Hello and thank you for standing by. My name is Steven, and I will be your conference operator today. At this time, all participants are in listen-only mode. After the prepared remarks, management will conduct a question-and-answer session and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I will turn the call over to Makela Taphorn, Director of Business Analytics and Reporting at Artisan Partners.

Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Eric Colson, Chairman and CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Before Eric begins, I would like to remind you that our earnings release and the related presentation materials are available on the Investor Relations section of our website. Also, the comments made on today's call and some of our responses to your questions may deal with forward-looking statements, which are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are presented in the earnings release and are detailed in our filings with the SEC. We undertake no obligation to revise these statements following the date of this conference call. In addition, some of our remarks made today will include references to non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in our earnings release. I will now turn the call over to Eric Colson.

Thank you, Makela, and thank you, everyone for listening or reading the transcript. On the call today, I want to emphasize our commitment to high value-added investing. High value-added investing starts with talented people; working in a stable environment; consistently executing a stated investment philosophy and process. High value-added investing requires degrees of freedom, investment discipline, risk awareness and thoughtful management of investment capacity. Lastly, high value-added investing takes time, time to execute and time for benefits to materialize. We believe that each Artisan investment strategy has delivered on our commitment to high value-added investing. Looking forward, we believe the work we have done to develop our investment franchises add degrees of freedom, and place renewed emphasis on investment discipline and risk awareness, will translate into successful client outcome for years to come. The benefits of a high value-added approach are more apparent in certain market environments. Since 2009, we have experienced a bull market with low volatility and high correlations across asset classes and securities. We have seen unprecedented monetary expansion and cash flows into market cap weighted index funds. It has been a difficult environment for active managers to differentiate themselves. As shown on Slide 2, over the last year or so we have seen correlations decline. And more recently, we have seen increased volatility and rising interest rates. We may be returning to a world, in which investment returns are not overwhelmed by central bank policy. We believe that's an environment in which asset allocators will place greater importance on high value-added investing, and an environment in which value-added should be more apparent. Having said that, we believe that our investment track-record during the bull market has been very compelling, despite the challenging environment for the active management industry. On Slide 3, the green portion of each…

Thanks, Eric. Financial results for the quarter are presented on Slide 7 and include both GAAP and adjusted results. I will focus my comments on adjusted results, which we as management, utilize to evaluate our business operations. Our first quarter results benefited greatly from the impacts of tax reform, which reduced our adjusted effective income tax rate to 23.5% from 37%. As a result, adjusted earnings per adjusted share rose 18% to $0.78 from $0.66 in the preceding quarter. The $0.14 benefit realized from the reduction in the effective income tax rate was offset in part by $0.04 of higher seasonal expenses that we incur in the first quarter of each calendar year. The adjusted operating margin was 37.7% in the current quarter compared to 38.6% last quarter and 35% from the same quarter last year. Summary of our AUM is on Slide 8. The March quarter-end AUM was $114.8 billion, down less than 1% compared to the previous quarter and up 11% compared to a year ago. Markets were volatile during the quarter as intra-quarter AUM rose above $120 billion in January and in part drove average AUM up 3% from the December quarter. Global markets, however, ended the quarter down over 1%. Strong alpha generation from active management across most of our strategies offset the majority of the market declines during the quarter. Net client cash outflows were $600 million, substantially improved from the previous three quarters as gross client inflows improved significantly across the firm. Our Global Value team had over $1 billion in net client cash inflows from U.S. and non-U.S. clients across its two strategies. And our newer teams, Developing World, Credit and Thematic continued to attract new client money into their strategies. Balancing out these net client cash inflows, we continue to experienced net…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Robert Lee with KBW. Please go ahead.

Great. Thanks and good morning, everyone. Maybe my first question is just kind of maybe to drill down into sales inflows a little bit. I mean, it looks like, particularly in your funds business you had a pretty meaningful jump in gross sales in the quarter. I know maybe there is some seasonality in that. But can you maybe give us some color? And maybe there was some large fundings or was this some evidence of what you've kind of talked a little bit about seeing a little bit more active demand? And maybe also how that kind of progressed through the quarter would be helpful.

Yeah. Hi, Rob, it's Eric. And, clearly, first quarter does have the seasonality. We've seen that back through time. So that does elevate the flow numbers. I think the active environment is a slight positive, but I wouldn't read too much into that in the first quarter given that we're still in the early innings of that effect. I think we have seen some of our clients, especially in the intermediary platforms and a few larger accounts in the mutual funds, rebalance, And we saw some of that in the Global Value Strategy, where the global value is open to pooled assets and international value is also open to existing in accounts that rebalance. So I think you just saw some first quarter rebalancing occur there than any trend that we would want to highlight.

Great. I appreciate that. And then maybe, C.J., going to capital management, I appreciate some additional color and your thoughts around, I guess, a quarterly payout ratio. But, I guess, particularly as valuation on the stock that's come in, can you maybe update us on thinking about at what point does maybe share repurchase become part in more of the mix? I mean, I think since your IPO I think the share count is up about 9%, at least fully diluted share count. And, I mean, so what point do you start thinking, gee, maybe that other 20% we should start buying back stock, just kind of the latest thoughts there?

Yeah, Rob, I think as we consider the payout policy on the cash dividend, that's why we've evolved our thinking a little bit on our thoughts on moving to a variable and using 80% as the level at which we would distribute the quarterly saving, that 20% for other type of decisions and absent doing something else, we pay out the special annual. We continue to favor the cash dividend. We like the consistency and the transparency, especially in a people based business. We like avoiding mistakes, which happen in share repurchase program. We think that in a high cash generating business, the dividend is an important element to the value to our current shareholders. So I think in a prolonged period of depressed valuation stock price that is evident. We would under the new policy consider that, but we haven't made any firm decisions on moving firmly in that direction.

Great. Thanks for taking my questions.

Our next question comes from Bill Katz with Citigroup.

Okay. Thanks very much. So Eric, I was thinking about - so what you're talking about in terms of your footprint, how it's evolved over time. And I guess the question is - I don't mean to be so crass, blunt with it, but does it matter, right? So what's happening on the LP side? Is there a migration back to appreciation for higher Active Share platforms? Or is it still, so you said it is getting a little bit better versus passive. But are you seeing any decisive change in allocation or even selections or like RFPs, anything sort of help us sort of see any kind of momentum change that might lead to a sort of better flow picture? And then sort of the corollary to that, you have a lot of funds that are still closed with outstanding performance as you highlighted, where are you in terms of capacity opportunity reopening any of those funds?

Yeah, certainly, Bill. From a high active share, and then evolving into the alternative space or hedge fund space, which we've labeled degrees of freedom, because of that spectrum of unable to specifically define what a hedge fund is, we believe that space is very robust. I think we're over $3 trillion in just the hedge fund space alone. So I don't think, we're looking at it as a momentum of assets as much as a reshuffling of assets. If we can compete and deliver a high value-add result, which is to us stable investment team, integrity of process, capacity control and delivering talent that I think differentiates in the marketplace, we can win a fair amount of assets in that category. We also look at the high value-added Active Share category and there was quite a bit of assets there. So our mindset is competing on market share there as opposed to forecasting a trend away from the current momentum of asset, which is in ETF and passive exposure. And we clearly don't want to compete there, because we're competing on scale and fees. And I think there is plenty of players in that marketplace. So we'll continue to migrate and shift our mix of strategies more and more into the higher degree of freedom. So what was your second question on that? There was a second component.

I'm sorry for the messy question. Just in terms of the capacity opportunity, and obviously your slide with the excess alpha is rather high and sort of you've obviously has been in a lot of those have been either soft close or hard close, and so you're just slowly getting the impact of redemptions now on gross sales. Is there any opportunity to reopen any of those funds? Where do you sort of stand on that scope?

We don't plan to reopen those. We will continue to manage the exchange of kicks, and that's what I was referring to the earlier question with regard to the rebalancing. So if we get a higher attrition rate or no redemptions coming in the future, we'll manage that capacity within close strategies or soft close strategies. So one quarter might be a little elevated and the next quarter might be down a little bit, because we're looking out and just trying to managing the rebalancing of the capacity constrained strategies. But of the ones listed there, we are not contemplating opening those up in the near term here.

Okay. Thanks for taking the questions.

Our next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Thanks. Good morning, guys. Just a follow up to Bill's question, I guess, around capacity, just, I guess, on the other end, anything on your radar that's starting kind of flash yellow saying that look, there might be some incremental capacity constraints that we should be thinking about on any of the products that are open right now?

We've mentioned in the previous calls just on the Global Opportunities strategy that we've been managing the pipeline of Global Opportunities, it's $16 billion under management. We have a healthy pipeline, but we want to make sure we glide into the - a reasonable capacity numbers. That's one strategy that we've been managing a bit. And that's probably - that's the only one that's coming up that would be yellow.

Got you. And then, C.J., just one for you around your commentary on the expenses. So it sounds like tech, occupancy you highlighted will pick up a little bit in the second quarter and progress through the rest of the year. Just again remind us on the magnitude of the increase you expect in the next quarter and through the rest of the year. And is it just a 2018 phenomenon as you guys kind of step up incremental investments? Or do you expect some of that spillover into 2019 as well?

Yeah, Alex, so on the last call, I indicated that both occupancy and tech spend would pick up in 2018. The occupancy spend is related to three investment team moves, which are scheduled to happen late third quarter or early fourth quarter and there's going to be - currently, we're estimating about $3 million of onetime charges related to sort of sublease charges for vacating the space and accelerated depreciation, and those will happen when we actually vacate the space. So it's hard for me to give exact timing on whether it will be the third quarter or the fourth quarter, because the moves are primarily happening around quarter end. And then on an ongoing run rate expense, we'd expect fully loaded that we'd have about $2 million more of expense on an annual run rate basis, but that's going to be start of - back end of the year and thinking more about 2019. And then on the technology side, we talked about increased expenditures there and we expect that to pick up in the second quarter here. And for the rest of this year, our average - our quarterly run rate, we would expect to be around close to the $10 million a quarter versus the current $8 million and change. And then we would expect that to decline a bit for 2019, because we have a number of projects that we don't anticipate replacing next year with other projects.

Got it. Great. Thanks for taking the questions.

Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Thanks for taking my question. And thanks again for the updated thinking on the variable quarterly dividend. I'm wondering if there are any initial thoughts on potential floors or caps on that variable dividend. Just trying to see if there is any kind of flexibility within that 80% payout ratio that you guys are thinking of.

No. Thanks, Ken, for the question. We are still evolving our thinking, but at this point, if we were to move to something like that, we'd want it to be transparent and consistent. So we indicated it would be 80% of the cash generated. We would want to stick to that and use that other 20% as sort of the variable piece that we would decide at the end of the year.

Got you. And then one follow-up. In terms of the outflows within the separate accounts, wonder if you could highlight any specific drivers for those flows, either key strategies or certain sets of clients that might have contributed somewhat elevated outflows? Thanks.

Sure, Ken. I can't think of any large separate accounts or terminations that drove the number. It's primarily just a variety of clients rebalancing.

Okay. Thank you very much.

Our next question comes from Chris Shutler with William Blair. Please go ahead.

Hey, guys. Good morning. You mentioned the emerging markets team has beaten the index pretty substantially over the last five years. Can you just talk about where you stand regarding marketing efforts around that team in the pipeline? Thanks.

Sure, Chris. We highlighted the Emerging Markets, primarily, last year, you saw the index up about 25%. You see a quite a few clients below their asset allocation targets in EM, and you're finally starting to get to three and five year numbers that are attractive versus other regions of the world. On top of that, our emerging markets team led by Maria Negrete has a differentiated approach looking at primarily a local perspective as well as a more diverse team. And we feel that the three and five years are quite strong. We echo those comments for Developing World as well. Again, it's a differentiated in Emerging Markets outcome, and we think both those strategies, given the backdrop of last year and continued into this year, will be of interest. From a pipeline standpoint, we are seeing more inquiries, but I think we're still in the early stages this quarter and next quarter, and we're hoping to see more in the back end.

All right. That helps. And then just, Eric, how do you feel about fee rates right now at Artisan? Are there any areas, any particular funds that, I mean, you might need to reassess? Or how are you thinking about fee structures at this point?

That's primarily why we highlighted on our deck in the Slide 3 with regard to our performance and that performance is net of fees. We believe our clients look at performance net of fees. They also look at the stability and the integrity of the strategy. In a lot of cases, you look back and look the performance and the portfolio management team has changed over a couple of times over a decade, and that's why we highlighted the strategies that we did that have decade long track record. We also have controlled the capacity of these strategies and that capacity warrants a fee rate. And so when we say a high value-added outcome, we're looking at that in totality and the returns speak for themselves on that page. With that, we are obviously aware that fees are a big topic of discussion. The one area that we do see more fee discussion around is in the larger scale platforms that we're talking to, and you do see a mindset around either a separate account for sub-advisory or other vehicles that you can play into for those platforms. And what I find more interesting now that these platforms have been around and have come around to an institutional oriented mindset, which is having research teams, having gatekeepers and having groups that can extend the duration of our relationship not relying on a retail investor that may have two year duration in a fund. These platforms are showcasing the longer duration relationship and those warrant a slightly lower fee, because the present value is high. And that's how we think of the fee context as: one, quality of services; and two, the total present value of the relationship. And we'll keep those two mindsets in place, when we look at fees. But at this point, we feel confident across our fee schedule.

All right. Thanks a lot, Eric.

Our next question comes from Michael Carrier with Bank of America. Please go ahead.

All right, thanks, guys. Yeah, maybe first one, just on like on the open strategies, particularly some of the new ones, when we look at the track record it's been impressive, you're seeing the inflows. Just trying to gain some understanding, when you look at the clients, whether it's U.S. versus non-U.S., like could you accept like more money at a faster pace? And when you do get pushback, is it on the strategies that have more degrees of freedom and some of the clients not used to that or is it on fees? Like what tends to maybe get the pushback versus where you're seeing more traction?

Sure, Michael, it's Eric. I think the real delta for early flows or startup strategies is how much time you put on the investment team, to hit on the road and sell. And we have said over the years that we limit this and try to spend most of our time getting the resources, the investment team, the process and the foundation work in, so that we have the opportunity in the long run to deliver - to deliver to clients. And if we wanted to increase flow, I think we would have to demand more time from our investment team, clearly our portfolio managers, and get them on the road, so that investors could look across the table, especially early investors, and spend time and do due diligence. And that's a time consuming process for your most talented investors. And we have opted to pace that in years one and two. And as we get into years two, three and four, that gets elevated up and we manage that cycle. So the one way we really could increase it is just push the investment teams to get on the road, get out and just sell. And we've opted not to do that.

Okay, got it. And then just a quick one, like the long-term performance remained strong. I think just on the one year, there is a bit of a pullback. I don't know if there was anything specifically that was driving that across the strategies or if it's more just a cycle, but just any comments on that.

It was more cycle. I think just more of the quarter that caused maybe a slight pullback. But it really could have been around a product or two, and it could have been around what happened in that index. And probably the key one is around the Global Value team for the quarter had a slight pullback. But I think their long term record and their ratings speak for themselves.

Got it, makes sense. Thanks a lot.

Our next question is a follow-up from Bill Katz with Citigroup. Please go ahead.

Okay. Thanks. For C.J., just as you look out to 2019 on the stock-based comp, if the stock were to hold here, so it's a two-part question. One is what will be sort of the incremental savings in terms of the amortization? And then, more conceptually, would you look to potentially increase the grant rate as an offset to the foregone value?

I'll answer the second one first. No, that's not how we think about granting equity. The stock price and the grant date value are just sort of what they are. So our level of grant, size of the grant would not change based on where the stock price would be. And I think the guidance I gave for the fourth quarter I think it was at $11 million. It probably would hold consistent to sort of that fourth quarter guidance that I gave of $11 million. Yeah.

Okay. Great. All right, thanks for the clarification.

Our next question comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hey, guys. Sorry, another follow-up. Eric, this one is for you. So just wanted to go back to the point you made earlier around larger intermediary partners. So, I guess, the wirehouses exploring ways to migrate more out of commingled funds into separate accounts, et cetera. I guess, this is something that would just kind of yield them a lower fee and totally get the NPV argument, given the longer duration of capital there. But is that something we are just starting to see now or has that been happening for you guys for a while? And, I guess, do you anticipate to see a larger migration of assets from mutual funds to separate accounts if this kind of continues to unfold? It's just something I don't think you guys talked a ton about in the past.

Yes, sure, Alex. The migration has been occurring over the last few years. And we've been more confident with some of our partners and how they think, and we can measure the duration of relationship. It's also been occurring just as you look at the classic institutional business of defined benefit and even the migration of DC, moving out of direct mutual fund allocations into target date funds or some type of solution. The nature of those relationships has evolved our traditional separate account business that would have been more direct. And you're seeing that attrition in the older institutional business of a defined benefit moving to an LDI type program. And we've been seeing a shift going into other programs. But net-net, you're swapping one long duration lower fee for another. And so, I think you haven't seen the overall mix change much, because it really is just a shift there.

Okay. So it sounds more of the same. All right, thanks.

Yeah.

This concludes our question-and-answer session for today. This also concludes our conference call today. Ladies and gentlemen, thank you for attending today's presentation. You may now disconnect your lines.