貝萊德 (BLK) 2010 Q2 法說會逐字稿

Good morning.

My name is Brandi and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the BlackRock Inc.

second-quarter 2010 earnings teleconference.

Our host for today's call will be Chairman and Chief Executive Officer, Laurence D.

Fink; Chief Financial Officer, Ann Marie Petach; Vice Chairman, Susan L.

Wagner 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).

Mr.

Connolly, you may begin your conference.

Good morning, everyone.

This is Bob Connolly; I'm General Counsel of BlackRock.

Before Larry and Ann Marie and Sue 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.

And as you know, BlackRock as 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 Ann Marie, our Chief Financial Officer.

Thanks, Bob.

Good morning, everyone.

As we report second-quarter earnings, we are pleased with the progress of the integration and the additional capabilities of the combined firm.

Since the BGI transaction, we have delivered consistently strong results despite market volatility while continuing to reinvest in the business for future growth.

Our results have produced strong positive cash flow, allowing us to reduce our commercial paper balances to about $180 billion.

Million.

Million.

This is down from $3 billion where $2 billion was replaced with long-term debt and the remaining reductions have been funded out of operating cash flow.

We are announcing that the Board has approved repurchase of up to 5.1 million shares.

The purpose is to neutralize the dilutive effects of restricted stocks and options that have been granted to employees.

5.1 million represents the shares which become dilutive over the next few years.

The timing of the repurchases will be at management's discretion.

We are pleased to reinstate this practice after a pause during the financial crisis and for the BGI acquisition.

As I discuss results, I will primarily be talking about as-adjusted results.

Second-quarter net income was $463 million, or $2.37 per share.

This includes $2.46 per share of operating earnings and $0.09 per share of non-operating expense.

Net income was about equal to the first quarter and was almost double second quarter 2009.

EPS was down $0.03 or only 1% from the first quarter despite a quarter in which markets declined about 10%.

While the swing in the Dow from a March 31 level of 10,856 to a June 30 level of 9,774 was not uplifting, the point-to point measure masked the volatility in the first half of this year.

That resulted in an average Dow in both the first and second quarter being almost equal at about the 10,500 level.

At the same time, we have seen over a 25% improvement in markets compared to a year ago when the June 30, 2009 Dow closed at 8,331.

The 35% increase in EPS from second quarter 2009 was driven by $59 billion in long-dated organic growth, the BGI transaction and the market improvement I just talked about.

The second-quarter tax rate remained at 35% and reflected the geographic mix of the combined company in a period of no unusual items.

As-adjusted results exclude pretax BGI integration costs of $32 million in the second quarter; that is primarily G&A.

Total integration costs to date have been $[267] million and at this point, the bulk of the spending is behind us.

We provided an estimated range of integration expenditures of $300 million to $350 million at the time we announced the BGI transaction.

We presently estimate that aggregate expenditures will come in at about $300 million or less.

As-adjusted operating income of $741 million improved $14 million, or 2% compared to the first quarter and $439 million, or about 2.5 times a year ago.

The second-quarter operating margin as adjusted of 38.8% reflects early synergy realization and initial investments to fund future top-line growth.

Our margin is on track to align with our 2008 and 2009 margins and to exceed our 2007 margins.

We remain committed to achieving synergies as we integrate the business, recognizing really full integration is going to extend into and perhaps beyond 2011.

At the same time, we are investing in future growth opportunities including, our iShares business, the defined contribution platform, BlackRock Solutions, Asia, multi-asset class strategies and our global trading platform.

Our commitment to these and other opportunities gives us confidence in BlackRock's long-term organic growth prospects.

As I discuss (inaudible) and cost, I will be talking really about comparisons to the first quarter as the comparisons to a year ago get dominated by the BGI transaction.

Second-quarter revenues of $2 billion are up 2% from the first quarter reflecting a 2% improvement in base fees, including the effects of average loan balances on securities and one extra day in the quarter.

The improvement in base fees reflects higher index equity revenues of $32 million and stable active equity revenues.

Basis points in a single quarter, particularly on index products, are affected by markets, a mix of index and ETFs and loan balances, which are not even across the year within the period.

Base fees also reflect a 5% improvement in multi-asset class revenues reflective of what we believe to be a long-term trend into solution sales investing and I know that is one of our investment areas, as well as a present capability.

This is offset partially by a 5% decrease in cash management revenues, which is reflective really of the low yield on asset class and the resulting redemptions from cash.

Overall, base fees were stable despite a period of instability.

Performance fees of $50 million were equal to the first quarter and included $21 million of fees on absolute return products and $29 million of fees paid based on relative performance measures.

The fourth quarter continues to be the primary quarter where annual performance fees lack, so it is the one quarter we'd really expect to look different.

BlackRock Solutions and advisory second-quarter revenues remained strong at $114 million, about equal to first quarter.

Revenues and the strong pipeline reflect a continued appetite for analytic and [aligned] services and continued advisory assignment.

The change in other revenue reflects primarily the number of transition assignments and these assignments can vary from period to period.

Moving onto expenses, the as-adjusted expense rate for the combined firm was $1.291 billion.

That is up $23 million from the first quarter.

Compensation expenses of $693 million were actually down about $41 million compared to the first quarter.

That reflects primarily the fact that the first quarter in the US is the peak period for payroll taxes.

Also reflects incentive comp.

I would note that the year-to-date compensation to revenue ratio was 35.4%.

That is really exactly in line with historic trends going back to 2007.

G&A expense of $312 million increased $57 million compared to the first quarter.

That includes a $12 million first-quarter nonrecurring benefit related to balance sheet foreign currency effect.

The remaining increase reflects a $20 million increase in marketing and promotion expense, which includes travel, advertising and promotion and the $12 million increase in occupancy as we retire old space and took on new space to bring the firm together.

Non-operating expense of $28 million represents $5 million of positive marks on co- and seed investments and $33 million of net interest expense.

The total value of the co- and seed investment portfolio stands at about $930 million or about $840 million excluding investments which represent hedges or which are being hedged.

This is relatively consistent with prior periods.

As I have said before, we do not run any proprietary investments, but rather invest alongside our clients or seed new product as required for the base business.

Our exposures are aligned with the interests of our clients.

In summary, we are well-positioned to benefit from business trends and are balancing synergies and investments in the business.

During our relatively strong product performance, we are maintaining or gaining share in the long-dated retail business and our institutional business is well-positioned for growth as clients become increasingly comfortable with the combined firm.

Their confidence is reflected in our $59.5 billion pipeline, which Larry will discuss in a moment.

Our broad diversity of investment products and risk management tools allow us to support clients' needs with their knowledge that we are working totally as a fiduciary on their behalf.

With that, I will turn it over to Larry.

Good morning.

Thanks, Ann Marie.

Let me just start off by thanking all our employees for all the hard work and dedication for a very successful cultural integration to become one BlackRock.

This is a big milestone.

This has been quite a bit of hard work that we have all worked towards this objective and I am pleased to say that much of this is behind us.

I can now announce to our shareholders that the merger integration is progressing quite well.

Our business momentum is building and we are beginning to leverage our expanded capabilities.

I am very proud of the leadership team that we have in place now.

I think we have a great platform that I would like to also talk about.

Last week and the week before, we announced a number of new leadership appointments and a strong new organization and leadership structure to be better prepared for the globalization of the world capital markets.

We can no longer have all our leadership in the United States, no longer have all our leadership pocketed in London.

We need our leadership to be much more spread out.

We need to expand heavily in Asia and we need to empower more and more of our functions as we build out to anticipate the changes in the global capital markets as the world becomes less dominated by dollar-denominated assets and as GDP growth in Asia and South America continues to grow.

And so much of the cultural -- much of the business platform changes is not just related to the merger of BlackRock and BGI, but much has to do with the changes that are going on in the economic landscape.

In addition, we had to be more prepared to be in the right position in what I would call the post-FinReg Basel III capital markets.

I think this is very important.

I think many organizations are going to be impacted by the changes and I am pleased to say that our business model in the post-FinReg Basel III environment is incredibly well-positioned.

So some of our changes are in anticipation of how we believe the world will be looking.

This took a great deal of time.

It took a great deal of leadership focus and the euphoria, enthusiasm internally is quite strong right now.

I do believe people are very much focused now and now communicating with our clients and building more and more momentum.

Let me talk about the business environment that we experienced in the second quarter.

Ann Marie spoke about that quite a bit.

Obviously, market sentiment changed dramatically from a very positive view of the world through April and then beginning in May, we saw a deterioration of confidence, a problem in Europe with sovereign credit, which then caused a deterioration in the global capital markets, a severe market fall, which led in our opinion to a dramatic slowdown in high-end consumer behavior.

We are a big believer of trickle-down economics and the wealth effect has had a big impact on the economy and now we are beginning to see throughout the economies economic slowdowns from the faster pace of the first quarter.

We still remain to be constructive, but our clients in the second quarter, as we have seen and witnessed in other institutions' second-quarter results, clients did slow down.

Clients, in some cases, froze from getting prepared to put a great sum of money to work to saying, wait, let me just watch what is going on, how do I best prepare ourselves.

But the reality is, despite most clients' behavior, this low rate environment is very destructive for many clients.

Clients have a large mismatch between their needed return or their liability.

Low rates are aggravating it.

The uncertainty how to invest in higher-yielding assets actually aggravates this situation and the conversations we are having with our clients today has never been greater.

Some clients are looking to put more money to work.

Many clients are now looking to do things related to minimizing risk and putting more money to work in indexing.

Some clients are looking to put index money and then hedge fund money to work.

So we are seeing varied behavior.

If you look at the mutual fund flows, they slow down dramatically into the second quarter from the faster paces of the first quarter and the second quarter.

So we did see a market slowdown.

But what I can say, because of these dialogues we are having with our clients, I believe our business model has never been better positioned to work with our clients.

No other platform in the world has the risk management tools, the beta products, the alpha products to have these conversations with our clients.

And so I believe having this platform allows us to have quite comprehensive conversations with our clients.

I would also add, and I am going to talk a little bit later related to iShares, I strongly believe that the iShares platform, having an ETF platform, changes the dynamics quite a bit on the beta products.

Because of the liquidity afforded in the ETF platform, clients are looking in their asset allocation strategies, whether it is tactically or more of a fundamental strategy, the utilization of ETFs and having our platform, having the ability to do index products, ETF products and coupled with all our alternative products and fixed income and equities products in the fundamental spaces has really given us the ability to encapsulate much more of a holistic conversation with our clients.

We are not going to win all that business from our clients, but we are involved with our clients in these types of discussions.

And so we are -- our belief about the combination of BGI and BlackRock, the combinations of beta, the intersection of ETFs and all our alpha products is really coming to fruition.

Let me just pause a moment on performance.

I am very pleased to say our performance in spite of the real volatility in the marketplace and on top of that, a large merger integration, our manufacturers, our leaders in the businesses performed very strongly.

Our fixed income fundamental team has had extraordinary good performance.

All our mutual funds are in the top quartile and so we are continuing to build momentum for the future, especially in the mutual fund side of fixed income to really build a much faster platform.

We still have our three and five-year numbers in that area, but I am pleased to say that the performance returns and our equity platforms and our alternatives as evidenced in some of our performance fees and our equity teams, especially in our European platform, has done quite well and they continue to do quite well through July now.

Let me talk about flows.

Obviously, this is a much more complex story.

It is very lumpy.

We have witnessed in the second quarter very large inflows and very large outflows.

We saw a continuation of dissynergies due to the merger.

We still are seeing some clients who are removing some of the assets in index and other product areas.

And so we continue to see these issues and changes, but I am pleased to say we are winning -- we had the non-merger, nonscientific equity non-cash very -- that's a big complex sentence, but we still -- we saw about $28 billion of organic growth in the long-dated products.

It is important to note about cash.

I have said this in the last few quarters.

As we continue to have low rates, if we continue to have low rates, we are -- the money market business is not as competitive as bank deposits.

Banks are still offering higher rates than money market funds.

But I can say we are witnessing now, as banks are building so much cash and now with two-year treasuries trading around 60 basis points, we are now beginning to see the banks bring down their deposit rates and the competitive arbitrage between bank deposits and money market funds is narrowing.

So we don't believe going forward we are going to see the type of outflows and quite frankly, we may start seeing as an industry more inflows if two-year treasuries continue to trade where they are trading now.

And if obviously they trade even lower then we are going to see banks are going to have a harder problem offering 30 or 40 basis points for overnight money as a competitive platform versus money market funds.

Let me talk about scientific equities.

This is an industry -- we call it scientific -- the industry calls it quant.

This is an area that is still under duress.

We are still under duress in this.

This is a legacy BGI product.

This is an area when we did our merger, we saw the underperformance and so this is part of our merger dissynergies that we expected to see outflows and those outflows have continued into the second quarter.

There is less and less assets now in the problem product areas.

I should state that some of our scientific equity products are actually doing quite well.

Certainly in our Asia, products are doing quite well, Canada, some of the other areas and Europe are doing very well.

So this is not a story of complete problems.

This is a story of mostly problems related to Australia where we had a turnover in personnel and we had underperformance in the scientific area and a problem here in the United States.

In the fixed income area, our flows are not as robust as our competitors.

Much of it has to do with -- most of the flows in fixed income as an industry is in the mutual fund area.

We are seeing our flows, but we did not have as strong a platform as some of our competitors in the fixed income area.

As I said, I am very pleased in our performance year-to-date.

Our one-year numbers are strong.

As I said, in some cases in the high-yield area, we are in the top decile.

In the core products, we are in the top quartile and so we are doing -- we have done a great deal in terms of restructuring our fixed income platform and we are seeing the benefits and we are seeing the benefits quite -- month-by-month-by-month.

So I do believe we are going to begin to start seeing competitive flows in that area.

So we are -- it is a mixed bag, but we believe we are beginning to see more momentum now with the restructuring of our corporate structure and our platform.

Let me just talk about assets.

Assets were down 6% as a platform.

If you think about how large our international equity platform is, and if you take into account FX, international equities with FX components.

Part of it was down over 11% and so as an asset base down only 6%, I think we did quite well relative to the market.

That is an indication of our outperformance relative to some of the liabilities that we look against.

So you have to look at a combination of FX in terms of as we calculate all assets on a dollar basis.

Ann Marie spoke about pipeline.

This pipeline is masking all the ins and outs.

The pipeline is a net $59 billion of which $47 billion is long-dated.

This takes into account -- we know of a very large -- as much the $15 billion outflow.

As I said this is netted.

That was a client -- because of the merger integration where we had over 40% of their assets and the client will be taking out $15 billion in the third quarter.

And so the $59 billion is netting all the ins and outs and so we are starting to see more and more momentum now with that in line.

Let me just talk about our mutual funds.

I believe we are continuing to build a very strong platform.

We are the third mutual fund platform in the United States.

We are third internationally.

We have a real opportunity to become much larger.

We had great -- we're building a great business in the subadvisory business in our mutual fund platform.

In the US, we had some very large wins that is a part of our retail platform.

It doesn't show up in our mutual fund platform, but it shows up in terms of our interconnection with our clients and that has been -- continues to be great.

In our international mutual fund platform, we are seeing some very large changes going on.

More and more institutions are going open architecture and when they first go into open architecture, they open it up to 10 or 15 different third-party providers.

As they start understanding the interconnectivity between open architecture and their internal asset manager, in many cases, they conclude they have too many outside managers.

And in three very large cases in the first six months, three large distribution platforms narrowed their external parties to as few as three -- through firms, some five.

In every case, BlackRock is one of those providers.

And so there are major changes going on in the distribution platforms and we have, because of our scale, because of our products and performance and most importantly, or just as importantly our continuing growth in our brand and our brand recognition, we are developing these very intimate relationships with these distribution platforms.

And I do believe it is going to be a very large engine for our forward growth as we build out these strong connections.

And I do believe it speaks loudly as we are going to see, in my mind, the haves and have-nots, very similar to the banking industry and the insurance industry where you're going to have fewer and fewer third-party providers allowed in distribution platforms.

And so I do believe we will be positioned quite well for that shelf space.

Let me just talk about our ETF platform, iShares.

We are very pleased to say that our marketshare has been very strong.

Obviously, a little lower as more and more participants come in, but much higher than we thought it would evolve to.

At the end of the second quarter, our marketshare was approximately 46.5%.

And so we are very excited about our positioning and I do believe a lot of our positioning has to do with the dynamics between our iShares team and the institutional and our mutual fund side.

And I think that represents a very good connect of a tissue between iShares, our mutual fund team and our institutional team.

We believe institutions are a larger component of the ETF platforms worldwide than retail.

So when people talk about ETFs and they compare them to mutual funds, I think this is not a correct measurement because there are so many new participants and many new institutional clients are using this as a hedge, as a tactical allocation and this is why the connectiveness between BlackRock, ETF platform and our institutional platform is very important.

And we are seeing more and more opportunity.

I'm pleased to say when providers, distribution partners like Fidelity and Schwab, we have large connective relationships with them as they are trying to build out their platform and we play a big role in their growth.

The other thing that is very clear that we need to continue to invest in are ETF platforms to be competitive to offer other products.

There are, we believe, globally ETFs are going to become much more dominant, especially in the emerging world, South America where we are the leading platform, and in Asia.

I mentioned branding, but let me just talk about that again.

We are spending a great deal of time making sure that our messaging is broad-based, it is global, it is institutional, it is retail, it is solutions-based.

And I think we are very pleased with the slow but steady progress in building out our brand and we believe our brand continues to be enhanced by all of the connectiveness.

We are extremely pleased with the connectiveness between our iShares branding and our BlackRock branding.

We believe both platforms are benefited by the connectiveness of the leading ETF platform of iShares and the growing brand and growing presence of BlackRock.

BlackRock Solutions is having really an exceptional year.

Over the last two years during the financial crisis, much of the revenues were one-timers in terms of solving short-term problems for our clients.

In 2010, we knew we needed to find replacements in those revenues and we won quite a few Aladdin assignments, 14 new overall assignments in our solution space.

We started off the year worried about how can we build upon it and I can tell you today, we are now worried about do we have the right -- do we have enough staffing to handle all of the opportunities.

One of the great opportunities that we are seeing now for BlackRock Solutions obviously, A, is a continuing desire in having world-class risk management tools.

Unquestionably, financial reform is putting more pressure on risk-adjusted returns and then Basel III is going to have a pronounced impact on many of the leading banks in terms of how they navigate their balance sheets.

So we are seeing huge inquiry worldwide in how we can help our clients in terms of navigating Basel III, FinReg and we are in -- we have conversations now, and I am not here to suggest we are going to win them all, but if we do win these few assignments, we are going to have some extraordinary growth in terms of the opportunities in the solutions space.

Ann Marie spoke about the global solutions.

We believe more and more clients are looking for multi-asset solutions.

We had two large wins in the second quarter, which have identified the type of complexity that clients are looking at.

One was the Ohio 529 plan in terms of multiproduct, a combination of institutional and retail connective tissues to get this relationship.

And then where we won a very competitive platform called the Equitable of the UK, which is about EUR5.7 billion, which is multi-asset class, heavily weighted towards sterling-based assets, but it is an example of the uniqueness of our platform of presenting multi-asset category solutions for our clients.

And we continue to believe that the solution-based assignments will continue to drive and drive very strongly for our platform.

Let me just talk about again about our margins.

I think there was a lot of concern about our margins after the first quarter.

We have been very successful in the second quarter in making sure our operating margins are strong at 38.8%.

This is a time in which where we had obviously extreme volatility, negative markets and yet we had great discipline over the course of the quarter.

On top of that, our margins stayed strong even with our strong investments.

We are going to continue to invest in Asia, we are going to continue to invest in our iShares ETF platform.

We are investing in our trading platform as we believe scale is going to become a more important component an identity of BlackRock and we will continue to build out our brand.

The other thing that we announced in the last few weeks is a strong buildout in our alternative space where we believe we have very large opportunities in building out that platform.

The last thing I would like to just reiterate, which Ann Marie discussed, and that was the Board approving the 5.1 million share stock repurchase.

This is reinstating a program that we had prior to the last two years.

We are going to -- this is taking an approach that we have those many shares of dilution over the course of the next fourish years.

However, we have -- and it's up to management's discretion to determine when we purchase these shares.

And it is fair to say that purchases will probably be more frontloaded in terms of when we actively go into the marketplace.

Well, I should probably talk about FinReg and Basel III.

The President will be signing the bill today.

We believe it will have a much bigger impact on the financial landscape than people understand.

Obviously, there is much to be -- there is much information that we still need.

Much of it is in outline form, but we do believe it will have a pronounced impact on institutions that rely on balance sheets.

BlackRock does not rely on our balance sheet.

We believe we have great opportunities in terms of where we are taking this business.

In addition, we believe the outcome of a more capital-intensive balance sheet business is going to lead more and more businesses and products to the capital markets.

This is why we did the reorganization in terms of our corporate structure because we do believe the growth in the global capital markets are going to be the large outcome as a result of Basel III and the financial reform bill in the United States.

No other firm in the world is as prepared and in terms of product, in terms of footprint to take advantage of these opportunities.

And we believe we are in the right position.

Our business model is secure.

Our business model is very -- we are in a very good position to take advantage of the flows, especially if clients need to start doing things with our cash and short-term products.

Our performance year-to-date is strong and our solution-based model is intact.

As I said earlier, the leadership changes we made lead me to believe that we have the strongest leadership team that we ever had at BlackRock and I do believe our leadership team is world-class compared to our peers in any financial services arena.

I want to again thank everybody for a lot of hard work in the second quarter.

It was difficult, but I can say today now in the third quarter this is behind us.

We have a lot of opportunity in front of us.

Let me open it up for questions.

(Operator Instructions).

Craig Siegenthaler, Credit Suisse.

Good morning, everyone.

Larry, maybe first if you could help us with regulatory reform, thinking about maybe how the bill and other issues like money market capital charges could potentially affect the industry and also BlackRock.

Then also maybe you could talk about if you may need to modify several pieces of the business like the bank holding company in the US or the regulated entity in the UK with the capital charges.

Well, FinReg doesn't speak about money market funds.

I mean that is a separate issue that the SEC is working on.

We have had meetings with the SEC as recently as two weeks ago.

The big issue for money market funds is going to be how the SEC -- do they demand variable NAVs.

That to me is the most important issue related to the money market business.

In terms of capital charges, our proposal has been to have capital charges that we could build over a number of years, that we believe we need to find ways of making sure that money market funds are as competitive as any bank deposits.

So we believe for the industry to go to the next level, we believe we have to have as competitive a product as a money market industry as bank deposits.

With the FDIC guaranteeing up to $250,000 of deposits now, we need to make sure we have some form of safety for investors.

And I do believe the shadow NAV is a good start.

I do believe the industry in which we are in favor of of having a liquidity bank is a very good first step.

And so we have a leading position with the market in trying to make sure that we are in front of this.

But at this moment, I don't see any real threats to the financial situation related to money market funds.

In terms of bank holding company and in UK, we don't see anything related to FinReg having -- or Basel III having any real impact on BlackRock's business.

And so I need -- Craig, give me a little more color as to what specifically you are asking about for us?

Well, I mean positive is I guess no impact from the Volcker on the bank holding company and maybe touch on that and then maybe in terms of kind of potential positives, do you see the ability to win business from any of the institutions that are affected by this that maybe have to reduce their asset management business and their proprietary businesses?

A, we don't know how long they are going to have in terms of unwinding whatever businesses they may have that may be restricted or inhibited through these capital charges and/or prohibitions.

So I don't think in the near term it is going to have any demonstrative impact on any of the banks.

I do believe the biggest issue will be how does Basel III impact capital and capital charges and what I do believe out of that outgrowth is you are going to see a reduction in balance sheets.

Obviously, that is having a big chilling effect on the economy because it is going to be the lenders and how we are going to do it and I do believe that is going to lead to more capital market activities.

And so we -- that is how we are building our platform; we are having these conversations.

We believe that opportunistically these are really good things for us.

Okay, and a real quick one for Ann Marie on the short-term assignments, the solutions business.

You had a bunch of wins this quarter.

Actually it seemed like a pretty high number.

Does that set up a difficult comp for solutions revenue in the third or the fourth quarter as some of those run off?

Is that something you can maintain there?

I think as Larry mentioned that we continue to see, as regulation comes out and given some of the atmosphere in Europe, good opportunities.

I would also note that in solutions, what we have seen compared to a year ago is actually a stronger mix in the base business because some of the people that we did do advisory work decided to migrate onto the platform and use the full toolset.

So actually, if anything, our revenue mix in solutions compared to a year ago has a greater mix of the ongoing revenues and a smaller mix of the advisory assignments as compared to one year ago.

Great.

Thanks for taking my questions.

Michael Carrier, Deutsche Bank.

Hi, thanks a lot.

Just a quick question on the flows.

Thanks for breaking out -- I think the $34 billion, separating that out relative to kind of the core business is helpful.

In that $34 billion, is there --and I am just trying to go through -- you guys give a lot of numbers.

Is there $26 billion that is related to the quant product and then the remainder would be more related to the dissynergies related to the merger?

Yes.

Okay.

And then just in terms of the pipeline -- I think last quarter the pipeline was at $35 billion and then when we see the results, if you combine cash and long term, we are at $30 billion of like outflows.

So I am just trying to understand, and I know you said it is a net number, but just from the timing, like when we see that $60 billion, it is obviously a very healthy pipeline.

But from a realization, is that typically realized over the next say two to three quarters, one to two quarters, same thing just on redemptions?

Like when can those pop up just so we kind of can gauge those numbers.

Let me have Sue talk about it.

That's a great question.

We actually track our aging to try to be able to get greater and greater insight on this point.

As you might expect, the aging on redemptions is much lower than the aging on inflows as a typical matter.

So we would typically expect redemptions to occur within the next quarter if they carry over.

And so then it flows I would say on average over the course of two quarters.

And it is very hard for us to predict and to give you a sense of will these offset each other in the same timeframe.

Okay, that's helpful.

And then I guess just on the investment and the expenses just being higher particularly in G&A, I guess just for Ann Marie, is this a good, a fairly good run rate if we strip out that $28 million of G&A that is related to the merger?

Then I guess just going forward, in terms of the new investments, you have mentioned some things on the distribution side, products like alternatives.

So I guess where are you seeing the most opportunity for this investment to drive new business growth?

And I think you mentioned the international distribution opportunity.

Any more detail there in terms of which markets and then from a demand perspective, which products are being demanded by these new clients?

Yes, well, first of all, I do expect us to continue to invest in the business.

So we will have expenses in certain areas going up as we do that.

Over a longer period of time, at the same time, we are going to continue to reap synergies, but that is not going to necessarily equalize in any period.

The important connection is the one you drew, which is the connectivity to revenue and our opportunities to really grow the top line and where we see opportunity there.

Larry clearly talked about iShares.

We continue to see that market expanding.

We are not necessarily thinking about marketshare expansion there, but we are seeing more and more opportunities.

We are introducing new products and we are continuing to compete there.

Defined contribution, we are -- again, relative to our capabilities, I think historically we were paying underweight relative to where we are.

Larry mentioned some great wins in the pipeline with respect to multi-asset class where clearly we are seeing more and more people and we are investing in really our capabilities to work together with clients because that is one of our advantages outside that we can bring risk together with multi-assets to help people solve investment problems.

The next one I would mention is, because it was part of our leadership announcement, really alternatives.

I think we continue to have great opportunities within that platform.

And then you mentioned geographies where clearly Asia, just from a growing market perspective, is a real opportunity.

We are seeing some of that realized quickly for example in some of our Asian iShares and really that is where, for example, our quantitative product is doing very well.

However, certain of these opportunities are going to pay off and realize relatively quickly in revenue, while others such as Asia are going to play out over an extended period of time.

And we are committed to investing in both, both opportunities that will pay off immediately, as well as opportunities that are going to (inaudible) us well for long-term growth consistent with the [world].

Larry, I don't know if you want to --

No, I would just add another -- pardon me?

(inaudible)

And we continue to build out at BlackRock Solutions in hiring.

We continue to see huge opportunities there.

And as I said earlier, we actually have shortages of people to handle some of the inquiries.

And the other thing is that we are making large investments and we continue to build out.

The payday for there is about another year from now and that is our trading platform that we are going to build, making sure that we can do more of the internalization of our trading.

And we are looking at how we can link that up with BlackRock Solutions to provide that to our third-party clients.

But we are hiring quite a few people in building this out and it is generating a lot of energy within the firm that we could truly differentiate ourselves through this initiative.

Okay, that's helpful.

Thanks a lot.

(Operator Instructions).

Bill Katz, Citigroup.

A couple questions if I could.

Larry, from a big picture perspective, you mentioned -- you talk about capital markets perhaps taking some marketshare back from the banking system on the other side of the Basel.

Can you talk about exactly what you're doing there?

Are you building out -- is it just trade execution, is it broker-dealer capabilities?

Just trying to get a sense of how capital is being redeployed.

We are not going to get into the trading business.

We are not going to be changing our business model.

We are building out just more non-dollar-based manufacturing, we are hiring people in Singapore in credit.

We are building more equity teams and so we are just building up a larger, more robust global footprint.

As you know or heard, IPOs in Hong Kong were greater than IPOs in the US this year.

So as you see more and more growth in the equity markets overseas or growth in the credit market, securitization in Europe is exploding where it is basically dead in the United States.

A need to have a much more global footprint, a larger manufacturing platform even for US investors is a requirement in the future.

I don't believe most investors have those capabilities and most investors are not preparing themselves for the changes that are going on.

Too many investors are too reliant or too many investment managers are too reliant on dollar-based assets and the changes in the world, changes in the capital markets are happening very fast.

We are spending a great deal of time getting prepared for that.

And as I said, Basel III with higher capital standards is going to lead more and more of the asset finance business going to be done through the capital markets.

You are going to see more and more corporate bond market growth as banks are going to have less corporate loans.

And you are going to see -- as markets expand, you are going to see the growth of the capital markets in the form of IPOs and extended equity markets and we want to be there and take advantage of it.

That's helpful.

Thank you.

Second question I have is another big picture question.

Vanguard recently got into I guess the ETF business, a little bit more pronounced with a pretty low fee product on the S&P.

And then recently iShares lowered its fee rate on its gold, gold portfolio in the US.

Are these one-offs or do you think that there is potential for pricing pressure in the ETF business collectively?

On the gold side -- I can't speak about Vanguard; I can speak about our motive behind the gold fund.

First of all, I would say if you look at the results of the gold ETF business, first movers is a very pronounced advantage.

The SPDR's gold product was launched before the iShares gold product.

It had a 10 to 1 in terms of assets, $50 billion versus our $5 billion essentially or $40 billion versus our $4 billion and we needed to find ways to be more competitive.

And in that product, it made a lot of sense for us to lower the fees where we believe we could get a bigger slice.

That product is much more of an institutional product and we believe we have strong relations with the institutions, especially some of the institutions who are the largest owners of that product.

So we did this strategically more than with that product, not as a statement about price wars.

Related to the S&P product at Vanguard, Vanguard is our biggest competitor in the ETF space.

They are doing a great job.

And yet despite all of the power of Vanguard and all the new announcements of new participants in the market, we believe because of the intellectual capital of our team, the product generation of our platform, our first-mover position and our business proposition in terms of service we provide our clients, the customized work we are doing even with, in some cases, higher fees, we still have a 46% plus marketshare in the world.

And so we pay attention to pricing, we pay attention to all those issues, but we believe we are in a very good position to prosper as ETFs become larger and larger.

Thanks.

That's perfect.

And then just one last question.

Just trying to counterbalance the near-term pressure on margins versus synergies and then sort of a sustainable margin.

So look out another year or so, maybe get past some of the investment spending -- I think you ticked off four or five different areas, what do you think the right margin for your Company is?

Is it still that 38%, 39% or is there room for some of that to lift as the AUMs start to build?

Certainly, with market growth on top of organic growth, I would say that we can look for potential margin expansion.

At the same time, I think just in balance, we remain more committed to top-line growth and organic growth and growing the business than really running the business in order to save costs.

So I will just say we continue to get the right balance and take out costs everywhere appropriate and that may indeed translate to some improvement, but not at the expense of the top line.

I would say though it is our view if we do our job right that we get it all right, we continue to have the investment performance that we are having and experiencing now across the platform.

The investments we are making in alternatives will start paying off in terms of growth in alternatives.

I would say most certainly our margins will expand.

Thanks for taking all my questions.

Marc Irizarry, Goldman Sachs.

On the non-US distribution, it sounds like there is some favorable changes in terms of the way the landscape of distributions is playing out overseas.

Can you just discuss how far off you are from seeing a real pick-up in flows outside the US and maybe just how the model is serving you now versus what you would expect over the coming quarters?

I would say, A, we are developing deeper and deeper relationships with these distribution platforms, especially in Europe.

And yet with the market capitulation in Europe, with the sovereign credit issues, flows in Europe did slow down.

And so we are not seeing the flows, but our presence, our position is -- we are in the right space, we are in the right position and our performance is good.

So I think probably the most important thing I could say, Marc, when the market does start stabilizing and we start seeing real growth in long-dated assets, we have never been as prepared in terms of being in the right position.

And so that is what we are doing now.

We are investing, we are building those strong relationships.

We continue to believe and hear from our distribution platform that we are becoming one of the key strategic partners.

And so as -- and we are investing in those platforms and when those flows pick up from where they are today, we will be a large beneficiary.

In Asia, we continue to do the same thing and are continuing to build connectivity with the local distribution platforms.

We still have a very dominant position in Taiwan, working with our strong distribution platform.

And so all I can say is we are building this connective tissue.

Our iShares platform in Asia is the leading ETF platform.

That is giving us greater connectivity with more players than we have ever had in legacy BlackRock.

And so we are building a platform to be prepared when those flows are there.

Okay great.

And then you talked about the quant duress.

Can you give us a sense of how much the scientific or the quant product, what the size of the AUM is there now?

And how do you sync the sort of quant duress that we're under, when do you see that sort of ebbing?

Assets are under $100 billion now, of which about $37 billion, $35 billion is US and that is where a lot of the duress is.

As I said, the other product areas are not -- they actually have done quite well.

And so we have done a lot of leadership changes there.

We have reached out to a lot of the clients and this is an area that we are intently focused on.

In some of the non-US scientific business, we're actually seeing some modest flows.

But it is a product industrywide that is under a lot of duress and it is a product over the last few years as an industry that has underperformed.

And it is a product that before that had seven years of pretty good performance.

And so in many cases, there are some disillusioned investors.

Okay.

And then just in the multi-asset class, portfolios looked like you have got some big wins there in some of the insurance outsourcing mandates.

Can you talk a little bit about what the pricing is like there and when you look out at the pipeline, what are those sort of map portfolio -- what does sort of the pipeline look like for map portfolios?

Yes, we are having some very large conversations with some large players, whether it is fiduciary outsourcing in Europe, a few very large insurance companies in Asia and Europe.

So we are in some pretty advanced conversations with a lot of these institutions.

But as you know, this business is very lumpy.

But we are pretty confident that we are going to win our share in this business.

Fees are -- really is a function of the scale of the assets that we win in terms of the -- and the types of products.

It could range from anywhere from eight basis points to much higher.

So it really depends on the complexities of the assignment and what we are doing.

And in many cases, this is also connective, and this is where we have an advantage, it may be connective to BlackRock Solutions.

Equitable Life is a good example where it is a solutions-based assignment and they are taking into account -- they are going to be using Aladdin.

Okay, great.

Thanks.

Robert Lee, KBW.

Good morning, everyone.

Thanks for taking my question.

I apologize if you went through this earlier in the call.

I jumped on a little late.

But capital management -- I mean obviously I know you announced the share repurchase and earlier in the year, you had a nice increase in the dividend.

But now that you have pretty much chipped away your outstanding short-term debt, I guess it is down to about 180, your cash generation is pretty big, can you kind of update us on how you are thinking about it going forward and how the debt repayment is probably receding in terms of near-term importance?

Are you targeting a certain type of dividend payout ratio?

And as you kind of work through the integration with BGI, how are you thinking about acquisitions on a go-forward basis?

A, we have always had a target and this is a loose target around a 40% dividend ratio.

So we have always had that approximate guidepost and we have tried to work around that.

It is not set in stone, but it is a guidepost that we have always looked at.

And we look at share repurchase and dividends to be a part of what we should be doing for our shareholders.

There is no question that we are going to be generating much more cash.

And depending on capital needs associated with financial reform or capital needs associated with money market funds or capital needs associated with Basel III, we don't know how anyone will be impacted yet.

And as I said, we think we are in very good standing, but depending on all those uncertainties, which we will know obviously over the course of the next six months, one should assume that we will be either reviewing subject to Board conversations and approval our dividend policy and/or we may review our share repurchase policy.

In terms of mergers, we are going to be opportunistic in terms of mergers related to our solution-based business.

If we could find data providers and/or technology enhancements, we will be -- we will continue to look at that and we will continue to be opportunistic there.

There are many orphan ETF platforms that have approached us over the course of the year.

In many cases, we have walked away from any conversations as we were just trying to absorb our merger.

As our merger integration is behind us now, we have a little more flexibility.

So we will look at some orphan ETFs if they make sense and so we will continue to do that.

In terms of any large-scale merger related to asset management, I would say that would be highly improbable.

I don't believe we need to do that.

I believe we have a platform in place that is unmatched, unrivaled by any other institution.

And now -- and we are making those investments in making sure that we are prepared.

And so I think we don't have to do anything large-scale and we are not even considering anything of that consequence.

If we see an opportunity in some of the emerging countries though in terms of an asset management platform that may help us as we grow out our manufacturing, that could be a possibility, but that would be probably something very small-based.

So I think it is fair to assume that we will be generating a lot of cash and we will be actively looking working with our Board in terms of dividend policies and share repurchase.

Thank you.

And a question on -- for lack of a better way of describing it.

I'll call it the legacy institutional fixed income business of BlackRock, just trying to get a feel for how that business is going.

I mean to the extent you have had -- I guess I am having trouble parsing through because you've I think broadly in the industry generally I think institutional fixed income business has been kind of a net gatherer of flows industrywide.

I mean it kind of feels like -- and I don't know if this is related to the merger -- that maybe you haven't gotten what I will call your fair share in that.

Can you maybe kind of update us on how that business is going?

Yes, I think the merger did slow down our growth in terms of fixed income.

I do believe our 2008 performance hurt and then we did the restructuring of the team and that slowed down inquiry.

I can say though the dialogue we are having now is very positive.

We are having stronger conversations with the consultants now with our clients and we are winning incremental business, but we have lost some fixed income business due to mergers, to restructuring and so we are seeing some lumpiness.

I would say more of the institutional flows are in the short end of fixed income, not in the long end.

I would also say most of the flows are more in the mutual fund side as an industry in fixed income.

So I think it is no mystery where all the money is sitting.

It is sitting in the short end as evidenced of a two-year note sitting around 50 bps.

And so I think more and more money is just sitting there waiting to be redeployed, whether it is in equities, alternatives or long-dated fixed income.

And we do know many insurance companies are sitting with large pools of cash.

They are not aggressively investing here and so -- but I think it is fair, Rob, to say that the merger integration slowed us down and the changes we made in 2009 with our leadership team in fixed income, people are watching us, but I can say today that we are having some very positive dialogue and I feel very good about it.

All right, great.

Thanks for taking my questions.

With that, we have reached the end of our allotted time for questions and answers.

Mr.

Fink, Ms.

Petach, are there any closing remarks?

No, I would just say, as I said hopefully clearly in my presentation, when we did our first-quarter results, we were in the midst of our merger integration and now I can say very loudly to all our shareholders, to our employees that the hard work is behind us.

We have a great leadership team, a great structure in place now.

I feel very fortunate to be leading this organization with the team that we have in place.

And I believe we are in a good position now to really take advantage of the opportunities this platform has.

It is very unique and very different.

With that, thank you and I will speak to everyone in a few months.

Thank you.

This concludes today's teleconference.

You may now disconnect.