Thank you for standing by and welcome to the AllianceBernstein Fourth Quarter 2018 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, Jessa. Good morning, everyone and welcome to our fourth quarter 2018 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. Seth Bernstein, our President and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our 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 would 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 2018 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 are 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. Thank you for joining us today. Despite the impact of year-end market dislocation on both industry flows and assets, we maintained strong underlying momentum across our business in 2018 and further strengthened our competitive position. Our full year results reflect the differentiation of our revitalized active equity platform, which attracted $10.8 billion in net new flows, and our ability to continue scaling and commercializing our business. Our sales mix across channels was our most diverse in years. And finally, our results reflect our ongoing commitment to disciplined expense management, as demonstrated by the 140 basis point expansion in our adjusted operating margin in 2018 to 29.1%. Now, let’s get into the specifics. Starting with the firm wide overview on Slide 3. Annual gross sales of $93.8 billion in 2018 were up $15 billion or 19%, about $10 billion of the increase came from first quarter CRS funding. The rest was from robust client activity particularly in active equities. Total firm wide net flows were negative $8.1 billion for the year. We experienced two large CRS redemptions totaling $14 billion in the first half and significant annual outflows from both institutional and retail fixed income products. Because of these net outflows and the seen fourth quarter market decline, we finished 2018 with lower assets under management. However, average AUM was up due to our first three quarters of strong market performance. We also reported January 2019 AUM this morning. We were pleased to see the markets rebound during the month and return to positive net flows in our Retail and Private Wealth channels, though these were eclipsed by outflows from Institutions which resulted in total firm net outflows for the month. Slide 4 shows our quarterly flow trend by channel. The left side chart shows the outsized impact of…

Thank you, Seth. Let's start with the GAAP income statement, on Slide 15. Fourth quarter GAAP net revenues of $804 million decreased 13% from the prior year period. Operating income of $199 million decreased 30% and the 25% operating margin decreased by 490 basis points. GAAP EPU of $0.63 compares to $0.84 in the fourth quarter of 2017. 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 base our distribution to unit holders upon our adjusted results which we provide in addition to and not as substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are on our presentation’s appendix, press release and 10-K. Our adjusted financial highlights are included on Slide 16. Fourth quarter revenues of $696 million, operating income of $204 million and a margin of 29.3%, all decreased year-on-year. We are going to distribute to our unit holders $0.64 per unit compared to $0.84 for last year's fourth quarter. Lower base and performance fees as well as seed investment losses primarily drove the weaker results. For the year revenues increased $213 million to $2.9 billion, operating income increased by $102 million to $852 million and operating margin increased by 140 basis points to 29.1%. Adjusted EPU increased to $2.67 from the prior year's $2.30. Higher base and performance fees drove the increase in revenues and diligent expense management drove our continued margin expansion. We delve into these items in more detail on our adjusted income statement on Slide 17. Beginning with revenues. Net revenues decreased 10% for the fourth quarter but increased 8% for the full year versus the same prior year periods. Base fees for the fourth…

[Operator Instructions] Your first question comes from the line of Michael Carrier from Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. This is actually Sean Tillman on for Mike. Just a couple of questions on flows. Can you guys discuss your thoughts on what drove the elevated fixed income outflows in the quarter? Do you guys believe it was driven by the weaker short-term performance or more just environmental factors and seasonality?

Let me take that. I think it was more the environment than short-term performance. And I say that principally because particularly that's in the grade credit. A lot of those flows, outflows were a function of unattractive FX hedging costs that a number of our offshore clients were experiencing rather than necessarily performance shortfalls in the -- in performance of investment grade. On the other hand, in our retail services, which were global multi sectors such as global high yield and AB high income, we do have an exposure to emerging markets and we did see underperformance there given our overweight earlier in the year which did cause us to underperform relative to some peers. So I do think it was more accentuated by a broader environment that was more negative.

Okay, thanks. And then you guys have had really strong flows in equities and alternatives. And a part of that is a strong performance, but even very strong performance than peers, you guys are doing better. So we're just wondering if that's more of the product lineup or distribution mix that's driving this?

Well, I think it may be both. I think we have really spent a lot of time and effort creating a product suite that speaks to our clients. We had 16 services, equity services with net flows greater than $250 million last year. And so I think that they were -- the services were meeting specific client needs. Additionally, we have been as you know, been investing in optimizing our US and EMEA sales forces and I believe there's been benefit from that as well.

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

Thanks, good morning. Just looking into next year you highlighted that assets are starting at a lower point or I should say this year. Can you talk about non-comp expense and kind of how you're thinking about the environment or budget for this year versus say previous periods?

Sure. This is John. Actually I think we've made a lot of great headway on keeping the non-comp expenses under control. They're actually down year-over-year for the full year when you look at the combined a promotion, servicing and general -- G&A expenses. Going forward our goal is to try to keep those -- the rate of increase of those -- both of those lines around the rate of inflation.

Great. And then performance fees obviously very difficult to predict but just thinking about the setup for 2019 and is there are any high watermarks or how we should think about just generally the level versus kind of previous periods as you've obviously been growing your alternative AUM, but just want to get a sense of how we should kind of think about the contribution in ‘19, maybe versus previous periods or other things you could help us in terms of getting some level around that?

Sure. In 2018, we were -- held -- in the performance fees -- over $195 million or so in performance fees we had, about $130 million of those fees came from two funds that are currently in liquidation. So Real Estate Equity Fund I, we realized that $91 million of performance fees and then over $30 million came from Financial Services Opportunity Fund I. The liquidation of that fund was completed in 2018. Real Estate Fund I is still out there. But it's been mostly liquidated, so we would expect some minimal fees from that in 2019. So I think when you look at the $195 million, you have to really take off the $130 million. And then of course, it's really a function of what's going to happen with the markets going forward. The strategies all vary, some of them have high watermarks, that you have to pass and then you get a certain percentage of the upside above that, some others don't, but again, it's just varies strategy by strategy.

Your next question comes from the line of Bill Katz from Citi. Please go ahead.

Okay. Thank you very much for taking the questions, this morning. Just wanted to spend a little time on the institutional dynamics in your AUM release you sort of noted that you had outflows in the institutional in January, but yet your pipeline at the end was rather strong. So I’m wondering if you could talk to maybe interplay between what's sort of driving the nice pick up in the pipeline versus what was sourcing tactical basis here in the month of January?

In terms of January, it's always -- I hate to even comment on a month-to-month basis. But I think the dynamic was not unlike what we saw in the -- in 2018 in the sense that we had a couple of large fixed income outflows that really accounted for the bulk of what we saw in January. Outside of that the trends were quite similar and to your point the level of activity that we're seeing, be it in equities or alternatives continues to be quite strong. The -- and what's encouraging, I think when you look both at what's been coming into our institutional business over the course of say over last three quarters of the year where the fee rate was nearly twice, what our overall average fee rate was in the book overall and then you look at the pipeline, and the average fee rate is well above 2 times our existing book, I mean that's a very encouraging trend when you think about both the breadth of activity, the type of support that we're getting from consultants, and the average fee rate. It's all positive.

Okay, that's very helpful. Thank you. And then you'd mentioned in the private clients a new sort of fund-to-fund opportunity. So sort of wondering how quickly that gets launched and what kind of scalability you could foresee to lookout over the next one to two years, maybe back here this year in 2020?

Bill, it’s Seth. We are working with Abbott Capital to do a private equity fund-to-funds vehicle. Abbott's focus is on middle market which fits nicely with our focus of our middle market lending business, both of which we target capacity for our private client group. I think it's too early for us to forecast what we think the take up will be, because we haven't sold the sort of service before. So I would refrain from guessing, but we're hopeful that this will resonate with our clients.

And Bill, I would just see it as again one more step in a continuing evolution of how we're positioning our Private Wealth business as we target a higher network clients and maybe that we've served historically. And it's going to be -- if you look at how we have progressed in terms of the development of our alternative and focused equity services in that business, it's just another brick in the wall.

If I can squeeze maybe one more in. So as we think about your commentary that you run a little bit ahead of time in terms of the pacing of the cost saves associated with the relocation and sort of putting aside the elevated up front transition costs, can you update us as to what you are thinking about in terms of the long range margin opportunity. Obviously you've bottomed up already close to that 30% near-term target. How should we be thinking maybe long-term once you get through from this cost savings and just assuming reasonably benign markets, I know it's a big assumption?

Well, again, this is John. So as we talked about that we expect to turn breakeven or slightly positive in 2021. And from that period the savings continue to build each year, but it's not until you get to 2025, when the transition period ends. At that point, we're looking at basically expense savings 70 million to 75 million a year. So I think you can just take that number and there you'll see the impact on the margin from that.

Our next question comes from Robert Lee, KBW. Your line is open.

I guess my first question would be in Private Wealth, I mean, I noticed the 60% increase the number of advisors, if I'm not mistaken, maybe the highest biggest increase in the number of years. So if you maybe just -- I'm assuming maybe this is a larger recruiting class, you maybe talk a little bit about what's driving that and kind of how you see that progressing and how you're kind of thinking of that for those new advisors hitting kind of run rate production?

Sure. We have, as Jim was saying, as we revived -- have we've revived the suite of products, services that we offer our private clients, we are beginning to see greater productivity out of the advisors, I think the advisor productivity was up 7% year-over-year. And so we also thought it was as we are beginning to gain more and more confidence in our ability to penetrate in higher income brackets, we thought that we should be growing the advisor force carefully. And so we've been increasing the size of our incoming classes. And we've dedicated personnel to accomplish that and we're beginning to see, we’ve seen very good classes who are diverse, engaged and they're taking their seats in our offices around the country. So we want to continue growing it carefully. Part of that is finding the right people. And I think that's really all I can say in that regard.

And as a follow-up, I know it’s still very early days for the thoughts on fee and seems like you've had some success signing up new distributors and some early sales. Is there any sense that in those channels where you start to sell the product that it's being additive to overall gross sales versus maybe cannibalizing existing sales? And how you -- may be it’s too early to tell but what's your experience so far?

We are pleased with the progress, I think we said all along this was going to take an awfully long time. Because in part we were appealing to slightly different segments of the marketplace. So I think it's too early to determine whether it's cannibalization. I don't think so because this is appealing to people with model portfolios and others. I think it's important to recognize that most of our clients have at least in their non-IRA portfolios a lot of tactical gains as they don't want to recognize. So I don't think this is really arising from people moving out of existing. But we think it's been additive and -- but we think the process is a slow one, and we just want to manage people's expectations around it but the take up from distributors has been very reassuring.

Great. Just maybe one last one, I mean you've talked about and clearly you had a positive mix shift with a new sales and pipelines into higher fee strategies. If we were to look at 2018 fourth quarter and maybe even look at the first quarter, do you have a sense or a number you maybe could share what the organic revenue growth will look like relative to kind of just a pro picture?

Well again I -- in terms of the year? Let me answer in terms of the year. I think the arithmetic is pretty straightforward, the fee rate growing 1% and then you can look at what the AUM changes year-on-year and that's really the some of those two that's going to be over time our organic revenue growth rate.

Thank you. Our next question comes from Alex Blostein from Goldman Sachs. Your line is open.

On the research business, can you talk about the pipeline that you're seeing specifically outside the US, in U.S. and Europe? And what sort of how do you plan to expand the number of stocks that are being covered and add additional resource in that business?

We are seeing a pipeline outside the US that’s similar to what we're seeing in the US in terms of improved mix, I think that's what you're asking.

Yes. Could you repeat the question? Because you just.

Yes, sure. We just wanted to get a sense of the pipeline outside the US and how many more analysts that you plan to add going forward in 2019 and extend the coverage?

Well, the -- there the business is, as we note, we're in the process of adding analysts really around the world both US as well as, as you mentioned, in Europe and in Asia. Those Asian hires are going to be in both Hong Kong, Singapore and India. The -- I think that is just a continual process of that business to continue to build out the overall headcount.

Okay. And last one, any technological improvements or investments that you are planning going forward like are you trying to build an in-house or are you trying to outsource from a third party. Just want to get a sense as to how you're thinking about it for this year and next year?

I think our -- if you're talking about our overall technology spend?

Sorry. Can you repeat the question?

Yes, sorry. Just wanted to check on what are the technological improvements or investments are you thinking for 2019 and 2020 and are you trying to build things like internally or trying to purchase it from like going for a third party outsourcing?

I think that we do all of the above, where it makes sense, we will develop in-house, where it makes sense to use third-party software, we’ll use third-party software or similarly in terms of using onshore and offshore and nearshore resourcing. The -- it is an ongoing strategy across all of our businesses to continue to digitize. There's been a whole series of examples, for example, in our fixed income business, the development of efforts like Alfa or Abbie or in our US Retail business the Simon application, there are a host of those types of examples of things going on our business where we're looking to work smarter and more efficiently in everything we do.

[Operator instructions] Your next question comes from the line of Bill Katz from Citi. Please go ahead.

Okay. Just a couple follow up, actually one follow-up, one request, on the follow up, just as you think of January I’m sort of curious of the behavior that you're seeing in terms of the snapback in January, can you talk about maybe on the retail and private client side where the demand is by asset class or by geography?

Let me start and people may add-in. But with regard to January, we reported AUM this morning as you know of 538 billion that was up 4.2%. That increase was due to market appreciation partially offset by total firm wide net outflows. But by channel, what we're really seeing is improved retail taxable fixed income flows and the outflows as I mentioned earlier, were more institutional in nature and active equity remains in positive flow.

And you asked about, you know, geographically, like say that in retail the trends have been positive globally. So, we've seen good traction in Asia ex-Japan, we’ve seen more positive or constructive situation in the US. And so that includes global high yield in American income.

Okay, just one request. I certainly appreciate all your disclosure. To the extent you could further breakout your cost associated with the relocation somewhere either in the press release or the supplement. I think would help investors get to know the core earnings power core margin improvement, because it takes a little bit of work try and get there. Thank you very much.

Hey Bill, it's john. So maybe I can give you a little bit more info there, just with regards to 2019. So as I said, we expect 2019 the impact to EPU to be about $0.07. And that impact is going to be split between increased occupancy costs, as well as increased costs on the headcount or human capital side. And the human capital fees tend to flow into the comp ratio. So we expect the impact or the pressure on the comp ratio from the human capital piece to be about 40 basis points. And I think of the total $0.07, I would say that probably, maybe just around a third or slightly more than a third of that will flow through occupancy and the balance would be in that 40 basis points that would flow into the comp ratio for human capital costs.

There are no further questions at this time. I'll turn the call back over to management for closing remarks.

Thank you everyone for participating in our conference call today. If you have any follow-up questions, feel free to reach out to the Investor Relations team. Thank you and have a good day.

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