Eaton Vance Earnings Call Nuggets: Floating Rate Product and Clifton Outlook

Eaton Vance Corporation (NYSE:EV) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Floating Rate Product

Craig Siegenthaler – Credit Suisse: First, just looking at the floating rate product, I’m wondering if you can just update us on your thoughts in terms of capacity here, given another quarter of very strong growth and also the closed-end fund launch, and also maybe update us on your thoughts on the CLO component of this business?

Thomas E. Faust, Jr. – Chairman, CEO, and President: Yeah, so we continue to grow our bank loan business at a really brisk pace. We’re up to $38.2 billion in assets in our folding rate bank loan mandate. I think we said last time, that there were only so many quarters that we could continue to grow, at $5 billion a quarter roughly and we had another one of those. So, our ability to do this did not continue indefinitely. Scott Page who runs that business was asked at our sales meeting two weeks ago, more or less the same question you asked. His response was, we’re doing fine now. The markets are amply liquid. We have no trouble putting to work efficiently, effectively, the money that we’re getting in and that, at some point, if and when that changes, we will close the strategy to new investment. It will be an investment related decision and we’ll make that decision when liquidity in the market doesn’t really give us the ability to buy loans that we like in sufficient size to populate our portfolios. We’re not there yet. We may be approaching it over the coming quarters. We can’t time that. It depends on both factors, internal to our business, that is how fast we grow but also to external factors, on that note there have been a couple of positive developments, the supply of new loans has been increasing. There have been several fairly significant deals including some that we like that are helpful. It’s also notable that with the sell-off in the fixed income markets recently bond funds, high yield bond funds which are fairly significant owner of bank loans have been in net liquidation and they have been selling loans. So it’s been new supply both in primary and secondary market sources that’s helping the cause. But this is a big important franchise for us and last thing we want to do is to jeopardize that by being greedy in terms of growing beyond the capacity that we can effectively manage. In terms of CLOs that has been an element of the market it was huge part of the market prior to 2008, we participated actively in that, with half dozen or so CLO products that we manage working with various sponsors. We have been having discussions again as that market has picked up again, we haven’t done any transaction, but we have a couple of deals that are in process but nothing that’s really looking absolutely definitive at this time. But a couple of things that are in the works. A lot of things have to come together as you know in terms of timing and where the markets are trading at particular moment for a CLO to launch effectively. We are not there yet but we’ve got a couple of (indiscernible) and plans. One case it’s something that’s been going for, that’s been in the works for maybe nine months or so waiting for that right opportunity and the other case it’s a newer possibility that in both cases we think there is a reasonable prospect we can do deals before the end of the year but that’s certainly not an absolute…

Craig Siegenthaler – Credit Suisse: Then just as my follow-up on share count. I heard your commentary there but we really don’t know the level of options outstanding in the money and especially I know you have a little bit of visibility into the fourth quarter as into the third quarter. Tim, should we expect the share count to kind of be steady now with buyback offsetting that or could there still be an upward sloping trajectory on the share count over a longer period, over the next few quarters here?

Daniel C. Cataldo – Treasurer: It’s hard to know with any precision, Craig what’s going to happen with share count, I mean you point out one of the major driver which is the level of stock option exercises also factoring into the dilution of the price that the stock is trading at. You’re right, we do have some visibility in the expiring options and we know what will be coming due in this quarter and the amount that’s coming due, we could easily offset with stock repurchases. Now, the big variable there is how many exercises we get of options that are not coming due and that’s a little harder to predict. So, to project what it would be – share count would be at the end of the fourth quarter, if we can get in the market and be active, buy back shares, it could be flat to slightly up.

Thomas E. Faust, Jr. – Chairman, CEO, and President: I think it’s fair to say that we continue to view share repurchase as an attractive use to the Company’s capital and we generate significant free cash flow and certainly we’re in the stock of trading what we view as attractive ranges, you can expect us to continue to be a buyer on an ongoing basis.

Clifton Outlook

Daniel Fannon – Jefferies & Company, Inc.: Tom, I guess just based on the additional color on Clifton, now that you’ve had a few months, a few quarters now with it, under your umbrella, are you more or less positive about the outlook for this business, it seems a bit more uncertain just given the volatility of maybe some of the gross sales and redemptions.

Thomas E. Faust, Jr. – Chairman, CEO, and President: No, I think we’re very positive and I think feel very good about the direction of the business that’s clearly on an upward trajectory, Laurie and I were – just out in Seattle at the end of last week for a two-day business overview and strategy meeting, really covering all of Parametric’s businesses including Clifton and there’s a tremendous amount of positive momentum and energy surrounding Parametric and certainly the repositioning of their brand and their Company that was made possible the Clifton transaction is very much a foundation of that. I think the thing that is maybe somewhat different about Clifton than we might’ve appreciated on day one was not the trajectory of their business, which is very much in a positive direction, but the fact that, there’s a fair bit of noise around that trajectory related to short-term client decisions to take on or take off position, because, futures are so liquid and so if we add and subtract, we become a short-term – can be a short-term variable that moves or flows around and as you probably noticed on our slides and as we commented on, we do think it’s perhaps a good idea to highlight going forward, more this particular aspect of our business, which is different than most other things we do, here, a dollar coming in may not be a sign of long-term growth, it may be a sign of short term decision. But underneath that it is very strong growth. The Clifton people themselves look to both number of clients that they have and also new revenue generated by new business and both of those continue to be in a very positive direction. I would say on the implementation service side and I said this in my prepared remarks, but I’ll reemphasize it. Two things going on one is the certain amount of noise around our clients adding or taking away from the size of their overlay positions. But there is also at least one very significant client that’s in the process of a multi quarter build out in their implementation services position with Clifton which makes us feel confident that even among the existing clients there is an upward trajectory to the quarterly average asset balances and revenue growth. So underlying trend is positive in terms of growing new clients, revenues from new clients underlying trend in terms of growth of revenues from existing clients is also positive. However the third element is the noise in terms of quarter-to-quarter volatility and flows from current clients pretty hard to predict. We don’t expect $5 billion certainly every quarter in that, recall just one quarter ago it was a net $1 billion out. But the business is very good the transition the integration of the business is proceeding very smoothly from July 1 we have gone to a dedicated sales force covering all the Parametric products and U.S. institutional market place, and that sale, as far as the origin for that is from Clifton and so that team is now starting to cover all Parametric products and we feel real quite excited about the potential for that sales team to both grow and to become more effective serving the broad range of Parametric capabilities…

Daniel Fannon – Jefferies & Company, Inc.: Then just as a follow-up, if you could just give us some context maybe around the pipeline for the new business around the institution, you mentioned, I think a $500 million win in your prepared remarks, but any other comments would be helpful?

Thomas E. Faust, Jr. – Chairman, CEO, and President: Yeah, so, that’s a big one for us. I mentioned that, Kathleen Gaffney in that multi-strategy fixed income mandate. We do have quite a bit of bank loan flows in the works, no surprise there. Everyone likes bank loans these days. We’ve got some fairly significant opportunities in Parametrics, especially index business that tends to be relatively low fee, Hexavest has some good opportunities that we expect to fund before the end of the fiscal year. Is there anything else here, I needed to highlight, I think that’s probably the highlights. Certainly see continued positive momentum across the whole range of businesses. We see opportunities starting to emerge for us in Asia, in a way that we haven’t seen for a while in both bank loans and some interesting opportunities there for Hexavest as well, but those are not – that’s not business that we’ve won but really some solid leads on business that might come in the future.

A Closer Look: Eaton Vance Earnings Cheat Sheet>>