Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the Eaton Vance Corp fiscal first quarter earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Eric Senay, please go ahead.

Thank you and good morning and welcome to our fiscal 2019 first 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, Investors 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 2018 Annual Report and 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 and thank you for joining us. Earlier today, Eaton Vance reported adjusted earnings per diluted share of $0.73 for the first quarter of fiscal 2019, a decrease of 6% from the $0.78 of adjusted earnings per diluted share we reported for the first quarter of fiscal 2018 and a decline of 14% from the record $0.85 of adjusted earnings per diluted share we reported in the fourth quarter of fiscal 2018. The market backdrop for the first two months of our fiscal first quarter was challenging in our respects. From the end of October till the close of trading on Christmas eve U.S. equity market is represented by the S&P 500 fell 13.4% as investors fled to safety amid concerns about a really hoc issue as monetary policy and rising trade tensions. In November and December Eaton Vance lost approximately $15.4 billion in managed assets to market price declines. During the first two months of the quarter, we also saw a sharp downward shift in our floating rate bank loan fund flows reflecting rising apprehension about the future course of the economy and tax motivated sign [ph] as the end of the calendar year approached. Across our lineup of us floating rate loan mutual funds, we moved from that inflows of approximately $500 million per month and the August to October timeframe to net outflows of nearly $600 million in November and net outflows of $1.8 billion in December. Flows of our global macro absolute return, mutual funds were told long and short positions in currency and sovereign credit instruments in emerging and frontier market countries were similarly affected with net outflows accelerating from an average of just over $200 million per month in August to October, to nearly $500 million in November and over $1.1 billion…

Thank you and good morning. As Tom mentioned we reported adjusted earnings per diluted share of $0.72 for the first quarter fiscal 2019 a decrease of 6% from $0.78 of adjusted earnings per diluted share in the first quarter fiscal 2018 and a decrease of 14% from $0.85 of adjusted earnings per diluted share reported in the fourth quarter fiscal 2018. As you can see an attachment to our press release GAAP earnings exceeded adjusted earnings by $0.02 per diluted share in the first quarter fiscal 2019 to reflect reverse full of $2.9 million of net excess tax benefits recognized during the period related to stock-based awards. In the first quarter of fiscal 2018 adjusted earnings exceeded GAAP earnings by $0.15 per diluted share reflecting the add back of $24.7 million of income tax expense recognized in relation to the non-recurring impact of the tax law changes and a $6.5 million charge recognized from the exploration of the company’s option to acquire an additional 26% ownership interest and our 49% owned affiliate additional 26% ownership interest in our 49% own affiliate Hexavest, partially offset by the reversal of $11.9 million of net excess tax benefits related to stock-based awards. In the fourth quarter fiscal 2018, GAAP earnings exceeded adjusted earnings by $0.02 per diluted share to reflect the reversal of $2.4 million of net excess tax benefits related to stock-based awards. As Tom mentioned, the market backdrop for the quarter, particularly for the first two months was particularly challenging. Operating Income decreased by 11% year-over-year and 16% sequentially, primarily driven by the decrease in management fee revenue this quarter. Our operating margin was 29.8% in the first quarter fiscal 2019 versus 32.3% in the first quarter fiscal 2018 and 33.5% in the fourth quarter fiscal 2018. Having exited our fiscal…

[Operator Instructions] Your first question today comes from the line of Daniel [ph] of Jefferies. Your line is open.

Great, thanks. Actually, Gerry O'Harris [ph] sitting in for Dan this morning. Appreciate the color around the bank loan flows for into quarter but perhaps you could maybe elaborate a little bit on the outlook for flows products was a flat to even potentially declining interest rate environment going forward?

Yes, so there were a couple of things that occurred in the quarter that adversely affected the flows. One, relating to a changing view on where short-term interest rates might be going. Second, relating to where it looked like the economy might be going is the potential there for credit losses in full investment grade assets like floating rate loans. And the third was, yearend tax law [ph] selling. And as we look at the outlook from here, we’re not in a position where we’re going to see yearend tax law selling at least not anytime soon. From our read of the economy, there is not a substantial chance of a recession or a dramatic weakness occurring over the next few quarters anyway for what’s visible. In terms of where rates are going, I think we’re in a position where investors could see long term rates frankly move either way and also where there is some potential albeit diminished for continuing upward movement in short term rates. What people need to understand about bank loans is that you don’t need increases in short term rates for this to be a favorable investment. If you can look at yields on the funds today based on where rates are today and the potential for recovery overtime of some of the old ground that was lost on valuations in the December declines, we think we’re positioned for high single-digit type annualized returns in the asset class even in the absence of upward movement in short term rates which we believe many investors will find attractive.

That’s helpful. And perhaps one for Laurie looks like there is an accounting change in early November could you perhaps help us unpack this solo maybe which line items and revenue or even expense side of the P&L were impacted?

Yes, the most significant impact of the new accounting pronouncement related to the reclassification of fund subsidies so previously under the old accounting guidance, we recorded fund subsidies as a component of fund expenses and under the new guidance we need to actually bring that up to the top line and actually report that as a contour revenue amount against the management fees. So, you’ll see that we adopted the new account pronouncement using a full retrospective application so the numbers you’re seeing are full apples-to-apples comparison going back for all periods presented. But just to kind of give you the numbers that really kind of moving the numbers around a little bit on the revenue side. The subsidies that we moved from expense up to a control management fee representation where a total for the quarter were $9.2 million for the previous quarter so Q4 of 2018 were $8.7 million and then for the first quarter of 2018 more felt $5.7 million so those are the numbers that are now being netted against management fees and are affecting not only the obviously the absolute dollar amount of management fees presented but also impacting our affective fee rates and then all the calculations. So again, we did the full retrospective application all prior periods had been changed to reflect those that movement including our effective fee calculation by mandate category.

So, the net impact of that is that the revenues go down and reported expenses also go down. So, margins go up. There was also a second aspect of that change, although smaller had the opposite effect on margins. You want to talk about that?

Yes. At the end of the day and just be clear, operating income didn't change at all, this is all just movement around categories. But on the distribution side, there was a modest required between distribution expense and distribution income. And by quarter, it was somewhere in the neighborhood of $3.5 million to $4.5 million. So that was far less impactful, because obviously one of the biggest drivers of the business right now is looking at our effective fee rates in terms of our management fees. So that had far less impact, but it muted the impact on margin of the management fee change.

Okay. That's helpful. Thanks for taking our questions.

Your next question today comes from the line of our Ari Ghosh of Credit Suisse. Your line is open.

Hi. Good morning, everyone. Maybe the first one for Laurie back on expenses. I know that the restatement impact of the distribution and services lines on this quarter. But can you help us think about comp and other expense line for 2019? Is the 36% still a reasonable called margin range for fiscal '19 and then on the other expenses? Should we expect the 53 million per quarter to drift low a little bit, just given that you're done our platform in creation projects?

Yes, I think we're still continuing to invest. So, I wouldn't make any assumptions about our longer-term investments on the technology side. I think that we've got, and Tom identified in his comments earlier. We're continuing to invest both in Calvert and also on our platforming around separate accounts and will be thinking more about that as the year progresses. From a comp perspective, I think that the comp range is reasonable. I think that obviously in periods like we saw this quarter, where you had a significant downturn -- down take in the management fees, the mix between variable and fix is going to shift a little bit. But we would not anticipate seeing anything significantly changed in terms of our overall comp ratios.

Got it. And then on the fee rates. Can you talk about the core trends that drove the lower fee rate this quarter? Was more mix shift driven by product to channel within these asset classes? Any additional color here would be helpful. And then you mentioned the improvement in the organic revenue growth in January and throughout the quarter. Is -- are you seeing that in Feb as well? Can you just give us an update on how that's tracking for that?

Yes. So, let me just -- I'll start with the organic revenue growth. We don't calculate work, it's a fairly involved calculation. So, we don't do a daily updated organic revenue growth this was actually the first time, we've broken it out on a monthly basis into quarter. So, we don't -- I have a sense of exactly where we are in February, but it feels like the tone of the business remains positive. We do see daily flow data, we can approximate what that looks like from an organic revenue growth perspective. So, generally the positive tone of January continues with solid net inflows for the month to date in February. In terms of drivers of -- our declining average fee rate. It's 2 things, it is mix of business that is both across categories and within reporting categories. Generally, we're adding business or adding more business at lower fee rates. And in some cases, we're losing higher fee assets. There was also some, I would say it's a secondary effect, but also there was some re-pricing of existing mandates. Particularly in the first quarter, I highlighted in my comments. The net outflows from our bank on mutual funds and our global macro mutual funds, both of which happened to be among our higher fee strategies. So, in this particular case, it was really the outflows from those plus the fact that our inflows are in things like custom beta that are lower fees. That really accounts for the continuing movement downward. But we view this as a long-term secular trend and expect to manage our business accordingly.

I'll get back in the queue.

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

Thank you, good morning. On the exposure -- on the parametric side and custom data stuff, I know you’ve always kind of highlighted how high touch that can be. As a part of the investment process, working towards ways to maybe automate that business a bit more in order to eke out a bit more operating leverage?

Well, so we manage across parametric. I think it's something on the order of 40,000 individual separate accounts. So it has to be highly automated for that to work, particularly given average fee rates across that business in 20 basis point range. So let's say -- so we're -- we think we're already pretty good at serving customized individual separate accounts investors on an cost effective basis. We expect over time to get even better to continue investing in technology and improving our operating efficiency to drive down service costs. And those costs are primarily reflective of the number of accounts. So it's -- although our fees tend to be AUM-based or [indiscernible] O-AUM base, our cost in that business are primarily account based. So the margin is sensitive to average account size and also to our costs per account. And we very much focus on trying to drive those down as much as possible because we expect and we hope that as our business grows, we will expand the range of assets and investors that we serve. That will likely have the effect of driving down average account sizes. So we need to drive up our operating efficiency so that we can drive down our per unit operating costs, so that we can maintain profitability levels as we bring down average account sizes.

Helpful. Thank you. And then I think you just mentioned the re-pricing of some existing mandates. Could you expand on that a bit? And is it something that you think was fairly idiosyncratic to the quarter or a trend developing with -- a certain core climates or something?

No. There were no material individual repricings during the quarter, certainly nothing to call out. I was just commenting on the general trend in our business that fees are moving lower. Sometimes that's in response to agreements with individual clients, or intermediaries or fund trustees, but frankly more often it's driven by competitive forces where our sales teams or marketing organization generally recommends that we lower prices in a particular asset class because we think that will make our strategies more saleable.

Thank you.

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

Great, thanks, good morning. Maybe just following on that question on the pricing pressure; obviously mix shift there as you alluded to is a major driver of that. But within the two buckets where we saw the biggest compression in the equity area and the alternative area, I guess maybe Tom, if you could comment on to what extent that was caused by the repricing versus just simply mix shift within those categories. And if it's mix shift, should we expect that fee rate to bump back up in the next quarter, given that positive trends within geography.

Yes, Brian in both of those categories, it would certainly be overwhelmingly mix shift. I can't promise that it's going to reverse in future quarters. If you look at the alternatives category, the Global Macro Absolute Return Advantage Fund, which has embedded leverage in it, and therefore has a higher return potential commends a higher fee. We saw an increase in the average fee rate within that category a year ago or over the early quarters of fiscal 2018 as the global macro advantage version grew relative to the category as a whole. With the outflows from the global macro strategies including global macro advantage in the fourth quarter that reversed. Within equities, I would say the primary driver, there has been new business gained at relatively low fee rates. That includes a large investment council client, that includes our parametric defensive equity mandates which are at lower than average equity fee rates. Also, some of the inflows at Calvert are in index-based strategies, including their largest index-based bond, which is at 19 basis point expense ratio for the institutional share class. So it's really very much in those two cases in particular, very much driven by mix shift for.

Parametric emerging markets.

Yes, thanks, Laurie. To go on the other direction parametric emerging markets where we had I think about $700 million of net outflows in the quarter, is an above average fee rate. So it's gaining assets in lower fee strategies and losing assets in higher fee strategies. Unfortunately that's the way of the world these days in asset management.

Yes. Now it's very clear. Thank you. And then just to follow up, I mean maybe Tom if you could talk a little bit about the clear head application, how you think that's differentiated from the I think it's probably closest to sort of a T row [ph] type of application as opposed to precision. But maybe how you see that differentiated and you mentioned also if there's negative action -- no action on it. Do you think that will become a catalyst for the ETM app and maybe you could give a sense of timing on that I guess if that's possible?

Sure. So the clear hedges one of now a series of half dozen or so exempted applications before the SEC, relating primarily to the ability to offer ETFs that don't disclose their full holdings on a current daily basis. Most of those the proposition is that the fund will disclose on a daily basis using different technology, but different terminology. But I'll call them a reference portfolio that was something that looks like smells like behaves like the fund's actual portfolio but does not include all the current holdings where the delta is designed to preserve the confidentiality of current trading. The concern has been that a proxy portfolio, I'll call it, while on clear days may perform adequately particularly in asset classes like U.S. equities that in harder asset classes like international securities or less liquid securities, or across all asset classes during periods of significant market volatility, that, that won't be good enough. And that the reference portfolio and the actual portfolio will be subject to what's called basis risk, which market makers will deal with in a very clear way, which is during those times, and for those types of funds they'll deal with, by widening their bid-ask spreads and causing investor trading costs to go up. Our proposed approach called Clear Edge builds on that approach by not only disclosing a reference portfolio, but also by incorporating a swap facility whereby a market maker or other arbitrage --could enter into transactions with the fund to an effect lay off the relative performance risk between the known hedge portfolio, and the unknown underlying portfolio, so providing a much more reliable basis for ensuring that the funds can be arbitrage effectively across all market environments and across all fund asset classes. As mentioned in my comments, we were…

Okay very good, great, thanks for that. And then cost for the turnout are relatively immaterial I guess continues to stop [ph] in the distribution in the ETMF?

Relatively in material yes.

Okay great.

And we don’t expect the same kind of cost to be incurred in connection with launching Clear Edge if we’re so lucky to have that opportunity. Our expenses for next years if you look back on it were principally related to training of advisors educating the market and developing technology at the broker-dealer level to accommodate the special way in which NextShares trade. ETFs involving the Clear Edge method will still be ETFs and will trade in exactly the same way as other ETS and don’t require significant investor education.

Okay, great, thank you so much.

Thank you.

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

Good thanks good morning everyone. Could you maybe just follow up a little bit on some of the investment priorities I mean obviously time you called out, contained investment in scaling the separate account business and investing in Calvert in ESG but can you maybe talk a little about some other initiatives and I guess maybe particularly you built out London a few years ago kind of your thoughts about on progress there as well as maybe more globally.

Yes thanks so just check off you hit most of our list strategic priorities for the year, so building out our specialty solutions for high net worth investors led by the custom beta offerings, responsible investing and when you did mentioned but which I’ll just highlight is floating rate and short duration strategies building on our historical basis of market leader and [indiscernible] to encompass a broader range of short, ultra-short duration strategies. Some of them connected to Calvert some not, some primarily fund vehicles some offered a separate account but broadening our portfolio of businesses relating to short duration floating rate type assets. The fourth priority and the one you’re asking about specifically is growing our business internationally. We seem to be in a holding pattern with about 95% of our assets managed for clients in the U.S. and that’s [indiscernible] of trying to grow our business outside of the United States. You mentioned an effort that we undertook about 3.5 years ago to put in place an equity investment team in London that team continues to operate there. We are at a point where our lead strategies managed by that team recently gained three year track records and in some cases those were quite attractive three year track records. Particularly in small cap global and international equities, we see an opportunity to gain significant business in 2019, driven by the strength of that three year track record, the reputation of the team that precedes their coming to Eaton Vance. And also just the fact that small cap is an area of the market where good managers tend to talk with capacity. And so there tends to be more demand for let's call it new managers. And also there's maybe a broader belief that active managers can add value…

And maybe, thank you. Maybe kind of corollary or follow up to that. I mean look historically the firm has been reasonably acquisitive. And then looking at well, it was Calvert or Parametric many years ago, along the way in acquiring new capabilities. So when you think of the industry landscape, can you may be helpful if it's possible, kind of thinking about how are you thinking about it incremental, inorganic, opportunities are there specific -- whether it is regions or distribution channels or asset classes that are would be most interested in if there was an inorganic opportunity that came along.

Yes, we certainly subscribed to the view that the industry needs to consolidate and is likely ripe for consolidation. There have been some challenges to that, in that the rising equity markets of let's say 2017, 2016, 2017 covered a lot of sense for companies that while they were experiencing organic declines in their business, we're seeing top line growth driven by rising prices. With the declines in the market last year, particularly the acceleration of those in the fourth quarter. I think more companies are aware of the fact that on the active side and unless you have scale also in the passive side, this is a pretty tough business and that there can be significant advantages by combining to gain market strength and potentially also to realize some cost synergies. We have not done what we would consider consolidation type acquisitions. For the right kind of target we would certainly be interested, they would have -- they would have to be a cultural complementarity, there would have to be clear potential to save costs. But probably most importantly, we would have to have a clear path to understanding that revenues were going to be sustained post transaction. Always in these things that the risk is that you lose more in revenues then you save in costs. But we're looking at this, Laurie and I spent a fair bit of time chasing down different potential opportunities in most cases we proved to be to price sensitive to be the cases, we proved to be to price sensitive, to be the winners that things come to an auction, where it's outside of an auction situation where people are more focused on the past, supportive owner and supportive investment culture, we tend to do pretty well in those conversations. Objectives that…

Great. Very helpful. Thanks for taking my questions.

Thank you.

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

Thanks, and good morning. Just one for me. Just given some of the mix shift trends that we've seen and then some of the strength that you're seeing in the individual separate accounts, I just wanted to get maybe some color on how we should think about or how you guys are thinking about like the fee rate trends, but then, you probably more importantly, the incremental margins in that channel and the business overall. Laurie, I think you mentioned just given like the market dynamics and expense discipline and then some of the investments to try to drive down like improving efficiency overtime. So just any color on -- what you guys are working on? Or what can give some of the fee rate in the trends in the industry?

That's a -- that's pretty broad question. I think that we're very mindful as Tom mentioned, that when we start entering and continue to scale the separate account business, that the margin profile is a little bit different, because it is far less about the variable costs as it is about that sort of fixed cost base that you have to deal with, because it really is an account driven business. So I think we're really being very thoughtful about that business right now. Because we do recognize that going forward, if we want to scale way beyond the roughly 80,000 separate accounts across the complex that we're currently managing. And we certainly have every intent and desire to do so. We're going to have to make some investments to ensure that we can remain as efficient as possible and ensure that our platforms are scalable as possible. So I would anticipate that we will see incremental investment there, I don't think we have anything that we're quantifying at this point, but we will be making incremental investment. But to that end, if we're able to make those investments, we would hope that we would become on an account-by-account basis, effectively more -- will be able to leverage the business in a more efficient way. So we continue to think that both sides of the business sort of, our traditional active, as well as the direct indexing and other separate account parts of our business are equally attractive to us and are certainly capable of generating significant operating leverage. But we need to be really thoughtful as we continue to grow these businesses going forward.

Okay. Thanks a lot.

Okay. Very good. I think we're out of time for today. So at this point, I want to thank everybody for your participation. And we look forward to speaking with you soon.

And this concludes today's conference call. You may now connect.