AllianceBernstein Holding LP (AB) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Alliance Capital fourth quarter and full year 2002 earnings review. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session and I'll give you instructions at that time. As a reminder, this conference is being recorded and will also be replayed.

I would like to turn the conference over to the host for this call, the Director of Investor Relations of Alliance Capital, Ms. Valerie Haertel.

Thank you and welcome to our 2003 conference call. Today our information can be found on our website and supported by a slide presentation at www.alliancecapital.com. Presenting our quarterly results will be Bruce Calvert, Chairman and CEO, John Carifa, President and Chief Operating Officer, and Lewis Sanders our Vice Chairman and Chief Investment Officer. In addition, Jerry Lieberman, Executive Vice President Finance and Operations and Robert Joseph, Senior VP and Chief Financial Officer are also in attendance to answer your questions.

I would like to note that some of the information we present may be forward-looking statements in nature and is subject to certain second quarter rules an regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page 2 of the slide presentation.

In light of SEC information, management will be limited in responding to inquiries from investors and analysts in a non-public forum therefore we encourage you to ask all questions of material nature on this call.

At this time, I would like to turn the call over to John Carifa.

Thanks, Valerie. Let's start by turn to go display number three. Continued declines in capital markets have contributed a 14.5% decrease a year ago and our assets to management of $387b. Clearly, it's been a very difficult environment over the past year. The S&P is down almost 25% and growth as measured by Russell is down 27% and value is down 23%.

Our analyzed fee base, which is the fee yield on assets under management, was showing at the end of the quarter was down 16% and our average assets under management fell 14% to $384b. Accordingly, the bulk of our revenues, which are asset-based, fell 16%. At the same time, our expenses declined 10% due in part to staffing reductions and general cost containment.

As we mentioned in our press release, historically we have emphasized net operating income, which is GAAP net income excluding the amortization of goodwill and intangible assets. Since the difference between net income and net operating income has narrowed to about eight cents per year, we will now report GAAP net income exclusively on the following schedules and in subsequent reports. So our GAAP net income for the quarter was $109m versus $168m last year, a decline of 35%.

Let's turn to the next display. As I mentioned, our average assets under management declined by 14%. Revenues fell 16%, pretty much in line with the decline in assets. Base fees, which is directly tied to our asset base declined 14 %. Distribution revenues, which are also asset-based but skewed to growth products fell 23%. Institutional research services dropped 19% as transaction volumes declined during the quarter. Expenses declined by 10% resulting in a 35% drop in net income as I mentioned to $109m.

On display five we take a look at our revenues per distribution channel. With a higher concentration in growth equity products retail revenues both fees and distribution revenues declined by 20%. Our institutional investment management business, which has more product balance, experienced lower transaction volumes declining 4%.

Lower transaction volumes, by the way, also impacted our two other distribution channels. Our private client business, while a net-adder of accounts over the past quarter and in fact for the full year fell 5% and finally our institutional research services business declined by 19% from a year ago.

On display number six, we'll take a look at our expenses. Our largest expense category, employee comp. and benefits, declined by 8%. While staffing levels have fallen by 7% over the past year, higher severance cost reduced the benefit of that decline to about minus 2% for the base compensation line. Lower operating earnings and performance fees reduced cash incentive compensation by 22%.

The amortization of the third and final traunch of deferred compensation which was awarded last quarter to former Bernstein employees decreased deferred incentive compensation by 36%. And then finally commissions fell by 22% from lower sales, the introduction of a new commission deferral program and a shift to sales management people that we initiated last quarter from commission expense to being funded from the cash incentive compensation pool.

On display number seven, all our other expense categories were down from either market declines, which reduced distribution payments to financial intermediaries. In total, expenses are down about 10% from the first quarter of last year.

On display number eight, this display shows our compensation expenses on a sequential basis. The first quarter compensation expenses were up slightly, about 1%. And that is the benefits of the lower headcount and lower operating income which decreased cash compensation and cash incentive compensation was offset by the increase in the crediting rate and higher amortization of deferred compensation, which was granted in the fourth quarter and we began amortizing in the first quarter of this year.

And also an increase in commission expense due to the shift in compensation funding that I just mentioned before for certain sales management personnel. That change was made in the fourth quarter of last year but was retroactive for the full year creating an outsized cross reduction benefit for the quarter. So net of all of those items we ended up seeing our expenses up our compensation expense up about 1%.

On display number nine, we'll take a look at all our other expenses, again on a sequential basis and you'll note they declined by about 1%, again due to our on-going focus on reduction of controllable expenses.

On display number ten is our net distribution expenses and they're up 27% from last year and up 5% from the fourth quarter. As a reminder, distribution revenues are tied to assets under management while the expense side is only partially impacted.

So as assets decline on net expense increase and conversely of course as assets increase, there will be a decrease in the net expenses. If the market levels stay constant from where we are today or increase, we expect to see improvement on this line in following quarters. And then finally in our judgment there is no deferred sales commission asset impairment at this time.

On display number 11, we'll take a look at our margin. The impact of capital markets declines on assets under management, which reduces base fees and distribution revenues and the decline in transaction volumes more than offset the benefit of the lower expenses in our cross-containment efforts. Those margins declined to 22.9% for the quarter.

And then finally on slide number 12, at the holding company level we reported net income and a distribution per unit of 37 cents, a decline of about 36% from last year.

With that I'll turn the presentation over to Bruce Calvert.

Thanks, John. As we normally do, I'd like to just provide a little color on some of the factors that drive the changes in our assets under management and revenues. Remember, primarily in the short run, these are changes in markets, but also they're impacted by our relative performance and that is an important factor for the longer term as well. And then they're impacted by our business flows, which is in term a function of investor sentiment and investor trends, our relative performance, and the success of our marketing activities.

So first a bit more on markets, even though John already covered some of this. Note in the first quarter that markets continued to decline. There was a little bit of a change in trends, however, in the sense that longer duration assets, i.e., growth and riskier equities were really the best performing equities, but fixed income continued to provide the best returns.

As John already said, the most notable thing about the last year that is everything on the equity side of the ledger was down 20 something percent. The differentiation of returns to style was much less pronounced than it had been in the two previous years but again fixed income continued to be the place to be and the only place that offered positive returns.

Now, the next five pages provide a lot of detail on our relative performance position or competitive position, and I'm not going to go through those in great detail, but let me just try to summarize our position as we see it. The majority of our investment services outperformed the benchmarks in the first quarter - what are growth or value or fixed income, whether in U.S. assets or in international and in products across all three of our major distribution channels.

In addition, I would say April, and knock-on-wood because there is still a day and an hour or so to go, we've had a pretty strong month, particularly in some of our key growth services. So I would say the following, that longer term our performance across our disciplines continues to be in a favorable competitive position and our short-term performance, generally speaking, is improving.

Let me then turn all the way to Exhibit 20 and look at our flows. And again a reminder that - well, first just looking at the aggregate. We did have net positive flows of $4b. Those were almost entirely offset by market declines or market declines plus relative performance such that assets under management were down slightly basically unchanged for the quarter.

But in terms of the trends of the flows or in terms of the nature of the flows, they basically represent primarily investor sentiment in this period in the sense that investors generally continual to reduce exposure to growth and increase exposure to fixed income and the value equities. That happened across our distribution channels as well with $4b of net outflows in growth but with positive flows in value equity and in fixed income.

On page 21, the trends are pretty much the same except you see the sharp nature of the market decline over the one-year period so that assets under management were down on the aggregate about $66b. Again, $61b of that $66b being from markets and relative performance. But in terms of the nature of the actual flows, again, it was primarily out of growth equity and that was roughly half in retail, half in institutional with a little bit into private client and flows into value equities and fixed income.

Looking at it by distribution channel probably the most important factor here in terms of the nature of the flows is the beginning of period exposure that each of these channels had to the asset classes that we just looked at, growth or value or fixed income. Retail, which had a heavier exposure to growth relatively speaking had net outflows, notwithstanding in the first quarter good in-flows in the fixed income assets both onshore and particularly strong offshore in our Luxembourg fixed income fund. We did have modest net income flows into value equities as well.

On the institutional management side and more on this later, we had good net new business flows. They really went across the product line but again more in fixed income and value than growth. We had continued steady growth in the private client business.

Looking at the 12-month trends, they are essentially the same. Net flows out of retail, but primarily in our growth oriented funds reflecting what is going on in the world at large. Positive inflows into fixed income and value. And as we have talked about before, net outflows and cash management, much of which we think was nonrecurring in nature, but good positive flows and institutional investment management and private client but not nearly enough to offset the declines in markets overall.

You may remember that John said our average AUN was down 10% but our average fee base in revenues were down more like 16%. On page 24, you see the reason for that. In general, annualized fee base for each of our channels declined a little more than assets under management. This doesn't really reflect pressure on pricing as much as it reflects just a change in business mix and particularly so in retail where the decline in growth stocks which tends to be our higher fee products impacted overall yields. So there was a reduction in yields for the 12 months but it doesn't really reflect pricing pressure, just a shift in mix.

Just a few words on our business channels and I'm on slide 25 now. In the retail area, I think one of the important developments in the quarter was we renamed or rebranded our business to Alliance Bernstein Investment Research and Management. We wanted to reflect a more complete nature of our product array now - strong offerings in growth, value, fixed income and in our blended or core products. But we also wanted to signal at the margin a shift toward consultative selling plus continues efforts at product sales.

Another highlight that we just note is that this was the two year anniversary of the launch of the Alliance Bernstein value series. This was one of the synergies that we hoped to realize when we joined forces with Bernstein about a little over two years ago. There are now some $2b in assets under management, notwithstanding market declines.

In the institutional investment management business, we really had an excellent quarter, $9b of announced new wins. These came across all major services. There was particular strength in global value and in fixed income and I think perhaps most interesting, 65% of our wins, which I believe is a new record in a quarter, came from overseas and we continue to build momentum in our overseas institutional marketing activities.

The private client business had another excellent quarter. Organic growth was still roughly 10%. The trend to larger account sizes that we've commented on before was intact with some 50% of new wins in accounts that were $10m or greater in size. I think those accounts averaged about $30m in size.

Our portfolio exposures to growth as we moved from sort of a -- what was two years ago an all-value orientation on the equity side -- to growth and to hedge fund continues to build. Importantly we have been doing this without adding substantially to headcount so the focus here remains on productivity and improved profitability.

In the institutional research services business, we had a tough quarter. As John already said, revenues were down about 19%, 18.5%. We had a very weak January and February as our addressable market declined. But if you adjust for program trading, our market share was relatively stable, off just a bit. And we're reassured that our competitive position is intact by a recent or a well-known survey of institutional analysts and portfolio managers which actually showed improvement on virtually every front for the institutional research services business.

But most importantly we continued to rank number one in overall research quality, number one in product quality, and number one in analyst service quality. And we also had good improvement in our sales and service profile. So that summarizes, gives you a capsule of both the financials and a little bit of what was behind the financials in the quarter.

As the chart on page 27 shows, it's been a difficult 12 months for the business. It has been a difficult 12 months for the stock. On the other hand, I think we feel as good as we have ever felt about our competitive position and our ability to grow the business in future years, and we just remind you that Alliance has been a very good investment relatively over the last three years, relatively and absolutely over longer periods of time. We believe that we're well-positioned to provide positive returns to shareholders in a different kind of market environment, attractive positive returns.

We finish with our usual slide of position for growth. I won't go through it line by line, but we do think our competitive position is strong for some of the reasons that are listed on this page. We look forward with that to taking your -- listening to your comments or trying to answer your questions.

+++ q-and-a.

And, ladies and gentlemen, if you would like to ask a question, please press the one on your touch-tone phone. You'll hear a tone indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing the pound key. And we ask if you're using a speakerphone, if you will please pick up your handset before pressing any numbers.

Ladies and gentlemen, management has requested to please limit your initial questions to two in order to provide all callers an opportunity to ask a question. We welcome you to return to the queue to ask any additional question. Once again, if you would like to ask a question at this time, please press the one.

And our first question comes from the line of Ken Worthington with CIBC. Please go ahead.

Good afternoon. The first question on the institutional business. Are you seeing any improved interest in growth investing? Under the Bernstein they were able to do a great job for a while selling value when value was out of favor. Are you seeing any early signs that the institutional investor is ready to jump back into growth investing at this point?

I guess we would say not in a way that we would call a trend. We certainly did have win in our growth services in the first quarter we didn't want to suggest that wasn't the case but we have not seen anything that -we hear anecdotally people rebalancing to growth, but we have not seen anything that we say constitutes a trend in that direction.

Okay. And in terms of institutional sales they're climbing. Are you guys seeing the benefit of under funded pension funds making catch up contributions? Or does it have to do with your hit rate going up or what is going on there?

I think it is more a matter of improving our market share as opposed to an acceleration in contributions in to existing plants. As you probably know, the accounting rules that apply to under-funded plans provide in most cases pretty long lags between the point in which the under-funding occurs and the point you have to remedy that under-funding. So our view is a more robust trend of cash flows will develop in the industry in '04 as opposed to this year.

Okay. Great. Thank you.

And our next question is from the line of Robert Lee with KBW. Please go ahead.

Thanks a lot. Good afternoon. I apologize if you covered this in the beginning of the call because I unfortunately got on a little bit late, but I know in the fourth quarter of last year was the last traunch of the Bernstein I guess I'll call it retention compensation. What could we expect looking at '04? Are we going to see a full rough in comp. expense when that sort of runs out? How should we think of that in longer term?

Yeah, Bob, this is actually a question Yes, the final traunch was granted at the end of the -- in the fourth quarter of last year so beginning in the first quarter of this year, we will see roughly an $8m fall-off in amortization per quarter.

Okay.

There will be some offsets to that and we have talked about all of these things before that we plan to include compensation in our investment research services business at a slightly higher rate and we will ultimately broaden our options program which until -- which for the first full years of the merge era pride only to Alliance legacy employees but now will apply broadly to the rest of the company and of course at license partner's plan which has applied to Alliance legacy employees with will now apply for the whole company. So there will be some offsets to that reduction.

Okay. And I guess lastly, of the $9b on page 525, the $9b of new business wins, is that wins just in the first quarter and most of them had still to be funded?

Yes. Those are announced wins in the first quarter and I'd say not there's half and half is a rough estimate of what is funded and what's not.

Okay, great. Thank you.

And just a quick reminder, ladies and gentlemen, if you do have a question, please press the one.

Now we'll go to the line of William Katz of Putnam. Please go ahead.

Hi, everybody. Could you flush out a little more on the institutional side. You mentioned the win overseas. What is the size of the portfolio overseas these days and secondly could you maybe walk through what the success factors are? Is it just simply performance? Is it service? Are these sort of market share gains or new business from outside? I’m just sort of curious of what you're seeing overseas.

The answer to the first part of your question is that our overseas clients account for roughly 15% or so of our total business. Would you mind restating or just repeating the second part of your question?

Just wondering what you could attribute the success to the asset flows offshore to the institutional channel? Is it just performance? Is it product mix, market share? Obviously there are good numbers and I want to get behind that a little bit.

I think it is all of those things but it's also the global consulting community, the large consultants have done a good job of establishing their businesses overseas and I think we have done a good job of positioning ourselves with the global consultants in markets like the U.K., Australia and Japan. They're less influential in Europe, but it's coming there as well. But I think the other thing is we not only have a broad product line, but we're very style-consistent in the way we manage each portfolio and that makes it easier for consultants to work with us. And finally, I think that the investment results are in most cases highly competitive, particularly the long-term results.

Okay. A lot of moving parts, distribution channels and incremental growth area. Apart from the market, maybe inclusive of the mark, what do you think is the sustainable realization rate or revenue yield on your assets under the management business? Obviously it has been trending down in shifts of equity versus mixed income. Where do you think that sort of stabilizes or settles out in more of a normal environment?

I think what we tried to indicate size is yield erosion we have experienced is entirely mixed induced. We don't really see any important price pressures in any of our channels in any of our geographies. So the overall yield then will be a function of future shifts and if the Capital Market begins to conform to most of their history, equity will retake some market share and our yields will rise accordingly.

To that point and probably if we took a look at our yield and our retail business after the first four weeks of April, you'd see that the yield would be higher because we saw depreciation in our equity portfolios.

So as you're growing your institutional private client business probably faster than the retail business, all else being equal the emphasis of the mark is going to be the biggest driver. Is that fair?

Yes.

Okay, thank you very much.

And our next question is from the line of Mark Constant with Lehman Brothers. Please go ahead.

Hi. I wanted to ask sort of a combined question kind of a little bit. The research and trading market share being relatively stable, program trading impact aside this quarter, do you detect even sort of short-term cyclicals or willing to pay issues in that business sort of the quality of your product decide that are fundamentally troubling to you down the road and if you could perhaps address as well the FSA that pertain to your business as far as soft side and all sides considerations?

I'll take part A of that and note that that business has always had some cyclicality. The first two months of the first quarter were unusual and the degree to which our overall volume contracted. We see this as more cyclical than secular. There is no do you not there is factors that are in some ways constraining the growth of that market. But I think overwhelmingly what happened in Q1 was cyclical and in fact our results in March and even more so in April would seem to support that point. They have strengthened in a note worthy way since the first two months of the year.

Okay.

Now B.

Yes, with respect how the FSA factors might have impacted first an foremost your investing businesses outside the United States but longer term soft side business as well?

Well, if the sense of your question with regard to research and trading is whether the recent agreement of a number of investment banks

No, no, no, the FSA proposals, the unbundling of research and explicit commissions and elimination of soft dollar.

Well, yes. I mean, to the degree that there is a total unbundling of services, I think you can assume in which geography it occurs that the available market for research services will contract and we're it is going to be really important to have a distinguished product line to do real well in that environment and our view is that we are in that position.

Do you see yourselves as less impacted than most should that scenario play out?

I'm not sure I can make that distinction. The only thing I would stress is that our strength in product quality is of such a magnitude that we think that we are likely to be one of the firms that institutional clients will want to continue to pay for the reasons that follow from high product quality and high service.

Okay. And if I succeeded in counting that as one question, then I'll ask an incredibly short second one. The change in the reporting focus in operating earnings to GAAP, that is just sort of political correctness in not being a significant member as it used to be or is there a potential implication in terms of distribution policy down the road?

Well, I think it's primarily just that the spread, as you say, is not as big as it used to be now that we have anniversaried the change in goodwill accounting practices. I think typically we have paid out net operating income less a penny and I don't think this is set in stone yet, but this quarter certainly would suggest and I think our proclivity going forward, we have not decided this is a firm dividend policy yet paying out net income.

So there is an implied distribution change as a result of that?

A little bit. You actually get into rounding and fractions, but it is not substantial.

It's not much of a difference from what we would have paid had we done it on a net operating basis.

Okay. Thanks.

And, ladies and gentlemen, just a quick reminder, if you do have a question, please press the one.

And we do have a follow-up from Ken Worthington from CIBC. Please go ahead.

Just one more question. What portion of your costs are variable versus fixed? I thought revenue came down quite a bit this quarter and expenses really didn't budge. Can we just say that the variable costs are relatively low at this point?

I think you could say that over any quarter that could happen because the markets move much more dramatically than we're willing to move the expense base or the cost base. So I don't think you can look at it on a one-quarter basis. Remember when you're looking, that is why John went through the presentation on sequential quarter expenses. There are some funny one-time things and we won't repeat that presentation, but we can help you out in understanding that.

Okay. Thank you all. I'm touch base off-line.

And we have a follow-up from Mark Constant with Lehman Brothers. Please go ahead.

Hello?

Yes.

Sorry. I just wondered your comment about the DSC impairment, about there not being a DSC impairment at current market levels. I believe, if I remember correctly, you had mentioned in your sort of guidance adjustments which in retro retrospect was a trough of assets in February a more cautious posture on that front? Did those assets get on an enter quarter basis to caring values that were real close? That is how we should read that?

Yes. That is sufficient and of course in April it has become even less of an issue.

You have a much more comfortable margin obviously now but that margin had nearly eroded and it was --

It was getting very tight on the day we issued that press release.

It was a great controlling indicator. Thank you very much.

We're glad to be helpful.

Whatever takes the market up.

And we have a follow-up from Bill Katz from Putnam. Please go ahead.

Actually a two part question up I may. On the DSC discussions, I'm curious, what type of turnover redemption rates are you assuming versus what you're actually seeing and the second part unrelated is in terms of your guidance for the rest of the year? What type of market assumption are you making? Is it all what we have seen soar in April or are you making an explicit statement about your plans going forward? Thanks.

First of all, in terms of DSC, we run models with a lot of different assumptions all of which are consistent with kind of our long-term redemption pattern and some of which are very consistent with the recent redemption pattern which has been improving from where it was say six months ago. And I don't think we want to go into the details of those models. But other than to say that we look at them at great length and try to make realistic judgments about them and the asset simply isn't impaired at this point in time. The following question was?

Sort of curious, you spoke to now exceeding sort of your guidance you lower a month ago as Mark pointed out.

Right, right.

Two months ago, I guess. I am curious, what are some of the baseline assumptions that are driving that I guess would be my question.

We use the same assumptions that we've always used. We have not changed them. You know, they basically come down to a blended rate of equity and fixed income that is 1.6% or 1.7% a quarter and we continue to assume that for quarters three and four even if the market moves more than that in a quarter.

Okay, thank you very much.

And again, ladies and gentlemen, if you do have a question, please press the one at this time. There are no further questions in queue. I would like to turn the call back over to the presenters.

Okay, thank you very much for joining us today. If you have any follow-up questions please feel free to call Investor Relations.

Ladies and gentlemen, this conference is available for replay. It starts today April 29th at 630 P.M. eastern and lasts until May 6th at midnight. You may access the AT&T playback service at any time by dialing (800) 475-6701 or international participants please dial (320)365-3844 and the access code is 680945. That does conclude your conference for today. We do thank you for your participation and you may now disconnect.