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Eaton Vance Corp. (EV)

F3Q12 Earnings Call

August 22, 2012 11:00 a.m. ET


Dan Cataldo - Treasurer

Tom Faust - Chairman and Chief Executive Officer

Laurie Hylton - Chief Financial Officer


Dan Fannon - Jefferies

Michael Kim - Sandler O'Neill

Ken Worthington - JPMorgan

Adam Beatty - Bank of America Merrill Lynch

Jeff Hopson - Stifel Nicolaus

Robert Lee - Keefe, Bruyette & Woods



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Greetings, and welcome to the Eaton Vance Third 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. Thank you. Mr. Cataldo, you may begin.

Dan Cataldo

Good morning and welcome to our third quarter earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; and Laurie Hylton, our CFO. 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 the Eaton Vance 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. Following positive net flows in the second quarter, the third quarter of fiscal 2012 for Eaton Vance fall into net outflows and $3.8 billion of withdrawals from our large cap value strategy, more than offset $2.4 billion of net flows into other strategies. The quarter’s net outflows coupled with $3.2 billion of price decline in managed assets, caused our assets under management to fall 2% during the third quarter from $197.5 billion to $192.9 billion.

Reflecting lower average managed assets, our revenues declined 2% and our operating income declined 4% from second quarter levels. The quarter’s $0.43 per share of adjusted earnings were also down $0.04 from the $0.45 of adjusted earnings per diluted share we reported for the second quarter. A highlight of our quarter was the June 18 announcement of our intent to acquire a 49% interest in Hexavest Inc., a Montreal based manager of equity and tactical asset allocation strategies for institutional clients.

As of the close of the transaction on August 6, Hexavest managed $11 billion in client assets, invested permanently in global and global ex-U.S. equity mandates, and employing a predominantly top down investment style. Post-transaction employees and shareholders of Hexavest continue to control the company through their remaining 51% ownership. Eaton Vance assumes primary responsibility for Hexavest new business development in all markets outside of Canada and will over the next few weeks be launching the mutual funds in the U.S. and offshore markets to be sub-advised by Hexavest.

As previously disclosed, under the terms of the transaction, Eaton Vance will have an option to acquire an additional 26% interest in Hexavest following the fifth anniversary of the closing. We view the Hexavest transaction as a winner for Hexavest and its clients and a winner for Eaton Vance. Partnering with Eaton Vance enables Hexavest to better realize its business growth objectives while remaining a small, tightly knit organization focused on investment performance and client service. Expanding our global and international investment capabilities has long been a strategic priority for Eaton Vance and our partnership with Hexavest goes a long way towards achieving that goal.

Hexavest gives Eaton Vance access to a top performing global equity manager whose sales efforts have heretofore been restricted to the institutional market and focused on a handful of geographic regions. By applying Eaton Vance's powerful distribution capabilities, we believe we can accelerate Hexavest's growth and elevate the revenues and profits relatively quickly. Although we expect the Hexavest transaction to be accretive to Eaton Vance earnings from day one, what has us most excited is the potential for Hexavest profit contribution to grow meaningfully as their business scales up from its current size. We look forward to reporting on the progress of the Eaton Vance/Hexavest partnership in future calls.

Returning to the operating results of our third fiscal quarter, a continuing bright spot was the performance of our Parametric affiliate. This structured emerging market discipline continues to be one of the real success stories of the year, generating almost $700 million in net flows for the quarter and $2.8 billion for the first nine months of the fiscal year. While pursuing the continued build out of Parametric structure emerging markets business, we are also working to translate its marketing success to Parametric's newer structure of active strategies, which includes global and international equity, global small cap, commodities, currency and absolute return, all of which are in the process of building performance track records and a critical mass of managed assets.

At just under $50 billion in assets under management, Seattle based Parametric represents about 25% of Eaton Vance's consolidated AUM. Parametric has been a consistent growth engine inside Eaton Vance from when we acquired a controlling interest in September 2003. At that time, Parametric managed just over $5 billion in client assets focusing on tax efficient core equity portfolios managed for family offices and high net worth individuals. Over the past nine years, Parametric has grown its business nearly ten-fold, expanding its investment and capabilities to include a complement structured active, structured tracking centralized portfolios management and equity option strategies.

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