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Eaton Vance Corp. (EV)

F2Q 2012 Earnings Conference Call

May 23, 2012 11:00 ET


Dan Cataldo – Treasurer

Tom Faust – Chairman and Chief Executive Officer

Laurie Hylton – Chief Financial Officer


James Howley – Sandler O’Neill

Bill Katz – Citigroup

Jerry O’Hara – Jefferies & Company

Ken Worthington – JPMorgan

Cynthia Mayer – Bank of America/Merrill Lynch

Roger Freeman – Barclays Capital



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Greetings and welcome to the Eaton Vance Corp’s Second Quarter Fiscal Year 2012 Earnings Release. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dan Cataldo, Treasurer of Eaton Vance Corp. Thank you, sir. You may begin.

Dan Cataldo

Thank you and welcome to our second quarter fiscal 2012 earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO; Laurie Hylton, our CFO; and we will first comment on the quarter and then we will take your questions.

The full earnings release and charts we will refer to during the call are available on our website, under the heading Press Releases. 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 operations and business, including but not limited to those discussed in our SEC filings. These filings including our 2011 Annual Report and Form 10-K are available on our website or on request at no charge.

I’d now like to turn the call over to Tom.

Tom Faust

Good morning and thank you for joining us. I am happy to report that our second fiscal quarter marked the return to positive organic growth for Eaton Vance with $567 million of net inflows into long-term funds and separate accounts during the quarter.

Our second quarter net flow results showed sequentially improvement across all categories of investments, equities, fixed and floating rate income, and alternatives, and among funds and separately managed accounts of all flavors, institutional, high net worth and retail. We achieved positive net flows primarily on the strength of net sales into Parametric’s structured emerging market equities, our tax managed bond and high yield income strategies, Global Macro Absolute Return, Parametric’s index tracking and overlay products.

We reported $0.45 of adjusted earnings per diluted share in the second quarter, which compares to adjusted diluted EPS of $0.47 in the prior quarter and $0.52 in the year ago quarter. As noted in the press release, earnings per diluted share were increased $0.01 and $0.03 in the prior and year ago quarter respectively by gains recognized on the 2011 sale of our interest in Hong Kong-based equity manager, Lloyd George Management.

And as Laurie will address in a few minutes, earnings in the first quarter of this fiscal year also benefited from $0.02 of other investment gains that did not recur in the second quarter. If there was a theme for our second quarter, I would say, it is improvement. In the quarter, we saw improved gross and net flows, improved investment performance, improved financial strength, and most importantly, improving opportunities. As I comment further on the results for the quarter and our prospects going forward, please refer to the PowerPoint slides on our website. We ended the second quarter with managed assets of $197.5 billion, 3% ahead of where we finished the first quarter and within 3% of our peak AUM reached 12 months ago.

Gross sales and other inflows in the quarter were $13.2 billion, up 15% from the first quarter. The increase was driven largely by 26% higher income product sales and strong flows into Parametric’s emerging market and index tracking strategies. Redemption and other outflows of $12.7 billion were flat versus the first quarter. The $567 million of net inflows for the second quarter translates into organic growth of just over 1%, not where we want it to be, but a decided improvement after two quarters of negative flows.

We have seen an improving investment performance trend for our strategies in a number of asset classes. We now have 31 funds with at least one share class with an overall Morningstar rating of 4 or 5 stars, up from 25 such funds a year ago. The improving performance of our family of municipal bond fund is coming at an opportune time as the prospect of higher federal income taxes in 2013 moves ever closer.

Floating rate bank loans continued to be a top performing and top selling franchise for us with significant growth potential. The combination of attractive current yields, solid underlying credit fundamentals, and a little to no exposure to potential loss of principal value due to rising interest rates creates a compelling investment opportunity. Industry – industry flow data provided by the Investment Company Institute continues to show a general reluctant among U.S. retail investors to invest in domestic equities instead of favoring international equities, taxable income, and tax free income.

We have competitive products in each of these categories as shown on the slide listing our four and five star ranked funds. Funds managed by our Atlanta Capital and Parametric affiliates remain an important part of our performance story. Within U.S. equities, large cap value strategy appears to be turning the corner in terms of its relative performance.

Following two months of strong relative returns, the Class A shares of Eaton Vance large cap value fund is now ranked in the top half of its Lipper peer group for a year-to-date, 1-year and 5-year performance and in the top quartile over 10 years. Performance over three years continue to lag most peer funds reflecting our funds more competitive positioning coming out of the market bottom in early 2009. We were optimistic that large cap value fund is now positioned for prolonged period of good performance.

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