BlackRock, Inc.

Good morning. My name is Gigi, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated First Quarter 2019 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. Meade. All lines 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. Mead, you may begin your conference.

Good morning, everyone. I'm Chris Mead, 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 which list some of the factors that may cause the results of BlackRock to differ materially from what we see today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So with that, I'll turn it over to Gary.

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the first quarter of 2019. 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 our as-adjusted results. BlackRock generated $65 billion of total net inflows in the first quarter, or 4% annualized organic asset growth. reflecting our differentiated solutions-based approach to addressing client needs. Our first quarter results reflect the benefits of our integrated business model and the investments we've made to diversify our investment platform, enhance our risk management and technology capabilities, and build local expertise at global scale. First quarter revenue of $3.3 billion was 7% lower than a year ago, reflecting the impact of fourth quarter equity market declines on our 2019 base fee entry rate. Operating income of $1.2 billion was down 11% compared to a year ago, while earnings per share of $6.61 was down 1% as lower operating income and a higher effective tax rate were partially offset by higher non-operating income and a lower share count in the current quarter. Non-operating results for the quarter reflected $135 million of net investment income, driven by higher marks on our unhedged seed capital investments and the revaluation of certain strategic minority investments. Our as-adjusted tax rate for the first quarter was approximately 22% and included a $22 million discrete tax benefit related to stock-based compensation awards that vested during the quarter. We continue to estimate that 24% is a reasonable projected tax run rate for the remainder of 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. First quarter base fees of $2.8 billion were down 5% year over year, primarily due to the negative impact of non-U.S. equity markets and foreign exchange on average AUM. and an associated mixed change favoring lower fee fixed income assets compared to a year ago. On a constant currency basis, base fees were down 3% year over year. Sequentially, base fees were up 1%, or 3%, after adjusting for the impact of a lower day count in the first quarter, driven by market appreciation, organic base fee growth, and higher securities lending revenues. On an equivalent day count basis, BlackRock's fee rate increased from 18 basis points in the fourth quarter to 18.2 basis points for the first quarter of 2019. Performance fees of $26 million decreased meaningfully from a year ago, reflecting lower revenue from liquid alternatives and long-only equity products. As noted on our fourth quarter earnings call, investment underperformance entering the first quarter resulted in certain locking funds falling below high watermarks. We saw improved performance in many of these funds during the last three months, which better positions us for the remainder of the year. Continued momentum in institutional Aladdin resulted in 11% year-over-year growth in quarterly technology services revenue and 17% year-over-year growth on a trailing 12-month basis. As Larry will discuss in more detail, overall demand remains strong for our full range of technology solutions. Advisory and other revenue of $49 million was down $22 million year-over-year, primarily reflecting lower earnings attributable to an equity method investment. On a sequential basis, the decline reflected lower fees from advisory and transition management assignments. Total expense decreased 4% year-over-year, primarily due to lower compensation and volume-related expense. employee compensation and benefit expense was down $54 million, or 5% year over year, reflecting lower incentive compensation driven in part by lower operating income. Sequentially, compensation and benefit expense was up 5%, primarily reflecting higher seasonal payroll taxes and an increase in issuance and mark-to-market of deferred compensation, partially offset by lower incentive compensation driven in part by lower performance fees. Direct fund expense was down $19 million, or 7% year over year, primarily reflecting the negative impact of equity and foreign exchange markets on average index AUM. G&A expense was up 1% year over year, reflecting higher technology expense, partially offset by the impact of product launch costs in the first quarter of 2018. Sequentially, G&A expense decreased $61 million, reflecting seasonally lower marketing and promotional expense, lower professional services expense, and $31 million of contingent consideration fair value adjustments related to prior acquisitions recorded in the fourth quarter of 2015. Our first quarter as-adjusted operating margin of 41.9% was down 220 basis points from a year ago, reflecting the negative impact of markets and foreign exchange on quarterly base fees and a strategic decision to continue investing responsibly for the long term. While we are always margin aware, we have deep conviction in the stability of our business model, which allows us to better navigate the financial challenges associated with short-term market volatility. Since year end, beta has been constructive, organic growth has improved, and the number of our hedge funds are back above high watermarks, all of which contributed to 9% growth in our assets under management and positioned us well for the second quarter. We remain focused on funding our most critical strategic initiatives to optimize organic growth and significantly advance two of these strategic initiatives, technology and illiquid alternatives, during the first quarter. We are confident these investments will enhance outcomes for clients and generate long-term value for shareholders. Last month, we announced a binding offer and exclusive agreement to acquire eFront, the world's leading end-to-end alternative investment management software and solutions provider. As clients increasingly add to their alternatives allocations, the ability to seamlessly manage portfolios and risk across public and private asset classes on the single platform will be critical. The combination of eFront with Aladdin will set a new standard in investment and risk management technology and reinforce Aladdin's value proposition as the most comprehensive investment operating system in the world. Subject to the French Works Council process, we expect the transaction to close in the second quarter. We have also announced the first close of long-term private capital. LTPC is an innovative, perpetual direct private equity fund designed to create value for the long term, limit reinvestment risk, and operate with lower volatility than comparable vehicles. It's a crucial new component of BlackRock's comprehensive alternative investment capabilities, which now include hedge fund solutions, real assets, private credit, and direct private equity. LTPC is another example of BlackRock's ability to assess the market, organically develop our capabilities, and deliver the products and solutions clients need most. Our capital management strategy has always been to first invest in our business and then return excess cash to shareholders through a combination of dividends and share resources. As previously announced, we increased our quarterly cash dividend by 5% to $3.30 per share of common stock, and we purchased $1.6 billion worth of common shares in the first quarter, including $1.3 billion we purchased in a private transaction at approximately $413 per share. We have now completed our targeted level of share repurchases for 2019, but will remain opportunistic should relative valuation opportunities arise. BlackRock is having deeper and more strategic conversations with a greater number of clients than ever before. and our first quarter results highlight the value of the investments we've made to assemble the industry's broadest offering of active and index investment strategies, coupled with technology and portfolio construction tools. The diversity of our platform positions us to serve clients' needs in a variety of market environments and enables us to generate consistent and differentiated organic growth. Quarterly net inflows of $65 billion were positive across active and index strategies, as well as in our cash management business. BlackRock's institutional franchise generated $29 billion of net inflows, representing 4% annualized organic asset growth. Flows were led by momentum and fixed income, reflecting continued demand for liability-driven investment solutions and our top-performing active strategies. Institutional active net inflows of $15 billion were driven by $13 billion of active fixed income flows reflecting strong activity in our insurance client channel. Momentum in our illiquid alternatives franchise continued into 2019. Record quarterly net inflows of $6 billion were led by infrastructure, real estate, private credit, and the previously mentioned first close of LTPC. In addition, we have approximately $22 billion of committed capital to deploy for institutional clients in a variety of strategies. representing a significant source of future base and performance fees. iShares net inflows of $31 billion reflected global client demand for a diverse range of strategies, including core, fixed income, factor, and sustainable ETFs. We saw record quarterly flows in fixed income iShares as clients continue to adopt ETFs for corporate, emerging market, and high yield bond exposures. Approximately 40% of iShares flows in the quarter were in higher fee products outside of the core, resulting in annualized organic-based fee growth of 7% in line with organic asset growth in the quarter. Retail net outflows of $1 billion reflected industry pressures in international equities and world allocation strategies, partially offset by strength in BlackRock's municipal fixed income franchise and event-driven liquid alternative funds. Finally, BlackRock's cash management platform saw $6 billion of net inflows as we continue to grow our cash business, leverage scale for clients, and deliver innovative distribution and risk management solutions through a combination of Cash Matrix and Aladdin. In summary, our first quarter results highlight the breadth of our investment strategies coupled with our industry-leading technology and portfolio construction capabilities and an ability to service clients on a global scale. While we will never be immune to beta headwinds, and the impact those headwinds can have on our short-term financial results, we intend to remain focused on investing in our highest growth priorities and exercising prudent expense discipline to ensure we meet the critical needs of clients and shareholders alike. Our goal remains to deliver consistent and differentiated organic growth in the most efficient way possible. With that, I'll turn it over to Larry.