Sotheby's Q1 2008 Earnings Call Transcript

Sotheby's Holdings, Inc. (BID)

Q1 FY08 Earnings Call

May 9, 2008, 9:00 AM ET

Executives

William F. Ruprecht - President and CEO

William S. Sheridan - EVP and CFO

Dana Cohen - Banc of America Securities

Analysts

George Sutton - Craig-Hallum Capital

Kristine Koerber - JMP Securities

Rommel Dionisio - Wedbush Morgan Securities

Jody Kane - Sidoti & Company, LLC

Steven Reeves - JP Morgan

Rob Schwartz - JL Advisors

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Sotheby's First Quarter 2008 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 generally accepted accounting principles in the United States of America. In this earnings call, financial measures are presented in accordance with the GAAP and also on a non-GAAP basis. When significant, the company excludes the impact of changes in foreign currency exchange rates when comparing current year results to the prior year. Consequently, such period-to-period comparisons are provided on a constant dollar basis by eliminating the impact of changes in foreign currency exchange rates since the prior year.

Management believes that excluding the impact of the significant changes in foreign currency exchange rates when comparing current year results to the prior year, provides a more meaningful discussion, and analysis fluctuation in the company's operating results. Management also utilizes this non-GAAP financial measure, when analyzing its operating results. Reconciliations of these non-GAAP financial measures used in this earnings call to the comparable GAAP announced are provided as applicable in Appendix B of the company's earnings press release for the quarter ended March 31, 2008, 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 as 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-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 would like to introduce 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, Vicki. Good morning everybody. Today, we are announcing our first quarter's loss of $12.4 million, which is well below the net income of bellow this $24 million in the prior period of 2007. The first quarter is traditionally a loss quarter for the company due to seasonality, although in 2007 the first quarter results were profitable for the second time in the last 18 years. Our last quarter is in line with our expectations. Decline from the prior year first quarter is not primarily due to demand for works of art or sales levels, but largely due to a lower option commission margin which was about 13.6% in the quarter which is compared to 16.6% or 300 basis point higher level in the prior first quarter period.

We have been operating in an environment of pretty uncertain economic times over the last nine months. So, at the end of last year we focused very keenly on managing our risks and limiting our exposures to guarantees by taking on fewer deals where we could have exposed our balance sheet to material losses. As risk in the world tend to travel together, we tampered some of our opportunities which led to lower margins where it meant that we could meaningfully shift risk-away from Sotheby's. Those are short-term issues which we expect will affect 2008 to some extent but the level of financial market turbulence that we see and seems to be impacting anybody associated with our business does appear to be diminishing. We have seen some increased competition which has impacted our margins, but primarily in the impression is in the contemporary marketplace, elsewhere the margins has been quite stable.

Partly as a result of these factors we are announcing a buyer's premium shift today, new pricing structure will be effective June 1st, 25% on the first $50,000 of the hammer price that you bid, 20% on the next $950,000 and the same as before 12% on the margin above $1 million. And over 95% of the lots which we are offer that's 2% or less as the price shift. As we turn to the second quarter we are encouraged by the results so far which include the strong New York impression of sales this week, demand for great works of art remain strong.

I give you Bill Sheridan who will take you through some of the numbers in greater details than I.

William S. Sheridan - Executive Vice President and Chief Financial Officer

Thank you, Bill and good morning everyone. I'll walk you through our income statement. Overall results as Bill mentioned we had a net loss from the first quarter of $12.4 million or $0.19 a share. This can stress to net income of $24.3 million or $0.37 per diluted share in 2007. Excluding the impairment charge relating to Noortman Master Paintings, the insurance recovery from the life insurance policy covering Mr. Noortman and the gain from the sale of our Sussex property in the UK in first quarter of 2007, net income would have been $16 million versus the net loss of $12.4 million this year.

Revenues, the first quarter of 2008; total revenues were $129.3 million, an $18.1 million decrease from the prior year or 12%. This deterioration largely established from an $18.6 million decline in auction commission revenues, principally due to a decline in margins to 13.6% in the first quarter from 16.6% in the prior year. Had we held that commission margin at the same rate, revenues would have essentially been flat year-to-year. This will be an area of keen focus as we move forward in 2008.

Auction commission margins were adversely affected by a change in sales mix, which was more heavily weighted to high end property where margins are traditionally lower, as well by thinner... as well as thinner margins that Bill Ruprecht previously mentioned resulting from competitive pressures and managing our guaranty risk to a lower level.

Direct costs... on the direct cost line in the first quarter of 2008, we saw cost of $13.6 million which is unchanged from the prior year and consistent with the level and composition of our first quarter sales. On the marketing expense line in the first quarter, marketing expenses increased $1.2 million to $5.3 million due to the timing of corporate sponsorships of leading museums in the United States and the United Kingdom as well as higher costs to promote the Sotheby's brand in Europe.

Salaries, from the first quarter of 2008, salaries and related costs increased $6.1 million or 12% to $61.2 million, when compared to the first quarter of 2007. Excluding foreign exchange movements, salaries and related costs for the first quarter increased 9%.

Full-time salaries increased $5.3 million to $35.7 million, primarily due to targeted headcount additions during the prior year as well as the impact of the limited increase in base salaries. Stock compensation expense increased $3 million in the quarter due to a higher value of restricted stocks awarded in February of 2008 in conjunction with the company's strong financial performance in 2007. Partially offsetting these increases is a $3.6 million decline in employee benefit expense, principally attributable to a $3.2 million decline in cost relating to the company's UK pension plan.

I'd like to remind you that in recent years our compensation strategy has evolved towards having greater variability, so that paid moves in direct relation to our financial performance, and incentive bonus costs, which can be dialed back easily in the event of downturn of our business.

Turning to the general and administrative cost line, the first quarter of 2008, G&A expenses increased $7.4 million to $45.5 million when compared to the prior year. There is a significant increase in professional fees of $3.5 million, $1 million in which relates to outsourcing our tax compliance function and management expects that to decline in the future. Also contributing to the increase cost in professional fees were higher consulting audit and legal fees. There was a $1.7 million increase in traveling and entertainment costs during the quarter, principally due to higher level of travel for pursuing business opportunities during the period as well as increasing globalization of our client base. We are also pushing at this with higher costs through airfares, hotels and other travel related cost.

Turning to net interest... interest income and expense. On a net level it is up slightly to $5.3 million during the quarter. Overall, earnings per share for the first quarter was... or a loss of $0.19 per share compared to diluted earnings per shares of $0.37 per share for the first quarter of 2007. Two final points. There's been some recent press coverage concerning our accounts receivable at the end of 2000 and its growth relative to the prior year.

The growth in accounts relievable at the end of 2007 was essentially due to our record revenues in the fourth quarter of 2007. Further, in the prior year of 2006, there were early payments by a significant number of buyers as they wanted their property earlier than they have in the past. Our general policy is unless you pay for the goods, you do not get them.

We're very comfortable overall with our receivable position, the terms are matched principally by our consigner so we've typically not out of pocket from an interest expense standpoint. This is consistent with what Sotheby's has been doing for many years. Fundamentally, collection of those receivables has not been an issue at Sotheby's and we use extended credit terms to help market sales which benefits both the consigners as well as our shareholders.

Lastly, I just want to highlight a change in our auction calendar that we've highlighted in certain Investor Relations presentations. We've had very successful contemporary sales in our London sales room. And in February we split the Impressionist sales week and the contemporary sales week. We're doing that again in June, so the last week of June we'll see the Impressionist sales in London, and we have moved the contemporary art sales through the first week of July, in London. We believe this is a prudent decision, there are many logistical issues surrounding this, and it's really a function of the success we've had in the contemporary market in Europe.

Last year, in June of 2006... 2007 whatever, our contemporary sales were approximately 200 million. That's all for me and I'll turn things back over to Will Ruprecht.

William F. Ruprecht - President and Chief Executive Officer

A couple of more comments and then we will look forward to you questions. So far in 2008, the market continues to be pretty strong. The demand for great works of art remain high, as we've seen throughout the spring most recently on this week on Wednesday night. We are encouraged by the sales of... so far this year which are 11% up on prior year as of yesterday and include the... as I indicate the Impressionist sales which brought $273 million above the free sale low estimate of $245 million.

The two big prices of the week for us were the Leger which sold for $39.2 million and a colorful monk which was titled Girls on a Bridge which sold for $30.8 million and surpassed its presale highest estimates. Seven lots sold for over $10 million, the average lot value in the evening sale was $5.7 million, that's versus the previous spring when it was $5.1 million and $4.8 million last November.

Last month in Hong Kong, we had a very strong group of sales which brought $227 million which is a little bit over 60% increase from the prior year in terms of that sale series, highlights included the record for a Chinese work of art sold at auction, the record for a some ceramics sold at auction and the record for Qing Gold sold at auction.

Russian sales here in New York last month brought over $46 million, again right within the estimates from prices there for 19th and 20th century and contemporary Russian paintings. Beginning next week we look forward to the contemporary art sales which are estimated to bring over $375 million as a presale low estimate. Highlight of our sales series is a Francis Bacon Triptych from1976 which may bring in the region of $70 million. Also there is a important Rothko in the region of $35 million. Other really important works by Rauschenberg, Warhol, Basquiat, Yves Klein and Tom Wesselmann. We are actively in the collecting period as we speak for our London Impressionist art sales of the end of June and as Bill indicated the Contemporary sales in early July.

I'll say again that sales today continue to be strong; they are reflection of the steady and ongoing demand for great works of art against a pretty turbulent backdrop of global financial uncertainty. Our mindset as managers and stewards for a company that's over 210 years old is that we want to be relevant and vital in 2008, and in another 200 years as an organization. So we are not managing week to week, but we are managing what we think is in the best interest of the company over a very long period.

The demand for these great works of art is vibrant in every respect in our first quarter results; remains largely on our investing levels combined with a lower levels of commission on our sales and are wholeheartedly not a reflection of the dispirited marketplace. They really are a reflection of how we've chosen to manage risk and not expose ourselves to significant losses. The vast majority of our best customers who continue to be active with us every year are very active again here in our business year-to-date through early May. Of course we are never satisfied when revenues decline and our rate shift and challenging our expense levels in the coming months should be positive.

A traditional competitor has approximately $80 million more in guarantees than we in this 10-day period. And by our calculations which are of course only approximate, we are year-to-date the only firm that has had a meaningfully profitable guarantee experience.

That's not a Q1 comment. Accounting standards, I will remind you have required us to record any guaranteed losses for second quarter sales in the first quarter as losses must be recognized as soon as they are known and quantifiable. On the other hand, auction commissions and gains related to these guarantees must be deferred until the second quarter when sales occurred. I say again that year-to-date out experience here has been quite positive and I think we are the ones who can say that. It's a testament to the underwriting skills and the appropriate management of this issue as far as we are concerned.

Against a revaluation of world equity indices by as much as 50%, and indeed a reappraisal of our own equity valuation, Sotheby's continues to deliver outstanding sales, credible results, and reflects very strong collector interest not well tolerated to these other indices. The broad long term story of global wealth creation continues unabated and the economic elite continue to drive our business, many of them somewhat insulated from the subprime credit crunch we read and hear about all day long in New York City.

That's concludes our comments. We would be prepared and look forward to your call... questions about the quarter.

Question And Answer

Operator

Thank you gentlemen. [Operator Instructions]. We will take our first question from Dana Cohen with Banc of America Securities.

Dana Cohen - Banc of America Securities

Hi, Good morning guys. A couple of questions. Can you give us a better sense on the auction commission margin, how much should we think of the 300 as mix, and how much of it is competitive pressures, I mean ballpark, 50-50, 60-40, I mean can you give us any sense of that?

William F. Ruprecht - President and Chief Executive Officer

You're going to hate my answer, Dana, but again, I think that the three issues that are driving that are number one, our appetite to have it secured in the first quarter of some deals where when given a choice between a guarantee that we were uncomfortable with or a lower margin, we cooked those deals at lower margins as a risk management exercise. I do think some stability and it's getting a little easier for us to gauge, what we think things are worth over the next several months and over the last six months. That's one set of issues, and I think it's an important one. The second issue, which we articulated, is this question of mix on... and the average price on Sotheby's lot on a year-to-date basis has almost doubled from prior year, I believe; the average per lot price since prior year. And that's because of the core strategy which we pursued of selling fewer objects and higher value objects overall.

I'm not quite sure that the number is exactly right, but the trend is certainly towards the much higher value per lot basis which will drive in particular in the first quarter margin's down, because you cannot look at the first quarter as a particularly a credible or valuable veneer or window into what the six-month cycle looks like. It's a very frustrating period, because it's not a typical sales mix, you've got very important high value sales in February in London, and you don't have as much business in the reps of the business, as you do, in other quarters.

All that said, mix, particularly in the first quarter is a key element there, and we have got some competitive pressures on the third element that we articulated is the cost content between Sotheby's and Christie's.

I guess the last comment I can say on that is year-to-date Sotheby's is in a market share leadership position. I don't particularly like being in a market share leadership position to tell you the truth, because I think it forces our traditional competitor to get particularly aggressive on some of these large deals and cut margins. I'm very happy to be riding around a little bit under 50% because I think it's the most stable way for us to operate and not experience in an ongoing way of significant margin pressures. Other than that I can't give you waiting 50-50, 40-60, 30-30-30, but sort of the entirely my rent on margins and I don't think I can do any better.

Dana Cohen - Banc of America Securities

Okay. And then on the SG... on the various expense items, I mean how should we think in the current environment, I mean businesses is still holding up, but currently down to away [ph], so how just we think about how you are thinking about the expense structure right now?

William S. Sheridan - Executive Vice President and Chief Financial Officer

It's Bill Sheridan, Dana. I think we are very focused on it. We are actively looking at it and you'll see our efforts during the rest of the year with regard to that. But it's a keen area of focus for management.

Dana Cohen - Banc of America Securities

Okay. And then just last... the number that you gave for the Impressionist, I think you said 273 combined?

William F. Ruprecht - President and Chief Executive Officer

I think that was the low estimate Dana. I think that the sales levels were 240... hang on a second; I'll find that number again. Yesterday part two sale included, it was about $37.3 million, the night before. So in aggregate... one more time I can get this for you. What's the total? 233, sorry.

Dana Cohen - Banc of America Securities

Okay. But that number includes the commission margin, correct?

William F. Ruprecht - President and Chief Executive Officer

Yes, absolutely.

Dana Cohen - Banc of America Securities

Okay. Which the estimates don't?

William F. Ruprecht - President and Chief Executive Officer

Correct.

Dana Cohen - Banc of America Securities

Okay.

William S. Sheridan - Executive Vice President and Chief Financial Officer

And always so articulated in many of our printed narratives.

Dana Cohen - Banc of America Securities

Great. Okay, thank you.

Operator

Our next question will come from George Sutton from Craig-Hallum Capital.

George Sutton - Craig-Hallum Capital

Good morning guys. So the 13.9% in Q1... I am sorry, 13.6% in Q1 just to be clear that included any loss on Leger from the Impressionist sale, is that correct?

William S. Sheridan - Executive Vice President and Chief Financial Officer

I guess it's a different line George, I think that --

William F. Ruprecht - President and Chief Executive Officer

You will see that in our 10-Q which we expect to come out --

William S. Sheridan - Executive Vice President and Chief Financial Officer

Come out in an hour or two, I think will be... any losses that you see there are on principle line as opposed to in option revenues or commissions, and all that said if there's... you're not going to see that number having been artificially distorted down George just because it will be principle fact on which... in effect I don't think you will find.

George Sutton - Craig-Hallum Capital

Right. But that specific piece was handled in Q1, I think, that was --

William S. Sheridan - Executive Vice President and Chief Financial Officer

That's correct.

William F. Ruprecht - President and Chief Executive Officer

That is correct.

George Sutton - Craig-Hallum Capital

Okay. Now with --

William F. Ruprecht - President and Chief Executive Officer

As well as anything that took place through yesterday in our business.

George Sutton - Craig-Hallum Capital

Okay. Now with respect to the second quarter, I just want to make sure I am clear in terms of the timing with respect to... that you've been seeing pressure on the commission side. That pressure did continue in Q2, so for the season we are seeing right now. I just want to make sure that was the message you had and has there been any obvious change to that yet?

William S. Sheridan - Executive Vice President and Chief Financial Officer

It continued into the second quarter George, and we are just starting to build our broker business for the second half of the year and we'll see. Our competitor has both said... did not have strong results on the guarantee line. So, hopefully they will acting in a different manner and more so when they price their guarantee risk.

William F. Ruprecht - President and Chief Executive Officer

And so the $10 question George is of course, okay, what's the commission margin going to look like in Q2 and I wish I knew that answer. You got obviously a complex brew there of what's the mix of business, what's the rate shift going to do in terms of raising your margins and what's the business that we've yet to get that will be written over the coming weeks.

So, I think it's fair to say that we are optimistic that we'll see a positive movement here, but more than that I can't give you.

George Sutton - Craig-Hallum Capital

Bill I outbid you. I bid $20.

William F. Ruprecht - President and Chief Executive Officer

Well, George I think you know where to see value.

George Sutton - Craig-Hallum Capital

Yes. Lastly, with respect to the Middle East, can you just give us a sense of your broader strategy there, obviously we are seeing a culture of new museums there and I just want to make sure I understand your efforts?

William S. Sheridan - Executive Vice President and Chief Financial Officer

There it is a keen effort by a variety of countries throughout the Gulf to begin to position themselves as very much associated with culture, the arts, and looking forward to over the next 50 years building a strong cultural richness and identity for many of these peoples and countries. If you look at what's been achieved in the last 20 years in Dubai I think you may see well achieved in the next 20 years in a number of places as to looking to use works of art and culture and cultural richness as a way of attracting people from all over the world to this part of the world as the centre.

Sotheby's watches those developments very carefully, Sotheby's has dialogues and active engagements with a number of families in the region, and to-date we have found the most effective path for Sotheby's to be focusing our efforts on the relationships with the families of considerable wealth in the region rather than importing a large group of works of art. We are investing in people and in relationships rather than to-date focusing on importing a lot of works of art to the region only to then see them re-exported through sale events in that region.

So, we have not spent our time or energy focusing on a... building of new sales platforms, and then fundamental strategies of our organization has been to sell as much property as possible through our core sale centers, because our customers are very comfortable with that process.

George Sutton - Craig-Hallum Capital

Now, I appreciate the 50-year opportunity but if we look more shorter term, is this going to be an area that you breakout at some point like you break out Russia for example or like you break out parts of the Far East in terms of the business that you might do?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Well, we don't hold sales in Moscow at this point, George. We have really three larger sales centers, obviously in New York, London and Hong Kong. But, I guess your question is that you are about to spend $100 million in CapEx in the region and I guess the answer is no.

William F. Ruprecht - President and Chief Executive Officer

And George on the Investor Relations slide, what we do break out of Russian works of art and Asian works of art are discrete catalogue sectors that we track and the public can track on our Sotheby's website. Middle Eastern artist, not a separate category and they are collecting categories of people from that region or across a lot of different catalogues. So, it's not something we've highlighted; if it becomes a material part of our business then we will take a look at that.

George Sutton - Craig-Hallum Capital

And I am not being clear, I'm just wondering if it becomes a more significant enough category that when I say categories, significant enough buying group that we really sort to highlight that as a separate entity?

William S. Sheridan - Executive Vice President and Chief Financial Officer

No. It's something that FASB, SEC rules require geographic segmented information don't break out that region. We have Europe, Asia, and the Americas, but we'll continue to track it.

William F. Ruprecht - President and Chief Executive Officer

One just side note George, Islamic art is an incredibly important category. It is very actively collected by any number of people who may have the background or residents in the Gulf States. But it's a category which we principally sell through at London sales terms where we have had this spring already and extraordinarily successful sales.

George Sutton - Craig-Hallum Capital

All right, thanks guys.

Operator

Our next question will come from JMP Securities, Kristine Koerber.

Kristine Koerber - JMP Securities

Yes, hi. Couple of questions, looking at the expenses again, aside from incentive bonuses and where would we see tightened expenses? Is there... can you pull on expenses in other areas?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Kristine, it's Bill Sheridan. I think we're going to look at every line item in the P&L and focus on that. And we're keenly focused on that right now. But it's... you will see it from every bucket on the income statement.

Kristine Koerber - JMP Securities

And just for G&A, I mean the lot of the G&A, I mean that seems a necessary part of the business. Are you still out there hiring people, I mean are there any positions that you're looking to fill?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Well at any point in our business, we have a significant number of vacancies. I think what's the fairest thing to say is we challenge at this point, every single opening in our business, and challenge whether how we staff the organization; are we terminating a bunch of staff? No. Do we actively and hopefully challenge where our investments are, and people? Of course, it's our largest expense category, and there undoubtedly will be situations where people of either who arrive to us with a great portfolio of relationships or a great opportunity to generate revenue, makes infinite sense to hire those people. But we think we've got our business scaled about right in terms of staff but there's a real healthy tension in place as we speak today, in terms of pushing back at any positions which are open in the business.

Kristine Koerber - JMP Securities

Okay, that's helpful. And then also have you seen any change in buying patterns of your core customer lately?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Well, I tried to say earlier, that we map and track some of our best customers who are with us with considerable frequency. And I think it's fair to say that we are continuing to see very active, avid interest from the people who drive our business year-to-date through May. And so if you look at percentage of people who do business with us year-on-year, we are continuing to see very active participation from people who are buying, selling and bidding in our salesrooms with our core customers. The U.S. buyers in our Impressionist sales were strong, 50% or more were from the U.S. this year. That said, looking at who bought versus who under bid is always a little bit whimsical because you don't get to account any benefit for some of your other... who's an under-bidder, although they were prepared to put almost an equivalent sum of money on the table. So, looking at buyer mix, is a little bit difficult and I think it's fair to say that we see ongoing very vigorous demand weather it's from Far East, whether it's from Russia, former... Soviet Union, Uzbekistan, Kazakhstan, all those parts of the world as well as Western European and the United States. You got a situation today where the demand for these great works of art is not really prudential or isolated in one corner of the world. There's an active community of very wealthy people who find these things very relevant and important to their lives on almost every place in the world.

Kristine Koerber - JMP Securities

Thank you.

Operator

Our next question will come from Rommel Dionisio with Wedbush Morgan.

Rommel Dionisio - Wedbush Morgan Securities

Hi, good morning. I just want to ask about professional fees, I think Bill... Bill Sheridan, in your prepared comments you talked about how professional fees were up and you mentioned some reasons as tax outsources and tax functions and with the legal expenses, it's suppose to come down this year because of building situation versus artist. Is this the first quarter, is that can be the... kind of the base level we should expect to see going forward or is that the --?

William S. Sheridan - Executive Vice President and Chief Financial Officer

It's level, it's hard to predict the slow legal cost; I am sure hopeful that it will dissipate over the year. But I can't predict what's out there, it's just hard, and in the first quarter was the first period that we outsourced our tax services to PricewaterhouseCoopers and there was a big learning curve and cost element to that that we expect to go down.

Rommel Dionisio - Wedbush Morgan Securities

And just... this is around the topic of the building, Bill any update in terms of the timing on that closer?

William S. Sheridan - Executive Vice President and Chief Financial Officer

No. Under the terms of the agreement the people are buying the building from have until July of '09 to... their time is structural like timing and exchange for their own tax purposes. And we are working with them but the clock runs out in July of '09, so we don't have any clarity on when we will be able to close. But we are looking at our financing options with respect to that and hope to close on the transaction as soon as possible. But it may be an '09 event.

Rommel Dionisio - Wedbush Morgan Securities

Okay. Fair enough. Thanks very much.

Operator

Jody Kane with Sidoti, Inc.

Jody Kane - Sidoti & Company, LLC

Hi. Thank you. Shouldn't reducing your expenses to... or reducing your exposure to the lower priced auction that have helped lower SG&A in the first quarter?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Not really. Most of that was in direct cost and salaries, the savings there, not so much on the G&A line.

William F. Ruprecht - President and Chief Executive Officer

Listen those are tended to be regional business, so you don't have senior experts flying across the globe collecting property which is what you see in T&E and there weren't a lot of... it was just rent for Olympia and not so much on the G&A line, Jody.

Jody Kane - Sidoti & Company, LLC

And then the rate auction that you held, how did that impact the, I guess, the profitability of the first quarter?

William S. Sheridan - Executive Vice President and Chief Financial Officer

It added sales to our sales total but absolutely no earnings on our margin and this was entirely contributed to the charitable organization our expenses where we captured but the only line that it particularly grew for us was sales and as a result clearly was not helpful in managing a margin on sales level, so that 13.6 has a little bit to do with the lack of earning on that what was a $48 million in sales.

Jody Kane - Sidoti & Company, LLC

Great. Then can you talk a little bit about the lag time between... when you look at the market and see how it's going and when you start to cut expenses, now how much of a lag is there going to be between if the market turns or stops to slow, how quickly can you get your expenses down?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Well I think there's sort of three conditionals or hypotheticals in there. If you see the market moving in a certain direction, you can choose to take certain decision on when... what's the outcome of that and the easiest thing of course to do is challenge your variable pay. I mean you can do that in an hour. I think that the choices that we are taking are not likely to include on the expense side dramatic of shuddering of elements of our business or anything of the like, it's the tone and the sensibility of prudent choices and saving smaller sums of money all over the business rather than looking for some of your weaker moment in one particular quarter of the organization. That requires a management and leadership throughout this or any other business to make sure that they've got the right tone in the business and the right oversight and scrutiny of the core operating environment.

I think both on margins and on expenses, we've got pretty darn good record managing our margins and we've got a pretty good track record of managing our expenses in relationship to what environment we find ourselves in. So, I can't give you a... it take 6 weeks to see this happen, I'm sorry to say but I think we're in a business that has volatility as ours does and we are prudent and we are responsible. But we always keep on the shelf of variety of opportunities to look at on the expense side and as we've indicate several terms this morning, those increase and efforts have already begun at this point to challenge a variety of the operating policies throughout the business.

Jody Kane - Sidoti & Company, LLC

All right. And then just quickly, the pressure on the commission margin, is there any effect of maybe two months supply out there, and if... it may be... could be affecting that as well as comparative pressures?

William F. Ruprecht - President and Chief Executive Officer

Yes, never though about that, no, I don't think so. Now look the auction business is... call Sotheby's last year $6 billion, call Christie's $6 billion. There's a private art market out there on an annual basis that people will suggest is probably twice that size. So I don't view the art market has been washed in supply, the keen of focus of most of our organization is securing supply at the high end of our business. And so I'd always be happy if it was a little easier to get big works of arts rather than anything else.

William S. Sheridan - Executive Vice President and Chief Financial Officer

And Jody, I don't think we have excess of supply. 2006 was a fantastic year for the company and then what we would do for an encore, we had more supply in '07 and it was even better. So, supply is a good thing, it's rare great works of art, the lousy people on the planet love to have those objects.

William F. Ruprecht - President and Chief Executive Officer

One of the reasons for those '08... was not positive in relationship to '07 as we have such a significant decline Jody in single owner sales. The single owner sales went down by some $80 million or $60 million, $70 million or thereabouts year-on-year. We had a fantastic group from the Albright-Knox museum for instance. We have another extraordinary Italian furniture sale in Europe, all the first quarter of last year. We didn't have those events this year and supply's incredibly episodic and it's not that [indiscernible].

Jody Kane - Sidoti & Company, LLC

All right and just finally, your outlook for the year seems to be as far out as you can actually look seems to be somewhat positive and if there is an overreaction to the deposit of the stock, would you not consider a share buyback with your outlook being so positive?

William F. Ruprecht - President and Chief Executive Officer

Good question and what we tell investors it's very topical within the company and our board of directors, but we also tell people we're looking at repurchasing the building, and we're trying to weigh all those things, but it's certainly something that we look at and consider.

Jody Kane - Sidoti & Company, LLC

Great, thank you.

Operator

Our next question comes from Steven Rees of JP Morgan.

Steven Reeves - JP Morgan

Hi, thank you. Just on the competitive... the increased competitive activity that you saw in the first quarter, can you just sort of talk about how that trended throughout the first quarter? Was it something that you've seen signs of in the fourth quarter and then as we sit here in the second quarter, would you characterize the environment as stable, getting worse, getting slightly better on the competitive front?

William S. Sheridan - Executive Vice President and Chief Financial Officer

Well, a traditional competitor likes to define themselves through being the largest auction house in the world. And last year, they really were not able to make that claim. And as a result I think that they began the year and throughout the spring have done a lot of vigorous biddings for business, to try to ensure that they are sales leaders, if not profit leaders, if really having a very different portfolio of activities than Sotheby's.

I'll remind you that Sotheby's sells about half the number of objects that Christie's does and the average price point of Sotheby's lot is about twice of that at our traditional competitor. So I think it's fair to say that they have been keenly focused on share leadership. Unfortunately as I already indicated, year-to-date they have not succeeded in their quest for share leadership and we'll see where the next 10 days sugars [ph] out onto to see what happens there.

As I have indicated, our view here is that we have a primary focus on profitability rather than on share leadership and that's the reason we've made the choices we have, navigating away from the risk in terms of inappropriate guarantees and I think that the big drivers to margin pressure are, once again, how we navigate it away from inappropriate guarantees, how the sales mix shifted in the first quarter. Again, it's a very complicated place in the first quarter in which to take an awful lot of insight for the second quarter or the half just because the sales mix is quite different in the first quarter than in the second quarter.

I don't think that the competitive dance between Sotheby's and Christie's is acceleratingly violent at this point and I think that the focus of price competition has really been in only a couple of markets as I indicated in Impressionist painting, contemporary paintings.

If and when an organization stuff their channel with a bunch of no margin or low margin goods, it's not all that bright a place to be particularly as you go out into the horizon, because it then prohibits you from competing for and securing property on which you can take a stronger margins because you can only have so many pictures of a certain type at any one given time. So I think we're... we're... it's a lot of words, I'm sorry. But I'm trying to give you as much [multiple speakers] as I can in terms of where we are and what we are seeing.

Steven Reeves - JP Morgan

All right, thanks. And just quickly on the guarantee portfolio. It sounds like you were pretty successful in your more conservative stance and then you sort of match that with your optimism for the market. I mean what metrics are you looking at in terms of deciding when to ratchet up your guarantee portfolio again and how are you looking at that?

William F. Ruprecht - President and Chief Executive Officer

It's something we access week to week and if there's a change in our position we typically disclose it in an 8-K or something. But... I mean I don't think its even week-to-week, its sort of hour-to-hour. I mean, you know it. I wish I could say there was any casualness about this. There's not. A healthy sense of a concerned... even a gravely serious mindset towards that book of business is the appropriate stance as I indicated. It's been a significant contributor to profitability in 2008 through today although you won't see that in the Q1 numbers and we are the only place that I think can completely say that we've navigated this so far.

Does that mean we will have losses in the future? Yes, we will have losses in the future. Will we probably be penalized in some quarter for taking losses and then not given credit for selling works of art later at reasonable prices or even accretive valuation? Yes. But nevertheless given the lack of real understanding of our guarantee book. And it's undoubtedly going to be one of the sources of volatility in the future value of the business.

Steven Reeves - JP Morgan

Okay. But at this point you are comfortable of the level of risk you are taking but you wouldn't expect guarantees to go down, further, would you?

William F. Ruprecht - President and Chief Executive Officer

Well, everything's opportunistic. I'm sorry to be so equivocal, but I'm pretty comfortable with how we've done so far. Now, will it always perfect? No. Do we reassess week by week, hour by hour, how we are doing? Yes, and so far we have done great. Over the last 17, 18 years that I've been doing this, we've never had an annual negative in that portfolio. Does that mean we can't have losses in the future? No. But we're pretty darn good at this and through today it's been a meaningful contributor to the business.

Steven Reeves - JP Morgan

Great, thanks very much.

Operator

Our next question will come from JL Advisors' Rob Schwartz.

Rob Schwartz - JL Advisors

Hi guys, just a quick question. When you report the auctions sales on the website, you report them assuming you receive the full commission. So I guess the past two quarters, that reported number... you came in below that reported number because you are not keeping the full commission. Do you think maybe going forward a better way to report it would be to report the actual commission you received instead of the assumed full commission?

William F. Ruprecht - President and Chief Executive Officer

We have to be clear; we always received a full buyer's premium. What happened to that in negation with sellers is a different story. So we are getting that cash, we are conformable with how we are receiving that. There's absolutely no circumstance under which we report a number that we are aware of in terms of what we get fetched or the money that comes to us for an object that's not accurate.

Rob Schwartz - JL Advisors

I am sorry, maybe I am misunderstanding. But don't you give a piece of that buyer's premium back to the seller now instead of guaranteeing works? Isn't that the very game plan you are doing?

William S. Sheridan - Executive Vice President and Chief Financial Officer

There are... we collect the full buyer's premium from the buyer. Depending on the negotiation we made, remit or rebate some of that to the seller and that hits a different line in the P&L, but we do collect the full amount.

Rob Schwartz - JL Advisors

Right. But is there a better way for us to follow if you are giving us that data, it's really --

William F. Ruprecht - President and Chief Executive Officer

The best way you will follow it is the auction commission margins which as you can see during the quarter moved dramatically downward. And that's where we put that in MD&A to highlight the movement in that, and I think that's the best place to look at it.

Rob Schwartz - JL Advisors

Well, I understand. But I'm just saying for inter-quarter when you are giving us these numbers which don't reflect the full value of the totals, and I guess you are saying it's the total sales number you are getting, but you are reflecting it in G&A out there, some --

William S. Sheridan - Executive Vice President and Chief Financial Officer

We are not prepared and are able to on an object-by-object basis account to you within seconds of the transaction what the net impact will be on our business after expenses, after negotiation with every party. Because every one of those transaction's different. What you see and all you see there is the funds flow into the business from buyers.

William F. Ruprecht - President and Chief Executive Officer

We net that cost against the auction commission revenues. That's why you see the margin down Rob, and we don't break it out separately.

Rob Schwartz - JL Advisors

All right, thank you.

Operator

And we'll take a follow-up from George Sutton from Craig-Hallum Capital.

George Sutton - Craig-Hallum Capital

My question was answered. I just wasn't smart enough to figure out how to get out of the queue.

William F. Ruprecht - President and Chief Executive Officer

Okay George. What do you expect from a cardinals fan?

Operator

And gentlemen, that's all the time we have for questions. I'll turn things back over to you for any additional or closing remarks.

William F. Ruprecht - President and Chief Executive Officer

Thank you for your ongoing interest in Sotheby's. Wish us luck over the next week and in our upcoming series of contemporary art sales, gathering for the second and third quarters, and the ongoing stability of the financial world which will certainly be a positive from our perspective. That concludes today's remark. Thanks very much. Ends today's call.

Operator

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.

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