Ladies and gentlemen, thank you for standing by and welcome to the Eaton Vance Second Quarter Fiscal 2020 Earnings Conference call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Eric Senay. Please go ahead.

Thank you. Good morning and welcome to our fiscal 2020 second 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 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 headline Investor Relations. 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 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 the call. Amid the continuing COVID-19 pandemic, I want to start by offering my sincere best wishes for good health to each of you and your families. Over recent months, we've seen a tragic loss of human life in nearly every country around the world, as well as massive disruption to the global economy and the world's financial markets. We see genuine heroism displayed by the countless healthcare workers, first responders and other essential service providers who are putting themselves in harm's way serving others. All of us at Eaton Vance are deeply grateful for their service. In recognition of the sacrifices of the COVID-19 heroes, and the suffering of those experiencing ill health or economic hardship due to the pandemic, the company and our employees have contributed $1 million to support COVID-19 relief efforts in our communities and around the world. In this challenging period Eaton Vance’s primary concern are the health and safety of our employees and their families, the resilience of our business and serving the needs of our clients and business partners each and every day. Over the last couple of months, the creativity, adaptability and teamwork of our staff have been put to good use meeting the challenges of operating amid a pandemic. Since the middle of March, nearly all Eaton Vance employees have been working from home, connecting with each other and our clients and business partners chiefly through video technology. While not the same as being together physically, our businesses function seamlessly. We've not experienced any notable disruptions due to operational issues, loss of communication capabilities, technology failure or cyber attacks. Throughout a period of heavy account activity and highly volatile markets, our trading and operations team have consistently kept up with unprecedented demand even while…

Thank you and good morning. Our second Tom’s hope that each of you and your families are healthy and well. As Tom described we reported adjusted earnings per diluted share of $0.80 for the second quarter fiscal 2020, unchanged from the second quarter of fiscal 2019 and down 6% from $0.85 in the first quarter of fiscal 2020. Effective this quarter, our calculation of non-GAAP financial measures excludes the impact of consolidated sponsored funds and consolidated collateralized loan obligation entities, collectively consolidated investment entities and other seed capital investments. Adjustments to GAAP operating income include the add back of management fee revenue received from consolidated investment entities that are eliminated in consolidation and the non-management expenses of consolidated sponsored funds recognized in consolidation. Adjustments to GAAP net income attributable to Eaton Vance Corp shareholders include the after tax impact of those adjustments to operating income and the elimination of gains, losses and other investment income expense of consolidated investment entities and other seed capital investments included in non-operating income expense, as determined net of tax and non-controlling and other beneficial interest. Our goal in making these adjustments is to provide investors and analysts alike a clear line of sight to the company's core operating results. All prior periods’ non-GAAP financial measures have been updated to reflect this change. If you can see in attachment 2 to our press release, adjusted earnings, exceeded earnings under U.S. GAAP by $0.15 per diluted share in the second quarter of fiscal 2020 reflecting the reversal of $16.8 million of net losses of consolidated investment entities and our other seed capital investments, the add back of $1.8 million of management fees and expenses of consolidated investment entities, and reversal of $1.1 million of net excess tax benefits related to stock-based compensation awards. Earnings under US…

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

Thanks. Good morning. So just a follow-up on some of the monthly trends, certainly appreciate the additional disclosure. But can you talk about kind of the variance between March and April? And if you can comment about May so far with regards to gross sales versus redemptions in terms of the improvement, it was mainly just the slower redemptions or if you saw kind of gross sales also starting to pick up during those most recent months?

Yes, Dan, this is Tom. The -- maybe somewhat odd thing about March was that although we had significant net outflows, as we described, gross flows were very strong, up approximately 50% from February to March. So it wasn't like there was no activity. In fact there was hyper activity on both of the inflows and outflows side. Things have slowed a bit on both sides of that thankfully. As indicated we had positive flow results for the month of April and May, have been -- I guess I would say May to date has been broadly similar to what we saw in April. So, we're -- we got hit pretty hard in the crisis period. We bounced back in trying to find this report. I was going to -- I can't pull it up. But we've stayed positive in March and starting May to-date with flows.

And then I guess just another one on flows. You mentioned $1.3 billion in high yield that's going to fund in the third quarter. I guess, just thinking about risk profiles and clients engagement, would you say that you're seeing kind of re-risking or just opportunistic where you have good performance or certain strategies that are doing well, you're seeing the kind of uptick. So I guess, just broadly, any other commentary on the institutional portfolio and kind of client behavior based on what you're hearing and seeing?

Yes, I would say it's mixed. There are certainly clients that are looking at where risk assets are priced and where they have been priced and have stepped in, in some cases those might have been clients that were early to take off risk exposures. The fact that we're seeing high yield inflows I think is indicative of that, where we've seen a good period of -- we had actually a quite strong month in high yield in April, and we are as indicated expecting some quite important significant institutional flows. And I think you'd say in both cases that represents maybe I think generally sophisticated clients looking at prices of risk assets and concluding that from a long-term investment perspective that these are attractive entry points. We've seen some of that in bank loans as well, flows there have continued on an improving path in May. So we're -- they're not -- they're modestly negative but better than they were in April and vastly better than they were in March. So it feels like that our experience has probably been consistent with what just the trend of the equity market would suggest that people have been increasingly willing to take the view that we've likely seen the bottom of the cycle in terms of both stock prices and economic activity. And while there's obviously a lot of pain to be still absorbed, as we tentatively start to come out of the pandemic period, investors want to work through that and we see that in our core results, which have been certainly much better in April and our positive trend is continued in May for let’s call it risk assets, so equities and floating-rate income, and high yield bonds principally would be exposure there.

Your next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open.

My first one is on the fee rate and I heard Laurie's earlier comments on the day count. But I was looking for additional color on the 2 basis point decline in both the equities and the all -- blended fee rate from last quarter?

Hi Craig, it's Laurie. In terms of equities, I think why we're seeing the decline is due to the net outflows that we've seen in Parametric emerging markets. Within that category tends to be one of the higher fee products. And then all it's the same issue. So it's just a question of product mix within the category.

And then just a follow up to the last question. Can you provide us an update on the bank loan business? I'm just thinking with very low interest rates today and rising corporate defaults in the U.S. how is this product sold to both retail institutional investors? And do you have any updated thoughts on the forward flow trend from this business?

So, as I mentioned flows for May to-date have been modestly negative less than $100 million of outflows for the month-to-date through -- I think that’s through Monday. So we're not seeing a significant continuation of the negative trend that we saw in March. The appeal of this asset class, I would say for many investors is from a total return perspective. As we pointed out, rates are absolutely -- benchmark rates are low, but spreads are wide. So in a place where it's -- in an environment where cash yields are zero, we're headed close to that, this asset class offers true floating rate exposure, so you can get high levels of current income without being exposed to meaningful amounts of interest rate risk, and also the opportunity for a significant price appreciation. Yes, and this is a big if. This economic cycle is similar to others where the experience of past cycles has been that the default and recovery experience of senior secured floating-rate bank loans is such that from current prices, there's a significant opportunity for price appreciation. Certainly no guarantees, these are risk assets below investment grade securities, but high current yield negative -- no exposure to interest rate risk to speak of, and a price that reflects still a pretty dire outlook for the economy, which again looking at the historical defaulting recovery experience of bank loans, this is proving to be a good price point for entry.

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

Yes, just as a follow-up to Dan's question, I appreciate the pipeline guidance, are there any known offsetting redemptions to the unknown wins?

Not really to speak of. Generally, you don't have a whole lot of -- generally there is not a whole lot of visibility on outflows. So, I wouldn't take too much comfort from the fact that we don't have a significant pipeline of outflows, but the fact is that we don't. We've said in previous quarters that we have a large bank loan client that for a multi-year period has been redeeming out of their position, that's not over with yet, but there is still some outflows there to go, but that's something we've been living with. I think in total, we're expecting, maybe -- in the range of $1.5 billion over a extended period of likely multiple quarters, potentially even multiple years, for that to come out. But that's really the only significant net outflow where we have visibility on. The rest of our business, I would say, generally we're not expecting to see significant net outflows, but we live in a volatile world and we don't always get a heads up when redemptions are coming, but the pipeline looks good in terms of outflows, but I'd take that with a bit of a grain of salt because that's generally true that there is not much in a way of outflow pipeline.

Helpful. Thanks. And then, obviously, the ESG investing theme continues unabated and obviously helping Calvert. Could you update us on any plans or discussion around perhaps backward integrating the Calvert process across the whole complex?

Yes. So, that I would describe as well under way. I hesitate to say finished, but certainly well established. A priority for us, I'll say beginning two years ago was to integrate Calvert Research into the investment -- the fundamental investment processes of both Eaton Vance Management and Calvert, and to build systems connections and relationships among analyst teams and portfolio managers to accommodate that. So we've been working on this for two years. We have full access to the Calvert Research system and the Calvert Research analysts by all of our equity analysts and fixed income analyst and portfolio managers at both the Atlanta Capital and EVM, and that's been true for several quarters now. Like anything, the amount of inflow that has in our investment decision making is maybe a bit hard to measure. But certainly the connectivity is there and if you talk to our portfolio managers and hear them describe what we view with our competitive advantage is, the fact that we have access to this team of Calvert specialists, analysts who bring a very different perspective and a very different skill set than traditional fundamental analysts. It's something I would say that consistently, our PMs have been talking about for several quarters. It varies a bit by asset class, it's bigger in equities, but it's also becoming increasingly important in fixed income. The other place where we're increasingly integrating Calvert is relative to Parametric. Parametric is not in the business of making active calls on stocks or bonds. So, there's no fundamental process to integrate into. However, a significant part of the customized separate account business of Parametric relates to the ability to do customization to reflect client-specified ESG sensibility. To the extent that we can back that up with Calvert Research that we can provide with Calvert impact measurement that we can provide with collaboration and engagement with issuers, that strengthens the value of those Parametric offerings. And so, that's a -- I would say that's more of a current priority than something we've been focusing on historically and still some work to do there, but are optimistic that at the conclusion on this process that in Parametric, like Atlanta Capital and Eaton Vance Management, we will see a significant enhancement of their offerings in the marketplace, based on the connection, through Eaton Vance to Parametric -- I'm sorry to Calvert.

Your next question comes from the line of Ken Worthington from J.P. Morgan. Your line is open.

Maybe first on your changes to the reporting of adjusted earnings. So, it looks like the changes make this quarter's results look much better and prior quarters look a little bit worse. So, maybe a couple of questions around this. It looks like if the changes were not in place, your earnings would be $0.17 lower this quarter as per Page 10 of the release. I guess, firstly, is that correct? And then the timing of the changes seem a bit gimmicky. You took the benefit when it enhanced earnings and now that the CLO outlook has changed, you're adjusting up the losses. So, can you further flush out your comments on why this version of earnings is better than the prior?

So, let me start and then Laurie can jump in.

Okay.

So, headline earnings or GAAP earnings, excluding all of these adjustments, we earned $0.65. That's the top-line. If you want to go with GAAP, go with GAAP. We earned $0.65. This quarter consistent with most recent quarter, certainly over the last several years, every quarter, we've called out the contribution of seed capital investments and CLO investments to our earnings. These are investments that are mark-to-market, not all, but, I would say, most analysts that look through to try and uncover the underlying earnings power of our business have excluded those. So, we've called out the numbers in terms of earnings per share impact. A read of what most analysts report on our earnings have backed those out of our reported earnings. As you point out, during past periods, these were positive contributors, so that's consistent with rising markets. Absolutely, this adjustment here made our adjusted earnings higher then if we had included the -- then if we had not reflected -- sorry, then if we had reflected the losses in our business realized on seed capital investments and CLO gains and losses. We've also tracked competitors among public companies. What we're doing is fully consistent with what we think the prevailing trend is of other managers. There's a lot of disclosure here about the impact. And you and every other analysts have the ability to pick and choose. You want to the GAAP number, it's $0.65. You want to know with or without different adjustments, we quantify every one of them to its cents per share, and you have the ability to choose whatever earnings you want to choose that's being most relevant. We believe that for most people, not out -- but not everyone perhaps, the most relevant measure of our performance is what we're today describing as adjusted earnings per diluted share. Laurie, you might want to add to that?

Yes, I would just add, Ken, that we may be putting in tabular form and actually including it as part of our adjusted earnings calculation, but we have consistently been actually providing that information quarterly for quite some time. And I think as we were actually looking at how other peers were handling their seed capital portfolios, we realize that our parenthetically disclosure was not necessarily consistent with what others were doing. And then, quite frankly, if we were going to provide it parenthetically, we should just provide it as part of the reconciliation, and we thought it would be cleaner and it would be easier to get at. So that was the rationale for actually providing it in the adjusted number. And I do believe, as Tom said, that this is a better indicator from our perspective, the earnings power of the Company and it takes out a lot of the noise associated with consolidating large portfolios of products that quite frankly have very little to do when you actually back out the non-controlling interest, had very little to do with what our core operations actually look like.

Okay. Great. Thank you for that. And then on the muni business -- the muni ladder business, to what extent is COVID-19 still weighing on the outlook for sales? Or is that business sort of recovered, like some of your other businesses that you highlighted?

Let me just pull up some numbers. So, we have -- the...

The rational being it's a good business for you and we've got municipalities under pressure. And we can see what muni funds are doing, but the ladder business is sort of a different entity or different animal and it's been a very good one for you.

Yes. I would say, that business has not really recovered to, I'll say, pre-crisis levels. We're not seeing outflows. We never really saw outflows in bond ladders during this period. But the first challenge we had, and this is more of a February challenge, was that, particularly in muni, rates got so low that income levels were not particularly attractive in investment-grade muni. So one of the issues we're dealing with is just when you layer in the advisor of the expenses at interest rates as they have been for muni sort of February timeframe, there wasn't a lot of income available. So that was one of the things that was weighing on it. And then as we got into March, yield picked up because muni spread versus treasuries started to gap out, but the muni market was not functioning particularly well during the month of March. And I think advisors were somewhat leery of but coming back to coming back to the asset class. So, it's been up. I guess, I'd say it's been up maybe partial recovery, but we're not seeing the kinds of activities that we did before. I am looking at -- for month-to-date, modestly positive flows. I guess, probably consistent with maybe a little better than the -- yeah, a little better than the trend of the second quarter, but not where we were in the first quarter and prior periods. So it sounds like it will -- it looks like it will take some time for that business to come back.

Your next question comes from the line of Mike Carrier from Bank of America. Your line is open.

So, first, maybe on the Parametric overlay flows. Tom, you mentioned some of the drivers in the quarter as well as the pipeline of new clients. Just in terms of the current clients that derisked during the quarter, maybe based on past trends and these volatile backdrops, do you tend to see those clients like come back in and rerisk as kind of the markets start to stabilize? I just wanted to get some perspective on some of the kind of derisking that we saw in the quarter...

Yes. A good question. So, we've, obviously, been through different downturns before, and it is not uncommon as we're coming into or going through a crisis period, when there is a lot of volatility in the market where institutions and that's who these clients are, will say I want to pull back from market exposure at some point. Maybe it's early before the crisis hit, as it hit, a little bit after the worst, whatever it is, it's certainly not uncommon for people to derisk their portfolios during market declines. And again, these are sophisticated institutional investors. So this is not a -- there's not a knee-jerk reaction. Primarily how these -- how this service has used, the biggest application, there are lots of other ones, but the biggest application is securitizing cash that's in client portfolios. So if you've got 3% or 4% cash in your portfolio that's not there for a particular investment reason, it's there -- maybe just I'll say sloshing around at the bottom of the portfolio, we've made the case historically that the best way to put that cash to use is using futures. So you're not disturbing the investments of the underlying managers who are running different sleeves of the portfolio, you have ultimate liquidity as to be able to take on or take off exposures quickly. So this is designed to be quick twitch asset movement positions that historically when markets go down you see people take off exposures, But I think, as your question suggests, generally as you get beyond the crisis period, particularly in periods like now and cash returns are nothing, that you start to see the resumption of putting back on positions by existing clients. There's certainly nothing in our experience or nothing in our communications with clients through…

Okay. That's helpful. And then, Laurie, just expenses are well-managed and the margin held up relatively well. And I heard your comments on -- focusing on kind of discretionary expenses. In the quarter, were there any like unusual declines or items in the expense base? And then, just how are you thinking about the outlook, given obviously uncertain backdrop, yet fairly strong rebounding market? So, any context on how we should be thinking?

Yes. And just in terms of the current quarter, I don't think there was anything that was sort of a one-time item that we would call out. There is obviously just a lot of unusual activity to the extent that we no longer have people traveling, and we no longer -- just generally speaking, you're going to have some decline in just sort of discretionary spend, partially that's being -- because it's being managed very carefully and partially just because people are working out of their homes and there's just not as much activity. I think that as you're looking at the quarter, I think what's probably what's most notable is just the decline in certain categories from last quarter. And I think that the biggest of that is obviously compensation. And we highlight every year in the first quarter that we've got seasonal compensation expense that hits related to benefits that reset, payroll tax clocks that reset and stock-based compensation that we recognize in relation to employee retirements. So I think you'll see that notable decline in terms of, what I would think of some of the more fixed components of our compensation. But other than that, roughly [40%] of our costs are variable. So in periods where you've got the volatility that we've seen in sales and decline in average assets, we're going to go with that and that's going to -- and to a certain extent, that's a testimony to the fact that our cost structure is pretty flexible in periods like this.

Okay. Thanks a lot.

As to getting any kind of forecasting, I think I had to decline to do that at this point, because I just don't think anybody knows where this is going.

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

Thanks. Thanks for taking my question, and I hope everyone is doing well in these tough times. Maybe starting with the expense initiatives, Laurie, about kind of pulling back expense guidance per se, can you and Tom maybe update us on what are some of your new business initiatives you're spending on? I know there was Parametric, clearly and technology to kind of keep your technological lead there. But, can you just refresh us on some of the key initiatives?

Yes. I can start and maybe Thomas there wants to comment as well. The two big ones that we had, that we're currently undergoing, I think we've talked about number of -- on a number of calls, the first is, as you referenced, the operations and technology platform, Parametric. We are really making the investments there to build out that platform, recognizing the opportunity that we see just in terms of growth of that business in Custom Core particular. The other big one that we're well under way with right now is migration to the cloud. I think that, like many competitors, we're moving off of our -- out of our data centers and trying to actually move into cloud technology. So, we've got a relatively large project that's going there that we are going to continue to invest in. I think that we're at the tail end of most of our initiative to effectively get our trading platform standardized across the organization. So, we've done a lot with our fixed income teams getting everybody on to the same platform. And I think that we've pretty much gotten to the tail end of that, but there is still some residual work being done. I don't know if there's anything else, Tom, that you think that we should comment on.

Yes. You highlighted the ones that I would point to. Certainly. the work at Parametric and the move to the cloud are the big -- the pretty big spend items that we've made the determination that these are strategically important to us, and they're going to continue. I would say also Calvert. as a business. is an area of obvious growth and growth opportunity for us. So there are Calvert-related spending initiatives that not necessarily technology-related, but just in general that continue to be reflected and will likely continue in the future, even though we're focusing on reducing discretionary spending. So, if you want to get funded or any kind of a project, two things, it's got to be supportive of business growth in areas of demonstrated pretty clear opportunity and/or quick payback cost savings. Beyond that, it's pretty hard to get new initiatives approved.

Maybe as a follow-up to that, I mean, I think historically, you guys have watched in the -- maybe relative to some peers to try new things. And just kind of curious with that in mind, you do have your own version of these non-transparent ETF on file, not ETFM, but your other technology that you put out some announcements on that. Just maybe update us on kind of where some of that stands and if there are any kind of things that your -- other things you make besides Calvert, may be investing in, that you think are -- if you look a year or two or three down the road and you think to be new businesses for you?

Yes. Thanks for that. I would just comment on the less transparent active ETF filing that was put in front of the SEC in, let's say, February of last year or may be January of last year. So, we've had a fair bit of back and forth with the staff there. I feel pretty good about the progress there and I think we're optimistic of a favorable outcome, but we certainly can't promise that that will be achieved and don't know the timing of that. But I feel good about the prospects of entering that growing field at a time and it's really just getting started. And I think the thing that we're watching about that space, maybe a couple of things, but the most important one I would say is on the uptake of these is, will sponsors allow the same or substantially identical strategy to be offered, both at the mutual fund and as an ETF. And there certainly has been a view at times that we've heard by distributors that causes concerns for them, I think primarily come up from a business risk management compliance perspective. There's certainly no absolutes there, but that was one of the things that slowed us down with NextShares. And if that changes, and I think there are signs that it may be changing at least at some distributors, we think that's a very bullish sign for the potential of these products. Obviously, the other key will be the ability to gain asset classes other than US equities. So far, all of the approvals have been just for US equities. And certainly, our ambitions, and I'm sure everyone else's ambitions in the space, would be to come out with a methodology that can provide for good assurance of good trading results in…

Excuse me. Do we have time for one more question?

Yes, let's take one last question. Thank you.

Your last question will come from Chris Shutler from William Blair. Your line is open.

Hey, guys. Thanks for squeezing me in here. I hope you're all well. Regarding, let's see, so the core equity separate accounts, Tom, maybe just provide an update on how you see the competitive environment evolving over the medium term in that space? I know that direct indexing is getting a lot more attention these days throughout the industry, including from some of the large custodians. Thanks.

Yes. So there is, I think, a fair bit of conversation about this topic, including some related to the acquisition activity just recently announced. The actual business that we're in, I would say, the competitive situation hasn't changed very much. There have been a few new competitors that have come in and they have a -- to my understanding, haven't really taken a lot of market share. I think our experience is, this is an easier place to put together an iffy brochure and in some cases, a nice looking website. But in terms of the blocking and tackling of customized individual separate accounts, literally delivering on the promise of customization, that means every account is managed separately. It's not so easy and I think one of the things that was demonstrated during the month of March was that this is not a business for the dabblers. This is a hard thing to do well. And we as the market leader, commit an enormous amount of resources and a tremendous amount of management energy and Parametric is focused on achieving a consistently high level of client service in all market environments, including the challenging environments like we went through in March. So it's more conversation about direct indexing, that term has entered the vernacular of our business. People recognize that one of the distinctive strengths of Eaton Vance is our leadership through Parametric in that business. Nobody had any real impact on reducing our market share. We're taking our business there. We continue to prosper in that business. But there's certainly the possibility, which we're very much open to that there will be more competition from credible players. By and large, we're of the view that, that can be helpful, because the visibility of the market opportunity is still relatively low. This is still a pretty small business in the range of maybe a couple of hundred billion dollars relative to index mutual fund and index ETF opportunity that many, many, many times that, trillions of dollars of assets. So, I think there is lots of opportunity. If there is going to be more competition, there is lots of opportunity for that competition to help drive market growth, not just take business from each other.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you. And thank you, everyone, for joining us today, and we hope everyone continue to stay safe and healthy. Thank you.

This concludes today's conference call. You may now disconnect.