Sotheby's Q2 2008 Earnings Call Transcript

Sotheby's Holdings Inc. (BID)

Q2 FY08 Earnings Call

August 5, 2008, 4:45 PM ET

Executives

William F. Ruprecht - President and CEO

William S. Sheridan - CFO and EVP

Analysts

Jody Kane - Sidoti & Company

Rommel T. Dionisio - Wedbush Morgan Securities

Steven Rees - J.P. Morgan

Kristine Koerber - JMP Securities

George Sutton - Craig-Hallum Capital

Dana Cohen - Banc America Securities

Presentation

Operator

Good day ladies and gentlemen and welcome to the Sotheby's Second Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will take your questions. [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 the 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 this significant changes in foreign currency exchange rates when comparing current year results to the prior year, provides a more meaningful discussion, and analysis of fluctuation in the company's operating result.

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 and actual events of the 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-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 very much Julian, and welcome to the call today. We will be filing our 10-Q tomorrow afternoon and announce earnings this afternoon. We announced second quarter revenues of $320 million and operating income of approximately $151 million, both of which at the upper end of the range we guided to an 8-K in June of this year.

Second quarter revenues of $320 million reflect a 6% decline from the prior second quarter in 2007 which is due to a shift in our summer contemporary sales in London from the second quarter of 2007 through July first of 2008. Those sales brought about $24 million in revenues into 2007 and will contribute approximately $26 million to the third quarter of 2008.

Auction commission margins for the second quarter of 2008 improved to about 15.1% which is a significant improvement from the 13.6% level in the first quarter of this year not quiet as high as the level that we have in the second quarter of 2007.

Auction commission margins have been impacted by our conscious decision to manage risk prudently in this global economic environment. The improvement in the first quarter... from the first quarters to second quarter of 2008 is partly due to the biased premium increase which we announced on this call in May that was affect of June 1st but is more due to a change in the sales mix and our concentrated efforts to manage margins effectively.

As a trend line a year ago the opposite was true as auction commission margins declined from 16.6% in the first quarter of 2007 to 16% in the second quarter of 2007. Affecting the second quarter results was a little over $18 million benefit from the reversal, the remaining liability associated with the coupons we issued in 2003 with the settlement of our antitrust related civil litigations.

Coupons expired in May of this year. This marks the end of our financial commitments relating tour antitrust liabilities. Second quarter net income, which declined slightly, is not reflective of demand or sales levels but is largely due to this calendar shift to the contemporary sales. Back at London contemporary sales remained in the second quarter of 2008 instead of the third quarter of 2008, our net auction sales would have been up $266 million or about 15% for the quarter and our income would have been up as well.

With the movement of these sales to the third quarter as well as the Damien Hirst sale upcoming on September 15th and 16th in London with an estimated excess of $130 million low estimate on that property we expect third quarter results to be stronger than the third quarter a year ago, albeit with typically thin margins on those high end contemporary sales.

Turn it over now to Bill Sheridan for some greater detail and I'll be back for your questions and a few comments.

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

Thank you Bill. If you could refer to page seven of the earnings release which is Appendix A in our income statement, I'll walk you through some highlights here.

Overall results, net income for the second quarter of 2008 was $95 million or $1.46 per diluted share, which compared to net income of $107 million or $1.64 per diluted share in the prior period. This $12 million or 11% decrease is largely due to the shift of our London contemporary sale from the second quarter of 2007 to the third quarter of 2008.

Also impacting the second quarter results is the $18.4 million benefit, which is $11.7 million after tax. From the reversal of the remaining coupon liability, in connection with the settlement of our antitrust related civil litigation. Net income from the first half of 2008 was $83 million or $1.26 per diluted share, which compared to $132 million, or $2.02 per diluted share for the prior year period.

Turning to operating revenues, in the second quarter of 2008 operating revenues totaled $320 million, a $19 million decrease or 6% decline from the prior year. This deterioration largely stems from the shift of our summer London contemporary sales, from the second quarter to the third quarter. As we mentioned, in 2007 these sales were held in June and resulted in second quarter net auction sales and auction commission revenues of approximately $168 million and $24 million respectively.

However, in 2008 these sales were held in early July, and will result in third quarter net auction sales and auction commission revenues of approximately $213 million and $26 million respectively.

Also adversely affecting second quarter revenues is a $10.5 million decline and results from principal or guarantee activities, largely stemming from losses related to property offered and sold under one auction guarantee in the second quarter.

However, in the third quarter of 2008, the company will recognize principal activities gain of approximately $4 million, related to its share of... on an overage of guaranteed property sold under one auction guarantee that was completed in July at the London contemporary art sale. year-to-date our guarantee portfolio was materially profitable.

For the first six months of 2008 operating revenues totaled $449 million, a $38 million or 8% decline from the prior six month period, primarily due to the aforementioned shift in sales calendar for contemporary, lower commission margins and lower results from principal activities during the period.

Turing to direct costs, for the three and six month period ended June 30th, direct cost of services increased $9.1 million or 36% to $35 million. It also increased $9.4 million or 24% to $49 million when compared to the prior year. These increases are primarily attributable to higher consignment and sales levels in Hong Kong as well as higher catalog and sale promotional cost related to the spring Impressionist contemporary art sales in New York.

These increases are not a proxy for projecting these costs going forward and we are taking steps to address this. Marketing expenses increased $700,000 to $5.6 million in the second quarter of 2008 and $1.9 million to $10.9 million for the first half of 2008 as compared to the same periods in 2007.

This was due to an increased level of corporate sponsorships of leading museums and cultural institutions in the United States and the United Kingdom, as well as higher cost to promote the sale of these brand around the world.

Salaries and related costs, salaries and related costs decreased $13.2 million or 16% to $72 million in the second quarter of 2008, and $6.8 million or 5% to $133 million in the first half of 2008 compared to the same periods in 2007. This improvement is largely due to incentive bonus accruals that were done significantly in both the second quarter of 2008 and the first half of 2008 and it's directly attributable to the decline in profitability for the period.

You should note, salaries as a percentage of revenues for the first half of 2008 was under 30% at $29.6 million. This compares to 32% for the full year 2007.

General and administrative costs, for the three and six months ended June 30th, G&A expenses increased $0.6 million or 1% and $8 million or 10% when compared to the prior period. These increases were principally due to professional fees, travel and entrainment spend and premises or rental related costs.

Turning to net interest expense, for the three and six months ended June 30th net interest expense increased $2.8 million and $3.3 million respectively, when compared to the prior year due to lower average cash balances as well as lower interest rates earned on those cash balances.

In conclusion, just a brief comment on the balance sheet, there's been some discussion in the press relating to some of these receivables position. I just wanted to comment that essentially all our year-end receivables had been collected by June 30th and our 10-K will highlight as there are no significant creditor reserve for bad debt issues relating to our first half results.

Cash on the balance sheet was $389 million as of June 30th and as Bill said our 10-Q will be available tomorrow afternoon online for your review.

Now, I would turn things back to Bill Ruprecht.

William F. Ruprecht - President and Chief Executive Officer

Thank you, Bill. Our markets continue to be strong; demand for great works of arts remained robust; year-to-date through July auctions up 14% from last year's pace of sale. Our May sales in New York were strong, highlighted by the Francis Bacon which sold for a little over $86 million the highest price ever fetched at auction for a contemporary work of art, highest price achieved anywhere for any work of art so far this year.

New York Impressionist sales achieved excellent results at $272 million in line with the pre-sale estimates, the summer Impressionist in Contemporary sales in London were our best ever with a total of $497 million sold over a two-week period in late June and early July.

And here the end of the pre-sale estimate ranges and 24% above last year sales over two week period sold... saw to be sold there, 102 lots for over a million dollars and to date we have sold 577 lots for a million dollars or more. I believe that it is compared to 391 at this time last year.

Interesting statistic in the growth of high value objects of our business. Our Old Masters sales in London achieved a little over $117 million, well above the highest pre-sale estimate of $106 million and 32% above last year's total, which is very strong response to the property we had on offer.

As we look forward in London on September the 15, 16 as I indicated, I was pleased to present beautiful inside my head forever which is a sale by Damien Hirst of over 200 new works which he has conceived of over the last two years and it includes an extraordinary range of things, highlight being The Golden Calf remarkable new sculpture of a bull in formaldehyde whose head is crowned by a solid gold disc. And the entire sale as I indicated is expected to bring in excess of $130 million.

From October 4th to October 8th we are looking forward to our fall series of sales in Hong Kong, which are estimated to total $265 million, which if they sold at that level would be a 31% increase from the prior fall sales of a little over $202 million.

A major exhibition of Contemporary in Modern sculpture is anticipated again called Beyond Limits which will be held in Chatsworth in Derbyshire in the British countryside this autumn, works by Botero, Kiki Smith, Ron Arad, Salvador Dali and others will be exhibited and will be available for private purchase. This exhibition will take place between September 9 and November 2nd.

So as we look forward the sales have been strong, no obvious slackening of demand from the record pace of year ago. As the decline again in our second quarter sales and earnings is really a function of the movement from our second... from our London sales from the second quarter into the third quarter, we are not trying to make your job difficult. And we are trying to accommodate the breadth and depth to property which we've had on offer and wanted to take advantage of. And so I anticipate some of your questions will be about this geography of quarter-to-quarter issues.

We do expect the third quarter to be strong when compared to the prior period and as we said approximately $26 million in revenues will come into the third quarter from the second quarter, if you were looking at us a year ago.

We are encouraged indeed by the state of our business and we have improved auction commission margins from 13.06% in the first quarter to over 15% for the second quarter. And we have implemented some really rigorous global procedures led by our senior business development team to support deal making processes for all major consignments going forward.

So we think we've got a handle on this. We've delivered on the promise to manage our compensation levels, as evidenced by a decrease by approximately half in bonus accruals in the second quarter as compared to the prior period.

The final chapter of our antitrust litigation is firmly closed through the expiration of the vendors' coupon certificates in May of this year and we were able to acknowledge and recognize an $18 plus million benefit in this quarter.

We have successfully raised $350 million in the capital markets which now provides us with greater liquidity than we have ever enjoyed. We were upgraded to investment grade by S&P in early June and we've retired our $100 million bond that was due in February of 2009.

Our company today is in excellent position to be flexible and competitive and continue our long traditions as innovators in our markets. We are the only company in our industry to account the market quarterly.

We are the only company where you can assess and measure our credit worthiness in this industry. Over time we believe this will be very relevant to consigners, certainly the market has punished in other businesses organizations without appropriate risk capital.

And we've been very prudent to assure that is not the case with Sotheby's. Our consolidated sales, which... good auction, the private sales, dealer sales, were $3.2 billion for the first half of 2008. Including the early July contemporary sales we would have $242 million in addition to that would take us to between $3.4 billion and $3.5 billion, which is virtually identical to our traditional competitor.

We get there in very different ways; Sotheby's still focused on our clients, and on the high end of the business. Against the backdrop of financial uncertainty, our belief is our business continues to be going strong, vis-à-vis second most successful results in our company's history.

I want to reiterate what I said to you in our call in May, that we continue to deliver what we believe are strong results in a prudent management of risk. The long broad term story of global wealth creation continues, with the economical leap continuing to drive our business, and many of those people continue to be somewhat insulated from market woes, if not today, at the stock market, on most days we certainly have been hearing about.

That concludes our remarks. I'll look forward to your questions.

Question And Answer

Operator

Thank you gentlemen. [Operator Instructions].We'll go first to Jody Kane with Sidoti & Company.

Jody Kane - Sidoti & Company

Hi, thanks. Can you just help us or expand a little bit more about the commission margin, exactly what, is affecting it, that seems to be the biggest confusion out there.

William F. Ruprecht - President and Chief Executive Officer

Well, commission margins got a bunch of different threads which are always running through it, Jody. One, what is the sale price of the objects which you're handling. Mix is a significant issue there, because the higher the value of the individual objects, the lower the margin, because as you know, we've got a tiered schedule of 25%, 20 %and 12% with different break points, the most recent break being at $1 million that institute as of June 1st so you have got a cusp quarter here which you can't normalize around. And all you can really do once again is look at 6 month period for margins rather than 3 months because the quarters are highly unusual and different.

The second set of issues is of course how we manage risk in deal making and to the extent that in the first quarter and in the second quarter, we took the view that we wanted to have less principal exposure in some situations and in sent people through lower margins on transactions but minimize our guarantee and our principal risk we did that in a significant number of circumstances in the first and in the second quarter.

All that said, on the principal lines in the business, I want to reaffirm that in the first quarter and in the half we were significantly profitable in our guarantee and principal exposures for the company, as we have been for each over the last 19 years. What else affects margins? You've got deal making, competitive pressures between Sotheby's and its traditional competitors. We believe at this point we've got some processes and oversight from... of individual deal makers through a pretty disciplined process on how we want to manage deal making for our organization.

That said there are always going to be some wiggling in terms of which deal you chase and which deal you don't chase in order to build your seasonal book of business. Overall however the trend line has been positive from the first quarter to the second quarter this year, while it was negative in the second... from the first quarter into second quarter last year. I can't think of another thing to add to that mix other than what I've already shared Jody.

Jody Kane - Sidoti & Company

That'sperfect, and with the raise in the commission would you expect commission margin to improve as we move into the back half of the year?

William F. Ruprecht - President and Chief Executive Officer

Well we already indicated that in the third quarter, it is not a typical mix so it is a little bit complicated to predict overall what's going to happen in that quarter. But I think you would hope to see that the steps we have taken with the buyers premium and through the consolidating of deal making oversight into fewer hands responsible management of margins, which I think over time we have demonstrated again and again that we are pretty good at.

Jody Kane - Sidoti & Company

And then just on the direct costs and services line, now that seems to have gone up quite a bit, is there any way that you could reduce that back you could bonuses salaries. I mean is there any way to reduce the actual costs that go into running the ops [ph]?

William F. Ruprecht - President and Chief Executive Officer

As I said don't use the first half as a proxy Jody, just as Bill shared on it. Our global auction team is now very focused on this, and we look forward to improving that cost line as we move forward.

Jody Kane - Sidoti & Company

Greatthank you very much.

Operator

We'll hear next from Rommel Dionisio with Wedbush Morgan.

Rommel T. Dionisio - Wedbush Morgan Securities

Oh yes good afternoon. Bill, in your comments I think relative to last quarter you highlighted that rather last quarter significantly increased maybe, at least we got the sense, level of competition from Christie's in terms of aggressiveness in the marketplace. I didn't think quite clear that in your tone this quarter, is that a fair assessment to say that maybe that's moderated somewhat in the last three months?

William F. Ruprecht - President and Chief Executive Officer

I think if you will ask that question everyday of the week you get a different answer. I think I have said before we probably get half of the business we get without any competition. And we probably get another quarter of the business that we get with some competition but we have some relationship giving us the last bite at the apple if you will. And some opportunity to negotiate into a shape of terms because there is a real preference, and then there's somewhere between 10% and 20% of your business which is done typically through a guarantee or something like that.

And for those people who just seem to think we are a utility and just want to an assurances of proceeds, very often those are terms which end up just being a price driven. It continue to surprise me when that happens because the level of the guarantee is not that common at the level which we deliver results. And I think it's fair to say that we work very hard to assess and try to communicate effectively to potential clients that we can add value over and above the minimum assured level of benefit of any guarantee model.

So look so that Christie's see a significant portion not most of each others' portfolio but a significant portion of each others' portfolio. I think it's important for some consigners to show the business to both houses. I don't feel as if there is an accelerating negative trend and I think is that we have put steps in place that we hope will both stabilize and create opportunities for us to enhance our margins.

Rommel T. Dionisio - Wedbush Morgan Securities

Hey great. Thanks very much Bill.

Operator

We hear now from J.P. Morgan, Steven Rees.

Steven Rees - J.P. Morgan

Hi thanks just on the expense side you had done a good job managing the salaries and related cost and it goes down 13% this quarter. I think you mentioned that incentive part of that bonuses were down about 50%. So I guess at this point given how the sales are trending and the margin improvement, what are the opportunities you see in the second half of the year to further cut costs?

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

Well this is Bill Sheridan. As I said we will be focused on the direct cost line clearly. We are hoping our results to turn around the second half of the year so that bonus accrual goes up in the second half. And the shareholders and employees all benefit, but the normal blocking and tackling Steve of dealing with third party vendors and getting cost out, we're looking at professional fees et cetera.

Steven Rees - J.P. Morgan

Okay. And then we have read some about the highest and lots holding out quite well but there has been some more volatility among... at lower end but some of the more moderate price lots. I mean is there any credibility to that statement? Have you seen any sort of volatility among any of the different segments?

William F. Ruprecht - President and Chief Executive Officer

WellI've seen a lot of people write and speculate on this subject. As I indicated we've had a significant increase in the number of lots which had sold for over a million dollars versus prior period increasing over $5 million, increasing over $10 million. So the part of the business that we've chosen to particularly put our resources against, which is relay long term relationships with families that want to buy or potentially want to sell those things. That's our sweet spot. I think it's a general matter it's fair to say that if any body is insulated from economic dislocation, it's the kind of people who have in most cases well over $100 million and are in a position to continue to afford themselves of the enormous enjoyment of participating in those key markets which you all see and read about.

So most of our business and most of our volume is in the upper price band tiers, it's not in the $5000, $10,000, $20,000 business which is it's been a significantly declining part of our overall portfolio for the last 5 years. So I hear stories at the grocery store that the guy selling $10, $50, $100, $500 of 'antiques' are not doing very well but that's really not our business. So I am not particularly qualified to speak it.

Steven Rees - J.P. Morgan

Okay and then thank you for that. And just finally as you think about guarantees for the second half of the year, looks like you are a little bit more conservative on the incentives this quarter but yet the overall guarantee portfolios including the principal activities appears to be performing well. So I mean is it time to start thinking about taking a more aggressive guarantees or are you still very conservative there?

William F. Ruprecht - President and Chief Executive Officer

I think that this is a time in the world where there is still some significant uncertainty, and while this is opportunistic business. And if the right property showed up I would contradict what I will now say, which is I think we're pretty comfortable that we have managed through this pretty well in the first half. And I wouldn't expect significant differences from that in the second half. If I saw an additional group of property that was offered to us at $200 million that I thought we could sell within two months for $350 million, I can tell you I'd be up all over it, and looking to realize that opportunity. But as we see it today I don't expect that there'll be material shifts there.

Steven Rees - J.P. Morgan

Okay, great. Thank you very much.

Operator

We'll go now to Kristine Koerber with JMP Securities.

Kristine Koerber - JMP Securities

Yes. First of all, just with respect to the guarantees are you are you guarantying more collections of art work than single properties?

William F. Ruprecht - President and Chief Executive Officer

I can't say that. I mean I can't tell you that there's a greater underlying number of individual objects. Kristine, I can tell you that the aggregate value of those objects has certainly declined, and we continue to maintain an aggregate guarantee cap of $350 million, which we imposed on ourselves, but was not imposed upon us. That is us deciding to manage risk, and us deciding of the levels at which we wanted exposures and to what is undoubtedly somewhat uncertain events.

Kristine Koerber - JMP Securities

Okay. Let me ask it a different way. The $10.5 million loss in Q2 related to the guarantees, as it relates to guaranteed property, I mean is that, for a single art piece of artwork or for a collection that you guaranteed [ph]?

William F. Ruprecht - President and Chief Executive Officer

That was related to I think a collection. We do not account in general terms on individual trades, nor do we intend to on a go forward basis, but this is an individual collection, that did not perform well in the second quarter. I'll state again that the guarantee book in the second quarter as well as in the half were materially profitable.

Kristine Koerber - JMP Securities

Okay, that's helpful. Thanks. And then just want to clarify on the commission margins. So what I'm understanding is that the rebating hasn't intensified, is that correct?

William F. Ruprecht - President and Chief Executive Officer

The margins moved up significantly in the quarter from the prior period.

Kristine Koerber - JMP Securities

Well I guess I am looking at the sellers' commission margin, I know there is a lot of rebating going on in the last quarter, we've seen that changes?

William F. Ruprecht - President and Chief Executive Officer

I think it's best to... when you take a look at our 10-Q tomorrow and there will be specifics in MD&A with respect to the margins and how they have moved.

Kristine Koerber - JMP Securities

Okay. Lastly you talked about changes geographically related to buyers, any positive or negative changes that you may be seeing?

William F. Ruprecht - President and Chief Executive Officer

I think that the U.S. remains the largest buyer of art in the world. The U.S. has become a net exporter of art over the last three years. And so it's more leaving the United States than it's coming into the United States. U.S. remains however the largest buyer of art in the world.

We import non-dollar transactions into U.S. profits which has been favorable for us obviously over a considerable period here. You continue to see pretty robust demand other parts of the European theater and certainly east of their significant ongoing interest from those economies and individuals who have their great good fortune to be creating wealth through commodity and resource-based industries. So I don't think there is a really a new story in the quarter there or it's really a continuation of my comments to date in that regard.

Kristine Koerber - JMP Securities

Okay, one additional question. The November auctions any comments or color on consignments at this point or is it too early?

William F. Ruprecht - President and Chief Executive Officer

Now if you want come sit here next to me you can see that the transactional dance is on and we are in the middle of taking on some significant opportunities and walking away from other significant opportunities, So it's really sort of business as usual at the moment. But it is early days.

Kristine Koerber - JMP Securities

Thank you.

Operator

We'll hear now from Craig-Hallum; George Sutton.

George Sutton - Craig-Hallum Capital

Hi guys many of my questions were asked and answered. But I am masked quite a bit whether or not the Board would entertain the dividend and is there any thing in your credit agreements that could preclude that?

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

It's still... Sheridan, George, there are certain restrictions in our revolving bank line dividends. We are in compliance, a year ago we raised our dividend 50%, we fell it to the current level.

George Sutton - Craig-Hallum Capital

I am sorry, I did say dividend and not buyback

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

Yes that's what I though you are map, so I was going to. It's a very topical discussion, and something we'll be looking at as we move into the third and fourth quarter. And we'll review it with our Board, and once the decision is taken, If there is one, we'll let people know.

George Sutton - Craig-Hallum Capital

Comment if I could for Bill Ruprecht, having listened to these calls for more than a decade. These are the most thorough forthcoming detailed answers you've ever given, and it's greatly appreciated.

William F. Ruprecht - President and Chief Executive Officer

Well George, I appreciate your acknowledgement. We, as I indicated, think that in general, transparency is probably a pretty good thing for this industry, both for investors, and for our clients. And we're the only ones in our industry to provide it. We like that.

Operator

We'll hear now from Dana Cohen with Banc of America Securities.

Dana Cohen - Banc America Securities

Hi guys. Couple of questions. One clarification. The... you said that the loss on the guarantees in Q2, for that one collection was $10 million but beyond that, you were still profitable overall in Q2, I just want to clarify.

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

That is correct, yes. That's just the principal loss on the guarantees. If you look at our 10-K for last year, you have buyer premium revenues, gained on guarantees offset by losses coming to a net number.

Dana Cohen - Banc America Securities

Got it. Okay, and then, going back on the bonus. Did you have to reverse out in Q2, the bonuses paid in Q1?

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

The bonuses paid out in cash in Q1 are accrued for at year end. So for the, so the 2007 bonuses were paid in February of 2008.

Dana Cohen - Banc America Securities

No, I meant the Q1 numbers that you accrued in the first quarter in light of the fact that the second quarter was down...

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

It went down [ph] and those bonuses principally related to private treaty transactions, so it's not a significant amount and but --

William F. Ruprecht - President and Chief Executive Officer

Shortanswer is no, we did not reverse anything.

Dana Cohen - Banc America Securities

Perfect and then how much of the... I mean I'm just thinking because there are 70 moving parts in their sales that are moving. So I mean was there any... I mean in light of the fact that the overall numbers for auctions are up here to date. I mean how should we think about the fact that maybe there's some pushing of bonus accrual into Q3 because you move to major event versus... I mean how much of the reduction is that timing issue versus last year you just kicked the ball out of the park, so you probably went through every hurdle and matched out and so you're getting a decline versus that?

William F. Ruprecht - President and Chief Executive Officer

Bonusesare a reflection of earnings and so they're not going get significantly out of the whack with each other. And so I understand that you'd lost two account fully in the quarter as if the quarter was like last year's quarter and we can't do that, because as you say too many moving parts.

Sales were essentially flat with the prior year and earnings on a pre-tax basis were down between 8% and 9% in the quarter versus the prior year. But when you throw the sales from the first two days of July back into that set of numbers, as I indicated, we would have been significantly up in both sales and profits.

Dana Cohen - Banc America Securities

Well that's why I am asking about whether... to what extent is it the timing issue?

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

It will be both there will be a timing issue and there will be an absolute issue based on our overall full year earnings. And our compensation committee of independent directors will assess what the full year bonus accrual should based on our second half performance.

Dana Cohen - Banc America Securities

Great. Okay and then just in terms of you talked a lot about the auction commission margins getting better in Q2, was there something corky about the July sales just given the numbers you gave out? Obviously the margin was down. So was there just something corky about that auction or price points were up such as that was operational?

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

The July Contemporary sale?

Dana Cohen - Banc America Securities

Correct.

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

You are starting off with a 12% maximum margin on those sales, so you are starting from a lower base point and those are very aggressive. It is an very aggressive marketplace.

Dana Cohen - Banc America Securities

Okay

William F. Ruprecht - President and Chief Executive Officer

But I don't think there is anything particularly unusual or corky about that sale at all.

Dana Cohen - Banc America Securities

Okay it is just that the margins were down about 200 basis points year-over-year. So I am just trying to... I am trying to just sort of put together the comments about it stabilizing in the one off, it was that a one off auction?

William F. Ruprecht - President and Chief Executive Officer

You can't presume those are the margins on those sales because there are a significant guarantee benefits available to us in addition to the traditional margins on those sales which are Q3 events Dana. So you're going to have to look at the Q and I think this will all make sense.

Dana Cohen - Banc America Securities

Okay, great. And then lastly on the Damien Hirst auction, have there all... in auctions like this in the past of one artist of this size just how should we think about this auction as we... which is not that far away?

William F. Ruprecht - President and Chief Executive Officer

Well I think we announced what we announced when announced it --

Dana Cohen - Banc America Securities

Only in the past.

William F. Ruprecht - President and Chief Executive Officer

All that said this is not an event that has ever happened before.

Dana Cohen - Banc America Securities

So this is a very unique one, I mean one time major co-event?

William F. Ruprecht - President and Chief Executive Officer

Well I'm not trying to be difficult but every piece of business we do is a one time event, it's not like there's a replicability about our book of business. That's why this is a challenging business for you guys.

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

But a few years back we did a Damien Hirst sale of this pharmacy... restaurant...

William F. Ruprecht - President and Chief Executive Officer

Contents of a restaurant, just want to emphasize at this but clearly the media has made a fair amount of hay over the boldness of this as an exercise of both on Damien Hirst is other reason [ph]. That's a part of what we like to do, we just pursue some innovative models. And I think they are very exciting sale something, rather we really look forward to.

Dana Cohen - Banc America Securities

Great. Thanks so much.

Operator

And gentlemen I'll turn the conference back to you for concluding remarks.

William F. Ruprecht - President and Chief Executive Officer

Hope you all are getting a summer holiday. Thank you for your interest in Sotheby's and we will be talking to you in November. Until then have a great autumn season.

Operator

That concludes today's conference call. Have a pleasant day.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.