Eaton Vance Corp. (EV)

F4Q11 and Full Year 2011 Earnings Call

November 22, 2011 11:00 am ET

Executives

Tom Faust – Chairman and Chief Executive Officer

Bob Whelan – Chief Financial Officer

Laurie Hylton – Chief Accounting Officer

Dan Cataldo – Manager of Financial Planning and Analysis

Analysts

Roger Freeman – Barclays Capital

Jeff Hobson – Stifel Nicolaus

Ken Worthington – JP Morgan Chase

Michael Kim – Sandler O’Neill

Bill Katz – Citigroup

Jerry O’Hara – Jefferies & Company

Cynthia Mayer – Bank of America

Marc Irizarry – Goldman Sachs

Douglas Sipkin – Ticonderoga Securities

Presentation

Operator

Greetings, and welcome to the Eaton Vance FQ4 2011 Earnings Release. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Dan Cataldo. Thank you, Mr. Cataldo, you may begin.

Dan Cataldo

Good morning, and welcome to our FQ4 2011 earnings call and webcast. Here this morning are Tom Faust, Chairman and CEO of Eaton Vance; Bob Whelan, our CFO; and Laurie Hylton, our Chief Accounting Officer. Tom and Bob will comment on the quarter and then we will take your questions.

The full earnings release is available on our website at www.eatonvance.com under the heading “Press Releases.” Please also refer to the charts available on that website as we make our comments this morning as they will provide additional color on the quarter.

Please be aware 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 uncertainties in our operations and business including but not limited to those discussed in our SEC filings. These filings, including our 2010 Annual Report and Form 10(k) are available on our website or on request to the company at no charge.

I’d now like to turn it over to Tom.

Tom Faust

Good morning and thanks, everyone, for joining us. October 31 st marked the end of our FQ4 and full F2011. While the first nine months of the fiscal year was a time of relative tranquility in the financial markets, FQ4 was anything but smooth sailing. Over the course of August and September, Treasury yields fell sharply, credit spreads widened significantly, and market volatility spiked in response to the dual US government budget and Eurozone crises. Reflecting higher market risk levels and moderated growth expectations, the S&P 500 fell approximately 15% from the beginning of the quarter to the market bottom on October 3 rd, erasing the entire previous year’s gains. And then quite remarkably the markets reversed course, with the S&P 500 closing October as one of its best months in recent decades.

While rollercoaster rides can be entertaining at the amusement park, in the financial markets they present difficulties for asset managers like Ethan Vance. Those of you who have heard our presentation at the Bank of America Merrill Lynch Financial Services Conference last week know that I characterized F2011 as a year of achievement amid challenges. The past fiscal year certainly did have its challenges, particularly in FQ4, but it was also a year of significant achievement for Ethan Vance. We reached new highs in terms of gross sales, revenues, and most importantly net income and earnings per share. It took a while but we finally surpassed our previous peak earnings levels reached prior to the 2008-2009 bear market, but the year ended with more of a whimper than a bang as volatile markets took their toll on our business results in FQ4 – more on that in a few moments.

For F2011 we had adjusted earnings per diluted share of $2.00, an increase of 28% over the $1.56 of adjusted diluted EPS in F2010. Adjusted diluted EPS was $0.47 in FQ4 of both F2011 and F2010. Reporting adjusted earnings per diluted share is a new practice for Eaton Vance that is designed to help investors understand the true current earnings power of our business. The major difference between our GAAP earnings and adjusted earnings is that adjusted earnings add back the markups or markdowns in the estimated value of non-controlling interests in our majority-owned subsidiaries that we are required under GAAP to include in current earnings.

In addition to backing out non-controlling interests value adjustments, our adjusted earnings calculation deviates from GAAP through other items that management deems nonrecurring or non-operating in nature. Please refer to the table we have included in the press release for further detail on our adjusted earnings.

Our managed assets of $188.2 billion at October 31 st, while down from our mid-year peak of $203 billion, were $3 billion higher than managed assets at the end of F2010. We had our best year ever in terms of gross inflows with$54.9 billion in new sales and other inflows up 4% from F2010. We did however see a declining trend of sales results as the fiscal year progressed, with FQ4 gross sales of $11.1 billion down 19% sequentially, and down 21% year-over-year, reflecting the challenging market environment in FQ4. A highlight of FQ4 from a flows perspective was the strength of our institutional business, largely driven by demand from our floating rate bank loan and pair metric-structured emerging market strategies. Combined, we raised $2.2 billion in institutional separate accounts and comingled funds in these two disciplines in the quarter.

Net flows for the full fiscal year were $3.9 billion, which represents a 2% organic growth rate. While in line with average industry growth rates, these results fall well short of our internal 10% organic growth target and our 11% average annual internal growth rate for the preceding decade. Net flows for FQ4 were a negative $2.7 billion as redemptions and other outflows of $13.8 billion exceeded quarterly gross inflows. In the category of “all good things must come to an end,” this marks the conclusion of our streak of 22 consecutive quarters of positive net inflows. We attribute the disappointing quarterly net flows primarily to the difficult markets and high investor anxiety that prevailed through FQ4. Consistent with the external environment, we saw improvement over the course of the quarter: negative $2 billion of flows in August, negative $700 million of flows in September, and flat flows in October – certainly a trend that we hope to build on in F2012.

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