BID
#Thank you, Nicole.
Good morning and thank you for joining us today.
With me here is Bill <UNK>, Sotheby's Chairman, President, and Chief Executive Officer; and Patrick <UNK>, 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 the non-GAAP financial measures used in this earnings call, as well as reconciliations to the comparable GAAP amounts, is provided as an appendix to the outline of this call which can be found on the Investor Relations section of the Company's website.
Also during the course of this call, the Company may make projections or other forward-looking statements regarding future events or the future financial performance of the Company.
We wish to caution you that such projections and statements are only predictions and involve risks and uncertainties, resulting in the possibility that the actual events or performance will differ materially from such predictions.
We refer you to the documents 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.
Please also see our investor webpage for a slide presentation which outlines Sotheby's full year financial results.
Now I will turn the call over to Patrick.
Thank you, Jenny.
Good morning, everyone.
Thank you for joining us and for your interest in Sotheby's.
I want to begin by thanking my colleagues here at Sotheby's for a job well done in the fourth quarter and now into the new year.
In the fourth quarter, the team flawlessly executed landmark sales such as the property of Mrs.
Paul Mellon, the record-setting Impressionist and Modern Auction in New York, and the Collection of Winston Churchill's daughter, Mary Soames.
As Bill will discuss, the team is right back at it in 2015, with market-leading sales in Old Masters in New York and both Impressionist and Contemporary in London.
Ours is the best team in the business and they are executing at a high level for our clients and our shareholders.
Now on to the results.
With a strong global art market and increased sales worldwide, we achieved a 20% improvement in adjusted operating income in 2014.
Importantly, in a growing market, costs were very well controlled and are ahead of our prior guidance.
This time a year ago, we announced we expected a decrease in professional fees, other general and administrative costs, agency direct costs and marketing expenses totaling $22 million, assuming a similar level of net auction sales to 2013.
We have succeeded in realizing a decrease of $33 million in these areas, a 50% improvement over our original projection.
As a result, total adjusted expenses in 2014 are flat with the prior year.
Moving to the detailed financial information on slide 3, and beginning with our overall results, 2014 adjusted net income is $142.4 million and adjusted diluted earnings per share is $2.03, in comparison to $130.8 million and $1.89 per diluted share a year ago.
The adjusted net income figures exclude restructuring and special charges, as well as CEO separation costs.
Now let's look at each of our main operating segments.
Starting with the agency segment on slide 4, we continue to see growing revenues on strong auction sales.
In 2014, agency gross profit increased $30.5 million or 4% to $729.6 million.
A $70.4 million or 10% increase in auction commission revenues resulted from a 19% increase in net auction sales over the year.
Auction commission margin decreased from 15.9% to 14.7% in 2014, due to competitive conditions for winning high-value consignments as well as sales mix, as 2014 saw a shift in the proportion of properties sold to the higher-priced bands of our buyer's premium rate structure.
Keep in mind that 2014 included our successful execution of high-profile sales in the fourth quarter, such as the series of sales from the Mellon Collection, which came with margins consistent with highly competitive consignments.
So far in 2015, we are seeing more normalized auction commission margins.
In order to enhance revenue and strengthen auction commission margins and fund innovation, we enacted a new buyer's premium rate structure that became effective February 1.
Offsetting the gains in auction commission revenues, private sale commissions decreased $28 million or 32% in 2014, when compared to the prior year.
2014 did not experience the significant level of individual high-value transactions we saw in 2013.
Favorably affecting agency gross profit is a significant reduction in auction direct costs as a percentage of net auction sales, from 1.78% in 2013 to 1.55% in 2014.
We established a goal to reduce this cost by 10 basis points for the full-year 2014, when compared to 2013.
As a result of increased efficiencies and spending controls implemented throughout 2014, we exceeded this goal and achieved a reduction of 23 basis points.
Turning to slide 5, the increase in principal revenues and cost of principal revenues in 2014 is largely due to sales of property acquired from a potential consignor in lieu of the agency segment providing an auction guarantee.
Moving to slide 6, we are pleased with the growth of Sotheby's Financial Services and our ongoing process of debt funding this business.
The finance segment average loan portfolio balance for 2014 was $583.3 million, a 35% increase from the prior year.
Finance segment revenues increased $10.8 million or 35% in 2014, reflecting the growth of the portfolio.
Finance segment gross profit, which is net of borrowing costs, increased $3.1 million or 10% in 2014.
As previously announced, we have established a separate capital structure for the finance segment that provides for the debt funding of loans through a dedicated revolving credit facility.
Debt funding the one portfolio reduces the finance segment's cost of capital and enhances returns.
Recently, management reduced targeted return on equity for the finance segment from 20% to 15%, to allow for additional investment to drive growth.
We have added staff to this segment to drive business and increase growth of the loan portfolio.
We also have certain foreign loans and loans that are ineligible for borrowing under our revolver, which affect the overall returns of the portfolio.
Slide 7 is an update of a chart we used last quarter.
I mentioned earlier that at this time last year, we identified opportunities for savings of $22 million in certain categories of expense, and we ultimately delivered $33 million in savings or 50% more than originally expected.
Salaries and related costs increased $13.5 million or 5% in 2014, as compared to the prior year.
This is partly due to a $7.6 million or 5% increase in full-time salaries due to the impact of midyear strategic headcount, salary increases in 2013, as well as targeted salary increases in 2014; and was marginally offset by headcount reductions carried out in the second half of 2014, as a result of the 2014 restructuring plan.
Also contributing to the increase in salaries and related costs is a $5.1 million or 9% growth in incentive compensation expense, principally due to the higher level of earnings as measured by adjusted EBITDA relative to the prior year.
As you can see on slide 8, incentive compensation as a percent of adjusted EBITDA was 21% in 2014, which is a bit below the 23% to 24% ratio in 2010 and 2013.
Sotheby's effective income tax rate was 39.2% in 2014, compared to 30% in 2013.
This increase in 2014 effective income tax rate over the prior year was caused by two income tax benefits that were recognized in 2013, for which there were no comparable benefits in 2014.
Based on our recently completed financial planning process, we are announcing a number of expense estimates for 2015, which are outlined on slide 9.
Direct costs as a percent of net sales is expected to grow approximately 5 basis points in 2015 as compared to 2014, in order to support new middle-market auction sales.
Therefore, we are keeping 18 basis points of the improvement we delivered in 2014.
For marketing expenses, an approximate 10% increase was targeted net of revenues from advertising, primarily for a revamped marketing strategy to increase brand preeminence and accessibility.
For full-time salaries, a 4% to 5% increase from 2014 is currently expected, largely due to investments in collecting categories and activities with the highest potential for growth, as well as inflationary salary increases.
This is net of savings from the restructuring plan initiated in 2014.
Staff reductions and unfilled vacancies associated with the restructuring plan will result in annualized savings of approximately $13 million, of which $11 million is being reinvested through the addition of new staff in support of growth.
We expect professional fees to increase 3% to 4% compared to 2014, due to senior-level recruitment expenses including the cost of recruiting a new CEO, and consulting fees associated with certain board level strategic initiatives, among other items.
Lastly, other general and administrative expenses are estimated to grow 2% to 4% due to facilities-related expense as well as higher travel and entertainment expense from increased business getting activities.
Sotheby's and RM Auctions, the world's foremost collector car auctioneer, recently announced the formation of a new strategic partnership which is branded RM Sotheby's, as Sotheby's acquired a 25% ownership stake for just more than $30 million.
This long-term investment comes as the more than $2 billion market for the finest collectible automobiles continues to grow, presenting increasing opportunities for both companies.
Over time, Sotheby's will have the ability to expand its ownership stake as the partnership evolves and grows.
Work between the two teams is well underway and is going smoothly as we head into a busy spring season for Sotheby's and RM Sotheby's.
Rob Myers and his entrepreneurial team built the best team in the sector, and we are very pleased to partner with them.
At this time, I would like to hand the call over to Bill <UNK> for his remarks.
Thank you, Patrick.
We have experienced exceptional auctions and continued strong global demand in our sales year to date.
Competition for the best works is robust in this strong market, and we are certainly winning our share of those and, of course, this keeps commission margins under some tension.
But as Patrick said, those margins appear to be stabilizing year to date.
2014 saw double-digit sales growth in many important categories: Impressionist, Modern, Contemporary, Jewelry, Old Masters, American art, among others.
More than a third of our categories had the highest level of sales in our history.
Across Sotheby's worldwide auctions, one-third of our buyers in 2014 were new to us, accounting for about a fifth of global sales.
Sotheby's dominated in Asia where we had over $900 million in sales, and Chinese buyers purchased more than $1 billion and did it across our sales rooms globally.
On the digital front, some figures offer important vantage points.
We saw 25% more buyers online in 2014 than the previous year.
The number of digital catalogs being reviewed is now four times what we see people reviewing in print, a complete reversal from only a few years ago.
And in our key categories like Contemporary and Impressionist paintings, even more catalogs are being reviewed digitally.
Stay tuned for the eBay partnership where we will be experiencing truly large audiences interacting with authentic works of art for the first time later this spring.
2015, as I've indicated, is off to a good start.
Our January Old Masters week in New York totaled over $79 million, and our February sales of Impressionist and Contemporary art brought well over $0.5 billion.
We are leading the market in all three of these categories this year.
We have an important Contemporary sales this week in New York and another important Contemporary sale next week in London.
Later this month in New York and next month in Hong Kong, we have our Asian sales series.
Also next month, we're offering a perfect 100-carat emerald cut diamond with a presale estimate of $19 million to $25 million in our New York Magnificent Jewelry sale.
Our friends at RM Sotheby's have a sale on March 14th in Amelia Island, Florida, with a presale estimate of $58 million, which is an increase of 61% compared to their same sale last year.
We wish them great success.
As is usual this time of year, we are very much in the middle of property gathering for our spring sales, and those efforts are progressing well.
These sucesses really highlight the breadth and depth of Sotheby's expertise and demonstrate our ability to deliver results for stakeholders.
In short, we are reaching more collectors in more corners of the world through more channels.
We'll look forward to your questions now.
That concludes our prepared remarks.
Sure, so I think there was two questions.
First was just on 2015, and what we've seen so far.
And it sounded like the second was asking for a little more clarity on the marketing comments.
On 2015, it's still early in the year, obviously.
But what we've seen so far with our sales, we've had an Impressionist sale and a Contemporary sale in London.
We did an Old Masters sale here in New York.
And what we've seen, as Bill commented, the margins have been consistent with what we've seen in previous periods.
So we haven't seen what we saw in the fourth quarter of last year, which was very successful sales, high profile collections that ended up coming with relatively skinnier margins.
This year is more of a return to the more normalized environment.
In terms of the marketing plan, what we were intending to communicate there was simply that ---+ and you saw this last fall when we launched our new advertising campaign for our sales ---+ we are continuing to that.
We are broadening the scope of that.
We are trying to make sure that we continue to support the sales, and that we're also putting our best foot forward in terms of our overall brand.
And we think it's a smart investment this year, and to make sure that we're continuing to push on that.
It doesn't represent a change in strategy, <UNK>, to your question.
It's continuing to support that marketing plan that we launched in the second half of last year.
Sure.
In terms of capital return, I would just point you to the press release that we put out a couple of weeks ago.
Where the Board stands right now is they're very focused on the CEO transition, and at this time it makes sense to hold off on capital return.
In terms of how we are thinking about liquidity, and there will be disclosure, obviously, on all of this in the 10-K, and that will go through where we stand in terms of borrowing availability.
But currently, we don't have anything borrowed on the revolving credit facility in support of the agency business.
We still have some availability on the Financial Services side.
That portfolio has continued to grow.
And all the new ones that we've put in place are eligible for the credit facility, so we have fully funded those and that's what we will continue to do in 2015.
And we've still got some headroom in that facility to further grow that portfolio.
Thanks, <UNK>.
I will start with the, particular, the February sales in London.
We are against a backdrop of some instability in Russia and questions about Chinese growth.
You could have seen in those high-profile Impressionist and Contemporary sales some hesitance or reticence to bid on those quality offerings.
In fact we saw just the opposite.
Strong demand, strong commitment towards wanting to acquire great works of art leading to, among other things, the highest price for a Gerhard Richter in, I believe, living artist in the marketplace.
So whenever you are saying strong demand, that tends to facilitate discussions with people who are thinking about selling works of art, because the market is clearly open and demand is strong.
So as is the case of this business with very limited visibility, all I can say about deals, what's been announced and what's underway, is that there's a bunch of very active discussions and opportunities which we are engaged in.
I'd point you in particular to a sale next week in London of Contemporary art from an individual collector which I am hearing good things about, and think is promising as a sale event for the Company.
I think that the guarantee book is remarkably opportunistic in terms of what flow we see and what the particular appetites of those sellers are.
I think you will see in the filings which will be out right after this call that we've got an unhedged guarantee position at present of I think quite a modest between $40 million and $50 million, and so we will see what comes forward.
There's a bunch of opportunity.
Some of it we hedge, some of it we hold, and sometimes our decisions are extremely rewarding and sometimes they're not.
I think as the Company sees opportunity that it's confident in, it will continue to deploy capital.
But I can't give you a rising or a declining tide narrative that's on point, because it's so responsive to the deal flow which we are presented with.
What we've said is when you look at the ---+ we look at the guarantee portfolio in the aggregate.
So it includes, obviously, what we make in terms of buyer's premium, the objects that are sold.
And it includes what we either make or lose on the principal side.
And when you look at it in the aggregate, the guarantee portfolio is profitable.
So the third question was growth; the second question was just a change in philosophy in terms of the restructuring.
What was the first one.
Well, the plan was announced in July of 2014, and we began execution shortly after that.
So there's some benefit that's reflected in the fourth quarter of 2014m but the lion's share of it will show up in 2015.
We haven't disclosed the specific number that hit in 2014.
In terms of philosophy, no, there's no change at all.
We had always talked about what it made sense to do was dial down the levers in certain areas so that we could dial them up in other areas where we saw opportunities to grow.
So that has been very consistent philosophy throughout.
And that leads to the third question in where are we thinking about growing.
I think a clear example is the middle market, and we mentioned that we expect to see our auction direct costs go up a little bit in 2015, because we will be investing in supporting those sales.
And it's a similar story when we think about people, and we need to have the right people in place both on the consignment side and in some cases the client management side to make sure that we can go ahead and source that property and effectively sell it.
So what we try to do is think about our strong categories where we see further opportunities for growth, and go out and make sure that we've got the team in place to continue to push on that.
We study it.
As I think you may recall, we did a very significantly larger number of transactions privately in 2014 than we did in the prior period.
But indeed, the aggregate value of the works and a number of the highest dollar lots were not included in 2014 as they had been in prior periods.
I don't see a meaningful shift in seller mindset.
Certainly big auctions and successful outcomes tempt people towards auctions, and those opportunities to pit bidders against one another are buffered in some circumstances by some individuals' appetite for privacy and certainty around a transaction.
So how those get put in the blender and how they all are expressed on a quarter-to-quarter basis is uncertain to us, as well as to you as investors.
What I said, <UNK>, is a 25% increase in the number of buyers of works of art at Sotheby's through online.
We had ---+ I'm not going to dig out the statistic in terms of works of art, very high value works of art, that were sold through an online channel.
I think it's in the press release for the year.
Let me see if I can find it.
It's that 10 lots were sold for more than $500,000 to online bidders across the sales room and categories, and we had a 20% increase in new bidders online in 2014 compared to the prior period.
And as I said, 25% more buyers online in 2014 compared to the prior period.
The high point for us in terms of a formula that was very successful, both in terms of an offering and a form of online engagement, was the collection of Mrs.
Paul Mellon where we had 71% of the lots having bids placed for them online, and 30% of the buyers were online.
So here was a large sale that included a number of reasonably priced and midmarket lots, a famous seller with a recognized name, a beautiful set of catalogs; and all that aggregated to a very large number of people wanting to participate online.
So we are continuing to see traction there.
Yes, consistent with what we talked about last year.
We are now targeting something in the high 30s.
The way we think about it, if you look at the business working down the income statement, we've produced $300 million of EBITDA in 2014, just short of that, $278 million of EBIT.
And when you get to the net income line, obviously the change in tax rate is a meaningful issue there.
But from a profitability standpoint, we think we've got the business performing well.
We have expanded our operating margins this year compared to last year.
Again, if you look at the EBITDA margin, that has gone up by close to 300 basis points; it's similar on the EBIT margin.
So we are seeing an expansion in operating profit.
We are seeing a return to having operating leverage in the business.
And as we continue to drive growth, we'd expect to see more of that.
So we do think that from a margin standpoint, the business is performing well and headed in a good direction.
Thank you all very much for your ongoing interest in Sotheby's.
Wish us a good next couple of weeks, in particular in the Contemporary marketplace and in the Asian sales as we end the quarter and begin the second quarter.
Thanks very much and have a good spring.
