Good morning. My name is Jamie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Third Quarter 2018 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President, Robert S. Kapito; and General Counsel, Christopher J. Meade [Operator Instructions]. Thank you. Mr. Meade, you may begin your conference.

Thank you. Good morning, everyone. I am Chris Meade, the General Counsel of BlackRock. Before we begin, I would 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 lists 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 will turn it over to Gary.

Thanks, Chris, and good morning, everyone. It's my pleasure to present results for the third quarter of 2018. Before I turn it over to Larry to offer his comments, I will review our financial performance and business results. While our earnings release discloses both GAAP and as-adjusted financial information, I will be focusing primarily on as-adjusted results. As a reminder, all year-over-year financial comparisons referenced on this call will relate current quarter results to recast financials reflecting the adoption of FASB's revenue recognition accounting standard, which became effective on January 1. During our second quarter earnings call, we noted that clients were deferring investment decisions in the face of an uncertain and evolving investment landscape. While we saw a modest pickup in industry flows during the third quarter, primarily attributable to ETFs, we also saw accelerated de-risking by many clients in an environment marked by continued trade tensions, a further slowdown in emerging markets, and a steepening yield curve. Against this backdrop, more clients are looking to BlackRock for investment guidance and technology solutions than ever before. Despite current headwinds impacting the asset management industry, our globally diversified business model enables us to stay committed to and continually invest in our highest growth businesses such as iShares, multi-asset solutions, illiquid alternatives, and Aladdin. These investments will enable us to deliver differentiated organic growth for the future. BlackRock generated $11 billion of long-term net inflows in the third quarter, despite over $30 billion of institutional index equity outflows. Quarterly net inflows were positive across our iShares and active fixed income, multi-asset and alternatives platforms. Third quarter revenue of $3.6 billion increased 2% year-over-year, while operating income of $1.4 billion rose by 1%. Earnings per share of $7.52 were up 27% compared to a year-ago, driven primarily by higher nonoperating income and…

Good morning, everyone, and thanks, Gary, and thank you for joining the call. BlackRock's third quarter results demonstrates to resilience of our differentiated platform as we once again delivered organic growth even in the face of industry headwinds. And we’ve been through these tough markets -- tough market environments before and BlackRock has consistently delivered growth, though asset management -- flow through asset management flows and technology revenues, while exercising expense discipline and investing for our future. We built our platform around a holistic client centric approach and today we are delivering a broader spectrum of investment strategies in technology capabilities to more clients than at any time in our history. However, as Gary mentioned, many of the challenges facing our clients continued in the third quarter have accelerated with recent marketing volatility. Divergence monetary policy and macro and geopolitical uncertainty continues to impact investor sentiment and our financial markets, leading many clients to reduce risk in their portfolios. After a decade-long rise of multilateralism, protectionist agendas are pushing forward around the world. Concerns over trade tensions and particularly are weighing on investor sentiments. Meanwhile a strong U.S economy is adding to investor concerns about overheating and the potential for greater than previously anticipated fed -- Federal Reserve rate hikes. Political instability in certain markets is increasing. In Italy, for example, the government significantly widened its budget deficit for 2019 driving Italian bond yields to their highest levels since 2014. And in Brazil the Presidential election is intensifying political polarization. These developments are all heightening worldwide investors concerns. As a result, financial markets performance continues to diverge in 2018. While our U.S equities reached record highs in the third quarter driven by strong corporate earnings growth, European markets are trading below where they were a year-ago and emerging markets and…

[Operator Instructions] Our first question comes from Dan Fannon with Jefferies.

Thanks. Good morning.

Hi, Dan.

I guess, Larry, could you elaborate on your broader comments about de-risking? It seems based on your commentary that we -- it should likely continue here in the short-term and we're seeing it through your index products. So I guess are there other kind of asset classes we -- that you're seeing that in? And then also, is there a capture rate where you're seeing flows going into other categories that are obviously less risky?

I will let Rob talk about it and then I will add to it after him.

So I think, Larry, mentioned increased trade tensions, emerging markets volatility, and certainly the fear of continued interest rate rises across the globe. So what happens, especially during that type of volatility period is clients de-risk. So depending upon the next couple weeks and some of the political issues as well and the volatility that's out there, clients may continue to de-risk. Certainly, we've seen the hedge funds de-risk from a period of time where I think across the board most of them are already down 2% 4%, so getting below that is difficult for many hedge funds, so they’ve just risked -- de-risked. And we also, depending upon the guidelines of the clients and what we think about the markets, we encourage either de-risking or risking depending upon what their objectives are. The goal for us is even in that de-risking, to capture those assets because whatever they're selling and going into, we have that product. So whether clients move from equity to fixed, we can accomplish that. Whether they’re going from value to growth, long duration to short duration, out of emerging markets into emerged markets, our goal is to offer a holistic solution so that they can de-risk and then be ready to put the risk on with us as well. And that also moves from product to product, whether they do it in iShares, and typically they'll do that in the non-core iShares that have the most liquidity. Clients in the core iShares do that less because they’re more buy-and-hold. So, we see that more in the active products, and I think that really describes a lot of the flows this quarter.

Let me just add a little more. I think the market movements post third quarter was, as Rob said, more hedge funds de-risking. We did not see any accelerated outflows in the first few weeks. I think, Dan, when you think about some of these big large strategic partnerships we announced, none of that was asset flows this quarter. All of this is going to be huge asset flows probably in 2019. And this is why we are spending so much time trying to develop these deeper relationships. We are not going to be able to predict or strive for any one quarter, but I do -- we're very excited about the opportunities of building these deeper relationships that over time are going to really push us towards a much higher growth rate. That being said, if the markets remain to be uncertain, if political risk remains large, you will continue to see clients pause. We’ve seen this in the past. Generally, in the fourth quarter, we see clients adding risk that is typically what happens especially November, December. We -- and so, I’m not here to tell you, I know how this will all play out, but we are continuing to see large interest from our clients in our technology businesses, we're continuing to see large interest from our clients in our alternative space and let me also talk about the breadth of our active business for a second. We had positive active flows in fixed, in multi-asset, and in alts. The only area where we had outflows that were significant was in the low-fee index products, and that I think, Rob Kapito has talked about this for years, that's where we see how people navigate money. They go in and out of index funds in large-scale as an indicator of their market beliefs. So -- and I would also say unlike most organizations in the industry we had positive flows in U.S wealth in our retail side. So I don't know the outcome of this quarter or political uncertainty, but all I could say is we're -- we have very strong conversations going on right now with really important clients and we will see how that plays out.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Good morning, Craig.

Hey, good morning, Larry. So it was nice to see another quarter here of larger buybacks. Can you remind us how much capacity via excess capital and debt capacity BlackRock has now? And how we should forecast capital management over the next few quarters just given your very systematic approach over the last few years?

Gary?

Good morning, Craig. So our capital management policies have not changed. I think it's -- we remain committed to obviously first investing in our business, and then returning excess cash flow to shareholders, that that will continue. Obviously, it's not necessarily tied to any 12-month period of time. We look at cash over a broader period of time than that, because we try not to be that specific. But we are committed to a 40% to 50% dividend payout ratio, and then paying the incremental back. As we’ve said many times, our total payout ratio is really an output as opposed to an input of our planning, and we will take into account all the various opportunities for investment in the business whether through our P&L, through our seed capital, through taxable inorganic opportunities. We’ve been pretty clear that our run rate going into the year was about $1.2 billion, [ph] or $300 million a quarter. We did slightly more than that earlier in the year. We saw opportunities to accelerate that this past quarter where we did $500 million, and we will continue to plan assuming our run rate is current and then looking at opportunities to more aggressively allocate liquidity to the stock price where we think it's a good investment for our shareholders. As it relates to how much liquidity we have, obviously as you know, we’ve never been capital constrained either from a cash flow or P&L investment point of view. We have about $5 billion of long-term debt on our balance sheet. We are levered at less than 1x, so we obviously have significant liquidity capacity if we so choose to use it for a variety of strategic opportunities.

Your next question comes from the line of Michael Cyprys with Morgan Stanley.

Hi, Michael.

Hey, good morning. Thanks for taking the question. Just on the commission free ETFs, which you defined as an opportunity to lead to growth in ETFs. Just curious if there's any color you could share in terms of the number of platforms that you’re on today with commission free ETFs and how much more penetration we could see? And how you see the duration profile of the iShares changing, if at all, with more commission free ETFs? In other words, do we see more flows, but maybe more volatility within the flows as it becomes more commission free? Just curious how you’re thinking about that?

So the whole commission free situation was actually a very large benefit to BlackRock. And I don't know if that story really got out that well. Because especially at Fidelity, what was not -- what was hidden I think in the communication was they actually added over 170 new ETFs to their platform commission free. So if that's the case, we obviously have many more on a very strong platform and it attracts many more investors because there's no trading costs. So I don't know if it's going to really change the profile. I would imagine since most of the people on those platforms are more equity than fixed income long-term investors, it may push them towards more equities. We haven't really been able to see a true trend yet, except that there are more buyers and that’s been positive to us. So our growth on that platform continues. Obviously, that will be the same on other platforms that begin to offer commission free ETFs. So this was a very big positive to us to continue. As you know, we have the number one market share globally of ETS. So we really have more people on it. It will give us more opportunity to distribute. But I haven't seen a trend yet, Michael, to tell you that there will be more of any one particular one. What I'm hoping for is that we get to see some of the smart beta, which we have over 100 different smart betas. We have a lot of the ESG ETFs coming onto the platform. So I think there's a big opportunity there and I hope that we're finding out that a lot of investors are interested in ESG. So hopefully they will express that through our iShares. But on the particular Fidelity platform, they’ve been great partners who had the best August we ever had since the pricing moved, even in what was considered a very tough market. So very optimistic as new buyers can enter the market commission free.

Let me add one more -- two more things. I believe more and more the market for ETFs will be commission free. I think it's incredibly important. So for the retail investor commissions, the trading commissions can be larger than the commissions or the fees of the asset manager. So when you’re trying to save for retirement and you're only investing, let's say, a $1000 at a time, the commissions were eating up quite a better of return. And so we actually believe commission free ETFs is going to lead to better outcomes for retirement. It's going to lead more investors to invest in ETFs for retirement and I believe this is a really important trend for all the ETF industry, but I also believe it's a very important trend for the advancement of pools of money for retirement. So we look at this as it's not just important for the ETF industry, we believe it's important contributor to the strategies of the wealth management platforms as they try to help clients navigate the whole cumbersome component of retirement. And we believe a commission free environment for ETFs is going to lead to far better outcomes of investing for retirement.

Your next question comes from Ken Worthington with JP Morgan.

Hi, Ken.

Hi. Good morning. Thanks for taking my question. This sort of follows up on Michael's question. So price has been a key differentiator in core ETFs, the majority of your ETFs are non-core. What are the longer-term success factors in non-core? So, you’ve mentioned liquidity as a factor, maybe a key factor in the past, does liquidity remain a key driver for the non-core ETF sales, or does that become less differentiated as the ETF market grows? To Michael's question, you mentioned commission free trading and distribution relationships are important. You alluded to product development in ESG, but what is most important for non-core ETF growth over time? And what is that say about the pricing that you think you could get for non-core? Will it hold up or does it sort of eventually mirror the core side? Thank you.

So I think the two most important things are brand and liquidity. So this is what those people that are more active and they participate under non-core want in purchasing their ETFs. And I think that what hasn't been talked about is this last move in volatility. We haven't seen any stories of any issues in the liquidity of ETFs. All of a sudden that is off the front page. They actually work. So the large and liquid with brand has actually provided more liquidity in the marketplace. The more situations we have like that, the more large investors will come in and have confidence in the market. So I think we saw that. So in essence, I would say brand is still very important. Liquidity and that’s due to the scale and size of the products that we actually have are the most important going forward. And I do think that's going to translate as more and more people get focused on either the smart beta in which they are using this to really focus on one of the factors in the market that they think will drive it going forward. And the second thing will be the ESG, where as large plans have the responsibility now to be asked by their boards to express that in their portfolios, I think they’re going to want to express it in ETFs that have that brand that also have the liquidity in it.

Let me add a little more to that, Ken. I think retail has always been more a buy-and-hold strategy. I think retail continues to be focused on more core oriented strategies for their, I would say, their large component of their investment strategies. But as ETFs expand whether it is ESG that Rob was talking about or factor based or emerging markets in other areas, we still believe that as Rob said, brand liquidity are major component. And I don't believe those two components lead to each other. So we are not seeing any indication, any issues related to a worsening of prices related to the non-core. But core is being -- growth is being driven by essentially by retail individuals that continues to be a major component of it. And those core products just don't have liquidity, that’s some of the non-core strategies have. They don’t have -- and some of the non-core strategies now have options against it and they have a much more derivative-based market around that too. And so they’re almost two different ecosystems both serving their clients and this is what's great about it, in their specific needs. Some clients have it a long-term need to invest for retirement and that’s a buy-and-hold. And that’s why we so much -- why we adopted that core strategy and we have a large component of our institutional clients worldwide are using it for asset allocation. They’re using it for exposures and brand and liquidity is very important and remain to be important.

I don’t think you will see pricing pressure as much because of the demand and it's only the large illiquid and ones with the brand that can offer the futures, the options, and the derivative. So I think this is as Larry said, a separate market. And I think because of that we can command a higher price.

Your next question comes from Alex Blostein with Goldman Sachs.

Hello.

Thanks. Hi. Good morning, everybody. So wanted to build the discussion on Larry's points around the strategic partnership with wealth managers. You hit on the Fidelity and the kind of the commission free model, but looking at the wirehouses and other brokerage firm networks, can you spend a little bit on how these partnerships are structured? What’s sort of the spectrum of products this creates for you guys both in a technology and the asset management side of things? And I guess, looking out into 2018 maybe a little more color, Larry, from you why you think these will yield stronger flows for you?

Well, I mean, our first indication from Fidelity, we’re seeing stronger flows immediately after one month. So we did begin to see that and we continue to believe that will continue to yield more flows. In terms of the wires, I mean, one of the great success story so far that’s just been implemented and one just was launched in its existence is Aladdin for wealth. So UBS and Morgan Stanley both use Aladdin for wealth. We have other organizations that we are working on. We have -- actually other organizations worldwide are adapting Aladdin for wealth. And so, it is through technology that is advancing our positioning with our wires. It is trying to work with them on ETF strategies, but I actually believe the relationships that we have with the wires now are more comprehensive, more holistic than anytime ever and we believe like we just said -- as I said, this last week was when we went live with Morgan Stanley. We believe through those processes we're going to start seeing maybe in the fourth quarter in 2019, increased flows through our holistic relationships with our wires of all our strategic partners. The other area where you're seeing especially from the wires, which is starting to become a bigger driver of their business, and one of the reasons while we believe over the next 5 years ETFs will double in size is how more and more wires as they move more towards away from brokerage and more to a consultive relationship or advice, they're using more models. And in the models are heavily populated by different BlackRock and iShares products. And so we believe over time we're getting ourselves better positioned that have deeper more holistic relationships. And we continue to believe that is what's going to be driving our future growth.

Your next question comes from the line of Brian Bedell with Deutsche Bank.

Hey, Brian.

Hey, good morning. Maybe switching gears little bit on pension plan rebalancing. Larry, maybe just your view of how that might increase to the rebalancing from equities to fixed income might increase. What kind of maybe yield thresholds do you think that will be a catalyst for that? And obviously you guys are positioned to capture that on the fixed income side. Do you see that from your perspective coming mostly in LDI, or do you think your active fixed income products can take the large share of that? And then, maybe just a little bit more color on the Lloyds arrangement with the $40 billion. Is that just a part that’s coming more quickly? And I think you are in a strategic partnership with them for a potential of up to ₤100 million.

So on year-end rebalancing, but before the market setback, I would have said there would be a lot of rebalancing out of equities into more fixed income. Now with the markets resetting itself, I think that rebalancing out of equities is going to be diminished quite a bit. Obviously, we still have a full quarter to see. Higher rates is good for more and more pension funds. They reset their liabilities, and higher interest rates is a reset. Keep in mind, it's based off the tenure, not the short end. So the tenure has only moved, I don't know, on the year, 30 basis points. So it's not a significant move. But net, net, net, you are going to see more and more pension funds using as you raise LDI. We are seeing more and more clients looking to use BlackRock services on LDI. It's one of our growth areas in the last quarter and continues to be an opportunity for us. I don't know how significant that will be. We will see where markets are and rates are over the course of the balance of this year, but we do believe the trend will be over the long-term for pension funds to reduce their exposures in their defined benefit plans. As you know, more and more money is now moving in the defined contribution. So it is -- we do have that dynamics. Just real quickly on Lloyds, we don’t describe what the client is doing. The client came out with a press release. I don't believe I could talk about more than what the client released in their press release. We have a strong, deep relationship with them. At the moment, we won a ₤30 billion mandate for index products. We also agreed on a partnership in terms of alternatives, where we believe we are going to see systematic quarter-by-quarter flows in our alternative platform. We are looking at -- they are looking at utilization of our Aladdin platform and other forms of technology. So it's a comprehensive relationship. It is deep and related to the other pool of assets, we will see. I mean, it -- we will see about that outcome.

Your next question comes from the line of Michael Carrier with Bank of America.

Hi, Michael.

Good morning. Hey, Gary, just one for you on the expenses. You mentioned the $42 million in the transaction cost in the quarter, and then that the typical seasonality that we see in G&A. I guess just want to level set that, should we be expecting the $42 million to come out and then build off of that in terms of the seasonality? And then, just given the seasonality, how does the -- maybe the diverging beta or the headwinds that you guys are seeing on the revenue side kind of factor into that?

So the $42 million, there is a component of that. And again, we’ve tried to give you a little bit more visibility through some better disclosure, both in the press release and the Q. But there's a portion of that, that is more professional fee-related, as I mentioned, about $13 million tied to closing a number of transactions that clearly will come out. The contingent purchase price adjustments is going to be a part of our P&L for some period of time. We have about 250 plus million dollars of contingent purchase price liability on our balance sheet. We will have to fair value that every quarter. The bad news is when it goes up, it creates some noise in our G&A line. The good news is when it goes up, it means the deals we’ve done are doing better. The most significant component this quarter was tied to the first reserve transaction where the expectations for our ability to raise assets in the coming quarters has gone up, which is why we’re providing that. So we will do as best we can to call that out for you, so that you can see some of that volatility in what we would consider kind of more non-recurring quarter G&A expense. In terms of expectations for the fourth quarter, I think you’ve got it right on. I think the intent was to try and call out for you that component that kind of is a little less recurring and to just highlight what has been the case for the last couple of years is that our marketing spend tends to go up in the fourth quarter, and you obviously know what that was during the third quarter. I think your broader question as it relates to the business model today in light of a more challenged revenue environment. Look, I think, for us, we’ve purposely built a very diverse business with both index, active, alternatives and cash to move away from any specific product, but really to focus on delivering, as Larry mentioned, a holistic client centric solution to our clients. And we’ve seen difficult markets before, but we think that are unique and scaled model enables us to kind of grow organically through those markets and to be able to manage our expenses appropriately, display whether they're cyclical or secular headwinds. And our view at the moment is really to continue to invest through the cycle. We see unique opportunities. Frankly, we’ve done the best in these types of markets because others frankly with less diversified models are forced to pull back. And candidly, it's a lot easier to cut cost than to invest for growth, and that’s really the hard part, but we think we’ve got a model advantage and so our intent is to continue to invest through the cycle on behalf of our clients and our shareholders.

Your last question comes from the line of Bill Katz with Citigroup.

Hey, Bill.

Okay, thanks. Good morning, everyone. Thanks for squeezing me in. So, a lot of it has been answered, right, but maybe just sort of drilling into the margin discussions a bit further today. When I look at your distribution fees versus the distribution expenses, there seems to be a deeper reduction in the distribution fees than on the expenses. How much has just either divergent data or sort of mix non-US versus U.S versus maybe some of these wealth management victories you’ve been getting and some elevated maybe point of sale economics against the manufacturing complex?

You know, we’ve seen on the distribution fees, obviously, as we’ve moved away from kind of 12b-1 fees over time, and that’s been going on for a long time for us now, Bill. And I think, obviously, we are moving into a more fee-based environment with all of our distribution partners trying to basically do the best they can for their clients. We’ve migrated away from traditional loan products to products that don’t have that. So we’ve seen a decline in our distribution revenue. By virtue of FASB, we’ve kind of grossed up everything. I don’t think there's that much of a breakdown beyond that, other than just demand for different classes of funds are changing and driving traditional 12b-1 fees down, but beyond that, I don’t think that there's anything more to it than that from our perspective.

Ladies and gentlemen, we’ve reached the allotted time for questions. Mr. Fink, do you have any closing remarks?

Yes. Thank you everyone for joining our call this morning and your continued interest in BlackRock. Our third quarter results reflect the value of our diverse investment platform and technology capabilities provide for our clients as they navigate through this very active investment landscape. We’ve built and evolved our business by staying ahead of our clients' needs and industry transformation, and we’re confident that our continued differentiation, our holistic client approach will enable us to deliver growth and scale advantages over the long-term to our clients and to our shareholders. And I do believe the third quarter really did show how building these strategic relations over the long run will produce future growth tomorrow. Everyone have a good fourth quarter, and we will be talking to you soon. Thank you.

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