AllianceBernstein Holding LP (AB) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Alliance Capital second-quarter 2003 earnings review. At this time, all participants are in a listen-only mode. Later, there will be a question and answer session and I will give you instructions at that time. As a reminder this, this conference is being recorded and it will also be replayed. I would now like to turn the conference over to the host for this call, the director of investor relations for Alliance Capital, Ms. Valerie Haertel.

Thank you, John. Good afternoon everyone and welcome to our second-quarter call. As a reminder, this call is being webcast and is supported by a slide presentation that can be found on our website at AllianceCapital.com. Presenting our quarterly results today will be Bruce Calvert, Chairman; Lew Sanders, Vice Chairman CEO and John Carifa, President and Chief Operating Officer. In addition, Jerry Lieberman (ph), Executive Vice President of Finance and Operations and Robert Joseph, Senior VP and CFO, are also in attendance to answer your questions. I would like to note that some of information we present today may be forward-looking in nature and as such, is subject to certain SEC rules and regulations regarding disclosure. Our disclosure regarding forward-looking statements can be found on page 2 of our slide presentation. In light of SEC's regulation FD, management will be limited in responding to inquiries from investors and analysts in a non-published forum. Therefore, we encourage you to ask all questions of a material nature on this call. At this time, I would like to turn the call over to John Carifa.

Thanks, Valerie. Let's turn everybody's attention to the third display, which is an overview of our financial results for the second quarter.

Strong equity markets during the second quarter resulted in quarter end assets of 426 billion, an increase of 40 billion, or 10 percent from the end of the first quarter and a rise of about 3.3 percent from a year ago. For the second quarter, the market as measured by the S&P, was up over 15 percent with growth up a little more than 14 percent and value up about 17 percent. Bonds as measured by the (indiscernible) aggregate, rose by 2.5 percent. And outside the United States, markets (indiscernible) even better with the MSCI (indiscernible) index up 19 percent.

In spite of the significant returns in the U.S. markets we experienced during the quarter, markets are basically flat from a year ago, although growth is up a little less than 3 percent while value is actually down 1 percent over this period. Bonds, the asset class of choice, particularly for retail investors over the past year, has risen about 10 percent. Principally as a result of these market trends, our average assets under management are up 6.7 percent from the first quarter this year, but still fall roughly 5 percent from where we were in the second quarter of last year. Market appreciation during the quarter, coupled with positive cash flows and higher transaction volumes, increased revenues on a sequential basis by 10 percent. Year-over-year revenues are down 8.6 percent due to the market and a decrease in transaction volume. Expenses on a sequential basis were up 3.7 percent, mostly from higher earnings and result in incentive compensation and down -- expenses were down 8 percent from last year from lower headcount and our emphasis on expense containment. The level of expense containment is best shown by our headcount numbers, which are down a little less than 1 percent in the quarter and almost 8 percent over the past year. So with revenues up almost 10 percent and expenses up 3.7, we're reporting a sequential increase of earnings of about 36 percent to $148 million. On a year-over-year basis, earnings are down 10 percent.

Going to the next display, the next several displays show our results compared only to last year. In my commentary, I'll also reference the first quarter. As previously mentioned, our average assets under management are down 5 percent from last year, principally due to the decline in equity markets. Based revenues, which are a small percentage of average assets under management, fell by 7 percent, though they are up 10 percent from the first quarter. Transaction charges of our managed accounts, which we previously included with base fee and other revenues, is down 22 percent from a year ago from lower transaction volume, but up 28 percent from the first quarter as that volume has increased. Distribution revenues, which are also tied to average assets under management, benefited from the quarter's market rise, but not enough to offset the impact of the past year's decline. Compared to last year, distribution revenues are down 13 percent, but up 9 percent for the first quarter. Institutional research services revenues are down 12 percent from last year because of declining transaction volume and also the decline in market share. Compared to the first quarter, revenues are up 19 percent as transaction volumes and market share has picked up. As I said before, expenses are down 8 percent from last year and only up 3.7 percent sequentially, resulting in an earnings drop of 10 percent from last year, but up 36 percent from the first quarter.

On display number of 5, our individual distribution channel revenues have all suffered on a year-over-year basis, principally from the lower markets and in the case of institutional investment management private client and institutional research services, lower transaction volume as well. On a sequential basis, the opposite is actually true. Higher markets and higher transaction volume has increased retail by 7 percent, institutional investment management by 10 percent, private client revenues by 6 percent, institutional research services by 19 percent. Mark-to-market gains of our investments, which partially fund some of our deferred compensation programs, rose $7 million from a year ago and 6 million from the last quarter.

On the expense side, our largest expense category is employee compensation and benefits. And that line is down 4 percent from the second quarter of last year, but is up 4 percent from the first quarter of this year. The decline from last year is due to headcount reduction as I mentioned before of almost 8 percent; lower earnings, which pushes down incentive compensation and a lower commissions due to our new commission deferral program and a shift in sales management compensation funding from commission expense to incentive compensation which I talked about last quarter. These expense benefits were partially offset by the cost of higher severance payments and the increase in amortization of the final tranche of deferred compensation that was awarded former Bernstein employees last year. Sequentially, compensation expenses are up 4 percent due almost entirely from higher earnings and the resultant increase in the compensation accruals, partially offset by some minor commission accrual adjustments. One point to make going forward -- the comparison of deferred compensation will begin to be positive starting in the fourth quarter of this year as the amortization of the initial grants that we have made to Bernstein employees start to run out.

Turning to display number 7, which focuses on all of our other broad expense categories, you will note that basically, all of these categories are down from last year. Promotion and servicing is down 16 percent due to lower average assets under management, which impacts distribution plan payments and revenue sharing, which is included in the other column, as well as our continued emphasis on keeping controllable expenses in line. G&A is flat with the benefit of office consolidation being offset by higher legal fees and insurance payments. Compared with the first quarter, these expense categories are up 3 percent from higher asset levels, increasing distribution plan payments and revenue sharing and a non-recurring insurance reimbursement that we received last year. This was partially offset by lower printing and office expenditures.

Turning to our distribution expenses. I mentioned last quarter that continued market improvement would likely reverse the direction of net distribution expense drain we have had for the last couple of years. That reversal, in fact, did take place in the second quarter as equity markets improved. Compared to the second quarter of last year, our net expense was down but would have actually been flat had it not been for an adjustment of amortization that took place last year. Compared with the first quarter, however, the net expense is down $6 million as a result the market gains. Accordingly, the value of our deferred asset has improved and we continue to have no impairment of that asset.

On display number 9, we are displaying our margins on a GAAP basis as well as the way we have been historically, which nets distribution revenues against distribution expenses. My comments will focus on the adjusted, or the non-GAAP numbers. Improved capital markets increased transaction revenues in net new business and also controlled expenses improved our margins to 28.3 percent from 22.9 percent in the first quarter and narrowed the decline from a year ago when our non-GAAP margin was 29 percent. So we reported 28.3 versus 29 a year ago, but a big increase from the first quarter. Finally at the holding company level, we reported net income and a distribution of 51 cents per unit as compared with 37 cents in the first quarter and 58 cents last year. That concludes the financial review and now I'll turn it over to Bruce Calvert.

Thanks, John. I will start with the exhibit on page 11, which are some performance data, some of which, John, has already gone through. But these serve as a reference both for our relative performance, which follows on other pages, but I think they are also reference to some degree for investor behavior, which often tends to be trend following in nature. For the quarter, equities turned in their best performance since the fourth quarter of 1998. On a trailing one-year basis, equity returns, however, were still subpar, and on a three-year basis, bonds were the only place to hide, as you all are very well aware. Growth, which dramatically underperformed value on a three-year basis, did slightly better on a one-year basis. So with that as background, the next five or six pages describe alliances relative to performance. And I'm not going to go through those kind of exhibit by exhibit, product by product, but I will try to make some summary comments about it.

As the preponderance of those green numbers show as you page through these exhibits, we remain very competitive up across a broad range of products. Value equity performance is excellent across the board, whether in the U.S. or abroad. On the growth front, our international performance is very strong and we have a great thus far in our multicap and midcap disciplines. Fixed income results are improving and have been particularly good of late in our multisector investment services. On the other hand, the recent results in our large cap growth disciplines, which you can see both in exhibit 12 for institutional and 15 for retail, have been below par. In part, I think, that is due to the quirky nature of the stock market in the second quarter and lower (indiscernible) are performing, but is also -- we have made some positioning mistakes. On the other hand, I think we have gone through a successful leadership transition in both of our large cap growth disciplines and results in July are very encouraging. At this point, we have pretty much recovered the year-to-date deficit. A month doesn't a trend make, but as I say, the year-to-date numbers now will (ph) significantly better.

Finally, I'd just note on page 17 that we continue to believe that our competitive position is very strong in the private client arena, having preserved capital for clients in a down market and participating as markets rise.

Turning to exhibit 18, let's look at a little bit more at the changes in assets under management. As you know already, assets under management increased by 10.3 percent during the quarter. Most of the gain was attributable to improved markets, but it was also the results of strong net inflows and value, partly offset by continuing outflows in growth, the negative 2 billion and the 5 billion that you see in the exhibit. The trends, however, were encouraging as net value inflows accelerated while net growth outflows slowed.

Turning to the next exhibit, on a twelve-month basis, again, as you know, assets under management include -- increased 3.3 percent. Again, changes in market value accounted for most of the trend. But now net asset flows largely mirror the performance trends that I noted at the start of my remarks, i.e, people wanting to get out of growth, the asset class that had underperformed and into value and into fixed income. As we also pointed out, these trends may have started to change in the second quarter. It is too early to tell. But I think investors at least are no longer certain that this is the route to follow.

Looking at the assets increase by channel on a three-month basis, retail had 2 billion of net long-term inflows reflecting slowing net redemptions in the United States and record net inflows offshore. In the institutional arena, it looks like not much happened. But in fact, we had about 5.9 billion in new business, but we lost nearly 5.3 billion, more than 40 percent of which came from a couple of large accounts, one on the equity arena, one a structured fixed income product. Notably as of June 30, and this is not normally a number we give, but it is a significant number of this particular juncture -- we had over $8 billion of unfunded new business wins and about 3.6 billion of that is funded thus far in July. So I think this exhibit masks a lot of very positive activity on the institutional front. And, again, there has been particular strength offshore. On a twelve-month basis, we experienced net market appreciation in each of our distribution channels. Net long-term flows in each channel reflected their exposures to growth at the beginning of the period. So for example in the retail arena where we had the largest exposure to growth relative to other assets at the beginning of the period, net outflows in growth offset inflows to value and fixed income. In the other channels, the reverse was true. So the channel story really is largely a product mix story.

Turning to the exhibit on page 22, changes in the annualized fee base or at our point in time fee base generally track the changes I've just described and assets under management. Yields dropped slightly in retail and we've talked about this before, again, as the higher fee growth products lost share. But importantly, aside from these modest mix shifts, fees remain quite stable throughout the business. So let me pause and we're going to ask Lew to provide some contacts for the highlights and initiatives section which follows.

Thank you, Bruce. In addition to improving financial performance, the second quarter witnessed the launch of a number of new initiatives and was characterized by a few business trend that are worth highlighting. We summarized them for you in displays 23 and 24, and I just want to comment on a few, focusing on those in particular that we think will be important in shaping our results for some time to come.

At the top of the list of course, the transitions in two key product areas -- U.S. large cap growth and global value. In both cases, we can report to you that the transitions have gone really well as measured by client retention and consultant response. The near seamlessness of these transitions demonstrates two things. First, that our services are seen as they should be -- less (indiscernible) on the intellectual capital of the firm as opposed to the genius of any one individual. And second, these transitions also demonstrate the depth of staff. Jim Riley (ph), who now heads large cap growth; Sharon Fay (ph), who now heads global value, are both long-time veterans of the investment teams that they now lead. Second quarter also saw the implementation of a number of initiatives in support of our goal to be an acknowledged leader in investment research. Now this is one of our highest corporate priorities. And I think you all know -- we already have one of the largest internal commitments to research in the industry with some 300 people employed in various research teams throughout the firm. The size and scale does not constitute leadership. Research leadership is about outstanding quality, and most of all, it is about innovation. To this end in the second quarter, we launched a series of new research units for which we have high hopes. The first is one whose mandate is to study strategic change. Now the goal here is to find investable ideas that stem from economic with technological change powerful enough, lasting enough to profoundly influence corporate performance across multiple industries, maybe even across geographies. In this way, the research assignment breaks free of the constraints -- I call them conventional constraints -- of industry and geographic coverage. In a similar vein, we've approved the substantial expansion of our growth research staff located here in U.S. . The goal -- uncover early stage growth opportunities. Like strategic change, this initiative isn't about expanding coverage per se. Instead, it is about surfacing and pursuing leads that will help find the next set of important growth stocks (ph) before they are seen as such.

We have also launched a new quantitative investment research focused in the growth domain, a space where quantitative methods in the industry are not widely used. This unit has multiple objectives, but important among them is a design of analytical tools that will highlight areas of potential opportunity, serving as leads for research; and on the other end of the spectrum, point to potential vulnerability among current holdings. You could think of these tools as precursors to growth rate failure. Let me make a point here. The goal here is to prioritize research, not replace it.

Finally, we've formed something we call the Alliance Bernstein Q (ph) Group. This is an internal association of nearly 50 professionals in the firm who have devoted to quantitative investment research. This group will foster an interdisciplinary exchange in such areas such as valuation, risk assessment, portfolio optimization, advanced investment planning tools. It will bring attention to the world-class capabilities we have in this domain. Indeed, I can report to you that innovations is already evident in a number of promising projects that this group is pursuing. So I hope you get the point. We are out to be truly outstanding in research, not just big and conventional. In our view, this performance (inaudible) (indiscernible) and maybe most important, there's a prospect for higher client satisfaction and retention.

Now when we merged Alliance with Bernstein, we told you that our major goal was to broaden our product array, essentially creating a firm that had first-rate services in all the relevant categories. But it wasn't just breadth that we were after. We were after services that work especially well together. In fact, they worked better together than they do alone. Now it is a feature that stems from the magic, if you will, of negatively correlating sources of alpha (ph), to use the industry jargon. Well you know what, we happen to generate such sources of alpha. It is a function of our highly disciplined approach to growth and value investing in the U.S. and around the world. These are including the emerging markets. This is an extremely powerful property and we think the source of considerable competitive advantage. It has already spawned a set of innovative style blend (ph) services that we see as superior in the core space as an alternative to core mandates, and that is a category we're now aggressively competing with that. But of even greater significance, this property positions the firm to offer highly attractive investment solutions along the entire risk return spectrum, especially when combined with our fixed income product array. Added advanced investment planning tools for this mix (ph), where we believe we're at the state-of-the-art and you can see how we can design solutions for clients with varying goals, complex circumstances, subject to varying tax regimes. It is a capability that already defined our high network private client business. In fact, it is why its growth rate is so robust and it is why it is raising its demographic profile.

As noted in one of the bullets on display 24, relationships above 10 million now account for fully half of the strong net cash flow growth in this business. This service profile will soon become the driving force behind our retail mutual fund business too. In fact, this is what underlies the rebranding and repositioning of that business. And while we're still in the early innings here, much progress was made in the second quarter on this score. We're on target for the fall launch of our wealth strategy family of style balance, multi (technical difficulty) class funds for investors of varying risk tolerance and tax positions. And I want to stress too that our objectives in this repositioning are well beyond product line enhancement. We are out to become a unique resource for the financial advisers who work with us in the retail channel. To this end in the second quarter, we launched what will be a sustained program of providing them with data, capital market insight with fully (indiscernible) analytics, and of course, the appropriate products to help them build their business, increase their productivity, increase the level of satisfaction that their clients have with them. In time, we want to become one of their most trusted, most valuable resources in a manner, I might add, similar to the way many more referral sources see us in the high net worth market. Ultimately, we believe this positioning will lead to a more stable and faster growing business.

Turning now to the institutional investment management service area, again in the second quarter as was true in the first, a success in winning mandates from non-U.S. clients was pretty impressive, accounting for nearly half the total. Success in the global arena ranks with leadership and research as among the most important of our corporate goals. And I will tell you why. Because we had product capabilities that in our judgment, offer distinct, competitive advantages. Our platforms in value growth and fixed income are all global in design, which is to say that our investment approach in these disciplines is consistent across the capital markets of the world, so let me give you an example. Our global value service is a logical derivative of our UK value, European value, Japanese value, Canadian value and U.S. value portfolios. The same is true in growth. Think about the meaning of this. We are positioned to compete for local, regional and global mandates with a common resource space, a uniformed marketing message to prospects and, importantly, to an increasingly globalized consulting community. Building on the momentum already established in this area will be a key focus in the period ahead.

Finally, let me comment on our institutional research business. And here, I don't have to report to you. Competitive conditions have been very intense. Our market share has been under pressure, as has pricing. Some of this is cyclical, some of it reflects the lack of growth and lower turnover in the portfolio as a subset of our most important client. Some of the pressures are almost surely going to prove lasting. As such, we look for overall market share to recover gradually as it began to in the second quarter. The recovery will likely be fueled by especially strong growth amongst smaller clients and, importantly, from overgrowing success with non-U.S. clients. Buying for our London-based operations grew sharply in the second quarter, a trend which continued, I might add, in July. And as we analyze it, our remaining penetration potential here is pretty substantial. Note too -- the most important measure of long-term success in this business, which is our research standing, has continued to improve. Indeed, survey data, which measures research quality and integrity, position our products in a way that has never been stronger. So while there is still value (indiscernible) in the second quarter, we remain upbeat about our prospects in this business. Now I think we're ready to take your questions.

(Caller Instructions). Ken Worthington, CIBC World Markets.

Hello, good afternoon. When looking at the leverage in your business model, it looks like you were able to move about 70 percent of the incremental revenue to pretax earnings this quarter. At least in a near-term, if market conditions remain robust, is this what we can expect from you guys in the future?

Clearly, obviously, if the market continues an upward bias, there is a lot of leverage there. But we also have a lot of moving parts. We have our institutional research services business and transaction volumes and other factors which impact margins. But clearly, in isolation, if the market takes the assets up, there's clearly a significant amount of leverage there.

So everything else equal, the 70 percent incremental margins look to be fair?

I think that is kind of rich. I mean I wouldn't certainly go to 70 percent, but it is significant.

Okay. My second question -- are there any recent changes in Europe to pension regulation that would either help or hurt your institutional business there? There's been a lot of discussion. I can't tell if these are changes or not, but can you give us some better insight?

Could you clarify -- do you mean our asset management business or sale of research services?

Investment management business.

No, I would not cite any noteworthy changes in regulations or any that we understand to be contemplated that we figure importantly into our growth prospect.

Great. Thank you.

Mark Constant, Lehman Brothers.

Good afternoon. As usual, I have more than a couple, but I will start with my two and try to get back in line. One -- it looked like the average fee was a little lower than I've anticipated, given the mix shift during the quarter. I wondered if there were meaningful money market fee waivers and to what degree you might be able to quantify that if it did happen?

There were virtually no money market fee waivers in those numbers, it is just a result of mix between the various accounts, not a big change.

Similarly, trying to interpolate a couple of other dynamics during the quarter to hopefully not draw another erroneous conclusion, it looked like on that institutional flow you were talking about that, strictly off the cash piece, it was largely fixed income that made that a wash, or fixed income outflows that had been reasonably strong that made that a wash. Is that accurate, and if so, is there a story to add, or just performance in the ebbs and flows of withdrawals?

Actually, it is not entirely accurately. I think that the mix effect that you're observing is more attributable to the loss of a passive equity relationship then just the net outflows in fixed income.

Okay. I will get back in the queue for the rest. Thanks.

Bill Katz, Putnam Lovell.

Thank you. Good afternoon and I appreciate the extra call around the strategy looking forward. First question is -- in reference to your relaunch in the retail platform in September, just curious how we should be thinking about G&A or marketing costs, whether that is self-funded? And then the second question is -- could you maybe draw a little bit more in terms of the fundings in the third quarter on the institutional platform, where you were seeing the type of demand? That would be helpful.

Let me answer the first question relating to the launch of our products. While there will certainly be incremental costs relating to materials from ocean and the like, I wouldn't consider it to be significant or a tremendously material in our financial results. It is sort of a redirection of monies from one product set to another. I would say in terms of the institutional mix, the wins continue to be across a broad array of services. But as Lew already said, notably, almost 50 percent of the wins came from offshore. And there was particular strength in our global value services and our international value services, but also in our global growth services offshore. But again, it was fairly broad.

I hope this doesn't qualify as the next question but more of a clarification. I was really focused more on the incremental mandates that you looked at into the third quarter. Is it the same trends are just continuing from the second quarter?

Yes. There is a couple of significant lumpy wins in there, I guess I would say. But by and large, I think - the one thing about the institutional business, some of the pieces of business are very large, but I would say there is no change in the trends.

Okay, thank you.

Robert Lee, Keefe Bruyette & Woods.

Thank you very much, good afternoon, everyone. My two quick questions (technical difficulty) are -- can you give us a little bit more characterization on the retail flows in terms of maybe what came from non-U.S. versus U.S., sort of where the relative strength was? And then in looking at the fixed income institutional business while you have possibly a pretty large book of business there, you often aren't put in the same -- people don't tend to think of you as being a part of the oligopoly, if you will. Do you feel that there is a need to invest in that business and sort of bring it up to compete better against the oligopoly as it is, or do you feel comfortable with where you are?

Let me respond to the mutual funds question, and I will turn it over my associates. We had net inflows on the long-term side of about $2.6 billion, which was the best quarter going back six or seven quarters. And as Bruce stated before, it was a function of lower redemption rates on the U.S. side, but we were still in net redemptions, although it's the lowest it's been in well over a year. We also basically turned the corner in our managed account business, which was in redemptions and we basically almost broke even for the quarter. But the real strength occurred outside of the United States in our family of Luxembourg funds, which generated about $1.9 billion of net sales during the quarter.

Thank you.

As it relates to your point about fixed income and the so-called oligopoly and the fact that we're not now included when people make reference to that oligopoly, I won't speak to that point directly, but say in any case that building our franchise in fixed income is a major, major corporate initiative in (inaudible). And we have every reason to believe we will be successful. When you examine our history, our record of success and the component parts of that business in asset-backed securities, in corporate credits, in emerging debt, in high yield, in global, our success in the insurance company marketplace and other specialty product lines of note in our mix, we have inside this firm without material incremental investments, the basis for great success, success that is acknowledged broadly, and that is our goal.

Cynthia Meyer (ph), Merrill Lynch & Co.

Good afternoon. I just wanted to know a couple of things. Can you further characterize the 8 billion in unfunded wins that you have right now? Is that mostly fixed income, mostly equity? And I'm also wondering if you can talk a little bit about the number of FAs (ph) you have in private client and any plans to growth that?

Let me speak to the FA issue first while we are searching for some data to help you with part A. We have approximately 165-170 financial advisers in the field in support of our private client business in the United States. In our planning process in the fall of this year, we will be looking at a number of strategies to accelerate the growth of that business, a very well positioned business. And it is deserving of additional investment to stimulate its growth. One component of that one option for stimulating growth is to extend the size of our sales footprint. We've studied this issue many times before and we have the potential to field these things productively a substantially larger number of FAs than we have in place today. We report to you on the course of action we're going to take at the end of the third quarter after our retreat has finished. And Bruce?

The mix of that 8 billion is, if anything, predominately equities and the character of it is, again, the same trend that I described. A lot of it is an global briefs or international briefs in both -- and regional briefs offshore in both growth and value disciplines.

I think it is worth adding, by the way, that it is not only diversity by product that characterizes cash flow and our backlog; it is diversity by geography. It is not just one non-U.S. region where we're finding success, it's many.

Mark Constant, Lehman Brothers.

Alright, I made it back. The answer -- doesn't my prior question kind of suggest maybe my expectations for the retail flows and the performance (indiscernible) you described were a little excessive, but that however (ph) it leads you in sort of the passive -- we have had a couple of relatively meaningful outflows over the last few quarters on the passive side, including if I remember, one was a particular client rebalancing. Three or four quarters ago, there was a couple billion dollars. Is there something systemic in that businesses? Has that business become less competitive than some of your other products, or is this again just manifestation of a specific client need?

I would say it is more on the latter. It is obvious that we don't define passive equity services as core. On the other hand, I don't want to minimize our interest in this area. We actually have if you study our results some pretty interesting services that has more than delivered on their goals. And those products are now located inside our style blend array of products and they will probably be receiving increasing attention although I don't think you should fund that draw (ph) that we are about to embark on a strategy to build that business in a major way.

Totally separate topic, a little surprise given the pickup particularly in retail sales and transaction activity in the quarter to see the sequential decline in commission expenses this quarter. Is that a function of the way you guys account for the deferral plan or is there something else there?

We had to -- you know what? It was basically again in the United States most of the change was because of lower redemption rates as opposed to higher sales although sales were up, but we did see obviously higher sales in Luxembourg but we had some minor adjustments during the quarter that probably negated a small increase but it is not significant.

Okay, thanks.

Bill Katz, Putnam Lovell.

Thank you. I was just going back over my notes over the past couple of quarters and talking about if you got (indiscernible) maybe a little bit better revenue environment, you might relax the purse strings to some degree on either headcount or maybe expense growth. And I was curious and maybe, Lew, you gave away a little bit in terms of higher net worth business, but how are you thinking about that relationship over the next six months based on what you have learned in sort of the first half of the year. And with that, I guess maybe specifically with headcount -- where do you see that going directionally?

You know what, Bill, I think that it would be best if we wait until our planning sessions have been completed, which are going to take place largely in September and early October. And we will be able to elucidate on these points more completely, and I think in the appropriate context at that time. So I will just leave you with this thought without quantifying anything. We have lots of opportunity to grow this business. And as time passes, you can make the assumption that we're going to make investments to fund those opportunities. On the other hand, our goal too is to self-finance those fundings.

Last question I have. Just curious if you have any update on I guess is the Senate Bill 752 around the MOP business income exclusion, what your sense is in terms of likelihood of passage, and any timing around that?

Give us a little help -- the exclusion -- ? You mean relating to mutual funds?

The ability to have mutual funds or anybody to own your stock without having to kind of (MULTIPLE SPEAKERS).

The answer is we don't have an update and we don't know what's going on there. We are aware of it, but we don't know what the status is.

Okay, thank you very much for your patience.

(Caller Instructions). Robert Lee, KBW.

Thank you. Two quick follow-ups. I'm just curious -- in the London-based business with I guess the FSA and seemingly heading towards some soft dollar reform and (indiscernible) -- how do you think about that impacting your UK-based business, if at all? And then I have one follow-up question on the fixed income business. One of your competitors has talked about possibly seeing compensation costs and fixed income going up due to competitive pressures, people trying to -- field portfolio managers, what have you. Are you seeing or -- similar pressures (indiscernible) that's the business you want to focus on growing and beefing up some more?

On the SSA situation and (indiscernible) scholars (ph) in the UK. As you know, there will be some movement on this (indiscernible) shortly. But for what it is worth anyway, because this is conjecture at this point, we really don't think and very substantive changes will be forthcoming out of those regulations (indiscernible) the kind of services that we are providing. This focus we think will likely be more on data sources and equipment and other uses of source dollars, quite apart from trading and research. As to unusual competitive pressure for talent -- well, look, that has characterized this business forever. But I think across all of our business lines, fixed income included, we don't see anything unusual on that score at this time.

Thank you very much.

Mark Constant, Lehman Brothers.

Appreciate you bearing with me. Just for my own edification and understanding the thought process -- on the non-GAAP margins disclosure that you guys used for page 28, (technical difficulty) in looking at that versus the page 9, I would typically think for apples-to-apples comparability that you'd strip out both distribution-related revenues and expenses from both. Is there a reason it makes more sense to do revenues only in both?

No, no, you're misinterpreting the chart, Mark. What we're doing is we're leaving the expenses in where the expenses are; we're taking the revenues and putting them up. We're just making believe that we're accounting for it on a net expense basis, which some firms actually do.

Okay, and netting it in both both (ph). Thanks.

Ms. Haertel and speakers, there are no further questions in queue. Please continue.

I think that we have answered everyone's questions and we appreciate your time today. If you have further follow-up questions, feel free to call the investor relations department. Thank you.

Ladies and gentlemen, replay information about this conference will be available at the Alliance Capital web site at www.alliancecapital.com. That does conclude our conference for today. We thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

(CONFERENCE CALL CONCLUDED)