AllianceBernstein Holding L.P. (NYSE:AB) Q1 2024 Earnings Call Transcript April 26, 2024

AllianceBernstein Holding L.P. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the AllianceBernstein First Quarter 2024 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session, and I will give you 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. And I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead.

Mark Griffin: Thank you, operator. Good morning, everyone, and welcome to our first quarter 2024 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, President and CEO; Jackie Marks, CFO; and Mark Gessner, Head of US Retail; Onur Erzan, Head of Global Client Group & 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 and the MD&A of our 10 Q, which we filed yesterday. 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 the call over to Seth.

Seth Bernstein: Good morning, and thank you for joining us today. In the first quarter, AB benefited from strong global equity market returns complemented by robust double-digit organic fixed income flows and 8% annualized growth in alternatives to multi-asset, more than offsetting equity outflows. AB's balance and diversification across asset classes and geographies coupled with broad global distribution capabilities enabled us to continue to drive market share gains in key areas. Retail led the way, driven by municipal SMA and strong cross broader fixed income flows. On April 1st, we closed the Bernstein Research joint venture with Societe Generale, improving our future profit margin profile, while using the proceeds of $304 million to pay down debt before quarter end, providing flexibility to invest in the future.

Now let's get into the specifics, starting with a firm wide overview on Slide 4. First quarter gross sales were $32.6 billion up $7 billion or 27% from the year ago period. Firmwide active net inflows were $3.7 billion or 2.3% organic growth. Quarter end assets under management of $759 billion increased by 12% year-over-year and 5% from the end of the fourth quarter. And first quarter average assets under management were up 11% year-over-year and 8% sequentially. Slide 5 shows our quarterly flow trend by channel. Firmwide, first quarter net inflows were $500 million. Strong retail gross sales of $23.8 billion increased 42% year-over-year and 13% sequentially, driven by both fixed income and equities. Net inflows were $4.2 billion or 6% annualized organic as we continued to gain share in fixed income, up 23% annualized organically.

Our institutional channel had gross sales of $3.3 billion up 12% from both prior periods. Net outflows of $4.2 billion included a $3 billion low fee passive partial redemption. In Private Wealth, gross sales were strong at $5.5 billion with net inflows of $500 million led by Muni, our proprietary direct indexing fund and ETFs. Investment performance is shown on Slide 6. Starting with fixed income. Government bond returns ended the first quarter flat, while most credit risk assets outperformed in the quarter. Government bond returns reflected volatility associated with the magnitude and timing for when central banks would begin to cut rates, falling early in the quarter and subsequently rallying in mid-March when those views began to change.

Meanwhile, corporates came to market with record new issuance and investors locked in higher yields. AB fixed income performance remains strong with 91% of assets outperforming over the one year period and 71% over both three and five year periods. This performance translated to double-digit annualized organic growth across our fixed income asset base this quarter, including some standout performances in retail. Turning to equities. Global equity markets posted strong quarterly returns with the S&P 500 up 10.6%, reflecting a resilient U.S. economy, ongoing enthusiasm around artificial intelligence and a widely held outlook for monetary easing, albeit at a slower pace than initially expected. We were encouraged by evidence of a more fundamentally driven environment as exemplified by some dispersion in performance amidst the Magnificent 7.

Our investment performance showed steady improvement as several large AUM strategies outperformed benchmarks in the first quarter. 40% of equity assets outperformed over the one year period, while 50% outperformed over both the three and five year periods. We continue to experience outflows in equities. Client rebalancing within their allocations, a shift to fixed income products given the higher rate environment, and specific strategies in which underperformance led to redemptions contributed to the negative flows in the quarter. That said, we received an upgrade from a global consultancy for U.S. Sustainable Thematic, an example of that strong long-term performance is being recognized. We're seeing some signs of renewed in U.S. value for which we have several competitive strategies as exemplified by fundings of the $330 million mid-cap value mandate during the quarter.

Relative to peers, 54%, 71%, and 68% of our equity assets outperformed the MorningStar peer group over the one, three and five year periods respectively. Now I'll review our client channels, beginning with retail on Slide 7. Gross sales and net inflows both reached the highest level in nine quarters, approaching record 2021 levels. The redemption rate improved sequentially to 27% from 30%, while ticking up slightly versus prior year. Net inflows of $4.2 billion reflected strong geographic breadth and demand for income from Asian investors despite resurgent rates volatility in the quarter. Taxable fixed income, we grew organically at a 25% annualized rate with net inflows of $4 billion marking the highest quarterly gain, since 2019. Sustained inflows into American income and money markets were supplemented by client engagement and global high yield.

Muni's posted record net inflows $2.3 billion 28% annualized organic growth rate. Active equity outflows reflected sequential improvement as redemption subsided, while performance rebounded. U.S. large cap growth posted net inflows in both Japan and the United States. You'll hear today from Mark Gessner, our Head of US Retail, who will walk you through our remarkable progress and growth outlook in the US Retail channel. Turning to institutional on Slide 8. First quarter gross sales were $3.3 billion up 12% versus prior periods. Outflows of $4.2 billion were concentrated in equities, including a $3 billion low fee passive equity partial redemption. Flows rebolstered by ABCarVal, which saw a $780 million COL and $315 million in residential mortgages, but latter funded by equitable.

Alternative multi asset flows are now positive for 13 of the last 16 quarters. Representing 35% of our channel AUM, up from 21% three years ago. Alts multi-asset has grown at a 20% CAGR, lifting our channel fee rate by 13% over this period. The ABCarVal acquisition is reflected during this period. Our pipeline was $11.5 billion at quarter end, down $500 million sequentially. First quarter fundings included $330 million in U.S. mid value and $135 million in U.S. low vol. Notable pipeline additions include $500 million through AB Private Credit Investors' new NAV Lending strategy funded by equitable and $500 million for systematic U.S. investment grade. Equitable's initial $10 billion private markets program is now over 95% deployed and we expect it will be completed in the first half of this year.

The second $10 billion is expected to commence thereafter and extend over the next few years. Moving to Private Wealth on Slide 9. First quarter gross sales of $5.5 billion resulted in net inflows of $500 million. We posted strong sales in our proprietary direct indexing strategy, now $4.6 billion in AUM, municipals and ETFs. Advisor productivity remains solid, and we continue to invest with FA headcount on track for mid-single digit growth in 2024, including internal promotions, a key part of our strategy. We have a diverse slate of private alternatives launches slated to ramp beginning in the second quarter, including our Evergreen Strategies, 2 ABCarVal Strategies and select external partners. I'll finish with our business overview with the sell side on Slide 10.

With the close of the joint venture on April 1, this is the last time we'll be reporting separately on Bernstein Research. First quarter Bernstein Research revenues of $96 million were down 4% over both prior periods. We saw modest improvement in Asia though global trading activity remains subdued. The close of the joint venture was bittersweet, the culmination of a great deal of time and effort expended by our many talented colleagues. We're proud of Bernstein's high quality global research effort built over the years, and we are excited for Bernstein's future under Societe Generale's majority ownership with the opportunity to leverage SocGen's experience in equity capital markets, derivatives and prime brokerage. Jackie will walk through the specifics on modeling for the financial impact shortly, which is summarized on the accompanying side.

I'll conclude by reviewing the status of our strategic initiatives on Slide 11. Performance of fixed income was strong for all periods, while equities improved steadily, though much progress remains. We grew organically, driven by 2% active organic growth, led by Retail, which posted outstanding 25% plus annualized growth in both taxable and municipal fixed income. We continue to grow through differentiated products, including our ETFs, now up to $2.6 billion in AUM, private markets at $63 billion up 9% year-over-year and tax efficient offerings including municipals. First quarter adjusted operating income rose 12% year-over-year, operating margin exceeded 30%, up 160 basis points and earnings and unitholder distributions of $0.73 per unit were up 11%.

Now I'm pleased to turn the call over to Mark Gessner to discuss the growth in our U.S. retail platform. Mark?

Mark Gessner: Thanks, Seth. And good morning everyone. I'm excited to discuss with you our U.S. Retail platform and its growth strategy. AB is well positioned for growth in the U.S. Retail channel. We have a strong track record of success through market cycles. We have increased our access to large asset pools and distribution partners, while continually evolving vehicle types to meet the changing needs of investors and their advisors. And we are operating from a position of strength, allowing us to invest in growth to meet the market's future needs. Turning to Slide 14, over the last seven years, our U.S. Retail platform has a demonstrated track record of consistent market share gains. As shown on the left hand side, sales have grown at a 15% compound annual growth rate.

AUM shown on the right hand side has grown at 12% compound annual growth rate. We have generated seven straight years of organic growth averaging 6% over this period, taking market share cumulatively adding $31 billion in net flows over the period. In fact, net flows have added more to AUM than market performance. Organic growth has been driven primarily through vehicle diversification with SMAs and CITs now accounting for nearly half of AUM versus a quarter seven years ago. Turning to Slide 15, we enjoy deep established relationships with key distributors, allowing us to take advantage of this large and growing market. U.S. Retail represents a larger pool of assets than any other region in aggregate. Most key channels have experienced high single to low double-digit growth rates.

On the right, we highlighted examples of significant relationships across various channels. Our largest Wirehouse clients have grown at double-digit growth rates over this time period. Likewise, we are seeing very strong growth from a national broker dealer at 25% and a leading independent broker dealer at 23%. In the RIA space, we have a strong growth with a hybrid RIA relationship among many others. One consistent theme is that we're growing AUM faster than the channel has grown. Importantly, AB has a strong and growing brand that we can leverage. For example, we were delighted to win the Citywire Pro Buyer Service Award for Asset Management Service, awarded by RIAs in multifamily office. This recognition highlights the inroads we've made with some of the key decision makers and faster growing channels.

That leads into Slide 16, which highlights the increased productivity of our sales professionals have experienced in the financial advisor community. Sales professional productivity has improved by 70% in the last five years, driven by increasing the product footprint at key distribution partners, targeting geographic growth to align with market opportunity and investing in technology infrastructure to better inform our sales professionals on opportunities with targeted clients. As shown on the right, we've grown the number of financial advisors with sales exceeding $1 million by 39% and compounded that growth through increasing the average sales per advisor by 32%. Turning to Slide 17, our focus has been to develop vehicles that meet investors and their advisors where their needs are resulting in accelerated growth.

In SMAs, our overall AUM has grown at a 24% compound annual growth rate. Looking forward, we feel we are well positioned to continue to out index the category growth rate of 14%. As an example, year-to-date through March, our U.S. Retail Muni platform has seen $2.3 billion in net flows. We have opened approximately 2,400 new SMA accounts this year. While more nascent, our retail CITs and ETFs provide tailwinds in our business that allow us continued growth in excess of market forecasts. Now turning to the future and why we think we can maintain our robust growth on Slide 18. We are executing a three pronged growth strategy. First, accelerating growth in SMAs, which we still think is in the early innings as we expect robust growth over the next decade as clients and advisors demand personalized and tax efficient investment solutions.

We plan to capitalize on our differentiated industry leading capabilities by launching highly differentiated products that deliver innovative tax benefits. This includes a fully integrated AB balanced direct index solution with tax managed equities and municipal bonds, active equity and balance products with research driven tax overlays and a suite of taxable bond SMAs. Focused growth on our municipal SMA platform where our customized solutions enjoy broad distribution approval in industry leading technology and performance, and the evolution of top tier client experience and SMA platform scalability through tools enabling elevated tax transition prospecting, customized advisor and client reporting and portfolio transparency. Secondly, in active ETFs we continue to launch complementary solutions, new innovative concepts and expand our reach.

We were pleased that our AB Disruptors ETF took home the Best New Active ETF award at The 2024 etf.com Awards, beating out some formidable competitors. AB Disruptors ETF employs a thematic approach to identify innovative disruptors across AI and cloud infrastructure, energy transition, medical innovation, digital transactions, and media and industrial. And in private alternatives, we will leverage our distribution advantages, including deep established relationships with the home offices of the largest platforms, strong field coverage of advisors, brand awareness and education and training. With the addition of ABCarVal, the breadth of our private alternatives capabilities now span many areas of private credit, and of course include U.S. and European cred, along with ABPCI, our middle market lending business.

On Slide 19, we show how we are laying the foundation for future growth. Over time, we have shifted our mix towards sales specialists, who now account for one-third of our sales force, successfully augmenting our talented teams with outside talent where needed. These specialists span both product with a focus on ETFs and private alternatives, as well as client segment, both RIA and defined contribution. We have made significant investments in technology and data infrastructure with our new leading edge proprietary sales enablement tool, Oculus. Oculus integrates 15 third-party data sources, 12 third-party technologies and internal transaction detail to improve sales professional productivity by enhanced advisor targeting. We are pleased with this rapid adoption and effectiveness.

In summary, we're excited to continue to deliver on our proven growth capabilities in U.S. retail, with a strategy that leverages strengths and expands our capabilities for investment and distribution capacity. Now, I'm pleased to turn it over to Jackie, who will walk through the financials. Jackie?

Jackie Marks: Thanks, Mark. Let's start with the GAAP income statement on Slide 21. First quarter GAAP net revenues of $1.1 billion increased 8% from the prior year period. Operating income of $242 million increased 12%, and operating margin of 21.2% increased by 110 basis points. GAAP EPU of $0.67 in the quarter increased by 14% 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 a reconciliation of GAAP to adjusted results are in our presentation appendix, our press release, and our 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 23 beginning with revenues. Net revenues of $884 million increased 6% versus the prior year period. First quarter based fees increased by 8% versus the prior year period as 11% higher average AUM was offset by a lower fee rate. The first quarter fee rate of 39.3 basis points decreased 2% year-over-year, driven primarily by mix, reflecting organic growth and lower fee rate products, including Munis and money market. We expect the fee rate trajectory will continue to reflect the mix of organic growth combined with market movements. First quarter performance fees of $27 million decreased by $6 million from prior year period, primarily due to lower fees from international small cap.

We now see full-year 2024 performance fees in line with 2023 levels. First quarter revenues for Bernstein Research Services of $96 million declined 4% from the prior year period. As Seth mentioned, we were pleased to close on the Bernstein Research JV on April 1, 2024, which I'll take a few minutes to discuss. Beginning in the second quarter, we will deconsolidate all revenues and expenses from the Bernstein Research business. We expect the deconsolidation will increase our adjusted operating margins by 200 to 250 basis points on an annualized basis. Our equity interest in the net income of the JV will be reflected in the investment gains and losses line of our revenue and will be slightly dilutive to GAAP earnings. As this business is no longer a core operation, any gains or losses will be added back to adjusted earnings.

Prior to first quarter close, we received an equalization payment of $304 million which we used to reduce our debt for which the average interest rate in the quarter was 5.3%. Including the benefit of lower interest expense, we anticipate the JV will be slightly accretive to adjusted EPU. First quarter dividend and interest revenues net of broker dealer interest expense was essentially flat. Now moving to adjusted expenses. All in, our total first quarter operating expenses of $617 million were up 4% year-over-year. First quarter total compensation and benefits expense was up 5% versus the prior year period, driven by a 6% increase in revenues offset by slightly lower compensation ratio of 49% of adjusted net revenues as compared with 49.5% in the prior year period.

U.S. and global equity markets continued their gains in the first quarter, so April has been more volatile. It is still early in the year and we are balancing market growth with continued strategic investments. Given market conditions, we plan to accrue at 49.0% compensation ratio in the second quarter of 2024 as compared with last year's second quarter level of 49.5%, and we may adjust further throughout the year. We note that the Bernstein Research business had a compensation ratio only modestly above the corporate average. Promotion and servicing costs increased by 12% from the prior year period as growth in the US Retail business combined with higher markets led to higher mutual fund transfer fees. T&E expenses also increased commensurate with business growth.

We expect second quarter promotion and servicing expenses to decline by approximately 28% to 30% on a year-over-year basis, reflecting the April 1st deconsolidation of the Bernstein Research Services business, which will significantly reduce trade execution and clearance expenses. For the calendar year 2024, we expect promotion and servicing expenses to decline by approximately 20% on a year-over-year basis. G&A expenses declined by 3% in the first quarter versus the prior year period. The quarter benefited from recognition of a one-time $20.8 million grant from the state of Tennessee related to the Nashville relocation. This was partially offset by $6 million of additional quarterly rent expense, primarily driven by the new Hudson Yards location as well as higher market data expenses and adverse FX translation.

We expect G&A expenses in the second quarter and full-year 2024 to decline by mid-to-high single digits year-over-year, reflecting the Bernstein deconsolidation. First quarter adjusted operating income of $267 increased by 12% versus the prior year period. First quarter adjusted operating margin of 30.3% increased by 160 basis points year-over-year. Below the adjusted operating income line, first quarter interest expense increased by $4 million in prior year period, driven primarily by higher interest rates. Going forward, we expect interest expense to decline due to the recent debt pay down. As outlined in the appendix of our presentation, first quarter earnings exclude certain items which are not part of our core business operations. In the first quarter, adjusted operating earnings were $25 million above GAAP operating earnings due to the acquisition-related expenses and interest expense.

Non-GAAP EPU was $0.06 above GAAP EPU, primarily reflecting acquisition related expenses. The first quarter effective tax rate for ABLP was 6.6%. Our guidance for ABLP's effective tax rate in 2024 remains at a range of 7% to 7.5% inclusive of a one-time second quarter tax item from the Bernstein joint venture. Post 2024, a normalized effective tax rate would be in the range of 6% to 6.5%. As noted last quarter, we realized $23 million of savings from the Nashville relocation in 2023. We expect it will remain accretive for the full-year 2024 and are on track to realize the full annualized savings of approximately $75 million in 2025 following the lease expiry at 1345 Avenue of the Americas in December 2024. With that, we are pleased to answer your questions.

Operator?

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