BlackRock, Inc.

Good morning. My name is Maria, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2020 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 Escapito, 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, 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 list some of the factors that may cause 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 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 2020, and I hope everyone and their families are remaining safe and healthy in the current environment. 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 adjusted financial results, I will be focusing primarily on our adjusted results. BlackRock's steadfast focus on serving clients, employees, shareholders, and the communities in which we operate continued in the third quarter. Our strong performance during the quarter and throughout the year amidst unprecedented market uncertainty is a testament to the investments we have made over time to build a diverse and resilient business model, the strength of our BlackRock brand, and the commitment of our amazing employees to always deliver for clients. Our broad-based platform, pairing diverse investment capabilities with best-in-class technology and rigorous risk management, has now generated almost $400 billion of total net inflows over the last 12 months, representing 7% organic base fee growth. Our voice is resonating with clients more than ever. and our ability to address their current challenges through whole portfolio solutions, no matter the market environment, is a direct result of a strategic vision we embraced well over a decade ago and grounded in the strength of our one BlackRock culture. BlackRock generated $129 billion of total net inflows in the third quarter, representing 7% annualized organic asset growth and 9% annualized organic base fee growth. As markets strengthened during the third quarter, BlackRock leveraged the entirety of its global platform to help clients meet long-term needs. Not only did we see positive flows across all asset classes, investment styles, and regions for the quarter, we have also generated positive flows over the last 12 months across each product type on our active platform, evidencing the strength of our alpha-generating capabilities. Record third quarter revenue of $4.4 billion increased 18% year over year, while operating income of $1.8 billion rose 17% and reflected $83 million of costs associated with a successful closed-end fund launch in late September. Record earnings per share of $9.22 was up 29% compared to a year ago, also reflecting higher non-operating income and a lower effective tax rate and diluted share count in the current quarter. Non-operating results for the quarter included $116 million of net investment income, driven primarily by mark-to-market gains on our seed and co-investment capital, but also reflected incremental interest expense associated with our second quarter debt issuance to pre-refinance our May 2021 debt maturity. Our adjusted tax rate for the third quarter was approximately 23%, which we estimate is a reasonable projected tax run rate for the fourth quarter of 2020. Third quarter base fees of $3.2 billion were up 8% year over year, primarily driven by 6% organic asset growth and the positive impact of market beta and foreign exchange movements on average AUM, partially offset by strategic pricing changes to certain products. Sequentially, base fees were up 9% from the second quarter, reflecting similar dynamics, but also the positive impact of one additional day in the quarter and the negative impact of lower securities lending revenue, which declined $57 million from record second quarter levels as cash spreads tightened in response to the Fed's intervention in money markets. The impact of lower securities lending revenue during the quarter was the primary reason we saw a sequential decline of 0.2 basis points in our annualized effective feed rate, despite the positive impact of strong organic base feed growth. Record quarterly performance fees of $532 million increased significantly on a year-over-year and sequential basis, reflecting strong overall performance from our single strategy hedge fund platform. A significant portion of the year-over-year increase in performance fees was attributable to a single hedge fund that locks annually in the third quarter and once again delivered exceptional performance over the last 12 months. Quarterly technology services revenue increased 9% year-over-year, While recent growth has been impacted by extended sales and contracting cycles in the current environment, we remain committed to low to mid-teens growth in technology services revenue over the long term. Demand for integrated and resilient investment management technology to support effective risk management and operational efficiency has meaningfully accelerated in the complex remote work environment brought on by the COVID-19 pandemic. Advisory and other revenue of $42 million was down $20 million year-over-year, primarily reflecting the absence of PennyMac equity method earnings following the charitable contribution of our remaining equity stake in the first quarter. Total expense for the third quarter was up 19% year-over-year, primarily driven by higher compensation and G&A expense. Employee compensation and benefit expense increased 27% from a year ago, driven in part by higher incentive compensation associated with higher performance fees and operating income. And G&A expense was up $76 million year-over-year, reflecting $80 million of closed-end fund launch costs associated with the successful close of the $2 billion BlackRock Capital Allocation Trust. Recall that we exclude the impact of these product launch costs when reporting our as-adjusted operating margin. The increase in year-over-year G&A expense also reflected higher technology expense, including certain costs related to COVID-19, and lower marketing and promotional expense, which is where we categorize our T&E expenditures. Core G&A expense for the third quarter, which among other items excludes product launch costs and certain incremental costs associated with COVID-19, was essentially flat with the second quarter, and we would continue to expect core G&A expense for the year to be generally in line with the estimates we provided in July. Our third quarter adjusted operating margin of 47% was up 100 basis points from a year ago, benefiting from significant performance fees in the current quarter. We remain margin-aware in the current environment and committed to optimizing organic growth in the most efficient way possible. Our long-term strategic growth plan continues to focus on accelerating growth in Aladdin, iShares, and private markets, keeping Alpha at the heart of BlackRock, delivering whole portfolio solutions, and becoming the global leader in sustainable investing. Our capital management strategy remains first to invest in our business and then to return excess cash to shareholders through a combination of dividends and share repurchases. As a reminder, in the second quarter, we completed our targeted level of share repurchases for 2020, including the repurchase of $1.1 billion of common shares from PNC at $415 per share. While we did not repurchase any shares of common stock in the third quarter, we intend to be opportunistic should attractive relative valuation opportunities arise during the remainder of the year. As you will hear more from Larry, BlackRock has never been better positioned to deliver for clients as we leverage our unique insights, guidance, and solutions to help clients meet long-term investment needs. Third quarter organic asset growth of $129 billion reflected the diversity of our platform, with strong flows across the franchise, especially in iShares, active strategies, and cash. iShares net inflows of $41 billion, representing 8% annualized organic asset growth and 7% organic base fee growth, reflected continued momentum in fixed income and sustainable ETFs. Two strategic product categories will leave leading market share. and inflows into higher fee precision exposures as institutional buyers utilize these highly liquid trading instruments to express tactical market views. Retail net inflows of $20 billion, representing 11% annualized organic asset growth and 12% annualized organic-based fee growth, were positive in both the U.S. and internationally and across all major asset classes. Inflows reflected broad-based strength and active fixed income, equity, liquid alternatives, and multi-asset funds. As previously mentioned, retail multi-asset flows also included the successful close of the $2 billion BlackRock Capital Allocation Trust closed-end fund, made possible by the top decile performance of our global allocation investment team. BlackRock's institutional franchise generated approximately $37 billion of net inflows in the third quarter, reflecting demand for our top-performing active strategies and industry-leading index capabilities and renewed client interest and fixed income. Institutional active net inflows of $30 billion were also broad-based across all product categories and were led by $12 billion of active fixed income flows, reflecting strong activity among insurance clients. Multi-asset net inflows of $11 billion were driven by continued growth in our LifePath, TargetDate franchise, and OCIO client wins, where BlackRock's global insights and unique ability to provide whole portfolio solutions enable us to be the partner of choice to clients. Across our retail and institutional client segments, we generated a record $10 billion of active equity net inflows, representing our sixth consecutive quarter of positive flows in this product category. Flows were led by top-performing franchises in technology, health sciences, and U.S. growth equities, as well as quantitative strategies. We remain well-positioned for future growth in our active businesses with over 80% of fundamental active equity, scientific active equity, and taxable fixed income assets performing above their respective benchmarks or pure medians for the trailing five-year period. Overall demand for alternatives also continued, with nearly $5 billion of net inflows into illiquid and liquid alternative strategies during the third quarter, driven by infrastructure, real estate, and liquid alternatives. Momentum in fundraising remains strong, as we have approximately $23 billion of committee capital to deploy for institutional clients and a variety of alternative strategies, representing a significant source of future base and performance fees. BlackRock's cash management platform continued to grow, even as the broader industry saw outflows, generating another $28 billion of net inflows in the third quarter. In September, as gross yields fell below relevant thresholds, we did begin to waive fees on select government funds. While there was minimal impact of third-quarter-based fees given our proactive management of portfolios during the year, we would expect fee waivers to accelerate during the fourth quarter and into 2021. Finally, third quarter advisory net inflows of $3 billion were primarily linked to asset purchases managed by our financial markets advisory group. Recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item of our income statement. The continued strength of BlackRock's results once again validates the resilience of our globally integrated asset management and technology business model, which allows us to consistently and responsibly invest for the long term, evolve ahead of client needs, and serve all of our stakeholders, no matter the market environment. With that, I'll turn it over to Larry.