BlackRock, Inc. (BLK) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Luanne, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2007 Earnings Teleconference. Our hosts for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Paul L. Audet; and General Counsel, Robert P. Connolly. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. Mr. Connolly, you may begin your conference.

Good morning. This is Bob Connolly. I am General Counsel of BlackRock. Before Larry and Paul make their remarks, I want to point out that during the course of this conference call we may make a number of forward-looking statements. We call to your attention the fact that BlackRock's actual results may differ from these statements. As you know BlackRock has filed with the SEC reports which list some of the factors which may cause our results to differ materially from these statements. Finally, BlackRock assumes no duty to and does not undertake to update any of these forward-looking statements. And with that I will turn it over to Paul Audet.

Good morning. Obviously a very strong quarter to talk about today, I would like to really say that how proud the Company is of our performance, and really because it reaffirms three major themes which we've emphasized since the announcement of the MLIM merger a year ago. First the importance of integration and for us both cultural and operational, it provides the base for future success. I think we also would like to emphasize integration is a long-term effort and you don't accomplish all in one year, but obviously, we have had a very successful year in the integration. I think the key for us is the integration has not limited or sold organic growth for the business. I think you can see that in evidence in the $41 billion of organic growth and AUM we had in the third quarter and the $107 billion of new business we generated for the first nine months of 2007. I would also say that if you look at year over... for the first nine months of the year we announced a 63% increase in adjusted earnings per share. If you look at that performance fees for the two periods year-over-year were approximately $200 million, so we've seen a 63% growth in our EPS. If you go back to our initial discussion of the MLIM merger in February 2006, we said our first full year performance we would like to see that we would accrete approximately 24%. I think you can see in these results the integration has performed well. Second, and I think also equally important, we talked about the strategy over the combined businesses and what we have created here is a firm with a balanced business, whether you evaluate it in terms of product mix, customer mix or geography and one that is positioned for growth in different economic and market environments. During the third quarter, we've been presented or and we've seen exceptional volatility in not only the equity markets but also in the fixed income and short-term financing markets. During this quarter, we saw a lot of clients reducing or delaying long-dated investment decisions and date for a quality and safety and as you are all aware there has been a significant, tremendous growth in the money market assets in short-term investments because of this. Obviously, one of our products were significant... our significant scale player is the cash management business and we were positioned to service those client needs and during the third quarter, we saw organic growth in cash management business of $30 billion. I would also note, if you look at it on also a geographic mix side, we generated substantial performance fees for the third quarter, 50... almost 50% of those performance fees are coming from our international equity based hedge fund products. So you are seeing in effect geographic and product mix evident in our results in the third quarter. And third; and I think most importantly that Larry emphasizes this every time he talks, our business is all about investment performance and client service. We continue to see strong investment performance across all of our equity, alternative product and liquidity platforms. As we discussed in previous meetings, we... our concerns about credit pricing over the last couple of years did have some implication of fixed income, but I believe that what you are seeing now in terms of the correction in credit pricing as well as some of the volatility in market will obviously enhance our ability to generate fixed income returns. A tangible piece of evidence with respect to that is, this quarter we had some of this highest performance in obsidian our fixed income hedge fund as a result of our positions. During the quarter, there were some special items incorporated in our financial results. I would just like to note those very quickly. We completed a very attractive trade with Merrill Lynch to in-source servicing which they performed on approximately 40 closed-end funds. These funds... this fee servicing would run between 30 and 40 years and in fact amounted to a notional payout of probably about $600 million over the term. We took that out in effect for a $128 million, it will add about $15 million of operating income benefits on an annualized basis going forward. We believe that we have the ability, obviously to provide this servicing and we actually feel very confident that this is a tremendous opportunity to invest capital back into the business. We financed a $128 million payment for those services with proceeds from a $700 million tenure debt offering we completed during the third quarter. It came at a yield of $636 million. It was a very successful offering and one that we felt that was very, very well timed for us in order to, now not only have a reputation in brand in terms of the equity markets, but also in terms of the debt markets. I would also note; we completed the Quellos acquisition on October 1st. The initial purchase price payment of that was $562 million in cash. So effectively, by October 1st, we have reinvested all of the proceeds of a long-term debt, between the transaction with Merrill Lynch and the first payment. On August 22nd also, we closed a new five-year, $2.5 billion revolving credit facility. I think this makes us feel very confident, we can look for opportunities in the marketplace but also to support the liquidity needs of the business as we grow. Third quarter also included one one-time tax adjustment of approximately $51 million to re-measure certain deferred tax liabilities, as a result of recent corporate income tax reductions in the UK and Germany. I think Larry might have some comments about this as we go through. The interesting thing, the UK reduced its corporate income tax from 30% to 28% and we actually saw the German corporate income tax go from 41% to 32%. Key third quarter financials results, and very quickly; overall results... and what I would like to emphasize on a recurring basis, if you take performance fees out, because obviously performance fees are very lumpy. But if you take those out the result are very strong. Total revenues ex performance fees were up 8% on a linked quarter basis, $78 million. Operating expense if you excluded out of performance fee related incentive costs and before the impacts of the net changing closed and fund launched to cost were up 3.5% or approximately $20 million. Obviously, operating margins improved almost a little less than 2% between the second quarter and the third quarter. Something that we indicated would happen and obviously this is all as a result of strong leverage, I mean strong revenue growth and the operating leverage that is embedded in the business which we expected. Last, non-operating income, actually declined approximately $20 million from the second to third quarter. There were some big changes as we've said this is going to a very volatile area between non-operating income and non-controlling interest. We had significant mark-to-market declines in private equity and head fund to fund products. But it was also offset by a very strong mark-to-market gain in certain real estate equities namely Peter Cooper Village. So I would note to everyone on the call that obviously the debt was issued late in the third quarter, so expect interest expense to rise approximately $10 million from our third quarter reported levels into the fourth quarter. With that I will turn over to Larry, but I believe a very strong financial report for the third quarter.

Good morning everyone. As Paul mentioned, we did complete our one year anniversary with our merger with Merrill Lynch Investment Management. I think the result speaks for itself. We are a global investment firm and I do believe the marketplace... with this marketplace becoming larger and larger and more and more business being executed overseas, and now with tax rates being lower overseas, having this global platform allows BlackRock to take advantage of the opportunities on a global basis. I think looking back after one year, the synergies that we discussed a year ago and the synergies we discussed 21 months ago when we announced the transaction, really speaks quite loudly that the synergies are happening, that the mix of the two businesses put together has really transformed ourselves into this really truly global platform. There has been a lot of discussions about the turmoil in the marketplace in the last few months. And I really do believe BlackRock's result of the third quarter speaks loudly about where we are in terms of cultural integration and team. I don't believe we would have gotten through with this quarter as strongly as we did, if we did not build one strong unified culture and I think it speaks very loudly where we are and where we are going. I do believe that firms that are navigating successes in this chaotic marketplaces are the firms that are unified by a global culture. BlackRock, as you know, we've always been pretty rigorous and very religious about the fact that we have one platform, one culture, one organization and I believe how we've navigated through this. As our teams and equities and fixed income and alternatives discussed continuously about what are the risks and what are the opportunities in the marketplace on behalf of our clients and I think the number one story for the third quarter was the integrated platform that BlackRock has with an integrated global culture. I cannot speak loudly enough about how important that is and to navigate in these troubled markets. And I do believe these troubled markets are not behind us and I know the marketplace has rebounded very nicely, but there is still lot of lurking problems in the marketplace and we are not going to believe that these markets... these troubled markets are behind us. And so it is this culture, it is this unified platform, it is this one operating platform that is allowing us to navigate somewhat better than our competitors. It is that culture that allows us to take advantage of these market problems. It is this culture and unity that has allowed us to have the success in terms of performance across most of our portfolios and it is that performance that allows us to believe that the future growth of the firm can remain strong. So, it is not only the culture that has allowed us to be where we are, but it also is this business mix. No one would have predicted to see the flows in liquidity that we have seen. In the last six weeks, if you look at our pipeline numbers and if you look at our liquidity growth in the last quarter, much of this happened in the latter part of the third quarter. We grew by over $43 billion in liquidity assets in these last six weeks, as people are looking for safe havens. And this speaks so loudly as clients are try to analyze what this means for them, they are not as rapid and they are much more careful in terms of where to place their long-term money. So, as we suggested, long-term searches have momentarily slowed down, we saw this last year when we had in the third quarter last year. We've seen this at many times when there is market turmoil. But the organization was able to have opportunities and products for our clients to take advantage of it and our liquidity business speaks very loudly of having this unified platform with multi-products and so we are able to work with our clients when they have specific needs. So clients are still, as you look at our pipeline and our searches, clients are still looking to put their money in longer dated strategies. Clients are continuing to look for more alternative strategies. However, at this moment, they are looking for safe havens as they try to determine how this market will evolve and what it means for them in their own liabilities and so we've seen this as huge surge in liquidity. Areas that I would like to specifically note that I'm very proud of is our retail platforms in a global basis. We continue to expand our platforms in the U.S., our third party distribution platforms are continuing to expand. We're opening up more product offerings and launches within different third party systems. In our International retail platform, we continue to see very strong growth in our Asia platforms, specifically Taiwan and Korea. We're seeing real opportunities in the last few weeks in terms of our retail platforms in Europe. And so we continue to believe the retail side of our business although in the last quarter, it was dwarfed by the huge scale of cash and long-dated institutional strategies, we continue to believe that the retail side of BlackRock will become a larger and more important component of overall business. I am particularly proud that we crossed over the $400 billion in retail now and so, we are getting more and more scale, and more and more opportunities to build out. Paul mentioned; we closed our closed transaction; our fund to fund platform is now a BlackRock alternative advisors. We are now the third largest fund to fund platform in the world with about $7 billion in fund to funds of private equity and $20 billion odd in fund to funds of hedge funds. We are particularly excited about what these product capabilities will do for us as our clients are looking for more multi-asset strategy solutions. And so having those products in those platforms will give us a more complete product offering on a global basis for our clients. In addition, we continue to see great results in some of our alternatives and some of our hedge funds, and most specifically we continue to see huge opportunities in global real estate. Our global real estate platform has grown to $28 billion and we believe this will continue to drive and build a larger opportunity for us. I can tell you clients are looking for more real estate as a part portion of their asset allocation. I am not here to talk about residential real estate. I am talking really about commercial and multi-family. But the change with our clients is less U.S. real estate but much more global. So having this global platform with multiple distribution centers and multiple manufacturing centers really gives us this unique opportunity to take advantage of the changes investors needs, taking advantage of investors' appetite to become much more global. Some information came out from the treasury yesterday that the foreigners sold approximately $60 odd billion in U.S. products and obviously that should not be a surprise when you look at the direction of the dollar, and this is... this speaks very loudly why investment firms have to be much more global and why investment firms have to be offering more than just a dollar based assets. And this is the trend that we believe will continue to drive the business and this is the trend where we continue to expect us to drive and build our manufacturing platforms away from dollar based assets. Overall, as Paul said it was a very good quarter. I could go on-and-on and talk about the various areas, our successes in performance in equities and fixed income, our successes in alternatives, our successes in our platform. But I think it is just important to say, overall in this troubled marketplaces, we navigated very successfully because of who and what we are and what... and how we all came together as an organization. As Paul said, and I've said it repeatedly, integrations take years. We are not over the integration of our firms. We have now the integration of our Quellos team here. So we have a lot of work to continue to do. We still have a lot of integration in terms of our technology, in terms of global equities and so we have... we are not complete. Integration of culture takes years. We proved to ourselves, we proved to our clients that we have a pretty unique culture already that is unified. But I don't want to suggest that we are over in terms of the integration of our two firms and we are not over in terms of the overall direction where we want to take this platform in terms of build out of our international footprint, to build out our products. We did a... one last thing we did expand our European equity platform that was announced late in September. So we continue to look for opportunities and building out teams and manufacturing, as we believe we need to have more products, stronger teams to really build out. If I had to just suggest one other last thing in particular attention should be given to is just the whole unity of the portfolio teams working together, suggesting opportunities together, looking at different opportunities to build out on behalf of our clients, be it a strength in opportunities we have in minerals and minings or strengthen opportunities we have in the oil service area, and all the other areas. So its just not broad based product, its specialized products and working to having that strength in those products, working along side our fixed income teams, our fixed income credit teams. I had just an incredible quarter in terms of navigating risks. And the last thing I have to say, our liquidity credit teams. We don't have the problems that many liquidity firms are sitting here. We have not decided whether we are coming together with this large super SIV, we don't have these single party SIV assets that some people are struggling with. And so, we have navigated credit very successfully from overnight money, to long-dated money, to equities during this quarter and we will still be very conservative in terms of credit as we think this credit price is not behind us. We that I had like to turn it over for questions. I would just like to thank everybody and thank the overall BlackRock team to really make our investors proud and to make our clients very happy in terms of performance. Question And Answer

[Operator Instructions]. Your first question comes from Craig Siegenthaler with Credit Suisse.

Thanks. The performance fee number, you mentioned international equity hedge funds, can you give us some more detail what's in this number in terms of percentage from international equity and in terms of private equity, I thought I heard you mentioned negative marks?

Well, not negative marks, they were not as positive as the second quarter, which were very high. We generally do not disclose the nature of performance fees by products. What we try to say was that, if you kind of look at the mix of the business, we saw a lot of revenue growth coming from all over the business.

I would say clearly our performance fees were across the board in almost every one of our alternative products. We... real estate was very strong, our European hedge funds, our domestic hedge funds, Paul mentioned our very large fixed income hedge fund had an extraordinary quarter, and so I think it's fair to say it was broad base.

Okay. Thanks. And one more question, can you give us your thoughts on the cap rates proposal to eliminate management fees and solely pay performance fees if you outperform a benchmark and how do you think this could impact the industry and BlackRock in general?

Well I was with Chris yesterday; he was at a meeting with us yesterday. I had lunch with him yesterday. I think it's... I don't know enough about it. But I... we discussed it at lunch. I think it's pretty fair proposal. I don't think it's going to change business that much; obviously it's going to make the stronger, stronger and the weaker, weaker. I think the ultimate response to that is. I think there are too many organizations are... have survived with mediocre performance probably for too long. So if this becomes an industry trend, you are going to see more volatility in the investment management business with some of the weaker players. But I don't know the tonality, what it is. Is it a one year look back, a three-year look back, a five-year look back, we didn't get into that, but I understand the notion. I don't think it really makes long only investment management similar to absolute return strategies and you get paid if you do well, you don't get paid if you don't perform.

I guess the big question is, is it going to add a lot of volatility to quarterly EPS and the answer is probably, yes?

No, I... if it became the prominent strategy, yes. I think that's true I don't believe we will become the prominent strategy for everything. So, the answer is yes. If it really is adopted by everybody, no question, it creates greater volatility. I don't believe it will do that though. I mean I don't believe it is going to have a big impact on the marketplace and how we do business in the near-term.

Your next question comes from Douglas Sipkin with Wachovia.

Hi.

Hi Doug, how are you?

Good morning. How are you guys? Just a couple of questions, first just I might have missed did you guys made some color about how much incremental operating income you would generate from basically taking the Merrill Lynch fees in-house. Can you provide that again?

Yes, it was $15 million on an annualized basis.

Okay perfect. That's helpful. And then Larry you mentioned the interest in long-dated strategies obviously veined throughout the quarter, any pick up in that interest or a little bit of return given that the credit markets parts of the credit markets are starting to act a little bit better?

I would say lot of the credit markets are not acting a little better but its just the visible ones are subprime certainly is not acting any better and lot of the housing products are certainly not acting better. As you look at our searches, searches are bigger than ever we have more searches going on, more of off keys than we've ever had right now. So they're existing people are just delaying decisions and so for me to tell you at this moment whether there's a real change its too early for me to tell, but we are very constructive on the long-dated business in the future with the amount of searches we have and or up ease we have, coupled with the performance we've had over the last quarter.

Okay. So, in respect to your terms about some of the problems still lingering you provide a little bit of color for how long you see this playing out but I mean just giving your experience in the industry, how long do you think it's going to work through the system. Obviously, I guess, I got a flavor for your comments about this subs these major SIV that they are thinking about putting together to save sort of the money markets. But just curious what your thoughts on the overall credit markets and how long this thing could potentially play out?

Secretary Paulson is doing a very good job in alerting the world as to this housing price is not over and we got to get our arms around it. So I really do think with Secretary Paulson is doing very good because I think he has cracked in stating this prices is not over and as we saw in housing start today was clearly evident its having an impact on the U.S. economy. To me it's pretty binary I think we need to see some form of... if we see that Fannie Mae and Freddie Mac have certain expanded power for securitization and I am not talking about balance sheet issues. In terms of allowing more types of mortgages to be securitized and so the housing market will be less depended on the conventional housing market where there is a lot of congestion and problems. I think that housing market could resolve itself, but if the housing market does not resolve itself and the mortgage debt market doesn't resolve itself. I think it's going to play out in so many different areas and other types of credit and for me its kind of binary. I do see solutions at hand; I do see Congress talking about these types of solutions. Unfortunately politics are once again playing a wicked hand and hopefully the housing start numbers today will alert our government that this problem is not getting better it's getting worse and it's going to jeopardize the future of our economy and you know I am a long-term believer of our economy, but I do believe that the housing market will erode consumer confidence will erode the capital markets, if we don't solve these issues. So it's kind of hard for me to tell when it will be over because I think there are solutions and that can fix it but if we don't find ways to making these solutions happen than we are going to get in to deeper problems or going to have a much wider spreads and probably a much more difficult capital markets in the future.

Great. And then just finally, any guidance, I mean how should we be thinking about potential performance fees in the fourth quarter, I know it seems like the outlook for performance fees has improved throughout the year as you are positioning in products has worked to your advantage. Any color around the fourth quarter that can you shed some light?

We... really hard to do I would tell you that there are a number of products which lock in the fourth quarter and performance is... has been as strong as we have seen year-to-date in the third. But it's hard to put in an exact number on it. Obviously, you are not going to see anything like you saw in the third quarter, its coming way back. But I think that we continue to see some positive opportunities there.

Great. Thanks a lot and congratulations on an exceptional quarter.

Thank you.

Your next question comes from Marc Irizarry with Goldman Sachs.

Great thanks. Hi everybody.

Hi Marc.

Larry, maybe we can start with the dollar demise and just the shape of the business overtime in terms of U.S. versus global. How will acquisitions sort of play out, in the dollar demise in terms of getting more non-dollar denominated assets? Thanks.

I know... hello... we are looking at any acquisitions overseas. We... so we did [Technical Difficulty] Europe equities. Looking other teams to help us expand --. Can we get the operator on? There is still a lot of disturbance.

Okay. Mr. Irizarry, if you could mute your line, while Mr. Fink is speaking?

Hello. Operator, are you getting this feedback?

I am hearing the feedback, why don't you go ahead and clear the question and you can go ahead respond to it. Go ahead,

Okay, there we go. Thank you. We are presently not looking at any acquisitions internationally. We are working on expanding our presence in with... to our joint ventures in India. We have a platform already in China. We're doing... list out teams in terms of equities overseas where we see huge opportunities. I would not say we're going to have the demise of the U.S. dollar, I actually believe in some areas the U.S. dollar is cheap. Especially versus Euro I do believe European markets are going to have just as many problems as the U.S. So, I am not here to suggest, but I think the dollar will be... will weaken a lot further. But I do believe more-and-more investors... more-and-more U.S. investors are looking for more diversification away from dollar assets. So it's not just our global clients are looking for greater diversification away from the dollar, but even our U.S. clients are looking for more diversification. Not just in bonds, not just in equities, but in alternatives, in real estate and in all the type of products that we have.

And our next question comes from Michael Hecht with Banc of America.

Hi guys, good morning,

Good morning,

I just wanted to... question on the fixed income performance this quarter which seem to slip again, I guess a bit with 57% of top half of feasible one, three and five years. I think, on the last quarter was 63%. So I was wondering if you can recap for us which product areas you are seeing kind of weaker performance and in whether, you think this is help lead to some of the slowing organic growth that's you are seeing on long-term fixed income side this quarter, you think its really just more function of the macro issues you've already talked about in commentary?

I think... the issue in fixed income performance have nothing to do with the long-term trends this time. We are... our areas of strength have been in the high yield where we continue to have great performance. One of our credit products are having very good performance, in line of our global products who are having good performance. I think, some of the long-term trends have been... we are seeing more-and-more clients looking to move away from core strategy to which we did discuss into LDI and other types of products. And it is that type week construction that we are seeing a slow down in as people are trying to digest what the capital markets and credit markets are doing. So, I still believe we are going to see huge, huge transformation out of core strategies into longer dated strategies, better matching assets and liabilities. We are going to see more-and-more global mandates and we are going to see more global mandate that are longer dated.

Okay. And then can you just touch on some of the maybe areas that are or a little bit weaker performance wise that maybe drove the overall performance number down?

Its not performance. It's just... I would clearly tell you we have not seen any slow down due to performance issues. We've seen slow down just in deferral decisions and as I said, if you look at our pipelines, if you look at our RRPs, this is no different than what we saw in the third quarter of last year when we had a remarkable slowdown in some of the long-dated mandates. But overall, I mean the asset mix is strong, the growth of our asset mix is getting stronger and having a $123 billion of organic growth in over a rolling 12 months is something that has exceeded our expectations and we think we have great opportunities to continue to build momentum in the future.

Okay, that's great. And then let me shift a little to the competitive dynamic you're seeing again like kind of institutional fixed income space just for a minute I mean, some of your big competitors on the fixed income side without many names have seen some weaker performance and that benefiting you guys at all and then also are you seeing any impact from other players who've entered the institutional fixed income space maybe more recently outside of the Big Three players and whether you are seeing any impact there?

First of all, the other big, the other two players out of the Big Three are doing great. Short-term some, one of that may have better performance than the other; they are both really incredible firms that we respect a lot. They are going to get their lion share of business. I think the biggest change in the fixed income market has been clients are moving out of core bond strategies into other strategies and so with that with long-dated products with other transport products you are going to see a different mix of investors, a different mix of investment managers. And so I think because the business mix is changing because client needs a changing, you are going to see changes in terms of investment managers. I do believe the Big Three are adapting very rapidly into offering the longer dated strategies and different product strategies. So I don't see any change in terms of the Big Three having a pretty tight dominance in the marketplace but there's always room for the big eight or big ten. They are having more players in the fixed income market. We are... we don't feel threatened in that market at this moment of time and in fact we believe our performance in the third quarter in terms of avoiding credit proves again BlackRock may not be the sexiest of bond managers, but we are very consistent in terms of risk avoidance and risk management.

Okay that's helpful. And can you talk a little bit about the retail opportunity you see on the fixed income side and whether you see upside there over time as well and I guess what I am getting out is are you seeing any evidence of demand or the pick up in demand for yield for meet down investors. And then the $400 billion milestone you mentioned you reached in retail, how much of that is fixed income versus equity?

It's de minimus in fixed income its probably I am going to guess if you strip out money markets its people running and looking before... my estimate is probably closer to $10 billion over that it so. Excuse me... $82 billion in fixed does that includes in liquidity, okay, $250 billion is in equities. The... I forgot municipals and all the other products. So that's where I was. We have huge opportunities in fixed we just launched our fixed income platform in our... with our European and Asia platform where we really had no fixed income... the very de minimus fixed income platform in Europe and Asia and so we are just rolling that out now. And we continue to roll out more fixed income strategies and equity strategies with third party distributors in the United States. So it should be a very large component of our business.

Okay. And then can we shift over to the integration at MLIM which you mentioned is not kind of a one quarter, one year type of event, that it takes time. Can you touch a little on the morale? I guess you are seeing on the equity side of the business and kind of general levels of attrition and whether the equity side of the business in terms of the integration has lived up to your expectations, and just how much more work do you really have to really do there?

I don't think work is ever finished. In terms of the equity integration, it has gone great. I mean, I can't say one real hiccup that we've had in terms of our equity platform in terms of the integration. Where we've had turnover, it was more in the fixed income side where there was some redundancies and rolls and responsibilities, that's where we have had some turnover. And in all the cases, we didn't have one of these people to lead, but we have a real strong depth of people and a real talented full base. And so, we had turnover there over the last nine months, but I can't think of one... well we had one person in our European equity team left, and as we announced, we have just brought in a brand new team of six people to be part of our European equity team to replace the one person so, we already had a pretty fine European equity team, but we just doubled the scale and size to build it up for multiple types of products in European equity. So, emphasizing your question of Europe equities I would say it's gone as well as one could ever dream of.

Okay great. And then just last question. Could you talk a little bit about the long term outlook for operating margins, obviously you saw good improvement versus last quarter although a bit below year ago, kind of pre MLIM, do you still see off side to the margin and should we think about this as a franchise of long-term, talking three to five years out can sustain 40% plus kind of margins and what you think of this kind of the key drivers there. Just like a combination of comp and non-comp expense leverage in the model?

Look, I think that... yes you saw some operating leverage in this quarter. We signaled that we saw that coming. If you are evaluating... operating margin before the MLIM trade, please understand add back intangible amortization and you are going to come... you are going to add 3% to what we are reporting.

Right.

The non-cash items. So it really we are in excess of what we are reporting before. I would tell you that the one issue that this organization will always be interested in looking at our margins. Is that, at what point in time does operating leverage should be invested back into the business to sustain the growth rates. It's hard to have revenue growth rates like we are doing and not invest back in the business. If I would tell you if we try to milk every piece of margin, will it come up every quarter, yes. What I think we would be short changing our growth rates into the future if we did, I would also say yes. So I think there is room for operating leverage growth overtime, but I also would tell you that we also believe there is a lot of investment opportunity to grow our revenue base and we are not going to be afraid to do it that's what BlackRock is always done. So, I would tell you that I wouldn't like to see us over 40% ever in terms of operating margin. I think we will be making a bad trade for investors.

The biggest tension, we have is, as we see the opportunity to global as we see more-and-more clients are looking for non-dollar based investing. I mean our need is to really continue to build out and invest. And so I will critics [ph]... If I was one of you guys it will be critical for us if we had those types of margins.

Okay, great. That's fair enough. Thanks for taking all of my question. Great quarter guys.

Thanks.

Your next question comes from Robert Lee with KBW.

Hi Rob. Robert Lee - Keefe, Bruyette & Woods: Hi. Good morning. Thank you. I have a quick question on capital management and I guess mainly of the payout ratio. I mean you have the credit facilities generate a lot of cash and I understand you look for strategic opportunities, and how should we think of the payout ratio going forward in the dividend and particularity in light of the growing importance of performance fees, how do you work that into your thinking in what you want to payout?

I think that we'd established a 40% payout right now and what we are operating under which is pretty significant. I also said... I think we've also said to the marketplace that as our earnings and cash flow grows, we are not adverse to looking to increase that in order to make sure that we are not in effect investing excess capital at lower rates of return within the business. I think it's hard right now, we are only in the first year of this integration and it's hard to tell you exactly where all these pieces are coming. But I thing you are starting from 40%, you are moving most probably higher giving what we know to be the growth in cash flow in the business over time. And we will keep you, obviously abreast of where we go with it. I still think we are going to always be a pretty of high return on our capital back to shareholders. Robert Lee - Keefe, Bruyette & Woods: Okay great. And I had a question on retail business could you maybe give us a little bit of color, a lot of the assets are clearly and still Merrill centric in retail business in the U.S. Could you talk a little bit about your flows there and some proportion of what and how much of your business is starting to come outside of Merrill versus and still be independent on Merrill?

First of all our global pickup platform is very diverse, we are... our European and Asia flows are heavily dominated by other players beyond Merrill Lynch, we are one of the top mutual fund platforms overseas is dominated by, 30 or 40 different distributors and we continue to expand our platforms there. In the U.S. a greater percentage of our flows are with strategic partners, I don't have the actual flows right at the moment. But we can get them for you, they are... I would say our market share within Merrill Lynch has grown. So the concept of independent name has helped us within the Merrill Lynch system. But we're seeing more-and-more flows with our strategic partners in retail, and just, and slowly but surely we're adding more-and-more of our products with our other third party distributors. So it's just a slow process, we just were given notice with one of our large third party distributors that they are adding our, many of our large cap products on to their platform. And so, we are slowly getting more-and-more products on to these third party distributors and we continue to be selling through these strategic relationships where we have... where the manager with their mutual fund. So it is not a BlackRock product, but we are the manager of one of their products. So we are seeing more-and-more strategic type of opportunities there. So, we can get you that number but I would say the percentages have moved greater towards third party providers and strategic partnerships. Robert Lee - Keefe, Bruyette & Woods: Great. And that's all questions I had, a very next quarters. Thank you,

Your next question comes from Prashant Bhatia with Citigroup.

Hello Prashant.

Hi. Just real quick on the money market funds, the money is flowing in there? How much of that you think you could retain overtime put it into new strategies and so on?

I have asked that question every hour. So it's not its... Paul why don't you answer that one?

I... this is a great question for some, we are all playing with it. I would tell you that what I kind of told Larry so far, within the quarter the $30 billion that we grew, this tended to be largely as we said to flight the quality safety type money. A lot of this came with a lot of our existing clients to just increase their business with us. I think we have a pretty... because of our reputation and all the rest of it, I don't think it was long-dated movements. I think this was actually money that's always been in the cash marketplace. I think we have a pretty good chance to hold that. I do think where you are going to see hard press rest to whole lot is, what we are seeing right now that's in our pipeline. Because what really is ended up happening is we also had a fed funds decline, in our early... late in the third quarter. Certainly all money market funds have our outperforming direct investments that will equalize overtime. We also happened to be in the top of the peer group in terms of performance. So we are probably catching a little bit more of that benefit. That... this $18 billion or so that we have see since quarter end, that I think is a harder one to see us retain over time.

Okay, okay that's very helpful. And then on the alternative product side, some of the longer dated products, could you give us a feel for what some of the new products are that you are going to introduce over the next 6, 12 months?

We really on a number of global real estate products right now. We are rolling out right at this moment agriculture fund in the hedge fund space, with our natural resources and mineral mining team in the UK, where we continue to... we are trying to build out our science and technology hedge fund here. We just... we are... we believe we have opportunities in rolling out distressed funds in terms of taking advantage of the opportunities in the distressed mortgage area. So. we are contemplating a big rollout of those types of products. We are in the market right now, so I can't speak too broadly about this, Mr. Connolly is sitting here he will get mad at me. Our private equity fund to funds, we are as has been reported in the marketplace in rolling out a distressed debt fund. And so, unfortunately because we are in the marketplace, I cannot really talk about in any extent of what we're doing in these areas. But I certainly believe Prashant we have great opportunities in rolling out some rather large products on behalf of our clients.

Okay that's helpful. And then just maybe broadly in terms of the large SIV that's being put together now. Just your thought process on why you've been getting involved with it? You've avoided as you said, most of these problems altogether, why step into it now, it is just an incremental fee or what would be the purpose?

I don't see any fees in it, the real issue is if a broad base support helps the capital markets and helps our clients, we need to do that, I mean

Was more stabilization type of incentive?

Yes I mean, so we want to be helpful if that's where in our participation helps whether we have issues or not, I think that's important point. Not big as issue there, as the competitor lot other people who need to participate have needy issues and as a competitor you would like to shine a little better relative to our needy competitors, and so in some respect I think it marginalizes our success. But on the other hand, you got to have the bigger picture of making sure if this works, it helps stabilizes our markets, it helps stabilizes our issues surrounding our clients, and whether it benefits our competitors more than we do, is probably the right thing to do.

Okay, that makes sense. And then just finally in terms of Quellos, how did that manage to the three key dislocations? Did it have any of its fund to funds that they have some of the big funds that had issues or?

No, we have once again, this is I cannot talk about. This is private, we have had great performance.

Okay. Great thank you so much.

Your next question comes from William Katz with Buckingham Research.

Hi Bill.

Hi, Good morning everybody. Just a couple of questions, still wondering a little bit of tactical question at this point, you have been, is it kind of your revenue yield in the fixed income business, may be it's a function of volatility of the asset in the quarter. But could you give us a sense of seeing a decline in the revenue yield as you are shifting facilities for bonds to more specialized products.

Well there's no question. As you give it the more specialized products you need more teams, and so you can say the margins do decline initially as you start growing. So there's no question as you asked, more specialized products by definition, you have more specialized teams and then the net results would be lower margins. On the other hand, as those... as we believe we are going to see more and more products like that, we will get the leverage of that and as you know we have our own BlackRock Solutions platform our own technology and that gives us an advantage over a lot of people and during customized solutions. And so it allows us to be more adapted to our clients and most of our peers.

Bill one thing too that you should be aware of with respect there was a re-class smallest one but $10 million and would have a definite impact to your yield of computation a re-class between equity and fixed income revenues of our second quarter. It had to do with something that was positioned in appropriately and some of our overseas mutual funds and that implicating that fixed income yield. So if you come back to me I can show you where that is and I think it will take off some of the risk that you are talking about there.

Okay that's helpful. In terms of the... give a lot of color on your... little curious you have obviously talked about the shift within fixed income, could you talk a little bit about what you are seeing whether shifts in terms of some fixed income back to equity whether the shift back... passes back to active and may be even styles then just value for growth?

Actually we are seeing as equity markets rally we are starting to and we saw it in September we are starting to see some very large reallocations out of equities in to fixed. We are actually seeing as that happens and then the clients are looking actually to do more LDI and more of locking in their liability as they have enough gains from the equity side to lock in an immunized portion of the portfolio. So that's what we are seeing now and this is where we think that will continue to grow and build and we had a client conference yesterday where we did hear from a lot of clients that are really lot of more contemplating doing more LDI. And so we are seeing more of that. In terms of style irrespective of the market volatility we are still seeing overall clients are looking to diversify more out of dollars, diversify more out of core equity, core bond strategies into more alternatives and I actually believe the volatility in the marketplace and we see more dispersion in returns among hedge fund managers and probably private equity managers and I think that dispersion is going to help BlackRock as we build out our alternative platforms. I think it will be beneficiary of that and so if anything, we need to be even little more aggressive in building out our alternative strategies and offering more products to our clients as they are started contemplate to navigate away from some of the historical core strategies.

Okay. And then just in terms of Quellos it looks like maybe answered in the last question. It looks like your assets were up about $2 billion from the time the deal was announced in June to what you sort of put in the pro forma data is press release?

That's true.

How much of that was performance versus new business and where do you see the immediate leverage on the combined franchise?

Well, we are already... we have a notification that we want a very large assignment. We are actually in fee negotiation in that one and that is a great example because the major substantial client are BlackRock that we're now... we can add to our fund to funds platform and so we are starting to see some opportunities and synergies already. So the opportunities I believe are going to be large. It is my belief with more dispersion with hedge fund managers more and more clients are going to look for fund to fund strategies because its hard for lot of clients to have event risk with one manager blowing up and they may have a perfectly fine portfolio, but having professionals in the fund to fund space navigating and managing all their hedge funds making sure there isn't a style drift among hedge funds as you know, that's one of the biggest problems in hedge funds base because it is very opaque and less transparent that having a team of professionals navigating and reviewing all the different hedge funds and private equity managers to make sure there isn't style drift. And so, we believe there is dispersion in these returns help the platform and make it even more powerful. We're going to need get back to on actually how much was it organic and how much was it in terms of just market appreciation. I would, my belief is its more new clients in knowing where, I think the returns in the third quarter by most hedge funds but the fund to funds is maybe 1% or 2%. So it has to be almost highly a large percentage of it in organic growth.

Okay. Thank you very much.

Ladies and gentlemen, we have reached our allotted time for questions. Gentlemen, are there any closing remarks?

I would just like to thank all the employees of BlackRock for really creating a real exceptional quarter. We did it, as I said to all of us, it is a culture that binds us, it is the organization that makes us special with our clients and I truly believe our model of being a unified platform with one brand name, with one technology with one unified platform to market products to our clients, to work with our clients, allows us to have a better linkage with our clients and the reason why we're doing it and doing it well is because everyone at the firm is believing that a unified platform, a unified culture is the right structure for our clients. I would like thank all our shareholders for standing by and working with us and we'll be talking to you in the next few months. Have a good fourth quarter. Bye-bye now.

This concludes today's teleconference. You may now disconnect.