AllianceBernstein Holding L.P. (NYSE:AB) Q2 2023 Earnings Call Transcript

AllianceBernstein Holding L.P. (NYSE:AB) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Thank you for standing by and welcome to the AllianceBernstein Second Quarter 2023 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be 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. 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 second quarter 2023 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, our President and CEO; and Bill Siemers, Interim CFO, Controller and Chief Accounting Officer. Karl Sprules, Chief Operating Officer; and Onur Erzan, Head of Global Client Group and 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 in 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 it over to Seth.

Seth Bernstein: Good morning and thank you for joining us today. In the second quarter, equity markets continued to rebound with the bulk of the gains in June led by a small number of large U.S. technology companies. Government bond yields rose amidst generally higher rates and a significant drop in market volatility. We generated net inflows two of three months in the quarter led by U.S. retail and our global fixed income platform, both growing at 9% annualized organically. Our municipal SMA platform continued to gain market share growing for the 11th of the last 12 quarters. Our institutional pipeline grew to $14.4 billion, up 10% sequentially reflecting several active equity wins and our private market AUM ended the quarter at $61 billion, up 13% year-over-year apples-to-apples, as still in CarVal had been owned last June 30 and up 5% sequentially.

During the quarter, Equitable Holdings made its second $10 billion commitment to grow this platform in the coming years. Let’s get into the specifics, starting with a firm-wide overview on Slide 4. Gross sales were $22.4 billion, down $1.5 billion or 6% from the year ago period. Firm-wide active net outflows were $4 billion, reflecting $6 billion of pre-announced low fee redemptions early in the quarter. Net flows were positive in both May and June. Quarter end assets under management of $692 billion increased by 7% year-over-year and were up 2% sequentially. And average assets under management of $678 billion, was down 1% year-over-year and up 2% sequentially. Slide 5 shows our quarterly flow trend by channel. Firm-wide second quarter net outflows were $4 billion or a positive $2.2 billion, excluding pre-announced low-fee redemptions of $6.2 billion.

Retail growth sales of $16.5 billion declined 5% year-over-year and slightly sequentially. Net outflows were $700 million despite strong demand for taxable and municipal fixed income of 9% and 13% annualized organically, respectively. Our institutional channel had gross sales of $1.5 billion declining from prior quarters. Net outflows were $3.2 billion, reflecting the pre-announced low-fee redemptions. In Private Wealth, gross sales were resilient at $4.4 billion driven by money market funds and private alternatives. Net flows were flat in a seasonally slower quarter. Investment performance is shown on Slide 6. Starting with fixed income, developed market government bond yields rose in all major markets, as most major central banks hiked interest rates given persistent core inflation.

Global developed market treasury returns were essentially flat. AB’s fixed income performance showed meaningful improvement in the one-year period, improving to 73% of assets outperforming as both American Income and global high yield funds outperformed. The three and five-year periods remain strong at 76% and 75%, respectively. Investors are showing greater comfort with durations. The Fed appears to near the end of its rate hiking cycle. American Income net inflows in the quarter were positive $1.5 billion or $4 billion year-to-date. We secured our first systematic U.S. investment grade fixed income client with a $100 million win, a validation of the strategy we discussed last quarter, which marries our fixed income technology with our quantitative research.

We are initiating a number of other active conversations where there’s a preference for higher quality bonds. Now turning to equities. Global equities advanced in the second quarter led by a narrow group of stocks seen as big winners from the artificial intelligence revolution. During the first half of 2023 just 10 U.S. stocks accounted for 79% of the S&P 500’s gain and 54% of MSCI All Country World Index’s gain. Over this time, medium forward PE ratio of the 10 largest capitalization stocks in the S&P 500 surge by nearly 50% to 28.2x at the end of June compared to a median increase of just 7% for the rest of the market. While we own many of these companies we were wary of the concentration risk of the high benchmark weightings in mega cap tech.

A risk highlighted earlier this week when a major benchmark provider carried out a special rebalance of its technology index to reduce the weightings of its seven largest constituents. Near-term equity performance was challenged with just 23% of equity assets outperforming over the one-year period. Our three-year performance improved 48% while five-year declined to 52% of assets outperforming. Importantly, we continue to outperform our peer group with 65% and 71% of our equity assets outperforming the Morningstar peer groups over the three and five-year periods respectively. At quarter end, 62% and 65% of our equity assets under management in U.S. and Lux funds respectively were in funds ranked four and five stars. Now, I’ll review our client channels beginning with retail on Slide 7.

Gross sales of $16.5 billion and our retail channel declined 4% from a year ago and were down 2% sequentially. The redemption rate was slightly higher at 27% versus 25% last quarter, resulting in net outflows of $700 million. We continue to see strong growth in U.S. retail, which posted 9% annualized organic growth driven by taxable fixed income equities and munis. Last quarter, we highlighted our belief that we’re in the initial innings of a fixed income reallocation. Our Asia business continued to grow bolstered by American Income, which grew sales at 5x year-over-year, driving taxable fixed income net inflows of $1.3 billion or 9% annualized organic growth. Muni sales inflows also continued to be robust with net inflows of $1 billion or 13% annualized organic growth positive for 11 of the last 12 quarters.

Active equity sales were $8 billion, the highest level in four quarters, reflecting strong momentum in U.S. retail for more key strategies. Increased global redemptions resulted in net equity outflows. As shown on the bottom right, we ranked in the top 2% for cross-border flows for fixed income substantiated by Broadridge, which ranked AB first in Asia for year-to-date fixed income sales and net inflows. We’re experiencing a strong start for our ETF launches, for which assets under management reached $800 million, having raised approximately $500 million year-to-date balance between retail and Private Wealth channels with sales from well over 100 distributors. Turning to institutional on Slide 8. Second quarter gross sales were $1.5 billion down from both comparable prior periods.

Net outflows were $3.2 billion, reflecting previously announced low fee redemption split between our custom target date and fixed income businesses driven by rebalancing. Our pipeline grew to $14.4 billion at quarter end, up 10% sequentially. Additions included a $1.3 billion U.S. large cap growth mandate, which funded earlier in July, and for which annualized fees exceed those of the pre-announced redemptions. We saw over $300 million of CarVal additions and a number of additional active equity wins. We’re pleased that at the imminent close of its latest Clean Energy Fund, AB CarVal have raised approximately $1.5 billion, which is triple the size of its first Clean Energy Fund. Notably Equitable announced at its May Investor Day, a second $10 billion multi-year commitment to AB’s private markets platform.

The initial $10 billion program announced in mid-2021 is now 75% deployed. Moving to Private Wealth on Slide 9. Second quarter gross sales were resilient at $4.4 billion, up 35% year-over-year, while down 23% from a seasonally strong first quarter. We continue to experience strong sales and money market funds in private alts. While second quarter nets were essentially flat on a year-to-date basis, they’ve grown at a 3.4% annualized organically double the rate of the prior year period. Our AUM growth from business sales well outpaced the industry as measured by M&A volumes, and the pre-transaction planning pipeline remains solid. We continue to see sustained growth in the ultra-high net worth $20 million and over category. Year-to-date alternative raises of $1.3 billion were well diversified across strategies including secondaries, private credit, real estate equity, and clean energy, and our proprietary direct indexing strategy grew to $3 billion, posting strong annualized organic growth of 35%.

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I’ll finish our business overview with the sell-side on Slide 10. Second quarter Bernstein Research revenues of a $92 million decreased by 14% year-over-year and 8% sequentially. Industry-wide global institutional equity trading volumes remain constrained with investors reluctant to turn over portfolios in the face of continuing market and economic uncertainty. Research checks were up at Autonomous for the quarter. We launched coverage from four global sectors this past quarter, three in the EU and one in Japan. Our 39th Annual Strategic Decisions Conference was a resounding success with over 1,200 clients and nearly 150 companies attending. Our joint venture with Societe Generale announced last November is proceeding. The timeframe for closing has been extended into the first half of 2024, and we remain highly confident that we will obtain necessary regulatory approvals.

The economics are essentially unchanged and we anticipate disclosing further financial details closer to that time. I’ll conclude by reviewing the status of our strategic initiatives on Slide 11. Performance and fixed income improved, while equities near-term performance lagged versus capitalization weighted benchmarks. The second quarter was led by 9% annualized organic growth in fixed income, and we gained market share across retail, taxable, and municipal categories, including muni SMA. We had several active equity wins, which grew the institutional pipeline. In private markets, we progressed toward the imminent close of AB CarVal’s latest Clean Energy Fund at $1.5 billion 3x its predecessor fund. We were pleased to participate in Equitable’s May Investor Day, at which Equitable announced its second $10 billion permanent capital commitment to growth of our private markets platform.

Additionally, we outlined at that meeting that at current market levels we had visibility to 350 basis points to 500 basis points of margin expansion through the 2027 horizon period. This reflects the margin benefit of the Bernstein Research deconsolidation about 200 basis points to 250 basis points, the completion of the Nashville relocation about a 100 basis points to 150 basis points in additions to savings already realized, and the growth of private markets and other investments about 50 basis points to 100 basis points. Second quarter financial comparisons reflected lower assets under management versus the prior year period. Adjusted operating income declined by 3%. Adjusted operating margin was 27%, and adjusted earnings and unitholder distributions were $0.61 per unit down 14% versus the prior year.

Now, I’ll turn the call over to Bill Siemers to discuss the financials. Bill?

Bill Siemers: Thanks, Seth. Let’s start with a GAAP income statement on Slide 13. Second quarter GAAP net revenues of $1 billion, increased 4% from the prior year period. Operating income of $189 million decreased 2% and operating margin of 18.4% decreased by 420 basis points. GAAP EPU of $0.53 in the quarter decreased by 23% 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. Our adjusted results now reflect interest expense below the operating income line, whereas previously interest expense was above the operating income line. This was done to improve the comparability of our adjusted operating margins with our peer group.

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 reconciliation of GAAP to adjusted results are in our presentation Appendix, press release and 10-Q. Our adjusted financial highlights are shown on Slide 14, which I’ll touch on as we talk through the P&L shown on Slide 15. On Slide 15, beginning with revenues. Net revenues of $823 million increased 1% versus the prior year period and were down 1% sequentially. Base fees were flat versus the prior year period as 2% lower average AUM was offset by a higher fee rate. The second quarter fee rate of 40.0 basis points increased 2% year-over-year, driven primarily by the addition of higher fee rate carve-out base fees.

Sequentially the fee rate was down less than 1%. As we experienced unfavorable mix shift in a risk-off environment with net inflows in lower fee rate fixed income AUM including money markets. Looking forward, we expect the fee rate to improve sequentially based on asset mix reflecting improved markets. Second quarter performance fees of $15 million declined by $3 million from the prior year period due to lower real estate equity and strategic equity fees, partially offset by higher fees on private credit services. Given current marketing conditions, we continue to see full-year 2023 performance fees roughly in line with the prior year level. Second quarter revenues for Bernstein Research Services decreased 14% from the prior year period, driven by a decline in customer trading activity in the U.S., Europe, and Asia as investors remain cautious given the macroeconomic backdrop.

This quarter, we are breaking out dividend and interest revenue, which at $46 million increased by $34 million year-over-year, reflecting the higher interest rate environment and higher average balances. Netting against this is broker/dealer related interest expense associated with our Private Wealth brokerage clients. Interest expense of $26 million increased by $17 million year-over-year due to higher interest rates and was down $2 million sequentially. Moving to adjusted expenses. All-in, our total second quarter operating expenses of $601 million increased by 2% year-over-year and we’re up 1% sequentially. Total comp and benefit expense increased by 4% from the prior year period, reflecting a higher compensation ratio of 49.5% of adjusted net revenues as compared with 48.0% in the prior year period, and a 1% increase in revenues.

Regarding headcount, excluding the 284 previously outsourced India staff whom we onboarded in the first quarter and the CarVal acquisition headcount declined year-over-year, reflecting the previously announced 4% reduction in February 2023. Taking a step back, global equity markets continue to rally throughout the second quarter, which is encouraging. That said, there is a lag effect as average AUM and revenues catch up, particularly when comparing on a year-over-year basis. As well, we continue to manage the business with a balance perspective, recognizing uncertainty remains in the current environment. We continue to believe that our full-year 2023 compensation to revenue ratio will be towards the higher end of the historical 47% to 50% range.

We plan to accrue at a 49.5% compensation ratio in the third quarter, and as we typically do, we’ll true-up the full-year ratio in the fourth quarter as full-year revenues crystallize. We plan to pay competitively based on performance giving our people are the most important asset. Promotion and servicing costs decreased by 10% from the prior year period due to lower trade execution, marketing, advertising and transfer fees. Promotion and servicing costs increased 11% sequentially driven by higher T&E, seasonal firm meetings, including the Bernstein Strategic Decisions Conference in early June. For the full-year, we continue to target promotion and servicing spend to be up lower-single-digits. G&A expenses increased 3% in the second quarter versus the prior year period due to higher office-related expenses and professional fees, which were partially offset by a favorable foreign exchange impact.

Sequentially G&A expenses increased 5% due to an unfavorable foreign exchange impact, higher portfolio services, related expenses, office-related expenses, technology-related expenses, and professional fees. For the full-year, we continue to target G&A growth below inflation levels up low-single-digits. Second quarter adjusted operating income of $222 million, decreased by 3% versus the prior year period and was down 7% sequentially. Second quarter operating margin of 27.0% was down a 100 basis points year-on-year. As shown at footnote two on this slide, interest expense, which is now below the adjusted operating margin line increased by $12 million from the prior year period, reflecting higher interest rates and higher average debt balance and increased $1 million sequentially reflecting higher interest rates.

As outlined in the Appendix of our presentation, second quarter earnings excludes certain items which are not part of our core business operations. In the second quarter, adjusted operating earnings were $33 million above GAAP operating earnings due to acquisition-related expenses including CarVal intangible amortization and due to interest expense. Non-GAAP EPU was $0.08 above GAAP EPU primarily reflecting acquisition-related expenses. The second quarter effective tax rate for ABLP was 5.3%. Our guidance for effective tax rate in 2023 remains approximately 5.5% to 6%. We continue to expect Nashville relocation will be accretive for the full-year 2023 with compensation-related savings more than offsetting increased occupancy costs. With that update, we are pleased to answer your questions.

Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Daniel Fannon with Jefferies. Please go ahead.

Daniel Fannon: Thanks. Good morning. Wanted to follow-up on the longer-term margin outlook as you highlighted at the Investor Day. And maybe if you could bifurcate the segments that, that are going to contribute to that. And as I think about the timeframe given even the quarter push-out of Bernstein as well as I believe most of the national savings should be done by next year. Shouldn’t we really see this kind of transition closer to the 2024 and 2025 as we just think about the natural evolution of those things flowing through your income statement?

Bill Siemers: Hey, Dan, it’s Bill. Yes, just to — there’s definitely a timing difference there and that’s what when we said that in the Investor Day that these are end targets by 2027, but yes, the Bernstein pickup of 200 basis points to 250 basis points now that’s not going to be fully realized next year. So there’ll only be a piece of that next year according to when we close. But then going forward in 2025 and beyond that, that would take effect. As to the relocation of 100 basis points to 150 basis points, the most of the Nashville is done. We’re still fitting that out, but primarily the big pickup there is all predicated on the New York move when we get out of 1345 and go to Hudson Yard. And so that’s going to happen in the fourth quarter of 2024.

So again, same thing, it’s going to be 2025 forward. And then the Private Wealth and growth investments I mean should start slowly taking effect as soon as we can this year into next year and all that, but we can’t really say when exactly that’s going to be fully realized.

Daniel Fannon: Understood. Okay. That’s helpful. And then following-up on your comments on the fee rate outlook, I think you said near-term, some improvement in clearly beta is going to help with the flow through of end of period versus average, but as you look at the backlog, you look at kind of investor trends with fixed income potentially being a bigger source of flows with higher rates, even as your kind of private markets business picks up. Do you still — is there as those trends that that change and investor dynamics shift, do you still see kind of a longer-term fee rate backdrop being constructive if we see more of that fixed income demand pickup?

Bill Siemers: I mean, currently we’re seeing, we think we’ll modestly improve throughout the year. I mean that’s in based on the pipeline split between higher fee active equities and alternatives. Right now the pipeline’s at 59 bps, which is about 3x higher than the normal fee rate in the institutional channel. I mean, but at the same time you have to worry about it’s all on timing of the fundings there could be a funding in there of low fee custom target date mandate, which definitely has lower fees. I mean, so it — there is risk in there that is not — it’s not all perfect of active equities and alternatives. Anybody want to add anything further there?

Onur Erzan: Yes. Yes. Thanks, Bill. It’s Onur. I’ll add two minor points. Number one, in fixed income, obviously we have a strong Asia taxable fixed income franchise in retail that tends to be pretty high fees in the about 50 basis points level for American Income and definitely even higher for global high yield. So within fixed income, we participate in high peak categories, particularly in Asia. So that should be a factor then, number one. Number two, as you might have followed, our U.S. retail continues to grow at a very high organic rate. So even though we might be adding at times lower fee assets like muni SMAs on an overall basis, it lifts the overall revenue. So we are very pleased with the net revenue additions in U.S. retail, which comes through very high organic growth rate. So that’s the other overlay I would that.