Thank you for standing by and welcome to the AB Second Quarter 2017 Earnings Review. [Operator Instructions] 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, Kim. Hello and welcome to our second quarter 2017 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website, www.abglobal.com. Seth Bernstein, our new President 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 second quarter 2017 Form 10-Q 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 also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights. Now I’ll turn it over to Seth.

Good morning everyone and thank you for joining us. I'm happy to be here with you today hosting my first AB earnings call. Clearly I've joined AB at an exciting time. The strategy to firm has pursued over the past several years is both compelling and bearing fruit, which you can see in the results so far this year. Investment performance is strong and getting better across a diverse product suite. Active net inflows were $6.6 billion in the second quarter and $8.5 billion for the year-to-date, which equates to 4% annualized organic growth rate. Second quarter adjusted revenues grew at nearly twice the pace of expenses in the second quarter allowing us to increase operating income by 20% and expand our margins by 270 basis points year on year. And we grew adjusted earnings per unit by 26% year on year to $0.49. These are great results that any CEO would welcome reflecting hard work and commitment of AB's 3,400 plus employees around the world. I'm proud they're now my colleagues and I'm excited to do my part going forward to build upon this strong momentum. So let's get to the results. Beginning with the firm-wide overview on Slide 3, total gross sales for the quarter were more than $20 billion, up 11% from last year’s second quarter and 7% from the first quarter of this year and our highest since the second quarter of 2015. Net inflows of $4.7 billion represents the $6.6 billion in active inflows I just mentioned, partly offset by $1.9 billion of passive outflows. This is obviously a huge improvement from net outflows of $200 million in the first quarter when active inflows of $1.9 billion were more than offset by passive outflows of 2.1 billion. Period-end average AUM were up versus prior periods…

Thank you Seth. Let's start with the GAAP income statement on Slide 14. Second quarter GAAP net revenues of 802 million increased 10% from the prior-year period. Operating income of 163 million increased 14% and 18.1% operating margin was 90 basis points lower. GAAP EPU of $0.43 compares to $0.40 in the second quarter of 2016. As always, I’ll focus our 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 based our distribution to unitholders upon our adjusted results which we provide in addition to and not a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentations appendix, press release and 10-Q. Our adjusted financial highlights are on Slide 15. Compared to the same prior-year period, second quarter revenues of 649 million increased 7%, operating income of 162 million increased 20% and our margin of 25% increased 270 basis points. [indiscernible] to our unit holders $0.49 per unit, up 26% versus the $0.39 for the last year’s second quarter. Higher base and performance fees combined with nearly flat non-compensation expenses primarily drove the improvement. Revenues, operating income and margin all increased from the first quarter due to higher base and performance fees combined with a lower comp ratio for the compensation accrual. We delve into these items in more detail on our adjusted income statement on Slide 16. Beginning with revenues, second quarter net revenues of 649 million increased 7% year on year. The 9% increase in second quarter base fees compared to the same prior-year period is due to higher average AUM across all three distribution channels and higher fee rate realization reflecting a mix shift from lower to higher fee…

[Operator Instructions] Your first question comes from the line of William Katz from Citigroup. Your line is open.

Okay thanks very much, I think its William Katz, but you guys can call me Bill. Thanks for taking the questions. And maybe we start with the discussion on compensation, I appreciate the update on the accrual. And so sort of stepping back, Seth, you may have a little bit more time to sort of understand the business and maybe put it in comparison to your peers. The comp rate is significantly higher than where some of your key peers are and if you adjust for I think the sell side business, I think that that’s probably reasonably true as well. How do you sort of think about that ratio looking out beyond 2017. Is there a meaningful opportunity to sort of normalize that ratio?

Thanks, Bill for the question. I think there is the intention of normalizing that ratio over time. That ratio will normalize with the continuing improvement in investment performance inflows and frankly, our continuing focus on managing our own cost structure. And I think given the breath of different services that we've successfully sold into our client channels this year and the change in improvement in the mix from a revenue perspective, it gave us confidence to actually reduce, we indicated the comp to revenue ratio in the second quarter rather than later in this year for an adjustment, which is what our normal course practice is and we'll continue to do, but maybe I'll just turn to John if there's anything additional to add.

Bill, I would just add there that we’ve spoken in the past that we believe there is definitely operating leverage in the business. I think we've demonstrated it this quarter with the high incremental margins that I mentioned during my comments. So as revenues, if they continue to increase, we do hope to, as we have done in previous years, leverage that comp ratio down somewhat. Last year, we came in at 48.5, which was actually down from the prior year. So I think what we're seeing right now is that year-to-date basis, with the revenues up 7%, within the markets higher, our next flows are positive 4.5 billion year-to-date basis, effective fee rate on the portfolio is up 140 basis points, we feel confident at this point in the year and we’ve also accrued, compensation expense is actually up about 33 million or 5.5% on a year-to-date basis. So at this point, we feel very comfortable with lowering the rate at this point in the year. It's just that we'll have to see how the rest of the year pans out. As I said, we expect to accrue the 49% right now for the balance of the year. And as we get into the year and the revenues start to crystallize and we are able to determine what our compensation needs are by business, we’ll see if potentially we can do better than that. But right now, we're looking at 49% for the second half of the year.

And then sort of a follow-up, when I look at the institutional business and so I appreciate that things bounced back very nicely and your mandates and et cetera, but when you gave some of the statistics that I think 8 of your 10 largest mandates within the pipeline, where I think commercial real estate, that number was a relatively small number, so I guess that the broader question is, is there an opportunity here to really scale some of this performance or is the targeted services philosophy more limiting in terms of an incremental absolute level of flaws?

No. I think there is additional opportunity to leverage the services. I think the targeted services of course are in the private client segment of the business. But more broadly, institutionally, most of the strategies that are actually in our largest fundings by this year are not in capacity constrained -- significantly capacity constrained services. So in fact, we're seeing broader breath across both fixed income and equities as well as in multi asset and alternatives. So I'm not particularly concerned that we're seeing concentrations in more capacity constrained strategies.

Yeah. I would just add Bill, I mean just even to tie your first and second question together, I think we've been pretty transparent that we've been making investments to build out a range of services, including in the alternative space, equities and the like. And the, while private client has been a major piece of helping us build those businesses up, we're seeing increasing traction in the institutional world as well and that's starting to be reflected in the pipeline and in the fee rate that you see in the pipeline.

Your next question comes from the line of Alex Blostein from Goldman Sachs. Your line is open.

Question around MiFID II. Obviously, the deadline is approaching pretty quickly here. So I was wondering if you could spend a minute on how the pricing discussions are going. I know you mentioned they're encouraging, but assuming a kind of flattish volume environment comparable to kind of 2017, how are you guys thinking about the implications for Bernstein revenues heading into 2018?

Thanks. There is no doubt that MiFID II creates an added pressure on the sell side revenues, we believe Bernstein is well positioned in situations where firms are deciding to call their list of research providers. Our research and training capabilities are distinctive and conversations with clients to date so far have suggested that they recognize that value of our offerings and are willing to get -- and are not willing to give it up. So in our view, we may ultimately be a winner, but I think it's too early to draw any conclusions on the topic.

And then second question around action the equitable spend, so is there a way I guess to kind of approach that, how should we think about implications for AllianceBernstein ownership by AXA and kind of that structure the way it stands today and I guess more importantly, the assets that you guys are currently managing for AXA and how that could evolve with equitable spend.

Well, as you know, we're in a quiet period. So we can't speak specifically about AXA’s intentions. From our own conversations with them however, they've been very clear from AXA’s perspective that they want to maintain the tenor of the relationship as you probably know that we manage about $120 billion for them, which is I think around a quarter or a little less than a quarter of our total assets, but they constitute, I think, around 5% of our total revenues. But there has been no expression on their side and we've certainly talked about it specifically in Paris, any interest in reducing their commitment to us. They continue to be a very supportive provider of seed capital for new services and I think importantly, our relationship with the US business that is subject of the spin will actually, in many ways, be much closer. There are two blocks down the street and the role we can play in there or our combined business activities is relatively more significant. So it's too early to determine whether there's meaningful growth there, but I would certainly say to you that we have no expectation that they'll be diminished and their commitment to us as a client as a consequence of this transaction.

Your next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open.

Asian retail sales activity can be quite volatile, especially in the retail channel. And we've actually seen this experience in your own results over the last few years. Can you just comment on how sustainable that current organic growth is and also are the sources generally broad based and diverse across both geography and distribution platforms.

Well, let me start and I'm going to turn it over I think to Jim to help me on this, because I am new, although I was just in Taiwan and Hong Kong and Tokyo a couple of weeks ago and it's an incredibly impressive business just to see in person. You're absolutely right. We have credit products that have been very volatile for the industry in general and they've been volatile for us. But what is really encouraging is the mix of the business that we're beginning to sell is widening. I mentioned earlier our multi asset businesses are diversified, our discretionary investment management product as well as emerging markets, multi-asset or MA as I affectionately call it, have both really seen strong gains in revenues. And as you know, multi-asset products tend to be stickier in their persistence than other products. But Jim, perhaps you might want to add?

No. I think you're capturing it well, Seth. I think we tend to look at how that part of the world trends over the long haul rather than quarter-to-quarter, because as you said Craig, on a quarter-to-quarter basis, the numbers can be, you can see significant moves one way or the other. But the long term trend and if you look at the growth that we've had broadly in that region over the long term, it's been quite positive. I would say, as Seth just noted, if you look at our year-to-date results in the region, it’s quite different than it was five or six years ago where if you looked at that part of the world five or six years ago, our AUM and our gross sales and our flows were largely concentrated in two funds, that being our global high yield fund and our American income fund. Those are still two very important funds, but if I look at gross sales year-to-date in that region, nearly half of the sales are coming from equities, multi-asset products or other fixed income products rather than those two funds. So it's our ability to broaden out and diversify our participation in the region is really encouraging and so that's also a major contributor to what you're seeing year-to-date.

And as my follow-up, I just wanted to dive a little deeper into MiFID II, do you expect to see any spillover in either the US or Asia as buy side firms adopt pricing disclosures of best practice and also how is AB’s agency trading business prepared to compete as a standalone business, if it has to compete separate from research.

Look, I think I'm going to punt a little bit on that question, Craig because I think that anticipating how this regulatory change is going to ultimately impact the industry as it is a little tough, I do think just echoing what Seth said that we're remarkably well positioned. The trading platform that you just mentioned is among the largest counterparties for the largest asset managers in the world, which I think speaks to their respect for that trading platform. It is a unique and very differentiated platform and it's reflected in some of the survey results that Seth also mentioned. So I have a hard time seeing folks wanting to back away from the type of capability because they're making that choice and it includes investors who are, let's call it, quantitative or passive in nature that are making that choice strictly based on the quality of the trading execution that they get.

I think Craig it is right that different firms are going to take different positions with respect to the application of MiFID in different regions. And so I think we've spoken to a number of them and most of them are still debating. What they do? A number of them come down and said, they will restrict it to Europe where it's relevant and others have said other -- have been thinking otherwise. So I think it's an open question, Craig on what the flowback effects or blowback affects could potentially be.

Your next question comes from the line of Michael Carrier from Bank of America.

Hey, Seth. Maybe first one, just given that you've been there a few months, just wanted to get your view on the institutional side, how have some of the conversations been going, you just given some of the turnover and the changes. And then on the strategic [Technical Difficulty] conversations been going, you’ve just given some of the turnover and the changes. And then on the strategic side?

I’m answering the first part of the question. But with respect to the future, I think when Peter and the management team were looking at this business post the financial crisis, they had to make some really fundamental decisions on where to build capabilities and how to fund it. And in my view, looking at it from the outside, they took a bold gesture to rebuild and create new services, both in alternatives and in equities and we're at the point now I think where those investments are beginning to come to fruition. Indeed from my perspective, the challenge the firm has in my opinion is that we probably have more sellable services than we have the ability to sell them at the moment and we funded a lot of that growth and managing the broader business through the distribution side of the shop over those prior years. And so we really need to continue the investments that Peter and Jim were making on the distribution side to give us the incremental capabilities, both in Europe, here in the United States from a retail perspective to follow through on that. So I'm, at this point, I think we have a product set without major holes that need to be filled. And so our focus at this point I think is blocking and tackling. So let me just stop there.

And then just real quick on performance fees, just given that it came in fairly healthy this quarter, is there anything on the outlook and I think you mentioned the performance fee, funds, just any timing I guess on those.

Well, let me answer the second part on the timing of the performance fee based funds, they are seeded. We look to start up activity in earnest through the course of the -- toward the end of this year. We've had very good reception from our critical partners, but with regard to performance fee outlook, I'd like to just turn it over the John.

Sure. So, Michael, it's John. Just with regards to the performance fee funds, we wouldn’t be looking to realize any material performance fees from those in the short term, because keep in mind we have to launch them, they have to garner AUM and we have to perform. But just in terms of the, our typical portfolio, as we’ve talked about in the past, the biggest quarters are always the second quarter and the fourth quarter, because for the funds that are on annual calculation periods, we had the select Alpha fund, which ended in May. That has always had the potential to contribute big as it did this quarter, did not last year because the markets were down. And then also always, the fourth quarter is always large as well, because we have things like securitized assets and a couple of other funds that will actually hit at that point in time as well. The other thing we should talk about is briefly here, is the LP structures, because we have real estate equity funds that are in LP structures. We have middle market lending, private credit structures and LP structures. Those structures, we cannot, under the current accounting, actually recognize the performance fees and revenue until the actual fund is either wound up or very close to being wound up and that there can be no chance that those performance fees can be called back. So we actually today that we disclosed this in the Q, but we actually have deferred revenue relating to performance fees on our balance sheet currently at about $73 million and we have offsetting compensation expense that when we realize those revenues will have to book at about 33 million. So there's about 40 million of operating income that’s just sitting there deferred on the balance sheet. And so the point where we actually sell more of the properties in these funds move towards the closure of these funds and get to the point where we actually got that cash, we were able to take that cash out of the fund, but we have been able to recognize it through our P&L. Some of these may get a bit easier next year, because the accounting recognition becomes a bit easier on this, but it's still not a slam dunk. You still have to pass these tests, where you look at the properties to the left or the bonds to the left in the portfolio and if you were to liquidate them at basically zero prices, there has to be kind of a very low probability they could call back those performance fees. So this is just, as we talked about these businesses getting to scale, this is how you're starting to see it, you’re starting to see these deferred P&L on the balance sheet that at some point will work its way through the P&L.

Your next question comes from the line of Rob Lee from KBW. Your line is open.

Just maybe a follow-up to an earlier question, again, understanding that it's three months in, so still getting your arms around things, but could you maybe, I mean the private wealth business I guess would be a business that maybe little near and dear to your heart to some degree and business has clearly turned around. So number one, if you look at that business, how do you, at this point, think about further opportunities to other accelerated growth there or do you see any need to kind of change or make some changes there to accelerate growth, just kind of how do you think about the positioning?

It is a business near and dear to my heart. And I've been a client of it for, I guess, 15 years. So I speak as a client as well in this regard. And I’d tell you that AB has a really distinctive proposition in a world where open architecture has become the rule, rather than the exception in the way portfolios are built. And having seen it from both perspectives and recognizing as well I think as most people, the merits of each, I'd say that the portfolio construction of what we're creating for clients has a consistency and an integrity which others really can't match because we’ve recognized what’s best are embedded in each of the services that build out that portfolio and that is an unusual benefit. But it doesn't appeal necessarily to everybody and we recognize that. And -- but it is the cornerstone of what we do. It doesn't mean however that all of the services we provide to our private clients need to be managed in house and indeed we do offer third-party services selectively to fill out areas where we don't necessarily have those capabilities in house. We need to continue to focus on that and build out a suite that is really compelling to our clients and that days. I think our challenge is less in convincing people about the quality of our services, particularly when clients are aware of our -- how cognizant we are of tax planning and how important that is in building after tax returns, something I think many of our competitors are less focused on. But rather our ability to accelerate growth in the number of days we have in the field, that has proven more challenging to us than I think we had originally anticipated and we have to continue thinking about that, but the quality of the FAs is critical, we can't compromise on that. We have our own distinctive way of developing them and we will be methodical in building out our reach within the markets we currently are and those adjacent to where we are. So let me stop there, but I think they clearly have a bright future.

And maybe as a follow-up, I'm just curious, if I look at many of the alternative strategies in real estate, direct lending and others, I think as you mentioned, they've been really focused -- distributed predominantly through the private client channel, but why not bring those to the broader institutional market. There is obviously strong demand out there. Is it just trying to control capacity or I mean why not kind of broaden the client base there?

I'm going to pass it over to Jim for the specifics of it.

I would say you're right on both counts in the sense that in many cases, those strategies were initially successful in our private wealth business. But as we noted earlier, just as an example of the largest addition to our institutional pipeline this quarter was in commercial real estate, which is one of those alternative services. So we are -- and over the years, we've been successful in our real estate equity business in terms of raising money and the like. So I think what you're going to see in the institutional space is an increasing diversification of those alternatives as well as everything else that we've done. I was looking at, if I look at gross sales this quarter in institutional, we’ve talked about the pipeline, but I think that like the first of the largest items only to our, in our fixed income business, the other dozen fall into multi-asset alternative business or equities.

And maybe just a quick, more of an accounting follow-up, but of the 5.5 billion of commitments in the alternative strategies, is that in -- are those fee paying at this point or are those all kind of in drawdown funds that’s kind of as you deploy that 5.5 billion kind of flow in over time.

As it is deployed, that would be that committed capital, but as they're drawn down and put to work, that's when the fees would kick in.

[Operator Instructions] Your next question comes from the line of William Katz from Citigroup. Your line is open.

Sort of a tactical question. Within the private client balances, can you give me a sense of what percentage is in cash and can you talk a little bit about what if any revenue sharing you might have as, to the extent rates would continue to rise.

This is John. As far as what percentage of the 70 odd billion is cash, we really would not disclose that. And I'm sorry, your second question again.

In the possibility type of dynamic or revenue share, just trying to think about, I guess what I'm trying to triangulate toward is given interest income was a much bigger number than we anticipated on the revenue side, so just sort of thinking about that, just sort of presumed that maybe there was a bit more cash in the private client business and given where rates are, just trying to get a sense of sensitivity to that line item going forward?

Great question. And that’s, in my prepared remarks, I was trying to address this and I apologize if it wasn't clear. So you're absolutely right that we did have dividend and interest and the other revenue line was up about $4 million and that's on the broker dealer investments. We also have that interest expense line in the P&L as well and that's the actual interest that we're paying the private clients who are keeping cash balances at the broker dealer and that also went up 4 million. So you can see, there is somewhat of an offset there. Typically what would happen in a rising rate environment, sometimes, the expense will lag the revenue side. So we may see a bit of a bump in the revenue before we actually realize the expense in terms of raising the rates that we're actually paying on those, on those client balances, but what you're seeing this quarter is that there's pretty much an offset.

But over time, it's largely going to be a wash, Bill.

There are no further questions at this time. I turn the call back over to Ms. Prochniak.

Thank you everyone for participating in our conference call today. If you have any follow-ups, AB investor relations will be available all day. Thanks very much.

This concludes today's conference call. You may now disconnect.