Sotheby's Q4 2007 Earnings Call Transcript

Sotheby's Holdings, Inc. (BID)

Q4 FY07 Earnings Conference Call

February 26, 2008, 04:45 PM ET

Executives

William F. Ruprecht - President and CEO

William S. Sheridan - CFO

Analysts

Dana Cohen - Banc of America Securities

George Sutton - Craig-Hallum Capital

Kristine Koerber - JMP Securities

Steven Reeves - JP Morgan

Jody Kane - Sidoti & Company

Rommel Dionisio - Wedbush Morgan Securities

Rob Schwartz - JL Advisors

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Sotheby's Fourth Quarter and Full-Year 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder ladies and gentlemen this conference is being recorded.

GAAP refers to the Generally Accepted Accounting Principals in the United States of America. In this earnings call, financial measures are presented in accordance with the GAAP and also on non-GAAP basis, EBITDA and adjusted EBITDA as presented in MD&A are supplemental measures of the company's performance that are not required by or presented in accordance with GAAP. They are not measures of the company's financial performance under GAAP and should not be considered as alternative to net income or any other performance measures derived in accordance with GAAP or an alternative to cash flows from operating activities as measures of the company's liquidity.

The company defines EBITDA as their income, excluding income tax expense, net interest expense and depreciation and amortization expense. The company defines adjusted EBITDA as EBITDA, excluding income from discontinued operations before taxes the impairment loss and insurance recovery related to Noortman Master Paintings B.V., and the gain recognized on the sale of land and buildings from the first quarter of 2007.

The company cautions investors that amounts, present in accordance with its EBITDA and adjusted EBITDA, may not be comparable to similar measures disclosed by the other companies because not all companies and analysts calculate EBITDA and adjusted EBITDA in the same manner.

Management believes that EBITDA and adjusted EBITDA provide an important supplemental measures of the company's performance and believe that they are frequently used by Sotheby's analysts and investors and other interested parties in the evaluation of the company. Management also utilizes EBITDA and adjusted EBITDA in analyzing the company's performance. Reconciliations of these non-GAAP financial measures used in this earnings call to the comparable GAAP amounts are provided as applicable in Appendix B at the company's earnings press release for the year ended December 31, 2007, which is available via the Investor Relations section of the Company's website www.sothebys.com.

Also, 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 that company files periodically with the Securities and Exchange Commission, specifically the company's most recently filed 10-Q and 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 will like to introduce to Bill Ruprecht, President and Chief Executive Officer, and Bill Sheridan, Chief Financial Officer. Mr. Ruprecht, please go ahead.

William F. Ruprecht - President and Chief Executive Officer

Thank you, Mary, 45 minutes ago we announced our best fourth quarter and full year results in our 264 year history. With full year 2007 revenues of almost $918 million. Net income of $213 million and EBITDA of almost $324 million. Last year at this time we communicated to you our strategy to focus on higher valued lots. And so I am really pleased to be able to share with you that in addition to growth in the lots sold above the $10 million mark, we are also successfully tackling and refining the low end.

In 2006, lots $5000 and less comprised 47% of our volume. And in the second half of 2007 that figure had shrunk to 27%. We will continue to work on this going forward. Our focus is on quality not on quantity. Sotheby sold the most valuable painting at auction last year Mark Rothko's White Center which sold for almost $73 million. The highest price every achieved at auction for a contemporary work of art anywhere.

We also had the privilege of selling seven of the top ten works of art sold at auction in 2007 as well as 41 works over $10 million more than double the previous single year record of 20 works sold for above $10 million. Also, as a result of our strategy to focus on major clients, the number of clients purchasing valuable lots as we consider them with $500,000 or more has grown 238% in five years to a total of 848 clients which purchased works of art in excess of $500,000 in 2007.

The diversity of our client base has continued to grow as well. The number of countries these clients come from has grown 61% to 58 different countries in 2007. We've been pleased about the direction the business is taking and 2008 is off to a strong start. With the Impressionist and Modern Art sales in London and a number of important sales ahead this spring.

Bill Sheridan will now offer some comments on the P&L and the Appendix to our press release.

William S. Sheridan - Chief Financial Officer

Thank you, Bill. I would like to take this opportunity to walk through our income statement, address some key points in more detail. Please refer to the financial information at the end of the press release on page 7. I would also like to remind the audience on page 8 of the press release it's about non-GAAP reconciliation.

Overall results, net income in 2007 was $213 million or $3.25 per diluted share. This compared to $107 million or $1.72 per diluted share in 2006. This $106 million on 99% improvement in net income is largely due to 38% increase in total revenues which grew to $918 million over the period. Partially offsetting this increase in revenues is $174 million or 37% increase in operating expenses over the prior year. Much of this increase is in those expense areas which move up and down directly with our increased business activity and profitability. Variable expenses such as the direct cost of auction sales, dealer cost of sales as well as incentive compensation costs which result from our increased profitability.

Excluding, the impairment charge relating to Noortman Master Paintings, the insurance recovery from the life insurance relating to Noortman Master Paintings, as well as a gain on our sale of our Sussex property in U.K. all recorded in the first quarter of 2000. Net income for the full year 2007 would have been approximately $205 million or $3.12 per diluted share, $98 million or 91% improvement.

Turning, to operating revenues, in 2007 total revenues increased $253 million or 38% to $918 million compared to 2006. This improvement is largely due to $210 million or 38% increase in auction commission revenues principally resolving from 43% increase in net auction sales over the period, as well as $29 million or 113% increase in private sales commissions.

Looking, at our auction commission margins which will be outlined in our 10-K which will filed tomorrow morning. In 2007, they were down slightly from 17% in 2006 to 16.5% from the prior year. This was due to a change in the sales mix as we sold more high-end works of art in 2007. This was also mitigated by the buyer's premium increase in January 2007 as well as September 2007.

We are pleased that we have been able to successfully manage our margins within this range. Despite the natural pricing pressures when we sell more goods at the high-end.

In principle activities, revenues declined $36 million when compared to the prior year, resulting in a net principle loss of $22.4 million. This is largely due to $19.1 million of net losses on guaranteed property which were offered or sold in 2007. However, this $19.1 million loss on the principle activities line was more than offset by $77 million in auction commission revenues earned from these works. As, a result in 2007 we earned $58 million in revenues from our guaranteed portfolio.

Continue with guarantees by the way of comparison, in the prior year we experienced $9 million benefit from the sharing of the up-side on a guaranteed property that sold at auction. As well as $6.3 million gain in 2006 on the sale of the guaranteed painting that was sold from inventory that initially failed to sell when offered in 2004.

Despite, these our overall revenue earned on guarantees was very similar in both 2007 and 2006. Our current guaranteed position is approximately $149 million. But you will find when you review our 10-K, the year-end inventory numbers are up year-over-year, largely result of guarantees that did not sell. Please note that this inventory has been written down to lower cost of market. We are off to a good start in our first quarter in working down these inventory levels which is something we very much focus on at all times during the year. I should add that we will continue to purchase inventory on an opportunistic basis when it make sense for our shareholders.

Turning, to the direct cost of services line. In 2007, direct cost of services increased $17 million or 27% to $80 million when compared to the prior year. Principally due to the higher level of sales volume that we had in 2007. We have a new caption on our income statement. We have decided to break up marketing expenses and we defined marketing expenses as cost related to the promotion of the Sotheby's brand including the cost of client service initiatives, strategic sponsorships at important cultural institution. As this spending which is critical to our business development efforts that increased in years, we have concluded that it was appropriate to break it out as a separate income statement line item.

2007, marketing expenses has increased $6.9 million or 54%. This increase is principally attributable to the cost of special events to promote the Sotheby's brand in new and expanding markets as well as a cost of sponsorship commitments and cost associated with launching several of our strategic business initiative such as Sotheby's Master Card and mysothebys our new website portal.

Turning, to the salary related cost line. In recent years our compensation strategy has evolved towards having greater variability in pay. So, the pays moves in a direct relation to our financial performance. The $67 million or 30% increase in salaries and related cost during 2007 grew that amount to $294 million, it reflects this shift in strategy as significant drivers of this increase, include higher levels of incentive bonus costs and restricted stock compensation. Both of which are directly attributable to our significant profitability.

Incentive bonus costs increased $24 million or 57% and grew to $66 million. This was a result of the company's exceptionally strong financial performance compared to the prior year. Our stocks compensation expense increased $13.7 million principally due to incremental cost related to restricted stock awards in February of 2007, as well as certain compensation cost resulting from employment arrangements of certain key senior executives in 2006. As a reminder these stock compensation costs vest over a four year period.

Also, contributing to the increase is $16 million or 14% rise in full time salaries was 9.5% if you back out foreign exchange. This was largely due to strategic headcount additions in certain key departments, as well as limited salary increases to existing staff.

Importantly, our overall salaries and related costs have been trending steadily downwards as a percentage of revenues to 32% of revenue in 2007. This metric has steadily improved from 39% in 2004 to 37% in 2005, 34% in 2006, and as I said down to 32% in 2007. Most of our salary growth in recent yeas has been in fact variable and we will continue to monitor metrics such as this to ensure we are responsibly managing our people costs.

Turning, to general and administrative, our G&A cost expense has increased $30 million or 22% to $167 million when compared to the prior year. This is a result of a number of different factors, the two principal ones are $12.8 million or 33% increase in professional fees due in part to $3.7 million of legal costs associated with assessing our rights and options related to the York Avenue headquarters which we were able to wrap up on January 11th when we announced we will be repurchasing this very important and strategic asset. There are no comparable costs relating to that in the prior year.

Also, contribution to the higher level of professional fees or increases of $2.7 million in tax debt [ph] outsourcing, and $1.6 million in costs associated with our outsourced catalog production due to higher level in catalogs produced, as well as continued consulting fees supporting our various strategic initiatives. We also had 28% or $6.4 million increase in travel and entertainment costs principally due to the higher level of travel for business gaining opportunities throughout the world. Also, contributing to the higher level of G&A cost were higher cost relating to airfares, hotels and other incidental travel costs.

Turning, to net interest expense there is a substantial improvement in our net interest expense due to strong operating result and related cash flows, they decreased $13 million or 48% in 2007. On an overall basis our earnings per share for the year 2000... or diluted earnings per share for 2007 was $3 and 25%, up $1.53 or 89% versus the prior year.

That's all I have. I will turn the session back to Bill Ruprecht.

William F. Ruprecht - President and Chief Executive Officer

Thank you, Bill. Worldwide sales have been strong so far this year highlighted of course by the London Impressionist and Modern sales and the New York Old Master Painting sales which took place just prior to those towards the end of January. That Old Master Painting sales totaled $82.5 million slightly ahead of the prior year sale with the exception of two unique Rembrandt's that were in the prior year sale. The Impressionist and the Modern sales last month... earlier in this month in London lead the market and achieved $285 million which were 20% up on the prior year with the evening sale there in London recording the highest total ever for any sale at Sotheby's Europe. The top lot was a German picture of Franz Marc we sold for $24.3 million.

Average value of a lot that evening was $4.3 million, 70% of the lots of the 67 lots sold achieved $1 million or more. Sotheby sale was the only significant success of that week of sales in London. Our superior focus on clients and key paintings was palpable and certainly demonstrated strong results. Again, we have got to focus on quality as opposed to quantity in our business.

On the upcoming sales this spring we look forward to a number of strong vest beginning with our contemporary sales tomorrow evening in London which are estimated to bring a $175 million to $249 million as compared to $124 million in 2007. Set of Francis Bacon there which is a rare portrait of a close friend of his as estimated to bring $36 million or more. There is a trinity of canvases by Andy Warhol and titled Three Self Portraits which are estimated to bring in excess of $20 million.

On March 12th in London, we will hold our second winter sale of Russian Contemporary Art include thereby our young works by a number of young and really exciting artist and the sale is estimated to bring over $11 million.

Later in March on the 17th during Asia Week in New York our Chinese Contemporary Art Department will hold its spring Asian Contemporary sale that is estimated to bring $23 million to $33 million. Highlighting the sale are seven works by Zhang Xiaogang and Yue Minjun really some very exciting and powerful works there.

Other highlight of our Asian Week in New York is the Chinese Ceramics and Works of Art sale on 18th, estimated to bring $18 million to $24 million. There is an extremely rare Archaic Bronze Wine Vessel expected to bring between $4 million and $6 million.

From April 8th to the 11th in Hong Kong we will have our spring sales which are estimated to bring $185 million well above the previous equivalent sale of last year. We are in the midst of assembling our New York fine art sales coming up in May, and precious to contemporary. We don't yet have a full visibility on either of those sales but we can report that we will be offering some outstanding material at these auctions.

It's important to note for you all that in the first quarter of last year we had a number of single order sales that don't have direct equivalence roughly $80 million of material that wasn't single on our sales of 2006. Nevertheless, I think it's fair to say that the demand for great art continues to be ferocious and varied one.

Our 2007 results are the best in our 264 year history. Our full year net income increased 99% to gain a record $213 million in the consolidated sales, broke the $6 billion mark for first time ever. The international art market has remained much more consistent than the financial markets and we are encouraged by our sale results to date in 2008. We continue to see strong global demand for great works of art. Much of it coming from international commodity based wealth and we have yet to see any direct correlation with the dislocations in the financials markets.

As for what the future holds in this regard, we will of course look to tomorrow night as an indicator and balance watchfulness with optimism the demand continues to be very strong.

That concludes our comments and we look forward to your questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question comes from Dana Cohen with Banc of America Securities. Please go ahead.

Dana Cohen - Banc of America Securities

Hi guys, thanks so much. Bill you were going through the guarantee numbers and I lost you along the way can you just go through that again. You started off with the $19 million but then you said going through it they were offset.

William S. Sheridan - Chief Financial Officer

Sure Dana, and this we have had... you will be able to track it in our 10-K tomorrow when it comes out.

Dana Cohen - Banc of America Securities

At the preview tonight?

William S. Sheridan - Chief Financial Officer

Yes, we recorded a net principle loss of $22.4 million and principle activities declined $36 million. This was due to $19.1 million of net losses on guaranteed property that was offered.

Dana Cohen - Banc of America Securities

Okay.

William S. Sheridan - Chief Financial Officer

So, those amounts were on the principle line and our revenue in the MD&A breakout, but on the auction revenues we had an offsetting revenue of $76.9 million that we earned on these auction guarantees.

Dana Cohen - Banc of America Securities

And that's upside from the guarantee number?

William S. Sheridan - Chief Financial Officer

No, that's the buyer's premium essentially on the objects that were sold. Offsetting that is the $19.1 million loss on guarantees. So you will have a net revenue of $57 million, $58 million.

Dana Cohen - Banc of America Securities

Okay.

William F. Ruprecht - President and Chief Executive Officer

The net effect of the transactions was earnings for the organization on a pre-tax basis of almost $58 million.

Dana Cohen - Banc of America Securities

Got it. And then, how does the 19... when you reported at the end of third quarter was more like 14 or 15.

William F. Ruprecht - President and Chief Executive Officer

Yes with so 14.6 was recorded in the third quarter and the balance in the fourth quarter.

Dana Cohen - Banc of America Securities

Okay. And so can you just update us, I mean have you now dealt with everything from that Impressionist sale or they are still things that are left?

William F. Ruprecht - President and Chief Executive Officer

We have recorded charges to earnings to value the remaining inventory that we have not yet sold on a lower cost to market basis. We think they are prudently valued in the balance sheet and all the earning heads have been taken in 2007. We still have inventory relating to that sale that we are actively selling. As we pointed out in 2004, we broke down some inventory in 2006; we sold it for a gain of $6.3 million.

Dana Cohen - Banc of America Securities

Okay. And then just... it's knity but what the hell. The dealer expenses seemed relatively high to the revenue, is there some timing thing going on there?

William F. Ruprecht - President and Chief Executive Officer

The full year run-rate for the Noortman acquisition in 2006 we acquired in June. So, it didn't have full year numbers in for that.

Dana Cohen - Banc of America Securities

I was just looking at the fourth quarter, its like revenue of 16 and expenses of 15?

William F. Ruprecht - President and Chief Executive Officer

Revenues were almost doubled. Some of that is timing Dana.

Dana Cohen - Banc of America Securities

Okay, all right. Thanks, so much.

Operator

Thank you. Your next question comes from George Sutton with Craig-Hallum. Please go ahead.

George Sutton - Craig-Hallum Capital

Hi guys, great results. I wanted to first focus on you made some high profile hires in the fall last year, was that I believe are expected to be strong from a gathering perspective. Can you give us any updates there in terms of how that might be coping you for the spring auction season and beyond?

William F. Ruprecht - President and Chief Executive Officer

Sure, George I suspect you are talking about Lisa Dennison

George Sutton - Craig-Hallum Capital

AmazinglyI am.

William F. Ruprecht - President and Chief Executive Officer

And Lisa has been here for only a number of months, I would say her impact has been extremely positive, palpable. Her relationships are extremely broad and rich and we are thrilled to have her in the organization. I don't have a meter on her activities on a day-to-day basis, but I think you can be confident that she is integrating effectively and adding a lot of value to the organization.

George Sutton - Craig-Hallum Capital

Okay. A bigger picture question, you in 2007 really tried to move the focus to the high end part of the market, quite successfully. And now I am hearing the term quality more and more, and while I think that makes a lot of sense I do wonder if it limits your ability to grow the business, did you get to a smaller set of potential pieces of supply when you move high-end and then further move to specifically the high quality. I just... trying to understand growth versus quality offset?

William S. Sheridan - Chief Financial Officer

George if you recall we had a slide on our Investor Relations website where 47% of those low end lots only generate 2% to 2.5% of our auction sales. So, from a revenue and growth center I viewed it as a non-event in very sensible management of our people's time and our space.

George Sutton - Craig-Hallum Capital

Right, I agree with that, in terms of last year as you moved to the high-end, but till then you had a measure of quality. It sounds like you are really focused on bringing high quality pieces in that. Can put you in a position of emphasizing quality more than growth, and I just wanted to make sure I understood those offsets.

William F. Ruprecht - President and Chief Executive Officer

George, this is Bill Ruprecht. I don't think that we intend to be precious or indifferent to the opportunities ahead of us. And if we see profitable avenues to do volume transactions, we will do them. What we won't do is focus a very significant part of our resources. I am thinking... attention to high volume, your relevant revenue transactions, and our focus on taking care of our clients and taking care of the opportunities which can meaningfully move to the bottom-line is only a net plus for the future of the business.

George Sutton - Craig-Hallum Capital

Okay. Bill Sheridan, you discussed some flexibility of the cost structure that you built into the model. Can you just give me a sense of how flexible that cost structure now is?

William S. Sheridan - Chief Financial Officer

Well, the easiest thing to look at by example is the bonus number for last year was up dramatically, it totaled $66 million. So, that's above people's base salary. So, if you see a downturn, you can sure, that's an easy number for management to dial down if we have to.

George Sutton - Craig-Hallum Capital

I understand, perfect.

William S. Sheridan - Chief Financial Officer

Just same with certain marketing expense, G&A expense times are good; we wanted it best while times are good.

George Sutton - Craig-Hallum Capital

Got you. Last question. You had talked... I believe it was last quarter, possibly the quarter, or about some client service initiatives, things like the credit card program. Can you just update us there?

William F. Ruprecht - President and Chief Executive Officer

Well, I think our key focus on service is really recognizing and looking for avenues to reward the clients that are really making such a difference to our business. And this is a business where your success is traditionally wed to a relatively small group of people who drive the business. Those are people who are increasingly global. As I indicated at the beginning of this quarterly call, we've seen dramatic growth in the geographic spread of where our clientele reside. Finding ways for those people to feel really comfortable and engaged in doing business with us through our key market setters, New York, London and Hong Kong, is a significant but very realizable challenge and goal.

I think we feel really good about the traction we are getting in both listening to our customers and adopting the offerings that we have for our customers so that we are responsive to what they want rather than what we could otherwise impose on them. So I think I feel pretty good about where the whole menu of service and if you will recognition and reward tools are going and how they are being received by our clients which is extremely positive.

George Sutton - Craig-Hallum Capital

Okay. Thanks Bill and Will, good job.

Operator

Thank you. Our next question comes from Kristine Koerber with JMP Securities. Please go ahead.

Kristine Koerber - JMP Securities

: Yes hi. First of all can you give us the share count for the fourth quarter?

William S. Sheridan - Chief Financial Officer

I think its 66%.

Kristine Koerber - JMP Securities

Okay.

William F. Ruprecht - President and Chief Executive Officer

We'll have this detail in the 10-K.

Kristine Koerber - JMP Securities

Okay, I'll double check it tomorrow then. Also, as far as supply, have you seen any changes in consignment of art work, I mean, has the marketplace changed at all. Is it getting any more competitive and people still willing to come out and sell their art work?

William S. Sheridan - Chief Financial Officer

Well that's always been the... in many ways the frustration for you as representatives of the investor community, the lack of visibility on supply. I wish I could tell you that was gone... had gone away. I can't tell you only that there are very significant properties out there to be secured. The results of the sales that we've been seeing so far and I expect tomorrow night as well will be such that it is generally encouraging people rather than discouraging people to continue to engage in discussions about potentially selling really great material.

The environment as I indicated has not led to a significant decline at Sotheby's of the outcomes from our major sale events. When we've had great properties, it's done exceedingly well.

Kristine Koerber - JMP Securities

Okay, great. And then of the $149 million guarantee exposure, what auctions related to primarily? Are we looking out to the May New York auctions with some of that $149 million?

William S. Sheridan - Chief Financial Officer

Sure, some of it, sure. But we are still building that book of business.

Kristine Koerber - JMP Securities

Okay. So it includes tomorrow's auction and then going up to May as well?

William S. Sheridan - Chief Financial Officer

Sure.

Kristine Koerber - JMP Securities

Okay. And then lastly share buyback; have you revisited putting your share buyback program in place?

William S. Sheridan - Chief Financial Officer

No, it's something we visit with our board and discuss pretty much every time we get together. So it continues to be topical, but I want to remind the audience we're going to be repurchasing this building, and we have $100 million in long-term bonds that mature next February. So we are balanced all those, but our stated goal has always been to... if we don't need the cash for the building, let's return it to the shareholders.

Kristine Koerber - JMP Securities

Okay, thank you.

Operator

Thank you. Next question comes from Steven Reeves with JP Morgan. Please go ahead.

Steven Reeves - JP Morgan

Hi, thank you. Just on the guarantees, what the portfolio still generating nice $58 million of revenue for the company this year. How are you thinking about the total value of guarantees and the number of guarantee pieces as you move throughout 2008? I mean, do you expect it to change meaningfully from last year? And have you noticed a shift in the environment from your customers or sellers in terms of what they want from guarantees?

William F. Ruprecht - President and Chief Executive Officer

I don't think that it has, at least in our experience so far to date has not seen sort of acceleration that we saw a year ago. I think that the balance there is... when people ask us to do guarantees, they pay us typically in many cases on the upside a significant percentage of the value of the assets. So the debts between risking reward continues to be very topical and I think there hasn't been a big shift there but I don't actually see meaningful overall growth in the guaranteed portfolio as a likely outcome.

Steven Reeves - JP Morgan

Okay, great. And then just you incurred some legal expenses in 2007 related to litigation behind our headquarters. Can you just quantify how much that was and what sort of benefit you are expecting on a legal expense side?

William S. Sheridan - Chief Financial Officer

It's $3.7 million. It would be laid after 10-K, and it's essentially done, we signed an agreement with our holdings to essentially buy the building back at the price of $370 million.

Steven Reeves - JP Morgan

Okay. And then just finally you mentioned kind of the globalization of your high-end customer base and I was just curious in terms of the sales mix coming from domestic versus international, as that has changed into 2003, has the rate of change accelerated over the last year? Have you seen it accelerate away from domestic towards international sales?

William S. Sheridan - Chief Financial Officer

I think it's fair to say that the US by our reckoning has become a net exporter of works of art over the last three or four years, from collectors in this country buying things from outside versus those collectors inside selling things to foreign jurisdiction, new homes. I think the US is a net exporter today of works of art.

Steven Reeves - JP Morgan

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Jody Kane with Sidoti & Company. Please go ahead.

Jody Kane - Sidoti & Company

Hi thanks. When you talk about geographic diversity, can you talk about how this cycle is different to previous cycles in terms of that geographic diversity?

William F. Ruprecht - President and Chief Executive Officer

Well, when you last had a very robust partner in fiscal late 1980s and then in the 90s, if you had dramatically fewer communities seeming to play critical roles in the growth of demand, whether it was the Japanese in the late 1980s or in the 1990s Americans and Western Europeans in large part driving the demand side of the equation.

As I indicated, Jody, we now have, if I recall, what I said, over 58 different countries... individuals from 58 different countries buying works of art for over $0.5 million on an annual basis. That's a 60% plus shift in that sort of scope and shape of demand. What does that say? It either says that there is not one set of economics or one set of circumstance driving that demand and works of art are relevant to people as they become very well wealthy in many jurisdictions and in many different cultures on which I think is a fair conclusion.

I do think, as I also indicated that on some of the greatest areas at wealth creation in the last couple of years had been from some version of a commodity based wealth community, whether that's petrodollars, whether that's bauxite, whether that's grain, whether that's soybeans, whether that's... whatever it is, there have been as global demand for a variety of base goods and commodities continues to growth quite strongly. There are people who have made stunning fortunes in the process. That's not based upon one marketplace or one location; it's based upon people in many parts of the world being in the right place at the right time in terms of wealth creation. Does that mean that their wealth is permanently uncoupled from the financial markets? I don't guess that's true, but I think my comments stand. I don't know whether I helping you but I think what I am saying is there's a breath of demand that we have not seen before.

Jody Kane - Sidoti & Company

The more players outside of the sort of hedge fund industry which has been driving over the last couple of years is more of a positive, and have you actually seen a decline in the financial buyers or the financial players?

William S. Sheridan - Chief Financial Officer

As I think I indicated in our last call, hedge fund players have never dominated our business, and they have been a visible but small component of the demand side of the equation in our business. I don't think you can as a result characterize them over the last past couple of years or over the next couple of years as a dominant element of how we anticipate demand taking place.

Jody Kane - Sidoti & Company

All right. And then just in terms of the guarantees, has your appetite for guarantees changed since the last major auctions?

William F. Ruprecht - President and Chief Executive Officer

I think it's all about facts and circumstances. And if you show me a great work of art, that's worth $35 million that you are prepared to accept to guarantee $25 million on it and I can get a meaningful participation on the success of the sale above that $25 million. So that's a deal I will ride all day long, because it's a huge opportunity for the company. I don't believe as I indicated that the trend line in growth is likely to show the kind of acceleration in guarantees that there was over the last couple of years but I don't think it's easy for me to give you more color specificity on the question.

Jody Kane - Sidoti & Company

Okay. And just last question, has the website upgrade that you have done, has that sort of led to more people bidding online or more people interested in the auction, the fact that they have access to watch the auction from home?

William F. Ruprecht - President and Chief Executive Officer

Well, let's focus on what we provide and then I will tell you what I think it's done for us. What we provide is not real-time bidding over the web, because our clients have been incredibly clear that they think that's a piece of technology that's largely irrelevant and outdated in relationship to what they want from us. What they want is high velocity accurate information about their account, in essence an online banking suite of information.

They also want conditional reports online and they want alerts from us reminding them if they track works of art, if there's been a change in the status of an object or new information that becomes available about an object, because our clients are so global, running your business on the basis of any one jurisdiction just doesn't make mistakes... doesn't make sense. So if you are a seller, you can get within 30 seconds of an auction and an understanding of what the net proceeds are, that will be available to you. Similarly, as a buyer, you can figure out within a second or two of an auction transaction what your net purchase cost will be. You can manage your portfolio of contact, how you want us to communicate with you, and do so in a way that you control.

That suite of services that we provide is available no place else in the world. As a result, it gives us a much greater ability to communicate with clients about what they want to communicate about rather than some marketing push that's sort of a big clumsy arena of noise or static. What that does is create a greater intimacy in frequency of contact that overtime has been very helpful in helping us build an effective robust communication channel that we believe will lead to greater frequency of transactions.

Jody Kane - Sidoti & Company

Great. Thank you very much.

Operator

Thank you. Our next question comes from Rommel Dionisio with Wedbush Morgan. Please go ahead.

Rommel Dionisio - Wedbush Morgan Securities

Yes, good afternoon. Just a couple of quick questions with regards to the salaries line and obviously [ph] top line. Bill Sheridan, in response to a question Bill, I think, you talked about how obviously if there's market downturn the incentive compensation would decline. But it was always my understanding that you set these targets each year based on last year's results. So in the hypothetical case of a flat market or flat revenues would you see those incentive payments decline as well?

William S. Sheridan - Chief Financial Officer

You're breaking up on us.

Rommel Dionisio - Wedbush Morgan Securities

Bill, sorry about that. In the case of flat revenue market, would you see those incentives payments decline as well given that you set or reset financial targets each year?

William S. Sheridan - Chief Financial Officer

That would be a... the decision of our compensation committee of independent directors. But my personal expectation is they're looking for growth for our shareholders and unless we show growth, that line will not increase at the historic rate. So we got to deliver growth and earnings or EBITDA to achieve that.

Rommel Dionisio - Wedbush Morgan Securities

Okay, fair enough. And just a second follow-up question if I may. You talked about trimming expenses in London, obviously with regards to the Olympia facility. Have you realized the full benefit of that in the fourth quarter? Are you still [multiple speakers].

William S. Sheridan - Chief Financial Officer

We think at least... we realized the people savings beginning in probably in the fourth quarter, we are starting to see that... the facility was under a lease through 2009 and we didn't... it wasn't... we looked at marketing that for a short-term lease, it didn't make sense. So recurring we still have staff that need... we tied [ph] out space at London, so we are using that facility until the lease expires in 2009. Another way it's providing us savings because it's... the rents are lower than other space in London.

Rommel Dionisio - Wedbush Morgan Securities

Okay, great. Thanks very much Bill.

Operator

Thank you. Next question comes from Rob Schwartz with JL Advisors. Please go ahead.

Rob Schwartz - JL Advisors

Hi guys. If one of you can update us on the cash balance on the balance sheet at year-end? And then how do the guarantees, what percent are using your balance sheet and what percent are you accessing the debt markets?

William F. Ruprecht - President and Chief Executive Officer

The cash position at December 31, 2007 was $348 million. And with respect to whose balance sheet the guarantees are. Well until the sale happens, there are notional commitment and when the sale happens if the property sells, we have no need to use our balance sheet cause it's sold, we get paid before we typically... before we release the property. If it's a loss, we will buy the inventory and we'll use our existing funds or if need be we'll draw down on our evolving credit facility.

Rob Schwartz - JL Advisors

Out of that $340 million, do you have... have you decided what the right amount of cash to maintain the balance sheet is or a debt to EBITDA level or anything like that, that you are going to establish?

William F. Ruprecht - President and Chief Executive Officer

As I said earlier we need to resolve the financing surrounding this opportunity to buy the building back as well as $100 million bond. So at this point the answer is no, we haven't resolved that. But you are very consistent in your focus on that, so I give you credit for that.

Operator

Thank you. And ladies and gentlemen that will conclude our question and answer session for today. I will turn it back over to Mr. Ruprecht and Mr. Sheridan for closing comments.

William F. Ruprecht - President and Chief Executive Officer

So we traveled this evening to London for the contemporary sales over the next 48 hours which again I have an expectation that we will do pretty positive, I believe [ph], and well for our organization, and we look forward talking to you with first quarter results sometime in May. That concludes today's call and at this point we say good bye and thank you for your interest in Sotheby's.

Operator

Thank you. Ladies and gentleman, we would like to thank you again for your participation and at this time you may disconnect.

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