BlackRock, Inc. (BLK) Q1 2014 Earnings Report, Transcript and Summary

Absolutely that's correct, and thank you for having us. Just want to introduce this good looking man to my right is Tom Wojcik, who is our Head of Investor Relations at BlackRock. So I basically go to know BlackRock back in 1993, which was the year BlackRock sold to PMC, I will give a big round of applause to anyone who can tell me what the purchase price was in 1993, is there anybody out there who actually knows that? $230 million was what BlackRock sold to PMC for in 1993 and today PMC actually books an annual dividend in excess of the purchase price that they paid for BlackRock in 1993. And so, you correctly stated it. We were effectively a domestic institutional fixed income manager up until about 2006, at which time we did our first transformational deal with Merrill Lynch investment managers which rapidly overnight took us to have an equity business, having retail business and having a significant presence outside the United States, primarily through Merrill's ownership of Mercury. And then once again 2009 really the final part of the transformation was complete with our acquisition of BJI, which basically brought us in to the passive marketplace both in terms of ETFs and non-ETF business. And so that really transformation for us has really set us for a lot of strategic discussion we are going to have today in terms of how we can become really all things to all people and really lean on our diversification being a multi-asset, multi-product, multi-geography player. Craig Siegenthaler – Credit Suisse: Excellent. And Gary one of the big shifts we have seen within the U.S. retail industry from some style box segregated products to outcome-oriented products. How is BlackRock positioned for this cyclical change and what are your own thoughts on the emergence of this trend?

Yes. So, I think there are two separate issues there I mean there is a retail story and an outcome story and I would think about retail and outcomes as really a big part of both our institutional and our retail strategy. But let's talk about retail for a minute. I think there is really four key trends that are driving retail growth going forward and the first one as you mentioned Craig is definitely outcomes. They are the new alpha. McKenzie today estimate that, the outcomes business itself would be a $2 trillion assets class by the end of 2015, so that's happening very, very quickly. And again we are as I mentioned in terms of the evolution of BlackRock really well positioned having both an alpha business, beta business or active and passive business and being able to put those together and customize really to drive solutions for our client base. So in that respect, it's really incredibly important. We hit outcomes really in three key ways. First is a fully bundled offering and this is where we basically create our own products and we basically deliver an outcome solution to the client ourselves. Examples of that could be something like global allocation, which is about a $90 billion fund family today or something like multi-asset Income Fund which is a relatively new fund a little bit in excess of $5 billion again strong returns low bow and very high income. We can basically take those products. We can sell them to the investor as an outcome-oriented solution and obviously that's critically important. Secondly, we can hit it. It is basically by providing building blocks to what we're calling other people's asset allocation models. And so as you all know, as we saw basically dis-aggregation of manufacturing and…

So look, I think we are in the early stages of ETFs and there is a number of factors that are going to drive that. As we think about our iShare's business our publicly stated target that is probably low double-digit growth on the assets side, and I think it's important to understand that today we have about 27%, last year we ended about 27% share in that business there and about 38% share of base book of business. Clearly, increasing adoption and global penetration of iShare ETF products broadly presents a pretty big runway for growth. I think if you look at the U.S. and Europe, you will get two different outcomes. So the U.S. really -- our challenge as you know we're much more heavily institutionally weighted in terms of our business here. We've got to do a better job in terms of penetrating what we call in the by in hold. And we're going to do that really in three key ways. I think we have talked about a lot of those before. It's segmentation through the course today is about a $100 billion business in terms of assets under management last year. We did about $25 billion of flows which represented a 30% organic growth rate and that's going to be critically important for us to penetrate. We obviously have our extended strategic relationship with -- to hit the direct channel and that's going to help us drive growth there and the good is that, that business put up about 15% inorganic growth last year which was in excess of 9% of business ultimately. And finally, we have got to leverage our new integrated sales force. So, I mentioned the 275 wholesales that are out there they are now working as one single sales force. We…

One of things to add is just new usages as Gary mentioned but now new usages with new clients basis. We have global financial institutions for the first time putting ETF on balance sheet, using them in the U.S. with some of our fixed maturity products very early days for that, but also in EU using some fixed income and equity products and actually tapping into a new market. It hasn't been there before so as ETF are in the U.S. some of the rest of the world there are huge loss of investment organization that is happened much yet and we are really pushing. Craig Siegenthaler – Credit Suisse: Now turning over to U.S. fixed income assets class. Given the sharp rise in interest rate last year, many investors have been more concerned with the potential for outflows for bond managers. BlackRock in 2014 is quite diversified. You still have $1.3 trillion overall bond business. Can you talk how you are specific bond product mix is positioned for higher rates including specifically your core products your general unconstrained products ETFs which kind of just hit on and also more importantly the LDI?

Sure. So we do have $1.2 trillion fixed income but let's kind of walk through the different pieces of that, so we can give people a better sense of some of the dynamics. So on the institutional side, keep in mind that off that $1.2 trillion, roughly 75% of that is institutional. In that context a lot of money is already basically matched LDI mandates actually managed in some assets liability way. So in terms of as rates rise and I think we have already shown this, we tend to have more stability in our fixed income book just by virtue of the fact that it has a heavily institutional bend, and we actually think that overtime, we talk a little about this last week, as we start to see increasing equity markets lots of pension funds are choosing to immunize generally and they immunize whether they choose LDI or they simply just take their games and move to things into fixed income, we actually think that's a pretty nice hedge to rising markets on the equity side. On the retail side, this is a class of good news bad news. So we didn't have a great 2009 in terms of performance and as a result we kind of struggled a little bit during the period of time I think we have effectuated a really strong turnaround in our fixed income performance and as I mentioned earlier our fixed income products today really across the board are incredibly well positioned from a performance standpoint. The good news for us or advantage for us either way you want to look at it is run up happened we didn't get a lot of that core/total return retail money. It went to number of competitors in particularly so as rates really started to…

So retirement is a huge them you obviously heard Larry's talk mid-year. He had a big speech done at NYU talking about the challenges of rising interest rates longevity retirement and that's been a huge theme for us in terms of growth. Our DC business today, Rob Goldstein likes to call us the biggest DC manager that no one's ever heard about. We're $525 billion DC manager today. People tend not to hear as much about it because most of that for us is not driven through open-end mutual funds, it's driven through more passive vehicles. We are the originator of the year date products that's celebrating its 20th anniversary today that went over $100 billion just last quarter. So DC is a big business for us. We talked about in our institutional world as part of our drive to offset some of the secular decline in DB. DC is one of the three fast rivers if you will in the institutional market place. In recognition of that kind of that momentum and the commitment that we have actually we just formed a U.S. Retirement Group at the end of last year. Chip Castille who runs our DC business was put in charge on that, and the goal there really is to grow very significant focus to trying to solve and bring to bear retirement solutions for the individual whether that be in 401(k), whether that be an IRA, whether that be for people who are just in taxable products who are looking to basically save more for the future. And Chip's ability to really be the external face of retirement for BlackRock, was really going to try and drive and link together products strategy, product development and manufacturing and the like to really think about this significantly more holistically…

Sure. So solutions was really the framework of regional BlackRock I mean interestingly from the first everyone heard the famous stories about the micro system, computer server next to the coffee maker and if you haven't you should we see video that we put on the website. But really BlackRock solution was the technology infrastructure that was created for BlackRock, and it was really used to drive everything that we do every day to create a fully integrated portfolio management, risk analytics, trading and account systems that we use, every portfolio manager uses every day. I guess the advent really of the third-party business came when Kidder blew up and GE needed some help and basically they needed to understand what exactly they have so they handed Rob Goldstein to say he personally got the floppy disk that he got from GE guy and basically went back and all of the boom the concept of using Aladdin as a third-party vehicle was born. So today we have really two key businesses and what we are calling BlackRock Solutions. There is the Aladdin business which is actually acronym and that's the second kudos if anyone can with the acronym that [inaudible] means I'll that you that later. But we have the Aladdin business which today of the $575 million that we booking in BlackRock solutions today is roughly 75% of that. We should think about that as more of the annualized stream of that. We still believe that this business will continue to grow in the mid-teens in terms of the growth rate and growth rate there is really coming from two key themes. One obviously as that business is going to grows as our clients assets grow so people do have people on third party assets on and secondly that…

One other thing just to mentioned as you think about BlackRock solutions certainly you see the $575 million on the income statement business what you don't is a lot what Gary talked about on the initial question on the outcomes and solutions and how BlackRock bringing those for their clients and the business the FME business is really pushing into our retail and institutional and iShares channel and a lot of that manifesting into flows and rest of the financial statement or rest of performance of the business. It's really pervasive within the firm everything that and FME brings to the firm. Craig Siegenthaler – Credit Suisse: Excellent. So at this time we still have some more prepared questions but we want to open up the audience and see if there is any question out there from the audience. So if there are questions please raise your hand and someone will bring a mic over to you. Craig Siegenthaler – Credit Suisse: Let me ask a -- it's a clean story, It's a very clean story. So let me ask just a question here on operating margin. You had some very nice improvement over the last few years here, what your incremental margins on average and how do you think about that by product, by flow versus kind of market appreciation? And kind of what are the long-term expectations for the operating margin of BlackRock?

Yes. So, this is a question we get a lot and we absolutely, we look at lots of analytics internally on margin and profitability and how we think about different business. I mean important this is we really run the businesses as part of one business, as part of BlackRock. We don't run a lot of segments and in fact we have only one segment. So we don't really think necessarily about try to grow the margin that's important although we obviously have sense of where we should be allocating capital. Look if we could grow the margin to the sky and not invest any incremental dollars in the business, that would really be a fantastic thing. The reality of that, it is simply not true and we have to invest in our technology platform not only for our own benefit but to keep light and sharp, we have to keep investing in our brand, we have to invest in our infrastructure and sales force and we talked about the ability to drive product flows. We have to obviously meet the needs of ever increasing regulatory and compliance cost that are critical to organization along with all the other controls that you need to invest in. So we continue to have to invest. I was a banker for a long time. I used to look at the charts and I would read those chart and people would tell me that your PE multiple is only your ability to grow. And so, we continue to invest in the business. We are not going to be able to drive that growth and if we can't continue to drive the growth we can't get our premium PE multiple that we aspire to. So at the end of the day, we are really looking…

Yes. RDR is changing a lot. I think we are obviously starting to see a large movement as we get into kind of a non-retrocession environment which is starting to move throughout Europe we think. The traditional distributors there are thinking much more -- less about proprietary products and they are thinking much more about again cost effective, cost efficient customized solution product where they are basically playing much more of the tactical assets allocator and basically trying to full the buckets again with these building blocks more and more which are going to low cost alternative. So we have -- whether it's our ETF platform and iShares which are trying to basically deliver more leverage with whether it's our co-mingled trust funds that we're basically going to use or basically it's our new index mutual funds which many of you saw we re-allocated from an institutional market classification in our earnings report and our assets table to retail. We are definitely starting to see that. In many cases it's going to be bulky. So you will see big mandates as they come in but over time I think there is definitely an upward bias no different to kind of low cost customized solutions. Craig Siegenthaler – Credit Suisse: Excellent. So let me just give one more try if there is any questions from investors. We've got one here in the front.

[Question Inaudible].

Well, we are caught up in it unfortunately just by virtue of some of the wrong ones that are out there. There is really no new update I mean you know I can kind of tell you what the state of play is but we frankly know nothing more as an organization than we did when the OFR report really came out. So I think there are a couple of things that's going on in SIFY We obviously saw the OFR report come out. We obviously saw a significant reaction to that both at the industry level and industry participants so you've seen the SEC who asked for comments, which was slightly unusual given it wasn't their report and basically ourselves and frankly a number of the firms that you all work for put in letters and you can read all of those on the SEC website they're posted. Dick Werner who runs OFR had the pleasant task of testifying for a number of committees over the last few weeks. He was in house financial services, Standard Banking and I think he took some criticism and heat for a lot of things that we heard him before did Dodd-Frank mean to capture the assets manager industry, was there transparency, was the study flawed again these were the questions that he was basically getting. And interestingly I think the criticism that would level candidly was equally balanced between the left side and the right side of the aisle. I think we have also seen a number of kind of industry observers basically putting their views whether it's in the Times the Journal or the FTE. Again kind of we will you are on liberal or other kind of more conservative view it seemed everybody has basically got an issue with that.…