BlackRock, Inc.

Good morning. My name is Jamie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Fourth Quarter and Full Year 2018 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer Lawrence D. Fink, Chief Financial Officer Gary S. Shedlin, President Robert S. Capito, and General Counsel Christopher J. Mead. Onlines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Meade, you may begin your conference.

Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, the results of BlackRock, to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statement. With that, I'll turn it over to Gary.

Thanks, Chris. Good morning and Happy New Year to everyone. It's my pleasure to present results for the fourth quarter and full year 2018. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and As Adjusted financial results, I will be focusing primarily on As Adjusted results. As a reminder, For one last time, all year-over-year financial comparisons referenced on this call will relate current quarter and full-year results to recast financials reflecting the adoption of FASB's Revenue Recognition Accounting Standard, which became effective on January 1st, 2018. In 2018, BlackRock delivered positive organic asset and base fee growth, increased year-over-year revenue, and expanded our operating margin, while also maintaining an investment mindset and returning significant cash to shareholders. Our performance was sustained by the investments we have continuously made to leverage our scale and optimize our strategic positioning. We generated $123 billion of long-term net inflows during the year, representing 2% organic asset and 2% organic-based fee growth, and achieved these results despite $92 billion of low fee institutional index equity outflows associated with client de-risking in a volatile equity market. The stability of our operating model allowed us to continue to invest in high growth opportunities such as retirement, illiquid alternatives, ETFs and factors. We also continue to extend our leadership in technology and lead the industry's shift from product selection to portfolio construction, all while simultaneously expanding our full year operating margin by 20 basis points to 44.3%. And after investing for growth, we returned approximately $3.6 billion of cash to our shareholders during the year, an increase of over 30% from 2017. The strength of BlackRock's diversified global investment and technology platform enabled us to continue to execute against our framework for long-term growth, despite meaningful headwinds for the asset management industry. Global equity indices declined more than any year since the financial crisis, and almost every asset class but cash posted negative returns. U.S. and European ETF flows declined 38% in 2018, and global active mutual funds saw outflows accelerate to record levels by year end. As BlackRock has historically demonstrated, environments like this create opportunities for growth as long as we have the discipline to realize them. Executing on this vision, however, requires that we move decisively to focus more limited resources where the impact will be greatest and make difficult decisions to reallocate in challenging markets. We view our ability to continue playing offense as critical to positioning us to deliver differentiated organic growth for the future. With that in mind, we recently undertook a restructuring to free up investment capacity for our most important growth opportunities by modifying the size and shape of our workforce. This resulted in a fourth quarter restructuring charge of $60 million, primarily comprised of severance and accelerated amortization of previously granted deferred compensation awards for approximately 500 impacted employees, or 3% of our global workforce. This charge appears as a single line expense item on our 2018 GAAP income statement and has been excluded from our as-adjusted results. For the fourth quarter, BlackRock generated revenue of $3.4 billion and operating income of $1.3 billion, down 9% and 12% respectively from a year ago. Nonetheless, full-year revenue of $14.2 billion was up 4% versus 2017, and operating income of $5.5 billion increased 5%. Earnings per share of $26.93 was up 20% versus 2017, reflecting the impact of a lower effective tax rate in 2018. Non-operating expense for the quarter totaled $72 million, reflecting lower marks on unhedged seed capital investments. Our as-adjusted tax rate for the fourth quarter was approximately 21%. We currently estimate that 24% is a reasonable projected tax rate for 2019 though the actual effective tax rate may differ as a consequence of non-recurring or discrete items and issuance of additional guidance on tax legislation. Fourth quarter base fees of $2.8 billion were down 4% year over year, despite positive organic base fee growth over the period and the impact of recent acquisitions, reflecting the negative effects of beta and FX and lower borrowing demand for securities lending in the current quarter. Full year base fees were up 6% for 2018, but we entered 2019 with an annualized base fee run rate approximately 6% lower than last year as a result of significant global equity market declines, which reduced BlackRock's AUM by approximately $500 billion in the fourth quarter alone. Fourth quarter performance fees of $100 million declined 65% year over year, reflecting lower fees from liquid alternative and long-only products in a very challenging year for the hedge fund industry. Underperformance during the fourth quarter will also impact performance fees for 2019, as certain quarterly and annual locking funds are below high watermarks entering the year. While we're seeing significant growth in our illiquid alternatives business, performance fees from these products are generally not booked until capital is returned to clients and represent a source of meaningful longer-term future growth. Quarterly technology services revenue grew 15% year-over-year, driving record full-year technology services revenue of $735 million as an outsized number of new institutional Aladdin clients went live in 2018, and we expanded our range of digital wealth and distribution technologies. we continue to target low to mid-teens growth in technology services revenue over the longer term. Total expense increased 4% in 2018, driven primarily by higher G&A expense, volume-related expense, and compensation. Fourth quarter G&A expense was up 9% sequentially, primarily due to planned, seasonally higher levels of marketing and promotional spend. Similar to the third quarter, the current quarter also included $31 million of contingent consideration fair value adjustments. This was primarily related to improved expectations of achieving specified performance targets on prior acquisitions and lowered quarterly as-adjusted operating margin by approximately 100 basis points. G&A expense increased 13% in 2018, reflecting higher plan levels of technology, data, and marketing spend. Approximately 50% of the year-over-year increase in G&A expense was comprised of non-core items, such as deal, tax, and Brexit-related professional fees, contingent consideration fair value adjustments, product launch costs, and FX remeasurement expense. While we continually focus on managing our entire discretionary expense base, we would currently expect 2019 G&A expense to be essentially flat to our core level of spend in 2018. Direct fund expense was up $103 million, or 12%, in 2018, primarily reflecting higher average AUM as a result of growth in our iShares franchise. For the full year, compensation expense increased $68 million, or 2%, primarily reflecting higher headcount and higher operating income, offset by lower levels of performance fees. Our full year comp to revenue ratio of 34.4% declined 110 basis points versus 2017. The decline was primarily associated with lower performance fees, the impact of ongoing technology investment, and successful implementation of our IHUB strategy. Recall that year over year comparisons of fourth quarter compensation expense are less relevant because we determine compensation on a full year basis. We see significant opportunities to better serve clients in this environment, and BlackRock remains committed to investing in key growth areas. As evidenced by our recent restructuring, we are always margin aware and remain committed to optimizing organic growth in the most efficient way possible. Away from the P&L, we also prudently used our balance sheet to position the business for continued success. During 2018, we allocated $1.2 billion of new seed or co-investment capital to our products, resulting in a net increase to our total portfolio of approximately $500 million. We closed the strategic acquisitions of Citi Banamex Asset Management, furthering our goal to be a full solutions provider in Mexico, and TandemBan Capital Partners, enhancing our private credit capabilities. In addition, we continue to expand our technology portfolio with minority investments in Acorns, the country's fastest-growing micro-investing app, and InvestNet, a leading provider of intelligent systems for wealth management and financial wellness. And we remain committed to returning excess cash to shareholders through a combination of dividends and share repurchases. We repurchased approximately $1.7 billion worth of shares in 2018, including $525 million in the fourth quarter, as we sought to take advantage of attractive relative valuation opportunities in the current market environment. Since inception of our current capital management strategy in 2013, we have now repurchased almost $7 billion of BlackRock stock, reducing our outstanding total shares by 7%. At present, based on our capital spending plans for the year and subject to market conditions, including the relative valuation of our stock price, we would anticipate share repurchases aggregating at least $1.2 billion during 2019. In addition, Consistent with our predictable and balanced approach to capital management, our board of directors has declared a quarterly cash dividend of $3.30 per share, representing an increase of 5% over the current level. BlackRock is having deeper and more strategic conversations with a greater number of clients than ever before, even as many clients are deferring investment decisions and de-risking in the face of an uncertain market landscape. Fourth quarter long-term net inflows of $44 billion representing 3% annualized organic AUM and base fee growth, were led by flows into strategic focus areas including iShares, multi-asset strategies, and illiquid alternatives, partially offset by continued outflows from lower fee institutional index equities. Global iShares generated $168 billion of net inflows for the year, representing 10% organic growth for 2018. Importantly, We saw momentum into year-end as seasonal tax planning, growth in fee-based wealth management, and demand for efficient exposure supported by significant market liquidity generated back-to-back record net inflow months in November and December. Fourth quarter iShares net inflows of $81 billion represented our highest flow quarter on record and an annualized organic growth rate of 18%. 49 iShares ETFs had over $1 billion in net inflows in 2018, and we once again captured the number one industry share of global, US, European, equity, and fixed income ETF flows for the year. Strength in the iShares core continued in 2018 with $106 billion of net inflows, almost twice that of the next largest player, representing an approximately 45% share of industry core ETF flows. Equally important, during the fourth quarter, about 60% of iShares net flows were in higher fee ETFs, including financial instruments and precision exposures outside the core. BlackRock generated full-year retail net inflows of $21 billion in a challenging year for the mutual fund industry, which experienced historic outflows in December. BlackRock's inflows were led by our broad active fixed income range, our multi-asset income fund, and liquid alternatives. Retail outflows in the fourth quarter were driven by active fixed income, reflecting industry pressures in the unconstrained and high-yield categories where we have significant market share. Unconstrained products were impacted by the volatile rate environment as investors shifted into short-duration mutual funds and ETFs. High-yield and emerging market debt funds experienced outflows driven by risk-off sentiment in credit. BlackRock's institutional franchise generated 2% organic-based fee growth for the year, reflecting strength in illiquid alternatives, multi-asset solutions, and liability-driven investment strategies, despite almost $100 billion of low-fee index equity outflows and elevated active fixed income outflows, which reflected several large client redemptions associated with client M&A, cash repatriation, and manager consolidations. In a record year for our illiquid alternatives business, BlackRock now has approximately $23 billion of committed capital to deploy for institutional clients in a variety of illiquid strategies, representing almost $170 million in incremental base fees and the opportunity for significant performance fees over time. Finally, BlackRock's cash management platform continues to increase share by leveraging scale and delivering transformative distribution and risk management technology through both Cash Matrix and Aladdin. While for the year 2018, net inflows were impacted by two large planned redemptions totaling almost $40 billion, base fees grew 9%. In summary, our diversified business model once again delivered differentiated organic growth, record technology services revenue, operating leverage, and significant capital return in 2018. We are committed to continuously evolving, investing in, and disrupting our platform to benefit client needs. We believe BlackRock's platform is as well-positioned as ever to meet client needs and deliver long-term value for shareholders. With that, I'll turn it over to Larry.