BID
#Great, thank you, Liz.
Good morning and thank you for joining us today.
With me here are Tad <UNK>, Sotheby's President and Chief Executive Officer, and Mike <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, are provided in the Company's Form 10-Q for the period ended March 31, 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 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 see our Investors webpage for a transcript of our prepared remarks.
Now I will turn the call over to Tad.
Good morning, thank you for joining us and for your interest in Sotheby's.
I'm delighted to be here today with Sotheby's new Chief Financial Officer, Mike <UNK>, who joined us at the end of March.
I would like to thank our esteemed Director, Dennis Weibling, for so ably guiding us in that role on an interim basis since the end of last year.
I would also like to take a moment to thank Bobby Taubman who elected to retire from the Board.
Bobby brought great insight, wisdom and passion to Sotheby's over his 16 years as a Director and we will miss him and the spirit of his wonderful family.
We would also like to note the passing of our longtime Director, John Angelo earlier this year.
John brought incredible energy and wisdom to Sotheby's and we were fortunate to benefit from his leadership and financial expertise over the past eight years.
Now let me turn to the results for this quarter.
As we said on our last analyst and investor call, we generated a significant loss in this quarter, mainly attributable to two factors.
First, at the end of 2015, it was clear that the significant market growth experienced in 2014 and the first part of 2015 had slowed somewhat.
Consequently, we experienced a 35% decrease in net auction sales during the quarter when compared to the exceptionally strong quarter of a year ago.
This was most acutely felt in the London auctions of Impressionist, Modern and Contemporary art in February, but it was consistent with all other signs in the marketplace for this period.
Second, we returned to our normal pattern of quarterly seasonality.
As a reminder, the auction calendar and our business are highly seasonal, with the majority of our most significant sales occurring in the second and fourth quarters.
At the same time, our expenses are more evenly spread over the year, which then generally leads to losses in the first and third quarters, and income in the second and fourth quarters.
To underscore this more fully, over the past 25 years, we've generated a loss 22 times in the first quarter.
Despite an overall decline in auction sales during the quarter, there were a number of bright spots, affirming that the appetite for great works of art remain unabated.
For example, in New York in January we had our best Old Master results in five years and our star lot, a Baroque masterpiece by the artist Gentileschi, was purchased by the J.
Paul Getty Museum in Los Angeles for a record $30.5 million.
In London in February, six bidders fought for a stunning portrait by Lucian Freud, sending the final price to $23.2 million, well above expectations.
Similarly, a sculpture by Auguste Rodin set a new benchmark for the artist at auction when it sold for $16.7 million, above the $11 million high estimate.
Our Asia Week sales in New York were also solid, and I will elaborate on Asia and our recent Hong Kong sales in a moment.
Turning now to what we are experiencing so far in the second quarter of 2016.
Our sales in Hong Kong in early April were much-anticipated both for the quality of works we assembled and the intelligence those results would provide about the mindset of collectors in Asia.
The series totaled $405 million, exceeding our expectations and representing a 17% increase on the same sales a year ago.
One particular highlight was a 50-minute bidding battle for a masterpiece by one of the most celebrated masters of Chinese painting, Zhang Daqian, which finally sold for $34.7 million, more than four times the high estimate of $8.3 million and a new auction record for the artist.
Bidders form greater China were active and focused on computing for works of outstanding quality they felt were priced well.
At the end of April in London, we presented Orientalist and Middle Eastern Week ---+ a group of five sales celebrating the history of Middle Eastern art ---+ that realized a combined total of $22.6 million.
70% of the 600 lots sold brought prices above their high estimates and eight new artist records were established.
We held two important jewelry sales in April and we have additional major sales taking place in Geneva and London later this season which I will elaborate on in a moment.
The sales thus far have been solid with some outstanding prices including $31.8 million achieved for the De Beers Millennium Jewel 4 in Hong Kong, but our sell-through rights (sic) have been a bit weaker than we have experienced in recent seasons.
Overall however, the results of the jewelry auction market are in line with a year ago and we're looking forward with cautious optimism to our upcoming sales.
Before we turn to a preview of our upcoming sales, let me take a moment to provide updates on two important strategic initiatives: first, our push to engage with our clients and buyers online; and second, an update on the integration of Art Agency, Partners.
On the past calls I've gone into detail about our digital developments, particularly our commitment to expanding and engaging our audience and how we have made progress.
Between our own site and are partner work of Invaluable, and their network of 4,000 auction houses, dealers and galleries, and eBay and their 145 million buyers, Sotheby's has the largest audience of online buyers anywhere in the art world.
We continue to reach and engage new and existing audiences through a variety of tools including our social media network, the largest and fastest-growing in the marketplace; multiple distribution efforts including our Apple TV app, which has contributed to a 187% increase in her video views; and our iPhone app, which we launched in early March and was rated 4.5 stars out of 5 on the app store.
We also recently released an updated iPad app and will continue to improve both products through the summer.
The key point is engagement ---+ clients are spending in excess of 60% more time on our website than our nearest competitor.
And we know that clients who engage with the editorial content and videos we produce are 33% more likely to register to bid.
As of mid-April we have seen a 32% increase in online bidders and a 31% increase in online buyers, leading to a 60% increase in lots sold online.
And we are seeing this interest and engagement across all categories ---+ for instance, at a recent Old Master and British paintings sale in London, 32% of all lots sold by volume went to online bidders.
With respect to Art Agency, Partners, it has been three months since the team from AAP joined Sotheby's and I'm pleased to report that things are going well.
While some employees remain dedicated to advisory services exclusively, others have expanded their roles rather comfortably into Sotheby's core business.
We are working on expanding the advisory business and have a number of potential new clients, some of whom come as a result of the reputation of Art Agency, Partners and their principals and others who have been introduced to the services we provide through Sotheby specialists.
We have begun to take some important steps in developing our framework to expand Sotheby's private sale activities.
Dedicated spaces, staff, and an incentive compensation structure that is transparent and designed to promote collaboration are all among the topics being strategized in this initial phase.
Now let's take a look at some of our upcoming sales.
This season in New York we changed our schedule to offer our major auctions of Impressionist, Modern and Contemporary Art in a single week to capitalize on the evolving taste of collectors and allow for a longer presale exhibition period.
We made some improvements to our galleries, significantly expanding our exhibition space and updating the aesthetic, all the while spending very little capital.
We are now able to show more than 900 works of art simultaneously and seamlessly integrate different categories.
Like our February auctions in London, and reflecting the current market conditions, this week's sale of Impressionist, Modern and Contemporary Art are smaller than a year ago ---+ down 38% at the midpoint of our expected ranges ---+ but we are very pleased with what we have assembled.
The sales are well curated with a lower level of guarantees and we anticipate good results.
Highlights from tonight's sale of Impressionist and Modern Art include two Fauve masterpieces: Andre Derian's 1906 view of the Thames, Les Voiles rouges, and Maurice de Vlaminck's 1905 landscape in Chatou, Sous-bois, which are estimated at $15 million to $20 million and $12 million to $18 million respectively.
Also on offer is a striking Pointillist painting of Saint-Tropez by Paul Signac from 1892, Maisons du port, Saint-Tropez, which is estimated at $8 million to $12 million.
And on Wednesday the evening will be led by a stunning example of Cy Twombly's famed Blackboard series.
The canvas was acquired by the current owner directly from the artist's studio after it was executed in 1968.
The night will also feature Two Studies for a Self-Portrait by Francis Bacon, which carries an estimate of $22 million to $30 million.
Our Magnificent Jewels and Noble Jewels sale in Geneva later this month carries a low estimate of nearly $150 million and features some superb gemstones and signed period jewels, all predominantly from private consignors and fresh to the market.
The sale is led by the Unique Pink, a supremely rare and exceptional fancy vivid pink diamond weighing 15.38 carats, which is estimated at $28 million to $38 million.
We have also been entrusted with the sale of the Lesedi La Rona, an 1,109 carat rough diamond discovered in Botswana last year, which has the potential to yield to the single largest top quality polished diamond in existence.
The sale will be held in London in late June.
On our last earnings call, we said that we did not expect sales levels for the full year 2016 to reach the annual sales levels of 2014 or 2015.
And as of right now our view remains unchanged.
However, as I just outlined, recently we observed a number of positive indicators, most notably our Hong Kong sales series which was up 17% year over year.
Of course, our most significant data points for the second quarter kick off tonight with a number of important auctions to follow in the coming days, so the next two weeks you provide all of us with a lot of good market intelligence.
Until then, we will remain cautiously optimistic.
From an earnings point of view, our quarterly pattern of stronger second and fourth quarter should hold true.
Historically approximately 80% of our yearly sales volume fall in the second and fourth quarters, particularly in light of the fact that our London summer evening Contemporary sale will return to the second quarter this year.
In 2015, the Contemporary evening sale occurred on July 1, at the very start of the third quarter, bringing $137 million in net auction sales for that quarter.
With that I think it makes sense to turn things over to my colleague Mike to provide some context on the numbers from the first quarter.
Mike.
Thank you, Tad.
This morning we are reporting a first-quarter adjusted net loss of $22.3 million and adjusted diluted loss per share of $0.35 compared to adjusted net income of $7.4 million and adjusted earnings per share of $0.11 a year ago.
The adjusted figures exclude charges related to contractual severance agreements, the voluntary separation program, CEO separation and transition costs and restructuring charges.
As Tad has already referenced, and as our recently filed 10-Q reflects, the story behind these financial results is mainly about the lower state of the art market and a return to our normal quarterly seasonal pattern following an unusually strong first quarter in the year ago period to which we are comparing.
In the Agency segment we experienced a 35% decline in net auction sales, a 25% decline in private sales and a loss from our inventory activities.
From publicly available data, we know other players in the market have experienced similar declines in their net auction sales, so clearly we have all faced a softer market for art sales in the first quarter compared to last year.
Completely consistent with this pattern, our Agency segment gross profit was down 42%, or $48.1 million, versus the same period a year ago.
Gross profit takes into account all of our Agency commissions and fees and associated direct costs as well as the impact of inventory activities, so it is highly sensitive to market conditions.
Most tellingly, on a consolidated basis our adjusted operating results declined from quarter to quarter by $48.4 million, thus indicating the decline in Agency segment gross profit accounted for nearly 100% of the swing in results.
In a nutshell, that is the major takeaway of this quarter: lower Agency gross profit driven by softer market conditions.
For those who want to dig deeper into the results for this quarter, I would point you to the following.
On a positive note we experienced an improvement in our auction commission margin, to 15.4% from 15.0% a year ago.
If you exclude the impact of the $22.5 million in net sales from the Taubman Collection in the first quarter, the margin improvement was even greater, from 15.0% last year to 16.2% this year.
While much of this improvement is attributable to a shift in mix towards higher-margin sales, part of this improvement can also be attributed to greater pricing discipline.
Within the detail of our expense breakout, you will see a $5.2 million increase in our salaries and related expenses.
Two factors account for more than 100% of this increase.
First, we incurred $6.1 million in contractual severance agreement charges related to departed senior level executives in Q1; and secondly, we recorded $2.2 million related to the earnout obligations arising from the recent acquisition of Art Agency, Partners that GAAP requires us to record as compensation expense.
To arrive at our adjusted operating loss, we are adding back the effect of the contractual severance agreement charges.
Finally, while our Finance segment experienced a slight decline in gross profit dollars versus last year, this was principally due to the greater leverage we have achieved with the dedicated credit facilities for Sotheby's Financial Services.
The most important metrics for this business, a finance revenue margin of 10% and a trailing 12-month return on equity of 16.3%, illustrate the advantages of our business model and our funding structure.
With respect to the balance sheet, the biggest story of the quarter is 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.
You might recall that in January, we started buying shares on the open market, and then we continued buying shares through a 10b5-1 program while the trading window was closed late in the quarter through tomorrow.
I am pleased to report that since the beginning of this year we have purchased 8 million shares at an average price of approximately $24 per share for a total investment of $193 million.
This represents 12% of the shares that were outstanding at the end of the year.
The benefits of this buyback are twofold.
First, we believe the purchase of our own stock is currently the best way to deploy cash not needed for reinvestment in the business.
The second benefit is that we will now be reporting our net income on much smaller number of shares outstanding, and all other things being equal, we will experience significant accretion on an EPS basis as a result.
Since we plan to continue making open market purchases once the trading window opens, we thought it best to advise to you that we've recently been advised by an outside investor that they may make purchases of our stock, whether through the open market, privately negotiated transactions, block trades or derivative transactions, to bring their holdings to at least 10% of the shares outstanding.
And they filed the necessary documentation under the Hart-Scott-Rodino Act that would allow them to do so.
Of course, they have no obligation to purchase stock and they could decide for any reason not to do so.
As for our overall liquidity, we closed the quarter with approximately $414 million in cash even after giving effect to the first quarter stock repurchases.
We have been relatively cautious on guarantees as indicated by our current net guarantee exposure of $72 million.
But let me conclude by saying just how pleased I am to be here at Sotheby's and how exciting I think the prospects are for our Company.
Yes, we have the normal ebbs and flows of the art market to deal with, along with its pattern of quarterly seasonality.
But we also have everything we need to succeed in this business in the long-term, starting with the very fine people here.
And I'm confident we are all working on the exact right issues with the appropriate amount of energy and urgency.
So Tad and I are now happy to address your questions.
Okay, let me try to break that into three pieces.
Let me first, if I might, <UNK>, clarify your characterization of my view.
When you said it it leaned a bit toward cautious.
And I think I chose the words cautious optimism.
I have to tell you I am reasonably optimistic.
But I am cautious given the fact that we have limited visibility over the next two weeks.
I observed that two other houses did reasonably well last night.
There has been a lot of interest and enthusiasm for what is going on here, what we have, our sales and things like that.
But the plain fact of the matter is until the hammer comes down we are just not sure.
So, I would say rather than lean to cautious or lean to optimism, I am at a rough balance.
But I would say there were some important signals in what Mike said, particularly about disclosure and we plan to continue making open market purchases.
Because frankly, if we do as we would like to do in the next few weeks, when I said in the prior earnings call we are going to have one or more bad quarters, I think we are going to keep it to one.
So, I am reasonably ---+ I feel good about things.
On the online side, wow, what surprised me.
Well, I am just thrilled with it.
I wouldn't characterize it as surprised.
In terms of the traction we are getting, in terms of the way that the team is executing, in terms of the results that we are getting, in terms of the size and resonance of purchases being made through it, all of it is very encouraging.
And I think we are just beginning to come down the curve on that.
If you think about ---+ our mobile apps really only a month old.
And one of them is only a week old.
So, we have got a lot of opportunity there.
And if you think about the benefits of an electronic on-ramp, as my colleague, <UNK> Goodman, likes to call it, to Sotheby's, which is very low risk as opposed to walking into our business or registering in a phone or something like that, it is a much more embracing and easy way to get in.
So one should expect that the demand curve for our services should expand and that the number of bids per lot should rise over time as we keep adding more and more bidders and getting them more and more comfortable with us, with our brand, with the great stuff that we have and with the opportunity to do and see what we see.
As you look five years into the future, I don't think it has materially changed since what I said in any of the prior calls.
I think what you would see is a greater and more exciting Internet proposition.
You would see significantly more private sales.
You would see a more robust and thoughtful and actually high impact dispersion of our resources around the world with where we are in connection where emerging wealth pockets are.
You would see some interesting growth in jewelry.
I think you would see some interesting growth in the various parts of the middle market, which I think are very attractive.
And I think you would see us doing very well in the high end of the art market.
I think I covered all of them, <UNK>, but I am not sure.
Well, thank you, <UNK>.
That line is of course highly dependent on the mix.
But I would echo Tad's optimism on this line as well.
We have now had two quarters in a row of improvement and I think we are comfortable with the direction that that line is heading as well.
Yes.
<UNK>, let me first talk about salaries and expense structure because I think that is where it tends to be most variable and probably what people were referring to in past discussions.
If you look at our comp expense the total change period to period on a reported basis is $5.2 million, that looks to be up 8%.
But we need to point out there are three items in there which kind of make that a little bit confusing.
First and foremost, that is aligned where the severance ---+ contractual severance agreement obligations are that we believe should appropriately be added back in a non-GAAP context.
That is $6.1 million of the change.
So that accounts for more than 100% of the $5.2 million change.
Also in that line is the earnout for our agency partners, that is another $2.2 million.
That really could conceivably also be added back, but we choose not to because we are characterizing it as compensation expense.
But that is fine; that is a bit of a oddball type expense to be included in there.
And then you will see in the footnotes of our 10-Q, also included in there is $1.2 million of accelerated share-based compensation expense for those same group of people who are departing that account for the $6.1 million in cash severance obligations.
So if you take out those $4.3 million of expenses, our compensation expense is actually down 7% period to period.
A lot of that is because of improvements we have made in the UK with respect to our pension obligations there, and other share-based compensation expenses, again proving the variability of our comp expense.
So, I think the appropriate way to really look at comp expense is that it is down 4% ---+ I'm sorry, 7% period to period.
As for the rest of the G&A, there were three items kind of worth calling out there.
First, our travel and entertainment expense is down $1.5 million, that is a variable type expense you would expect to see happen in slower art markets.
They were offset by two major expense items: one was a $1.3 million increase in the digital initiatives that we think are critical to improving the client experience here, and Tad talked about the benefits of those.
And then a $1.8 million increase in professional fees associated with some litigation and tax matters that we are battling.
We should probably add ---+ <UNK>, you probably know this.
But with the exception of the amortized earn out of the full-year incentive compensation we accrue in the second and fourth quarters, for what it is worth.
I think it is best to wait and see the next couple weeks before saying anything more than what I said on that.
Because really the last big data points we had outside of Hong Kong were way back in early February.
And we have had lots of little medium to small sized sales since from around the world.
But I think the next two weeks is really going to tell a lot.
And I would hesitate to go beyond what I said earlier.
Let's wait and see.
But as I said, I am cautiously optimistic.
Interest level on the lots, number of bidders on the lots, enthusiasm for the lots, visits, visitor counts, how we are seeing our salespeople and how they are seeing their clients, a feedback from the marketplace for the trade, all those things.
None of them are particularly surprising, but that is where we are focused at the moment.
Thank you, <UNK>.
Very near the end.
Let me pause as I think about what I want to say ---+ just give me a moment on it because it is competitively sensitive.
As you think about the private sale process, there are several things one needs to make it work well.
First, one needs insight on where things are and insight on who wants them.
Second, one needs a very, very buttoned up process that is compliant that connects those who have things to those who want them in a way that is client friendly and is transparent but clear and discrete and careful.
Then you need a group of individuals in our organization that have all of those motivations.
And then finally, you need a reward system and then a management system that tracks progress and provides feedback into that process.
We have a terrific team, which is one of those areas, but on some of the other pieces of that value chain we have got a little work to do.
No, we are not going to say anything.
Let me deal with the guarantee part of the question first, <UNK>, and then let me make sure I got the second part clear.
On the guarantee part of the question, guarantees are essentially, as you know, a liability that might turn into a use of cash that we expend to generate profit.
And as such it needs to be thought of as one of many different levers that we are constantly using up and down the balance sheet to maximize the value to shareholders.
At a time when it makes ---+ when there is a fair bit of inflection point in the market and when we have lots of attractive uses for our cash, the combination of those two alone should make one, I think everything else being equal, conservative on guarantees.
They don't scream high value for shareholders when you have those two situations and those are exactly the situations we are in.
And, by the way, we might be in that situation for quite a while.
And so as a consequence, I as a shareholder, but also as a management who works for all of the shareholders, am going to be very conservative and careful on guarantees and continue to be so.
On the second part, I would say that the evolution of the Company is in a very encouraging place.
We have got an extraordinarily talented group of people.
The relationship between the various parts of our business is exciting and I feel very good about it.
If you wanted to ask a more specific question about that second part, <UNK>, I will need it again.
Yes, I am not really connecting the Art Agency, Partners acquisition to anything necessary about guarantees.
But I need to think it through more clearly because there is probably some nuances I am missing.
But the one thing I would certainly say is that the advisory business brings us very close and deeply in touch with the end collector's needs and wants and also sharpens our skills on providing solutions to them.
Because the art market is clearly complex and in a state of interesting and exciting and evolving change.
And having ---+ advising people on that.
And by the way charging for the advice on it means that you have got to be really on your game and really close to it.
And that I think keeps us sharp.
Insofar as that level of raising the bar on the need of solving the problems of end collectors also will color or actually maybe change the way we think about guarantees or changes or structure in some way.
That is a very provocative idea.
I will have to think about it, and I think Mike and the rest of the management team will give it some thought.
It is a bit early to say, because so much of the second quarter sales haven't really happened yet.
So I think we should just wait and see.
We are very pleased with our sales.
We are very pleased with the position we have in Modern Impressionists, Contemporary ---+ we love the evening sale of Contemporary by the way.
We love our jewelry position.
We feel very good about it.
And I think we made the point earlier that we are very, very focused on running the business for the benefit of our clients, and also for the benefit of our shareholders, because that is what our employees want.
And so, I don't think the idea that we would be racing to do risky or low margin vanity deals just to pump up the market share numbers is necessarily on our table right now.
Well, we still have just a little bit north of $130 million available to invest from the previous $325 million authorization.
We are certainly going to be watching the market closely, feel good about the investments we have made to date.
Feel like the two reasons we have done it, namely it is a great use of cash that is not otherwise required to be reinvested in the business.
And then secondly, we like the accretive impact it has on earnings per share.
I would expect us to continue investing up to the remaining authorization.
Mike, thank you.
Jennifer, thank you.
Thank you all for joining us and let's get on with the sales.
Take care.
