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 Corp Fourth Fiscal Quarter Earnings Conference call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Eric Senay, you may begin your conference.

Thank you and good morning and welcome to our Fiscal 2018 fourth 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. In 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 and Form 10-K, are available also on our Web site or upon request at no charge. I will now turn the call over to Tom.

Good morning. Thank you, Eric, and thanks, everyone for joining us. Earlier today Eaton Vance reported adjusted earnings per diluted share of $3.21 for the fiscal year ended October 31st, which is an increase of 29% from the $2.48 of adjusted earnings per diluted share we reported for fiscal 2017. In the fourth -- for the fourth quarter of fiscal 2018, we reported adjusted earnings per diluted share of $0.85, which is up 21% from the $0.70 per diluted share of earnings we reported for the fourth quarter of fiscal 2017, and up 4% from $0.82 per diluted share in this fiscal year's third quarter. Both the annual and quarterly results we reported today are new record highs for the company. While lower income taxes have contributed significantly to this year's earnings growth, pre-tax adjusted operating income increased 14% for fiscal 2018 as a whole and was up 4% in the fourth quarter versus the fourth quarter of last year. We ended fiscal 2018 with consolidated assets under management of $439.3 billion, up 4% from 12 months earlier with a volatile October raising the fiscal year's previous market gains, all our AUM growth in fiscal 2018 was attributable to net inflows. We generated $17.3 billion of consolidated net inflows in fiscal 2018, representing 4% internal growth in managed assets. Excluding exposure management, which has lower fees and more volatile flows than the rest of our business, net inflows for the year were $25.6 billion in fiscal 2018. This equates to 8% internal growth in managed assets and nearly matches the $26.4 billion of net inflows we delivered in the -- in fiscal 2017. Fourth quarter fiscal 2018 consolidated in -- net inflows of $2.1 billion represent 2% annualized internal growth in managed assets or 5% annualized internal AUM growth, excluding…

Thank you and good morning. Tom mentioned fiscal 2018 was a record year for Eaton Vance in terms of revenue, net income and earnings per share both on a U.S GAAP and adjusted basis. As you can see in attachment two of our press release, we are reporting adjusted earnings per diluted share of $3.21 for fiscal 2018, an increase of 29% from $2.48 of adjusted earnings per diluted share in the prior fiscal year. Adjusted earnings exceeded U.S GAAP earnings by $0.10 per diluted share in fiscal 2018, reflecting the add back of $24 million of income tax expense recognized in relation to the nonrecurring impact of the tax law change that became effective in January. And a $6.5 million charge recognized upon the expiration of the company's options to acquire an additional 26% ownership interest in our 49% owned affiliate Hexavest. These add backs were partly offset by the reversal of $17.5 million of net excess tax benefits that new accounting guidance requires us to recognize in connection with the exercise of employee stock option and vesting of restricted stock awards during the year. In fiscal 2017, adjusted earnings exceeded GAAP earnings by $0.06 per diluted share, reflecting the add back of $5.4 million of costs associated with retiring the company's senior note that were due in October 2017. $3.5 million of structuring fees paid in connection with the 2017 initial public offering of a sponsored closed end fund and $0.5 million related to increases in the estimated redemption value of noncontrolling interest in our affiliates redeemable at other than fair value. Adjusted operating income, which excludes the closed-end fund structuring fees paid in fiscal 2017, increased by 14% year-over-year. On the same adjusted basis, our operating margin improved to 32.6% in fiscal 2018 from 31.8% in fiscal…

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

Great. Thanks. Actually Jerry O'Hara sitting in for Dan this morning. Just a question around fee rates, and specifically the alternatives. It looks like that segment despite some outflows that you cited has continued to kind of march forward or higher with that fee rate, perhaps you could give a little color or context around that dynamic?

Yes. So the assets in that category are unusually concentrated in the global macro absolute return and global macro absolute advantage mutual funds. The fee rate on the advantage strategy, which has effectively built-in leverage is significantly higher than the base strategy. So as Eaton Vance global macro advantage grows relative to Eaton Vance global macro absolute return fund, which has happened, you will see the fee rate in that asset category move up.

Understood. That’s helpful. And then perhaps one on Hexavest flows just sort of looking at Slide 7, it seems to be little -- I guess, a little choppy. Perhaps you could talk a little bit about kind of what the trends look like there. And then one maybe kind of follow-on, if there's any color you might be able add on quarter-to-date flow trends. I know it's still early, but that would be appreciated. Thank you.

Yes, maybe I will add. Laurie or Eric, take the quarter-to-date, but just on Hexavest, Hexavest is a top down global equity manager based in Montreal. We own 49%, acquired that position in 2012. Since then, they’ve for the most part been pretty defensively positioned and certainly have been over the last, I will say 2.5 years. Not surprisingly, that meant that until recently they’ve lagged the market in terms of their performance, and again, not surprisingly, given that they lag the market, they’ve seen harder times winning new business and have seen some acceleration of outflows not surprising, but given that they’re defensively positioned and that’s well known to their clients, we'd think that performance during the market rallies of 2017 and earlier parts of this year. It shouldn't have been, it shouldn't have been a surprise. Given the turn in the market recently, not surprisingly, they’ve been performing better. They’ve had good performance, well above market performance since the market started to correct. May not happen immediately, but certainly our expectation is that as that happens, they will see less pressure on outflows and potentially be in a position to see a greater trend of new business won as well.

Great. Thanks. And then -- yep, go ahead.

Go ahead.

No, I was just going to say then any additional on quarter to date would be helpful.

This is Laurie. We don’t have a lot of visibility into the current quarter to date, given that we are only a couple weeks into it, but I think that as Tom noted, their performances has improved significantly. We are waiting to see how that’s actually going to play out in largely institutional business.

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

Hi, good morning and thanks for taking my questions. On the bank loan product, it seems like the industry is focusing maybe a touch more on the credit deterioration more so than higher interest rates, and at least we’ve seen a reasonable step up in the outflows from the bank loan ETFs. To what extent do you think the ETF outflows is sort of a leading indicator for what you will see in floating rate products? And then maybe just how are the floating rate products holding up more recently given what we are seeing elsewhere?

Yes. Just focusing on the U.S mutual fund business, we’ve seen outflows from the bank loan categories. So similar to what you are describing on the ETF side in the last -- based on industry data that we’ve seen in the last four weeks of industry flows for bank loans have been negative. As you point out that, we believe that relates to increasing concerns about credit. We’ve not been immune to these effects. We’ve seen some outflows at least on some days from our bank loan strategies this month. So there has been a reversal at least partly from the strong inflows that we experienced over the course of fiscal 2018. It's a little hard to say whether there's carry through on this current concern. There has been a little bit, but not much price volatility in the bank loan sector and in some ways that’s healthy, because one of the concerns has been that as new loans are brought to market, they’re brought with tighter spreads or that rates reset on existing loans, which brings down the spread we earn over LIBOR. With the softening of the market, there's we think a healthy effect of mitigating some of those downward pressures on spreads. So -- but everything cuts both ways here, right. So people are more concerned about credit. So that means spreads on new issues are better from the standpoint of buyers, but it also means that at least in the short run we are experiencing some retail flows in connection with growing concerns about credit markets. I would say that looking at the underlying fundamentals, which ultimately will govern whether this is a good time or a bad time to be selling or buying bank loans, certainly, our team is not seeing anything in our portfolios to suggest that there's been a change in credit market conditions. That doesn’t mean that there won't be at some point. We’re pretty long into the current economic cycle. We’re mindful of that just like everyone else is, but we’re not seeing anything in our portfolio that would appear to justify the market concern or the softness in prices that we’ve been seeing in loans over the last couple of weeks. And that softness -- pricing softness has been quite modest. It is not surprising, given the flow dynamic we've experienced.

Okay, great. Thank you for that. And then just maybe an update on NextShares. I believe during the quarter one of your partners either announced or did dissolve, I think two of their NextShares funds. Maybe what happened there and what were the -- you usually call the expenses that you’ve incurred. If you did, I apologize, I missed it. But if not, what were the expenses you incurred for NextShares this quarter?

Yes. So the announcement that you are referring to was not during the quarter. It was actually the last week that Gabelli announced that they would be converting two of their four NextShares funds into mutual fund. Hasn't happened yet, but they’ve announced that they will be doing that. I don’t know exactly when, but sometime coming up. I guess, the implications of that maybe are obvious, which is that they’ve been disappointed with the sales success that they’ve had with those strategies and think they might be able to sell more with the same strategy and our conventional mutual fund structure. That doesn’t surprise us. We’ve seen -- we look closely at all the mutual -- all that flows into NextShares' funds, not just our own, but those of our licensees and there really hasn’t been a lot of activity, which is reflective of the limited distribution that we’ve had. We’ve been as talked about on the last quarter, we’ve in the absence of significant sales, we’ve been ramping down our marketing activities and bringing down expenses related to NextShares. We are in the range roughly of $2.5 million to $3 million annual spending currently.

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

Great. Thank you. Good morning. Thanks for taking my questions. Maybe starting with you Tom, I would like to -- maybe like dive into a little bit more about your comment about positioning Eaton Vance for kind of a changing environment. Maybe give us some sense of specific initiatives that maybe you’ve underway that you think are doing that? And then, as part of that, has the kind of rapidly changing environment in your view at all maybe changed how you think about perspective M&A. Obviously, you -- Calvert and others in the past, you’ve done these bolt on transactions, but -- now you kind of maybe change how you are thinking in light of M&A, particularly given what investors are doing that kind of change the landscape at all?

Yes. Thanks, Rob. The -- there are several things going on related to changes in the industry dynamics that I'd point to. Maybe first and most obviously with the market sell off over the last few weeks that has an immediate effect on revenues and so we’re -- we will be tightening up certain spending initiatives in response to that, assuming that there are some carry forward of that. You shouldn’t expect large changes from us on the expense side. We’ve generally taken the view that our strong financial position and margins and cash balances give us the flexibility to invest during periods of market weakness and we will continue to do that. Some of the things on the new initiative side that I'd point to relating to a changing industry environment, clearly our lineup of customized index and laddered bonds, separate accounts, very much play to a couple of current themes in the market. One of those is the growth of passive versus active and the other is the increased desire among investors and intermediaries for customized positions. We’re the market leader in each of those markets and while we expect increased competition, we also see those as significant growth areas where we’re very committed to maintaining our leadership position. Another thing I would point to is our long-term initiative related to responsible investing. You mentioned the acquisition of Calvert, we think we are still in the early stages of growing out our capabilities in responsible investing and seeing that translate into increasingly important part of our business. This is more cyclical than long-term, but we do see a cyclical benefit to us from our floating rate, short duration, adjustable rate, ultra short, a lot of categories of income strategies where we’ve planted seeds and are now seeing strong…

I mean, would it be fair to say that you don’t feel that you particularly have say a scale issue in the U.S mutual fund business or anything that you feel kind of your size and scale that’s good?

I fell like our size and scale is good, not in the context of $500 billion is necessarily at scale. It might or might not be. What we believe is more relevant is the scale of our leading investment franchises. We are certainly at scale world class by any measure in bank loans. We are certainly at scale world class in the Parametric Custom Indexing business and their exposure management business, in the muni and corporate ladder business with Eaton Vance, our global income business, our high yield business, certain of our equity strategies, we could go on. But that to us is critical is that when an advisor or gatekeeper or consultant is thinking about introducing an asset class into a client's portfolio, what providers are on the short list of names that they consider while performance is important there, so also is scale. You need to have a critical mass to be on that short list and in places where we are active, by and large we think we are big enough to be on that shortlist. We are looking to diversify our business. A key part of that is playing into the trend and responsible investing that continues to emerge. But if I had a choice of doing an acquisition that took Eaton Vance from, let's call it $500 billion in AUM to a trillion in AUM, that did nothing for us in terms of our growth rate and did nothing for us in terms of our current earnings power, I wouldn’t see a lot of point in doing that kind of a transaction.

Your next question comes from the line of Brian Bedell with Deutsche Bank. Your line is open.

Great. Thanks. Good morning, folks. Maybe just Tom, you made some good comments earlier in the presentation on the portfolio implementation in custom beta on the equity side and the covered call writing outflows. Maybe you could just give a little perspective on your outlook for flows within the portfolio and Parametric portfolio implementation products and the sales environment moving into 2019 and whether you see any competition that is emerging that might mute that or do you view this as continuing to be an exceptional growth at that growth category in the industry?

Yes. So the -- so within the portfolio implementation segment that we report, that’s all Parametric business. A smaller part of that is what they call centralized portfolio management, lower fee, relatively modest flow expectations in that business. But the bigger opportunity there's, the bigger business, the higher fee business and the bigger opportunity is what they refer to as custom core. So this is customized index-based strategies offered in a variety of markets, but U.S retail into the high net worth, multi-family office market and also offered in institutional versions of that strategy. This is a big business for Parametric and one where we’ve very measure, we know market leadership today. There have been announcements of players that are either bringing out new products into this business or increasing their offerings there, that doesn’t surprise us. We think this is today something on the order of maybe let's say $100 billion to $200 billion in assets across the industry, hard to say exactly what that is. But when we look at the opportunity versus multiple trillions of dollars in indexing, just reflected in index mutual funds and index ETFs, we see significant opportunity for custom indexing to grow relative to what we call bulk indexing. Custom indexing has clear tax advantages, in that if you own the same portfolio of stocks in an individual separate account, you can do tax loss harvesting and recognize the value of losses currently, which you cannot do in a fund structure. Also in a fund structure, typically you cannot fund positions in kind, therefore the deferring recognition of gains on initiating a position. Also in a separate account format, you’ve the ability to customize holdings to fit the clients' responsible investing criteria or to account for oversight positions the investor might have in other parts of his or her portfolio. These are things you can't do in a bulk index fund or index ETF. We are quite convinced that custom indexing is positioned to grow and to grow rapidly. And we are quite determined that as that happens, that we will maintain our leadership position in that market. We think increased competition is inevitable, but we also think extensive growth of that market is also inevitable and we’re happy to welcome competitors, because in part, they are going to help make the case that this is a better way to invest in indexed strategies than what many investors are doing today, which to our thinking, if you are investing significant amounts of taxable money in an index-based strategy, with very limited exceptions, you are going to be better off being in a custom index type strategy just -- such as Parametric offers. So we think there is lots of growth opportunity and while we expect more competition, we see lots of room for Parametric to grow in that market even with more competition.

This is a pretty durable positive net flowing segment of your business even with that and obviously if we do get into tougher market environment in '19, you have a lot of confidence in this still being a positive net flow contributor.

Certainly based on everything we can say.

Yes, okay. And then just follow-up on expenses. Thanks for your comments, Laurie on that. Just two of the buckets, the fund related expenses and the other categories those are obviously elevated this quarter. So the comments -- at least on that, but as we think about our run rate going forward in fiscal '19, do we expect to revert back on that? And then, I guess, just from an operating margin perspective for fiscal '19, if we have say a flat market environment and you continue doing what you are doing on the organic growth side, is that a good recipe for significant positive operating leverage.

Well, just addressing the first question related to fund expenses, I would think that I would not anticipate that our fund expenses in the first quarter are going to go down for all the reasons we highlighted on the call as well as in our text. There are couple of products that have been performing well, where we do have sub-advisory expenses and we’ve also got some funds subsidies associated with those. I don't anticipate given the growth in those franchises that we are going to see a decrease there. So I would not anticipate seeing that go down. In terms of our other expense categories, there are a few significant drivers both for the quarter and for the fiscal year that I would highlight. Facilities, I think we talked a little bit about some increased depreciation expense we took earlier in the year, but looking forward, Parametric is in the process of moving their corporate offices and we will have some incremental headwinds there in terms of our rent expense and other facilities expenses associated with that move. And I would think if you are thinking about your sort of the first quarter of fiscal '19, I would think a mid single-digit expense increase there would be appropriate something in the neighborhood of 5%. In terms of technology, as we’ve noted, we’ve been making some significant investments in terms of our trading platforms and also making investments in Calvert's research platform. I would anticipate, we will continue to make investments in 2019 and also in that sort of investment technology category you got market data that is just going up as a function of doing business in this industry. So I would also anticipate in those areas you are going to see some probably mid single-digit percentage increases just…

I would now like to turn the conference call back over to our presenters.

Do we have any other questions left in the queue. I think we’ve time for maybe one more.

We’ve a question from the line of Bill Katz with Citigroup. Your line is open.

Okay. Good afternoon. Thanks so much for squeezing me in. I really appreciate it. So just maybe a two-part question. Tom, you mentioned that doubling your AUM for sort of marginal growth or earnings power is probably not likely. So you step back and think about your franchise. You think about the five initiatives you laid out. Where, if any, do you see some product gaps or geographic opportunity maybe to potentially expand the platform?

Yes, we’ve a pretty big geographic gaps in almost everything we do. We’ve good coverage of the U.S and limited coverage outside the United States. So we are still about 95% of our assets and revenues are sourced from the U.S. So finding the right partner and finding the right opportunity to grow outside the United States is certainly something that we'd consider, in terms of acquisition activity. Having said that, I feel like a bit of a broken record, we’ve been thinking that way for a long time, but haven't found a suitable partner and frankly don’t know that there's a suitable partner that could -- would make sense for us to jumpstart our business growth outside the United States. We have been growing organically outside the United States, we’ve expanded our office in Tokyo. We added a new facility earlier this year in Frankfurt, we are opening an office in Dublin. So we are growing incrementally, but still would love to find an opportunity to jumpstart that international acquisition -- international expansion through an acquisition, but haven't been able to find it yet. In terms of product areas, I think we’ve pretty good coverage across the landscape of most equities that we -- equity categories, public equities that we carry about fixed income, floating rate income, multi asset strategies. We’ve looked a bit at private assets, maybe there are places either in real estate, private real estate or private debt that might make sense as a complement to our public market securities businesses. So those are things that are possibly of interest and we kick the tires on a few things there, but haven't bitten on anything as yet, but we were interested. We look at lots of different things on the acquisition front. But today have yet to bite on anything.

Okay. And just one last one. Thanks for that answer. Just as I think about your distribution margin and maybe we are not capturing all these ins and outs between what’s going through the management fee line versus what goes through the distribution expense line. How do you sort of see that ratio evolving over the next several years given your focus of where you are growing other products or by distribution segment?

So just to clarify, what do you mean by distribution margin, Bill?

Well, just if I look at the [indiscernible] revenues less the expenses and think about that ratio, again I apologize if some of that might be embedded in the manufacturing fee space on private mix or even geographic contribution, but it just looked to me like the distribution expenses relative to the revenues were disproportionate over the last couple of quarters, I’m trying to see if there's more of a trend that [indiscernible].

Yes, so you are looking at distribution relative to revenues, relative to distribution expenses, is that right? Do you want to try and answer that?

I think the only thing I would say is obviously there's significant pass-throughs in terms of distribution, service fee income and distribution expense and one other component that's in the distribution expense obviously is other marketing expenses associated with for example, our marketing support payments to our third-party intermediaries, which is never an expense line item that’s going down, given that it's largely driven by asset growth. So we haven't noticed anything structurally in terms of a significant change there. So I’m not sure what is driving your question, but hopefully recognizing that there are other distribution line items including promotion and marketing that are going into the distribution expense line item that might actually be factoring into what you're seeing.

I think, we may have lost the line. Okay. Very good. Well, operator I think this concludes our call for today.

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