Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp. Fiscal Second 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]. I would now like to turn the call over to Laurie Hylton, Eaton Vance's Chief Financial Officer. Please go ahead.

Good morning. And welcome to our fiscal 2018 second quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and Chief Executive Officer of Eaton Vance; Dan Cataldo, our Chief Administrative Officer; and Eric Stein, our new Treasurer and Director of Investor Relations. As many of you are likely aware, Eric joined the Eaton Vance last month to replace Dan as Treasurer and Director of Investor Relations following Dan's promotion to Chief Administrative Officer upon the retirement of Jeff Beale. Welcome Eric and congratulations Dan on your new responsibility. In today’s call, Tom and I will first comment on the quarter and then take your questions. The full earnings release and charts we will refer to during the call are available on our Web site, eatonvance.com, under the heading, Press Releases. Just a reminder, that 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 2017 Annual Report on Form 10-K are available on our Web site or upon request at no charge. I'll now turn the call over to Tom.

Thank you, Laurie, and good morning everyone. Earlier today, Eaton Vance reported adjusted earnings per diluted share of $0.77 for the second quarter of fiscal 2018, which is up 24% from $0.62 of adjusted earnings per diluted share in the second quarter of fiscal 2017, and down 1% from $0.78 in the first quarter of fiscal 2018. For the first six months of fiscal 2018, we reported adjusted earnings per diluted share of $1.54, an increase of 34% from $1.15 in the first half of fiscal 2017. Of the $0.39 per diluted share increase in first half adjusted earnings, $0.23 was attributable to growth in operating income, $0.12 is the net effective lower income taxes and the remaining $0.04 reflects the lower interest expense and other non-operating items. We ended the fiscal second quarter with $440.1 billion of consolidated assets under management, up 14% or $53.1 billion from a year earlier. The year-over-year increase in consolidated managed assets reflects net inflows of $28.6 billion and market price appreciation in managed assets of $24.5 billion. Consolidated assets under management declined 2% from the end of the fiscal 2018 first quarter, reflecting second quarter consolidated net inflows of $4.4 billion and $13.6 billion of market driven price declines in managed assets during the quarter. The $4.4 billion of consolidated net inflows in the second quarter equates to 4% annualized internal growth in managed assets. Excluding the $3.6 billion of net outflows from exposure management mandates, which are both lower fee and more volatile than the rest of our business, we had $8 billion of consolidated net inflows in the second quarter, an increase of 7% over last year’s second quarter and up 43% from the first quarter of fiscal 2018. Reflecting strong inflows into a number of higher fee strategies, we generated…

Thank you, and again good morning. As Tom mentioned, we’re reporting adjusted earnings per diluted share of $0.77 for the second quarter of fiscal 2018, an increase of 24% from $0.62 of adjusted earnings per diluted share in the second quarter of fiscal 2017, down 1% from $0.78 of adjusted earnings per diluted share reported in the first quarter of fiscal 2018. Second quarter’s seasonal factors, primarily reflected three fewer fee days and three fewer payroll days in the quarter, reduced earnings by approximately $0.02 per diluted share sequentially. As you can see in attachment two to our press release, adjusted earnings trailed GAAP earnings by a penny per diluted share in the second quarter of fiscal 2018 to reflect the reversal of $1.9 million of net excess tax benefits recognized from the exercise of employee stock option, investing of restricted stock awards during the period. Adjusted earnings per diluted share matched GAAP earnings per diluted share in the second quarter of fiscal 2017, and exceeded GAAP earnings in the first quarter of fiscal 2017 by $0.15 per diluted share, reflecting the impact of tax law changes, a newly adopted accounting standard addressing the treatment of stock-based compensation and the expiration of the Company's options to acquire an additional 26% ownership interest in our 49% owned affiliate tax vest. Our operating income in the second quarter fiscal 2018 was up 13% from the second quarter of fiscal 2017, down 2% sequentially. Our operating margin was 32% in the second quarter fiscal 2018 versus 31.5% in the second quarter of fiscal 2017, and 32.2% in the first quarter of fiscal 2018. Operating margin for the first six months of the fiscal year improved from 30.6% in 2017 to 32.1% in 2018. Ending consolidated managed assets of $440.1 billion at April 30,…

[Operator Instructions] Your first question today comes from the line of Patrick Davitt of Autonomous. Your line is open.

The fee rate, particularly in floating rate, came down a little bit more than we would have expected. Are there any timing issues around when flows came in and out, or is there anything you want to that you would point out? And in particular, is there a mix shift within the floating rate bucket driving that to come down so much?

The main thing going on, I believe, during the quarter was continued growth on the institutional side of the business, which has for us and for market generally, has lower fee rate than in our recent product. So you'll see that rate bounce around, primarily reflecting mix of retail and institutional. I talked about -- we had good growth offshore in the second quarter and that largely was in bank loans and that was largely institutional. So hope that gives you a little flavor.

And then on the pipeline commentary, I appreciate that. Could you maybe scale that relative to last quarter and this point last year?

So that's on pipeline on our business generally or on specific…

I think -- you're talking about…

I don't have that on my fingertips, I don't recall where that was last quarter versus -- or the year ago quarter. We're looking at for the quarter on the order of $3 billion or so of net flows for which we see a visible pipeline. Understand that includes a mix of both active and passive businesses, and a fair bid of that is Parametric business, including that exposure management where we do expect net inflows. But I would say on an overall basis, the pipeline is robust. We've got multi-hundred million dollar visibility and to growth macro absolute return franchises, Parametric emerging markets, high yield bond, custom core the sense of equity and exposure management.

Your next question comes from the line of Michael Carrier of Bank of America Merrill Lynch. Your line is open.

This is Geoff filling for Mike, thanks for taking our question. So just looking at the $800 million of cash and equivalent in the short term investments. How much of that would you say is free to return versus tied up due to regulatory other needs? And then maybe longer term is there a total payout ratio that you typically target?

Well, we don’t have in our precise number on what cash tied up in regulatory. But we can -- feel like we can comfortably run the business with $200 million in cash. It's probably something close to 100 that would be tied up due to regulatory…

Included within that 200.

Exactly, yes. The second part of your question was?

So I think on the total payout ratio over the long term…

Yes, it's certainly something we look at each year when we review our dividend for the upcoming 12 months, and that typically is done mid-October. So it’s definitely something we consider in addition to cash needs to support the growth of the business.

And I would say that on an overall basis long-term it’s 100%, we have no other reason for being then to earn cash and cash flow for our shareholders, and returning that to shareholders either through dividends or stock repurchases, are certainly long-term goal and strategy and consistent with the history of the Company. The fact that we’ve seen a buildup in cash over the last several quarters doesn't reflect the change in that philosophy.

Your next question comes from the line of Bill Katz of Citigroup. Your line is now open.

Question for you just in terms of flows, and appreciate the last comments, so seeing across the range of the platform. Could you fill in maybe one level deeper and give us a sense of maybe where you’re seeing the volumes coming from? Is it from other place with lesser performance, or is there any mix shift that you’re seeing in terms of allocations whether it’d be on that retail gatekeeper side or on the institutional consultant side?

Maybe it would be helpful to break that down. It will vary between our active and more passive businesses just starting with the active businesses. And in bank loans, we’re benefiting from two things; one is bank loans have been an asset class that has attracted significant flows, relating to expectations and the reality of rising interest rate; and then second among the bank loan mangers not surprisingly, given our performance, we’ve been gaining market share. So it’s really a combination there of both and expanding category, which reflects cyclical factors maybe some secular growth there as well, plus a relatively strong performance profile for Eaton Vance. I would also highlight absolute return strategies in particular global macro absolute return, which again benefits from the cyclical phenomenon of investors looking to diverse so far away from fixed income and duration risk into a less correlated or non-correlated strategy that invest primarily in emerging market currencies and debt instruments of a short-term duration nature. There I think we’re probably also gaining market share where in Morningstar categorizes us in non-traditional bonds in that strategy. And relative to that category, we’ve noticeably gained market share over the last few quarters. The same generally would apply to other short-term income strategies. We have a short duration government fund that’s in inflows. We have a short duration strategic income fund that’s in net inflows. We have a short duration inflation protected fund that’s in net inflows. In all those cases, we have strong performance. I believe those are all five star rated funds and also these are in categories position to benefit from investors looking for ways to diversify their duration exposure to reduce their duration exposure within fixed income. On the more passive side of our business, this is primarily what we call…

And then maybe a follow-up for Laurie, I may ask this question quarter-after-quarters, I do apologize for the repetition of it. Can you give us a sense of how you’re thinking about margins from here? And I am trying to understand interplay now it looks like great comp leverage within the other line little bit sequentially. So you look out into the second half of this year or maybe longer term. Do you still think you can drive some operating leverage? And maybe is the way to think about on the incremental margin, just trying to get a sense of how much incremental room there might be for margins to move higher here quickly given the great growth?

In terms of looking out, I would love to have a crystal ball and tell you that I've got great visibility going out into 2019. But I think that would be an overestimation of our forecasting skills at this point. But I think that as we look ahead to the next couple of quarters, I would anticipate that we will be in this range. I do continue to think that we've got operating leverage opportunity. But I would not anticipate -- obviously, March and February, were both really tough months. From a market perspective, there was lot of volatility and it really hurt us in terms of what we lost to market -- lost to assets due to market. So that create a little bit of a headwind that we're coming out of now. But if we get some really nice market, that's going to be helpful. We could see a little bit more leverage. But otherwise, I would anticipate we're going to be in this range, maybe modestly up another 50 basis points. But I wouldn't anticipate we’re suddenly going to see a screaming run on our operating margin.

Your next question comes from the line of Dan Fannon of Jefferies. Your line is open.

I guess, just to follow up on that last question. Can you talk maybe about the differences in the profitability or the scalability of certain of your businesses? So if we think about, we know the fee rates but the exposure management how we think about that or this in terms of incremental margin, how you want to characterize it versus say your traditional fund business?

It's important to make sure, we're talking about the same thing, we're talking about margins. So just to be clear, we're talking about operating income as a percentage of revenue not operating income expressed in basis points on assets. So expressed in basis points on assets we make significantly less on exposure management because we clear with 5 basis points not starting with 30 or 50 or 75 on some of our mandates. In terms of margin profitability per dollar of revenue, that's a very good business. It's probably approaching the corporate average. It's not substantially below this is a scale of business very efficiently run. A portfolio manager and implementation business doesn't command the same compensation level as a portfolio manager does in a stock or bond picking business. It is highly scale dependent and we have a large scale there and it's entirely systems dependent. And we have excellent systems to support that business. So it's while though, say it's not particularly the margin, I don't think we would say it's higher than our average margin, but it's in the range of most of our businesses. If you look across our businesses, the key driver of profitability is scale. If you look at things like bank loans, where we've got a very large business. we have higher profitability. And things that we do in limited scale either because we're trying to grow the business or hope brings eternal and we're hanging on. Those kind of businesses have lower margin. So big picture our approach to growing the profits of Eaton Vance is developing and cultivating through scale a range of market leading franchises. And typically the bigger the franchise both the easier it is to sell all else being equal and the more profitable it is from a margin perspective again all else being equal. So the goal is always is to build scale to the extent reasonable and to the extent we still have the ability to manage money flexibly and efficiently at that scale. But the goal is to build scale across franchises and if you want to know relative levels of profitability of our business starting with revenues is probably a good place to look. And things that we have good revenues in, we tend to have good margins in. And things that we're trying to build revenue we don't tend to have attractive margins. This is fundamentally a people business, it takes a certain amount of people to run any kind of investment business, the more assets you manage the more revenues you generate likely the higher the fee is going to be from that business. And that holds pretty true across the board in our business.

Thanks that's helpful. And I guess just another question around M&A you guys have been successful and deploying capital and adding on businesses. I guess at this point of the cycle, how do you think about M&A in terms of that versus repurchasing your own stock or other capital return methods?

We certainly look, there have been some transactions that have happened to our business. We think asset management is right for consolidation. We think Eaton Vance has many of the characteristics of a successful acquire, including as you point out having a record, having done this successfully in the past and a fair bit of financial flexibility to allow us to finance a transaction. We're particular about what we might acquire. While in the past, we've been successful in growing our business and expanding our footprint within asset management through acquisitions. We are also mindful that this is a fairly hazardous business going out and buying someone else's asset management business and inheriting their culture and inheriting there people. So we wanted to do it very carefully. We are price-sensitive, we don't tend to win auctions, because really we're going to put the highest valuation on a business. But we do think that that we bring a lot to offer here and we do devote a fair bit of attention to at least thinking about that. So I think we it's not a large team, its mostly Laurie and myself and other people in the finance group. This is not a significant activity for people in our sales organization or people in our investment or admin group. But in terms of the senior levels of legal and finance and general business we do look a fair bit at things that might be of interest. I would put the kind of things that are possibly of interest to us into three or four categories. One that would be consistent with things that we've done in the past are what I'll call both on acquisitions where we had distribution firepower, we brought on our business mix and helped our business grow to scale, adding more distribution resources than that company could likely afford to do on their own. That's been our traditional growth path. We have also looked at acquisitions that would expand our footprint graphically, only about 6% of our assets today are outside the United States. We think there could be opportunities for us to accelerate the growth of our business outside the United States through transactions that involve cross-border linkups. And then finally there are the scale type transactions that involve both opportunities for revenue synergies, but also cost synergies and those are if done at scale significantly riskier in a financial sense and in a corporate culture sense, but we also certainly kick the tires on those. Again we do believe there should be and there will be consolidation in our business and we want to participate that and that at least at a level of looking and if the fit is right and if we put the highest value on something. It's possible that will be active there as well.

Our next question from the line of Brian Bedell of Deutsche Bank. Your line is now open.

I just want to come back to the fee rates, I think you explained the floating rate is moving towards the institutional from a mix shift and then quickly if I'm wrong I think you mentioned also in the fixed income the [lettered] bond portfolios shift towards that being lower fee rates that impacted that? If you can -- Craig if I am wrong enough and then also if you can comment on the equities bucket and the portfolio implementation in terms of the fee rates declines and that, is that a good run rate start into coming into the second quarter or do you think the mix would go back the other way?

Yeah, I think you're right in your observation. Certainly starting on fixed income, I think we highlighted in the call facts that we had a $1.5 billion of net inflows within fixed income that were ladder separate accounts that's 15-16 basis points business as that grows, that tends to pull down the average fee rate in the fixed income category. So that's the primary driver of that category. So you see, I'm looking in our press release, attachment 10. So the biggest year over year decline was in fixed income where fee rates went down 7% from 38.5% to 35.8% . Again, that primarily reflects the strong growth of our ladder separate account business is that if the rates in the 15 to 16 basis point range. Floating rate income, I think we already talked about that. Alternatives which went the other way. We have a global macro absolute return advantage strategy that is at a higher fee rate, that and its sister fund, call macro absolute return, really dominate that alternatives category, both in terms of assets inflows and because the mix of flows have been skewed towards the higher fee advantage version of that strategy, you've seen that 9% pickup in average fee rates year over year in the alternative category. Equities, that's also primarily mix shift among the fastest growing equity strategies we offer are what we call defensive equity or volatility risk premium strategies, which are Parametric offerings using a derivatives, primarily there's a permanently call selling strategies, fast growth contributing there, there are also other strategies in the equity group and higher fee rates that have been growing but unbalanced, that fee decline reflects primarily mixed with faster growth of these options based -- rules based option strategies offered by parametric. Within portfolio implementation, not exactly sure, that -- some of that might be mix, some of that is also we've grown with the client relationships where they have more pricing power and so fees on some business has been is coming at lower price points where it's a competitive situation, I would say generally, we view our business as, if you take out mix and look at pricing within existing mandates, something like 1% annual declines just based on fee concessions and break points built into fee schedules is part of our business. I've been here 33 years and I can't remember ever raising prices on any of our strategies over that period, I might be missing something. But generally the nature of our business is that fee rates go down within mandates as they grow out to scale. And that trend is certainly present here, still pretty modest, something like 1% of that 4% year-over-year decline in average fee rates is true price declines with the balance representing a mix of faster growth of all three businesses than in higher fee businesses generally.

And then I guess just on the -- I think I heard you say $3 billion and I wasn't sure if that was what you were indicating as the pipeline for through the outlook as you went through that for the quarter that we're currently in. And if you could just verify that? And then also talk about what's going on in the broker dealer channel obviously the platform consolidation? How you are faring in market share there and is portfolio implementation also part of that in terms of when mandates within broker dealer channels?

Yeah, so just to clarify. The number I gave that $3 billion number that's we have a weekly pipeline report of one not funded new business doesn't always happen, but these are as best our sales team can determine. Commitments that clients have made to hire us for new business things that we expect to fund over the coming period. Over the balance of the second quarter, which is going through -- balance of the third quarter which is going through the end of July as I mentioned, it's not only about $3 billion of pending pipeline and that includes about a $1 billion or so of Parametric exposure management and $2 billion of a range of other generally higher fee strategies. So I think that answers that first part. In terms of the impact on platform, broker dealer platform consolidation. We're winning some of [indiscernible]. So we're seeing some of our strategies getting -- taking all availability for current sale in broker dealer channels as they win or down the number of funds they offer. If you have a small fund it's pretty hard to justify the continuing existence of that if flows have not been strong. And we're not immune to that. We're seeing some of our funds being removed from platforms. When that happens I understand that doesn't mean the assets go away, typically those -- the assets stay on the books, though new sales are no longer permitted. There is the possibility for things that have been taken off the platform to come back on if there is advisor demand. We had -- during this quarter, we had and at least wanted to make -- broker dealers we had a case where several smaller Calvert strategies were taken off platform but then added back once they figured out that they have a large corporate initiative to support responsible investing and that these were leading high performing funds in those categories that do have growth potential as those responsible strategies grow. In terms of our non-fund business, our separate accounts including the implementation business the Parametric custom core. I don't think there's has been a lot of impact -- there is not a lot of impact on us of consolidation of offerings. I think that's largely been not fund phenomenon not a separate account phenomenon. And that's a legacy of days going back decades when large broker dealers potentially made all funds available. The separate account business -- the retail manage account business is a newer business and that was never really the way that business operated.

Great, I mean that there are few there potentially gain share in the portfolio implementation process as other funds are cut from the platform?

That's absolutely right, we're positioned to grow our business in portfolio implementation generally as money moves from active to passive and quasi passive. We just picked up a custom core availability in single contract in the last of the major warehouse broker-dealers. So we have got full coverage now for both single contracts into a contract across the landscape of the warehouses that just happened in the last two weeks.

Our next question comes from the line of Glenn Schorr of Evercore ISI. Your line is now open.

Similar to one of the previous questions I'm curious with all this growth and reasonable operating leverage, just thoughts on the share count going forward, I think we're up 7% year-over-year?

I think that we kind of have a very slightly more opportunistic and systematic share repurchase program. We're fairly heavy users or stock based compensation. We recognize that put the pressure on our diluted share count. But we really think about our share repurchase program in terms of our total capital management strategy and address that on a quarterly basis. And this quarter we did mean in, we repurchased what was $73 million worth of stock this quarter, and hopefully that will be helpful as we look at our share count for next quarter. But I don't have guidance to give in terms of what we anticipate we will do throughout the rest of the year outside of saying that we would certainly anticipate that we will be active in the market and that we do view share repurchase as a significant tool in our quiver as we think about ways that we can return value to shareholders.

Okay. And then if I could just get a follow up comment or clarity on the comment you made earlier on exposure management a product of declining client balances not clients leaving, is that just if you can think of it as run off of previous money less that you guys are just going to run this course is that the comment?

Let me again just explain again what this business is. So, imagine your large institutional investor with a couple billion dollars that you have placed with a number of different outside managers. So your pension fund or endowment or foundation. One application of parametric exposure management is to equatize the cash that exists within your different accounts held with different managers. So if you're actual cash in those portfolios is 3.5% and your target cash is 50 basis points you would hire Parametric to take long equity exposure implemented through futures equal to 3% of that billion dollar portfolio. We built on the basis of the amount of exposures outstanding. So if that client moves around. So let's say they either move their actual cash up or down from 3.5% or they move their target cash up or down from half a percent depending on the relationship between those two, the amount of balances on which we earn the management fee will go up or down in a particular quarter. We've tried and pushed down the management of that Parametric business to help us model, does it in some way relate to what's going on in the market, either in terms of market strength or weakness or high volatility or low volatility. And it turns out there aren't great correlations with what we report as flows in this business, to any of those market factors. We have some pretty large clients in there, where a 1% or 2% change in their target cash or how they're using parametric disclosure management can have a meaningful flow impact on us. In this particular quarter, we were in a period where large clients on balance, we're in a position of reducing their exposures. We continue to look at this business long-term as a…

I totally appreciate all that Tom. The only follow up I had is, if the foundation of this is to put idle cash to work and to eliminate cash drag even if it's temporary. As rates rise, does that start to just become a bigger drag or a competitor to the product in and of itself?

Maybe, I would guess that, really it's -- so it's -- how do you think about cash in your target allocations. Most institutions that I'm close to aren't targeting the allocations to cash because even though cash returns have come up, they're still significantly below longer term either equity or fixed income assets. And most institutions take the view that they can't afford to have a lot of assets sitting around earning very little. I think you're right in that, with rates around 1% there is a little less pressure than there was at rates at zero. But whether that's enough to impact institutions and how they think about cash I don't really know. I think if rates were 8% or cash rates were 8% and people were despondent about the return potential of longer term financial assets, we wouldn't be equitizing cash, but we might also be synthetically taking off equity or income exposure because this doesn't only work one way. One of the beauties of derivatives is it gives the flexibility to not only equitize cash but also to change equity exposures up or down or from emerging markets to developed markets and vice versa and but also to add and subtract duration currency exposure commodity exposure, et cetera. These are very powerful tools that can be used for lots of portfolio reasons. And we're optimistic certainly that as the push for return grows, that people will look to manage their portfolios more efficiently and these are ultimately tools for enhancing portfolio efficiency by allowing managers to more precisely target their asset allocations on a very tactical basis if that's what demands they want to do, without disturbing relationships with underlying managers. So we think this business is here to stay. Whether it's marginally less attractive at higher interest rates, I think there is a case can be made for that, but I would say that there are I would guess bigger factors likely that overwhelm that just in terms of the other flexibility of this service offering what we can do for clients beyond just equitizing cash.

And at this time, I would like to turn the call over to Ms. Hylton for any closing remarks.

We just want to thank you for joining us this afternoon. And we look forward to catching up with everybody again when we release our third quarter results in August. Thank you.