BlackRock, Inc.

Good morning. My name is Marcella, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the BlackRock Incorporated Second Quarter 2019 Earnings Teleconference. Our host 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. 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 second 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 Finance results, I will be focusing primarily on our As Adjusted results. Global trade tensions once again escalated in the second quarter, and market volatility followed. U.S. equities climbed to record highs, though domestic equity markets moved down 7% in May, only to increase 7% in June. Emerging markets remained challenged, and the 10-year Treasury bond traded below 2%. Clients accelerated rebalancing and de-risking activity, shifting out of equities and into fixed income and cash. BlackRock's globally diverse investment platform, combined with industry-leading risk management and portfolio construction technology, was purposely designed to not only withstand today's market volatility, but thrive in it. Our strategic positioning fosters deeper partnerships with clients, enables us to meet their goals in a variety of market environments, and drives more consistent and differentiated organic growth. BlackRock generated a record $151 billion of total net inflows in the second quarter, or 9% annualized organic asset growth. as clients once again turned to BlackRock for solutions-oriented advice to meet their long-term investment needs. Lower total organic base fee growth of 3% reflected mixed change favoring lower fee fixed income and cash assets and the impact of volatility-driven outflows from higher fee iShares financial instruments and precision exposures during the month of May. Second quarter revenue of $3.5 billion was 2% lower than a year ago. driven in part by lower securities lending revenue and lower performance fees in the current quarter. Including $61 million of costs associated with the successful launch of a closed-end fund, operating income of $1.3 billion was down 11% compared to a year ago. Earnings per share of $6.41 was down 4%, as lower operating income and a higher effective tax rate were partially offset by higher non-operating income and a lower diluted share count in the current quarter. Non-operating results for the quarter reflected $79 million of net investment income, primarily driven by the revaluation of certain strategic minority investments and higher marks on unhedged fixed income seed capital investments, but also reflected additional interest expense associated with the mid-April issuance of debt to partially finance the acquisition of eFront. Our as-adjusted tax rate for the second quarter was approximately 24%. 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. Second quarter base fees of $2.9 billion were down 1% year over year, despite the positive impacts of organic growth and acquisitions, primarily driven by lower securities lending revenue, the negative impacts of diversion equity beta and foreign exchange movements on average AUM, and strategic pricing investments. Quarterly securities lending revenue declined $33 million, or 18%, compared to record levels a year ago, due to reduced gross exposures, partially linked to hedge funding leveraging in the second half of 2018, lower demand for hard-to-borrow U.S. equities in the softer M&A environment, and lower spreads. In addition, the trend of reduced European seasonal demand continued from previous years. Diversion equity beta and FX continue to impact year-over-year base fee growth. While the S&P 500 was up 7% on average year-over-year, many markets linked to our higher fee equity products, including Asia, emerging markets, and global natural resources, were down 8% over the same time period, resulting in an overall decline of 2% in our revenue weighted equity composite index. Dollar appreciation over the last year had a negative 1% impact on our year over year base fee growth. Sequentially, base fees were up 3% as a result of higher average AUM and the effect of one additional day in the quarter. On an equivalent day count basis, our overall fee rate declined 0.4 basis points in the second quarter, reflecting this divergent equity beta and the impact of mixed shift towards lower fees and cash assets. Performance fees of $64 million decreased 30% from a year ago, reflecting lower revenue from long-only equity products. However, we have seen improved performance in many of our single-strategy hedge funds since year-end, better positioning us to generate performance fees in the second half of the year. Quarterly technology services revenue increased 20% year-over-year, reflecting continued momentum in institutional Latin and the impact of the eFront acquisition, which closed in May. The combination of eFront with Aladdin sets a new standard in investment and risk management technology and reinforces Aladdin's value proposition as the most comprehensive investment operating system in the world. As Larry will discuss in more detail, overall demand remains strong for our full range of technology solutions, and we are already seeing revenue synergies related to the combination of eFront and Elash. Advisory and other revenue of $53 million was down $25 million year-over-year, primarily reflecting lower fees for advisory and transition management assignments. Total expense was up 4% year-over-year, driven by higher G&A expense, which reflected fund launch costs and acquisition-related expense in the current quarter. G&A expense was up $77 million year-over-year, and $82 million sequentially primarily due to $59 million of product launch costs associated with end fund launches during the quarter. We exclude the impact of these product launch costs when reporting our as-adjusted operating margin. Quarterly G&A expense also included approximately $20 million in professional fees and contingent consideration fair value adjustments related to historical acquisition activities. Intangible amortization expense was up $10 million sequentially reflecting amortization of intangible assets acquired in the E-front acquisition. Our second quarter as adjusted operating margin of 43.1% was down 210 basis points from a year ago, but up 120 basis points sequentially as U.S. equity markets returned to historic highs from a year ago. Despite a more challenging overall revenue capture environment driven by current market volatility, we continue to see strong performance in future drivers of differentiated growth, including ETFs, alternatives, technology, and portfolio construction, and remain deeply committed to investing responsibly for the long term. 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 repurchases. In connection with the previously mentioned eFront acquisition, which closed on May 10th, we raised $1 billion in 10-year debt at a 75 basis point spread to Treasuries. This represented the tightest credit spread ever for a 10-year senior debt issuance by a public asset manager. In the first quarter, we completed our targeted level of share repurchases for 2019, repurchasing $1.6 billion worth of common shares. While we were really opportunistic in repurchasing additional shares during the remainder of the year, we did not repurchase any shares of common stock in the second quarter. Quarterly net inflows of $151 billion were positive across asset classes, investment styles, regions, and client types. Inflows benefited from particularly strong demand across our fixed income platform, reflecting changing client preferences, and validate our unique ability to partner with clients globally to meet their long-term needs in a variety of market environments. BlackRock's institutional franchise generated a record $87 billion of net inflows, representing 6% annualized organic-based fee growth. Flows were led by fixed income and reflected demand for our top-performing active strategies and liability-driven investment solutions. Institutional active net inflows of $73 billion were driven by $59 billion of active fixed income flows, which included two sizable client wins. BlackRock's global insights and unique ability to offer holistic solutions are resulting in more significant strategic fundings than ever before. Multi-asset net inflows reflected continued growth in our LifePath Target Date franchise, and active equity net inflows of $3 billion were primarily into quantitative strategies where long-term performance remains strong. High shares net inflows of $36 billion, representing 8% annualized organic asset growth, reflected continued growth in core, fixed income, factor, and sustainable ETFs. As previously seen in periods of significant market volatility, similar to the dynamic we saw in 2018, we saw outflows from higher fee financial instrument and precision exposure ETFs, which clients used to express real-time capital market sentiment and tactically allocate risk exposure. Quarterly outflows from these products resulted in iShares' annualized organic-based fee growth of 1% for the second quarter and had a dilutive impact on BlackRock's overall annualized organic-based fee growth. iShares crossed $2 trillion in AUM during the quarter and achieved the number one share of industry flows globally in the U.S. and in Europe and in key product areas, including fixed income, factors, and sustainable ETFs. We continue to project a doubling of the global ETF market by the end of 2023, including significant growth in fixed income, factors, and ESG, as well as in Europe. Retail net inflows of $2 billion reflected strength in BlackRock's municipal fixed income franchise and the event-driven liquid alternatives funds, as well as the successful close of the $1.4 billion BlackRock Science and Technology Trust II, BlackRock's largest closed-end fund launch in the last seven years and the industry's largest in the last five years. Momentum and our alternatives franchise continued with approximately $3 billion of retail and institutional net inflows in the second quarter. In addition, we have approximately $24 billion of committed capital to deploy for institutional clients and a variety of alternative strategies representing a significant source of future base and performance. Finally, Slackrock's cash management platforms were $26 billion of net inflows as we continue to leverage scale for clients, and deliver innovative digital distribution and risk management solutions. In summary, our second quarter results highlight the value clients place in our investment platform and our ability to use technology and risk management to develop broad-based solutions across ETFs, alpha-seeking, and alternative strategies. While we can't control market volatility, the diversification and breadth of our business positions us to serve clients in a variety of environments. helping to drive consistent and differentiated organic growth through economic cycles. We will continue to invest responsibly on behalf of clients and shareholders to execute our strategy for long-term growth.