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 2021 Earnings Deli Conference. 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 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.

Thank you. 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 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 2021. 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's proven track record of delivering for stakeholders reflects our ongoing commitment to anticipate change before it happens and continually invest for the long term. Our globally integrated investment and technology platform enables us to construct resilient whole portfolios for clients. We rely on thought leadership, global investment insights, and state-of-the-art risk management tools to help clients navigate ever-changing and increasingly volatile market environments. Our approach is resonating more than ever. and is reflected in the continued strong momentum we are seeing across our entire platform. BlackRock generated total net inflows of $75 billion in the third quarter. $98 billion of long-term net inflows representing approximately 4% annualized organic asset growth were partially offset by net outflows from lower fee cash and advisory AUM. In addition, Strong net inflows from ETFs and our active franchise once again contributed to this quarter's 9% annualized organic base fee growth. Over the last 12 months, our differentiated investment management platform, which pairs active and index capabilities across the entire range of traditional and alternative products, has now generated over $450 billion of total net inflows, representing 13% organic base fee growth, well in excess of our 5% long-term target. Third quarter revenue of $5.1 billion increased 16% year-over-year, while operating income of $1.9 billion rose 11% and reflected the impact of approximately $96 million of fund launch costs primarily associated with the successful launch of a $2 billion closed-end fund in late September. Earnings per share of $10.95 was up 19% compared to a year ago, also reflecting significantly higher non-operating income in the current quarter. Non-operating results for the quarter included $298 million of net investment income, primarily driven by non-cash gains related to our strategic minority investments in iCapital and Scalable Capital, as well as mark-to-market gains in our private equity co-investment portfolio. Our adjusted tax rate for the third quarter was approximately 24%. We continue to estimate that 24% is a reasonable projected tax run rate for the fourth quarter of 2021, though the actual effective tax rate may differ as a consequence of non-recurring or discrete items or potential changes in tax legislation. Third quarter base fee and securities lending revenue of $3.9 billion increased 22% year over year, reflecting the positive impact of market beta on average AUM and 13% organic base fee growth, despite higher discretionary money market fee waivers and strategic pricing investments over the last year. Sequentially, base fee and securities lending revenue was up 5%. Our third quarter annualized effective fee rate on a day count equivalent basis increased by two-tenths of the basis point from the second quarter as the positive impact of strong organic base fee growth driven by our higher fee active businesses and lower discretionary money market fee waivers more than offset the negative impact of divergent equity beta primarily associated with the accelerating decline in emerging markets during the current quarter. During the third quarter, we incurred approximately $130 million of gross discretionary yield support waivers. Lower discretionary yield support waivers in the current quarter were linked to the Fed's technical adjustments to the IOER and RRP in June, as well as outflows from U.S. government money market funds during the current quarter. Performance fees of $345 million reflected generally strong performance from our single strategy hedge fund platform over the last year. The decline in year-over-year fees reflected lower revenue from a single hedge fund with an annual performance measurement period that ends in the third quarter and which delivered truly exceptional performance a year ago, partially offset by higher revenue from illiquid products. Quarterly technology services revenue increased 13% from a year ago. Annual contract value, or ACV, increased 16% year-over-year and continued to reflect strong growth from the third quarter of 2020, which was impacted by slower sales and extended contracting in the early months of the pandemic. We remain committed to low to mid-teens growth in ACV over the long term. Total expense increased 19% versus the year-ago quarter, driven primarily by higher G&A, compensation, and direct fund expense. G&A expense was up $139 million, or 30% year-over-year, primarily driven by higher technology and portfolio services expense in the current quarter. Third quarter G&A expense also included $96 million of fund launch costs, primarily associated with our first ESG-oriented closed-end fund, the $2 billion BlackRock ESG Capital Allocation Trust, and $29 million of contingent consideration fair value adjustments related to the estimated final payment on our successful Citibank acquisition in 2018. Recall that we exclude the impact of product launch costs when reporting our as-adjusted operating margins. Core G&A expense for the third quarter, which excludes the impact of product launch and transaction-related costs, was up 3% from the second quarter. We have made no changes to the discretionary investment spending plans we have previously outlined and would expect a sequential increase in our fourth quarter core G&A spend to be generally consistent with previous years, reflecting seasonal increases in marketing spend, additional costs related to return to office planning, and ongoing technology costs associated with Aladdin cloud migrations. Employee compensation and benefit expense is up $116 million, or 8% from a year ago, primarily reflecting higher base compensation and higher deferred compensation related to the impact of grants associated with 2020 compensation. Direct fund expense increased 38% year over year, primarily reflecting higher average index AUM and intangible amortization expense increased $11 million year over year due to our imperial acquisition. Our third quarter as adjusted operating margin of 45.8% was down 120 basis points from a year ago, as operating leverage was more than offset by the impact of lower performance fees, higher contingent consideration fair value adjustments, and higher intangible amortization expense compared to a year ago. We're seeing more opportunities to invest for growth than ever before. We reopened the closed-end fund market in 2019 by making it more efficient for investors to access products at NAV. By synthetically seeding these new funds, we've now raised $14 billion in active AUM, representing over $170 million in new revenue. Our strategic minority investments in iCapital and Scalable Capital are reinforcing our Tech for Flow strategy and simultaneously generating very attractive returns for shareholders. And we continue to build our best-in-class ESG capabilities most recently by acquiring Rhodium's models related to the physical risks associated with climate change. Effective use of our balance sheet to seed new products, co-invest alongside clients, or make strategic minority investments both supports our growth and drives value for our shareholders. And while our capital management strategy remains first to invest in our business, we also remain committed to returning excess cash to shareholders and repurchase an additional $300 million worth of shares in the third quarter. As we discussed at Investor Day, we continue to invest in our highest growth franchises, such as ETFs, private markets, and technology, and we are accelerating investments to drive growth in our sustainable, traditional, active, and solutions capabilities. Each of these areas once again delivered strong results in the third quarter. Quarterly long-term net inflows of $98 billion were driven by continued momentum in our ETF and active platforms. Our ETFs generated net inflows of $58 billion in the third quarter, positive across each of our product categories, representing 7% annualized organic base fee growth. ETFs attributable to our strategic category drove over 50% of net inflows in the quarter, reflecting continued strength in fixed income and sustainable ETFs. Core equity and higher fee precision exposure ETFs saw net inflows of $16 billion and $9 billion respectively, led by U.S. equity exposures. Retail net inflows of $23 billion, representing 11% annualized organic-based fee growth, were positive in both the U.S. and internationally, and across all major asset classes. Retail multi-asset results included the impact of the previously mentioned $2 billion closed-end fund raised in late September. Inflows continue to reflect broad-based strength across our active platforms, and remain well-positioned to meet investor needs for risk-adjusted alpha and yield in the current market environment. BlackRock's institutional active net inflows of $26 billion, representing 6% annualized organic-based fee growth, were led by $25 billion of multi-asset net inflows. Growth included the impact of a significant outsourced CIO mandate from the Asia Pacific client, continuing our momentum in an important growth area where we are providing cost-effective whole portfolio solutions to the world's most sophisticated institutional clients. We also saw continued demand for our LifePath target date offerings, and Larry will update you about a recent milestone for our new LifePath Paycheck Retirement Solution. Institutional index net outflows of $8 billion broadly reflected equity net outflows, which were partially offset by fixed income net inflows, as clients continue to rebalance portfolios after significant equity market gains or sort to immunize portfolios through LDI strategies. Overall, BlackRock generated approximately $45 billion in quarterly active net inflows across the platform, including our 10th consecutive quarter of positive active equity flows. Demand for alternatives also continued, with nearly $7 billion of net inflows into liquid and illiquid alternative strategies during the quarter, driven by single strategy hedge funds, private credit, real assets, and private equity solutions. Fundraising momentum remains strong, and we have approximately $29 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 cash management platform experience net outflows of $12 billion, driven primarily by redemptions from U.S. government and offshore Sterling Prime money market funds, in line with the broader U.S. money market fund industry. BlackRock's diverse cash management offerings position us well to serve clients' needs, and you will hear more from Larry about how we are expanding our ESG cash offerings to enhance our competitive positioning even further. Finally, third quarter advisory net outflows of $10 billion were primarily linked to the successful planned wind-downs of portfolios managed by our Financial Markets Advisory Group on behalf of the Federal Reserve Bank of New York. Recall that revenue linked to these assignments is primarily reflected in the advisory and other revenue line item on our income statement. BlackRock's continued strong performance reflects our commitment to strategically invest in our business in anticipation of change and to lead the evolution of the asset management industry. Today, we see even greater opportunity to invest in our employees and our clients and in the communities in which we operate to ensure that we will continue to optimize organic growth in the most efficient way possible. With that, I'll turn it over to Larry.