BlackRock, Inc.

Good morning. My name is Jerome, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third 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. 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 questions during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, 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, which lists 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 third 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. The third quarter was once again marked by significant market volatility associated with ongoing global trade tensions and geopolitical uncertainty around the world. While U.S. equities finished the quarter up 1%, emerging market equities ended the quarter down 5%, and the U.S. dollar continued to appreciate against the euro and pound. As we have seen in previous periods of market volatility, industry flows slowed in the quarter, and clients continued to rebalance and de-risk favoring fixed income and cash over equities. Even within equities, investors demonstrated caution, shifting from momentum to value and favoring high dividend and low volatility funds. BlackRock's business model, however, continues to work as well as it ever has. Over the last 12 months, we have generated approximately $350 billion, or 5% total organic growth. Our fully integrated one BlackRock business model was purposely built to bring together the entire firm, to meet client needs in today's evolving ecosystem. Our globally diverse investment and technology platform, including our risk management and portfolio construction tools, is positioned to deliver not simply products, but comprehensive solutions to clients, no matter the market environment. We remain focused on thoughtfully investing in our business for the long term and capturing growth in areas of highest client demand. These include iShares, especially higher growth and higher fee segments like Factors, fixed income, sustainable, and megatrend ETFs, illiquid alternatives, and technology where we continue to evolve Aladdin's multi-asset analytics and portfolio construction capabilities. These investments will position BlackRock to continue delivering higher and more consistent organic revenue growth across market cycles. BlackRock generated $84 billion of total net inflows in the third quarter for 5% annualized organic asset growth, driven by continued momentum from our industry-leading fixed income and cash businesses. Total annualized organic-based fee growth of 3% reflected this mixed shift toward lower-fee products, but was also impacted by volatility-driven outflows from higher-fee market-driven iShares ETFs in August. In particular, EEM, our flagship emerging markets ETF, saw $6 billion of outflows during the quarter. Third quarter revenue of $3.7 billion increased 3% year-over-year, and operating income of $1.5 billion rose by 7%. Earnings per share of $7.15 were down 5% compared to a year ago, however, as higher operating income and a lower diluted share count were offset by lower non-operating results and a higher effective tax rate in the current quarter. Non-operating results reflected $7 million of net investment loss, primarily driven by the mark-to-market valuation of our minority stake in InvestNet. Recall that non-operating results in the year ago reflected a $40 million gain attributable to the disposition of our equity interest in DSP. Non-operating results versus a year ago also reflected additional interest expense associated with BlackRock's mid-April debt issuance to partially finance the eFront acquisition. Our as-adjusted tax rate for the third quarter was approximately 23% compared to 16% a year ago, which reflected $90 million of discrete benefits. We estimate 23% is a reasonable projected tax run rate for the fourth quarter 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. Third quarter base fees of $3 billion were up 3% year over year, primarily driven by organic growth, the positive impact of market beta and acquisitions, partially offset by the negative impacts of foreign exchange and strategic pricing investments, and lower securities lending revenue. Dollar appreciation over the last year had a negative 1% impact on our year-over-year base fee growth, while lower cash spreads led to a 6% year-over-year decline in securities lending revenue. As previously mentioned, BlackRock's differentiated platform has generated total organic asset growth of almost $350 billion over the last 12 months, but divergent beta and mixed change Items that we can't control continue to impact our absolute level of base fee growth as compared to growth in average AUM. While the S&P 500 was up 4% on average year over year, the BlackRock Revenue Weighted Equity Index was actually down 1% as markets linked to our higher fee equity products in Europe, Asia Pacific, the emerging markets, and natural resources were flat to down 8%. In addition, in the recent market environment, clients' preferences has favored lower risk assets, and approximately 85% of our organic growth over the last year has been in fixed income and cash, which have relatively lower fees than other asset classes. While base fees were up 3% sequentially, 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 point versus the second quarter, reflecting this ongoing impact of mixed shift and divergent data. Performance fees of $121 million decreased $30 million year over year, reflecting lower fees from alternative and long-only equity products. Sequentially, performance fees increased as a result of a single European hedge fund that lost annually in the third quarter, and once again delivered strong performance over the last 12 months. Quarterly technology services revenue increased 30% year-over-year, reflecting the impact of the eFront acquisition and continued growth in Aladdin. Demand remains strong for our full range of technology solutions and digital distribution tools. Total expense was up 1% year-over-year, primarily driven by higher compensation expense and expense linked to the eFront acquisition, offset by lower G&A and direct fund expense. G&A expense was down $29 million from a year ago, primarily due to lower transaction-related and foreign exchange remeasurement expense, partially offset by higher technology expense in the current quarter. Sequentially, G&A expense was down $86 million, primarily due to $59 million of product launch costs incurred in the second quarter and lower contingent consideration fair value adjustments and foreign exchange remeasurement expense in the current quarter. Consistent with prior years, our fourth quarter G&A spend will be seasonally higher than the first three quarters of the year. At present, after adjusting for the acquisition of eFront, we anticipate that our full year core G&A spend will be generally in line with the full year guidance we provided in January. As a reminder, core G&A expense excludes the impact of product launch costs, consideration fair value adjustments, foreign exchange remeasurement expense and transaction related fees. Direct fund expense was down 4% year-over-year and 5% sequentially despite higher average AUM due to a benefit recognized in the current quarter. We would expect direct fund expense to return to a more normalized level in the fourth quarter. Intangible amortization expense was up $15 million year-over-year reflecting a full quarter of intangible asset amortization related to the E-front acquisition. Our third quarter as-adjusted operating margin of 46% was up 180 basis points from a year ago, reflecting significantly lower levels of non-core G&A expense in the current quarter. Ongoing market volatility is contributing to increased beta divergence and client preference for fixed income and cash, leading to a more challenging industry-wide revenue capture environment. However, BlackRock's differentiated business model, financial position, and strategic alignment with high growth opportunities allows us to continue investing responsibly for the long term. Our capital management strategy is specifically designed to support this invest-first ideology and then return excess cash to shareholders through a combination of dividends and share repurchases. During the first quarter, we completed our targeted level of share repurchases for 2019, repurchasing $1.6 billion worth of common shares, and stated that we would be opportunistic with respect to repurchasing additional shares during the remainder of the year. In line with that commitment, we repurchased an additional $100 million worth of common shares during the third quarter, taking advantage of attractive relative valuation opportunities that arose during August market volatility. Quarterly net inflows of $84 billion benefited from continued strong demand for iShares, alternatives, fixed income, and cash, reflecting BlackRock's unique ability to meet client needs in a variety of market environments. iShares ETFs are unique in having a broadly diversified set of products that serve both long-term buy and hold wealth investors and institutional asset owners, as well as tactically oriented institutional investors who value secondary market liquidity and a vibrant options ecosystem. iShares net inflows of $42 billion, representing 8% annualized organic asset growth, reflected continued momentum in fixed income, factor, and sustainable ETFs, each a market segment that has strong long-term growth potential and a higher fee relative to BlackRock's total fee rate. Quarterly fixed income ETF flows of $24 billion were driven by clients' ongoing adoption of these products as a critical component of their portfolios. Factor and sustainable ETFs generated $13 billion of quarterly flows as investor demand for these exposures, especially in the U.S. and Europe, increased in the current environment. BlackRock is the industry leader in all three of these fast-growing categories. Retail net inflows of $7 billion reflected broad-based strength and active fixed income, partially offset by outflows from multi-asset world allocation products. BlackRock's U.S. wealth advisory franchise continues to gain share and has seen year-to-date organic growth of 8% in alpha funds and SMAs, while the industry as a whole remains flat. Institutional and retail demand for alternatives continued, with $3.5 billion of net inflows into illiquid and liquid alternative strategies in the third quarter, driven by real estate, private credit, infrastructure, and event-driven hedge funds. In addition, we have approximately $22 billion of committed capital to deploy for institutional clients in a variety of alternative strategies, representing a significant source of future base and performance fees. BlackRock's institutional franchise generated approximately $4 billion of net inflows in the quarter, positive institutional index flows driven by continued strength in LDI, more than offset approximately $4 billion of institutional active outflows in the quarter, which were primarily due to several client-specific active fixed income redemptions. Net inflows into higher fee quantitative active equities and alternative strategies resulted in overall positive institutional organic-based fee growth for the quarter. Finally, BlackRock's cash management platform saw $32 billion of net inflows, a post-financial crisis record and cross the 500 billion AUM threshold as we continue to leverage scale for clients and deliver innovative digital distribution and risk management solutions through Cash Matrix and Aladdin. Cash is a strategic asset class, and BlackRock's diverse cash management offerings, including Prime, ESG, Government, and Muniz, position us well to serve our clients' cash needs and continue to grow our market share. In summary, our third quarter results once again demonstrate the resilience of our globally diversified investment and technology platform to drive consistent and differentiated organic growth in a variety of market environments. Our focus remains on delivering the solutions our clients need to achieve their long-term investment objectives. We can't control market volatility or the impact it may have on our revenue capture quarter-to-quarter. but we can ensure that we meet the needs of our clients by generating exceptional risk-adjusted performance across all of our investment products. We continue to leverage our competitive positioning and the stability of our financial model to invest responsibly in high-growth areas such as ETFs, alternatives, and technology that are critically important to clients and shareholders alike. With that, I'll turn it over to Larry.