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Good day, and welcome to the Artisan Partners Third Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brennan Hughes, Head of Investor Relations. Please go ahead.

Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Eric Colson, CEO; Jason Gottlieb, President; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable GAAP measures in the earnings release and the supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan investment product or a recommendation for any investment service. I will now turn it over to Eric.

Thank you, Brennan, and thank you, everyone, for joining the call or reading the transcript. Artisan Partners brings together differentiated investment talent, broad opportunity sets and long-term asset allocation demand. Together, these three elements have tremendous power to compound client wealth and business value over time. On these calls, we usually feature metrics showing the amount of wealth we have created and compounded for clients over time. This quarter, we want to highlight outcomes we have delivered for shareholders. Since our IPO in 2013, we have returned to shareholders $36.47 per share in dividends relative to our IPO price of $30 per share. Since the IPO, we have generated an annualized total shareholder return of 12.38% with dividends reinvested. That is better than the S&P 500 at 12.05% and the Russell 2000 at 7.8%. We have generated those outcomes while investing heavily in thoughtful growth, the third pillar of who we are. We have invested in new talent, expanding degrees of freedom and distribution to access new and growing areas of demand. These are long-term investments. They may take years to pay-off, and we pay for them out of operating cash flows. They immediately hit our margins and reduced cash distribution to partners and shareholders. Investing in a manner that drives long-term shareholder value requires tremendous discipline. We are highly selective in investing in new talent and strategies. We seek to avoid mistakes, spend wisely and see things through over long time periods. This approach has allowed us to make significant cash distributions to our partners and shareholders, while simultaneously building business value, extend the duration of existing compounders, thoughtfully build the next-generation of compounders, maintain financial discipline and distribute cash flow through time. That is what we do. On slide two, I want to place our current phase of growth, or to be clear, spending into historical context. Our earliest investment strategies launched between 1995 and 2002, are style, market cap and geographically oriented. They were designed and launched in an era in which institutional allocators were focused on filling their nine boxes, manager selection sought sources of alpha, but alpha delivered inside of relatively constrained boxes. Our first-generation strategies have done and continue to do what we intend them to do, compound capital within agreed-upon guidelines. $1 million invested in each of these five strategies at inception would be worth $80 million today after fees. Had the same dollars been invested on the same dates in the corresponding indexes, the outcome would be a portfolio worth $41 million, about half as much as the Artisan outcome. In the early 2000s, we expanded degrees of freedom, focusing on global mandates that provide our investment talent with more ways to generate returns and manage risk. Global strategy is also aligned with institutional allocators evolving away from the style box approach, and allocating on the basis of deconstructed risk factors or more purely on risk return optimization. Our first-generation strategies were aimed at U.S. institutional investors. Our second-generation strategies targeted non-U.S. clients, and we expanded our global distribution and vehicles in order to better reach those clients. Today, the strategies we launched between 2005 and 2011 represent nearly $59 billion of AUM, and we now manage over $40 billion in assets from clients outside of the U.S., approximately 26% of our total AUM. Our latest current phase of growth has focused on even greater degrees of freedom, with more of an absolute return or outcome orientation, and more aligned with demand from the growing wealth channel. Since 2013, we have established five new investment teams. The Artisan Credit team, which takes a differentiated approach to high yield and long, short credit mixing bonds and loans, focusing less on hard assets and more on business value, and opportunistically navigating the credit quality and liquidity spectrum. The Artisan Developing World team, which takes a differentiated view on emerging markets investing to generate EM returns via a large opportunity set of issuers whose growth is linked to those markets. The Antero Peak Group, whose leader, Chris Smith, was our first portfolio manager hired from a long, short hedge fund background. The International Small Mid-Team, which invests in inefficient and less liquid issuers across global markets. And our newest team, the EMsights Capital Group, which invests in local and hard currency debt across emerging and frontier markets and also runs a global macro strategy that uses derivatives extensively to isolate, take and manage risk. This current phase of growth includes all four of our fixed income strategies and all five of our alternative strategies. These strategies have performed for clients and generated a meaningful business outcome for the firm. Since inception, our four fixed income strategies have generated 239 basis points of average annualized alpha net of fees. And our five alternative strategies have generated 331 basis points of average annualized alpha net of fees. Our business model and approach to thoughtful growth is working in fixed income and alternatives. But we have a lot more work to do. And as Jason will discuss, as we think about new teams, we remain focused on degrees of freedom and increasing our access to the global wealth market.

Thank you, Eric. The data on slide three is well known. We have used it before on these calls. It bears repeating in order to understand why we are focused on the areas Eric described. The U.S. public equity market looks very different today than it did when Artisan Partners was founded in 1994. The number of U.S. public companies peaked in 1996 at over 8,000. That number has since declined by over 40% to just over 4,600 in 2022. In the broader developed markets, the number of public companies peaked in 2007 at over 26,000 and has since declined by nearly 20% to just over 21,000 in 2022. As the opportunity set has shrunk, allocators are increasingly accessing public equity returns using low-cost exposure and thematic ETFs. There are now more than twice as many ETFs as they are publicly traded U.S. stocks. I want to be clear that these trends do not mean that the developed markets' public equity investing is a thing of the past. Trillions of dollars sit inside of style box strategies, and many allocators will continue to use style boxes long into the future. On an absolute basis, there may be more dollars in actively managed developed market public equity strategies than ever before. But the public equity opportunity set has been shrinking, competition for alpha has been increasing, differentiation is more difficult and incremental demand for active management in different areas of the market. Meanwhile, alternatives are here to stay. Quality of investment talent matters, and sophisticated institutions, RIAs and individuals will pay a premium fee for a premium outcome. At Artisan, we remain consistent with who we are as a high value-added, talent-oriented investment firm. We have historically operated in spaces where talent matters, clients recognize it, premium investment outcomes are realized and attractive financial outcomes follow. What has been changing is the location of the most attractive opportunity sets for alpha and incremental demand for active management. That is why we have been and continue to invest our incremental time and capital towards fixed income and alternatives. Slide four shows the outcome we have achieved to date with our four fixed income strategies and two of our five alternative strategies. Since inception, the Credit team's flagship high income strategy has generated 171 basis points of annual outperformance versus the benchmark, net of fees. And the strategy's high income fund is ranked number four of 302 funds in its Lipper [ph] category. We have raised $9.7 billion of net inflows for the high income strategy since inception. And year-to-date, the strategy has seen net inflows of nearly $1.4 billion. In 2017, the Credit team broadened its degrees of freedom, restructured the credit opportunity strategy to allow the team to invest in a broad universe of instruments and take advantage of opportunities in less liquid, distressed and other special situations. The Credit team has used those degrees of freedom effectively, generating an average annual return of 10.29% since inception and after fees. That performance compares well to other credit hedge funds as well as to private credit and direct lending funds, which are typically far less liquid. We continue to focus on marketing and credit opportunities and are seeing promising pipeline of opportunities. Our second credit-oriented team, the EMsights Capital Group is similarly using degrees of freedom to generate return and manage risk. Across the team's three strategies, they are invested in 66 countries, they own local currency positions in 32 countries, and they use derivatives extensively. In addition to the excellent absolute and relative performance shown on the slide, Global Unconstrained has been highly efficient in delivering return per unit of risk. Since inception, its sharp ratio is 1.88. We think that speaks for itself. The EMsights Capital Group now manages over $2.3 billion in AUM, with a high-quality institutional anchors in each of the three strategies. Two of the team's strategies will pass the three-year mark with Artisan in the first half of next year, which historically has been an important milestone for our teams, increasing the addressable market of investors and allocators. We believe the near, medium and long-term business opportunities are very promising. The Credit team and the EMsights Capital Group are just two examples of what we have been doing and what we expect to continue to do, great talent, high degrees of freedom, solid demand for active management. I will now hand the call back to Eric for some closing remarks on thoughtful growth.

Thank you, Jason. I want to come back to the compounding power of talent, broad opportunity sets and long-term demand. While we've added only one new standalone team in the past five years, we have spent significantly to bring on new talent and build new capabilities across our platform, which includes investing in talent and degrees of freedom for first and second-generation strategies. We have done so through market volatility with discipline, and we are confident that this spend will contribute meaningfully to our financial outcomes over time. While we have invested the compounding power of our existing businesses has fueled a healthy return for shareholders through steady cash dividends and a competitive total shareholder return. Five years ago, on September 30, 2019, our stock price closed at $28.24 per share. Since then, we have distributed cumulative dividends of $16.94 per share, representing over 60% of our beginning market valuation. We have done that while spending significantly to build underlying business value and the next-generation of wealth compounders. On September 30, 2024, our stock price closed at $43.32 per share, which has resulted in an annualized total shareholder return over the past five years of over 18% with dividends reinvested, more than the S&P 500, ACWI or Russell 2000 indices. We stay true to who we are as an investment firm. We focus on high value-added investing. We maintain a high-quality home for entrepreneurial talent. We invest in thoughtful growth while maintaining a partnership mindset. We believe the outcomes for clients, talent and shareholders validate our approach, and you can expect us to continue to execute as we have in the past with a focus on the areas we highlighted today. I will now turn it over to C.J. to discuss our most recent financial results.

Thanks, Eric. An overview of financial results begins on slide seven. Third quarter results reflect the quality of our business model, which drives durable growth and long-term returns for clients and shareholders. Compared to the June quarter, revenues rose 3%, adjusted operating income was up 12%, and our adjusted operating margin improved by 280 basis points. More specifically, assets under management ended the September quarter at $168 billion, up 6% from last quarter, and up 23% from the September 2023 quarter. Net client cash outflows during the quarter were approximately $750 million. Third quarter net outflows were lumpy and partially offset by a previously disclosed $860 million inflow into our emerging markets debt opportunity strategy. Average AUM for the quarter was up 3% sequentially and up 14% compared to the September 2023 quarter. In the fourth quarter, we expect the equity Artisan funds to complete their annual income and capital gains distributions. Based on our current estimates and assumptions, we expect fourth quarter distributions to result in approximately $600 million of net client cash outflows from investors who choose not to reinvest their distributions. Our complete GAAP and adjusted results are presented in our earnings release. Revenues for the quarter increased in line with average AUM, up 3% compared to the June 2024 quarter and up 12% compared to the prior year third quarter. Both periods benefited from higher average AUM. Our average recurring fee rate for the quarter was 69 basis points, consistent with last quarter. Looking ahead, we are on track to record some performance fee revenue in the fourth quarter. The amount remains relatively small as a percentage of total revenues. As a reminder, approximately 3% of total AUM across 14 accounts have a performance fee component to their fee structure. Performance fees are recorded when earned on the measurement date, which in the fourth quarter, those opportunities are at December 31, 2024. Adjusted operating expenses for the quarter were down from the second quarter of 2024, primarily from a seasonal decline in certain compensation-related expenses. Partially offsetting the decline is a charge for the acceleration of a lease for office space no longer in use. In comparison to the same quarter last year, adjusted operating expenses were up $14 million or 8%, primarily from higher revenue-based incentive compensation. Adjusted operating income increased 12% sequentially and 21% compared to last year's September quarter. Adjusted net income per adjusted share improved 12% compared to last quarter and 23% compared to the September 2023 quarter. Year-to-date, revenues are up 12% compared to the same period in 2023 on higher average AUM. Adjusted operating expenses increased 10% from the 2023 nine-month year-to-date period, primarily from higher incentive compensation on elevator revenues. Also contributing to the increase in compensation and benefits are higher fixed compensation expenses from a 4% increase in the number of full-time associates and annual salary increases. Amortization of long-term incentive compensation increased primarily from the $5 million impact of the retirement acceleration clause discussed during the first quarter call. We expect LTI amortization to be $16 million in the fourth quarter of this year, excluding the mark-to-market impacts. Higher revenues year-to-date led to a 17% improvement in adjusted operating income and an 18% improvement in adjusted net income per adjusted share over the comparable prior year period. In calculating our non-GAAP measures, nonoperating income includes only interest expense and interest income. Although the income generated on our seed investments adds to shareholder economics, we fully exclude these from investment gains from our adjusted results to provide transparency into our core business operations. Turning to slide 11. Our balance sheet remains strong. We currently have $158 million of seed capital in our investment products with significant amounts of realizable capacity. As those products begin to scale, we will redeem the seed capital to deploy into new products, reinvest in the business or return it to shareholders. In addition, our $100 million revolving credit facility remains unused. We continue to return capital to shareholders on a consistent and predictable basis through quarterly cash dividend payments and a year-end special dividend. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.82 per share with respect to the September 2024 quarter, which represents approximately 80% of the cash generated in the quarter. Our variable dividend is up 15% over the prior quarter and 26% over the same quarter last year, reflecting strong growth in our earnings since those previous periods. That concludes my prepared remarks, and I will now turn the call back to the operator.

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Alex Blostein with Goldman Sachs. Please go ahead.

Hey, good afternoon, everybody. Thank you for taking the question. First, I wanted to just touch base on margins and expense outlook. But really, in light of kind of the structural changes you guys are kind of pursuing with the business and the way you sort of outlined, adding incremental strategies and incremental capabilities to the existing teams perhaps instead of like adding new teams like you maybe have done over the last decade or so. So, how does that change the margin profile at all of the business? Does the incremental margin look better, look worse, look about the same, and maybe your kind of updated thoughts on where operating margins could go in this business over the next couple of years? And I guess as part of that C.J., maybe just kind of hit on your early expectations for 2025 expenses, that would be great. Thanks.

Sure. Thanks, Alex. I'll take that. So, as you know, we -- part of our financial model and principles is having a high percentage of variable expenses. That percentage fluctuates anywhere between 50% and 60%. We're currently in the low 50s. So, a large amount of our margin expansion is predicated upon revenue growth. From a fixed expense side, I'd say, over the last three years, we've invested very heavily in new teams, new capabilities. Our expenses have grown pretty rapidly over the last three years. I think you should see a pause on that. I think we'll still have inflationary expense increase pressures just like everybody else. But I think we've largely built out the infrastructure to support our new EMsights team as well as additional capabilities. With respect to guidance going into fourth quarter and to next year, the fourth quarter, we do have an opportunity to add performance fees. It's our greatest opportunity to add those performance fees. We're currently tracking pretty well with about five of 14 performance accounts in the money, but we're always very cautious on guiding the performance fees because the measurement date is the end of the year. And so, there's still more than two months left to go before we actually crystallize those. On the expense side, you saw some improvement on the expenses relative to revenues, especially on the comp ratio side. We would expect that to continue into the fourth quarter. That was primarily the benefit of higher revenues and the expansion that we get on the fixed expense space. So, as well as some of our newer teams, which we've been carrying, their expenses have started to add some accounts in the third quarter, which helps reduce the subsidies on the rev share.

Alex, I'll chime in. It's Eric. When you look at what we've done since adding on the Credit team in 2014 and created operational leverage then to add other credit teams and then provide other degrees of freedom to our existing teams and to extend that to what we did with China, the China Post-Venture team and their ability to do privates and other teams will be able to look at privates. We've created the operational footprint for that. And as we've created the global macro, each one of these add-ons does give operational leverage. And by adding on a few individuals to enhance the existing teams, I think it's definitely more powerful to margin expansion.

Great. Perfect. And one strategy-related question for you guys as well. When we look at some of the gross sales trends, international value has been an important driver of growth over the last several years. It looks like things are starting to slow there a bit from, again, gross sales perspective, and that's obviously impacting net flows as well. Anything you can point to underneath the surface, what's driving that? I don't know if it's a capacity comment or something else that's impacting flows in that business.

No, I think that we've always been cautious of capacity. We think the number one driver for revenue growth is our ability to compound performance at an absolute and a relative rate. And so, we've always been very cautious on how we manage flows for our more mature strategies. And when you break down the flow spectrum, I know everybody wants to see us grow at all costs and all means to put up a net flow, but the power of compounding of revenue growth is amazing, and we've seen it over the last five years. And with regards to international value, we just have a capacity management and flow management and delivering for clients' mentality. So, they'll be a little bit more lumpy inflows as we manage that on a go-forward basis.

The next question comes from John Dunn with Evercore ISI. Please go ahead.

Hi, thanks. Could you kind of maybe take us through some of the major puts and takes of the non-U.S. institutional business as far as gross sales and net redemption or gross redemptions?

The non-U.S. institutional business has been fairly strong for us. You can see, since we, really in the mid-2000, added on our global equity strategies and built out the appropriate strategies for that marketplace of increasing non-U.S. clients, our institutional business translated well due to the consultant marketplace, and we've grown the total asset base up to 26% of clients outside the U.S. This year, it's been slightly by single digit positive. We have a large client base of over 200-plus client relationships there. And the emerging market debt has more recently certainly been adding to that, and we think that's a very strong story on a go-forward basis when you look at the premise of the EMsights team. A big part of the premise was institutional clients. Looking at their emerging markets allocation, you saw a downtick in allocations about two, three years ago. Over the last couple of years, you've seen heavy outflows in the whole category. We're approaching our three-year track record. We have an asset base that meets all searches and so, we're in that foundational growth mode, and we think the institution business outside the U.S. is strong and is growing. It will be growing with the greater opportunities with EMsights in the emerging market that strategy.

Got it. And then maybe going back to capacity, but looking at it from the different direction. What areas would you highlight as having the most capacity?

Well, obviously, the emerging market debt team and EMsights, we just brought on, and we have under $3 billion in that strategy and that can handle 10 times that. So, from an opportunity set, your more -- recent teams you brought on have quite a bit of scale opportunity than you look at the larger cap equity strategies have quite a bit of capacity there as well. So, there's a good amount of capacity still in global value, global opportunities and global equity have good capacity in those strategies. Jason, would do you add anything else?

No, I think those are the main ones, really the three key areas where we've been maybe a little bit more limited in our ability is international value. As people recall, we have soft closed the high income fund. The strategy is still open as Brian and the Credit team seek to broaden out their institutional client base. And then, inevitably small cap will always be a more capacity-constrained area within the growth franchise. But for the most part, we still have a fair bit of capacity across the remainder of the platform.

The next question comes from Bill Katz with TD Cowen. Please go ahead.

Okay. Thank you very much. Good afternoon, everybody. Appreciate you taking the question. Maybe a conceptual question for you guys. I'm just looking back to page three and your sort of comments around sort of the migration of the franchise and sort of the market structure of the equity market. Many of us on the call cover a lot of the alternative managers and they speak to just the import of having origination and global footprints from a deal sourcing perspective as incremental keys to drive alpha across a lot of the buckets that you sort of laid out on the right-hand chart at the management dispersion. So, as you think about where you do need to spend looking ahead, is there a need to build up any origination capacity, or is it really just a function of stock picking and allocation as sort of the key sort of area of expertise for Artisan. Thank you.

Hi, Bill. It's Jason. I think it's primarily the latter. So, I think it's all about security selection and stock picking. And obviously, you have to have the right time horizon when you're evaluating your companies, but it also comes back to the one comment that we've been highlighting for a little while now, which is continuing to broaden out the toolkit as well, and that can come in many different forms, securities, countries, what have you. And it also comes in the form of making sure we have the right talent embedded on each of the teams to expand that opportunity set. So, I think it is -- it does come back to the basics of you got to pick the right stocks in order to outperform. I think the good news is we feel like we've got strong capabilities and it bears itself out in the numbers, but we're continuously trying to evolve the teams to make sure that we can stay one step ahead. And that's what I think you've heard from us and you'll continue to hear from us on the existing franchises that are deep into the equity markets. And then as you think about other areas, there might be the need for that, but certainly not with our existing franchises today.

Great. Thanks for that. And just as a follow-up, C.J., maybe one or maybe two more for you, if I could sneak it in. Can you comment a little bit about just the fee rate dynamics on the fixed income side? Was that influenced this particular quarter just given either the timing of the EMsights win or any fee waivers associated with those kind of mandates? And then you had mentioned that some of the subsidies that you've been providing to some of these newer teams is abating. Which particular line would we see that most? Is that more the incentive compensation line, the LTI line or a combination of all of that? Thank you.

Sure, Bill. So, the latter question, the subsidy, when we bring on a new team such as EMsights, we provide compensation guarantees for the first several years. And so, they earn into the 25% rev share. So, you're starting to see EMsights earn into the rev share as they bring on accounts, which improves our sort of our comp ratio with respect to the incentive comp line. And then on the fixed income side, the fee rate is really -- I mean, I know you noted in your note that you were off by 0.3 of a basis point. Some of that is rounding just a more precise calculation on our end. But the overall actual decline is related to sort of just an exchange of kicks between outflows in our higher fee equity pooled accounts and bringing on large institutional accounts for someone like EMsights where you have founder fee type rates early in the process to build scale. So, you're seeing a little bit of an exchange of kicks there.

The next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good afternoon. Thanks for taking my question. Just one around seed capital needs over the near term there. What's the latest outlook around the needs there? And wonder if you could just give us a little bit of an update in terms of new product development? In terms of -- especially within the private market side, what sort of new strategies could we see being introduced next? Thanks.

So, I'll start with seed. On the seed capital side, we continue to have a very large amount of seed out with respect to our historical levels, about $158 million. We are starting to recoup some of that seed as we gain traction in some of our -- some of these strategies. And to the extent we need further seed for the foreseeable future, we believe we have enough dry powder on the balance sheet to take care of that over the foreseeable future.

On your -- on the second part of your question -- it's Jason. At a high level, we're having really productive conversations pretty much across every asset class right now, both in the traditional world of lift outs as well as in the M&A category. So, private equity, secondary private equity, we're in conversations with some market neutral activity, fixed income and real estate. I'd say the most productive area that we have focused on, where we have a little bit more traction is in the real estate space. We're in some latter stage conversations, as you've heard from us repeatedly. Latter stage conversations don't necessarily mean materialization. A lot of things can happen and break down. But I would say that's probably the key area of focus for us right now is in the world of private real estate.

Gotcha. Very helpful color there. And just one follow-up, if I may, just a bit of housekeeping. In terms of the international value team, the new PM addition there. Should we expect any kind of expense or cost implications as the team ramps up? Or is it sort of like the capabilities and infrastructure has largely already been built there. Thanks.

Yeah. There's going to be some cost and some expense just from the acquisition of talent, but to the latter half of the question, I think we are building in a lot of efficiency and scale, having gone from one fixed income team to now our second team having two very big operating systems in place. We can now utilize one of those two. So, it's not a complete de novo build. So, we are definitely going to get the benefit of the foundational work that's been achieved and completed over the past decade. But there will be some cost on just the pure talent side as we continue to think about ways to build out talent and depth around Brian and the team underneath the international value franchise.