Good day, and welcome to the Artisan Partners Second Quarter 2022 Earnings Call . Please note that this event is being recorded. I would not like to turn the conference over to Makela Taphorn with Artisan Partners. Please go ahead.

Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Eric Colson, CEO; and C.J. Daley, CFO. Our latest results and investor presentation are available on the Investor Relations section of our Web site. Following these remarks, we will open the line for questions. Before we begin, I'd like to remind you that comments made on today's call, including responses to questions, may deal with forward-looking statements. These are subject to risks and uncertainties and are presented in the earnings release and detailed in our filings with the SEC. We are not required to update or revise any of these statements following the 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. The first six months of 2022 have been tough. The war in Ukraine, inflation and June reaching approximately 9%, a 40 year high, negative consumer sentiment, economic stagnation, whether qualifying as a recession or not, the worst first half for the S&P 500 since 1970, and persistent high volatility. At Artisan Partners, our AUM declined 26% from $175 billion to $131 billion. Year over year, first half revenues declined 11% and adjusted operating margin declined 750 basis points from 43.6% to 36.1%. As we've experienced before, these times demand discipline to our business and financial model for stability and perspective to capture opportunities for long term growth. To achieve stability and growth, it's critical that we level set our business and financials, and align our interest and resources for growth with all stakeholders, our board, management, associates, clients and shareholders. Last week after our quarterly board meeting, we hosted a firm wide discussion with several members of our board in Milwaukee. The event was attended in person and online by over 250 Artisan associates. We discussed Artisan Partners’ history, philosophy, values and consistency through time. I wish all of our stakeholders could have been there. The combination of the directors on stage and the associates in the audience drove home our commitment to who we are as an investment firm. Our commitment to excellence, quality and doing the right thing, our patient long term approach and the consistent application of our guiding principles, as we have grown and evolved since 1995. Across the firm, we take confidence in our investment track record and proven business success. We are well positioned to take advantage of the disruption around us, sharp market drawdowns happen relatively often. Since…

Thanks, Eric, I'll begin with AUM on Page 7. During the quarter, sharp market declines negatively impacted our AUM. Global equity market indices declined approximately 15% for the quarter and approximately 20% for the year, hovering near bear market territory as of the end of the quarter. Market declines were driven by, among other factors, the continued conflict in Ukraine, a spike in inflation and sharp increases in interest rates, which drove heightened fears of appending recession. As a result, AUM declined to $130.5 billion, down 18% compared to last quarter and down 26% compared to the June quarter of 2021. In response, some clients took defensive actions, turning away from riskier growth equities and emerging markets. Net client outflows were $4.2 billion in the quarter and were primarily from our growth strategies, in particular, those within our global equity and growth teams. A small number of clients drove the majority of the increase in outflows, mostly as a result of reallocations away from risk. Average AUM was $143.9 billion for the quarter, down 11% sequentially and 16% compared to the June quarter of 2021. Year-to-date average, AUM has declined 8% compared to the first six months of 2021. Across all generations, AUM was impacted by declining global markets during the quarter and year to date periods. There were no material changes in the weighted average management fee or AUM mix by generations. Financial results are presented on the next two pages. Our complete GAAP and adjusted results are presented in our earnings release. My comments will focus on our adjusted results. Quarterly revenues declined 11% compared to the previous quarter and 18% compared to the second quarter of 2021 on lower average AUM. Year to date revenues were also down 11% from 2021 on lower average AUM. Performance fee…

And our first question today will come from Kenneth Lee with RBC Capital Markets.

First one is just around investment capacity, just given the current -- the market volatility and all the various dynamics. How do you think about investment capacity across all your various teams and strategies at this point?

With the current draw down that we've seen in the marketplace, we've obviously increased capacity in some of our strategies with the drawdown, the strategies that still remain in high demand, we're going to carefully manage flows. We've always believed that there's been three major drivers of capacity control. One, really around just the pure rate and speed of which flows come in and sometimes you see a strategy get a high demand in a short period, and you have to manage that flow. So it's not disruptive to the integrity of the strategy. Second, you look at channels and regions. And so that you want to protect against a concentrated flow that comes in and likewise, you look at just the aggregate capacity of a strategy. So those principles still hold, there's a few strategies that we have that were in the demand category, but the bulk of the strategies demonstrated some outflow, as well as drawdown in performance creating capacity. As we look across the entire platform, we with the addition of new teams and strategy, we have more capacity than we've ever seen in the history of the firm.

And then one about the prepared remarks that you talked about retention of some of the special dividends for seed investments. Wondering if you could just help quantify that amount and perhaps talk a little bit more about the details, presumably this is going for either newer credit strategies or are there any other strategies that you're looking to seed in particular?

With respect to future dividends, our quarterly dividend policy at 80% of the cash generate remains the same. In past years, we have held back small amount of cash to fund strategies as well as be defensive. So I think last year we paid 95%, 96% of the cash generated and with a little bit of a hold back, and we're continuing -- we're on track to pay about the same percentage. Our trailing 12 month dividend yields about 11%. And even with the , we'll still have an extremely healthy dividend. And so we're not talking a whole lot of dollars probably somewhere in the 10% to 15% million range.

And our next question will come from Dan Fannon with Jefferies.

Eric, I was hoping you could expand upon, some of the comments you made. Obviously, your historical performance has been quite strong. Curious about the conversations with asset allocators today and how they weigh as longer term track records in periods of alpha generation versus kind of where things sit today?

We did highlight on page three of the deck, just our performance during very short periods of a 12 month period and then later in the deck of the longer term. With regards to the shorter period, we used a 12 month period. We looked at three year and five year but it clouded these unique periods. And looking at the drawdown in these 11 periods we highlighted, it does produce an opportunity on the back end of that draw down that we highlighted on our prepared remarks. I would also highlight the three periods where we didn't produce as a firm, a excess return to the index, where back in ‘09 where the index was up 60%, a great outcome for clients, and we lagged behind it 59% return. In 2002, index up 30% and we were up 23%, and 98 -- it was 32% and we were up 30%, those were pretty sharp V shape recoveries. And the client makes out very well in that absolute recovery. And likewise, we do with our AUM moving up. With regards to allocators, I think with each of these crisis, people have moved away from a static asset allocation to then a strategic. And I think today, we're seeing a little bit more tactical asset allocation and it's fueled by better services and tools and data and today, product to actually execute on those shorter term exposures. And we've always moved our business towards the strategic allocation and looked for longer duration clients, and haven't managed in that tactical exposure. So we haven't created what we call engineered products, whether it's in an asset class that's new like crypto or in a factor based that you see the ETFs like a momentum based factor ETF exposure, or even in a newfound like say an innovation energy fund that is maybe a hot theme, and that allows us to see through it. I think engineered products you would have to pull back quicker, because it's a market timing and distribution. We can invest through these periods because our strategies are built for the long run. So it doesn't surprise us that we have maybe a little bit pause on our inflow. We had about the same gross outflow that we've seen in other quarters. It was really a gross inflow that clients made tactical shifts this quarter and that makes sense to us. I guess that's our view and perspective on clients' shorter term allocation and our product mix.

And I guess, C.J. just to follow-up on your comment around continuing to invest. Thinking about 2Q kind of levels for non-com expenses, is this fair or reasonable for the back half of the year? And then also if you could expand upon the -- you've mentioned distribution and some investments there. But if there's anything you could highlight in terms of what you're specifically doing, that would be helpful?

We're on target with sort of the guidance we gave in the January call, they were primarily around compensation, occupancy and technology. We're right on target with the compensation targets that we set out, which was about $15 million increase on the fixed side of the comp and benefits. And then on occupancy and tech, we gave, those areas to be up $5 million to $7 million this year, and I'd say we're on the lower end of that but on target from a quarterly basis. The one area where we did see a little bit of an uptick this quarter was travel, travel came back pretty robustly this quarter back to pre-COVID levels. We see that being close to where we were in the next two quarters, but maybe a little bit lighter in the third quarter, which is typical. So we feel good with the guidance we have given, and we are on track to achieve those targets. With respect to distribution, it's really been around -- the majority of it's been around new investment teams and strategies, the new team and strategies that we've onboarded this year, as well as sort of accelerating sales in the intermediary space with some dedicated internal resources to target prospective clients, as well as on the digital enablement side. So we're in the early innings of those investments but we've made them this year.

And our next question will come from Alex Blostein with Goldman Sachs.

Eric, I was hoping you could spend a couple of minutes on the opportunity to bring in new teams and new talent in a more volatile environment. Is that a net positive, net negative, how are you guys thinking about it today?

Usually with volatility in the marketplace and then more importantly, I think, we've continued to see a pretty robust M&A activity. And with M&A activity and with volatility, it's natural for many people to think about their long term home of where they want to build an investment franchise, and where they want to actually reside for their career. And so we continue to have a fairly active dialog in the marketplace. We also are going to be putting a extremely high bar in that dialogue, given the amount of capacity we've built in the firm and the teams that we've brought on. We've always had a mindset that we purposely invest in strategies with clear intent that they fit for the long run and we see those through as opposed to designing strategies and throwing them against the wall and hoping they work. And given the amount of capacity and the number of strategies we've invested in, we're going to focus our investment operation time on those strategies and be highly selective on new teams that we're looking at right now. But the activity is still there and quite interesting in the marketplace, it's just key for us to stay disciplined.

And then heard you guys on sort of the commitment to private markets that you've obviously talked for a couple of quarters now, so doesn't sound like anything's changing there. But I guess from the balance sheet perspective, C.J., I heard you talk about retaining a little bit extra cash, nothing too material, but a little bit more than you've done in the past to I guess co-invest the seed product. What do you think is the right amount of seed capital that you guys need to have on the balance sheet to sort of support the growth, especially including some of the newer initiatives you have in the marketplace?

I'll jump in and then let C.J. jump and add on to the response. Really the uptick in seed capital is really driven by asset class. We've been quite fortunate to launch an array of public equity oriented strategies and to launch a strategy and that asset class takes a much smaller amount of seed, and we also did it primarily in the US. Today, we're operating with investments in array of credit strategies. And on top of that, the demand and interest in the more recent launch of EMsights Capital Group is global demand. So we've not only increased the amount due to the asset class, we've also increased the amount due to the distribution footprint of the firm being outside the US. As we highlighted the number of non-US clients, the emerging markets debt and Global Unconstrained is attracting clients and prospects for both a UCIT and a mutual fund. So it's hard to normalize that if we move into another asset class or we go back to launching some equity oriented strategies, but the current uptick is really around asset class.

The only thing I would add is that, we have a disciplined approach to seed capital. We obviously make seed capital investments to invest in growth, support our investment teams. And then on the back end, our primary objective is to recycle at the appropriate time, so that we can reinvest in other strategies and that process continues.

And our next question will come from John Dunn with Evercore ISI.

You guys talked about a small amount of clients reallocating and kind of driving the outflows. Maybe could you talk about a little more about the different demand dynamics on both the fund side and then the separate account side?

Certainly most of the clients that we look to invest in Artisan tend to have long term horizons. And really the fund side attracts a lot of institutional clients, whether it's in the mutual fund or a UCIT or a CIT. So we really don't see much of a difference based on vehicle. We have more recently seen really clients thinking about their risk exposure. And so much of the flow that we've seen this last quarter was due to either a time horizon or risk perspective. Two clients drove a significant amount of the outflow. One was a sovereign wealth client that was invested with us for less than three years and had a shift in allocation. In my view, that is not a statement about our strategy, given it was only a two and half year relationship, it was clearly an as allocation decision there to reweight the portfolio, and that client wanted to increase their private asset allocation. The other larger client was a superannuation that was with us for over seven years. We outperformed the index over that seven plus year relationship, and the client wanted to de-risk. So the trend really, in our mind, is an evaluation of their overall risk exposure. Our strategies across the board lean to high value added strategies to take advantage of risk opportunities, and there's an array of clients that want to de-risk that. And that's what we saw this quarter, which is fairly natural in a drawdown like this. And at the same time, there’s a pause on inflows, which created the imbalance there and the logic around the outflow. But the two clients it extrapolate, hopefully, it gives a good example of people evaluating time horizon and risk exposure.

And then the follow up is, there's already three strategies in EMsight. Is that sufficient for the time being or might we expect some more launches over the next couple of years?

No, over the next few years, that's a very sufficient number of strategies. In fact, that's the most we've ever launched with a single team day one. This team has managed these strategies for years and at their previous firm, and we would expect to see these three through and build some scale into the strategy. Clearly, a mindset would be to develop more around the team given their broad capabilities. But I would expect for the next few years we're going to really be focused on the three launches that we put together over the last couple of months.

And this will conclude our question-and-answer session, also concluding today's conference. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines.