Good morning. My name is Jerome, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the BlackRock Incorporated Second Quarter 2021 Earnings Teleconference. Our host for today's call will be Chairman and Chief Executive Officer, Laurence D. Fink; Chief Financial Officer, Gary S. Shedlin; President, Robert S. Kapito; and General Counsel, Christopher J. Meade. [Operator Instructions] Thank you. Mr. Meade, you may begin your conference.

Thank you. Good morning, everyone. I'm Chris Meade, the General Counsel of BlackRock. Before we begin, I'd like to remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that BlackRock's actual results may, of course, differ from these statements. As you know, BlackRock has filed reports with the SEC, which lists some of the factors that may cause the results of BlackRock to differ materially from what we say today. BlackRock assumes no duty and does not undertake to update any forward-looking statements. So, with that, I'll turn it over to Gary.

Thank you Chris and good morning everyone. It’s my pleasure to present results for the second quarter of 2021. Before I turn it over to Larry to offer his comments, I'll review our financial performance and business results. While our earnings release discloses both GAAP and as adjusted financial results, I'll be focusing primarily on our as adjusted results. Last month at our 2021 Investor Day we highlighted how the investments we have consistently made to support growth have enabled us to execute on our framework for shareholder value. We have invested and evolved over time to create a globally integrated investment and technology platform that enables clients to construct resilient whole portfolios that meet their objectives regardless of market enjoinment or risk appetite. And we continue to invest in our industry-leading high growth franchises such as ETFs, private markets and technology and they are accelerating investments to drive growth in our ESG traditional active and solutions capabilities. The combination of our comprehensive and integrated investment platform with global and local distribution capabilities once again delivered strong results for the quarter, and we remain very well-positioned to continue delivering differentiated organic gross in the future. BlackRock generated total net inflows of $81 billion in the second quarter, representing 4% annualized organic asset growth. As previously disclosed, second quarter net inflows included the full impact of a $58 billion low fee institutional index redemption from a large U.S. public pension client. Strong net inflows from ETFs and our entire active franchise once again contributed to this quarter's robust 10% annualized organic base fee growth. Over the last 12 months, our broad based platform pairing diverse investment capabilities with best-in-class technology and rigorous risk management has generated over $500 billion of total net inflows, representing 13% organic base fee growth well in…

Thank you, Gary. Good morning everyone and thank you for joining the call. We are once again reporting earnings today from our headquarters in New York City, and I'm happy to see more and more of our colleagues in the office in recent weeks and I remain cautiously optimistic for a gradual return to having people back in the office and a little normalcy. After more than a year of virtual meetings, I spent the last few weeks meeting with clients in-person again. I also spoke at the G20 in Venice on Sunday about sustainability and climate change, and it was great to be back on the road. Our business is built on listening to the people we serve and understanding their needs. And there is no substitute for meeting face-to-face with people to hear directly from them about their investment challenges, their opportunities, and what lie ahead for them. It is through these conversations that we're able to build a deeper relationship with our clients across their whole portfolio and to ensure BlackRock is always evolving and staying current and staying in front of their needs. This longstanding client centric approach is powering consistently strong results for the benefit of all our stakeholders. Total net inflows of $81 billion in the second quarter, representing a 10% organic base fee growth were driven by continued momentum and strategic growth areas. We saw client demand in our ETF and illiquid alternatives are active and sustainable strategies, as well as our scaled cash management solutions. And we developed 14% year-over-year growth in technology services revenues, as clients increasingly turned to Aladdin. We have now delivered organic base fee growth in excess of our 5% target for five consecutive quarters, including 13% over the last 12 months from over $500 billion of net…

[Operator Instructions] And your first question comes from Ken Worthington with JP Morgan. Your line is open.

Good morning, Ken.

Hi. Good morning. Thank you for taking my question. I'd love to dig in further into direct indexing and customized SMAs. So, maybe first, can you give us some additional color and how SpiderRock compliments customize SMAs in your direct indexing capabilities at Aperio? And then you highlighted in your prepared remarks number of times the importance of retirement solutions. So, should we see Aperio and SpiderRock capabilities permeating the retirement management part of your business? And if so, what does this mean for LifePath and its evolution over time?

We'd have Rob start off and then -- Rob

So, as you know more clients are looking for personalization and that's what we're seeing in direct indexing. And we are -- our combination with Aperio, which Larry had mentioned, actually enhances our ability to deliver personalized tax manage SMAs and gives us a two-plus-year acceleration in that space, while we continue to organically build additional capabilities for different client segments. So, BlackRock's core SMA capabilities historically were in actively managed equities, fixed income, and multi-asset. Aperio brings experience in building index-based highly custom investment solutions. So, these are our complimentary businesses and they enhance our value proposition for a whole portfolio SMAs across equity and fixed income in alpha factors and index solutions. So, with over $200 billion in SMAs, including Aperio BlackRock is a market leading whole portfolio sponsor. And with the prospect of higher income and capital gains taxes, we've now built a pipeline of over $6 billion in potential new Aperio mandates just since the transaction closed. So, this is an example of how we are getting more into the personalization and direct indexing. And of course, ETF and direct index compliment the tech that we are investing in and building it.

Ken, on target date in LifePath and LifePath Paycheck, we put a great deal of energy on LifePath Paycheck. We are in a position now, working with many different plans and we see this revolutionizing the 401k DB plans, corporate plans. We are in discussion with many, many corporations. And I think we have a lot of future growth and a lot of future announcements in terms of our positioning there. This is actually quite separate from what we're doing in the customized side related to Aperio. But we believe this is going to change the retirement business. And we are -- we have worked with all the consulting firms. We have buy recommendations on this from across many of the consulting firms. We are in dialogue with many, many of the plans and we hope in the next few quarters to have some very significant announcements related to the success we are seeing in LifePath Paycheck, which will be changing, as I said. And this is BlackRock responding to the future needs of our clients. So, I think when we are able to announce this with the clients, this is going to really identify how retirement is going to be reshaped and why the need for more of a -- more certainty during retirement -- during the deep accumulation period of time, why that is so important, why there is such urgency around that. And we are very proud of the R&D work that we did over the many, many years now. And now in these private conversations, we -- it is really resonating more than ever before with our clients across the United States. And hopefully this could be something that we could expand beyond the United States, but this is going to be some -- a significant part of our whole foundation. And the last thing I would just say related to the LifePath target date franchise, we're up to now $370 billion alone without even talking about the LifePath Paycheck. And so, this is going to continue to accelerate where we're taking market share.

Your next question comes from Craig Siegenthaler with Credit Suisse. Your line is open.

Hi, Craig.

Hey, good morning, Larry. I had a question on ETF adoption. I know you covered a lot of this in the Investor Day, but I had a follow-up here. Which client verticals do you think provide iShares the most one to three or upside? And have you seen any significant rise or decline in demand among any declined segments over the last six months? And I'm thinking some of the bigger ones like U.S. RAA, insurance and retail.

So good question, Craig. You know that we have said over and over that we see significant room for continued growth in ETFs. And the penetration of the equity and bond markets is still very low. We expect generational shifts to unlock a lot of new growth, especially whole portfolios where ETFs in fee-based are around 11%, new investment capabilities like ESG and overall capital markets replacements where we're seeing ETFs that are about 5% of the total market and 1% of the bond market. We expect to give you a number to throw out by 2025 that ETFs are going to more than double to $15 trillion. And even at that level, we would still be a small part of the markets in which we compete, which is why we think there are decades of growth. And we fully intend to be the market leader in revenue growth and truly organic client driven flows and in total assets as this evolves. And we recognize that we have to offer choice in the vehicles that we show clients, but ETFs, I believe are going to lead in that. So, there are some key client segments. One is Europe, which is adopting very, very quickly. The wealth area through model portfolios of again, of which we are a leader is showing a huge growth. And certainly in institutional clients, primarily in fixed income is showing growth. And then another segment sustainable, which you heard about which we are -- the leader is also showing growth. So, what makes our ETF platform unique relative to any competitor is its diversity and broad client base. So, for example, our global client base is made up of self-directed investors, wealth managers, pensions, insurers, and active managers. We have the most diversified platform with $2.3 trillion in the U.S. and $650 billion in Europe. And $2.3 trillion in equity and $700 billion in fixed income. So you can see how this matches up against the client segments I talked about. And most importantly, which may be overlooked, we provide the most secondary market liquidity. So, U.S. iShares traded almost $9 trillion in 2020 versus $7 trillion in 2019 and EMEA iShares traded $0.2 trillion in 2020 versus $1 trillion in 2019. So, this along with our precision exposures, which are often unique to us while that has been a drag in prior years, are actually a driver of our strong revenue growth this quarter. So, we're excited about the growth specifically in the segments that we are a leader in today.

And our next question comes from the line of Alex Blostein with Goldman Sachs. Your line is open.

Good morning, Alex.

Hey, good morning, Larry. Good morning, everybody. I was hoping you guys could flush out the expense dynamics a little bit in the quarter, as well as look out further in a year. Obviously, very strong revenue environment, revenues up 25% in the first half. But the comp rate is actually up, on a year-over-year basis for the first half as well. Now, I know performance fees tend to skew that upward sometimes. So maybe help us think through the rest of the year. And then just big picture, your framework around expense management and margins. Thanks.

Thanks, Alex. It's Gary. Good morning. So, let's break it down maybe individually. So, in terms of the comp side, we talked about comp being up about 34% and that primarily reflected higher incentive compensation. And you correctly pointed out that incentive compensation is very much tied to both profitability and performance. And so as we saw higher operating income and performance fees that that definitely ticked up. But we also saw higher deferred compensation year-over-year. That was up by about a $100 million year-over-year. And I'd say there's really two things there. One is, is more ongoing, which is the ongoing impact of additional grants associated with last year's compensation. Obviously, we defer a significant component of current compensation for retention. And last year saw a rather large level of deferrals, especially as it related to performance fees and the level of performance fees last year. That was -- I'd say that's probably about 60% or so percent of that increase. But there was also a one-time, what I would call a crystallization and acceleration of certain compensatory arrangements tied to the success of one of our historical acquisitions. That was probably about $35 million or about 70 basis points on the comp ratio that ultimately should migrate away. Now that that has been settled out. So that's it on comp as I would think about it. Obviously, Larry mentioned the base salary increases, which is more a function of going forward. And he talked all about recognizing the accomplishments of our tremendous employees over the last 18 months. I don't expect that to have a very significant impact on our financials this year, but it could be, given its effective date of September 1st, let's call it roughly 20 basis points or thereabouts on both comp and margin…

And your next question comes from the line of Patrick Davitt with Autonomous Research. Your line is open.

Hi, Patrick.

Good morning. Hey, hi everyone. It's obviously hard to handicap the chances of a change in the capital gains tax rate at this point, but are you guys seeing any change in either retail or institutional behavior change in conversations around that concern via specific gain harvesting, or just wanting to talk about options? Should it come through?

So not really. I mean, look at, maybe that is one of the reasons that Rob Kapito talked about the personalization and customization of tax efficient strategies. I think across the board, the awareness of after tax returns are becoming more dominant in the RRA channels. But I don't think it's -- excuse me -- I don't think it's reflective yet, and I don't think people are motivated or seeing any real changes in behaviors related to the potentiality of these changes in taxes. But I think there is just a much greater awareness, as the ability now to create customized, personalized tax efficient portfolios. And I think that's what's going to be driven. Rob, do you have anything to add?

No. I'd say it's another reason why people are moving towards ETFs, which are much more a tax efficient tool than the typical mutual fund is that they are in. So, actually it's another growth area for ETFs.

And your next question comes from Dan Fannon with Jefferies. Your line is open.

Hey, Dan.

Good morning. Larry, you mentioned that you were having some of the largest conversations or big mandates with clients in previous history. And I was just curious, are you used to give a backlog number on these calls and obviously you're much bigger and more diverse today, but hoping you can help us size you kind of more near term potential flow picture or those dialogues in the kind of size those mandates. So we can think about the potential there.

Yeah. Well, you're right. We don't do that and we're not going to do that at this call. But I think when you think about -- and I -- when I referenced the British Airways CI [ph] mandate, we believe this is going to be -- this is just the beginning of more focus on the virtues and the value proposition of -- for these pension funds to rethink how it's organized. Should it be done under a platform like BlackRock and then do we create the efficiencies? And most importantly, are we -- can we have a better fiduciary outcome on behalf of their participants? All of this is about their participants and can we provide a better outcome for the participants? And I really do believe -- we are thinking of that. But we have had some very large wins with a few other clients in the last few quarters. We are in large dialogue with many more, but I want to underscore what the transformation of LifePath Paycheck could be too. These are going to be -- these could be some very large opportunities to, and having the defined contribution business being reimagined and rethought. And that is how we framed it. How can we reimagine and provide better certainty to the participants, how can we provide better outcomes, and how can that lead to a better closeness between the employer and the employees, and how can they build deeper bonds when the employees are retired during deaccumulation period of time. These are broad based solutions that we've been focusing on. No different than the broad based solutions we focus on the needs of focusing on climate in portfolios across the board. And so, I believe what we are -- what you're seeing in the past related…

And then your next question comes from the line of Bill Katz with Citigroup. Your line is open.

Good morning, Bill.

Good morning everybody. Can you hear me okay?

Yeah. Perfectly.

Okay. Wonderful. Thank you. So, thank you for taking the question this morning. Great update. Maybe a two part -- I'm sorry. That's two questions, but sort of interesting things going on. One, Larry, at what point do you start to think about upgrading your 5% organic growth rate? It seems like everything you're talking about here has just very powerful and long tail opportunity. And then somewhat unrelatedly, but just sort of following up on your last conversation on the Paycheck opportunity, where is that share coming from? Thank you.

I'm going to let Gary answer that because Gary, as a CFO is the one who really -- is the tethering of our platform. And he is also our -- he provides the balance between me and him. And so, I love him, Gary?

Thanks, Larry. Greatly appreciate that thought. So, look Bill, I think that it won't surprise you to hear a lot of the same answers that I've traditionally given you on that. I think we feel very good about our organic growth potential going forward. I think it reflects the platform we've built. I think it reflects global reach, full range of investment capabilities, integrated risk, great performance. But as you know, growth is also somewhat tied to markets in particular. And I think some of the growth that we're seeing today, clearly as a result of the type of environment that we're in. And so, we try not to get too focused on a particular environment, but really look across cycles. And I think if you look at what we've done over the last five years, we've actually averaged the amount of 5% organic base fee growth over the last five years. And while we've actually -- I think really the more important piece of this is not how fast we necessarily grow in a more risk on environment, although I know Larry doesn't like that term. I think the reality is that when we see the markets fall back, we stay positive. And so even in tough markets, like 2016 and 2018 where the industry was roundly negative, we were still in positive territory. And I think I would also remind you that, look, the industry is basically right around 3% in terms of where everyone thinks the industry more broadly is going to grow. So at 5% we're already growing, if you will, at a 60%-plus premium to where we think the industry is. And we feel very comfortable with that, because of our breadth, because of our solutions orientation and our technology platform. I think we feel very good about both secular growth more broadly, and maintaining share in places like ETF. We feel like we have a ton of room to run in places like illiquid, where the market is growing and we're generally still low single digit share. When we think our investment performance positions as well to continue to play a major role in active. So, for the moment, until we get through this cycle and see where we come out the other side, 5% is the target and we feel very good about our performance going forward relative to that.

LifePath Paycheck, as I try to frame, it is U.S. based so specifically -- but we're redefining defined contribution business in the United States. I think that's what it is. But globally it was -- retirement is a $70 trillion -- has a big gap. We need to rethink retirement as we moved away from DB, but we need to find better ways of creating more certainty in a defined contribution world. I think this is one of the big problems we have in our society today, the uncertainty of retirement. And this is one of the problems that we've been focusing on for years and years and years to try to find a way to have something closer to a defined benefit, but having it still being in a defined contribution way. And I think there's just great opportunities. And we're having robust conversations on this, Bill. And I think it's going to reshape or reimagine or redefine the defined contribution business.

And your next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Hi, Michael.

Hey, good morning guys. Thanks for taking the question. Just had a question here on Aladdin. I was just hoping you could update us on the pipeline. I recall in the past you had spoken about a slowdown in implementations, but given the recovery here, the reopening, just curious if you think we can see that accelerate? And then also on the technology services revenue, I think that was up about 14% in the quarter, but the ACV was up a bit higher than that. So, I was just hoping you could help unlock some of the moving pieces there between your ACV definition and the technology services. I think your ACV excludes some of the consulting fees and implementation fees, just hoping you might be able to quantify how much that is relative to the overall technology services line. Thank you.

Thanks Mike. So, again, we're not going to get very specific on pipelines, but we will give you some tonality on Aladdin growth rate. So, I think as we've talked about, there's clearly increased client demand accelerated by COVID for comprehensive whole portfolio solutions that involve greater systemization, fewer vendor relationships as a number of financial service companies and other insurers, asset managers, and funds try to minimize their costs. And more importantly, trying to basically take down the number of data sources that they're relying on. We feel that growth going forward is going to be a function of a number of things, but it's going to be primarily gaining new clients, expanding relationships with existing clients, expanding the platform through enhanced functionality and products, and obviously under -- expanding into under penetrated geographies, most notably, Europe and Asia. With that, what we've said at Investor Day, and we'll continue to reinforce is given all of that, that our pipeline is as strong as it's ever been. And we continue to reaffirm our low to mid teens growth rate for technology services revenue. As it relates to ACV, ACV was up 16%. And as you correctly note, we do have -- we're migrating a bunch of the eFront business over to Aladdin in terms of its hosted model, as opposed to its traditional model, that does, as you say, have different accounting ramifications. And so, we decided to put ACV out as a key performance metric, because we think it better reflects the overall momentum of the business, and takes away some of the timing and accounting changes from migrating models over. So, ACV was up 16%. And I think as you also correctly note, that's probably a little faster than we would expect the longer term to be given our target. And I think that's a function of some of the business coming through today at a more rapid rate, that was delayed from a year ago in the early days of the pandemic, as we highlighted a longer sales cycles and contracting periods. So, we're definitely seeing a little bit of an acceleration there, but again, reaffirming our low to mid teens growth outlook.

I would just add one thing or two things. One is -- and there's a lot of this before my meetings in Europe last week, the demand for data and analytics on sustainability is going to grow exponentially. And this is why we've been so aggressive in terms of building out our analytics data across the board. And I do believe this is going to be a major sleeve and major opportunity for Aladdin. Aladdin Climate is going to be a major component of Aladdin, and we believe having the differentiating data and analytics is going to be further -- why clients are going to be looking to add on Aladdin across our portfolio. The way -- what we've witnessed since the acquisition of eFront to the need for data and analytics related to alternatives and across all the alternatives space integrated in a comprehensive data and risk analytic environment is really, really important. So, if you overlay the movement into capital markets and client demand and alternatives, if you overlay the demand for clients that related to sustainability and climate, that's going to be a major change and that's going to be a major component of it. And that's why some method tutorial [ph] is now having that role, and helping us drive Aladdin Climate. So, as you moves away from our client relationships. I'd leave it with that.

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

Thank you, operator. I want to thank everybody for joining the call this morning and your continued interest in BlackRock. Our second quarter results, again, are a result of the steadfast commitment of focusing on our clients first and importantly, thinking and investing and anticipating their needs in the future. I see a tremendous opportunity ahead and BlackRock's full focus remains on the long-term fiduciary commitment to all our clients worldwide. We will continue to invest in our business so we could deliver that long-term value for our stakeholders and lead the asset management industry and the many, many years ahead. Thank you again and have a great remainder part of the summer. And unless everybody hope to have a great third quarter, talk to you then. Bye-bye.

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