BlackRock Finance Inc (BLK) — Q3 2019 Earnings Call Transcript

Good morning, everyone. I am 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 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 US equities finished the quarter up 1%, emerging market equities ended the quarter down 5% and the US 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 in total net inflows in the third quarter or 5% annualized organic asset growth, driven by continued momentum from our industry-leading fixed income and cash businesses. Total annualized organic base fee growth of 3% reflected this mix 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 Envestnet. 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...

Thanks, Gary. Good morning, everyone, and thank you for joining the call. More than ever before, clients are looking for asset manager partners who understand their whole portfolio and investment goals. They want partners who can provide insight in the context of a complex and changing investment landscape. Rather than just sell products, they're looking for asset managers who can deliver solutions that meet their financial objectives. In the third quarter, a number of macroeconomic and geopolitical events drove global market volatility and heightened investor uncertainty. BlackRock's differentiated model continues to generate strong results. By always looking ahead to recognize unmet client needs, we have positioned BlackRock with the diversity, scale, and global full portfolio perspective to help our clients navigate their investments in all market environments. As Gary mentioned, we generated $84 billion of total net inflows, showing strength in many areas across the combined active and indexed platforms. We increased revenues by 3% and operating income by 7% year-over-year. During the third quarter, geopolitics were once again a primary driver of markets, impacting investor sentiment. Global market indexes sold off and had a tumultuous August as the US treasury yield curve inverted and trade tensions escalated. However, markets reversed course in September, and following a significant rotation out of momentum stocks and into value that had been building over the last year, US markets achieved their greatest year-to-date gains in more than two decades and averaged 3% higher sequentially in the third quarter. Meanwhile, even with a partial recovery in September, emerging market indexes averaged 3% lower for the quarter, a 6% divergence in these markets. Fixed income, the low and negative interest rate environment persists. In an effort to extend the economic expansion, we're seeing unprecedented synchronized signs of intervention by central banks globally. For the first time since the financial market, the Fed announced that they would add liquidity into the system after a brief spike in short-term repo rates signaled liquidity constraints, or maybe supply issues. Meanwhile, in Europe, the ECB announced they would restart their asset purchase program to support their inflation targets. The simultaneous rise in historical safe assets alongside riskier equities in the third quarter highlights investors' uncertainty about the global economy, the state of trade negotiations, and the Federal Reserve's path of monitoring easing. In this unprecedented environment and faster than any time since the financial crisis, clients are transforming what they demand from asset managers. They demand transparency, value, convenience, higher returns, and better outcomes. They want a global perspective and insight from partners they trust. BlackRock is uniquely positioned to meet those client needs. Our combination of active, index, factors, cash, and alternatives, powered by our industry-leading portfolio construction and risk management technology, enables us to take a whole portfolio approach and is resonating with clients more than ever before...

So, Craig, the commission-free trends have been very positive for iShares. And as Larry mentioned in his opening remarks, the elimination of barriers to investing simply means that more and more investors are going to have the ability to use ETFs. And as the ETF market leader, this has got to be good for BlackRock. More clients than ever before have access to the value and quality of iShares funds to hopefully achieve their investment goals. So, commission-free trading is actually accelerating ETF flows in the two fastest growing US wealth channels. One is the US RIA and that represents a $5 trillion market that has grown at a 10% compound annual growth rate. The other area is the US direct investors, and they represent $7.5 trillion in market that has grown at a 10% compound annual growth rate. So, our share on the e-broker platform has expanded since the commission-free trends began, and these segments are becoming a larger growth engine for BlackRock overall. So, we're confident this will increase the number of investors using iShares as an essential part of their portfolios, and with our focus on quality exposures at very good value, we think that we will continue to lead the industry.

I think you guys both got it. I don't think there's any question this is a great outcome for well-branded, scaled ETF providers. And we're going to continue to execute our strategy as we ever have. But I don't see that there's any impact on our pricing structure as it relates to ETFs from this move.

There's no question, the resiliency of the overall fees for wealth management is pretty inelastic so far. We're starting to see some of the e-brokers charge much lower fees than the traditional wealth management platforms in terms of the overall advisory fee. But, unquestionably, when commissions are free, the investor is going to have to make a choice. Is the value proposition of having that advice worthwhile versus having a commission to your relationship? And every client is going to have to make that assertion...

Sure, Patrick. It's Gary. So, again, if you think about some of the trends that we've had, we've talked about during the year, I think we've seen broad-based strong performance and flows in our active fixed income business. That's come from a combination of some of the market environment that we've talked about, but also really strong performance across the platform, candidly. If you recall last quarter, we called out a number of very significant large strategic client wins and we actually had about $65 billion of positive flows in the second quarter. This quarter, we had a couple of clients that went the other way and we had, I think, in the average about $7 billion of outflows in the quarter. Again, I would call those more client-specific, lumpy redemptions. But it's hard to look at this in any three-month period of time. I think, more broadly, you need to look at the longer-term trend. And on a trailing 12-month basis, we're running right now at about $55 billion of active fixed income inflows, which is representative of about a 7% organic asset growth rate. So, I think we will have timing issues, but the clear trend here is very positive in terms of the strategic positioning of this business.

I'd just like to thank all of you for joining this morning and for your great questions and your continued interest in BlackRock. Our third quarter results are directly linked to our deliberate investments we made over time, but, more importantly, our results speak loudly about the deep partnerships we're making globally with our clients. I said it time and time again, clients are looking for solutions. They're not looking for an asset manager who's talking about a product. Clients are looking for asset managers who are helping them with their purpose, not the asset manager's purpose. The client is looking for organizations that can help them in risk-off periods, in periods of risk-on. And I believe if you look at our $350 billion of flows over the last 12 months, our model is working. And we are continuing to be excited about the opportunities we have for BlackRock in the future. Thank you.