Sotheby's (NYSE:BID) Q2 2016 Earnings Conference Call August 8, 2016 9:00 AM ET
Jennifer Park – Head of Investor Relations
Thomas Smith – President, Chief Executive Officer & Director
Michael Goss – Executive Vice President and Chief Financial Officer
Oliver Chen – Cowen and Company
George Sutton – Craig Hallum Capital Group
David Schick – Consumer Edge Research
William Reuter – Bank of America Corp.
Good morning, ladies and gentlemen, and welcome to the Sotheby's Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded.
At this time, I would like to introduce Jennifer Park, Vice President of Investor Relations. Ms. Park, please go ahead.
Great. Thank you, Candice. Good morning and thank you for joining us today. With me this morning are Tad Smith, Sotheby's President and Chief Executive Officer, and Mike Goss, Chief Financial Officer.
GAAP refers to Generally Accepted Accounting Principles in the United States of America. In this earnings call, financial measures are presented in accordance with GAAP and also on an adjusted non-GAAP basis. An explanation of these non-GAAP financial measures used in this earnings call, as well as reconciliations to the comparable GAAP amount is provided in the company's Form 10-Q for the period ended June 30, 2016.
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 a possibility that the actual events or performance will differ materially from such predictions.
We refer you to the documents the company files periodically with the Securities and Exchange Commission, specifically with the company's most recently filed Form 10-Q and Form 10-K. These documents identify important factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements, also please see our investor webpage for transcripts of our prepared remarks.
Now, I'll turn the call over to Tad.
Thank you, Jennifer. Thank you, everybody for joining us, and for your interest in Sotheby's. This morning, we reported second quarter adjusted net income of $88.6 million, and adjusted earnings per share of $1.51 which compares to $73.1 million and $1.4 respectively a year ago. This a 21% increase in adjusted net income, but a 45% improvement in adjusted earnings per share due to the share repurchases done in the past year demonstrating the meaningful leverage from our ongoing capital allocation process.
Mike Goss will provide further details as well as a more comprehensive explanation for this improvement in results later on in the call.
I'd like to spend my time with you focused on two issues, the state-of-the-art market and our progress to-date on our four main priorities. First the market, there are a number of geopolitical, macroeconomic, commodity pricing and financial market uncertainties that leave the art market with a paradox. On the one hand, collectors are still buying top quality works of art in well-curated sales. On the other hand, consignors who have the luxury of discretion are showing a bit of reluctance to sell their work at this time. This paradox has led to lower overall sales volume this year, down some 30% to-date.
However, when sales are carefully managed and thoughtfully executed, we have many examples of very good sell-through rates and record prices. This was the case in our most recent sales in London at the end of June and also our Contemporary sale in New York in May. Our June Impressionist Evening Sale totaled $151.9 million at the top end of our estimates and major works by Pablo Picasso and Amedeo Modigliani sold for $63.6 million and $56.6 million respectively, the top two prices achieved at auction anywhere in London in over five years.
Furthermore, this well-curated sale was comprised of only 27 lots and achieved a sell-through rate of nearly 89%. The following week our Contemporary Art Evening sale totaled $69.4 million also at the top-end of our estimates and with a strong sell-through rate of 87%. 60% of the lots achieved prices over there high estimates and important auction records were set for Jenny Saville and Keith Haring, among others.
Nowhere was the demand for great treasures more apparent than in our Geneva salesroom in the middle of May. We set a new record for any jewelry sale ever held with a total of $175.1 million, eclipsing our own record set just a year ago. The sale was 83% sold by lot and led by the Unique Pink, a supremely rare Fancy Vivid Pink diamond weighing 15.38 carats that sold for $31.6 million which is just over $2 million per carat.
The sale also saw a new benchmark for a purchase by an online bidder in one of our auctions when a pair of Important Pear-Shaped Fancy Blue and Fancy Orangy Pink Diamond Earrings sold for $6 million.
Our results in Asia were similarly positive. Our aggregate auction sales in Hong Kong in the first half of this year reached $461.5 million up 22% over the prior year. Our spring auction series saw 16 auction records set and more than 80% lots achieved prices at or above their midpoint estimate.
In addition, the total number of Asian clients buying western art at Sotheby's grew 12% in the first half of this year with top lots in both our Contemporary sales in May in New York and in June in London purchased by Asian collectors.
Next, I would like to provide an update on our company's four main priorities. To remind you, these priorities are first to implement a compelling growth strategy, second, to embrace technology more effectively both internally and through client-facing products, third, to build a talented team within the organization and the processes to sustain success, and fourth, to allocate our capital more efficiently.
With respect to the first priority to implement a compelling growth strategy, a key element of the strategy is to improve our position at the high-end of the fine art market and we are making progress. We continue to lead the market in the category of Impressionist & Modern Art. And as mentioned above, we achieved the two highest prices in the category during the recent London sales. I'm delighted with the stride that our contemporary department has made with excellent sell-through rates in our May and June sales of 95.4% and 87% respectively. Both sales also performed well against their pre-sale estimates and it’s probably worth noting that these metrics are the most important to our consigning clients.
As for the coming season, Sotheby's outstanding teams secured two of the most prestigious fine art collections on the market. In New York, we will offer the collection of Steven and Ann Ames a peerless collection of outstanding contemporary art, which is estimated to fetch in excess of $100 million. At the core of the collection are outstanding groups of works by two giants of 20th century painting Gerhard Richter and Willem de Kooning.
And in London, we will present a three-part auction comprising approximately 400 items from the private collection of David Bowie valued at more than $13 million. At the core is Bowie's collection of modern and contemporary British Art, an outstanding group by many of the most important British artists of the 20th century, including Henry Moore, Frank Auerbach and Damien Hirst.
Over the past year, we've built a great team, made a number of key hires and realigned and focused existing talent. That team today is very focused on profitable deal-making and more judicious use of guarantees the benefits of which we're also starting to see in our financials.
Another element in developing our growth strategy is to improve our private sales business and I mentioned in our last earnings call that it will take a while. Nevertheless, I'm pleased with our progress here too. We've added two seasoned colleagues to our team from Gagosian Gallery and The Warhol Museum. We've spent a lot of time over the past six months considering our global S|2 gallery program, assessing its strengths and developing a concept for focusing the programming and creating a meaningful niche to further serve the needs of our existing and expanding clientele.
Leveraging technology to improve collaboration and efficiency is another critical component of private sales and we're making progress here too. We've also reviewed and are making changes to our private sale incentive compensation program to motivate and reward more staff more effectively.
Now, turning to the second priority, to embrace technology more effectively and accelerate innovation, both internally and through client-facing products. In the past year, we launched iPhone, iPad and Apple TV apps. We've continue to refine those products and have successfully added functionality including search and auction results. We recently added an Exhibition Audio Guide to our iPhone and iPad apps, making visits to the Sotheby's, both online and offline, more dynamic. Next steps for our mobile and app strategy through the end of the year include expanding our footprint onto the Android operating system and increasing distribution of our video and auction streaming services through the likes of Amazon Fire on Samsung Smart TV.
We will also deepen integration into messaging platforms, specifically WeChat for our Asian audience and begin to look to roll out transactional bidding capabilities on our apps. Later this month, we'll launch the Sotheby's Museum Network, an aggregation of video content from the world's most renowned institutions, including the Metropolitan Museum of Art and the Tate. There is a growing audience here eager to learn about art, and increasingly, they are using digital means to explore. At the same time, the world has many public and private museums that may not have an efficient digital platform to promote their collections. Many of those institutions are supported by some of the world's great collectors and we believe we can create an engaging digital hub for audiences interested in learning about art, while at the same time creating a distribution channel for our most important clients in a way that differentiates us.
It will be available across Sotheby's digital platforms, most notably an updated version of Sotheby's Apple TV app, which was submitted to Apple last week. In addition to syndication, the initiative will also include original content conceived and produced by Sotheby's, launching with the Treasures of Chatsworth, a 13-part series in one of Europe's largest private houses and most significant art collections that is currently in production and will debut this autumn.
Next, we remain focused on online sales and continue to see them grow and play a more powerful role in our overall totals, as well as our engagement with clients. Online sales in excess of $90 million were achieved in the first six months of 2016, a growth rate of 27% versus the same period of 2015. We've seen a 54% growth in the number of lots sold online, accounting for 18% of total lots sold globally by Sotheby's, compared to the same period last year. The behavior is global and in nearly every category, London, Paris and New York have each held sales that sold over 25% of lots to online buyers.
As we've seen over the past year, awareness is an important part of engaging new and existing audiences. We continue to work with our network of e-commerce partners to access the largest audience of bidders and buyers in the market. We remained at the forefront of social media with the industry's largest audience, embracing the latest trends including Facebook Live, which has driven tens of thousands of viewers to live streams about our auctions. We also recently announced a sale curated by a major Korean popstar and collector with a short video that garnered more than 3 million views across social media channels in one week. As a result of our efforts registration for our auctions on sothebys.com is up 57%, compared to the same period last year.
Finally, as important as these innovations are to our existing business, these new technologies will the key to securing our desired position in the middle market. Throughout the month of July, we presented a series of five online-only sales at a time when historically the company, and our engagement with clients, was particularly quiet. We offered a range of property from prints to books and Contemporary Art and the results were encouraging. We had nearly 1,000 clients register to bid, an average sell-through rate of 79% including two-sales, by the way, they were 100% sold and 33% of the buyers new to Sotheby's.
The top selling work of the series was Untitled [Four Works] by Bosco Sodi that sold for $125,000 in our Contemporary Online sale to a first time buyer at Sotheby's. Looking ahead, we recently announced an online-only sale of jewelry by designer Tony Duquette that closes on August 30 and we are currently filling out a full schedule of sales for the fall season. In summary, our company has made enormous progress against this second priority in the past year.
With respect to our third priority, or next priority, that of people, my primary objective when I came to Sotheby's 17 months ago was to work with the many very talented people here to fashion a team that performed at a level that was better than the sum of its parts. On the last earnings call, I said I was delighted with the Sotheby's team and we've made tremendous progress, and the only thing I will add in this earnings call, is that our sales results in the most recent quarter have shown that.
At the same time, we're not resting on our laurels and we continue to improve the excellent team we have. For example, there have been a number of key hires in areas of priority including Contemporary Arts and private sales as well as potential growth categories such as Contemporary African Art. We've promoted a number of experienced Sotheby's colleagues in both the Americas and Europe to senior positions as chairmen. We've appointed new leadership in categories where we see opportunity; wine, jewelry and 20th century design, among others. We've also successfully filled the important positions in our digital and technology teams including heads of e-commerce and product development. We have an outstanding team and we are even now making it better.
Our final priority is to allocate capital well. I'm extremely pleased with the progress we've been able to make on implementing comprehensive capital allocation policies that have delivered significant returns to shareholders. Mike will discuss this topic in more depth.
So at this point, I'd like to turn the floor over to you Mike.
Thanks, Tad. Before I get to the progress we've made on capital allocation, I'd like to discuss our second quarter results. As Tad has already referenced and as our recently filed 10-Q reflects, these finance results reflect the impact of six fundamental factors. First, a lower art market, which has led to smaller sales. In the Agency Segment, we experienced a 16% decline in net auction sales for the quarter. But for a true apples-to-apples comparison, we should take into account last year's London Contemporary auctions, which were held in the third quarter last year.
When you include the Contemporary sales and the impact of the change in calendar, the decline in Net Auction Sales is closer to 24% this year. You might recall that in the first quarter, we saw a decline of 35%, so this period's decline was slightly more modest, though still not what we want.
The second fundamental factor impacting these results was an improvement in auction commission margin to 16.4% versus 15.5% last year. While much of this improvement was attributable to a shift in mix towards lower price bands, we believe part of this improvement can also be attributed to greater pricing discipline.
We should also point out that this improvement represents the third consecutive such improvement versus the respective year ago periods when you exclude the effects of the Taubman auctions in the fourth quarter of 2015 and the first quarter of 2016. Third, we managed a 15% reduction in adjusted expenses compared to last quarter, largely due to a $24 million decrease in incentive and share-based compensation expense.
Fourth, our share repurchase program executed in the past year has led to a significantly lower number of shares outstanding. We now have 55.1 million shares outstanding versus 69.5 million shares a year ago. That's nearly a 21% reduction in the past year and we still have another $43 million, which is available for further stock repurchases under the current authorization.
Fifth, our forecasted effective tax rate excluding discrete items is lower this year, 26% versus 35% a year ago. Two factors are driving this improvement. First, a year ago, we assumed we would be repatriating all of our foreign earnings for redeployment in the United States and thus our 2015 foreign earnings were taxed at the highest U.S. federal tax rate of 35%. This year, we believe we will be indefinitely reinvesting the majority of our foreign earnings except for our UK and a few other smaller jurisdictions' earnings abroad, and thus large parts of our pre-tax income will be taxed at marginally lower foreign rates. Of course, this also means that our tax rate will consistently be dependent on the mix of our earnings among our various foreign jurisdictions, which brings me to the second reason for our lower tax rate for the quarter.
In this year's current quarter, our lower forecasted effective tax rate was driven by the strength of our Hong Kong business, where tax rates are lowest. And based on current projections for the year, we expect this lower tax rate to prevail for the balance of the year, but of course, it will also be dependent on the exact mix of our earnings among the jurisdictions in subsequent quarters.
The sixth and final major factor driving this year's improvement is that last year's second quarter results included a couple of unusual events, which negatively impacted last year's second quarter. As you may recall, these included a significant loss incurred on obtaining sold from our inventory, and a cancelled sale provision and costs associated with the client authenticity claim both of which were related to property sold in prior years. The charge for the authenticity claim accounts for the overwhelming majority of our favorable comparison in this quarter's other indirect expenses, which is recorded within the general and administrative expense line on our income statement.
Looking ahead to the third quarter, many similar factors will work against us on a comparative basis versus last year's third quarter, and thus, we expect the third quarter to be quite weak, but the fourth quarter to be much better. These factors include, as I had previously discussed, the results of the London summer contemporary sales, which were included in last year's third quarter, but will not be in this year's third quarter. And secondly, just as we had that significant loss from the sale of a painting in the last year's second quarter, we had an equally significant gain from the sale of a second related painting from inventory in last year's third quarter.
It is this lumpiness that reminds us why we consider it so important to focus on rolling six-month or full 12-month periods to get a better feel for the state of our business. Such an approach significantly lessens the impact of changes in the auction schedule or one-off transactions that might significantly impact the results of our seasonally small and generally not very telling first quarters and third quarters.
Such an approach also makes it easier to understand our cost structure given that we recognize most of our incentive compensation in the second quarters and fourth quarters. Said another way, when trying to understand our business for this quarter, it may make sense to look at it in combination with the first quarter. And likewise, when we report the next quarter, it will again make sense to look at it in combination with this second quarter.
Turning to the balance sheet, the biggest story continues to be the progress we've made on capital allocation with the repurchase of our common stock under the $325 million authorization discussed with you in January and the significant EPS accretion we've experienced as a result. Since the increase of our authorization, we have purchased 11 million shares at an average price of approximately $25.68 per share for a total investment of $282 million, again indicating that we have about $43 million remaining under the current authorization.
Tad and I are now happy to address your questions. [Operator Instructions]
And our first question comes from Oliver Chen of Cowen & Company. Your line is now open.
Hi, congrats on solid results. Tad on your prepared remarks, we were curious about your statement about more judicial use of guarantees. What's the incremental winds that you're using just to make sure that that is in the right place in terms of how those are taking place? Also, with your number one shareholder being a China Taikang Life Insurance, does that change any aspect of your strategic wins in terms of how you're thinking about your development in China, and what may unfold there or what kind of parameters you might think about in that strategy? And you've had nice results in Hong Kong, we'd love to get your thoughts on what's driving the strong momentum in this region, and do you see the trend occurring in? Thank you.
Okay. With respect to the first question on guarantees, my view is what is the profitability and risk balance on guarantees. I am, with respect – I think we currently have approximately $100 million of net exposure to guarantees as of the end of the quarter plus or minus, and I expect a good portion of that to be covered by hedges, but the truth of the matter is I am thrilled with the team and the pricing excellence of the contemporary team, and frankly, the moderate impressions in many other teams too. And so, I feel very comfortable that a combination of understanding the value of the underlying works, having a clear sense of where – how they would sell in the auction room, gives me a higher degree of confidence that our guarantees are judicious, and frankly, we have a strong bias to hedging guarantees. So, the way to hear that is we are unafraid to make guarantees, because we have a high degree of confidence in our team and the confidence in our team is borne out by that team's ability to both hedge where it make sense or make – or get profitable returns from guarantees in the auction room.
I feel quite good about it, and I expect you'll see more of the same which is that we are willing to use you guarantees and we are also hedging them very aggressively and bubbly. With respect to the second one, I think it was Taikang if I am not mistaken, Oliver. And the question, if I recall, was it with the fact that Taikang is now a very significant shareholder in our business affects our strategy, generally or also specifically, in China.
And, first of all, Taikang, as so many of you've know, life insurance of the fourth largest insurance company in China that assets under management of approximately $6 billion, and there are 13-D filing states, very clearly, that they quote have a positive view of our business prospects, and that to me is very encouraging. They support our strategy significantly and one critical element of our strategy is to develop and continue to provide a really, really attractive business for client and for shareholders and also for staff by the way in the Far East in Hong Kong, in China in the areas around the Pacific rim. And so far as anyone, whether they are shareholders or not, can be good partners for us, we would absolutely welcome that and continue to develop it. With respect to the recent results in the China business, I would say quite frankly, we have a very strong team there. They had some excellent consignments in the first half. I think they're going to be a bit more cautious on the second half with respect to their forecast, but this is a team in China for us that does really, really good work. And I guarantee you, if there is any ability to serve clients or to generate returns to shareholders in China in the second half, they will do it. The one thing I would add is that even with the good product that we had, and that they found in terms of consignment, they also sold it very well, and there were clearly buyers in China.
So part of it would be meaning – it's not just that we had good product in the first half and the team did a great job. The team also sold it, but also they was clearly demand. And I would say that – that bodes well, even if the second half for our Eastern results is a little bit tougher than the first half because the consignments were not as favorable, perhaps, as they were in the first half, meaning the availability of consignments was not quite as favorable.
I think, I covered all possibly, Oliver.
Yeah, just one – that was great, really helpful, and Mike, the details on 3Q versus 4Q were really helpful in terms of eliminating, how we should think about expectations for 3Q. Just looking forward, on the demand side, it sounded like Tad you were – you started off quite – quite explicit about in the financial market uncertainties versus consigner reluctance. Just on the demand front for Q4, what are the positive catalyst that you would focus this on, in terms of what manifold, if fourth quarter is better than third quarter?
Oh, it's interesting. Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however, it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and honestly probably for a lot of other markets as well, so that I would look for. Number two, I would look for any sort of – and this is actually the catalyst here will be the absence of bad news. If you see the absence of bad news, related to any further instability in Europe, I think that would be a positive catalyst, meaning Brexit seems to have been largely absorbed. And as long as there is not more noise about Europe, I think it would be a positive. And I think if you see – again, the absence of negative catalyst is another positive, for example, if you have some absence of high data events in the world or absence of high data events in commodity prices.
All of these things affect individual's moods, and what we have right now is we have a lot of people with a lot of money. They would love to buy masterpieces and great pieces of art, where we see a little bit more of a challenge, reluctance is because of all these exogenous events, consigners who have the discretion to be able to consign or not are being a bit more cautious, a bit more difficult to persuade them even though we have demonstrated results that we can, that we can sell their masterpiece for record prices.
Thanks for illuminating that, very helpful, best regards.
Thank you, and our next question comes from George Sutton of Craig-Hallum. Your line is now open.
Thank you, and I appreciate you're pointing out all the usual items in each of the quarters that transparency is helpful. So, as – I want to ask the last question a little bit differently, you mentioned that some of the opportunities for China, in particular, in the second half, maybe a little more limited. Could you give us a broader sense of what you're seeing from a consignment opportunity perspective?
Well, I mean, I think, it's probably, first of all good morning, George. I would say, it's a bit more that we had a very, very strong consignment list in the first half, and that's what I was trying to emphasize. Relative to the outstanding consignments in the first half, the second half, the early indicators and it's still early by the way, the early indicators from our Far Eastern colleagues are that the consignments in the second half won't be quite as strong as the first half, but that's really all I was trying to say, it wasn't anything more than that. I also try to emphasize that the – even though we have strong consignments, the selling did very well and also that there was clearly demand. So there are people who are willing to buy and they are buying in China, and that's very encouraging, and that will also be true in the second half. We don't see any reason why that should change. The only point I was making with wand just if where we were on slide.
Okay, but now again, outside of China, as we look more broadly, are you seeing encouraging levels of activity from consignment perspective? Obviously, we've seen the aims and we've seen the Bowie collections, and I'm curious how much broader the opportunities are?
Well, actually, there are some things, that are very interesting, that are bubbling around in the pipeline, and – but again on some times on these things, they could happen in the fourth quarter or they might kick over into the first part of next year, but there is a lot of activity, meaning the art market is very much interested in transacting. And there are – again when you step back, you think about consignment, it's the classic, right, it's death, it's divorce, it's death and discretion. The only one that comes into play when you have uncertainties in the exogenous environment are really discretion, the other three continue to motor along relatively nicely, and so that, that core element of consignment business is out there for sure and we're seeing it everywhere around us. The question is to what extent will it happen coming up or will it happen pushback and I am going to remain optimistic.
So, you had continued improvement in your auction margins, and you had talked about the shift in the mix you're seeing, but you also mentioned pricing discipline. I wonder if you can go in a little more detail of how you're seeing the competitive landscape from a pricing perspective and I'm really thinking of a premium giveback perspective. Are you being firmer on terms, are you seeing others be firmer on terms, how is that working?
The truth is, I can't tell how anyone else is doing on terms. I mean, it's just – it's okay to us. So I can't really say that, what I can say is that, directly in my view as a result of some of the new members of the team mixed with some of the existing members of the team, we have become very, very good in my view at – and disciplined in my view at the financial side of our business and the transactions and execution of the transactions. And I think you hear that from collectors our turnaround time has accelerated. I think you hear it from our specialists that they've gotten a lot more support, and I am exceedingly pleased with the management team responsible for that.
Perfect, okay. Thanks for the answers.
Thank you. And our next question comes from David Schick of Consumer Edge Research. Your line is now open.
Hi, thanks. Good morning, and I'd add my congratulations to the team. Tad, you just touched on it a bit, with speed to market or speed of responses, but my question centers around technology, and your emphasis there. Just to review it as a long term, say five years or more years, as you apply or give more tools to your buyers and sellers, do you expect – how do you expect technology and those tools to impact the aggregate commission margin? And then second was really about speed to market, both for buyers and sellers, are or is your use internally of technology starting to change the amount of consignments, anything you can point to or measure, that would be helpful? Thank you.
Let me start with ... first of all, Dave, good morning. Let me start with the second half of your question, because it's a little bit easier to answer. The first example of the second half of your question is, is just in the past month, I mean we did five online-only auctions, and they had a very beneficial result. And I think the prepared remarks said, we're going to be doing a jewelry one coming up and we're going to be rolling it out through the fall. We were frankly, and by the way, these were, to be clear, they were small auctions for sure, David, but we really liked both the effect that they had on our specialists, because part of what happens here is to explain to a specialist, we're going to do an online-only auction, you have to get them excited about online-only. And then, when they see the results, and by the way when the consigners see the results, they get excited about it, and so that will create more demand.
And the fact that, remember, we didn't have any production cost, or catalog cost or anything like that, that's a very attractive business model for us, and so, scaling those up is very exciting. Secondly, remember that the our – I spent a little bit of time in the prepared remarks talking about our strong presence in social media and other things and when you – that is a very attractive customer acquisition cost. So the combination of more consignments, relatively less acquisition cost, relatively less customer acquisition cost, substantially greater volume over time, should have a very, very beneficial effect on our middle market strategy and I – I mean, that is in essence a core long-term investment pieces. David, I think, I need your first question again, I'm sorry, I spoke too long for your second.
That was about – I mean, it was about – you wrapped them together. Can you quantify how many more folks here in percentage terms or whatever you're talking to and how it will help, I'm sorry for the airport, how it will help with consignment pace essentially, and then separately the margin both on the commission side and the operating margin side? I think you're wrapping all them nicely.
Yeah, I do want to add one thing and thanks for calling in from the airport. That's hard duty for you and we appreciate it. The one thing I would say is interestingly more and more and more of the consigners that we are seeing are asking us about online capability and they're also asking us about online only capability, very interesting development that was not true for me 17 months ago when I arrived and or it wasn't being talked about internally as much. That's also a possibility, but the truth is we're seeing a lot of it and that is clearly an access of competition that we like and we think it is vibrant for the future.
Thanks so much.
Thank you. And our next question comes from William Reuter of Bank of America. Your line is now open.
You guys touched a little bit on the pricing discipline that you guys are maintaining with a Roger commission margins. I think on your last call, you guys had made some comments that you expected commission margins going forward to continue to increase. Do you continue to believe that as we look over to the next handful of quarters, we should see expansion of those margins?
We believe that right now based on what we see, we believe that we'll continue to compare favorably against the year ago, but, again it's cautioned by the same provides elevated, it is dependent on mix, but our outlook for the balance of the year looks for a couple of more good quarters.
One quick point is, it's very important to note and I think we said it, the third quarter is gone to be very weak. A lots of things reversing in it. Not with – by the way I'm not speaking just respective margins, I think Mike addressed that, but the third quarter will be quite weak and what you need to do is look at the second half and the first half and that's where we're trying to get straight to see.
Okay. And then my second question is on operating costs, I mean late last year, you guys had done expense reduction initiatives and kind of in your prepared remarks, you talked a little bit about a couple of key hires in the private sales area. I guess I'm wondering going forward whether you guys feel like this is a good time to make investments in people or alternatively given the – the slowdown in the market that you need to be a little more cautious with regard to your operating costs.
That's a very, very good question, exactly the timely ones they were talking about. What you'll see in the third quarter is that we have relatively a little in the way of sales, a little in the way of revenue. We've got expenses in the – and by the way with the fewer number of shares it's going to have an unattractive look for sure. And, third raises the question what do we think about how long the art market will be in the doldrums. And, if initially, we did look back at this and it's hard to see based upon to the last 20 years, 30 years of history, it going much longer than sort of 18 months to 24 months. If you look at where the art market started tipping, arguably I would say it was about 12 months or 13 month ago, clearly by the time July rolled around, it was getting a little softer in last year. And so, it's an interesting question, particularly as we sit down for the budgeting process next year. How we think about how long we're going to be in a relatively lower revenue environment on the one hand, versus all of the exciting things, we have going on that are essentially and I think in the press release I said burnishing Sotheby's for a much, much even more successful future.
I think our – my view is that our shareholders believe that, they understand completely that this is a cyclical business. They understand that Sotheby's has very, very substantial growth opportunities that are not just cyclical but secular all around it. And that for some period of time, they're willing provided, we are rigorous on our capital allocation policies. They will give us a little bit of time on the expense side to continue to invest as long as they're seeing things that make them happy in terms of results all around it. That has been the balance we've been trying to achieve as we've gone into a softer art market and thus far, we see no reason to depart from that until we see some reason that the art market would be materially worsened for materially longer than we think will happen.
Okay. And then just lastly for me. You have about $43 million remaining on your share repurchase authorization, I recognize it that there is a little bit of a board decision that would need to be made there, but I guess how you guys are viewing share repurchases I guess either for the remainder of the year or just kind of looking forward.
Well, our bias will be to, use the rest of this authorization. Of course we're not completely insensitive to price along that way. It will be keeping our eye on things, but our bias will be to spend that $43 million, when we can do so in the best interest of the shareholders.
Okay. I'll pass along to others. Thank you.
Thank you, and I'm showing no further questions at this time. I'd like to turn the conference back over to Ms. Park for closing remarks.
Thank you, Candice. Thanks for joining us today.
And I'll just add mine. Thank you, Jennifer. And thank you all – all of you analysts, journalists, shareholders and investors, we appreciate your interest in Sotheby's and we wish you a good day.
Ladies and gentlemen, thank you for participating in today's conferences. This concludes the program and you may all disconnect. Have a great day everyone.
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