but just the dynamic there particularly if you continue to grow that area.

I think you got that right.

And then maybe just on the margin. I just wanted to understand, you guys have made a lot of investments over the past couple of years. So when I think about the pace of investment, so like the growth rate, given what's on the plate for '15 and '16, should we expect a similar level or will some of that start to pull down and will that be the fuel of the operating leverage, if the momentum on the revenue side continues?

I think, in general, you are correct. The pace of investment will slow. As we look to '15, we still have relatively significant investments as we indicated beginning of last year. The same thing is going to play out this year in terms of the opportunity that we see in the private credit space. But our overall level of investment as we move forward will decline.

Your next question is from Michael Kim with Sandler O'Neill.

First, any lumpy ins-or-outs, if you will on the institutional channel during the quarter? And then just curious to get your take on trends you're seeing across the institutional landscape in terms of risk appetite or allocation trends, either here in the U.S. or abroad as well?

So first question, no, nothing particularly lumpy.

I would say, we did have a couple of relatively large equity losses in the quarter in institution.

Yes. Although, non-multiple billions.

Correct.

But I do think that we did point out the $10 billion CRS win and so that's obviously a sizeable piece. But any north of $1 billion is basically zero. Secondly, on the institutional space, I actually think there are some interesting things bubbling around in the institutional world. I wouldn't say there are huge trend yet, but I do think that pension plans are looking at very low interest rates globally. They are looking at their de-risked positions over the last six or seven years. They've got to be reflecting on the pressure that we mentioned earlier that fixed income investors are putting on credit spreads. And they have to be looking at central bank easing around the world and they have been looking at the elevated equity risk premium. And deciding whether or not there is really any alpha and equity for them to take advantage of, given how little exposure they have to equity alpha having moved as far as they have into passive. And I think that is a question that they are asking. And whether the answer to that comes out in more exposure to these high-conviction managers, more exposure to hedge fund, more exposure to ill-liquid credit or some other rendition of something like that. I think that's the question institutions are asking. And I think that that's going to be of interest to our industry for the next few years.

And then just a follow-up on leverage, and not to beat a dead horse, but you mentioned expectation for margin expansion assuming revenues continue to build. But just given sort of the lower comp ratio in 2014 and some of the tailwinds you referenced earlier, just trying to box that with your relatively stable comp ratio guidance. Is that just more a function of wanting to stay a bit more conservative early in the year or any color there would be helpful?

Look this is an uncertain industry, markets go up and down. We make the best estimates we can of our comp expense at each point in time, and we try to be as clear as we can be on that. I think the best advice we can give you is that if we can create topline growth, which we obviously believe we can do, then you'll see the leverage, the operating leverage between revenues and the comp line. And I think as a question was asked earlier about investments, which also depressed or elevate the comp ratio, obviously, suppress the margin that more than likely those investments will, I wouldn't call it taper-off, but it will be less robust in the future, subject to opportunities that we see. But we've done a lot in the past, and we've got a lot of options and a lot of opportunities to raise assets in those. And so you would naturally believe that we have a little less need going forward. So between lower investment, higher revenue growth and a persistency to try to improve operating leverage, I think that's where the opportunity is, Michael.

Just to add to Peter's comment, as you can see, last year we started out accruing at a 50% comp ratio. And as we got into the third quarter, we got more visibility in terms of how we felt revenues were going to come out for the year, and some of the other factors that also affect the compensation pool like the severance payments and forfeitures of previous year's comp. We're actually able to then start to lower down the ratio. It's just that starting out the year, there's obviously a lot of uncertainty out there, so we have to be prudent.

And maybe just one last quick one. Just given the strengthening dollar more recently, can you talk about potential FX impact to AUM and the P&L? And how you're maybe thinking about hedging some of that risk and sort of the outlook for FX trends going forward?

I think the dollar probably continues to be strong against the euro. I think the FX impact on our numbers in January was significant. I think to the extent the euro continues to weaken. That will continue to be a drag on AUM. We don't have active hedges in place and doubt that we'll put them there. We do all of the hedging of currencies within the client portfolios, not on our balance sheet. I think you would be delighted if we got it right and irritated if we got it wrong. And the delight will have a positive effect and the irritation will have a negative effect. So we're just not going to go there. But I do think, Michael, that the dollar is likely to continue to appreciate, in particular if we see the Fed move on interest rates some time in this year, and the rest of the central banks in the world continue to ease, that differential in rates will continue to drive the currencies in the direction they're going.

I just want to add to Peter's comment. If you just focus on the balance sheet risk as far as translating the foreign currency balance sheets we have around the globe into U.S. dollars, that risk is very, very small and is really de minimis.

Thanks, John. That's a good point. All the risk is really in the AUM and where it's located.

Your next question is from Robert Lee with KBW.

Just curious, in private client, I mean now that that business is stabilized and certainly flows have improved from where they were. Is it time to go back to the offensive in a sense that maybe you're back to looking the growth that you had a number of offices or relationship managers? And any color on kind of the growth initiatives there, now that performance and the product set and what not are all better and performing well?

Rob, I think we are growing that business. We are growing the number of advisors. And we're also taking a lot of initiative to make our existing advisors more predictive, and we think those are the two biggest levers to growing the business going forward.

The very specific goals you have to grow the advisor force, I don't know 5% a year or what. I'm just trying to get a sense of I guess years past there have been some large, and I guess I'll call them recruiting drives almost, where they trained the live new advisors and there was like a pipeline you expected to kind of mature, so to speak. So any kind of additional color there?

So I'll give you some longer-term aspirations. It's very hard to predict it year-over-year. But I do think that we would like to see the advisor population grow in the low-single digits maybe mid-single digits or 2% to 4%, 2% to 5%. It's actually, as you know, a challenge to grow the advisor staff, because you have people to retire, you have people that don't openly find it successful and some people do leave. And then you have to bring people in, and as the people you bring in, there is a large component that is not successful and there is obviously a component that is. And so managing all of that, it's actually challenging to grow that population at a faster rate, because it's also driven by the local manager in each of those offices and their ability to mentor and train and help those individuals to be successful. So I think our target is to have, as I say, lower-single digit growth in the headcount of successful advisors overtime. And if we do that, and then if advisors grow their own business by adding assets, that's a growth rate, and then markets grow. That's where you can get to a low-double digit kind of growth to the business. So if you add to market growth, the growth of assets from existing advisors, productivity and new advisors that you add, that's the attempt that we're trying to create. In particular, in the near-term the ability to make our advisors more productive is a real opportunity. You think about the success that we've had with targeted solutions, where we raised well over $1 billion this year, we just see that. It's just one example of something that we can continue to build on in 2015 and the years ahead. And that has a bit of a pipeline to it, because not all of that money is cash, some of it is committed. So as we continue to build these kinds of services, we'll build a pipeline of commitments that will take down overtime or actually be funded overtime.

And just maybe one follow-up, just wanted to clarify. So the $10 billion mandate that you won in the retirement business, am I correct in assuming that that's the same basic capability that forms the backbone, so to speak, of your relationship with Morningstar? And then maybe as it relates to the Morningstar relationship, is there a specific market segment that that kind of joint venture is targeting small plans in middle market, any color there?

Sure, I'll give you a little color. The answer to your question is, yes or no. The Morningstar service is a service where Morningstar chooses managers and we work with Morningstar to actually determine the glide pass and the asset allocation. And then planned sponsors will adopt that joint venture service, that product, where they have the efficacy and credibility of Morningstar as a manager selector and the AB inside, if you will, the Intel chip inside, to determine the asset allocation and the glide path. That resolves many of the concerns that the Department of Labor has with regards to plans that are using platforms, where the default options are the platform owners owned asset managers, where they effectively use no outside manager selection and that you are in effect a captive audience. That could be in a large plan, it could be in a small plan, it could be in a mid-sized plan. But the general target is probably mid-to-small size. The CRS business is, essentially that business we're at large. There is no Morningstar involvement in that, but there is a highly sophisticated asset allocation process going on as well as customize glide path that's going on. And so the assets included in that, the types of assets included in those plans are somewhat more sophisticated, but its essentially the same process.

And we have a follow-up question from Bill Katz with Citi.

Actually I have three follow-ups, if you would allow. First one, just to qualify the FX discussion. The P&L impact, is that de minimis? I'm trying to understand the economics. I understand the AUM dynamic. But it is that you have some operations outside United States that's a natural hedge or is there a P&L impact we should be considering as well?

No. That's what I was getting to. So if you look at and think about the balance sheets and translating the foreign currency balance sheets to dollars that effect is de minimis.

Bill, we do have more cost in the U.S. than we have overseas.

Second question is if you look on Page 5, I'm just trying reconcile a notion in my head, and I apologize it might be [indiscernible] question. You had about a 65% year-on-year increase in your equity RFPs and 29% increase overall. And if I look at your AUM pipeline, it's up from $5.9 billion over $4.5 billion, that's also about 30% increase. So as you're interacting with clients and institution investors, are these a lot of small mandates or are any of these that could actually be rather sizeable and particularly scalable. And I guess the root question is, do you think we're getting to the inflection point with similar legacy equity attrition you've been suffering really starts to dissipate and some of these newer products can really jumpstart the equity line overall?

Well, that's a good question. I think in my comments you will have noted that, for example, Global Strategic Value has had very strong performance in the one year and three year time periods. And it has not gone unnoticed in the institutional marketplace and in the consultants' marketplace, similar kinds of attitude towards U.S. Large Cap Growth and Emerging Market Growth. These are core services that haven't seen a tremendous amount of interest in the past for all the reasons that you know, but consultants and institutions are actually engaging with us, and that's part of what's going on in the RFP activity. I think there also are early wins and early successes in both the concentrated U.S. team that's W.P. Stewart, historically, and in the global core team, which is the CPH Group. And so we're also seeing what we would be reasonably excited about as actual wins in some cases in both of those new services. I don't think that we would report to you that we've seen a sizeable amount of multiple billion dollar equity allocations to individual equity services, although certainly sizeable sub $1 billion wins or mandates are going on. And I don't sense that at least in the institutional market that there is a lot going on in the marketplace at north of $1 billion in the active equity space. And as you know active equity flows generally are negative. And so what we see in these more concentrated or high conviction portfolios that sometimes have capacity constraints, many times have capacity constraints. You'll note that we closed the capacity in our U.S. loan only select strategy. You do see smaller size mandates, but at attractive fees. So I'm not so worried about the size. I think that there is plenty of size out there and clients are giving us lots of assets when we win them. I've actually quite interested in diversification and the success we're having in the newer services that we brought, but most hardening is the success we're having in the services we've been long committed to, who are now performing, not just on a one year basis, but on a three year basis, and in some cases on a five year basis.

And then my last question, again, thanks for taking the broader questions here. On liquid alts, it seems to be a theme for the industry at large. Where do you think you are in terms of and maybe just on a global perspective in terms of distribution penetration and what that might infer from incremental growth?

I think we're in the earlier innings in distribution penetration. I think we're on some of the large platforms, meaning that both the wire houses and the large IRA platforms. We're not on all. There is discussion at some of the larger distributors around how to actually sell these products, what the right processes are, how to disclose them, how to train their FAs. I think that is going on for the industry that's a net good thing. It may slow the distribution right now, but it will accelerate it overtime. I mean there are highly attractive attributes to the long/short world for the investor. If the manager is able to select long/short managers that produced appropriate returns, given that you can generally get returns that are attractive from a sharp ratio point of view at less volatility than the equity market and effectively capture more of that equity risk premium I was just talking about, with a little less risk than having it all on the equities. There is real value to that and I think that that's something that distributors are trying to understand and wealth advisors to trying to figure out how to talk to their clients about it. So I'd say, we're in early innings of the general distribution system, figuring that out. And as it relates to us specifically, I'm pretty happy with where we are and we've got a lot of momentum and being able to expand that.

And there are no further questions at this point in time. I'll turn the call back over to Ms Prochniak for any closing remarks. End of Q&A

Thank you everyone for joining our conference call today. Feel free to contact Investor Relations, if you have any further questions. Thanks and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.