Hello, and thank you for standing by. My name is Gary, and I will be your conference operator today. At this time, all participants are in a 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, Investor Relations at Artisan Partners. Please go ahead.

Thanks. 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 up the line for questions. Before Eric begins, I'd 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 the earnings release. I will now turn the call over to Eric Colson.

Thank you, Makela. And thank you, everyone, for joining the call or reading the transcript. Let me begin by taking a minute to discuss the market volatility and the drawdown we have seen in October. At the end of Monday, our AUM was $104.2 billion, down from $116.6 billion at the end of September. Nearly three years ago, in January 2016, we experienced a similar sell off that reduced our AUM by about $8 billion in one-month. I commented on the volatility and drawdown on our February 2016 earnings call. I want to restate those comments verbatim because they remained true today as they were then. Our firm was consciously designed with market volatility in mind. Our flexible expense structure is a key part of our business model. The majority of our expenses fluctuate automatically with changes in AUM and revenues. As AUM and revenues decline, our investment team bonus pools also declined. This has two important benefits. First, our investment professionals understand in advance how market volatility will affect their compensation. They know what to expect when markets drive down AUM, and we don't have to renegotiate compensation or set new expectations. This predictability creates a more stable environment in which our investment professionals can do their best work. Second, because the majority of our expenses automatically adjust, we can continue to focus on our long-term business objectives. We are not forced to revisit or depart from our business plan. In fact, we believe the market volatility generates long-term opportunities for our business as well as for our investment teams. Since 2000, we have experienced 21 monthly periods in which assets declined by 5% or more. We don't know whether October's market decline will prove to be the beginning of a prolonged market downturn or just an isolated event.…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bill Katz with Citigroup. Please go ahead.

Okay. Thank you very much for taking the question this morning. I appreciate all the color. Just maybe starting on capital management policy and sort of appreciates the math that you laid out in the slide. I guess stepping back a little bit, thinking about how you sort of see the value creation of your business over a longer timeframe versus how the market is sort of treating that view? How did the Board and you guys think about buyback versus the dividend policy, just given where market appears to be a relatively high yield, but maybe not believing in full and just trying to get a sense of the priorities as you think about the decision making with that?

Yes. So Bill our view on that really hasn't changed, we've always valued the dividend and we attempt to create stability and transparency in our model and we believe that a consistent dividend policy with a very attractive yield is beneficial for our shareholders and our investment talent based on the predictability. We try to avoid mistakes and over the last five years, we went back and did it quite a bit of analysis on buybacks and by any metric, buybacks would not have been a good investment decision and we believe that buying back shares isn't investment decision and we can either put the money in the hands of our shareholders through the cash dividend, which is a very attractive yield or make an investment decision for them. So our lean is to towards the cash dividend. We don't rollout share buybacks, but we just haven't found it to be an attractive use of capital for shareholders, when you compare it to the dividend yield, we're able to achieve a cash dividend.

Okay, thanks. And just follow-up question is and thank you for the extra disclosure where the AUM sit today. So based on some back of the envelope math sort of penciling out about $1 billion of outflows in October, I guess the question is either – is that a reasonable back of the envelope calculation? And if it is, can you sort of talk a little bit about where you're seeing some of the pressure on the business model given your long-term track records and maybe the broader question underneath and that's the second one, what are you seeing in terms of allocations just given what's been more turbulent a few months now?

Yes. Certainly Bill. It’s Eric. The $1 billion is about right for the month there and what we saw was a few of our intermediary clients starting to rebalance in the international equities space, so within international value and international growth, those two strategies, where the dominant flows there from a rebalance. I think the volatility is, as we said an opportunity for our investment teams as well as the business, and we've seeing, some rebalancing occur, but the relationships and the long-term clients are very strong and we think the business is positioned very strong. So we don't see anything abnormal with regards to the rebalancing.

Thank you.

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

Hey guys, good morning.

Good morning.

On the occupancy expense C.J. Can you just reiterate what you expect for Q4? I think you said $5 million of extra expense is one-time and Q1 is $2 million of incremental. That's one-time maybe just – is that correct? And what's the right run rate beyond the time costs?

Yes. So if you exclude the one-time costs for office relocation's, the run rates going to be about a $5 million a quarter, into 2019. And the first quarter of 2019 a relocation costs are going to be somewhere around $2 million.

Okay. Perfect. Regarding the addition of Rezo I just want to confirm the right way to think about that from a flow perspective is that he needs to kind of rebuild a three-year trackers as similar to the hiring of Brian and Louis.

Yes. We definitely will treat it similar to a rather hiring’s where the first things first are to focus on investments and talent. And so we'd like Rezo to get situated and build the right foundation, with regards to how you want to conduct research. We were fortunate to hire too strong analyst to join Rezo and really build on the team, the process and the research to build a record that's durable for the long run. As you noticed in the years past, what we don't do is bring someone in and parade them around the country or the world trying to gather assets as quick as we can. We prefer to focus on delivering investment results and letting that build for the long run.

Yes, makes sense. Thanks, Eric.

The next question is from Dan Fannon with Jefferies. Please go ahead.

Good morning. This is James Steele filling in for Dan. Thanks for taking my question. So my question is on fund capacity, I understand that non-U.S. Small-Cap was reopened to investors. This is mostly due to the mandate being brought into include Mid-Cap or does it have to do with recent performance and/or AUM numbers. And then in general, when thinking about reopening strategies, what's the balance between AUM level and performance? Thank you.

Hi, James, it’s Eric. With regards to the reopening of International Small-Cap strategy that the catalyst there was the hiring of Rezo Kanovich and also broadening the guidelines, but the primary driver of reopening was due to hiring Rezo and building out a dedicated team for the strategy. And with regards to how we think about opening and closing, the first things we think about is performance. And we've said this on past calls of how we think about capacity, but we'll close the strategy if we feel that the overall capacity is hindering investment performance, we’ll close a strategy if it's hindering the integrity usually if there is a high velocity of flows that are coming into a strategy that would impair number of securities or the market cap or some type of characteristic. And we also will close the strategy due to the mix of assets. If we get too concentrated in a single client channel, we'll manage capacity. But investment performance comes first.

Got it. Thank you.

The next question comes from Robert Lee with KBW. Please go ahead.

Great. Thanks for taking my questions. Eric, maybe just want to touch a little bit on kind of fee pressure that's out there. I mean – and obviously you've talked extensively over time about the best way to maintain fees obviously is to generate alpha, manage capacity and kind of keep your fee structure intact, but I’m just curious maybe particularly in the intermediary world in retail. How are you thinking about – do you feel like you're getting your – because of that does you maybe missing meaningful opportunities in some products that have capacity because different intermediaries are becoming ever more focused on kind of just being in a certain quartile percentile from the fee construct perspective. I mean certainly you hear a lot of competitors talking about having to chip away at their fees just to get on model portfolio. So how do you kind of – how are you currently – any change and how you're thinking about balancing those two?

We haven't changed our thinking around our fee schedules or how we manage fees. We obviously talked quite a bit of our performance and more specifically our net of fee performance, which we believe clients look at first and foremost is how are we compounding their assets after fees. And we have highlighted our record there across our 17 strategies, specifically to the retail intermediary, as you know our makeup of assets has very small percentage in the retail space. With regards to the intermediary, we believe we have a very good size exposure into the various platforms whether it's the broker-dealer platforms or the financial advisors and we haven't seen a pressure in a sense for the current makeup of strategies we have today. We have seen fee pressure, which we've talked about on past calls when you get into the very large allocations, especially in the public funds or the sovereign wealth funds, and when you get to the sizable mandates, there's been a real shift in the market price of these right now. They've gone much lower then we're willing to go. We've been open to performance-based fees in that category of large mandates. But with regards to allocate in a large percentage of assets to the capacity of strategy, that's doing well. We really just don't want to impair the overall fees for the long-term.

And then maybe as a follow-up, can you also I mean update us on RFP activity out there and maybe your sense of given the volatility over the past month or couple of months, particularly in global strategies? How LPs are behaving? I mean, are they – do you have things that [indiscernible] waiting to fund, the people are putting it off or just kind of trying to get a sense of, the pace of activity in investor's mindset?

We haven't seen much of a change over the last couple of weeks with regards to the pipeline, especially in the institutional and institutionally oriented clients. Those are long processes with regard to asset allocation to the structure and then the search process. We haven't seen in this last couple of weeks derail activity in the pipeline. And with regards specifically to RFPs, we haven't seen any change there. And like we've mentioned on past calls, the process of RFPs has gone down in general over the last decade. So that the usage of request for proposal or some type of information is – it's not as dominant as it used to be in the past.

Great. Thanks for taking my questions.

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

Thanks guys. Maybe first one just on the flows in the quarter and you guys might have mentioned this, but I didn't catch it. Just anything that was more specific, do you guys, I know like the industry trends, is that weighed on the sequential direction when you look across the products at the distribution channels?

No, for the quarter is basically a continuation of sort of people being a little more cautious as well as the allocation to [GEC] mandates we saw come down and that hurt our international products, but sort of more of the same trends we've seen over the last several quarters.

Okay. And then, Eric just in terms of the outlook, so when you look over the past few years, you guys hired teams, you've done, [you can just put at] the value this quarter, bringing the Small-Cap. When you think about the outlook, which funds are now open, maybe just an update on what the distribution teams are able to bring to clients in order to generate the organic growth over the next year or so?

Yes. Across all nine teams and looking at the 2017 strategies, I mean, I feel highly confident that each of the teams have a strong returns, the teams are well positioned, and our intermediary and sales teams have quite an array of strategies to sell. With regards to capacity specifically, the Global Value team, the non-U.S. value, we haven't reopened the fund, but we clearly have been managing flows there as people rebalance. We have the ability to manage some of the outflow just from natural attrition. So even in the close strategies, due to some of the higher level of rebalancing, there's an opportunity across all nine franchises. So I mean, I think the sales and marketing have the entire array of 2017 strategies to look at.

Okay. Thanks a lot.

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

Good morning. This is actually Ryan Bailey filling in for Alex. I was just wondering if you're seeing anything in terms of demand from non-U.S. clients. I think since 2017 that had been a – non-U.S. clients had been a source of inflows and it seems like it had flipped to negative this year. So I was just wondering if there was anything you could highlight?

Ryan, this is Eric. I have not seen any change with regards to the interest. I think that the primary strategies remain our global strategies and looking across our Global Opportunities or Global Discovery, Global Equity and Global Value. Those strategies have strong excess return and are very well positioned in the marketplace. So we haven't seen any change in the marketplace with regards to the consultants and intermediaries that we've been talking too.

Great. Thank you. And maybe just as a follow-up, can you give us a reminder on any teams that might be interested in launching more private style strategies?

With all of our teams, we talk about degrees of freedom and how to add value and differentiate against indexes and create strategies that are difficult to replicate given the trend towards indexation and exposure, so we're in discussions with our teams with that theme in mind, but we have no new strategy or team that's announcing a product as of yet.

Got it. Thank you very much.

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

Thanks for taking my question. Just one on the potential excess cash on the balance sheet available that could potentially help fund the dividend, wonder if you just give us the latest update on that and maybe also help us think through how that excess cash could potentially fluctuate depending on market conditions with the Company might need to hold back? Thanks.

Yes. So the cash that you see on the balance sheet a good chunk of that is really, accumulated throughout the year to pay, incentive compensation at year-end. There's some unpaid dividends in CRA, payables that are on the book. So in general, we hold about $100 million of cash when all of the liabilities are paid. We do use some of that cash for seed investments and we currently have about $40 million of seed there. So we'll go through the same process at the end of the year when we get to the special dividend, we did provide some insight in the a deck or in sort of the transition from the fixed to the variable and that was done to show the transition not to really help estimate a special at the end of the year. But you can see that through the three quarters we've accumulated, around $1 per share of excess cash that will be available. But what we get to the end of the year, we'll transition to the variable. So we'll payout 80% of the December earnings, we'll retain that 20% on the balance sheet that won't be paid out, that will be accumulated throughout the year and considered for a special annual in the following year. So that that's about how we think about it.

Gotcha. Thanks. And then one more follow-up, broadly speaking, what's your sense in terms of how clients view the value proposition differentiate investment strategies with multiple degrees of freedom, especially in terms of market volatility. Did you see any change, whether it's an increase or decrease in that kind of interest? Thanks.

Yes. With regards to the high value added approach and strategy that we focus on when you get away from a price momentum market that goes up over the last nine years, 10 years. It's highly beneficial for exposure index oriented products. So with regards to the volatility and our degrees of freedom and our history of delivering inactive approach that has delivered, our belief is that it will be highly beneficial.

Great, thanks.

The next question is a follow-up from Chris Shutler with William Blair. Please go ahead.

So C.J., I just want to get a little more clarity on the expenses, particularly the communications in tech line. Just how do we think about the run rate from here? I know you said 10.5 in Q4, but is that the right run rate to think about heading into 2019 and a same type of question on G&A. What's the right run right there?

Yes. So yes, I did guided 10.5 in the fourth quarter and I think I'm absent any clarity that I have today. I think I would use 10.5 would be a good proxy for next year. Tech spend early goes down and so I think we'll continue to make investments in the business, given our new strategies, new asset classes, and investments in distribution technology. So I think that that's about right. And G&A that fluctuates within a range as you can see from history. So my best estimate would be just to use in that quarter. It's going to fluctuate up and down from there based on business activity. But on average I would think several would be a good proxy.

Okay. Thank you. End of Q&A

This concludes the question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.