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Sotheby's Holdings, Inc. (NYSE:BID)

Q1 2010 Earnings Call

May 6, 2010 04:45 p.m. ET


Bill Ruprecht - President and CEO

Bill Sheridan - CFO


George Sutton - Craig-Hallum Capital

Kristine Koerber - JMP Securities

Rommel Dionisio - Wedbush Morgan Securities

William Florida - Advisory Research


Good afternoon, ladies and gentlemen, and welcome to the Sotheby's first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a questions-and-answer session. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.

During the course of this call, the company may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such projections and statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions.

We refer you to the documents the company files periodically with the Securities and Exchange Commission, specifically the company's most recently filed Form 10-K. These documents identify important factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements.

At this time, I would like to introduce Bill Ruprecht, President and Chief Executive Officer; and Bill Sheridan, Chief Financial Officer. Mr. Ruprecht, please go ahead.

Bill Ruprecht

Thanks for your help, [Allison]. Welcome, everybody, after what I know has been a pretty athletic day in the investing world. Today we announced our first quarter results. Revenues were up dramatically to almost $102 million, thanks to the strong sales, London in February and our impressionist contemporary categories, which were up to $208 million, which was a 243% increase over the prior period.

Despite the significant increase in revenues, operating expenses declined over $16 million, about 15%, partially due to the absence of certain expenses in 2010 that had occurred in 2009 and to some extent the cost savings initiatives we implemented in 2009. Almost every expense line was down or flat in the first quarter, even though we saw an 87% increase in revenues. That's a notable accomplishment and we intend to remain vigilant on expenses going forward.

With the recent economic and art market upturn, the balance sheet is strong. We have $215 million in cash at the end of the first quarter, an increase of about 10 times in comparison to the prior period and we don't have any revolving debt under our credit facilities.

Traditionally the first quarter is a loss quarter for Sotheby's. We were on an operating basis significantly profitable in the first quarter and we very nearly broke even after debt and taxes and a loss of about $2.2 million, making one of our very best first quarters.

Last night we held an impressionist in modern art sale which brought $196 million, three times the result of last year at $61 million. Market has been gaining in the art world some momentum since last autumn and we have a number of exciting sales to finish up the second quarter that I'll speak to later in the call.

One final comment, today as I watched the Dow Jones strip off 980 points, we had an impressionist and modern painting sale today chugging right along, about a $30 million estimate making an excess of $30 million for the results. Our business and the value proposition for people owning works of art even in a volatile environment seems to be pretty attractive.

I'll turn it over now to Bill Sheridan for you.

Bill Sheridan

Thank you, Bill, and good afternoon, everyone. I'd like to walk through our income statement and highlight some points. Please refer to the information at the end of the press release on page 6.

Overall results, as Bill said, our $0.20 first quarter net loss of $2.2 million and diluted loss per share of $0.03 are among the best in our history. This result was possibly caused from the 80% increase in revenues, largely attributable to increased auction commission revenues combined with a 15% decrease in operating expenses in the quarter.

Turning to operating revenues, for the first quarter, operating revenues totaled $102 million, a $48 million or 87% increase from the prior period. This principally stems from the $286 million or 143% increase in net auction sales that is especially attributable to the performance of our London impressionist and contemporary sales in February.

Also, we had a very strong [average] sales showing in the first quarter which generated a $3.8 million or 79% increase in private sale commissions. Partially offsetting these improvements is a 10% decrease in auction commission margins from 19.2% to 17.2%. This is entirely attributable to a lower average buyers premium rate in 2010 resulting from our sliding scale buyers premium rate structure.

In the first quarter of 2010, we saw a 120% increase in the number of individual works of art which sold for over $1 million, a point at which our buyers premium declines from 20% to 12%.

Turning to the cost side, direct cost of services declined $2.3 million or 25% to $6.9 million in the first quarter. This improvement is principally due to the $3.3 million in costs relating to our first ever sales in Qatar which took place in the first quarter a year ago and was non-recurring this year.

It is also worth noting that we were able to lower our direct costs in the current quarter despite the substantial increase in sales volume due to [catalog] production and other initiatives implemented in 2009.

On the dealer cost of sales line, we saw a decline of $6.9 million or 79%, partially due to a much lower level of inventory write downs than in prior years.

Turning to salaries and related costs, salaries cost declined $1.3 million or 3% to $46.6 million in the first quarter, principally due to lower full-time salaries partially offset by higher employee benefit costs.

Full-time salaries declined $2.7 million or 9% largely due to headcount reductions which were implemented during 2009. Employee benefit costs increased $1.4 million or 56% due to this year's market gains and the deferred compensation plan for US employees.

It is important to note that these increases and decreases in employee benefit expense relate resulting from market gains and losses and the deferred compensation plan are largely offset by movements in the value of deferred compensation plan assets which appear below the operating income on the income statement.

It's very complicated accounting. It relates to the [Rabbi] Trust which holds these deferred compensation plan assets, so the costs are above the line and the benefits are below the line.

Turning to G&A costs, general and administrative expenses increased $800,000 or 3% in the first quarter of 2010. That [debt] expense and travel and entertainment costs increased $2.2 million and $1.1 million respectively.

The increase in travel and entertainment expense is attributable to the pursuit of an increased level of business getting opportunities. Partially offsetting these G&A increases were lower facility-related costs and professional fees which declined $1.9 million and $1.3 million respectively.

On the net interest expense line, in the first quarter, net interest expense increased $1.7 million or 18% principally due to lower interest income and higher fees related to our new midyear 2009 revolving credit facility.

Lastly, on the income tax line we saw a more normalized rate this first quarter. Our effective income tax benefit for the firs quarter was 28.7%. We currently anticipate our full-year effective tax rate to be in the range of 33%, excluding certain discrete items.

At this time I'd like to turn things back over to Bill Ruprecht. Bill?

Bill Ruprecht

Thank you. A couple of second quarter and forward-looking thoughts; as I mentioned, our impressionist and modern art sale last night really did well, $196 million, three times the previous total. The highlight was a Matisse which sold for a little over $28 million.

As Bill said, 43 lots or three quarters of the lots on offers sold for over $1 million or more and the sale by number of lots was 88% or 89% sold. Last month in Hong Kong we had a week-long series of sales that brought a little over $1.25 billion, surpassing the highest pre-sale estimate of $217 million and it was the best performance in our history of over 30 years of Hong Kong.

Numerous records there were set and just about all of our sales exceeded our pre-sale expectations. Top lots included an imperial seal which sold for $12.3 million and the other sale that bears mention to date in the second quarter was a strong $35 million jewelry sale in New York, which sold for close to its high pre-sale estimate and it was the second highest total in the history of our company in New York for a various owner jewelry sale.

Next week we've got contemporary art here in New York. Those sales have a pre-sale estimate of $155 million to $220 million. There is a Rothco untitled picture large red canvas from 1961. Pre-sale estimate on that is $18 million to $25 million. There is an unbelievably interesting Andy Warhol sale part portrait and one of Bryce Martin's Cold Mountain pictures, each of which has a pre-sale estimate of $10 million to $15 million.

Next week in Geneva we've got another jewelry sale which includes a very special white diamond emerald cut, 52 plus carrots and a blue diamond weighing a little over five carrots. Those have estimates on them of $7 million and $4 million to $7 million respectively and that's at a sale which is expected to bring between $34 million and well over $40 million.

In the press, considerable notice has been paid to a collection we'll be offering in London in June as well as in Paris. It's the legendary art dealer [inaudible] and the dealer there represented some of the great impressionist masters including Picasso, Van Gogh, Renwar and [Sazon]. We're handling an extraordinary [inaudible] that's got a pre-sale estimate of $14 million to $21 million.

We have an old master sale on the horizon in early July in London with an extraordinary picture by Turner of Vista over modern Rome which was purchased in 1878 by the Fifth Earl of Rosebery and his wife Hannah de Rothschild and has been in that family ever since. That painting, we believe, is conservatively estimated at $18 million to $27 million and we're very excited about that picture and the prospect of that summer offering. It's a wonderful, wonderful work.

We're mindful of ongoing uncertainties in the global economy. I do believe we're pretty well positioned for strong operating results. We're extremely encouraged by the sale levels to date, including today, as I already mentioned.

Hard assets appear to have a considerable appeal to many people in light of some volatility in other categories and the level of our consignments for the remainder of the second quarter and into the third quarter all are relatively assuring and we've secured those without materially exposing our balance sheet through the use of auction guarantees.

There are indications, of course, that our traditional competitor is taking some actions in areas such as pricing and guarantees to secure consignments and regain some market share deterioration that they've experienced over the last year.

We've continued to be pretty conservative in that regard and we've been able to secure attractive, high-value consignments certainly when compared to the prior year without resorting to buying or taking significant guarantee risks. We'll be prudent about that going forward and I look forward to your questions.

I think business is prospering for really three reasons; one, continue to focus on the costs; two, continue to focus on the margins; three, we've been looking at some pretty considerable uptick in the global economies with enormous interest in our business and in the assets which we have to sell, particularly from some of the so-called emerging wealth market places of Asia and remarkable new interest in our business from people of considerable wealth.

So that's it. We'll take your questions now. Thanks very much.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of George Sutton - Craig-Hallum.

George Sutton - Craig-Hallum

Just to probe a little bit more on the competitive environment discussion, obviously and I think you know my opinion on guarantees in an up market. I love to see them. But outside of guarantees there have been other tools in the past used like auction premium rebates and marketing dollars. Are we seeing any return of those types of activities yet?

Bill Ruprecht

George, this is Bill Ruprecht. I think I just said what I can say which is that we're pretty confident and comfortable that any deterioration in margin that we've seen so far has been based upon just mix. When you sell something for $10 million as opposed to for $1 million, you necessarily get a lower margin on it from the buyers premium side.

We've stayed pretty disciplined and will we get tested? Of course. Will we get challenged? Of course. On a day-by-day basis we've got some pretty good disciplined and centralized processes around talking about and managing margin.

I think all I can say, George, is you wake up every morning in this business and compete for opportunities and we're very confident that we've gotten the business that made sense for this company because we really don't optimize for the quarter. We optimize for the long term in this business.

We're not interested in hitting the cover off the ball for one quarter by buying a bunch of business. We'd a whole lot rather interact with our clientele on the basis of sort of a respectful agency relationship. We get well paid for what we do, as we should if we do a great job.

George Sutton - Craig-Hallum

On the cost side, a very impressive fact that your auction sales year-over-year were up over 140%; your actual dollars on the salary side were down and I understand why that dynamic occurred as you let some costs go in 2009.

How should we be thinking, Bill Sheridan, about that kind of dynamic going forward? Obviously we expect some bonus accruals and things in there.

Bill Sheridan

As we said, as the business trends up and we return to profitability, the biggest increase will be in the bonus pool. That's obviously reviewed by our Independent Compensation Committee. I think in the last quarter call at year-end we don't plan a significant headcount increase as we will look at some ads in China, which is a big opportunity and if we can find revenue producers that will continue to grow the business.


Your next question comes from the line of Kristine Koerber - JMP Securities.

Kristine Koerber - JMP Securities

A couple of questions, number one, can you first comment on what you are seeing as far as supply in the marketplace? Is it getting any easier to secure supply? If not, what may be holding sellers back? Are you having sellers come to you asking for guarantees?

Bill Ruprecht

Kristine, year-to-date, this is through sort of I think yesterday. We're up sort of 140% in sales. So is it getting easier? I wish it was. I don't really think it gets any easier to compete for business but I think the market is wide open in the sense that the biggest driver to the top-line in our business is actually not buyer demand but seller confidence.

So access to product is access to collections, access to individuals who are receptive to the idea of selling things is certainly ongoing. There're lots of discussion that are interesting and dynamic and I think as you can see from sales to date are taking place at a robust level than they were certainly a year ago.

Do people ask us for guarantees every once in a while? Yes, of course, they do. All I can say is that the balance between taking a guarantee or not taking a guarantee is not a question about [this is] straight forward. What's the way to generate the maximum benefit for yourself is very often not to take a guarantee.

Sometimes people are risk adverse and just need to, for tax planning or divorce or estate planning purpose, need X dollars and all they care about is a certainty of a certain level of proceeds. Under those circumstances in some cases a guarantee is uniquely beneficial to a potential client.

We, frankly, have had very little problem when we've wanted to of finding guarantors that could stand in working with us where we protect much of our margin on the transactions as an agent while taking the risk reward matrix up to some different levels of volatility through a third party.

So it works. All solutions are accessible to our clients and we really try to guide them in ways where they're fully knowledgeable about the risks and rewards of both avenues.

Kristine Koerber - JMP Securities

Then, Bill Sheridan, I believe you mentioned in the past that there has been pent up demand out there. How long do you think it's going to take to work through that? I just know over the past year -- .

Bill Sheridan

I hope it takes 10 years. But how long is this turnaround going to last? Hard to predict. It feels pretty good right now. All the data points we've had since the fourth quarter of last year have been very positive.

One of the rather newer dynamics seen is some of the Asian demand coming into our business. That's becoming more pervasive, more active across many categories and something rather we really need to keep an eye on because the wealth creation story in mainland China and the Far East is obviously a well-told tale. Some of that wealth is absolutely hitting our business as we speak.

Kristine Koerber - JMP Securities

Overall, are you still erring on the conservative side as far as pre-sale estimates that you're quoting to sellers?

Bill Ruprecht

Well, I think if you look, it's very hard to offer any science in this. On a quarter-to-quarter basis we've been exceeding our pre-sale estimates for each of the last four or five quarters. At some point you'll undoubtedly see seller expectations ratchet up and beginning to exceed those estimates by the same degree that we have over the last year.

At some point, those lines cross. If you tell me what the demand side looks like and the supply side looks like I can answer the question. But this is - frankly, my speculation is not worth anything in that regard.

We still have an awful lot of clients who are prepared to say, "You're market makers. Do what you can to optimize this transaction so that I get the most money, not so that I get the highest estimate."

Giving somebody a big estimate is a way that auction houses can compete for opportunities but it does their clients a huge disservice because the success here is not about getting the property. Success here is about selling the property and creating a long-term relationship with the client because you've done a good job for them.

I think that's something rather we're pretty focused on because the relationships that we enjoy - we probably get the better part of 70% of our annual business without competition. That's because we take an awful lot of respect and urgent focus on what do our clients need and what's going to be in their best interest rather than what's going to make somebody feel good for half an hour.

Kristine Koerber - JMP Securities

Then just lastly, Bill Sheridan, the accounts receivable balance, I believe it's around $60 million, one-fifth which is related to one buyer. Any risk in potentially collecting that payment?

Bill Sheridan

If you look in the details of the 10-Q that was filed today, the final balance has been collected.


Your next question comes from the line of Rommel Dionisio - Wedbush Morgan.

Rommel Dionisio - Wedbush Morgan

Bill, I know you touched upon the geography that the Asian was being very strong. But just with regard to the US versus European buyers, given some of the sharp currency shifts we've seen in the last few weeks, have you seen a sharp shift in terms of geographic dispersion of who's doing the buying?

Bill Ruprecht

I think what you mainly see is sellers and potential sellers saying - I mean, I've talked to Icelandic folks, Greek folks and French folks in the last 48 hours. Two in one said the same thing which is, "Thank God I own works of art." They seem to be more enduring under these recent circumstances than an awful lot of other asset classes.

So people who own significant works of art seem to continue to value what they offer in terms of a value proposition which is over time some considerable durability and some degree of dislocation from the movement of some other things like near-term currency shifts.

Rommel Dionisio - Wedbush Morgan

Just from your comments on the Asian demand being so strong, is that sort of - I realize you took some headcount down across the globe last year but does that sort of make you rethink maybe reinvesting some resources into that market whether that's opening new offices or making some strategic hires in that market?

Bill Ruprecht

We'll make any announcement when they make sense. Fortunately we're here every day challenging the resources and whether or not we think we've got the business optimized for the long term. We, in spite of the fact that we're a US public company, don't run this business for the quarter. We run it for what we think is in the best interest of shareholders over the long haul.

If that means we need to invest in people, that's what we'll do. We're the only significant auction house that's global that has Chinese leadership in our Asian operation. We have invested and continue to invest in people who drive our success, who have the cultural sophistication, language sophistication and long-term relationships which undoubtedly lead to our preeminent position.


Your next question comes from the line of William Florida - Advisory Research.

William Florida - Advisory Research

I just wondered if you would comment on the nature of the auctions recently. When the market started ticking up in November and earlier this year, it seemed like none of the lots were going unsold.

This may just be my impression, but I noticed that the [Christy]'s auction there was a good $20 million piece that did not sell as well as a couple of Picassos at the Sotheby's auction last night. Does that tell us anything about the supply and demand and do we start to see the limits of demand or is there something else behind that?

Bill Ruprecht

Well, I think that you saw at Sotheby's last night a sale that was about 90% sold by lot and about 94% sold by value. At [Christy]'s you saw two sales essentially; one, the Frances Brody collection, which did extremely well and then another sale which was about 65% sold.

I don't think in spite of how frustrating it is that these markets are in many cases open only six or eight days a year that it's very easy on the basis of even those simple metrics to draw an enormous amount of conclusions. It probably has more to do with who took an inappropriate estimate in on a piece of property because they were looking to stretch a sale or trying to push something over the top.

I can't really comment further on the - it's really inappropriate for me to comment further on why [Christy]'s did not have much success in their various owner sale while we continued a trend of what I think is very significant historic success on sell-through rates.

That's something we've been working very hard at and have done a really good job at because, once again, you've got long-term client relationships. When you disappoint your clients you injure your relationship over a long period of time.

I think you've got to look at the impressionist marketplace at this point as pretty robust. I think that there is an awful lot of value being transacted that's a multiple of what it was over the last couple of years. Yes, indeed, there have been a couple of very high-value lots which have garnered a lot of media attention.

Overall, however, there is an awful lot of depth and health of demand and pretty active supply in that marketplace. I think 1.5 years ago I would tell you that I was surprised at how quickly that particular marketplace opened up and became robust again. So I think I feel certainly pretty good about that marketplace and would air a few of the unsold lots particular that we saw at our cross town rivals as hopeful estimates rather than market deterioration.


I'm showing no further questions at this time, gentlemen.

Bill Ruprecht

Then I thank you for your interest in Sotheby's. I wish you a happy spring. I hope the financial markets stabilize and take some of the sovereign risk discussion out of equation for all of us and we'll be looking forward to talking to you after the conclusion of our, what I hope is a very strong and profitable second quarter. Take care and we'll talk to you soon.


Ladies and gentlemen, that does conclude today's conference. Now disconnect and have a wonderful day.

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Source: Sotheby's Holdings, Inc. Q1 2010 Earnings Call Transcript

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