Thank you for standing by and welcome to the AllianceBernstein First Quarter 2023 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be question-and-answer session. And I will give 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 of this call Head of Investor Relations, Mr. Mark Griffin. Please go ahead.

Thank you operator. Good morning everyone and welcome to our first 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; Kate Burke, COO and CFO; and our Co-Head of Fixed Income, Scott DiMaggio and Gershon Distenfeld; Onur Erzan, Head of Global Client Group in Private Wealth will join us for questions after our prepared remarks. Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q. 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. The first quarter saw positive returns in both equities and fixed income markets though equity leadership was relatively narrow and yields in bond markets were volatile. Our global platform generated positive net flows as retail and high net worth investors became more comfortable taking on risk and we're keen to take advantage of higher fixed income yields. Our realized fee rate improved by 4% year-over-year driven by the addition of carve-out. And we executed on several focused growth investments launching three new active equity ETFs filing for our AB carve-out interval fund and continuing to grow market penetration of our customized muni SMA platform. Let's get into the specifics, starting with a firm-wide overview on Slide 4. Gross sales were $25.6 billion, down $5.7 billion, or 18% from the year ago period excluding last year's large custom target date sale. Firm-wide active net inflows were $1.8 billion, or 1% annualized positive in two of three channels. Quarter end assets under management of $676 billion declined 8% versus the prior year and were up 5% sequentially. An average AUM of $667 billion was down 11% year-over-year and up 5% sequentially. Slide 5 shows our quarterly flow trend by channel. Firmwide first quarter net imposts were $800 million. Retail gross sales of $16.8 billion were down year-over-year though improved sequentially driving net inflows of $1.6 billion amid strong demand for taxable and municipal fixed income, up 15% and 21% on an annualized basis respectively. Our institutional channel had gross sales of $3 billion, declining from prior quarters, but of which included large custom target-based sales. Net outflows were $2.7 billion. In Private Wealth gross sales were strong at $5.8 billion with clients inclined to invest this into money market funds given market volatility.…

Thanks Seth. It's a pleasure to be with you today to share with you the key strengths that differentiate AB's global fixed income platform. The key points I want to leave you with today are: we firmly believe that bonds are back, with historically attractive yields that offer value to our clients. Our global fixed income offering with a 50-year heritage led by experienced and tenured teams is differentiated among peers, driven by a culture of innovation and market-leading positions in tax-exempt, high-quality global multi-sector and high income, as well as our investment-grade strategies. Our investment performance positions us well to garner flows at fixed income demand returns and we have a clear growth strategy, based on building market-leading positions in municipals income and third-party insurance. All areas we have a proven edge and a right to win. Starting with slide 13, we're a global platform with $263 billion in AUM, well diversified by channel, strategy and client domicile. We are proud of our tenured team of investment professionals, who have an average of 25 years in the industry and 17 at AB. Our team of 38 portfolio managers covers the full spectrum of global fixed income sectors and subsectors and are supported by experienced analysts, traders and APMs, with significant expertise across the industry. In addition, we have over 130 technology experts to help us to maintain an edge in supporting our portfolio managers and our clients. We think bonds are back, as entry points are extremely attractive following the aggressive interest rate tightening cycle by the Fed and other global central banks, a cycle which you should be acknowledged resulted in some of the worst performance across fixed income in 40 years. Slide 14 shows evidence of recent strengthening demand. We started to witness a turning card in…

Thanks, Scott. It's a pleasure to be with everyone this morning. Looking forward, our fixed income growth strategy resides primarily on three pillars: munis, income and insurance while at the same time maintaining an unwavering commitment across the breadth of our fixed income platform. Let's start with munis, where we have generated strong organic growth over the last five years driven by our market-leading performance, product innovation and a scalable technology. We are focused on becoming a top five provider of municipals, through accelerating the build-out of our next-generation solutions-oriented investment platform, expanding our current best-in-class investment performance, customization and tax optimization all attributes that have led to strong market share growth in recent years which we are confident we can extend. With over 10 consecutive years of organic growth, our Muni SMA business has grown to over $16 billion of assets under management led by muni tax aware and including high-quality, muni income and custom muni. We also believe that we can become a top three provider in SMAs. Finally, we are very excited about our new custom muni partnerships with multiple national and independent broker-dealers as well as RIAs. Let's turn to our second pillar, our income franchise. We plan to continue to capitalize on our existing brand recognition and 30-year track record managing income strategies. As flows come back into fixed income, we expect investors to continue to be attracted to our three-decade track record of delivering superior investment results for income investors. While 2022 was a challenging year performance-wise, as Scott alluded to, our three year relative numbers are strong with a key product like global high yield in the top quartile. We are focused on matching our APAC market share success in US and European retail diversifying our product offering and presence in key distribution…

Thanks, Gershon. Let's start with the GAAP income statement on Slide 21. First quarter GAAP net revenues of $1 billion, decreased 7% from the prior year period. Operating income of $215 million, decreased to 13% and operating margin of 20.1%, decreased by 450 basis points. GAAP EPU of $0.59 in the quarter, decreased by 32% 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 unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are in our presentation appendix, press release and 10-Q. Our adjusted financial highlights are shown on Slide 22, which I'll touch on as we talk through the P&L shown on Slide 23. On Slide 23, beginning with revenues, net revenues of $833 million, decreased 8% versus the prior year period and were up 4% sequentially. Base fees decreased 8% versus the prior year period as 11% lower average AUM was driven by market declines. The first quarter fee rate of 40.3 basis points was up 4% year-over-year, driven primarily by the addition of higher fee rate CarVal based fees and down 3% sequentially, primarily reflecting the $6.5 billion low-fee CRS funding late in the fourth quarter and a mix shift to fixed income from equities. We expect a modest recovery in the fee rate in the second quarter based on mix and timing of the expected low fee target rate redemptions. First quarter performance fees of $33 million declined by $12 million from the prior year period due to lower real estate equity fees, partially offset by higher fees on private…

[Operator Instructions] And our first question comes from the line of Craig Siegenthaler with Bank of America. Your line is open.

Hey. Good morning everyone. And thank you for the additional details on the fixed income business from Scott and Gershon. We found that helpful. But sticking with those disclosures, on Slide 14, you highlight that retail and private wealth are leading the migration back into fixed income and not the institutional channel. Why is that? And when do you expect the institutional flows to pick up?

Thanks for the question. You're absolutely right. In terms of the higher net growth channels have been our Asia Ex-Japan franchise with taxable fixed income as well as our U.S. retail and private wealth business. On the institutional side, we have seen an up-tick in the demand for U.S. high-yields and that kind of played into the sales and the pipeline. We continue to see strong demand in credit and U.S. high-yields. Obviously, it's hard to predict all the terminations, so hard to be very precise on the net flows. But we are pleased with the momentum in the client dialogue around global credits as well as US high yields in the coming quarters.

Onur, if I can -- it's Scott, If I can just add to that. I think the other trend we did see in 2021 was more of the money that left from retail whether that be US retail or offshore retail. So I think that cohort was under-risked or under weight of fixed income. And I think that's the first flow that we've started to see back in the last five or six months. On the institutional side, we continue to see steady inflows from defined benefit plans, who are in the process -- or many are in the process of de-risking. But we just have not seen that cohort de-risk in 2021. So I just don't think there's as much money that's going to come back to us as a result of that.

And then just honing a little bit on American Income. You've had some success there in early 2023. I know different geographies can really move that fund. So I'm wondering what kind of geographies, are driving that ramp in net inflows? And is it Asia ex-Japan?

It is -- I'm sorry. Onur, go ahead.

Thanks. Onur again and Gershon please chime in. Absolutely you're right. Our main engine behind AIP has been Asia ex-Japan. Hong Kong coming back very strong and we have definitely benefited from that in Q1 as we have done over multiple cycles. And on the broader taxable fixed income side, we are getting some demand in Europe as well on the fixed maturities side. So that's another encouraging sign. Those are the few things I would highlight. But Gershon, please add.

Yes. I would just add that what's encouraging to us is, this is the first time we've been -- I've been managing this fund for two decades and we've been running it for three decades. I can't remember another time when there was this type of volatility where we didn't see significant outflows. We saw it certainly in the global financial crisis even before that in the telecom crisis of 2002 and the European debt crisis, the taper tantrum, COVID. And this is really the first time where things were stable to somewhat positive. And I think we can attribute that to the theme we spoke about earlier of bonds are back. Bonds are back is not some short-term trading idea, but it's a realization that levels have gotten to the point where all in the yields are likely to produce superior total returns over the next few years and people are taking a longer-term view towards allocating to that. So if there's any type of short-term volatility, it's not the first place that our investors are thinking of reducing their exposure.

Thank you, guys.

Okay. And our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hi. Good morning. Thank you for taking the question. Well, I was hoping to touch on the private markets for a second. There's been clearly significant dislocation in the banking land. You guys have a fairly sizable CRE lending platform. So, maybe talk a little bit about the opportunities you guys see to lean into that and perhaps curious to maybe better understand with Scott and Gershon on the call, how the private credit platform as a whole between corporate and CRE is incorporated in fixed income? And to what extent could that create an incremental benefit as institutions are clearly still kind of shifting to allocations out of liquid into private market in fixed income.

Alex it, it's Seth. Let me give you a little sense of private alts. It is certainly true that from a fundraising perspective we're seeing more headwinds, as I think other firms have noted in their investor conferences. What I would say to you is the following and I'll touch on commercial real estate as part of it but separately. What we do see is that while originations are slower in our middle market lending business, commercial real estate and others, we're seeing a whole lot less competition and we see better structure better pricing opportunities. So this could be a very strong year from an origination perspective in terms of the quality of the assets that we're seeing. I would also add Alex that, those same factors lower M&A activity higher interest rates have actually slowed repayments as well. So while flows new issue, I'm sorry, new origination flows maybe slower so are redemptions. So it hasn't really impacted us on a net AUM basis, which I think is an important attribute. With regard to commercial real estate as you know we do have roughly $10 billion US commercial real estate debt business. We're a senior lender. Commercial is a pretty -- it's less than a-third of the business as we currently have it structured. We have a pretty strong equity cushions under it and we've seen certainly some needs in some of that portfolio. And I suspect, we'll see more of that as CRE continues to experience, representing with respect to refinancings. So the quality has remained pretty strong for us. And when we look at where we are given that we're -- in most of our strategy is not levered we have the time to restructure what we do have and we're pretty happy with the quality of the assets that we've underwritten to date. But we're not delusional. We know that there will be more challenges in that sector going forward. But let me turn it over to Gershon.

Thanks Seth. And Alex, I would add that we've seen a much greater convergence between the public and private markets over the -- just the past two or three years. Don't quote me on these exact numbers but something like prior to 2020 there was one deal of greater than $1 billion in the private credit market. And last year, it was something like 26%. And that's just illustrative of the fact that the public investors, companies have the choice now to go either public or private and the two markets are really overlapping a lot more than they ever had. As a result, we are looking at new opportunities that our teams are working closer together. Our public and private teams are working closely together obviously with the right wall for a nonpublic information perspective but we're working closely together on more innovative solutions for our clients that we hope to bring to market. I'd also say that, our engagement with insurance companies in general is more holistic than it's been and we're having just more detailed conversations around how to best invest across the whole swap of public and private markets.

Got you. Great. Thanks, guys. My quick follow-up for Kate just around the fee rate. You mentioned the fee rate came down in the first quarter as we saw given the $6 billion outflow that you highlighted in April it sounds like it's a low-fee mandate. So I think you said six basis points or something like that. How should we think about the fee rate into the second quarter maybe keeping like the markets flat from here?

Yes. Thanks for the question. I would expect a modest recovery in the fee rate in the second quarter. You'll see a likely positive second quarter versus first quarter asset mix primarily due to both the timing of the equity markets increasing in the first quarter. And then we'll get the mix benefit with the fixed income and CRS redemptions that you highlighted there as well as continued growth we believe in the higher fee private alternative space we have there. So for the full year I think we're still saying we would predict the full year to reflect a positive mix of them that will continue to kind of grind higher over time recognizing there will be some volatility based on these large mandates coming in and out.

Got it. Very helpful. Thanks very much.

And your next question comes from the line of Bill Katz with Credit Suisse. Your line is open.

Thanks so much as well. I appreciate the extra discussion. Maybe to shift gears a little bit. Seth you mentioned that CarVal launched an interval fund. I was wondering, if you could maybe help explain -- size it what distribution channels it's in and what the outlook for that might be as well as any incremental products on the other side of that?

Sure. Let me do an Onur I think will step in and talk a little bit about the distribution strategy around it. This is an existing CarVal effectively credit hedge fund that they've been running for years with a very attractive track record. We actually haven't launched yet we filed for it. So just to be clear it's not there. It's total size is in the several hundred million dollar range. And let me turn it over to Onur as to our expectations from a distribution perspective.

Thanks. Onur, here again. Yes this strategy has been in existence since 2014. It existed under the opportunistic credit fund category. So with the fund filing we're going to convert it an internal fund format that allows us to expand the distribution outreach with the accredited investors reducing the minimum investment size. First channel we're going to go ahead with is our private wealth channel, which as you know is a well-established track record of scaling private credit strategies with $10 billion in our private wealth books. And next we're going to expand into our US retail partners, particularly, leveraging strong penetration with affluent and high net worth oriented advisers that today use other strategies like our mini portfolios. So that's going to be our first wave of distribution opportunities looking into third and fourth quarter most likely.

Okay. Thank you. And then just -- I don't know if there's going to be too much detail on this call, but I'm sort of curious, if you could sort of unpack the other revenue and other expense line a little bit and maybe bifurcate between sort of AllianceBernstein balance sheet impact versus the private wealth cash. And within the private wealth cash any metrics here in terms of what the size is what percentage of client AUA it is and how to think about deposit betas underneath that. Thank you.

I'll take a start with it then if Onur wants to add any more color on the private wealth side. What you saw in the first quarter on the interest rate expense, we did obviously have higher borrowings in the first quarter versus 2022. That's somewhat of a timing issue as well. The first quarter tends to be higher just from how our cash flows go through the year, but there is obviously higher interest expense related to that. We have a strong line of credit across a diversified group of large global banks as well as align with Equitable. And so ultimately we feel very -- still that we have a lot of room and our balance sheet still remains substantially under leverage to their -- in terms of the interest income and interest expense line there that was largely as I mentioned in my remarks a decision around our ultra-high net worth and our private wealth business about how we were managing our lending facilities with them making it more in line with the standard norm and recognizing we're in a rising interest rate environment so that it follows that those trends better. Anything you'd like to add there Onur?

No, that's great Kate. Yes the net interest spread on our cash business in private wealth went up. So that's the positive. And the only connection I would make is obviously that partially offsets the deterioration you have seen in the fee rate, right? So you are making money on cash and that's partially offsetting the decline in the fee rate for managed solutions. And the other thing I would say is in most of the cases our clients don't leave cash balances for very long and they typically put that money into work whether it's idle cash or money market funds into higher-yielding strategies, which then gets a pretty nice lift in terms of the revenue we generate from our private wealth business. So we are pretty pleased with the performance of our overall cash franchise whether it's the cash in the private world as well as the money market business.

Thank you.

[Operator Instructions] And our next question comes from the line of John Dunn with Evercore. Your line is open.

Thank you. One on active equities. You kind of had a rare outflow quarter this quarter. What do you think gets that back to inflows? Any particular funds you want to highlight and maybe the temperature of the consultants for active equities?

Yes. Thanks John for the question. Yes it was sort of an outlier although I think it had much more to do with overall risk aversion in our client sets rather than issues with underlying strategies that we're offering. We continue to see strong appetite for large cap growth and other growth products generally, which I think reflects the fact that growth has been outperforming value year-to-date, which is a reversal as you know. But we're also seeing increased interest in the value suite generally, which is encouraging as well both on the institutional side and to a degree on the retail side. So we continue to see activity. We've had consultant support for our sustainable thematic strategy where we got an upgrade. And ultimately what we did see was we had 13 strategies that had gross sales over $100 million in the first quarter. And when you look at, we had basically $800 million in pipeline whether it was sustainable global thematic strategic value small-cap growth, small-cap value. So we're seeing it pretty broad-based. And we did get in April, a new mandate from an institutional client for $1 billion in our large-cap growth space, which was particularly encouraging for us. So hopefully that gives you a sense of it. Onur, I don't know if you have anything you want to add.

Yeah. The two small pieces on the outflows given we had a change in our emerging market value PM team that led to some institutional outflows, so that's a more idiosyncratic event that led to the outflows. On the positive, we continue to be very encouraged by our US large cap growth channel diversity in addition to the win in April that didn't make to the numbers yet. We also had seen very strong appetite from the CIT business, the Commingled Investment Trust business for our active strategies particularly large cap growth and that CIT business has been a new engine that we ramped up in the last four to six quarters and that basically plays into the retail DC channel and I'm very pleased with the expansion of our reach of equities into the DC space, defined contribution plans. That's what I mean by DC.

Makes sense. And then can you remind us of your strategy as far as the wealth management sales force. I think you had been trying to do a more homegrown strategy. But does the current environment provide any outside recruiting opportunities?

Thanks for that question. It has been a strong quarter for us in terms of adding new advisers, we were able to hire 15 advisers. Yes to your point historically in our hiring, we had a skew towards earlier tenure advisers that we train by leveraging our very well-recognized industry training program that has been time tested for multiple decades now. The current environment definitely opens opportunities for more experienced hires. We definitely made outbound calls got inbound as well. We have several experienced hires in the pipeline. We will always be selective because we care about the sustainability and the culture of the franchise. But definitely it adds an additional opportunity for us to accelerate our organic growth, which by the way was very, very high in the first quarter. There's some seasonality to that. But if you look at our first quarter we had roughly 7-plus percent organic growth in our private wealth channel, and these experience higher opportunities given the disruption with the regional bank model definitely should help us with the hiring.

Thanks very much.

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

Thank you, Kayla. Thanks everyone for participating in our call today. Please feel free to reach out to Investor Relations with any follow-up questions and have a great day.