Good morning. And welcome to the Principal Financial Group 2018 Outlook Conference Call. There will be a Question-and-Answer period after the speakers has completed their prepared remarks. [Operator Instructions]. I would now like to turn the conference call over to John Egan, Vice President of Investor Relations.

Thank you and good morning. Welcome to Principal Financial Group's 2018 outlook conference call. Our press release and slide presentation related to today's call are available at principal.com/investor. Following a reading of the Safe Harbor provision, CEO, Dan Houston; and CFO, Deanna Strable will deliver some prepared remarks. Then we will open up the call for questions. Others available for the Q&A session include Nora Everett, Retirement and Income Solutions; Jim McCaughan, Principal Global Investors; Luis Valdes, Principal International; Amy Friedrich, US Insurance Solutions; and Tim Dunbar, our Chief Investment Officer. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risk and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K, filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP measures. The description of these non-GAAP financial measures can be found in our 3Q, 2017 financial supplement on our website. Dan?

Thanks, John. I'd also like to thank everyone joining us on the call and everyone who participated in our recent investor workshop. Before Deanna gets into the details of our 2018 outlook, I'll share certain messages that reinforce our ability to deliver sustainable profitable growth and create long-term value for our shareholder. Finally, we view all substantially since our IPO in 2001 where the most notable progress occurring over the past half dozen years or so. We've added scale in Latin America and Asia and expanded our investment capabilities and distribution platforms around the world. We become more diversified and at the same time more integrated. We've turned our aspirational businesses into industry leaders by intensifying our focus on three key areas, the needs of our customers, individuals, small to medium size businesses and institutions, operational efficiency and effective capital deployment. Our results evidenced continued strong execution from 2012 through the third quarter of 2017, we've increased our assets under management or AUM by more than $250 billion, 63% growth in total, 11% on a compounded annual basis. Our strong AUM growth has fueled an increase in pretax operating earnings of over $800 million or 74% comparing year-end 2012 to the trailing 12 months ended September 30, 2017. Since the end of 2012, we've deployed more than $600 million for strategic acquisitions while continuing to invest heavily in our organic growth. We've also returned more than $3 billion to shareholders, approximately one third through share repurchases and two thirds in the form of common stock dividends. Today Principal is a top 40 global asset managers with clients in more than 80 countries. We're now the largest pension provider in Latin America in terms of AUM and a partner in the top 5 funds company in China. And in the U.S.,…

Thanks Dan and thank you for joining our 2018 outlook call. It was great to see many of you at our Investor Workshop last week. This morning I'll focus my comments on three areas, acceleration of our investment and digital business strategies and the impact on our 2018 outlook, 2018 guidance of key drivers for each business and our 2018 capital deployment strategy. As Dan mentioned we plan to accelerate our investment in digital business strategies starting in 2018. While we've been investing in digital for many years this acceleration will help us further differentiate with customers and allow us to continue to grow operating earnings faster than our competitors. We expect this higher level of digital investment will occur over a multiyear period. While we view this investment as meaningful, it pales in comparison to our current annual technology spend of over $0.5 billion. We anticipate this investment will reduce our total company operating earnings growth rate from 2017 to 2018 by approximately 2 percentage points. However, over the long term we continue to target annual growth of 9% to 12% in total company operating earnings and this digital investment does not that change that. Our 2018 guidance for the business unit revenue and margin ranges and corporate pretax operating losses are either the same or better than our 2017 outlook ranges. Additionally, the impact of digital investment is reflected in our 2018 guidance for business unit margin ranges and corporate pretax operating losses. Our key underlying assumptions are shown on slide 4 and there is a few I'd like to highlight. U.S. tax reform remains top of mind for us. The tax rates used in our 2018 outlook are based on current tax regulations. I'll share a few comments on potential impacts from the current House and Senate…

[Operator Instructions]. And your first question from the line of Erik Bass with Autonomous Research.

Hi, thank you. I just had a couple of questions on the digital initiatives and you mentioned that it's a multiyear initiative, did you expect 2018 to be the peak year for spending, or should we expect this level of spend to continue into 2019, I guess also is there anything meaningful we should think about in terms of the timing of these expenses on kind of quarterly basis in 2018?

Just a couple of thoughts, and that is we really try to ensure that as we went after this digital investment, as opposed to a spend, to recognize that it was going to be a multiyear effort, that we would have deliverables that will incur in the next one to two years, deliverables that would become interim term in that three to five, and there's frankly some investments in there that won't pay off for six or seven years down the road, we want those investments in the businesses as opposed to incorporate but I would expect that we would start seeing these investments start paying off throughout 2018 and then I suspect it's just going to be a steady diet of updates to you if we talk about our solutions and our modifications to the way in which we're doing business whether that's around customer experience, that's whether how we're delivery advise and of course ultimately how we're integrating that into our global investment research platform but we'll make sure to keep you updated on how these projects are coming.

And I guess you sort of answered the question but these will be allocated through the business units and obviously incorporated in the margin guidance you gave but it is initiatives you're talking about is it right to think that RIS and PGI are going to see the bulk of the investment at least near term?

I wouldn’t think so, I actually suggest they're spread out over all the businesses because again as we focus on the customers, its small to medium size employers, its individuals, its institutions and I think that's where you can get yourself in a lot of trouble by trying to focus this on any one business unit, so I would say whether it's international asset management, asset accumulation or the risk businesses these are franchise, investments all of which need to improve on the customer experience and to develop better ways to support the needs of our customers. One of the most encouraging parts of it Erik, perhaps a little -- add a detail here, when we look at the portfolio about two thirds of them actually drive revenue growth and about third of the initiatives drive expense reductions, and I like that mix, it basically is playing more offence and we've got a pretty good track record around being able to effectively drive out cost, but the idea of enhancing revenues is reassuring to make. With that I am going to throw over to Deanna if she has a couple of additional comments she would like to make.

Yes, I think Dan really reiterated the main points there, first it is reflected in all of the outlook we're giving you today, so it's reflected in the margins as well as the corporate expenses and if you think about that it is spread throughout, not concentrated in any one area. The other thing I would say is over a time I think the expense might be similar year-by-year, but we will start to see the benefits of those investments offset some of that and we'll be able to better fund that just through our normal revenue growth and so I think most impactful when you're thinking about e-growth will be the '17 to '18 comparison but we'll continue to update it and you did ask about kind of quarterly and I would say there's nothing that we've figured today and would think that it would be abnormal quarter-by-quarter; we're factoring this into our business spend kind of on a normal basis and so nothing that would be seasonal relative to that spend.

Your next question is from the line of Alex Scott with Goldman Sachs.

So I guess the first one maybe on the -- when I think about the pre-tax return on net revenue and how much higher the guide's been bumped up I guess for the last two years, but it's still it’s becoming even higher than the long term guide and I guess if you exclude I guess from the digital initiative it might be in there, could be even a little higher so can you help me think about what sort of would cause it to come back down in a long term outlook and I know equity market impact on DAC is part of that, but what are some of the other items that would kind of walk me down.

Yeah, I'll ask Nora to follow up on that. Again, I'd just remind you Alex of just the incredibly positive equity markets, we had pushing the -- a number of these businesses and RIS fee would certainly be one of those but Nora would you like to respond?

Sure, and now as Dan said it really is that equity market tailing, I mean if you look at the benefit that we get from that kind of growth that is the major explainer for that over performance based on outlook. The other thing we have that accelerated digital spend now and we'll continue to invest in the business as well, so when you look at the combination of the benefit of the equity market tailwinds and then the accelerated investment that we're going to make around the digital experience that Dan and Deanna had detailed, that in combination is what gives us that guidance for the 2018 outlook.

I'd also just pile on there for a second Alex, but it's not as if we're standing still here making additional or making for the first-time big investments in these businesses as Deanna said in her prepared comments we're spending half a billion dollars already. These are those incremental initiatives that can help propel and drive and bring forward some of the growth and so Nora and her team as well as the other divisional presidents have embraced expense reduction and revenue enhancers throughout and again I still think we're seeing the benefit of that and certainly in RIS fee. Did you have a follow up?

Maybe a quick somewhere one on spread just thinking about the margin being higher there versus the long-term outlook and it sounded like from the workshop that you guys held that you could achieve scale as you kind of grow that business which I think has a pretty good growth profile, so kind of again like why wouldn't we sort of see margin expansion as you achieve more scale there?

So, there's a number of things there Alex, we certainly are going to benefit from scale and as you can see we've lifted that 2018 outlook range around margins. We also though have that volatility around the variable investment income piece of it and we would expect to see some lower VI we’re estimating some lower variable investment income year over year, so it's going to be a combination of things but certainly we’re going to continue to benefit from the scalability of some of those businesses and as you probably heard at Investor Day that pension risk transfer business and another reminder, both the pension risk transfer business and our IO business are opportunistic businesses, we see a lot of opportunity in that pension risk transfer business over the next year or so but again we look at those two businesses on an opportunistic basis.

Your next question is from the line of Sean Dargan with Wells Fargo Securities.

Thank you, good morning. I have a question about the net revenue growth at RIS fee, you know given the market strength I thought it might have been a little bit higher year to date than it has been. I guess what gives you the confidence that you're going to come back to the long-term outlook of 3 to 7%.

I'll make a couple of comments and ask Nora to pile on Sean. The first thing I would say is when you look at the health of that business this is one metric the one that you're looking at very closely but we're growing the number of participants, we're growing the number of total plans and again the market is validating that our value propositions resonates with advisors as well as with our end customers. There is a lot of pressure on this business from competition, but again I still think that in the end there is going to be a lot of ways that we're going to differentiate. We're able to show that when we're visiting with our customers and having those discussions. But this RIS fee business does require significant investments in the business. And I would also remind you before I throw it off to Nora that remember what it spins off for the rest of the organization whether it feeds the annuity business, the mutual fund business the asset management business, this is a really important catalyst, it's a very foundational part of our strategy and not all of the value is found within this particular line. With that I'll throw it over to Nora.

Sure. And Dan really hit on it. It's the strong fundamentals that give us that confidence. And if you look at those underlying fundamentals around plans, participants, recurring deposits, strong retention especially in this F&B space that we place so well in the small to medium business on it. And we believe longer term our scale, our expertise and where we play will give us a benefit that many of our other competitors may not have and there are still subscale competitors in this space. So, we are assuming and expecting that will be then a factor as this space continues to consolidate over the coming years. So that combination of things both the fundamentals and the competitive environment gives us that confidence with regard to that long-term outlook or that longer term outlook.

Thanks. And one follows up. Can you share with us what the assumption on net flows as a percentage of beginning AUM and fee is or should be in 2018?

Sure. And we've had this discussion many times before. There is going to be volatility in this percentage because some of those larger cases. But certainly, within our S&B business we would expect and this is just a projection but sitting here today we would expect that that net cash flow would in our typical range of 1% to 3% at beginning of the year the comp value. The one caveat I'd add though is there always is going to be some pressure on that metric. When you got equity, markets moving the way they move for us because the recurring deposit piece of that net cash flow number doesn't move with those equity markets. That's a payroll based variable so just keep that in mind as we watch some of the equity market lift from 2017 and into 2018.

Your next question is from the line of Suneet Kamath with Citi.

Hi thanks good morning. I just wanted to follow up on Sean's line of questioning on RIS fee again. The 2% to 5% revenue net revenue growth was little surprising to me as well. Can you just talk a little bit about what you're seeing on fee rates in that business as you think about the competitive environment?

Sure. And certainly, that's an impact. We expect this competitive market pressure to continue in 2018 around pricing that certainly is part of the equation. But again, when you look at those underlying fundamentals and the growth in this business, longer term we expect to be the beneficiary of the market and the competitive landscape. With that said, pricing has always been a we don't assume that next year is only going to be the only competitive pricing year, we've got that built into our assumptions. But back to this idea that in this competitive environment there are subscale players, there are folks that we don't believe will be in this business for the long-term. And we certainly expect to see those the benefit of that.

You also Suneet, you have the mix of the business there between small and medium and large sized plant, that certainly contributes to revenue growth, investment management as you know we get a generous portion of that and there is desired loop to lower cost investment options, the good news is with our CIT platform, or our registered funds, our separate accounts, we have lots of different choices but there is a bias towards lower cost investment options, we've got great options I guess the target date series across that full range, so again you're still managing the assets but it may be in a structure that has an element of passive that may not generate the same level of revenue that perhaps we enjoyed five years ago, I think Nora had one more comment.

The one other thing I wanted to add is we do expect meaningfully lower variable investment income in 2018 again just an estimate, a projection at this point that that is impacting that revenue growth rate as well.

And then just a question for Jim in terms of the 4% to 8% outlook for PGI, can you give us a sense of what's the flow assumption climate and then are you expecting any significant cases either to come in or exit as we think about modeling 2018?

As we think about the flows in 2018 I'd say first of all I'm more confident in the revenue outlook than I am in the flow outlook, the reason for that is that there do remain some low fee, somewhat commoditized mandates which may be vulnerable, nothing specific I want to point out now, but may be vulnerable as things develop. Our inflows that we're seeing in the pipeline consists of things like real estate, international small cap, high yield and those are areas where there are premium fees, that's the reason why I feel more confident, about the revenue than I do about the flows. Having said that we expect [indiscernible] flows next year, which against the active industry was a move to passive maybe unusual, we think we will be industry leading in terms of flows. I don't really want to pin the loss on the flows, I think the outlook from revenue is the more reliable point.

Your next question is from the line of Humphrey Lee with Dowling and Partners.

Just a question related to the just the capital spends related to the digital mission is relative to your capital deployment for 2018, if it is a 2% headwind then it is kind of looking at roughly 30 million of earnings impact, don't know how much of the digital spend will be capitalized, but just thinking the range for capital deployment of 900 million to 1.3 billion, that's kind of 100 million to 200 million increase from 2017 level. I feel like given the real estate gains that you had in the third quarter we could see a little bit stronger capital deployment, so I just don't know how much of the digital spend in turn would affect your capital deployment time for '18?

A couple of things out of that question, the first one I would say is we don't expect that we'd be capitalizing any of that digital spend, because obviously we've translated that into how it impacts operating earnings. As you mentioned it's a pretty small number relative to our capital deployment and we did increase as you mentioned 100 million on the low end but 200 million on the high end, and that does really affect impacted by the third quarter real estate gain as long as just our normal net income growth. What I'd come back to is we continue to have a very balanced and disciplined approach to capital deployment as we talked about last week, we look at that across the full range of opportunities whether that be organic growth, inorganic growth or returning capital to shareholders and we do feel that ultimately this digital spend helps us to continue to have that disciplined approach as well as outperformance over the long term and we'll continue to have that same philosophy as we go forward.

Okay, got it, and then maybe a question for Jim, I think when you look at PGI you mentioned in your last year's outlook call, 2017 you expect a little bit decline or natural decline in terms of those kind of transaction fees or kind of performance fees for 2017. Can you give us a similar update for 2018, anything that we should be aware of from a fee perspective in our modeling?

Thank you, Humphrey. We expect to see continued fairly robust transaction fees, that's not where the issue is. Compared with 2014, '15, '16, 2017 has been pretty low on the incidence of multiyear incentive fees, many of the incentive fees that we get on real estate programs particularly are on a three or a five-year assessment and 2017's been somewhat low in that. 2018 is only a partial pickup, it seems like it'll be fairly low unless as is possible some of them get pulled forward because of earlier realization. You know sometimes an outflow can actually be good news because it's crystallizing a process and it means you've done what you intend to do for the client. And maybe a little of that but 2018 still feels a little bit thin compared with 2014, '15, '16. It's 2019, 2020 we're seeing already likely incidence of incentive fees getting back to that previous level. So, it’s a fairly slower build up. I do think however the main effort that we have and you'll see management fees this year have more than made up for the weakness in performance fees, the real measure of the ongoing earnings part of the business is those management fees, and those should be out well over 10% for this year against last year and I think that's the measure of the earnings power so the performance fees, the incentive fees will pick up slowly over the next couple of years most likely but the management fees is the real measure of our earnings power.

We have reached the end of our Q&A, Mr. Houston your closing comments please.

Well first and foremost thank you for joining the call today, we'll be back on the phone here on Tuesday January 30th with our fourth quarter results, we also look forward throughout 2018 giving you updates on this technology investment we're very enthusiastic about it, we remain convinced the fundamentals of this business continue to remain quite strong and with that have very safe and happy holidays with your families and look forward to seeing you on the road, thank you.

Thank you for participating in today's conference call. This call will be available for replay beginning at 12:30 PM Eastern Time today, until end of day December 19, 2017. 4295809 is the access code for the replay. The number to dial for the replay is 8558592056 U.S. and Canadian callers or 4045373406 international callers. You may now disconnect.