Greetings, and welcome to the Federated Investors Second Quarter 2018 Analyst Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ray Hanley, President of Federated Investors Management. Thank you. Please go ahead.

Good morning, and welcome. Leading today's call will be Chris Donahue, Federated's CEO and President; Tom Donahue, Chief Financial Officer; and joining us for the Q&A are Saker Nusseibeh, CEO of Hermes; and Debbie Cunningham, our Chief Investment Officer for the Money Markets Group. During today's call, we will make forward-looking statements, and we want to note that Federated's actual results may be materially different than the results implied by such statements. We invite you to review the risk disclosures in our SEC filings. No assurance can be given as to future results and Federated assumes no duty to update any of these forward-looking statements. Chris?

Thank you, and good morning. I will briefly review Federated’s business performance and Tom will comment on our financial results. For our remarks today, all data excludes Hermes results unless otherwise indicated. Looking first at equities. We closed the quarter with $63 billion in assets down about $1 billion from Q1 due to net outflows partially offset by market gains. However, we had 14 equity funds with positive net sales in the second quarter. Our small cap funds continue to show strong performance and solid flows. The Kaufmann Small Cap growth fund had top decile performance in its Morningstar category for the trailing 1, 3, 5 and 10 years at the end of Q2. The Fund had positive net sales of 270 million in the second quarter to reach nearly $1.5 billion at quarter end. MDT Small Cap core with its top 1% Morningstar category ranking for the trailing 3 and 5 years at the end of the second quarter had positive net sales of $177 million to reach almost $750 million in assets at quarter end. MDT Small Cap growth had top decile performance for the trailing 3 and 5 years at the end of the second quarter and posted positive net sales of $81 million to reach over $500 million in assets at the end of the quarter. Other Funds with positive net sales in the second quarter included International Leaders, MDT's Mid Cap Growth balance and All Cap Core and Muni Stock Advantage. Using Morningstar data for the trailing three years at the end of the second quarter, 7 federated equity funds 30% of the total were in the top decile and 12, 52% were in the top quartile. Trailing one-year rankings shows 7, 28% of the funds in the top decile, 11 funds 44% in the…

Thank you, Chris. Total revenue decreased by about $8 million from the prior quarter due mainly to lower average assets and higher money market fund waivers partially offset by an additional day in Q2. Reported revenue was down about $17 million compared to Q2 of last year of which $8.2 million was due to the impact of the adoption of the revenue recognition standard. Higher waivers primarily from money market fund and changes in asset mix of average money market assets also impacted revenues. Operating expenses decreased $8.9 million compared to the prior quarter and $13.3 million from Q2 of 2017. The decreases from the prior quarter was due to lower compensation and related expense from payroll tax seasonality and to lower incentive compensation. Distribution expense decreased mainly due to lower money market fund assets. The decrease from Q2 of 2017 was primarily due to lower distribution expense due mainly through changes in the mix of average money market fund assets. The adoption of the revenue recognition standard also reduced distribution expense by $7.4 million and other expense by $1 million compared to Q2 2017. When we announced the Hermes deal, we estimated that we would incur about $22 million in transaction-related expenses in 2018 including hedging costs. We incurred about $2.8 million in operating expenses year-to-date 2018 including $1.3 million in Q2. An additional $1.2 million of non-operating expense related to the derivative transactions was incurred in Q2 and is included in the $27.2 million net expense in the press release. For Q3 we estimate that we will incur about $11 million in transaction-related costs, an additional approximately $5 million in expenses to be incurred in Q4. For 2018, a total of approximately $19 million in transaction related operating expense. We will continue to - or we will consolidate Hermes for the reporting purposes beginning in Q3. At quarter end, cash and investments were $418 million, of which about $396 million was available to us. On July 2, we used approximately $327 million of cash and $18 million from our existing revolving credit agreement, to fund the purchase price and related obligations of approximately $345 million for the Hermes acquisition. We've already repaid the amount borrowed for the Hermes acquisition and currently have $215 million in unused capacity on a revolving credit line, which does not include the additional $200 million available to us from the accordion feature. Brenda, that concludes our prepared remarks. And we would now like to open the call up for questions.

[Operator Instructions] Our first question comes from the line of Michael Carrier with Bank of America.

Maybe first one, just on the equity for the business, it seems like on the small-cap side, you're seeing decent some momentum. Just wanted to get your take, seems like you have enough products there, but just from a capacity standpoint, in the industry we're seeing a lot that are closing just given where assets are trending. So just some outlook on the small mid cap where you're seeing some of the strength and flows?

Yes, the first point is, we are not threatening capacity in any of those mandates at this point. It is a important thing that gets reviewed, it gets reviewed in terms of portfolio manager input, trading impact, size, position of securities, and percentage of ownership. And so, at this point, we are not threatening any capacity in any of those mandates.

And then Tom, just a quick on, just on the expenses more in the core items, just anything that we should be thinking for the rest of the year? I understand the transaction cost, but on the core line, do you think maybe like other you have seen bit light - you mentioned comp came in a little bit better. I'm just saying is it unusual or that we should be thinking about from modeling standpoint in the second half?

The other is light because part of the hedging, there was a gain in there. So, that kind of made that look light. And so, I'd go back and look at last quarter and the quarter year before and average number is something like that. The $11 million is going to be spread out in a bunch of different areas. So, that's where it's going to be spread out, basically in professional service fees, comp, and then, again spread out. The new number is coming in from Hermes. We're not really going to go through where those expenses are going to show up. We'll all see them at the end of Q3.

Our next question is coming from the line of Bill Katz with Citi.

So first question, you mentioned in your prepared remarks and also in the press release about fee waivers on the money market business. So, I'm wondering now, where we are with sort of short-term rates? Why that's happening and how should we think about maybe the fee rate mix on money markets as you go forward if you're still employing fee waivers?

These are different fee waivers than those that were done in order to maintain a positive yield back in the day. So, let's set that aside, and I know you know that. What occasions - these particular waivers are simply competitive forces in the marketplace in order to maintain these products at a competitive level.

Bill, it's Ray. You can look through our disclosure. I mean, we've - prior to even the low point of the rate cycle, we would report in their hundreds of millions of dollars worth of fee waivers. So as Chris said this is really a continuation of a long-term trend of waving portions of our fee for competitive purposes.

Just couple of more follow-ups. Thanks for taking questions this morning. Second question I have is, as you think about the comp relative to the gross sales dynamics, so gathering that the comp came in below the prior range because of the sort of more sluggish gross in net sales. I guess, I wanted to confirm if that is the case, and if it is the case how do we think about the key to operating margin improvement from here so if you would get improvement in sales, would that get absorbed by a pickup in variable compensation?

You are exactly right. And if you remember last quarter we had a uptick in comp because we had uptick in sales. So this quarter we are having a downtick in sales and a downtick in comp. If we have another uptick in sales, which we hope to do, we will get what I used to call a success item higher expense in the intent of comp plan.

But bill that's not to say the margin can expand. You have noise in any period obviously with the timing of incentive comp accruals and payments. So, we would take a longer look at it, longer view of it than that quarterly tweaking.

And then just last question again, thanks again. So Chris, just going back to your opening commentary about sort of how you’re positioning in a strategic value fund, but then when we look at the attrition, it doesn't not really box up against how you're sought of thinking about it. So, what is the disconnect in the retail marketplace particularly SMA side and what are you doing trying to reeducate people relative to sort of stumping some of the redemption pressure?

I don't think there is a disconnect at all at the first point and that is because we have been very thorough at explaining exactly what the mandate was on that fund that is different in that category. The reason why the redemptions continue is because of the confluence of factors that occurred early in the year, which now is an exactly the case, but anyway a 3% tenure T-bill and then the securities that were owned in those funds were not the favored securities by the marketplace. And so you see in the reason I pointed those jump around numbers on performance was so that if you could get a sense of what we said all along because that fund is focused on high and growing dividend income stream. The performance on a Morningstar basis jumps around and I mean if even go into another factor for the month of June that fund was in the top 3% and through so far in July, it's in the 96%. And so if people are now focused on that kind of performance numbers as opposed to the 3.5% yield, then we are going continue to have the redemptions. So if you look at the redemptions, yes they are continuing and I can't make a very good case that they are lessening, however, I will note that in April the total redemptions were $509 million. In May the redemptions were $481 million. In June they were $440 million and so far in July they were $202 million. Now, you can double July or do whatever you want its three weeks, but it's not enough for me to make all well the trend is really good. Those numbers are very, very small. And overall if you look at the year, we have lost…

Bill I’ll just add one other thing we have seen some institutional interest viewing that as we keep saying that the dividend cash stream from this strategy has been effectively put on sale by the sector rotation and the rate spike that we saw earlier in the year. So the numbers are small relative to the mutual fund and the SMA, but we had positive institutional separate account flows in the strategy in the second quarter and we are seeing institutional interest in the income strategy.

Our next question has come from the line of Patrick Davitt with Autonomous Research.

The July flow picture you gave did that include or exclude Hermes and if not could you give other Hermes flows for July?

It excluded Hermes and we don't have Hermes month to date the flow information. What we gave you for Hermes was the full second quarter.

Right, okay.

I mean to say Patrick I did mention that Hermes net sales for the second quarter were £816 million.

And then following up on I think it was call - deal there were some discussion around some legacy BT assets that would be coming out over the years is there any update on the timing and size of those outflows?

Saker you are more than welcome to comment on this.

Sure. So we still manage a sizable amount of assets for the BT pension scheme and we had a plan over the long-term for a controlled decrease of those assets. They’re in fact spreads across a variety of our funds not just one or two and the decline has been exactly on schedule. So nothing is out of what we expected when we did the deal and it remains online. If you’re looking at the second quarter just to give you a flavor, we had small net outflows from the BT of about £600 million in Q2 and that's pretty much as part of the plan that we’ve had over the long-term.

And your next question is coming from the line of Ari Ghosh with Credit Suisse. Please go ahead.

On the urban sales trends that you just mentioned as well. So of that 800 that you saw in 2Q, it looks like the retail side of it is still in flowing really nicely. So curious if the institutional flows were a bit weaker in the second quarter. Any color on that would be helpful. And also I think in 2017 around 25% of the sales of Hermes was from the U.K. region. So any updates on that in early 2018, is it still a business usual or have you seen anything change?

Saker, could you hear the question.

I heard the second half, can you repeat the first half again, I am so sorry.

You got it, can you hear me now?

Yes.

So just looking for little more color on the sales trends in 2Q, I believe it was around net of 800 million in the net sales for Hermes and based on some of the information that we look at in the data that we track, it looked like the retail side was in flowing nicely. So just curious if the institutional flows were a bit weaker and what the outlook there is?

Thank you for that. And the answer is no, the flow between institutional and non-institutional remains on track as before, there is no change there. The institutional flow obviously there’s timing issues. So sometimes you'll see the retail flow comes stronger in one quarter more than another simply because of the timing that’s the whole thing that and we tend to play into. And if I look at the commitments that we have got in the second half which is yet to fund there is very strong institutional flow within that. So again no change from where the plan is. In terms of regional distribution, we have filed the majority flows are seen within Europe including the U.K. which is not surprising given this our home market and if you think about that. So that’s again no change from where we were. Does that answer your question?

And then just a quick follow-on. Back to expenses, excluding comp and other expense in 2Q that you added some color on is, are the core items a good run rate and starting point as we think about the next six months and this obviously excludes any impact from Hermes so just Federated on a standalone is 2Q a good sort of run rate. And then on the cost side, you mentioned a few institutional and mutual fund launches that you have planned, is all of this baked in to sort of the accretion numbers that you initially provided, was it part of the original plan or should we think about any incremental cost moving forward in 2018 and 2019?

The run rate for June and what we expect for Q3 without talking about the Hermes expenses. I don't have anything to add that I talked about before in terms of the other results because of the hedging the comp and the distribution lines and professional service fees related to the 11 million that we’re expecting in Q3 as an estimate. So I’m not really going to change that. In terms of expenses related to bringing out new products with Hermes, that's part of when we talk about the 5 million in Q4. And actually some of the money some of the 11 million in Q3 that we don't know what those numbers are. We keep saying they’re estimates and that should cover what we’re talking about doing for Hermes. Will that drag into 2019, we had to come up with estimates. We want to try to start at that 22 that we did when we announced the deal and as you see we have that down to 19 not including the hedging. And it’s our best estimate. We don't know we’ll carry into 2019 will we use all of it in Q3 and Q4, we’ll see.

Our next question is coming from the line of Ken Worthington with JPMorgan.

First on the competitive waivers obviously this has been a part of the business for a long time. It's the first time I can hear from you guys calling out the competitive waivers in the release. So to what extent were they more severe this quarter than you've seen in the past and whether waivers more meaningful on a particular product say like prime versus Govie or in a particular distribution channel? Thanks

Ken, it’s Ray. I don’t know that they were more severe I think that when we were doing attribution to those line items they stood out as - significant enough to mention it may just been with their work very many other changes to surround them. So, I don't know that I would call them more severe. And in terms of area of product, no they kind of go across the different types within money market. So they would correlate more to asset levels then to the - in terms of the financial impact and not necessarily to the type of asset.

And I can’t remember if Debbie is on the call, if she is maybe what are you seeing in terms of investor transition from banks to money market funds. Is there any evidence of that happening yet and in particular we’re looking at sort of the bank trust channel, what sort happening there in this migration from bank to money fund and money fund to bank? Thanks

Sure Ken, this is Debbie. Yes, we are seeing that, we started seeing that in the second half of 2017, and it is certainly continuing into 2018 as you well know I’m sure the deposit data with banks is very low in an upward trending interest rate environment which we've been in now for several years. And I think - certainly, the institutional side of the marketplace has recognized that and has started to transition into money funds, some of their deposit, product, cash, liquidity, little slower on the retail side. So, from a bank's trust perspective, I'd say it's less and maybe lagging a little bit there but it certainly has started. And it's interesting; the flows have gone both into the government funds as well as the prime funds. The government fund is more from a sweep product perspective because those products do not have gates and fees associated with them. For the Prime and Muni product, it seems to be more on a ticket trade basis, but substantial size from those businesses.

Our next question is from the line of Kenneth Lee with RBC. Please go ahead.

Just a follow-up on that question about the money market funds. Are you seeing any clients shift from money market funds towards a direct ownership of paper? Just want to see about that dynamic. Thanks.

Go ahead, Debbie. You're on a roll.

That is not a trend that we've been seeing. It seems as though with repo, the biggest direct switch from funds into a product in the market, was to switch into repo. And repo is just not that accessible any longer. There's fewer participants in the marketplace, although the rates in the second quarter offered was a little bit better than it has been over the previous quarters compared to where other short-term interest rates like commercial paper and CD rates are. It still is something that is contractual, it's got a lot of legal associates with it, and as such, we've not seen too much of a switch into the direct marketplace. Some of our very large clients that have some of the M&A activity, potentially some of repatriation activity, they have taken some cash and put it into the direct commercial paper and CD marketplace. But it's not a big trend, its more sort of the supersized players in the market that have gone that route.

And just one follow-up, if I can. Just in terms of the Hermes, I know that in the past you've talked about in terms of new product registration - things of the nature like, a private market strategy. Wondering if there's any other additional product that you'd like to highlight that could be coming online in 2019? Thanks.

Well I will let's talk second comment too, but at this point we're not prepared to articulate any given product. We have an array of ideas on many of Hermes various mandates and we have a longer term view towards the beauty of bringing property, infrastructure, private equity, as well, but in a later phase. I'll let Saker take an attempt if he wants to highlight any of the products.

I'll not highlight any of the products. We're doing a joint study of the market to see which is the most appropriate. The only thing I'd say about the products that Hermes brings to the table is, and you can see them because they're all on public domain. They have very strong performance, very high active share, which means high active products across the board in public markets. And the record of sales in the U.K. and Europe historically has been incredibly strong, and diplomacy is incredibly strong. And we think that in the right format, these would be equally effective in the U.S. market. The second thing that is worth pointing out is that, again, this is matter of public record, and you can look it up on our website. But where we've launched new products, we've quite often manage to receive them from clients coming into very early as [carbon tool] and these are done really well including in areas which are new in the market. Like SDG fund, like and impact fund, as well as and certain aspects of unconstrained credit funds. So, we've got a strong portfolio. Now, we and our colleagues in Federated are working hard to understand which are the best opportunities to bring to the marketplace in the United States. And in time, we'll come back and be able to share that with you. But I want to also emphasize that a big part of this is knowledge sharing. We have over the last 30 years, pioneered the way that you can integrate ESG to increase the ability to mitigate risk and understand the underlying stock positions better. I’m not pleased with the launch of something we call the carbon tool that lets you go down to specific company level and understand the risk associated with carbon with that specific company that you’re looking at. That's a sort of knowledge-based that we’ll be sharing with our colleague across the board, across Federated. And we think that is quite powerful in own right within the firm, as well as having new offerings to offer to third-parties. And with that I think I will hand back to you guys.

And I would only underscore our enthusiasm for the year's equity ownership services as something that we are looking at and have talked about before as to how to structure it and how to build it up for presentation more robustly in the United States which I don't have the answers to those questions. But it is something that we have articulated that we are quite interested in doing.

And our next question is coming from the line of Robert Lee with KBW.

I was just wondering going to the Hermes deal - now that you’ve closed on it, I don’t know if there is any update to how you're thinking about the financial impact. I think originally you thought maybe couple of pennies GAAP dilutive but cash accretive. So any change to that and then maybe as a follow-up to that, what your thoughts are about altering your reporting going forward to include an adjusted number that may reflect any kind of non-cash expenses intangible amortization, tax benefits et cetera?

What we came out with at the announcement of the deal and including the expectation of the $22 million and the 19 of $0.02 dilutive in EPS and so on. We’re not updating that. We’re not changing that. We try to give that to everybody as something to have a view of our expectation of what we thought was going to happen at the time. And so we don't want to go in and update the number change them look at what we think as Hermes is going to do for the July, August, September and redo those numbers. So we're just not going to do that. I did take you through the 22 million and the reduction there. And we will update you on that next quarter of how much we can attribute to the deal and so on. What was the second part of the question?

While since you have the acquisition I assume though you'll now have some non-cash items maybe there is some tax benefits so?

Internally we're not planning on doing that as of right now, and we think - so we don't have the valuations of course because we have to hire the evaluation company and have them go through that. So we’ll have that by the end of Q3 but we’re not - we think it's going to be readily available to see the amortization and so we’re not planning on doing a cash item and we’re trying to just stick to GAAP that’s our plan right now. Thank you very much.

Just a follow-up, it is possible so we can kind of touch up our models what Hermes assets were at closing?

Yes, - remarks and we’re just giving them back to you here wait a second.

Yes, I got on a little late so I may have missed it?

Assets at June 30 were 35.3 billion in pounds PS up £1.6 billion from 33.6 at Q1.

Thank you. We reached the end of our question-and-answer session. I like to turn the floor back over to management for closing comments.

Well that will conclude our comments for today and we thank you for joining us.