Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Webcast Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Eric Senay, you may begin your conference.

Thank you very much. Good morning and welcome to our Fiscal 2018 Third Quarter Earnings Call and Webcast. With me this morning are Tom Faust, Chairman and CEO of Eaton Vance, and Laurie Hylton, our CFO. In today's call, we 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 uncertainty 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 will now turn the call over to Tom.

Good morning, everyone. Thank you, Eric. Earlier today Eaton Vance reported adjusted earnings per diluted share of $0.82 for the third quarter of fiscal 2018. That's up 32% from $0.62 of adjusted earnings per diluted share in the third quarter of last year and up 6% from $0.77 per diluted share in the second quarter of fiscal 2018. The 32% year-over-year increase in fiscal third quarter adjusted earnings per diluted share reflects 9% higher revenue and an increase in adjusted operating margins from 31.6% to 33.0% and a decline in our adjusted effective income tax rate from 36.9% to 27.1%. We ended the fiscal third quarter with $453.2 billion of consolidated assets under management. That's an increase of 12% from a year earlier. The year-over-year increase reflects net inflows of $23.2 billion and market price appreciation of $24.4 billion. In the third quarter, the Company set new highs in terms of quarterly revenue and earnings and ending consolidated assets under management. During the third quarter, Eaton Vance had consolidated net inflows of $3.7 billion, which equates to annualized internal growth in managed assets of 3%. Excluding exposure management, which has lower fees and more volatile flows than the rest of our business, we saw net inflows of $7.4 billion and 4% annualized internal growth in managed assets in the third quarter. Looking at our organic growth from a revenue perspective, in the third quarter we generated annualized internal growth in consolidated management fee revenue of 5%. Our calculation of organic revenue growth measures the change in consolidated management fee revenue resulting from net inflows and outflows, taking into account the fee rate applicable to each dollar in and out and excluding the impact of market action, adjustments in the fee rates of continuing managed assets, and any acquisitions of managed…

Thank you, Tom, and good morning. As Tom mentioned, we reported adjusted earnings per diluted share of $0.82 for the third quarter of fiscal 2018, an increase of 32% from $0.62 of adjusted earnings per diluted share in the third quarter of fiscal 2017 and an increase of 6% from $0.77 of adjusted earnings per diluted share reported in the second quarter of fiscal 2018. As you can see in Attachment 2 to our press release, GAAP earnings exceeded adjusted earnings by $0.01 per diluted share in the third quarter of fiscal 2018 to reflect the reversal of $1.3 million of net excess tax benefits recognized from the exercise of employee stock options and vesting of restricted stock awards during the period. In the third quarter of fiscal 2017, adjusted earnings exceeded GAAP earnings by $0.04 per diluted share, reflecting $5.4 million of costs associated with retiring the remaining $250 million aggregate principal amount of our 6.5% senior notes that were due in October 2017 and $3.5 million of closed-end fund structuring fees paid during the quarter. In the second quarter of fiscal 2018, GAAP earnings exceeded adjusted earnings by $0.01 per diluted share to reflect the reversal of $1.9 million of net excess tax benefits recognized from the exercise of employee stock options and vesting of restricted stock awards during the period. Adjusted operating income, which excludes the closed-end fund structuring fees paid in the third quarter of fiscal 2017, increased by 14% year-over-year and 7% sequentially. Our adjusted operating margin was 33% in the third quarter of fiscal 2018 versus 31.6% in the third quarter of fiscal 2017 and 32% in the second quarter of fiscal 2018. Our adjusted operating margin for the first nine months of the fiscal year improved from 31% in 2017 to 32.4% in…

[Operator Instructions] Your first question comes from Patrick Davitt with Autonomous Research.

Last quarter you gave us some helpful kind of specific guidance on how the flow outlook was for the current quarter, how pipelines were looking. Any chance you could update that same disclosure and kind of talk about the trend through the quarter?

So, just a little bit we can say about flow outlook and in significant parts of our business we don't have a lot of visibility. Most of the retail business, you don't have a real good lens. We know current trends. In places where we do have visibility, it's primarily on the institutional side. I guess one thing I would highlight is we have a one not-funded pending high-yield mandate which we expect to fund in the high hundreds of millions of dollar range that's pending. That's probably the most significant thing I would point to in terms of significant inflows other than the Parametric Custom Core and exposure management business where we have quite a strong backlog for new business that's coming in, again in a similar magnitude. Laurie, anything you want to add on that?

No, I think those would be the most significant inflows that we have identified in the pipeline.

Great, thanks. And then to that last point, any update on the non-U.S. opportunity for both exposure management and portfolio implementation? I think few quarters ago you had mentioned your first non-U.S. mandate in one of those, so I was just hoping for an update there.

Yes, that was probably an exposure management. I would say it's been relatively slow. We continue to grow in both. Those are both Parametric businesses. The biggest market for them in exposure management and portfolio implementation is in Australia where we have what we call Centralized Portfolio Management offering there. Business there is stable. It's an elephant-hunting business. Not a lot of visibility to new business growth but also a steady stream of ongoing business there.

Your next question comes from Ken Worthington with JPMorgan.

I apologize if I missed this. Exposure management had outflows for the second quarter in a row. Just maybe what's happening here both on the sales side and the redemption side?

I had a couple of comments about that, but I'll just review those. So we had a net gain in client. I think we were net up two clients I think or up a net four clients on a base of something like 200 I think. So, the business is growing modestly from the perspective of the number of clients with whom we have relationships. So, essentially all of the decline in assets in this quarter were due to reductions in outstanding balances with existing clients. And that can be driven by several things. So, remember what this is. This is an overlay service where if a client wants say 63% equity exposure and their underlying managers have 61% equity exposure, they can add 2% synthetically through Parametric using derivatives. Most commonly, exposure arrangement is used to equitize cash positions but it can also be used on a transition basis to add or subtract exposure to different parts of the market. Increasingly we're finding that as investors are moving to immunize their fixed income portfolios, there is an increasing role for exposure management in managing the duration of their portfolios to match their liabilities. Overall we think this continues to be a growth business for us. There is a fair bit of volatility. We've had two straight quarters now of negative $3.6 billion and negative $3.7 billion of outflows. Our history over time has been balances with existing clients over time grow but that's with fits and starts and we've certainly seen that over the last couple of quarters. So, nothing fundamental that we can really point to and say the business has changed or there's any reason to think that the negative trends in terms of flows over the last couple of quarters is going to continue. In fact, I believe for the quarter to date we're in the positive territory. So we're hopeful this will return to being a growth business in the sense of flows. We know it's a growth business in terms of the number of clients we're serving.

On ETMFs, you had been talking about the potential for the UBS relationship for a number of quarters. Is what you kind of mentioned on the call, the more limited access to the financial advisors, like why is that a surprise, has something maybe changed more recently in this relationship or was it always designed to have sort of that limited access to the UBS advisor?

So just a little bit of review, so we in I think July of 2016 we announced an agreement to gain distribution access at UBS. In November of 2017, we launched our first product at UBS, first NextShares products at UBS, and have been slowly rolling things out ever since. There is a process that UBS has imposed where every fund had to go through internal due diligence. I think essentially that process is mostly done for – it is done for all the Eaton Vance products, and I think for the non-Eaton Vance products it's mostly done. There is a requirement also that each financial advisor to sell NextShares had to take an exam or a quiz. I think it's about a half-hour test you have to take to do that, to ensure that they have working knowledge of the product structure. So, we've had some progress there. It's been frustrating that we haven't had more advisors doing this, but in the absence of distribution access through the right platforms, it hasn't been particularly compelling for advisors to sign up for this exam and to take the exam. But the biggest issue, the one that I highlighted in my prepared remarks, is that today we're only approved in brokerage and we're only improved in Strategic Advisor, and Strategic Advisor is a discretionary advisor program, meaning that – sorry, non-discretionary program, which means that when a financial advisor wants to make a trade or make some change in the portfolio on behalf of the client, the advisor needs to go to the client and get consent to make that trade, so there's not a discretion to the financial advisor, and it's called Strategic Advisor at UBS. The larger program at UBS, called PMP, is their discretionary advisory program where financial…

Got it, okay. I think I understand better. Thank you very much.

Your next question comes from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

Maybe one just on operating leverage and the margins, so given that you guys have been able to put up the positive flows, the organic revenue growth has also been favorable and you've got the markets as a tailwind, and I know you guys have been making ongoing investments, but when you look at maybe the year-over-year like operating leverage that we've been seeing in that 140 basis point range, when we think about going forward, is there anything that we should be thinking about that should either limit that or accelerate that as we look over the next call it 12 to 18 months?

I wouldn't think so at this point. I don't think that there's anything that's going to push that around a lot. I think, to your point, net flows are wonderful. They are a high-quality problem. They do put pressure on margin because there are immediate point-of-sale costs associated with it. To the extent that we continue to see strong inflows and have to pay for that, it will put pressure, but the rest of fundamentals of the business really have not changed. And I think as we file our Q and you are able to see a lot of the detail on the expenses, you're going to see that the relationships have been hanging together and there really haven't been any significant changes.

Okay, got it. And then Tom, maybe just one, this is kind of bigger picture, but just when I think about like the growth avenues going forward, you guys have made some investments for international distribution and that would be like a longer-term kind of avenue of growth, obviously NextShares is one of those, but it sounds like depending on how this UBS relationship pans out and then if you can have other wins, you guys will make a decision on different paths to go on. But I just wanted to try to get – because if I look at the net flows that you are putting up, relative to the industry you are already doing well, but when I think about maybe other kind of like avenues that you guys have been making investments, where can some of the future growth come from that maybe we're not already expecting?

I think there are a number of future growth paths. I mean I'll tart with bank loans which has been a big source of growth for us in the last couple of years. In the U.S. mutual fund market, we are I believe the largest, if not one of the two or three largest, I think we're number one in terms of total assets in mutual fund bank loan funds. I think this is a business that can continue to grow for us for quite some time. We're in an environment where short-term rates are moving up. We're in an environment where credit conditions continue to be pretty benign. We've been blessed with very strong performance across our bank loan products. I think we have two five-star rated funds. So we're I believe the market leader, if not a market leader, in the U.S. retail space, and I think the positive flow dynamic that we've seen there will continue. Other things I would point to in terms of growth avenues for us are really the whole Parametric business, starting with Custom Core, their tax-managed separate account index-based strategy business. We're at a revenue level of I think it's about $140 million or so for that business. I think there's, if we can do this the right way, I think there's a chance for that to become a business that's multiple the current size. The value add versus pure passive index funds and index ETFs is quite clear in terms of tax, the benefits in terms of customization, to provide better alignment with personal values or to better fit with other investments that a person has, and to be able to deliver that at a price point that's quite competitive versus index type offerings. I think there is tremendous upside potential for that business. I think more broadly across the Parametric platform of implementation and exposure management businesses, we see lots of room for growth across that franchise using their ability to efficiently implement portfolios of all kinds of different flavors, index-based, non-index-based, single index, multiple index, tax-managed, non, responsibly invested, otherwise, we see lots of opportunities for growth. The third thing I would mention is just the general area of responsible investing, both in the customized separate account world as done by Parametric and through Calvert. This is an industry where there's huge demand and no obvious market leader and we think we can be that or we can become that with a range of offerings, led by our Calvert brand but also including customized strategies offered through Parametric. I think this can be a much bigger part of the asset management business and I think Eaton Vance is in a position potentially to lead that.

Your next question comes from Dan Fannon with Jefferies. Please go ahead.

Tom, you had mentioned in your prepared remarks that within equities the best opportunity you see for growth is in specialty products, and that's not surprising given some of the industry trends. I guess as we think about your current mix and what that would mean just in terms of profitability or fee rate as we think about going forward with Calvert and Parametric and some of the various kind of products that would fit that category, how should we think about the trend in fee rate as a result of that?

I don't think there should be a big change in the fee rate. Some of the specialty products that we have in mind are relatively high-fee, some of the products are relatively low-fee. One of the drivers of that business has been the Parametric defensive equity strategy, which is a derivative-based strategy, which is relatively low-fee. I think it's in average in the 30 range, 35 range. As that grows, maybe that pulls down fee rates a bit. We also offer some specialty tax-managed equity strategies that tend to be at higher than average fee rate. So I think the blend of the two is probably positive. We do have I should say add in the realm of equities, we have a good relative performance here across our line-up of equity strategies; growth, value, core. Across asset classes, generally we're ahead of benchmark, generally we're ahead of peer group. We have a team of global equity analysts and portfolio managers based primarily in London that joined Eaton Vance just about three years ago and they have some strategies there that are hitting their three-year performance mark, particularly on the small-cap side, small-cap global and small-cap international. We're hopeful or optimistic that over the next 6 to 12 months we can see significant flows there for strategies that are at the higher end of our average fee rate for equities.

Got it. And then I guess, Laurie, as a follow-up on just expenses and kind of outlook for margin, I guess anything in the quarter one-time that we should be thinking about that what have you just kind of normalizing for next quarter and going forward that you would highlight? And then given the beta that we've seen thus far just to start kind of your last fiscal quarter, anything that would kind of derail kind of continued margin expansion?

No, this was an incredibly clean quarter from an expense perspective. So, I wouldn't identify anything as a one-time item that would be worthy of note. I don't think that there is any impediment to margin expansion outside of the fact that there are obviously a number of different components that are going to factor in. And as I mentioned, we're obviously experiencing significant growth in our flow story and it's a quality problem but there are costs associated with it because everything on the retail side obviously is point-of-sale, so in terms of our incentive compensation. But I don't see anything that would necessarily represent an impediment to growth over time. It's just going to be the mix of things that happen in the course of the quarter.

Got it. Thank you.

Your next question comes from Ari Ghosh with Credit Suisse. Please go ahead.

Could you remind us of the size of your international AUM, is this primarily still the fixed income business out of Germany and Asia at this point? And then perhaps related, as you think of potential M&A opportunities, is the main consideration adding product scale or is that more towards increasing your footprint in any key non-U.S. markets?

So, in terms of AUM in our international business is about 6% of the total. Maybe somebody here is looking to pull up the number, but…

So, $25 billion roughly.

$25 billion?

Yes. That's 6%.

Biggest single market is Japan, representing maybe slightly less than half of that. Australia would be probably the second biggest market. We have been adding – growing distribution presence in markets outside the United States. We have about 50 people in London. Roughly half of those are on the sales and distribution side. Roughly half of those are asset management. I think you might be referring to earlier this year we did a transaction or we took on a team, I should say, based in Frankfurt that added about I think $600 million to $700 million in managed assets in fixed income. The mix of our assets outside the United States is, as your question suggests, I think is primarily on the income side. We have a well-established business in bank loans, particularly in Japan. As we think about growing further outside United States, I would say, big picture, to me it doesn't feel like the right ratio to have only about 6% of our business represented by the 95% or so of the world's population that lives outside the United States. So, probably not the right balance. We need to grow primarily I would say on the distribution side. We feel like we've made good progress in developing a range of really global investment capabilities, highlighted I would say by our global income capabilities and our range of emerging market strategies offered through Parametric and now also through Calvert. We are interested in and open to ways to jumpstart our business outside the United States, including potentially on a transaction basis. We certainly look at properties that become available outside of the United States with the goal to jumpstart that. But the main thing we're looking for more than anything else is a bigger distribution platform outside of the United States. We think we've got largely the product that we need to be successful around the world.

Got it, very helpful. And then just back to NextShares and comments around new efforts that you are doing right now, is this in the form of new distribution platforms that you are in talks with, or is there a way you could license or sell the NextShares IP, and are there any internal targets that you have before you consider maybe like shortening the initiative or removing the earnings drag which I believe is around $8 million a year? I'm just trying to get a sense of the different options that's under consideration here.

So, I think our current spending in the most recent quarter was about $2 million. So, your $8 million a year estimate is accurate. We have been able to pull that down a bit. So the run rate I think is more in the range of $5 million to $6 million we'll say. But we need to figure out what we're going to do here. As you pointed out, one of the options would be to shut it down. If no one wants to buy NextShares, we don't want to spend $5 million or $8 million a year. We think we have something of value here. We've spent a lot of time and effort developing this. This remains the only approved, less than fully transparent active exchange traded product structure approved by the SEC. It's performing in the marketplace. It's trading well. We have I think six or seven different partner firms that are up with product in the market. But we haven't been able to sell anything and the reason we haven't been able to sell anything is because we don't have distribution access. If we could maybe wave a magic wand and make that problem go away, we would, but that's the world we live in. How we break through that is the challenge at hand. Is there something we can do in partnership with some other financial organization, either another asset manager or potentially a distributor that would break that logjam and distribution access, that's what we're focusing on. But at the end of the day, we're going to decide what to do based on what's best for our shareholders, and if that means continuing to invest in a significant way or it means moving down to a lower-level spending or it means declaring that this thing isn't going to work, we're going to make that determination based on ultimately what good it does for the Eaton Vance shareholder.

Got it. Thank you very much.

Your next question comes from Bill Katz with Citigroup. Please go ahead.

So just coming back to the spending outlook, Laurie, as you think about the next 12 to 24 months, are there any big picture projects coming down the pike that could otherwise absorb some of the incremental margin opportunity that you highlighted?

Nothing that's outside of things that we're already doing today. I think that we have referenced on previous calls that we are engaged in some larger scale technology projects. We haven't called those out separately and I wouldn't intend on doing that now, but we have been standardizing some platforms on the investment management side and I would anticipate we're going to continue to have like projects, whether it's in Boston at Eaton Vance or whether it would be in Seattle at Parametric. So I wouldn't anticipate that you're going to see a sudden spike as I think the spend has been continuous. I think that we have noted in the past, we continue to invest in the business. Not that we are immune to being mindful of margin, but we do recognize that in order to be a growth company and have a scalable platform, we have to continue to make those investments, and we don't view those as being outside the ordinary course of business. So, no, I don't say that I would call anything out specifically, but I also would not anticipate that we would see a diminishing in our spend in technology and platform scalability projects anytime soon.

I might add that one other area that I would say that's an area of focus that certainly involve some spending is the technology underlying Calvert and more connecting the Calvert research process to the Eaton Vance fundamental analysts is an ongoing project that we'll be spending more money on over the next year or so.

Okay. And then just, Tom, for you, or maybe Laurie, you've mentioned that you're still sort of prioritizing your capital to the benefit of shareholders. Could you sort of walk through how you sort of think about that today, where the stock as trading particularly at today's reaction? Seems like you're drawn pretty close to the end of your existing buyback authorization. Maybe sort of tick off your sort of top two or three priorities as we look at over the next several quarters.

I will say they remain the same. There's only so much, so many different categories, the things we can do with our cash. We can pay dividends and look to expand our dividend rate, which we have evaluated annually typically in conjunction with our October meeting. So we'll be making a decision there at our next Board meeting. Share repurchases, we've been active, we have not historically been constrained by current authorizations because we've been able to get those reauthorized so that doesn't interfere. We can invest in our business through seed capital, and we have a pretty large seed capital portfolio, we don't see any particular call on that near-term. And we can do acquisitions. You may recall, at the end of 2016 we bought Calvert which was we think a very good purchase for us both financially and even more so strategically, really putting Eaton Vance in a position to emerge as the leader in responsible investing. So, we feel like over time our record of growth through acquisitions has been quite good. The Eaton Vance as it exists today would be a very different company if we had not acquired Parametric in 2003, Atlanta Capital in 2001, Calvert in 2016, and assorted other acquisitions along the way. We will probably not be the high bidder if there's an auction for property. That doesn't tend to be our style. But if we can find something that strategically makes sense, helps us meet our goals, and is attractive at a price, that can certainly be a call on corporate capital. We have a lot of liquidity on balance, we think that's a good thing, and we're certainly committed to using that to the benefit of our shareholders.

Thank you for taking the questions today.

We have time for one more question.

Your next question comes from Brian Bedell with Deutsche Bank. Please go ahead.

This is actually [indiscernible] for Brian Bedell. So just really going back to the flows for a second, there seems some strong flows in fixed income over the past few quarters. I was wondering if you could just give a little more detail on the drivers behind that including by product and distribution channel.

Sorry, it's a little hard to hear you. So, the key drivers of our growth in fixed income over recent quarters by product and distribution channel, I think you said?

Yes.

Okay. And just to be clear, are you including bank loans in that or not?

No, but both would be helpful.

Okay, all right. So, the biggest single driver of our flows into fixed income over the last several quarters have been laddered bond separate accounts, which are both municipals and corporate. In the quarter we had positive flows in high-yield, we had positive flows in mortgage-backed securities, we had the laddered business was positive. Calvert, which became part of Eaton Vance at the end of 2016, has a nice portfolio of fixed income business which is on balanced, have been growers. So, most of all of our munis outside of the ladders have been modest growers. Core fixed income outside of the short-duration strategies haven't really done a whole lot. So, I would say it's been primarily, in recent quarters it's been primarily high-yield, it's been mortgage-backed securities, and it's been ladders, the laddered bond separate accounts sold to the retail market that have been the primary drivers. And if you want to look at it by channel, I mentioned that we have a large high-yield mandate, part of which is already funded, part of which is coming in the next quarter. That was noticeable in the current quarter on the institutional side. The balance was primarily in retail strategies, either funds or separate accounts.

Okay, I think that concludes our call for today. Thank you very much and we look forward to speaking with you soon. Thank you.

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