FILED BY BLACKROCK, INC.
PURSUANT TO RULE 425 UNDER THE SECURITIES ACT OF 1933
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SUBJECT COMPANY: NEW BLACKROCK, INC.
COMMISSION FILE NO. 333-134916
BLACKROCK
2nd Quarter 2006 Earnings Teleconference Call Transcript
July 18, 2006
Before listening to the replay of the BlackRock Incorporated Second Quarter 2006
Earnings teleconference call, please listen to the following brief remarks
relating to BlackRock's proposed merger with Merrill Lynch Investment Managers.
BlackRock has filed with the Securities & Exchange Commission, a registration
statement on Form S4 which contains a proxy statement prospectus in connection
with a proposed transaction.
The proxy statement prospectus will be mailed to the stockholders of BlackRock.
Stockholders of BlackRock are advised to read the proxy statement prospectus
when it becomes available because it will contain important information.
Such proxy statement prospectus when available and other relevant documents may
also be obtained free of charge on the Securities & Exchange Commission's Web
site, http://www.sec.gov or by contacting our secretary, BlackRock Incorporated,
40 E 52nd Street, New York, New York 10022.
BlackRock and certain persons may be deemed to be participants in the
solicitation of proxies relating to the proposed transactions. The participants
in such solicitation may include BlackRock's executive officers and directors.
Further information regarding persons who may be deemed participants is
available in the proxy statement/prospectus filed with the Securities and
Exchange Commission in connection with the transactions.
Operator: Good morning. My name is (Judy) and I will be your
conference facilitator today. At this time I would like to
welcome everyone to the BlackRock, Incorporated Second
Quarter 2006 Earnings teleconference.
Our host for today's call will be Chairman and Chief
Executive Officer Laurence D. Fink, Chief Financial
Officer Steven E. Buller and General Counsel Robert P.
Connelly.
All lines have been placed on mute to prevent any
background noise.
After the speaker's remarks, there will be a question and
answer period. If you would like to ask a question during
this time simply press star then the number 1 on your
telephone keypad. If you would like to withdraw your
question press star then the number 2 on your telephone
keypad. Thank you.
Mr. Connelly, you may begin your conference.
Woman: In a few moments, don't say anything.
Robert P. Connelly: Good morning. This is (Bob) Connelly. I'm General Counsel
of BlackRock. In addition to (Larry) and Steve this
morning we're joined by Ralph Schlosstein, our President,
(Sue) Wagner, our Chief Operating Officer and Paul Audet
the head of our liquidity business.
Before (Larry) and Steve 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 list some of the factors which may cause our results
to differ materially from any of these statements.
Finally BlackRock assumes no duty to and does not
undertake to update any of these forward-looking
statements.
And with that I'll turn it over to Steve Buller.
Steven Buller: Good morning. Thank you, (Bob). Well we had another
quarter of strong performers, notwithstanding some very
challenging market conditions, and (Larry) will provide
some perspective on that in a little bit.
We know some analysts like to follow our core-adjusted
earnings. We had 12 cents per share of second quarter
integration expense which when added to our long-term
incentive plan expenses funded by PNC at about 12 cents a
share resulted in an adjusted EPS of $1.19, compared to 91
cents for the prior year.
The organic growth was hampered by a few large fixed
income outflows, but these assets were largely replaced by
better quality assets with higher face point rates which
yielded a net increase in separate account base fees.
This is the third consecutive quarter of strong
performers' fees. Certainly the prior two have set high
bars. As you may recall we had $87 million in performers'
fees in the fourth quarter of 2005, $113 million rather in
first quarter of 2006 and then $67 million in the second
quarter of 2006.
So the first quarter performers' included a fee earned
over multiple years, against which we made a $34 million
acquisition-related payment for (State Street Research).
When this payment is considered it results in a more -
pretty consistent contribution by the performers' fees
over the last three quarters.
Margins have remained relatively consistent when adjusted
for that performers' fee. If all of the first quarter
multiyear performers' fees and the related expenses are
removed our operating margin was 36.6% in the first
quarter compared to 36.1% in the second quarter on an
adjusted basis. So our operating margins or adjusted
margins generally fluctuate between 35% and 38%, depending
upon performers' fees and market conditions.
Given the magnitude of the Merrill Lynch investment
management transaction, we have elected to present some
broad guidance for 2007 which really reflects our very
positive outlook. We forecast diluted earnings per share
of $6.45 to $7.05 which does include a number of
estimates, including about $110 million amortization for
intangible assets, a new long-term incentive plan program,
performers' fees and taxes and all of these of course are
subject to some adjustment.
Our guidance also reflects $70 million in midpoint
synergies that we referred to in our February investor
presentation that we do expect to achieve throughout 2007.
We intend to roll out a new (Ltek) program with the awards
in the fall of 2006 and early 2007. As you may recall PNC
is funding a portion of the program with shares that are
left over from the prior (Ltek) program. The excess will
be available to fund the (Ltek 2) which is expected right
now to cover a five-year period. So taken together with
the cost-sharing arrangement with Merrill Lynch it should
substantially reduce the cost of the retention programs
we're putting in place.
We provided a range of performers' fees for you in the
guidance. BlackRock and MLIM both sponsor alternative
products so with their addition our product line should
continue to broaden significantly.
However given the asset based business of MLIM we expect
that performers' fees will decline as a percent of total
pro forma combined revenues in 2007 but still be a very
strong contributor.
As the ratio of performers' fees to total revenue declines
post-October 1, our compensation to revenue ratio
including the new (Ltek) program also should decline. In
the third quarter we will be staffing up for the
combination and making additional expenditures to put
everybody on a common global platform. So you can
certainly expect the Q3 MLIM integration costs will be
more than the Q2 obviously.
We will continue to invest in technology and
infrastructure and brand throughout the fourth quarter and
throughout 2007 to support our global business which is
reflected in the estimates you saw in the release.
Some of these items will be expensed and some capitalized
and amortized over future periods, so we will disclose the
amounts incurred each period but want to make the
requisite investment up front to build the infrastructure
that we need to accommodate our international growth. So
(Larry) will provide some additional comments on our
integration efforts. But, you know, in summary, a very
solid quarter while laying the foundation for our new
BlackRock.
So, (Larry).
Laurence Fink: Thanks, Steve. Let me just start off and I would like to
thank all of the employees at BlackRock and MLIM in terms
of working very well together in terms of our integration
and I'll get into that in a lot more detail. But let me
start off and say I would qualify the second quarter as
business as usual for our existing clients. Now that's an
important statement.
As we work towards our integration which has taken an
enormous amount of time, a lot of effort, we experienced
in the first six months great fixed income performance for
our clients, very good equity performance, and with that
we're beginning in a very strong manner to change some
skepticism of the merger because I've historically said
mergers don't work and we had to describe why this one
will work, to change skepticism and uncertainty into a
point that our clients are now starting to realize the
merits of the transaction and importantly are very aware
that we're keeping our eyes on the ball, we're protecting
our clients. We're building greater client relationships.
And over the course of the latter part of the second
quarter we began seeing a very increased and robust
pipeline of new RFPs. So at the beginning and we did
budget a lot of this that we thought, you know, we were
going to see some pause with many clients and consultants.
We had numerous meetings which we still do today -- I
don't want to say these meetings don't exist anymore -
with our clients and discussing the merits of this
transaction and why this transaction is good for them.
They understood why it may be good for our shareholders or
it may good for our employees but, you know, clients want
to know what does it mean for them and how do we ensure to
them that we are doing our job on behalf of them to the
highest level of fiduciary standards that we can.
And I think now sitting here on the 18th of July, you
know, more and more of our clients are realizing that just
like our integration with (State Street Research) and the
successful integration of that platform into BlackRock,
you know, at the five month point in time since we signed
our contract which was February 15, you know, we've come a
long ways in terms of proving to our client base, our
consultants, our near clients, our potentially new clients
that business is as usual.
Our fiduciary standards have not deviated. Our job in
trying to produce alpha has in many cases exceeded the
expectations of our clients and in most cases met their
expectations and very very few instances that we have
underrepresented our abilities to our clients. So that is
probably the most important characteristic of the quarter
in terms of forward momentum.
Let me go over some of the issues related to asset growth
and the lack of asset growth in the second quarter. As
Steve mentioned and our press release said we had $4.8
billion of outflows with a few very large-scale clients.
One of them was an asset reallocation into a different
product.
Another client, one of our largest clients just determined
that we had a too large of their portfolio and their Board
determined there were some concentration issues. And so
therefore they reallocated away from BlackRock. This has
happened in the past. There are other quarters where we've
seen instances of that and so this is unusual but not
totally unusual. But in terms of flows, we continue to see
exceptional opportunity in flows internationally.
We had $1.2 billion of wins in the second quarter, which
is a little lower than it was. And I think some of the
second quarter represented, I think, surprise in the
marketplace with the Fed facts of rates and the Fed fact
of equities. And we saw, you know, a - somewhat of a
capitulation on a global basis of clients saying what
should I do. And I'm not forecasting that the market is
going to be bright and happy going forward between now and
the year-end but I do believe clients are now
recalibrating their views of the world that they are now
forecasting probably greater volatility in both debt and
equity markets.
And we're starting to see a turnaround in terms of
momentum of RFPs and interests on a global basis. But - so
as I think it's a combination of just a recalibration from
our clients in terms of market conditions and then we have
these few changes of strategy and concentration issues
that really set the tone for the second quarter.
And then third, you know, a pause at the beginning of the
quarter due to the MLIM transaction and the uncertainty.
So I'm not here to tell you that we're going to - we
solved all our clients' issues yet. We still have
essentially 2-1/2 months left to closure and our clients
are going to be anxious to see that we continue to act as
a fiduciary first and making sure that we're looking out
for their interest on top of all the issues related to
integration.
Some of the highlights of the second quarter was
liquidity. I think it's important to note, you know, we
built up our liquidity platform. We expected to see asset
growth and we have seen asset growth.
Our average assets in the second quarter went from an
average of about $77 billion of average assets to about
$87 billion of average assets, a significant increase.
This is one coupled with obviously large corporate cash
holdings so I don't think it's just all BlackRock's gains.
The industry has gained more assets because of larger cash
holdings by corporations.
And we will see that fall if we continue to see very large
M&A activity, so I don't want to say this is a - we should
look at this as a permanent feature in the liquidity
market. On the other hand I do believe we see more and
more clients are comfortable earning 5ish percent, 5 plus
percent in their cash with all of the global uncertainty,
so you have - so we're a beneficiary of the liquidity
assets.
Equities we're starting to see a real turn around. As you
know from (State Street) we had some real outflows from
(Aurora). We had other outflows as we try to consolidate
the equity platform from (State Street). We had $877
million of net inflows which offset, excuse me, $733
million of net inflows which offset market performance in
equities. And we still continue to see very large momentum
in terms of the RFPs.
And then solutions, we had a real milestone in the second
quarter and we did note that. We now have 100 ongoing
clients in the solution platform. We have never seen a
stronger pipeline. We are working on one or two extremely
large and extremely visible mandates that we believe we
are going to hear some time in the latter part of the
third quarter that we, you know, that could be really
transformational in terms of solutions and our momentum
going into '07. This on top of the tremendous tremendous
work our technology group needs to do in the MLIM
integration which I'll talk about.
And then in alternatives, more and more clients are and
this is not unusual information, but more and more clients
are looking to add more and more alternatives to their
business mix. More and more clients are widening their
alternative business mix to as much as 20% of their asset
base, in some cases even as much as 30%. Having a $27
billion platform even combined with MLIM about a $40 odd
billion alternative platform, I would say to all of us
it's just too small. We need to get larger in this as our
clients are looking for us to provide them with products.
This is in real estate. This is in equity products, and
this is in fixed income products and its going to be an
(Alpha Transport) product which we are going to really
build out over the next few years.
So overall business is strong, business performance was
very strong, very gratifying and obviously some unusual
circumstances for what I would call only modest asset
growth certainly below trend line but with our pipeline
that we mentioned in terms of our business going forward
of over $12 billion (a wins) of that funded and non-funded
into the third quarter. You know, we're starting to see a
more robust pipeline and now we're involved with over 500
(RFP)s.
Let me go over integration issues. Steve discussed some of
them. I know this is a big issue on a lot of our clients
minds certainly a lot of our employees minds.
We have come a long ways in terms of integration. We are
on schedule in some categories we're ahead of schedule. We
have determined basically across all the business
platforms the employees who will be on board and the
employees who will not be board.
We have identified all our teams in portfolio management
and equities, alternatives, and fixed income. Our teams
are talking together already, they're working together as
best as we can until we actually close so we are
communicating.
We are aggressively working towards the integration of our
technology platform. As you BlackRock Solutions makes a
business of technology integration in investment firms.
As you know as we discussed this in many earnings
announcements that integration platforms take as much as
two years to complete. Well this is one of the biggest
integrations that our solutions platform needs to do and
we are among the meanest clients of theirs and therefore
we have higher expectations.
And I would say very clearly we are right on track. It is
our hope that 100% and it may only be 95% of our fixed
income platform will be fully integrated at or around
closing.
It is hoped by year end most of our domestic equity
platform will be integrated and it will take a good, you
know, a good part of '07 to get the entire firm fully
integrated and that's very - that's actually a more
truncated or concentrated time frame that we would do for
any one of our clients.
So as I said earlier the solutions team is witnessing some
enormous growth opportunities and a couple of very large
mandates on top of integrating BlackRock into one unified
platform.
And this is going to be a very important component for us
because I do believe one of the transformational
differences between BlackRock and many of our peers is
being integrated into one investment platform, one
information platform.
It is through this technology platform that we will be
able to create this one shared culture, this one shared
platform so we can communicate from Taiwan to London,
London to New York, New York to Floren Park and on and on
and on to our different platforms so we could have a
better investment process and we can have better
information for our overall clients.
Having this shared platform is vital for BlackRock and is
vital for how we deal with our clients and I believe we
will achieve those objectives. We are very excited about
our new team and new partners, more excited today than we
were five months ago when we signed the contract.
We believe we have more opportunities with the new
BlackRock than we've ever believed we could five months
ago and a point of reference the two firms now has over a
trillion 46 billion dollars in assets. I'm going to have
to start learning to use the trillion word instead of the
billion word.
The combined organizations in the first six months raised
close to $55 billion in net new assets. The new BlackRock
will be just as strong on a global retail platform as it
is in a global institutional platform.
I'm very pleased to say that our new partners in Europe
are one of the top three retail platforms in all of
continental Europe and the UK and they've exhibited huge
market share gains in the first six months this year.
Having the opportunity to have the BlackRock products are
our platform in Europe will only enhance our platform in
Europe. Having the strong relationship between what
BlackRock brings and what (MLIM) brings into our
relationship with Merrill Lynch and its global private
client group is going to be very powerful.
In addition, because of our strength with third party
distributors, being UBS and Morgan Stanley and Citi and
Wachovia and A.G. Edwards and on and on and on, I believe
we'll have great opportunities to branch out and build out
the BlackRock platform.
We are working right now with many outside consultants.
This is some of the expenses in the second quarter and
we'll have them the third quarter in helping us roll out a
whole new platform starting in October.
We expect to be launching a very significant global ad
campaign on the merits of the new BlackRock and the
opportunities we have to really build out the franchise
name domestically the entire platform and it will be under
the BlackRock name.
And internationally on the retail side we will be using
the BlackRock Merrill Lynch Investment Management name for
a period of time until we believe we could wean off the
(MLIM) name in continental Europe and that's principally
on the retail side because of its strength as I suggested
being one of the top three mutual funds providers.
We expect going forward that we will have a operating
committees, management committee, managing director
committees as having be unified with our teams.
We've come a long way in terms of building out and working
on towards these integrations of people, of culture, of
products, and I feel very strongly that we have what it
takes to be a world class investment firm in the future.
So overall we're on track, some areas we're further along
than we expected to be. Our synergies are on track that we
suggested when we announced the transaction.
Our cost take outs are as expected. We're on track and
we're extremely excited about the revenue and growth
opportunities together not just in the retail side but
institutionally on a global basis. Not just in the fixed
income side but on equity side also.
We'll be a much more balanced organization with products
across all different categories. We need to continue to
fill out some of our product mix as I suggested in
alternatives, but I believe we have what it takes to make
it work.
And last I would just want to say again we would not be
where we are today if it wasn't for the fine work from all
the team leaders at MLIM with (Bob Dahl) and (Robby
Fairburn) at BlackRock with (Ralph Salestein) and (Sue)
Wagner and (Rob Capeto) really.
And then with our finance team, our HR team, and then all
the business leaders in terms of getting our client
service team unified, getting our portfolio management
teams in both equities and fixed income together and OPS
and Admin, Legal, all the business units are working very
well together.
And the excitement that I see that our management team
sees is pretty convincing that, you know, we're going to
have a lot of momentum into '07. With that let me open it
up for questions.
Operator: At this time I would like to remind everyone in order to
ask a question please press star then the number 1 on your
telephone keypad. We will pause for just a moment to
compile the Q and A roster.
Once again that is star 1 to ask a question. Your first
question comes from the line of Chris Spahr with
Prudential.
Laurence Fink: Hey Chris.
Chris Spahr: Good morning. I just want to confirm the closing date for
the merger. It looks like you're saying October 1?
Laurence Fink: Well October 1 is a Sunday so yeah...
Chris Spahr: Okay...
Laurence Fink: We believe we're going to close October 2.
Chris Spahr: Okay and then the timing of the cost savings it looks like
you increased that number at least for the first year then
you kind of say its in 2007. Should we see any cost
savings in the fourth quarter this year or is it pretty
much going to be a 2007 story.
Steven Buller: This is Steve you will see cost savings in 2007 a large or
at fourth quarter. A large portion of the synergies we
have right now are related to head count and those have
been realized and through today in fact and will be
realized as of closing.
As I mentioned before we're going to have some other
non-recurring cost that will be with respect to
integration expenses that will be occurring in third
quarter, fourth quarter and throughout 2007 that, you
know, (Larry) also referred to.
Some of those are capitalizable for technology others are
just pure consulting and other expenses.
Laurence Fink: But we will have synergies...
Steven Buller: But the synergies stand alone and you will have that run
rate of $70 to $85 million you referred to. In the
beginning I think probably pretty much all on October 1.
Laurence Fink: And a lot of synergy Chris will occur as we integrate all
our technology platform and that'll occur throughout '07.
Chris Spahr: And I guess since it's changed a little bit these
synergies are coming a little sooner than maybe you
initially talked about a few months ago. Should we also be
thinking that maybe the total expense synergies might be
higher than the $140 million?
Laurence Fink: You know, I think it'd probably in the 140 range still to
be honest. You know, when we had our investor presentation
on February 15 we were doing a, you know, a broad based
estimate at that point in time and I think that's kind of
mid point because we didn't know when they would begin but
we actually have achieved, I think, that first level at an
earlier stage than we thought we would have. But I think
140 probably is a reasonable expectation for the next
phase.
Chris Spahr: Okay. And then finally regarding the time period for
(LTIP) program the new one I guess that will start I guess
I'm assuming that will be starting next year not the
fourth quarter?
Laurence Fink: Yes.
Chris Spahr: And that is - did you say that wouldn't be for five years
or?
Laurence Fink: Our expectation is that will be for a five year period.
Chris Spahr: Okay all right thank you very much.
Laurence Fink: Yes.
Operator: Your next question comes from the line of Marc Irizarry
with Goldman Sachs.
Marc Irizarry: Oh great thanks.
Laurence Fink: Hi Marc.
Marc Irizarry: How are you guys?
Laurence Fink: Good.
Marc Irizarry: I guess, you know, my first question is on the expected
revenue synergy. I mean you talk a lot about the cost
side, but (Larry) maybe you can give a little color in
terms of the, you know, the revenue synergies as you see
them now relative to, you know, what they were at the on
set of the deal and I know you haven't given specifics but
maybe just some color there.
Laurence Fink: Well, you know, I think its - the opportunities we have in
integrating the BlackRock product mix into the MLIM Mutual
Fund Platform in Europe and plus, you know, to the extent
that we knew about what the MLIM platform was in Europe
and five months ago we know it even better today.
It is a really strong platform in Europe to help us really
expand our products and our distribution channels. It is
one of the key platforms in all of Europe. We spent a
great deal of time as I suggested working with the other
Wall Street organizations and distribution organizations
in terms of rolling out the new BlackRock product mix.
So on the retail side both globally and domestically we
have huge opportunities for growth. Institutionally we've
already, because of the strength of the relationship of
BlackRock in one Middle East account, we were able to
actually bring in new business into a (MLIM) product.
So we're starting to actually cross-sell and emphasize all
the products we have institutionally on a global basis. So
we have huge opportunities on a retail side together and
then on the other side having the (MLIM) products to start
selling through our institutional channels on a global
basis really excites us and excites our client team to
really start promoting more products.
The other area that we have and, you know, I can't say
enough the opportunities we have in all alternatives in
one area like real estate, you know, we've had since our
acquisition of our real estate platform from State Street
which at that time was about $6 billion combined real
estate equity platform is closer to ($13 billion) today
and, you know, I see that continue to grow and growing at
a very rapid pace.
So we have just, you know, we're very excited about all
these growth opportunities, and I think, you know, even in
the first six months the $50 odd billion in growth
combined exhibits the potential that we have together.
Marc Irizarry: Got you. And as far as concentration issues and capacity
issues?
Laurence Fink: Yeah we'll have that. I mean, you know, we always budgeted
that, you know, we're going to have some capacity, we're
going to have concentration issues with some clients and,
you know, they're going to have to reallocate from
BlackRock or (MLIM) or the new BlackRock and, you know,
that's just a course of business and, you know, our - but,
you know, our hope is with the majority of clients we
don't have concentration issues and we're going to be able
to expand our product mix to our various clients.
Marc Irizarry: Got you. And then Steve if we just look at the G&A line
item and if you take out the $12.5 million in you know in
MLIM related costs you still you know you de-leverage
G&A, you know when should you expect to leverage your G&A
you know, is it in the middle of '07? Is it in the back
half of '07 or are those costs you know consulting, etc.?
Are those expected to you know just remain with you
throughout the entire year or should you expect to see
some leverage generated there? Thanks.
Steven Buller: I think you're going to see as I said before, very strong
G&A integration costs in the third quarter tailing down
the fourth quarter and then a smaller proportion
throughout 2007 trailing down. By the end of 2007 they
should be pretty much I would think pretty much gone.
Marc Irizarry: So you should, you should generate some operating leverage
there in the back half of '07?
Steven Buller: We should.
Marc Irizarry: Yes.
Steven Buller: Don't forget we have a lot of technology that's still
going to have to be you know put in place in the first
part of 2007 but then we'll see some significant leverage
in G&A and in technology.
Marc Irizarry: Okay, great. Thanks.
Operator: Your next question comes from the line of Bill Katz with
Buckingham Research Group.
Laurence Fink: Hi Bill.
Bill Katz: Hi guys. Thanks very much. A couple of questions - just
going back to the guidance for next year, just trying to
understand the range of expectations on performance fees.
They seem to be pretty wide if you will.
Laurence Fink: Yeah.
Bill Katz: And if you take what you said earlier Steve in terms of
sort of what you normalized run rates are you're still
hovering around a $70 million per quarter number which is
280 annualized. And I know it's difficult to annualize
performance fees but it does seem like even run rate
numbers, your guidance is far lower than what you're sort
of running at right now. Is there something we should be
should be thinking about that would result in a down step,
particularly given MLIM has a pretty broad platform as
well?
Laurence Fink: Bill, I'm going to let Paul and Steve talk about that, but
let me just say overall you know as you said it yourself,
performance fees are hard, very hard to estimate and just
like we historically have since we've gone public we try
to be as conservative as possible without, you know, but
we, obviously we have to set some targets and so you're
right. I mean our running rate this year with MLIM and
BlackRock is much higher. They were extraordinary
performance fees because of extraordinary performance and
it would be wrong of us to even assume that, you know,
that every year we could do that.
Man: Yeah, I would also add Bill just so you know when we were
kind of looking at the forecast, you have two big factors
hitting us this year that if we try to sit here and say
that they were going to recur every year I think would be
very, very speculative. One, you had a $100 million plus
real estate performance fee that was coming from an eight
year contract that certainly, that was eight years of
performance that delivered that $100 million. It wasn't an
annual number.
And then second, we have just seen a tremendous amount of
return in the energy sectors that which you've seen over
the last couple of periods. To say that you would
automatically carry that forward on a forward forecast
basis would also be just a little bit too high. So what
we've tried to do is say well take away a run time real
estate piece that covered eight years, look at energy at a
little bit more of a reasonable basis and then look at the
core business and say what kind of range are we looking
at? And that's what you really have.
Steven Buller: Bill when you look at performance fees over the longer
period of time too I mean we right now, we're at about
$184 million in year to date performance fees compared to
$168 million for all of last year. So you know we
obviously are running ahead of you know kind of a
normalized level. But to put it in perspective I mean you
know our goal had been, our commitment had been to develop
a broad based platform of alternative products to
complement you know the bottom line.
When you compare back to 2004 we were at $41 million in
contribution in all of 2004 so the strategy has worked
very well, but it does provide for you know a broad range
of variability and that's why we chose to choose you know
a range here of possible performance fees.
Bill Katz: Okay, second question is on flow. I was just wondering if
you could give a little bit more detail on the new
business in terms of maybe (Larry's), when I read the $4
billion of outflows I still got a little worried about
rotation risk more broadly so I wondered if you could
answer that question and then a little more detail of
where the $12-1/2 billion is away from the cash
management.
Laurence Fink: Well I don't think the $4.8 billion of outflows was, is
any indication of forward momentum. A good part of the $12
billion you mentioned, some of it's cash management, a
good part of it is in a very high yielding, high fee
paying products we won since quarter end three, high yield
mandates. We won a number of very strong equity mandates
and some large good paying fee fixed income products.
So you know so we're seeing, we're seeing, you know,
rotation, actually from some many core types of fixed
income products into the more absolute value types of
products, as I said more of the high yield products, more
different types of equity products and then, we're
continuing to see more business growth in our alternative
space.
So you add those together plus with just our, the growth
of global assets you know business is picking up nicely
Bill.
Bill Katz: Okay, I just have a final question, actually two final
questions, if that's possible. The (L Tip) step up I guess
was about 25 cents round numbers this year going to 35 to
45 cents. Is the step up just due to the fact that the
organization is larger or are you having to pay out higher
incentives to keep your management team in tact due to
potential recruitment issues?
Laurence Fink: Mostly it's larger. And it's, you know, we have not even
discussed this with our employee base yet. That's going to
be rolling out in the next few weeks. But it's broad based
and many more employees and without getting into details
yet because we have not discussed this with our employees
yet, it's as Steve suggested, it's a five year plan again.
Predominantly funded by Merrill Lynch and PNC.
Man: We had a as you'll recall Bill a 4,000 - 4 million shares
that were given to us in the first plan and the large
portion of that is being carried over to the second plan.
Man: But we won't know that until year end.
Man: And being used to partially fund that obligation.
Bill Katz: Right.
Man: Bill don't overlook one piece of that too which we tried
to say in the, our guidance. When we did our original
transaction expectation we were looking for a lot more up
front one time retention based payment that we were
looking at in the MLIM side. What we've actually been able
to do is put together some very long term arrangements
with MLIM. It has the implication of taking a one time
charge away and extending expense out into the future and
I recognize some people saw that but I actually think a
much more positive end result for the business because
what we really do is we have a lot of people in MLIM that
we're very confident is going to stay as part of the
business.
Bill Katz: Okay, and then final question, I know I asked this last
quarter and I know you had another 90 days to study this.
You know so if your range is right your free cash flow is
going to be something in the ballpark of about a billion
dollars a year so you recognize stepped up advertising and
build that new product. But are there any other uses for
free cash flow at this point in time beyond just sort of
reinvestment in the business?
Man: At the moment that's what we're, we're focusing on. Your
point is well taken. We are aware of that issue and we're
focusing on integration at this moment and making sure
it's done and making sure that we do have that free cash
flow or hopefully more. And but that is something that
will be on our minds probably in the fourth quarter.
You know, we have not discussed what we are going to do
with our board. I think I suggested you know the board
will always look at dividend policy, the board will look
at all the different issues surrounding what the needs of
the company. I did also suggest, you know I do believe
there will be M&A opportunities on the investment
technology side.
You know we're always interested in the really continue to
build out the solution platform and so, you know, so
that's what we're going to be looking at and we will
continue to look at it.
Bill Katz: Okay, thank you.
Operator: Once again ladies and gentlemen if you would like to ask a
question please press star then the number 1 on your
telephone keypad. We will pause again to compile the Q&A
roster. Again that is star 1 if you would like to ask a
question at this time. Your next question is a follow up
from the line of Chris Spahr with Prudential.
Chris Spahr: Hi guys, one quick question. What is the amount of AUMs to
non-US clients at quarter end?
Man: I'm sorry what was the question again?
Chris Spahr: What is the, you gave the amount of flows but what is
non-US client AUM at quarter end?
Man: $114 billion in non-US clients.
Chris Spahr: Thank you.
Man: I think that's it. Thank you very much. Everybody have a
very good quarter. I'm sorry, Operator is there another
call?
Operator: I believe so. Just one moment sir. We have a follow up
question from Bill Katz from (Buckingham Research).
Bill Katz: I'll take advantage of the lack of interest (Larry). Just
(unintelligible) one more line item. You know MLIM
just published out a 38% pre-tax margin in the quarter.
Your margin was about 36% so the (unintelligible) line is
slightly above industry average. Is $70 million to $85
million of cost saves too high? Are you eating into the
bone or the muscle of the company in any way? Or is this
just a function of duplicate practices?
Man: Yeah. A lot of it is, keep in mind a lot of it will be in
the integration, the technology platform. I mean there are
many different operating platforms at MLIM that we're
going to be simplifying quite a bit of that once we're
fully integrated on the solution platform.
So the answer is we don't think so and I think we just, we
actually did a pretty good job of budgeting, you know
where the, you know where is the opportunities in terms of
cost saves and where the opportunity is to build. I can
promise you we're just as conscientious about making sure
that reinvesting for the future and that is terms of you
know the build out of teams in Asia, that is in terms of
building our products here and making sure that we have
the proper distribution channels open and staffed as we
roll out the new firm.
Bill Katz: Okay, thanks guys.
Operator: We have a final opportunity for questions at this time.
Please press star 1 if you have a question. Your next
question comes from Roger Smith with Fox Pitt, Kolten.
Man: Hi Roger.
Roger Smith: Hey, how are you doing? Thanks. I just wanted to go back
to the performance fees again and in the quarter there
were $70 million and you talked a little bit about energy
and I just wanted to know was that primarily what was
driving the performance fees this quarter and was it more
in the fixed income product or just to try and get a
better sense on that?
Man: Yeah, the answer is yes. The performance fees in this
quarter were primarily driven by energy.
Roger Smith: Okay, and then in the guidance of the $100 million to $250
million, could you give us a split? I know you said
Merrill Lynch does have a net alternative platform but
where would that split be in that guidance number?
Man: Yeah, I don't think we're prepared to give that type of
granularity yet but we will probably as we roll out in the
fourth quarter help. I can tell you they have you know
also energy products and they do have natural resource
products. So there are, they have some very strong well
received products there. They do have some CDOs and other
products like that. They are in real estate. They have a
very successful private equity fund of funds product.
So there are areas that will be very complimentary to our
suite of alternative products and hopefully they're very
complimentary in terms of our revenue stream.
Roger Smith: Great. Thanks very much.
Operator: At this time there are no further questions. Gentlemen,
are there any closing remarks?
Man: No, I would just say thank you and once again to all the
employees who have worked so many long, extra hours. We
apologize for the hard work but I believe for everyone we
are building a much better organization. I do believe we
have a chance of being a true leader in the investment
management business on a global basis and I think we will
be differentiated in the future because of this and I do
believe we are setting the tone for our organization that
is differentiated among our peers.
Thank you very much.
Operator: This concludes today's BlackRock Incorporated second
quarter 2006 earnings teleconference. You may now
disconnect.
END
FORWARD LOOKING STATEMENTS
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BlackRock assumes no duty to and does not undertake to update forward-looking
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could cause actual results to differ materially from forward-looking statements
or historical performance: (1) the ability of BlackRock to complete the
transaction with Merrill Lynch; (2) BlackRock's ability to successfully
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BlackRock's investment products, including its separately-managed accounts and
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