Ladies and gentlemen, thank you for standing by and welcome to the Eaton Vance Corp. First Fiscal Quarter Earnings Conference call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Eric Senay, Director of Investor Relations. Thank you. Please go ahead.

Thank you. Good morning and welcome to our fiscal 2020 first quarter earnings call and webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance; as well as our CFO, Laurie Hylton. In today's call, we will first comment on the quarter and fiscal year and then take your questions. As always, the full earnings release and charts we will refer to during the call are available on our website eatonvance.com under the heading Investor Relations. And today's presentation contain 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 2019 Annual Report and Form 10-K are available on our website or upon request at no charge. I will now turn the call over to Tom.

Good morning and thank you for joining us. Earlier today, we reported $0.86 of adjusted earnings per diluted share for the first quarter of fiscal 2020 which is up 18% from $0.73 per diluted share in the first quarter of fiscal 2019 and down 9% from $0.95 per diluted share in the fourth quarter of fiscal 2019. On a combined basis seed capital and consolidated CLO entity investments contributed $0.03 to adjusted earnings per diluted share in the first quarter of fiscal 2020 and negative $0.02 in the first quarter of fiscal 2019 and $0.08 in the fourth quarter of fiscal 2019. Excluding these items, first quarter fiscal 2020 adjusted earnings per diluted share were up 11% year-over-year and down 5% sequentially. We ended the first quarter of fiscal 2020 with $518.2 billion of consolidated assets under management which is up 17% from a year ago and up 4% from the previous quarter end. First quarter consolidated net inflows were $6.1 billion or $5 billion excluding what we now call Parametric overlay services what we formerly referred to as exposure management. This was our 22nd consecutive quarter of positive net flows and a solid beginning to what we expect will be our 25th consecutive year of positive net flows. Our first quarter net inflows equate to 5% annualized internal growth in managed assets as calculated both with and without Parametric overlay services. Looking at our flow results on a revenue basis. In the first quarter, we achieved 5% annualized internal growth in consolidated management fee revenue, which compares to minus 4% in the first quarter of fiscal 2019 and positive 2% in the fourth quarter of fiscal 2019. Although revenue-based internal growth rates are not widely reported by other public asset managers, we continue to believe that Eaton Vance ranks…

Thank you, and good morning. As Tom described, we reported adjusted earnings per diluted share of $0.86 for the first quarter fiscal 2020, up 18% from $0.73 in the first quarter of fiscal 2019, and down 9% from $0.95 in the fourth quarter of fiscal 2019. Our adjusted earnings per diluted share this quarter, includes $0.03 of combined contribution from seed capital and consolidated CLO entity investments, compared to a negative $0.02 contribution in the first quarter of last year, and an $0.08 contribution in the fourth quarter of fiscal 2019. As you can see in Attachment two to our press release, earnings under U.S. GAAP exceeded adjusted earnings by $0.05 per diluted share in the first quarter of fiscal 2020 $0.02 per diluted share in the first quarter of fiscal 2019 and $0.01 per diluted share in the fourth quarter of fiscal 2019, reflecting the reversal of net excess tax benefits related to stock-based compensation awards during those periods of $4.9 million, $2.9 million and $1.5 million respectively. Operating income increased by 11% in the first quarter of fiscal 2020 from the same period a year ago, reflecting an 11% increase in both revenue and operating expenses. Operating income was down 1% sequentially, reflecting a 4% increase in revenue and a 7% growth in operating expenses. Our operating margin was 29.8% in both the first quarters of fiscal 2020 and 2019 and 31.2% in the fourth quarter of fiscal 2019. As Tom noted, ending consolidated managed assets reached a new quarter-end high of $518.2 billion at January 31, 2020, up 17% year-over-year and 4% sequentially driven by strong net flows and positive market returns. Average managed assets this quarter were up 17% from the same period last year, driving management fee revenue growth of 13%. Management fee revenue growth…

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

Thank. Yes can you clarify -- I think you -- Tom you discussed some of the quarter-to-date flows for certain segments, but left out I think fixed income and equities and some of the other metrics. So maybe just given that you did mention bank loans and alternatives I guess give us a kind of a broader update on the rest of the business.

Yes. Just to clarify the only thing I talked about was our mutual fund flows for the period just continuing the context of improvement. I'm not really prepared to talk about our overall flow trends for the quarter-to-date as that may or may not be a good indicator of what the quarter as a whole will be. I will say generally that in the same way that we had strong flows across the -- across our businesses in the fourth quarter we've had good flows for the month-to-date. But it's -- we're only a little over three weeks into the quarter, so I don't want to talk too specifically about anything other than those couple of exceptions I made in my remarks.

Okay. And then just a follow-up on kind of expenses and margins, I guess if we think about the last 12 months in the growth of both the beta in the market as well as your flows and essentially margins are flat year-over-year, so can you talk about an environment where you actually could see margin expansion? And then on the contrary given what's happened more recently with market how we should think about flexibility if that market tailwind is no longer there for a sustained period.

Hi. It's Laurie. I think we've talked a little bit about the pressures that we obviously see in the first quarter. It's difficult when we start the new fiscal year because we've got these seasonal pressures that we see each first quarter. And most of them relate specifically to compensation. We did our best to call those out. I would say as we're moving into the second quarter, I did call out specifically on stock-based compensation that we would anticipate seeing some level of relief recognizing that we had some material first quarter retirements that forced us to recognize about $5.5 million of incremental stock-based compensation expense and we've got some seasonal stuff that happens relating to our employee stock purchase plan and our directors plan that probably will provide us some relief as we move into the second quarter to the tune of about $1 million to $1.5 million. In terms of other operating expenses and the way we're thinking about the year, I think we had been telegraphing fairly clearly that we anticipate we're going to be continuing to make some significant investments in technology. I think that there was some – a little bit of first quarter noise associated with normal first quarter events and operations associated primarily with things like charitable giving which tend to be front-end loaded for us, the way that we actually interact with United Way. But we would anticipate that if we see a decrease in the charitable giving in the second quarter we are seeing a modest ramp-up in our technology spend. So overall, we're – we'd like to see margin expansion. We do think that there is opportunity for that. Obviously, the volatility of the last several days has got all of us a little bit cautious about how we're…

Your next question comes from Ken Worthington with JPMorgan. Your line is open.

Hi, good morning. On the custom portfolios, Tom you indicated that you're only scratching the surface. So maybe where are those large opportunities that you alluded to, say over like the medium term? And what is the strategy here to tap them?

Okay. Pretty open ended. So just maybe – just to take a second to talk about what custom portfolios are. What's in that? Three broad categories of things. One is equity portfolios that are managed on a basis that broadly replicates a stock market index but with customization to achieve enhanced tax efficiency, so funded in kind to – at least in part in kind to minimize upfront tax realization; incorporating tax loss harvesting and gain deferral as part of the strategy; and also customization for ESG and other client-specified characteristics. So one piece is what we used to call Custom Core or still – it's what we call Custom Core equity under Parametric. So that's one big piece. A second piece is laddered fixed-income separate accounts. This is the business that recently moved over from Eaton Vance Management Parametric. And then the third piece is a Parametric business called centralized portfolio management. That is where Parametric is engaged by a platform that does multi-manager strategies where those strategies or where the model – where each of the underlying manager's fee is a model for Parametric for implementation on a centralized basis, typically with ongoing tax management as a key part of that. So those are the three key pieces. There's a couple of small odds and ends in addition to that. But when talking about generally where we are with each of those in terms of the comment I made about, we think we've just scratched the surface of this first and talking about what we like to call custom indexing or what the market seems to be calling, primarily direct indexing, so that's – instead of investing in a index mutual fund or index ETF to achieve an index-like exposure, own a significant representative fraction of the underlying…

Yes. That was pretty comprehensive. I appreciate it. Thank you.

Your next question is from Mike Carrier with Bank of America Merrill Lynch. Your line is open.

Good morning. And thanks for taking the questions. So overall another quarter strong diversified flows. It looks like just the one area a little lighter was on the institutional side. So just more curious what drove it if there was any rebalancing? And any color in terms of the pipeline?

The institutional pipeline overall is quite good. We've had -- we have I guess three multimillion dollar -- multi-hundred million dollar pieces of institutional business that we're expecting in the second quarter that gives us certainly confidence in -- and general momentum in our institutional business. And I'm separating out the exposure management business, which is in our institutional flows, but we show those separately. So in -- think about my comments in institutional separate from exposure management. One of the things that has been working against us and worked against us in this quarter we have a large institutional client in bank loans I think which over the last several quarters has been drawing down their position over time. This was a -- this was and is a multibillion dollar client. So there will be some pressure there. We're most of the way through that drawdown. But this is a long-term allocation that over the last maybe four or five quarters has seen a fairly significant drag on both our bank loan business looking at it from a mandate point of view, but also from our institutional separate account business. Not to double-count those, but we report both of those things. So we're -- we think we're getting near the end of that on a -- more broadly we expect good flows in institutional. Some of the thing -- places where we're achieving institutional success one is our emerging market local income strategy, which is a big quite a big asset class outside the United States where we are seeing some success growing that with institutional clients. Also under the Calvert banner, we recently landed a significant institutional fixed income core fixed-income mandate. And also in the offing is a large high-yield bond individual -- institutional separate account offering that we expect to fund in the current quarter. So I would say overall maybe a mixed bag with one fairly significant negative. That's this bank loan client that's been pulling down over time their exposure to us and other managers that they've hired in this category offset by pretty broad strength in other things. Maybe on the equity side just a comment. You probably have noticed that Atlanta Capital has had a quite strong performance over recent years very strong 2019 numbers. And they also have seen a pickup in their institutional business. And that's what you can think of as traditional large-cap U.S. business, which has been as everyone knows a very tough place to grow institutionally. But their -- the distinctiveness of their performance record and their investment approach has allowed them to grow over the last few quarters and have a decent growth pipeline even in an industry environment where very few people are growing actively managed large-cap U.S. equity mandates.

Okay. Thanks a lot.

Your next question comes from Robert Lee with Keefe, Bruyette & Woods. Your line is open.

Hi. Good morning. This is Jeff Drezner on for Rob Lee. Just a quick question. I know you touched on the compensation line. I just wanted to circle back to that for a second just to make sure I caught everything. So there was a $5.5 million expense and then a decrease of about $1 million to $1.5 million that we should not expect to occur again in fiscal Q2, is that correct? Is it -- was there anything else there that I had -- that I missed? I just want to make sure.

No. Hi, it's Laurie again. No. Actually what I said was that there was $5.5 million of stock-based compensation expense this quarter associated with retirements that would not recur in the second quarter. And then there was approximately $1 million to $1.5 million of incremental stock-based compensation expense that is in the first quarter that will not repeat in the second quarter. So I would just say -- I think what we're saying is effectively that stock-based compensation expense is likely to go down between $6 million and $6.5 million in the second quarter.

Yeah. So just to add the two numbers up -- add the two numbers up not to subtract one from the other to get the expectation for second quarter versus first quarter.

Correct.

Got it. Yeah. I appreciate that. And then a quick question on institutional business. And if you can get -- give some color around some ESG strategies at Calvert and how you see that playing out?

So Calvert's the -- we acquired Calvert at the end of 2016. At that time very close to 100% of their business was U.S. mutual funds and we've grown that business. We've just about doubled Calvert business. We're not quite there but just about doubled Calvert's business from I think $11.9 billion at the end of 2016 when we acquired Calvert. So that business to date -- the business growth has to date still been primarily mutual funds, mutual funds in the U.S. But our ambitions for Calvert and Calvert strategies and the Calvert brand are certainly much broader than U.S. mutual funds. We're implementing a variety of Calvert strategies as institutional separate accounts in conjunction with Parametric as an offering under our Parametric Custom Portfolios banner. So these are both Calvert indexes as implemented by Parametric also the opportunity to offer Calvert active strategies as implemented by a Parametric. Institutionally, as I mentioned we recently had a significant win with a U.S. pension plan that is -- that was attracted to Calvert based on both the strength of their investment performance capability, but also on the strength of their commitment and support of responsible investing. There are many, many, many mission-driven organizations around the U.S. and internationally that we think there's an excellent potential fit between their desire to achieve both strong investment returns, but also alignment of their portfolio holdings with the mission of that organization. So think about all kinds of mission-driven non-profits as well as pension funds and broader organization endowments where responsible investing is a key initiative and a key focus of those organizations. So not to overplay the term, but again we think we're just watching the surface in terms of our ability to take the Calvert brand from heritage as a U.S. mutual fund provider to making that broadly known and broadly represented not only in mutual funds in the U.S. but also funds outside the United States and individual separate accounts and institutional separate accounts in the U.S. and internationally. Clearly this is a time when Calvert is in many respects ideally positioned to grow with surging interest in the market, in the general category of responsible investing. A lot of confusion about what that is and what that means that Calvert based on its long history there can help educate the market on and all that backed by really quite an exceptional investment performance record across a wide range of strategies. So I mentioned that Calvert had 26% organic growth rate in the first quarter. We're certainly optimistic that we can continue to grow Calvert at a well-above average rate not only drawing upon mutual fund clients, but increasingly separate account clients in both institutional and individual markets.

Great. I appreciate the color on that. If I could just get one quick follow-up just on custom beta products. And just any competition you're seeing there? And maybe competition on price or whatnot?

So when -- in Parametric custom portfolios there is competition. We will -- and growing competition. There's also a growing opportunity. And so we'll see how that plays out. We think there is a much bigger market opportunity for us and other competitors. It's not surprising given the growth profile of this business that there are other people that are trying this. We think there are significant advantages of scale, significant advantages of experience that we have that new market entrants do not have. But we don't expect this to be a one-player market. There are a handful of other significant players and a few around the edges that are maybe dabbling with this. I don't think there's room for a lot of dabblers to achieve success, but there will be likely a handful of market leaders in this business, of which we would expect Parametric to continue to be the largest among those market leaders as we are today. Price is and always has been one element of the competition in the customized individual separate account business. Mostly it's been about features and service and to some degree also access. Can you get in front of the financial adviser? Can you get access to that adviser? Can you articulate the advantages of a customized individual separate account better than the other guys? Can you demonstrate that you're achieving those advantages better than the other guys? And also, importantly, can you service that relationship better than the competition? And service here is both as-needed high-touch service, but also ideally an element of -- an increasing element of low-touch service, that is using technology to drive enhanced service, which we think is going to be critical to maintaining profitability in this business, if prices on average continue to fall, which we expect, by and large, they will over time in this business. On the fixed-income side, it's a bit of a different story. There are several competitors in the laddered bond space. It doesn't feel like the price competition there is intensified. We worry a bit about equal market access in that market relative to broker-dealers offering in-house strategies that can compete against third-party strategies. Also as I mentioned in my earlier comments in response to Ken's question, we do think there's a significant emerging opportunity for fixed income, direct indexing best solutions that we think we're in a far better position to offer those today, than literally anyone else in the marketplace, based on the development work we've done on those kinds of strategies, which we're pretty excited about the potential for long term, to expand how people think about this category. It's not just replicating or roughly replicating an equity index. It's taking that, combining it with fixed income and over time developing solutions that move well beyond replication or tracking of a benchmark, to helping clients and financial advisers meet their financial needs more broadly, including concepts of target risk and target date and custom LDI.

Great. Thanks so much.

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

Okay. Thank you very much. Appreciate all the color. Maybe just two questions. Tom, maybe start with you. Just big picture down, there's been a fair amount of M&A in the landscape, both on the sort of manufacturing side as well as on the distribution side and in varying forms. What if any impact, do you think, that has in your business?

Okay. Well, I guess, I'll start with time will tell. We don't know -- most of the acquisitions that have been announced haven't been completed. So, the ones that I think we feel most comfortable, we know the answer to, are consolidation within the asset management industry. And how that usually plays out may not play out in the case of the recently announced transaction. But how that usually plays out is that, during a fairly prolonged transition period, there's some amount of migration of assets from the two companies that are merging two competitors. Strategies get put on hold, there are changes, disruptions to investment teams. Those are the kinds of things that the firms that are merging are trying to minimize and those are the things that their competitors are trying to take advantage of and those are the things that their customers and gatekeepers are watching for and very concerned that there may be negative fallout of this transaction from the point of view of them and their clients. So there's always some opportunity. How big that is, is always very hard to gauge. But, in general, consolidation among competitors in the short run creates opportunity for those competitors, just because of the disruption associated with the merger. Longer term, once the thing happens, it very much depends on their ability to execute and lots of things that are very hard to foresee during the period when acquisitions are being announced. In terms of the more distribution oriented or ones affecting wealth management more than asset management, so this would be the Schwab TD Ameritrade or E*TRADE Morgan Stanley that's just to be clear what I'm talking about, those are a little hard to judge. What is important to us is that, we continue to maintain market…

Okay. That's very helpful. Thank you. And Laurie just one for you a little bit of a nasty question, so I apologize in advance. Can you break down a little bit on where you're sort of spending the technology? What kind of time line you talk about here? Is this a multiyear effort? And then just as I think about the ins and outs of flows versus fee rates it sounds like a very good flow story. But also I hear nothing about the competition in lower-fee products. So, how do you sort of see the dynamic between organic growth versus revenue growth notwithstanding this was a very good quarter of itself?

Yes. Maybe I'll address the technology question first. I think as we think about technology spend, I'm starting to think about this in terms of new normal. I don't think we're necessarily talking about a one-time big bang we're going to replace a big system and then all of a sudden we're going to be able to stop spending on technology. I don't think that's what we're talking about. What we are talking about is a slightly more consistent incremental spend on technology recognizing that a lot of this is in relation to the initiatives that we've recently announced associated with Parametric and Eaton Vance that we're combining technology platforms, we are looking to invest in technology to ultimately increase our efficiency, increase our effectiveness, bring down the cost of what it actually takes to manage separate accounts on an account-by-account basis. So our goal is to continue to make those investments and we will see an increase in our technology spend over a longer term period. But our goal is to ultimately then be able to leverage that to reduce our overall operating expenses in the future. So, this is from our perspective very much a long-term play and a long-term investment. In terms of revenue, I think as we're looking at our effective fee rates and I think if you look at Attachment 10 in our press release, you can see that they're really on a category-by-category basis. We are not seeing a diminution in our effective fee rate by equity fixed-income alternatives et cetera. What we are seeing is just shifts in mix quarter-over-quarter that ultimately impacts the average effective fee rate for the period. So, I know there's a lot of talk about decreases in effective fee rates. We are not necessarily seeing that by mandate, but we are seeing a decrease year-over-year in our average effective fee rate at the top of the house recognizing that that is being driven by mix. But I think what is positive from my perspective is that as you look at the this quarter ending January -- the quarter ending January 31 versus the quarter ending October 31 we saw no decrease in our overall average effective fee rate. So, we feel very, very positive that we have got some level of stability at the mandate level and that we've got every opportunity to see our average -- our organic growth in assets, if you will, to actually see our organic growth in revenue mirror our organic growth in assets going forward if we are able to continue to advance the ball on our active equity strategies where there are higher fees while growing our somewhat more passive strategies where the fees are lower. So, I think that we demonstrated this quarter that we could effectively do that by producing 5% organic growth in assets and 5% organic growth in revenue.

And maybe I can just jump in with a couple of comments. If you look at our charts accompanying -- the slides accompanying the call, you can see that over the course of fiscal 2019, there was a bit of a disconnect from our in our ability to grow to achieve organic growth in assets versus our ability to achieve organic revenue growth. So, that's comparing slides nine and 11. If you look at the slides, I guess, it's slides 10 and 11. 10 looks at annualized internal growth in consolidated managed assets on a percentage basis and then 11 looks at that same those same numbers just converted into revenues. The real difference -- the driver of the differences in 2019 was primarily the fact that we saw over the course of that year we saw I think roughly $14 billion of net -- no, I think 12 -- sorry $12 billion of net outflows over the year in two relatively high-fee categories; floating-rate income and global macro strategies that dominate our alternative strategies. The best thing that can happen for us in terms of our ability to achieve organic revenue growth in the same range as our organic asset growth is to stop the outflows in those two strategies. We came we got there in alternatives in the first quarter. We think we're getting very close to that happening in bank loans. Our expectation is for the balance of the year subject to markets is that you'll see a much closer alignment between our ability to grow assets and our ability to grow revenues tied to those assets simply because we don't expect that negative which drove that disconnect last year to continue into this year.

Its all very helpful. Thank you for the detail.

Maybe its time for one more question.

Okay. Our last question comes from Glenn Schorr with Evercore. Your line is open.

Hi thanks. Two quick follow-ups on sustainable investing if I could the conversation. One is I'm curious to get your thoughts on the client interest that you noted and are clearly seeing in terms of dedicated product versus just part of the process of ongoing product. And two is how you think passive plays a role ESG investing. It's counterintuitive but there are products they are getting flows. So, curious on how you think passive impacts pricing and flows yes and sustainable--

Yes. So, we're -- Calvert has a broad-based menu of strategies in the responsible investing space, including both active and passive. We have – we are growing in active. We're growing in passive. We have good performance in active. We had good performance in passive. That's on the equity side. Fixed income, we really it's – it's an all-active strategy business. I think there's an element of responsible investing that doesn't really cut quite neatly between active and passive and that's the aspect of engagement. So what are you doing to help drive value creation and help improve performance of the companies in which you invest? And you do that through how you vote your proxies, how you participate if at all and shareholder resolutions and the conversations that you engage either individually or as part of groups with the management to try to get them to achieve better results. Those kinds of activities to some degree can cut across both active and passive strategies. As it's – as this business is developing, there's still lot of – this is a pretty fast-moving turf. Lots of confusing terms that out there things that – I use on-term you use another. What I – the term I use might mean something different to me than it does to you. It's going to take a while for that to sort out. But one of the things that I think is clear is that the role of engagement is becoming more and more important in differentiating strategy A from strategy B or manager A from manager B. How do they vote their proxies? How do they participate in shareholder resolutions? How do they, if at all engage with management? So that's a second level of performance beyond the normal way that we measure…

All right. Thanks so much.

All right. Well, thank you very much for those of you who participated in today's call and we'll speak with you when we have our next webcast for the second fiscal quarter. Thank you very much and have a good day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.