Good morning. My name is Shelby and I will be your conference operator. At this time, I would like to welcome everyone to the Eaton Vance Corp. Second Fiscal Quarter Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Dan Cataldo, Treasurer, you may begin your conference.

Thank you, and welcome to our fiscal 2017 second quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. We’ll first comment on the quarter, and then we will take your questions. The full earnings release and charts we will refer to during the call are available on our website, eatonvance.com, under the heading Press Releases. Today’s presentation contains forward-looking statements about our business and financial results. The actual results may differ materially from those projected due to risks and uncertainties in our business, including but not limited to those discussed in our SEC filings. These filings, including our 2016 Annual Report and Form 10-K, are available on our website or at request at no charge. I will now turn the call over to Tom.

Good morning, and thank you for joining us. Today we are pleased to report strong business and financial results for the second quarter and first half of fiscal 2017. In the second quarter, we earned $0.62 per diluted share, an increase of 29% from the $0.48 of earnings per diluted share we reported for the second quarter of fiscal 2016, and up 17% from $0.53 in the first quarter of fiscal 2017. The 29% year-over-year increase in quarterly earnings is our highest growth reported for any quarter since 2011. The strong earnings results this quarter reflect the ongoing organic growth we’re seeing across our businesses, appreciation in the value of our managed assets due to favorable market movements, and contribution from our acquisition of the business assets of Calvert Investment Management on December 30, 2016. We closed the second fiscal quarter with a record $387 billion of consolidated assets under management, up 6.4% from the prior quarter-end. In the second quarter, we had net inflows of $12.9 billion which is the highest amount of net inflows for any quarter in company history. The second quarter net inflows translate to a 14% annualized internal growth rate in managed assets. Backing out exposure management mandates, our net flows were $7.5 billion, equal to a 10% annualized internal growth rate. Over the past year our assets under management have increased by $68.3 billion or 21% reflecting $32.6 billion of net inflows, $25.8 billion of favorable market impact and $9.9 billion of new management assets gain in the Calvert acquisition. With the ongoing shift in investor preferences toward lower fee offerings, achieving positive revenue growth has become an increasing challenge for the asset management industry. I’m pleased to report that Eaton Vance $375 million of second quarter consolidated revenue is a new quarterly high…

Thank you, and good morning. Today we reported adjusted earnings per diluted share of $0.62 for the second quarter of fiscal 2017 versus $0.48 for the second quarter of fiscal 2016 and $0.53 for the first quarter of fiscal 2017, which represents an increase of 29% year-over-year and 17% sequentially. Adjusted earnings per diluted share equaled GAAP earnings per diluted share for all periods presented. As Tom mentioned, it was a record quarter for us in terms of managed assets. Ending consolidated managed assets at April 30, 2017 increased 6% from the prior quarter-end, reflecting record quarterly net inflows and positive market returns. Ending consolidated managed assets increased 21% from April 30 of last year, again, reflecting strong net flows in favorable markets over the last 12 months, as well as the impact of the Calvert acquisition at the end of calendar 2016. Average managed assets in the second quarter of fiscal 2017 increased 22% versus the second quarter of fiscal 2016, driving a 16% increase in revenue. Revenue growth trail, the growth in average managed assets year-over-year primarily due to a decline in our average management fee from 36.1 basis points in the second quarter of fiscal 2016 to 34.7 basis points in the second quarter of fiscal 2017. This decline in our average management fee rate is primarily attributable to the ongoing shift in our business mix as lower fee exposure management, portfolio implementation and bond laddered businesses have become a larger percentage of our assets under management. Sequentially, our average management fee rate shows signs of stabilization, declining 35.1 basis points in the first quarter to 34.7 basis points in the second quarter. Although strong flows into our lower fee strategies continue to put pressure on our average management fee rate, net inflows and the higher fee…

[Operator Instructions] Your first question comes from Dan Fannon from Jefferies. Your line I open.

Thanks. Good morning. I guess, Tom, to start, flows, as you highlighted, were solid across the board. It really looks as if redemption trends across each segment were down pretty significantly. Can you help us think about that trend? Is it seasonal? Obviously, gross sales are also doing reasonably well, but the redemption trend seems like a big delta quarter-over-quarter to drive the improvement in the net number?

Yes. Thanks, Dan. I don’t have a lot of great insight. There was – we have, as you point out, benefited from a decline of redemptions. To us, the highest quality source of net flows is solid positive and particularly solid negative, that is low redemptions. I can’t particularly attribute it to anything we did to have in the prior quarter on lumpy redemptions that didn’t occur in this quarter. We expected that – I think we may have discussed that in the last quarter’s release, but nothing particular. I would say just the nature of certain number of business, particularly exposure management, is quite lumpy. We had a pickup in outflows, which, in the first quarter, that largely reflect rebalancing activities among existing clients. So we’re going to have period to period volatility in redemptions. What is notable to us about the quarter and the first half is that, that despite that we’ve achieved solid net flow across the whole range of our business.

Okay. And I guess as a follow-up, just with Calvert and kind of the outlook for expenses, can you help us think about the synergy opportunity from here kind of what you have identified as or already the kind of taken out in terms of costs and how we can about kind of the flow-through through the back half the year with regards to potential synergies and/or margins at an aggregate level?

I guess, I would highlight that most of the synergies have already been achieved. We did have, as Laurie pointed out, I think was it $1.2 million of…

Transition services …

Transition costs that were incurred in the second quarter. We had a team of transition employees that stayed on the job at Calvert through – primarily through the end of March. And those are – those people are generally gone, maybe a couple of holdovers still in place. But I would say most of the cost savings are in place adjusting for that $1.2 million that Laurie called out in her comments. From here, really, the growth potential for Calvert as we see yet in terms of the earnings contribution is going to be led by the top line. And as I commented, we think we’re poised for growth there. If you adjust for some onetime items, we will essentially flat in terms of our second quarter flows. We’re optimistic that we can do better than that. Calvert is up – is a franchise that’s broadly known and respected across the industry as a long-term leader in responsible investing. I think as people are well aware, there is broad interest among broker-dealer firms, individual advisors and their clients and they’re increasing their exposure to different types of responsible investment and people are looking for partners, and we’re certainly working hard to position Calvert as the partner of choice for many broker-dealers across a whole range of strategies both active and passive equity and fixed income in the responsible investing space. And so we know the opportunity is there. The challenge for his is completing our integration and positioning Calvert to take advantage of the growth opportunities that we see.

Great, thank you.

Your next question comes from Bill Katz with Citigroup. Your line is open.

Okay. Thank you very much. Just a question coming back to custom beta broadly for the category, Tom. Obviously, your numbers are very impressive, both absolute and relative to what your peers are experiencing. Can you maybe break it down maybe one, two more points of why you see in such good traction? Is it price, is it the solutions orientation, is it performance? Just trying to understand what’s driving the overall appetite and then maybe relatedly open-ended question, but any capacity constraints in any of the different buckets within customized beta?

Yes, just on the capacity strengths. We served constraints. We certainly don’t see anything on the horizon. I mean, in any rapidly growing business, there’s a question of how quickly can you scale up the business. And even in that respect, we think we’ve got the resources to handle the kinds of growth we’re seeing, which is a very significant, as you mentioned. What’s driving the growth? Its several things. One is the big movement from active to passive. We’re seeing it across the industry. I don’t think I need to comment further on that. These are inherently passive investment exposures. What’s different about this and the other things we’re feeding on is the desire for financial advisors to maintain relevance and to continue to add value as they shift their clients, clients increasingly into passive. So if an adviser says I’m going to put all my clients portfolios in these 6 index ETFs, it may be difficult to justify the fees of the advisors charging. If the advisor has access to solutions like custom beta that provide value add through either customization or tax or some combination of those things, it certainly becomes much easier for the advisor to justify his ongoing role in the clients financial situation. So that’s part of what we do for advisors and advisory firms. I think that is broadly recognized by the broker-dealer firms. It’s probably recognized by many certainly, not all, individual financial advisors that these custom beta solutions can be meaningful – meaningfully important to them and positioning their business for growth in an environment increasingly focused on passive investing. Hopefully, I’d say it comes down to the investor benefits. It’s not only what you do for the firm and for the individual advisor. It’s particularly what you do for the…

That’s very helpful. And just one quick follow-up for Laurie, and thanks for taking the questions, good morning. If you look at comp – certainly appreciate your prepared comments, but I’m still surprises flat sequentially just given the very good net growth of the company or maybe some gross sales dynamics sequentially. As you look ahead, I was looking at comp to revenue and also comp to investment management fees and both those ratios, I know you don’t want a company on a ratio basis, but both those ratios are a little bit low compared to both the last quarter and the year ago quarter, how you thinking about that on a go-forward basis just given some of the underlying growth trends you have?

To your point that we don’t manage the business on the ratios that were certainly cognizant of what they look like. The decrease in the ratio in terms of our comp to revenue this quarter versus last quarter is due a couple of things. One is that we had a blowout sales quarter last quarter, and there was a significant increase in our sales-based incentives. This quarter, we did ramp up a little bit on our Calvert hiring to support some of the functions that are now up in Boston, but we saw a decrease in the sales-based incentives. So that offset a little bit. So right now, we were – for this quarter, we were about 36% of revenue in terms of our comp ratio. I would think that, that would be our comp ratios through the third and fourth quarter would look something like that or in that sort of 36% to 36.5% range. Now having said that, there obviously variable costs, but if they do come through in terms of having a really strong sales quarter that is above and beyond expectations, that will put pressure on that number. But I would think that we would anticipate being in that range. We don’t see anything significant that should flow it out, and as Tom mentioned at this point, we think that we’ve largely got our Calvert fixed cost base established in terms of the employees. We don’t anticipate we’ll be taking any costs out, but we also don’t anticipate that any significant hiring. So again, I think that 36% to 36.5% will be a good one to think about.

And keep in mind, Bill, the fewer number of payroll days in this quarter did help us as well.

Right, okay. Thanks for taking the question today.

Your next question comes from Patrick Davitt with Autonomous. Your line is open.

Hey, good morning, thanks for taking my questions. My question is on the bank loan front. When you last peak back in 2014, I think you said you were comfortable with 8% market share. I’m calculating you now at only about 4.5%. Is that in line with what you guys think you’re at? And is 8% still a good bogey to assume what you’re comfortable with in terms of market share?

By market share, you just mean how much of the bank-owned asset class that we own?

Right. Yes, exactly.

I don’t think that, that’s changed. I guess, I think the questions getting at what’s our capacity of our strategies. Those are, I guess, I’m pleased to say not conversations that we’ve been having actively, so I think we say like we’ve got quite a bit of run way from where we are currently. I would – I have no reason why the investment teams would take a different view on capacity today versus – capacity in terms of market share relative to where we were at the prior peak. So I would think that’s probably still pretty good number.

Great. And then just a quick follow up, I’m really surprised to see you calling out a pickup in sales of AMC shares given the broader trends you’ve seen and now a little bit of a surprise that you all go into effect on June 9. So could you maybe speak to the trend do you think drove that when there’s a broader view that there share classes are in secular decline?

Patrick, I don’t think we meant to imply pick up in the low share classes. I think what you may be referring to is Laurie’s reference to the increase in distribution and service costs in the expense section, is that – could that be…

Right, okay.

So this distribution encompasses a number of things, including marketing assistance, payments made to the intermediary. So there’s been constant pressure on that line item. That will – that’s something that contributes at a higher cost this quarter. And then also, service fees are paid on load weight A shares. In this quarter, we did pull in a full quarter’s worth of Calvert fund service fee. So I think those are going to be the major dynamics driving the increase there. We do have privately offered equity funds that we pay commission out on, and that shows up in the amortization expense, and those have been – the sales of that product have been strong as well. So I think it’s combination of those things that we’re behind the increases in those line items.

We’re not seeing an increase in AMC share business.

Great. Thanks for the clarification.

Your next question comes from Chris Shutler with William Blair. Your line is open.

Hi, this is actually Andrew Nicholas filling in for Chris. Thanks for taking my questions. First question, I was hoping you could provide a bit of extra color on the equity flows during the quarter, obviously, a pretty good quarter given the current landscape for active equity. I think mostly, I’m interested in the split between institutional and retail. And if it is mostly retail, excuse me, mostly institutional as I suspect, how much is that is maybe more onetime and lumpy in nature, any extra color there would be helpful.

Yes, we have three equity businesses as leading the growth in the quarter. One of them Parametric’s defensive equity business, which is about, I think, about $6 billion in AUM and today essentially 100% institutional and the growth there is basically all institutional. We did – we have introduced a retail fund in the U.S. or a mutual fund in the U.S. that primarily we expect to be sold institutional share classes, but there is a new Parametric volatility risk [indiscernible] defensive fund. I think it’s called. So we have a new fund there. But it’s – it is a large and growing business that is not benefiting from onetime lumpy flows, but rather a broadly based institutional sales base. And we have a good pipeline and expect the sales success with defensive equity to continue. We are, in addition to bringing out a mutual fund version, we’re also – we’ve expanded from the initial version of the product was a U.S. version. We’re now doing a global version that we’re offering both in the U.S. and internationally. And so we expect that to continue to grow based on visible pipeline. The second business that we highlighted that’s contributing to the growth is the Atlanta Capital core. The biggest piece of that business is their SMID-Cap fund, which is a retail product, so you can track the flows of that through industry sources, but that’s the Eaton Vance Atlanta Capital SMID-Cap Fund, which is a five-star rated fund, that’s a category leader based on long-term performance. We also, in the quarter, had recently significant flows into the Atlanta Capital select equity strategy, and that’s both funds and increasingly retail managed account flows. We’ve gotten that strategy accepted into some model portfolios of the major broker-dealers. And so we’re seeing model assets into select equities. And then the third area we highlighted was Eaton Vance large-cap growth. That’s primarily in the private funds, so that would not show up in the form of industry mutual fund flows. So I would say your supposition that the flows are primarily institutional rather than retail is probably right. But I can confirm that there are – they’re not major lumpy factors that hit in the quarter that drove the positive result, rather broad-based success across a range of client types.

Great. That’s very helpful. And then separately, I think maybe for Laurie, repurchases flow to decent bid in the quarter, particularly relative to the pace of the past couple of years. I just wanted to understand the primary reasons for the slowdown and then how we should think about repurchases through the back half of the year. Thank you.

Yes, we don’t set targets in terms of our repurchases each quarter. I think that we’re very sort of practical as we get through the quarter in terms of when we’re going to lean and when we’re going to pull back in terms of our purchases. We were comfortable at the rate that we did our purchases this quarter. We anticipate being in a market in the third and fourth quarter. But again, we’re not setting targets at this point. So I can’t really provide any distinct direction in terms of how big those purchases might be.

I’ll just add to that. I would say the amount of repurchase activity is a function of two things. One is the availability of capital. We did, just as a reminder, complete the acquisition of Calvert at the end of December, so we spent a fair talk of change that may have otherwise been available for repurchases on what we think is a highly accretive acquisition and strategic acquisition. And then the second is, as Laurie suggests, tactically does it look like and particularly attractive price. We lean in and buy more when we think the stock is experiencing short-term weakness and looks particularly attractive as that happens in the future, which no doubt it will at some point. So you can expect us likely to step up our repurchases.

Thank you.

Your next question comes from Robert Lee with KBW. Your line is open.

Great, thanks. Good morning and thanks for taking my questions. I guess my first one is just thinking about kind of the margin, overall margin, and where we can go from here. I mean, I guess you’ve come back off the bottom, I’ll call it, last several quarters. What are you – what do you think it would take to kind of start to approach maybe some of your prior peak margins? And as part of that, I would assume that to some degree, some of your faster-growing parts of your business thinking portfolio implementation, custom beta, may just be inherently somewhat less scalable compared to the fund business given that their separate accounts and that probably has maybe just inherently a little bit less scalable than the mutual fund would be?

Yes. Hi, Bob, I think that is definitely the case. I think that we see some of the more service-intensive franchises are going to have fixed costs associated with them in order to actually and partially variable costs in order to support those businesses. So I think that there’s going to – not necessarily be the same level of leverage that you can achieve with open-end funds. I would also say that obviously, there are a lot of different pressures on the business right now. There’s obviously revenue pressure in terms of fee rate, and then to the extent that we’ve got great sales, there’s going to be pressure on our variable cost base, because we’re going to have to actually pay our salespeople. So I would like to tell you that we’ve got a magic formula for actually pushing up the margin, but I think there’s so many different pieces that are going to impact it. It’s very difficult to say that I anticipate seeing the margin go from X to Y over the course of the next year or so. I think we’re comfortable with the margin in terms of guidance that we’ve given in the past in terms of be in this range. We clearly believe we’ve got leverage opportunities in our business, but we also recognize the pressures that are coming both from above and below in terms of being able to do that.

Great. And then maybe just a follow-up, just kind of to setback a second, Tom, you’ve seen some of your peers try to fight some of the indexing trend through different fee structures, you made an alliance clearly filing, getting approval for more focused fee, performance fee-oriented funds. I’m just kind of curious, your take, I mean, is that a direction you think Eaton Vance and the industry broadly needs go in or how do you – I mean, how do you kind of think about the pricing dynamics at least than the traditional fund business?

I think the challenge for active managers is the same as it’s always been which is to deliver performance and the expectation of performance above benchmark that exceeds the cost of providing that. I don’t see performance-based fees as particularly a magic bullet that’s going to change that dynamic. If you put a good performance and you can demonstrate the ability to provide alpha that exceeds what you charge, people today and in the future will continue to find that attractive. As I see it, the biggest challenge that the industry has faced, the source of all this movement from active to passive and the pressure on fee and the consideration of new fund structures like NextShares and the fee structure like what you’re talking about is that we’ve gone through a pretty long period where, particularly in the U.S. equities, the average active fund has really struggled relative in performance net of fees relative to passive alternatives. There are various solutions to that. Some of them relate to fees and structure. NextShares is our answer to that and inherently lower cost better performing structure. I also think that there are market dynamics in terms of the way stocks have performed, the U.S. versus international, stocks versus bonds in cash that have exerted a drag on active manager performance. But I guess I don’t – you should not expect Eaton Vance to be a particularly early advocate of converting our business to a nominal-based fee and a high-performance-based fee. There may be clients that want that. If the structure is attractive, we’ll certainly compete for that business. But I think by enlarge, the way active managers compete more successfully is by delivering better performance net of fees. And our approach for doing that is in part driven by inherently lower cost structures, like NextShares, where it’s not just lower management fees, but potentially other – lower other costs that included the benefit of the long-term investors in those strategies.

Thanks, and maybe if I could just one more follow-up. Tom, I think on the last call after you – had Calvert, I guess, a month or so under your belt, at least my takeaway seem to be that while you guys have always done – for many years have done bolt-on strategic transactions, you seem to be talking a little bit more of that maybe there’s going to be either more of those opportunities going forward or you’d be – or Eaton Vance would look to be a more active participant maybe than it had been in the past. So, and I don’t want to read too much into it, so is that really just more that you’ll think there will be more strategic bolt-ons available in the marketplace, or is that kind of [indiscernible] there maybe things that in the past, you wouldn’t have considered because they don’t add as much incremental capability, but they could be more attractive financially to this even if the strategic contribution is going to be less than what the Calvert maybe or Parametric was years ago?

I would say my comments are, at the time, were and continue to be that the Calvert transaction really gave us a chance to look under the covers, and to some degree, experience life in the world of – in a $10 billion to $20 billion asset manager that’s really struggling to achieve scale economies in their business, is struggling to maintain distribution access and is struggling to in a cost-effective way achieve compliance with a growing burden of regulatory expenses. It clearly makes sense for Calvert, we believe, to merge with a company like Eaton Vance to help them address all of those things to shore up distribution, to give them the financial resources to invest in their investment teams, to piggyback on our efforts, our technologies, our legal and compliance staff, to comply with the new and growing regulatory burden. But Calvert is not alone. There are dozens of fund companies at or above that same business size that I think many of them will probably disappear into what I view as stronger hand as happened in the case of Calvert. That’s not going to be a linear process. Those companies are controlled, in many cases, by individuals whose a degree of optimism or pessimism about the future, those companies will be a critical factor in determining whether they look to partner with someone else or not. But I think that looking from the outside, there’s a compliant logic for those transactions to take place. From the point of view of the seller – rather of the buyer, so Eaton Vance, in the case of Calvert, this was an opportunity to do two things. One which is I think maybe a common opportunity, which is to achieve positive earnings contribution through taking out a redundant expenses, we did…

Great. I appreciate your insight and color. Thank you.

Your next question comes from Glenn Schorr with Evercore. Your line is open.

Thanks. Just a couple of quick follow-ups. In the conversation earlier on fixed income moving from brokers to advisory and that opportunity is transferring bonds into a managed account totally get the opportunity. Curious if, A, do you have an active selling effort to help FA’s transition in that book? Or are really talking about the opportunity as you wait for actual bonds own to mature off?

No, no, no. That’s – we have an active – for sure, we have an active selling effort. We have a wholesaling force calling on broker-dealers, warehouse, independent banks and registered investment advisors. And this is a key part of their ongoing conversation is to make the case that advisors should transition their book of bond business from brokerage advisory. And that Eaton Vance is the best partner for them to work with as they do that. So that is an ongoing daily conversation that takes place across many, many different financial advisory offices across the country.

And that’s happening at the same time that they’re considering transferring their entire client relationship into a fee-based account, it won’t necessarily be both, is that correct? Meaning some advisers with transition their whole book into a managed platform on their end, and then you guys represent an alternative on the fixed income side?

That’s right. We’re not in – generally, we’re not out evangelizing for why advisory versus brokerage makes sense generally. That’s – those conversations, in many firms, most firms have already taken place. We’re talking very specifically about converting muni ladders and corporate bond ladders, which I would say almost every financial advisors been doing this for a while has some clients for whom they hold fixed income securities on some sort of laddered basis. They know the concept of the ladder. They understand that, the clients know and understand it. What we’re proposing to them is something relatively discrete, which is move it for some block of your clients, not necessarily all of them, but for some block of your clients. Move those from brokerage to advisory, and we will work with you to manage that transition as seamlessly as possible to manage that transition with the lowest possible cost to the clients, transacting as necessary at institutional level pricing with full transparency of what we charge and with a level of ongoing credit research backing those portfolios that few, if any, advisors on their own can match in their separately managed muni laddered portfolios, that they do for their clients today. We think it’s a compelling proposition and it’s not surprising to us that this has become a big business for us.

Yes. Look, I think it’s compiling too. They also have underwriting businesses that they own. So I’m sure it will be one-step forward, one-step back for a little while. One other follow-up. You had mentioned earlier the Atlanta SMID-Cap Fund, which is doing great, great performance and great flows. It’s getting close to $10 billion, is there a thought on capacity constraint there? I mean, traditional small-cap fund would be already past, but SMID-Cap Fund, I’m sure, has more, but just curious on that front specifically?

Yes. So just a little history there. The team that manages that started in small-cap and – but that’s – it’s close, hard closed and has been for a while. This SMID-Cap strategy has been closed to almost all categories of new investors for, I want to say, three years, four years, something in that range. The only place that you can buy this where we’re taking – where it affect new clients’ in retirement relationship. So it’s an existing retirement relationship, they can add new clients to that. But it’s – we’re already closed in most classes of new investors today. But despite that, we continue to see net inflows.

Well. That took over $200 million in the quarter and that’s all existing retirement relationships?

Existing customers and – so existing clients and existing retirement platforms. It may be new individuals on existing retirement platforms.

Understood. Okay, got it. Okay, thank you very much.

There are no further questions at this time. I will now turn the call back over to Dan Cataldo.

Great. Thank you for joining us this morning. We hope you all enjoyed the upcoming Memorial Day weekend, and we look forward to reporting back to you at the close of our third fiscal quarter. Thank you.

This concludes this afternoon’s conference call. You may now disconnect.