BlackRock, Inc. (BLK) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Kerry, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Inc. First Quarter 2011 Earnings Teleconference. Our hosts 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 . [Operator Instructions] Thank you. Mr. Connolly, you may begin your conference.

Good morning. This is Bob Connolly, I'm General Counsel of BlackRock. Before Larry, and 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. As you know, BlackRock has filed with the SEC reports, which lists some of the factors which may cause our results to differ materially from these statements. And finally, BlackRock assumes no duty to and does not undertake to update any forward-looking statements. And with that, I'll turn it over to Ann Marie, our Chief Financial Officer.

Thanks, Bob. Good morning, everyone. This morning, as we report first quarter earnings, we're delivering a top line revenue story. Today, we announced earnings of $2.96. This is up 23% compared to a year ago, and those earnings are being driven by top line revenue growth of 14%. Our revenue growth is a combination of both market, but importantly strong organic growth. And we are seeing that organic growth, consistent with a number of the themes we've been discussing. We saw strong revenue growth related to retail close that both U.S. and internationally, and reflects the strength of those markets, as well as our relative share of those markets improving. We saw good close in our EPS business, iShares. And just a reminder that, that business, in the first quarter, is usually seasonally the weakest quarter of the year. We see good revenues in multi-asset products as clients are seeking people to solve their problems and help them manage risk, not just managed assets. And we are seeing good revenues from alternatives, both slated to the performance in alternatives, and forward into alternative. And that's a trend that investors continue to separate alpha from beta. The first quarter was also a quarter of a number of important milestones. We increased our dividend by 37.5%. We increased our credit facility by $1 billion to $3.5 billion, and extended the maturities for five years. While we have no plans to use the credit facility, we think it's an important source of long-term flexibility. Our merger-related concentration flows are, at this point, largely behind us. The first quarter is the lowest quarter since the merger. We have only one $9 billion outflow, that's relatively low revenue from a single client remaining in the pipeline, and we've got no other known concentration confirmed. With respect to our long-only quant [quantitative] product, the near-term performance is going to take time to work its way into the medium and longer term track record. With that in mind, we did budget for outflows in 2011, and we are seeing outflows in our U.S. and global products. At the same time, we're beginning to see inflows into regional quant products, where we have had good performance. And so we do believe, quant, is an opportunity going forward. And I wanted to see what our quant hedge funds which are performing well and attracting assets from our long-only quant. The pipeline is strong with a high-quality of revenue and Larry is going to talk much more about that. And finally, of note that on April 1, we were added to the S&P 500 index. And on the date of inclusion, we were the 75th largest company in the index. I'm going to walk through a number of the slides starting with Slide 1. Our operating income which is shown in the left-hand side of the chart of $819 million was up 13% compared to a year ago, with net income and EPS both up 23%. With respect to margins shown on Slide 2, on the far right-hand side. Our margin came in 39.1%. That was up from the first quarter a year ago. And just the fourth quarter margin as a reminder reflected a peak period of performance fee loss. Our comp to revenue ratio for the quarter was 35.4% consistent with where we've been running for a very long time. We do remain confident in both top line growth combined with a good margin, as we continue to seek efficiencies and realize the benefits of scale. Just a couple of examples from the quarter, late in the first quarter, we migrated a number of our data centers in Snohomish facility in Washington state. We're going to benefit from doing this by lower cost power. Another example is, we have been consolidating our operating functions into Centers of Excellence which will benefit from scale and following the sun. At the same time, we're investing in the firm bringing in some great new talents and capability, something Larry is going to spend time talking about. On Slide 3, with strong markets and all in all, we continue to benefit from improving markets. On Slide 4, on the far right-hand side, it was laid out the key components of our earnings per share. Earnings per share of $2.96 included operating earnings of $2.93. That's $2.79. That $2.79 included $0.06 associated with the successful launch of a $1 billion closed-end funds investing in commodities and energy. We have a tax adjustment of $0.12 that was related to resolution of certain tax matters and $0.05 of nonoperating earnings. If you take the $2.96 and you exclude the closed end, as well as the tax adjustment, we still had earnings of $2.90 in the quarter. Compared to the fourth quarter -- compared to the first quarter a year ago, you can see the business grew across all dimensions. And compared to the fourth quarter, we had growth in the base business, fewer onetime costs, offset by a period with fewer performance fee loss. The first quarter as adjusted tax rate was 33% before considering the $24 million tax adjustment. That brought the quarterly rate down to 30.1%. Speaking of revenues now, as shown on Page 6. Year-over-year revenues were 14%. I'm going to talk about base fees in a minute by really starting with performance fees. Performance fees in the quarter came in strong at $83 million. That reflected both strong relative performance on a number of equity accounts, as well as the strength of our alternative platforms. We have good performance across our single strategy hedge funds. And also of note, at this point, over 2/3 of our hedge fund of funds are above the high watermark that compares to about 20% a year ago. We had strong BRS revenues of $128 million. We continue to grow the base Aladdin business. We continue to win and implement new advisory assignments. We're beginning to see the run-off of some of our long-term liquidation assignments. This reflects the opportunity for holders to benefit from improved valuations and liquidity on the underlying assets, and it's a trend we expect to continue. Included in the AUM price line is $15 billion in new long-term disposition assignment. And there is active interest across-the-board on Aladdin, so we feel great about the BRS opportunity going forward. Moving on to base fees. And as shown on Slide 8, really, base fees improved 13% year-over-year across all long dated asset classes. Compared to fourth quarter, as shown on Slide 9, we had a $33 million or 2% increase in base fees, and that is despite the drag of two fewer days in the quarter worth about $40 million. When I talk about retail and U.S. and international strength that comes through in the $27 million of revenue associated with active equity product. You can also see the growth in alternatives and multi-asset that I mentioned. With respect to EPS, we are seeing trends inflows which reflects the rotation into equity. Rotation into yield products. We are seeing strong global growth. And that reflects international clients both coming into U.S. products, as well as domestic products. Just for transparency's sake and thinking about our institutional index assets, those assets can be high-velocity assets. Clients sometimes just parks their money in an index while they decide what they're doing longer-term. That can result in high-volume inflows as well as high-volume outflows which have relatively low revenue impact. So beginning in the fourth quarter, we've separated this out clearly in the press release so you can really see the impact of those revenues and flows. Moving on to expenses which are shown on Slide 10 and 11. Compared to a year ago, expenses are up $195 million, about 15% up consistent with the growth in the Base business. G&A is up $85 million, really, three key drivers from one cost of $19 million that I talked about earlier, $20 million of asset-free measurement and $28 million of marketing and travel expense. Compared to the fourth quarter, expenses are down $68 million or about 4%. Compensation costs were relatively stable at about $800 million, where we had lower direct incentives and bonus, offset by the fact that we hired more people. First quarter was at peak payroll taxes associated with our bonus payout and we are beginning to reflect the new stock awards into our expense. G&A was down $69 million. Despite the $19 million closed-end one cost, we didn't repeat a number of the unique cost that we experienced in the fourth quarter. A couple of what you'll recall, which was really the establishment of a charitable fund and the onetime regulatory fee to the asset management you pay in the industry, both of which were about $20 million. Nonoperating income which is shown on Slide 12 was $14 million, that which $43 million of investment gain across all asset classes, partially offset by net interest expense of $29 million. The value of our investment portfolio is stable at about $1 billion or $940 million excluding headwind-related items. Really, the gains in the portfolio were offset by net distribution down to the portfolios to the values of the investment are about stable. And these investments, as you know, were a pro-investments alongside our clients or seeding of new products to everything we're doing here is aligned with our clients interest. With respect to cash flow, we're generating substantial cash flow and returning a meaningful portion of that cash to shareholders. As shown on Slide 13, we did increase the dividend from $4 annualized to $5.50 to 37.5% I mentioned earlier. And in the quarter, that resulted in a 48% payout. We still have repurchase authority of 4.2 million shares. We didn't do any repurchases in the first quarter but we have given notice to redeem our convertible debt, which is likely to result in those investors converting those shares in common and increasing our flows by a small amount. We are still very conscious about flows since we've been included in the S&P 500. We want to continue to meet the criteria which got us included. And at the same time, we would like to begin repurchasing shares at a minimum of our anti-dilutive, and we're going to seek the opportunity to buyback shares in ways that won't materially disturb our flows. We don't have any plans for material M&A or investments that would be dragged. And believe me, we don't want to have idle assets on our balance sheet over extended periods of time. So wrapping up, the first quarter is indeed the growth story. We entered 2011, delivering double-digit earnings growth, fueled by top line revenue growth. We delivered a healthy margin, generated substantial cash flow and returned a large portion of that cash flow to shareholders. We feel great about our business model. We feel very strongly that we are well-positioned strategically, relative to the global plan, and that is already reflected in our pipeline and gives us great confidence in our future growth opportunity. With that, I'll turn it over to Larry.

Good morning, everyone. Thank you, Ann Marie. As we reflect on our first quarter, it became very evident to me that BlackRock has come together as one firm. Cultural and business integration from our BGI merger is totally behind us and our success this past quarter and in the beginning of the second quarter, demonstrates that our business momentum is accelerating. BlackRock's broad range of products, our worldwide business footprint, our solutions in risk management approach to our clients' needs, have allowed BlackRock to serve our clients with more opportunities enlarge and enhance our client relationships. As BlackRock feels more comprehensive relationships with our clients, we are expanding our product offerings, both in Beta and Alpha and more investment solutions. Our relationships are becoming larger and more substantial with many, many of our clients worldwide. As Ann Marie stated, our earnings were $2.96, up 24% year-to-year strictly driven by organic long-dated asset growth, beta obviously. But more importantly, by our expanding product mix. And also as we said at the end of last year, by what we are seeing more frequently re-risking by our clients moving into equities and moving into alternatives. And BlackRock is playing a larger role in that than we've ever done before. And this is leading to revenue growth of 14% year-to-year. And I should note, unlike so many other financial institutions who are recording, our earnings growth is fueled by revenue growth. A 100% of our revenues is driven by client business Ann Marie spoke about that. Our business model is not going to change. We'll use our balance sheet only to co-investment with our clients and seed products. We are not using our balance sheet to compete. And importantly, we intend to use all excess cash flows, in the form of dividends, and as Ann-Marie spoke about, to buyback shares when it's -- especially the shares that are being created for employee plan. And as Ann Marie spoke about, we didn't raise our standby credit facility. If there's any events that need us to take advantage of opportunities and repurchasing shares. Let me review our quarter. Our headline at AUM is $3,648,000,000,000. This has been led principally by our multi-asset class product growth, which grew by about $22.4 billion. Which $6.8 billion of it is in our fiduciary assignments and $16.8 billion of growth in our Defined Contribution business, principally through our LifePath products. And we continue to have more and more opportunities working with our clients in these products whether it is LDI, and/or just more complex relationships and having beta and alpha. And as I said, it is increasing product mix that isn't global -- that is global allows us to have a much more comprehensive relationship in terms of asset allocation, mixes of products, how does one look at the risk and how should one design a portfolio run-on liabilities. One of our most important jobs for the future is going to be a continuation of building our brand. We need to continue to build our brand recognition worldwide. This is going to be a big and aggressive campaign over the next five years. We believe this will demonstrate the growth of the platform and it will allow us to continue to grow worldwide. I have to emphasize worldwide growth although we are still seeing tremendous growth in the United States but as the world continues to grow faster outside the United States in parts of Asia and South America, we continue to build up that platform. It has to be away from dollar-based assets, so there has to be more in local currencies. And in doing so, we need to continue to build out that brand and the brand recognition as we expand our footprint worldwide. A good indication of how our brand recognition is being enhanced and also a good indication of the ability to grow in multiple channels, I'd like to highlight our retail channels in the first quarter. In terms of long-term asset growth, our U.S. retail platform and long-term assets grew by $7.4 billion. Our international retail channels and long-dated assets grew by $6.3 billion, so a total of close to $14 billion in terms of assets in the first quarter. I should also note, fixed income long-term assets grew $8.5 billion and equities, getting back to the re-risking, grew by $10.5 billion in the first quarter. In our iShares products, we continue to see very good momentum. And if you look at a year-over-year type of growth to the fourth quarter, generally is a sometimes low to no growth, after expanding growth in the fourth quarter. And if you add our growth in April and our growth April to date and our growth in the first quarter, it's over $12 billion. And it includes the iPath products. We are growing in every product in our iShares platform, except our emerging equity markets ETF. This is where we actually had bad tracking error last year. I am pleased to say that it has been fixed. We put a lot of emphasis on it. And in the last few weeks, we have begun to see a reversal from outflows to a multibillion-dollar inflows in that product. So the first quarter for our iShares product was strong and we continue to believe there's going to be more and more opportunity. What's interesting to note and we said this in the fourth quarter, but we're seeing it even more so in the first quarter, I do believe ETF flows is a good forward indicator of where asset allocation is going. And we began to see a shift out of fixed income into equities at the beginning -- in the third quarter last year, but that's accelerating. And we are seeing actually more growth now in equity ETF than we did in fixed income. So this is another example to us that clients are re-risking and why, I think I've been probably talking about why we believe equities will continue to rally. Long-term flows, as Ann Marie stated, grew by close to $35 billion. This has been offset by an outflow of $24 billion in our Cash Management business. Our flows are representative of the industry. With the shortage of short-term treasuries, we see rates below five basis points. This is a business that will continue to flounder during these low rate environments. We are constructive about it. We, actually, in the first quarter of those soft flows -- positive flows in the institutional side and we saw very large negative flows more in the retail side. And so we are building our market share in terms of institutional and it's not representative with our growth of $24 billion in our outflows in cash. But we are building market share institutionally and we are certainly seeing some substantial line downs in the retail side. And much of this is because in many cases, the retail platforms are migrating from money market funds to bank deposits. Bank deposits are higher in yield in money market funds, even at a time when banks are having a little success in terms of C&I loans, they're may be using the deposit for buying short-term treasuries or mortgage securities, but they're willing to pay more than money markets can afford. So that trend is not going to change anytime soon. And so this is going to be an area that will have a drag on our flows, albeit this is low-fee business, and what I'm trying to stress is the revenue from the very, very high-fee businesses that we are demonstrating. In addition, as Ann Marie suggested, in our BlackRock Advisory business, BlackRock Solutions, we are paying to our clients the principal paybacks in interest. And so as you witnessed now in the last few quarters, a decay in the Advisory business, this is a little over $4.5 billion a quarter. And once again, this is what we expect will continue. And yet in our pipeline, which I'll talk about in a minute where there is a big win in the Advisory business. I should talk about merger-related outflows, as Ann Marie suggested, it slowed a little more than $18 billion. We are not going to report merger-related activity again. We believe this is principally over. We are forecasting and telling you that there is, in our pipeline, another $9 billion. But this reporting is over. It will all be net. We believe we can look forward to growth now and we don't see any of the concentration issues that we had before. Let me just talk about our pipeline. $82.4 billion of pipeline winds. This represents also the netting of the $9 billion of outflows in it. So this is a net number in our pipeline. I'd like to really emphasize one important characteristic about our pipeline, $60.7 billion of that pipeline is long dated. I'm also pretty pleased to say 55% is in beta products and 45% is in active alpha products. So a very strong pipeline of wind in the long-dated products. $6.2 billion was money that left last quarter in the last few days in our money market funds, then it went back into money market funds. And then we did win a $15.5 billion advisory assignment in our BlackRock Solutions business. Over the last few quarters, we said we're going to be expanding our product mix, especially in alternatives. We have been very active in the first quarter. We brought in a team from NTR for alternative energy. We are adding more single-strategy alternative products. And importantly, we saw over $2 billion of flows in the first quarter in the first week of April. And now I'm pleased to say our total assets in alternative is $115 billion. We are witnessing even more and more demand for alternative products, as clients are looking to continue to re-risk. Some clients are re-risking through bar billing using some beta products. And in some cases using less, maybe, standard active equity strategy and are moving towards more what we would call a more evolved, more higher return active alternative products. So we -- growth continues in that space and we're continuing to make large investments in teams and in our platform in the alternative space. Ann Marie spoke about the scientific active equity team. I am pleased to say, in almost 80% of our products, we are witnessing positive returns. We still have some negative returns in our U.S. platform, but we are working tirelessly to rebuild the entire platform. We are seeing flows in our SAE business outside the U.S. and we believe this is going to be a much stronger product in the future as so much money has run away in this product, not just from us, from other firms, and we believe the opportunity in that product continues. We are going to continue to build out our investment teams. That's a big characteristic for the future. We have many -- we've talked to many people, in terms of building out fundamental equity teams and our fundamental fixed income teams. We continue to believe that global credit will become a very large component and we are very active in terms of rebuilding those teams. So despite our success, we are aggressively believing that we need to continue to build out our global footprint, not just in distribution, not just working with clients, but our entire manufacturing platform. BlackRock Solutions had a very, very strong first quarter. The momentum continues in the second quarter. 12 new assignments. Revenues were strong, a $128 million. We have a large pipeline of opportunities. I should note that we received a lot of attention, and I do believe we did an exceptional job in working with the Central Bank of Ireland in helping them understand the significance of their banking system, and the team who worked tirelessly in working with many -- with our client, the Central Bank of Ireland. But importantly with many other regulatory regimes that are involved. So we are building a stronger future. We are very constructive on the platform of Blackrock. I believe the first quarter was a very strong one that helped us validate our business model of multiproduct strategies. Our continued and relentless approach to making sure that alpha is the most prominent issue that were faced everyday and the production of alpha, that does not change with growth. That does not change with our scale. But importantly, as we build that alpha, we are going to continue to build out our manufacturing teams. We do believe worldwide, clients are in need of more solution-based answers. We believe the political and economic issues around the world are only raising more questions as to how the clients should think about their portfolio. And we believe we are the best-suited firm in the world in asset management to work with our clients, in terms of solving these complex issues. Let me just add a few more things as an indicator of the strength and conviction that we have on our platform. We were very aggressive in building out our leadership team in the first quarter. We hired a new head of institutional client service in the U.S. We are aggressively building out our Blackrock Institute. This is a very important issue for us because as we grow our global footprint, as we grow our products worldwide, we need to make sure that we are connecting all this information and then redistributing this information to our portfolio teams, and importantly to our clients. And so we believe this is going to be one of the core cornerstones of BlackRock in the future. Having the Blackrock Institute become the area in which we bring all those information together. Understand what all the information that we are seeing means, it should lead to better alpha production. But importantly, it should lead us to have more complex relationships with our client and helping our clients, in terms of understanding the dynamics of the world. We announced this week a new head of our real estate platform. We are very excited about this. This is an area that we were embarrassed in 2008, where we actually add this performance in 2010, and we continue to add this performance in 2011. And we are going to build this out, as we believe it is a great asset class, and we are very proud of the changes we're making there. We're adding many more people in our alternatives teams, I mentioned NTR. And I mentioned earlier, we are going to be aggressive and continue to build out our equity, fundamental equity and fundamental fixed income teams. So in closing, BlackRock is building a stronger global footprint. We're adding products. We see more opportunities. We're very pleased with the position we have with our clients worldwide now. And we're very excited about the future for BlackRock. I just want to thank all the employees for a really good quarter. And especially in terms of -- with all the noise in the world economies and the world political themes. We do believe that regulatory issues are going to be -- will still be with us for many months and years ahead of us and global uncertainty and global volatility is going to be probably more prevalent than we've seen in many years ahead. And having a global footprint, a global platform will allow us to navigate probably a little better than many other people. And I would like to just thank all our new shareholders who came on board with their offering in November. And I believe your first two quarters of ownership have proven to be successful. And with that, thank you. let's open it up for questions.

[Operator Instructions] Your first question is from Michael Carrier with Deutsche Bank.

Sue, your first question, I think a lot of the investments, it looks like, given where the pipeline is, it's just starting to pay off. And when you look at, whether it's the international distribution, you guys announced relationship with Mizuho, you mentioned the DC opportunity and you see more and more DB plan shifting. I guess when you look in some of those opportunities and where you are today versus what's still out there? Is there any way you can gauge or size that up, in terms of whether it's market share or -- just how you can continue to sustain the growth? It looks like that you're producing it but just so you can size any of those markets up?

You're just as aware as everyone else of the global instability that we're seeing. We believe, on the retail side, on the defined contribution side, to name two areas we have enormous opportunities in the future. I would say only a few years ago we did not have a brand that was well understood or recognized in the retail channels. Each year, we're expanding. And as I said earlier, we need to really invest in that brand to continue to build out those channels to make it easier. We are seeing, worldwide, a distribution platforms limiting the amount of manufacturers that they have. There are one or two big events that is going to happen with some international distributors are going to reduce the amount of fee. Manufacturers, they're going to be working with, we believe, we'll be a part of that in those cases. So we see actually somewhat of a crowding out effect that's going to be happening in the manufacturing space. And what I'm trying to suggest is the large multiproduct platforms are going to grow probably significantly faster than a single-strategy platforms. And so for me to give you a size, Mike, I believe we have just enormous opportunities in those areas. As you said, money is moving out of DB into DC. I think I said this at the end of the first quarter, we believe that trend will accelerate as the public funds are struggling with their defined benefit plans, and they're going to probably shift new employees into defined contribution plans away from the defined benefit plans. So that trend will continue, and I do believe we will be a big beneficiary of all that. And the whole impact of re-risking, as I said publicly many times in the last two quarters, investors are overweighted in fixed income because of fears. Underweighted in equities. And we believe having our beta products and our expanding alpha products in equities, we'll allow us to have more opportunities with more clients. Sue, do you want to add anything?

No. I'm just going to say, Mike, on the institutional side, I really don't think we think about it as a market share problem [indiscernible]. I think it's about the value-added services and the way we work our clients. So I think there -- while it may well be the case that our overall AUM continues to grow, and we certainly would expect that. In addition, we think that over time, the revenue mix moves, as we work with clients strictly around our bar belling and longer-term investment strategies like multi F class solutions that Larry has already talked about.

Okay, that's helpful. And then just one follow-up on the -- just when thinking about the margin. I think one of the things that everyone always focuses on, and this isn't just for you guys, but any type of passive products you tend to do to have lower fees, so you have a down or turning fee rate over time if the passive industry is growing faster than active. But if you can give any sense of what the incremental cost structure is on the passive, in reverse to the active side or the incremental margin, just so we can kind of say, "All right, we can see the fee trend in that product area." But I guess, some type of a cost base or the incremental just so we can try to gauge the margin over time that even though the fees can -- declined, the margin can still...

Fair question. Ann Marie?

Yes, when we think about that inside of any in-depth investment, it is a little bit like the cash business in that we really don't have to have a lot of resources, as you have billions of dollars of assets of coming in. So when you think of new business coming in, you can think of that coming in at an accretive margin, that is very positive despite low fees.

But we don't segment or report on. I mean, I think, off-line Ann Marie can give you more color.

Okay. All right. Thanks a lot.

Thanks.

Your next question comes from Craig Siegenthaler with Credit Suisse. Craig Siegenthaler - Crédit Suisse AG: Thanks. Good morning, everyone. Just first here on capital management. Just want to make sure we did the math right. So kind of in the second quarter, we should think about really some debt conversion, maybe some comp-based stock issuance. But you also have a cushion related to the passive constraint, the flow constraint. Should we expect though a net increase in stock in the second quarter?

No. No, I don't think there's going to be a material change. Craig Siegenthaler - Crédit Suisse AG: Okay.

Well, it is our objective. I would say, we clearly hope that we will be reducing that, the outstanding. That we are going to start -- so we are purchasing some of the employee plan. What Ann Marie has said in her speech is we have to be conscious of the hurdles that we have with S&P. We do not want to break any of those issues and we will be very mindful of that, but we do have room. Craig Siegenthaler - Crédit Suisse AG: Got it. I just had a second question...

So there's much necessity. Craig Siegenthaler - Crédit Suisse AG: So just the second question here. When we think of the advisory AUM's and the solutions business, how should we think of the medium lineage in your business here. Specifically in terms of kind of scheduled redemptions and also the economics of this business. Should we see a step-up in revenue as we help dispose some of these assets? And then, what's the economics in terms of the fee rate?

Anything I do with the Federal Reserve I can't even talk about. And that's a requirement with our relationship there. As I said, in a macro way about BlackRock Solutions, our business is very strong. The opportunities are large. We had a very strong first quarter, and we expect the second quarter to continue to be strong. Craig Siegenthaler - Crédit Suisse AG: Great. Thanks for taking my questions.

Your next question comes from Bill Katz with Citigroup.

Okay, in terms of capital management, how much capital do you think you need to actually run the business against the north of $3 billion free cash flow number that you're generating per year?

Well, we're not going to answer that question specifically, but we do. And I think this is a positive for us in the business if we do have a certain amount set aside and the close will risk the regulatory purposes, and that's certainly the core foundation.

As you know, Bill, we have -- we will have opportunities to continue to raise our dividends aggressively and/or if when we have those opportunities that will prevail in repurchasing shares subject to paying attention to the S&P hurdles.

Got you. Okay. And second question, just in terms of the broad discussion on margins. I certainly appreciate the accretive nature of the passive business. But when you sort of think through the AUM build against your discussion here about in terms of branding over the next five years and the decision to boost focus on alpha and then the headcount additions associated with that, any sort of thoughts, sort of the baseline view on the adjusted margin and those 39% just probably held up a lot better than people anticipated? But as you look forward to more normalized or sustainable basis, what's the reason?

I think I said at the end of the first -- at the end of the fourth quarter, our objective to have a margin of over 40%. And that has not changed. And so as we continue to invest in people, in brand and product, we are mindful of where we believe our margins should go. But if we see a massive opportunity, I will invest in that. I'm not here to tell you there's anything that is unusual that we're going to be investing in right now that is going to change my views of margins. But I will not foresake what I could say accelerated growth for up to 1/4 margins, if that was the case. But I know what my target is. We are mindful of it everyday as leaders. And we are managing our investments accordingly.

Okay. And just one last one, I know this is probably to be determined, but any incremental cost and sort of systematic risk? Your company continues to be sort of a primary focus as given the growth of the, AUM, but any thoughts there in terms of what it might mean to the business if any -- at this point?

I think, that Financial Times had a really good story on designation. And it basically alluded to, and I'm citing the article not my opinion, but I think it has merit. It cited that in most cases, most of the members of this committee believes specific designation should remain with leveraged companies. It should be small and if that criteria carries the day, we would not be designated as one. There was another competing view that there should be 50 firms in that article. And it kind of alluded to, that was a very minor, minority position. But the article is already two weeks old so it is dated. But from my indications and our conversations with Belgium and Washington and London, I don't think at this time, we would be a systemically important institution under that definition, that is prevailing at the moment. Of course the definition may change. I'm trying to dance around it, Bill, as you can see.

Good job. All right, thank you very much.

Your next question comes from Glenn Schorr with Nomura.

Just curious, I met with a private equity firm recently, they're called Basel III, the private equity and asset manager, Christmas tree, alluding towards certain banks not being able to hold certain assets and that just the regulatory arbitrage. I think you have spoken about them in the past. Just curious if you are seeing asset movement. I do see some options out there for some assets and how BlackRock might play a role on that?

Yes. And there's no question. I actually had a conversation with a leader of a large institution and they're looking at capital management and our solution team is going to be visiting them next week on things of that nature, of helping them in asset sales and how to look at their capital base. I mean don't give them advice in terms of when and what to raise in terms of equity because we're not an underwriter, but we are working with institutions. As we think about Basel III in terms of how should they be looking at their assets. So that's a -- no question, the big opportunities that we see for our Advisory business. And in addition, this is one of the reasons why we are a little more aggressive than I thought we would have been in terms of building on our alternative spaces. There's other firms that we're in areas that are not considered proper under Dodd-Frank. We are re-looking at different types of alternative activities including private equity. And so we do believe it is an opportunity. I would call it Christmas tree because you still have to perform. But I would call it added opportunities for asset managers and certainly for Blackrock.

Okay, fair enough. And apologies if I missed this, but do you disclose the remaining size of the scientific equity book, both either total or U.S. just so we can understand what potential headwinds might still be there in the short term?

No, we don't. We don't do that at segment reporting. But I don't believe there's not much headwind left. I mean there are some in the U.S. area, but as I said we are seeing growth in the non-US.

Okay, cool. And final one, any directional comment, I know it's tough to get too specific but anything regarding what seems to be an ongoing discussion with the banks on reps and warranties and potentials settlement there?

Well, it's an active dialogue that we're having and my General Counsel is looking at me, because there are active dialogues right now. I'm going to have my General Counsel smile now than I can't talk about it.

All right. Thanks very much.

But I can tell you it's active right now. And so let's leave it at that.

Okay, appreciate it.

Your next question comes from Robert Lee with KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Quick question. I know Larry, you talked at length about the goal to expand the business globally. When I -- one thing that will be helpful for me, at least, will be to get a little bit more color on kind of how you think of your global footprint at this point in broad terms? I mean, if I look at the inflows, very strong in the U.S., positive in other regions, but substantially less so. So can you maybe kind of put some color around whether it's AUM mix or client mix? How to look at the footprint maybe right now?

Well, one thing I can say because we're expanding our flows in retail internationally and the leader higher-fee businesses in the U.S. Well, I think some of the flows internationally were skewed by some events in Japan. The circumstances around Japan with the tsunami, nuclear problems and the earthquake, we have witnessed outflows from Japan and that's skewing some of our international flows. The Japanese have bought back money. I think this is one of the reasons why we are seeing maybe weakness in the dollar recently. And so, I think our numbers internationally are skewed by some of that. But we believe over the long run, and this is just an investment for the future as GDP grows, as savings grows, opportunities will prevail. And so you're right in asserting that we're still seeing more growth in the United States, that's a fact. We are witnessing more growth now in South America and the opportunities we have there. And we believe we're going to have more opportunities in Europe as our brand continues to grow, especially in the retail side. But Asia flows are slower than we would like. But we believe we need to continue to build out Asia to take advantage of future opportunities. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Maybe a follow-up question on the merger-related outflows. Understanding, that they've been thankfully starting to curtail and looks at this point a little bit pipeline there's they're pretty modest, if you want to use that word. But is it possible, I'm just curious if there's any kind of color around which client-set where you saw most of the merger-related outflows from? Is there any with the certain investor profile, U.S. domestic pensions more so than sovereign wealth? I'm just trying...

Yes, it was predominately pension. It was predominately pension both U.S. and non-U.S. where we had both large relationships, both legacy BGI, legacy Blackrock had a large relationship. And that's where the flows were. It was not sovereign wealth. It was not insurance. It certainly is not retail. It was pension funds worldwide. And as we are trying to telegraph, most of it is in index. Some of it was related to what we knew when we did the merger scientific on the equity side. And so that's where it is and that's the remaining block is another -- is the institutional. So that's where we are. Robert Lee - Keefe, Bruyette, & Woods, Inc.: Okay. And those are all my questions. Thank you.

Your next question comes from Marc Irizarry with Goldman Sachs.

Great. Thanks. Larry, on the Multi-asset Class business. It looks like the fees in that business maybe you continue to comment a little bit, at least on the surface. Can you talk a little bit about how you're sort of pricing some of the fiduciary outsourcing mandates. And then also is there some seasonality may be in this period for the DC business or are you gaining -- is it really about share gains on the secular basis that passes making at the expense of maybe some active target day funds?

Well, I think, we don't see any fee pressure in that area. I think what you're seeing is a very large DC allocation and DCs lower fees in some of the fiduciary outsourcing and some of the other products. And so as I told you, we had some very large wins in DC and that's where the fees are smaller. In terms of our growth in DC, I think we have we are picking share because we have some really innovative products in our LifePath products and we just rolled out a new really strong product in our target date and LifePath products that we're starting to see some real accelerated opportunities there. But I think it's fair to say, the defined contributions, there's a lot of flows in the beginning of every year. And I think that's a seasonal component. That's when people will generally change their defined contribution plan at the beginning of each year. Unless there's some serious issues, the first quarter, generally, a quarter of a lot of change from different managers in the defined contribution plans. And I think we've picked up share in the first quarter.

Okay. And then just on relationship to fees on some of the institutional fiduciary outsourcing mandates say you're winning in multi-asset class management. Are you seeing more of a pickup in incentive than performance fee AUM? And I don't know if Ann Marie, maybe you can give us some perspective on how much of your assets are set to sort of earn annual or quarterly performances?

No. We don't really breakout of those assets. I don't think we've seen a material shift in the way that we are working together with clients, and that's the trend we watched. So again, Mark, where you have the greatest transparency is thinking about the alternatives, but what we don't break out for you are those separate accounts and long-dated assets eligible.

Okay. Great. Thanks.

Thank you.

We have reached the allotted time for questions. Mr. Fink, Ms. Petach, are there any closing remarks?

Once again, I just would like to thank everybody for their commitment to the firm. Once again, as some of the employees are on the phone call, I want to thank all the employees for another good quarter and a lot of hard work. I'll talk to everybody at the end of the second quarter. Have a good one.

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