BID
#Great.
Thank you, Candace.
Good morning, and thank you for joining us today.
With me here are Tad <UNK>, Sotheby's President and Chief Executive Officer; and Dennis <UNK>, Interim Chief Financial Officer.
GAAP refers to Generally Accepted Accounting Principles in the United States of America.
In this call, financial measures are presented in accordance with GAAP and also on an adjusted non-GAAP basis.
Also, during the course of this call, that 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 Form 8-K that was filed this morning regarding this announcement, which includes an explanation of the non-GAAP financial measures used on this call, as well as a reconciliation to the comparable GAAP amount; and the Company's most recently formed 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.
I should also remind people that the transcript for the prepared remarks are available on our website.
Now, I will turn the call over to Tad.
Thank you, Jennifer.
Good morning.
Thank you for joining us, and also for your interest in Sotheby's.
This morning's call is to discuss a number of announcements.
First, I will begin with the pre-announcement our fourth-quarter earnings.
Of course, these pre-announcement figures are preliminary, and subject to change given the year-end financial close and review process, as well as events occurring after this call.
We plan to have a full report of earnings in late February, as regularly scheduled.
Adjusted net income for the fourth quarter of 2015 is estimated to be $75 million to $79 million.
And adjusted diluted earnings per share is estimated to be $1.11 to $1.17, which is largely flat on the adjusted net income line, and likely to be slightly better on the adjusted EPS line due to the share repurchases we made late in 2015.
Adjusted net income and adjusted diluted earnings per share were $78 million and $1.12, respectively, in the fourth quarter of 2014.
Fourth-quarter adjusted net income is impacted by a decrease in Agency segment gross profit due to a lower level of various owner auction sales, as well as income statement charges related to the Taubman Collection.
We now project to lose approximately 1%, or $6 million, of the guaranteed amount, due to a shortfall in sale proceeds.
Also, approximately $6 million of sale-related expenses were incurred in the fourth quarter of 2015, which is on the low end of the usual 1% to 2% of direct costs as a percent of sales.
The total $12 million for Taubman is included in the fourth-quarter adjusted net income.
The remaining property from the Taubman Collection, with a pre-sale low estimate of approximately $24 million, will be offered at auctions in 2016, primarily at the Old Master Paintings sale in New York on January 27, and could result in additional guarantee losses if the property offered at these auctions does not meet pre-sale expectations.
Any further loss associated with the Taubman Collection would be accrued to the fourth quarter of 2015, if material.
As a result of the guarantee shortfall, no net auction commission revenue will be recognized for the Taubman Collection in the fourth quarter of 2015, or in 2016.
With no revenue from the Taubman Collection in the fourth quarter, auction commission margin is down versus the prior year fourth-quarter.
Excluding the Taubman Collection sales, auction commission margin for the fourth quarter and full year did improve when compared to the prior year.
These factors, which unfavorably impact the comparison to the prior year, are largely offset by a reduction in adjusted expenses.
On an unadjusted GAAP basis, we expect to report an estimated net loss for the quarter of $10 million to $19 million, or $0.15 to $0.29 per diluted share, as compared to net income of $74 million, or $1.06 per diluted share in the prior year.
The estimated net loss for the fourth quarter of 2015 is due to two factors.
First, we will be recording a significant non-cash income tax charged in the quarter, which I will explain later in the call.
Second, during the quarter, we recorded a $37 million pre-tax charge, or $0.35 per diluted share, associated with the voluntary separation incentive programs that were implemented late in 2015.
For the full-year 2015, adjusted net income is estimated to be $138 million to $142 million.
And adjusted diluted earnings per share is estimated to be $1.99 to $2.05, as compared to adjusted net income and adjusted diluted earnings per share of $142 million and $2.03, respectively, in 2014.
On an unadjusted GAAP basis, we expect to report estimated net income of $36 million to $45 million or $0.52 to $0.65 per diluted share for the full year, as compared to net income of $118 million or $1.68 per diluted share in the prior year.
Second, turning from earnings to capital allocation, I said on the call early last week that due to the ongoing deal negotiations with Art Agency, Partners, we were unable be in the market buying shares when the trading window was open in December.
With the public release of information from today's call, we are able to repurchase shares at what we view as attractive prices.
On the topic of share repurchases, the Board approved a $200 million increase to our existing $125 million share repurchase authorization, which brings our current authorization total to $325 million.
We expect to begin to repurchase shares as soon as possible through open market purchases and/or accelerated share repurchase agreements, subject to the share price, the market and economic conditions, as well as other corporate considerations.
Third, this significant increase in our share repurchase program, and the need for cash in the US to fund other corporate strategic initiatives, have made it clear that approximately $381 million of accumulated foreign earnings that were previously set aside for investment overseas will instead be repatriated to the United States.
As a result of this change, we will recognize a non-cash tax charge of $63 million to $68 million, net of foreign tax credits, in the fourth quarter of 2015 as we change our APB23 assertion.
The specific timing of the repatriation of these foreign earnings and cash payment of the associated US tax is currently being evaluated.
We will continue to review our projections and planned uses of US and foreign earnings to determine whether our future foreign earnings will be reinvested overseas.
If we conclude that our future foreign earnings will not be needed to fund US operations or commitments, and will be reinvested outside of the United States, our effective income tax rate will decrease in 2016 and future years when compared to 2015 and 2014.
Fourth, and staying on the theme of optimizing capital for shareholders, yesterday our Board decided to eliminate our current $0.10 quarterly cash dividend, effective immediately, and allocate the capital to repurchase shares instead.
Fifth, with respect to 2016 and looking ahead to the current, seasonally quiet first quarter, there are a few items I would like to highlight.
A year ago, our first-quarter results for our second-highest in Company history, only eclipsed by a record-breaking 2007, and included a number of very strong events, such as record London February Impressionist and Contemporary sales of $533 million; robust New York March Asia Week and January Old Master sales; as well as the London contemporary single owner Bear Witness sale last March, which totaled $50 million.
We have recently published the catalogs for our February Impressionist and Contemporary sales in London.
And midpoint estimates are down 23% from last February's record actual sales totals ---+ record actual sales totals ---+ and 16% from last year's mid-point estimates.
We will have more to share with you about the market on the full earnings report next month, once we have some more data points in 2016 to digest.
But I can say that we anticipate a more typical net loss quarter for the first quarter of 2016, as in six out of the last eight first-quarters.
In terms of other upcoming auctions, this morning we announced the sale of property from the personal collection of one of Britain's most beloved figures ---+ Deborah, Duchess of Devonshire ---+ the youngest of the legendary Mitford Sisters who, for more than half as century, stood at the center of British rural, cultural, and political life, and was also the mother of our esteemed director, the Duke of Devonshire.
While the value of the collection is less than $1 million, given the public's fascination with the Dowager Duchess, our expectation is that our exhibition and auction at the beginning of March will draw significant attention, and provide opportunities for engaging with a broad cross-section of both existing and new clients.
We will have a better idea of how the first quarter is shaping up when we next speak.
The bulk of today's call was about capital allocation, which is one of the four key priorities I outlined back in March.
As we have taken a number of significant steps, I thought it might be helpful to turn things over to Dennis to talk about the process we undertook to evaluate our position before we moved forward.
Dennis.
Thank you, Tad.
Good morning.
First, this is not a normal course earnings call or detailed capital review announcement, so I will keep my comments brief and high-level.
I do want to begin by saying that our ongoing capital allocation process is thorough, detailed, and thoughtful.
The capital allocation framework considers our various capital needs, including amounts to support our business requirements and opportunities, pursue growth initiatives, and, importantly, we ensure appropriate liquidity for any environment.
It also includes a comprehensive examination of Sotheby's capital structure, our liquidity, our cost structure, and opportunities for growth.
Additionally, the review leverages off all of the hard work done in our detailed annual financial planning process for 2016 that was completed last month.
We stress-tested the business throughout the cycle and under different market conditions over the last 10-plus years, ultimately getting very comfortable that we can break even on a cash basis on significantly lower net sales levels.
A significant component of this framework is guarantees.
As an update, as of today, our outstanding guarantee position, net of irrevocable bids and other hedges, is a relatively modest $92 million, which we expect will be reduced by $30 million to a $62 million balance after next week's sales of Old Master Paintings, and includes guarantees also that are related to her February auction.
We are actively soliciting consignments for the May auctions in New York, and are comfortable with our capacity to take on a prudent level of guarantee risk.
As always, strategy, opportunity, sound judgment, and sensible risk management will guide our use of guarantees.
At December 31, we estimate we have approximately $849 million in cash.
After taking into account funds held for consignors, we estimate approximately $570 million of Sotheby's total cash is available to support our capital needs.
For me, this detailed examination of our capital structure has demonstrated the resilience of the business through an economic cycle.
This has been quite a robust process, and I have a good deal of confidence in our results.
Lastly, we would like to provide some brief estimated balance sheet data in advance the 10-K filing next month.
At December 31, our balance sheet reflected as follows: cash and cash equivalents, as mentioned, $849 million; accounts receivable, $876 million; notes receivable, $714 million; inventory, $215 million; consignor payables, $979 million; finance segment revolver borrowings, $542 million; and, finally, long-term debt of $615 million.
With that, this concludes our prepared remarks.
But I should remind everyone that this announcement is a change from our normal practice, and we do not plan to regularly pre-announce earnings in the future.
We don't have much more on fourth-quarter revenues or expenses that we're prepared to discuss with you at this time.
We would like to thank you, at this point, for your time.
And Tad and I are happy to take your questions.
Yes.
With respect to the first part of your comment, I think in prior earnings calls I have been clear, or certainly tried to be clear, that more and more of our performance will guide our compensation.
And I think you are beginning to see a little bit of that in the most recent quarter.
With respect to the second part of your question, it's a little early for us.
And I think we'll tackle both of those as soon as we can, potentially in the next earnings call or thereafter.
I don't think they were materially better than the fourth quarter, a year ago.
And since the clear priority of ---+ one of the several priorities of the Art Agency, Partners, transaction was to accelerate that.
And, by the way, if you look at that fourth-quarter versus fourth-quarter, say, between 2011, 2012, and 2013, it was ---+ or certainly the full year of 2015 versus 2011, 2012, and 2013, it was down.
So I think there's a lot of opportunity there.
I'm joined by Amy <UNK> and Adam Chinn of Art Agency, Partners.
Amy, do you want to comment, generally speaking, on how you see the private sales market.
Or feel free to pass if you don't; but if you want to add something, feel free.
Well, the first thing is, no, the CFO transition does not have an impact on the timeline there.
Let me step back and just address the philosophy of the real estate, before I directly answer your question.
One way to think about this is, with respect to New York, we own our house and we have a mortgage on it.
Because we own our house, and each day it is satisfactory to us, there is no compelling reason to go buy another house.
There are some good reasons that we need to think about improving our work environment, improving how we operate with customers.
We can do those in our own house with some investment, or we could find another suitable location.
But I think it would be fair to say that the philosophy of our management here is that if we were to go look for another house, we would not be looking outside of our budget at all.
And, moreover, we would be very mindful of alternative uses of our capital before we either deployed it in our existing house or deployed it looking for another house.
So one of the things to think about is capital allocation, as we think about it, is a dynamic thing.
And you might make a different decision to accelerate or delay certain things, given what your alternative opportunities for the uses of cash are.
That would be far more impactful on the management team and the Board than, say, an interim CFO, although our Interim CFO is excellent.
I hope that was clear, <UNK>.
Let's go first to Kevin <UNK>, our Controller, for the first question.
And then [Jerry], if you want to tackle the second one ---+ [Jerry <UNK>] heads financial planning.
Kevin, over to you.
And Jerry, do you want to comment on the margins, ex- the effect of Taubman, please.
I'm perfectly happy to, but let's pass that one over to Amy <UNK>, who is closer to it, and knows it well.
That one is on the list of things that I'm interested in discussing more at the earnings call at the end of February.
Some things I want to do with the earnings call at February, by the way ---+ not only give you the detailed picture, the actual earnings ---+ but I think we will have a better picture of how the first quarter is going.
And we have a number of key performance indicators in the Company that I think we'd like to share.
And so we are already thinking about that issue.
We know it's a clear and present issue on the minds of investors, and we'd like to be helpful.
But we're not going to do it in this call.
Yes, this is Dennis.
On the repatriation effort, one of the driving factors, frankly, was the stock repurchase.
The capital that was overseas and available to us, we believe, is best utilized in the stock repurchase.
And that's a big part of the reason why we upped the repurchases from $125 million to $325 million, is the ability and the current stock price, and bringing that capital home to be utilized.
No, it's non-cash tax charge in the quarter of 2015.
There will be a cash impact of the taxes potentially, and that's still to be evaluated.
That's very important.
It's only what was in 2015's fourth quarter is a non-cash charge to represent the taxes.
But there will be a cash impact of it, and that's still being evaluated.
Right.
We're strategically looking at when that cash comes over, based on redemptions and other capital needs.
And you're correct: as the cash actually comes over to this country, then there will be a cash tax liability.
The way you phrased you question: you said, beyond the current investment opportunity in the stock, meaning the current share price.
Meaning you're looking for us to find another reason, other than the fact we think that the share price repurchase right now is attractive, and the Board thinks it's worth doing.
And we think it's consistent with our having stress-tested our financials under multiple scenarios, as well as being comfortable with liquidity.
In my mind, that alone is sufficient to proceed, and certainly was in the Board's mind.
I see.
I'm sorry, I missed the nuance of your question.
I got it.
Let me separate what you're suggesting, which is about looking forward in the art market, and maybe turn it around to what we see in our business.
What we found in our business ---+ and Dennis, feel free to comment on this ---+ is when we went through this process, it was very rigorous.
And we came away with a really high degree of comfort that our business is remarkably resilient in the face of variability on sales.
Really quite ---+ in fact, a substantial amount of our costs are variable, and can be variablized; and, moreover, that management can take actions to find cash when it needs to as things go along; and, by the way, that we have available pockets of liquidity when we need them.
So that was the first revelation.
The second revelation is that, contrary to some instances, we're in the unusual situation right now where our guarantee position, net of hedges, is really quite low.
So, what otherwise might be a problem as you head into weather, something that could range from a rain shower to a gale, we have a tremendous amount of financial flexibility.
And we're going to preserve that as we proceed on this.
So I look at it and I say, even if the art market blows in ways that we can't really see, or even if Amy turns out to be wrong and it's substantially worse than we think, we're ready for it.
So it's really more insight on capital allocation opportunities and how we think about the business and how resilient it is, rather than exogenous observations about the art market.
Dennis, do you want to add anything.
Yes, I think to add a little bit to Tad's comments, we feel that from an operational perspective, that the operations can exist comfortably from a liquidity standpoint through the cycle.
And we aren't trying to predict the cycle, whether the cycle is down; if it is down; and for how long it's down.
If it does go down, is it six months.
Is it a year.
Whatever, we don't ---+ we're not predicting that.
We're just looking at this from a long-term perspective to say that through this cyclicality, we believe that there's an opportunity for share repurchases.
And we don't know exactly how long ---+ we're not trying to predict the cycle or anything like that.
But we believe that we have the liquidity to make it through an extended downturn.
Hopefully that answers your question.
We have the ability to repatriate.
Exactly when we do that is still up in the air.
That's going to be subject to ---+ and be kind of an iterative process.
Yes, we're just ---+ yes, we're not going to ---+ that's not coming back over tomorrow.
That's going to be very selective ---+ what countries, et cetera.
So that's a little bit more complicated process that we're going to be working on continually, as needs arise.
Yes, a small amount.
That's a good question, and one we have thought about and talked about at the Board level for a number of years: what is the meaning of the dividend, and how do our shareholders look at it, how does it benefit our shareholders.
And we believe that, at this time, the best benefit for the shareholders is to use that capital to buy back shares.
That's a better result for them, as opposed to paying the dividend.
So, that's the conclusion of management and the Board.
Thank you once again, investors and analysts, for joining us on relatively short notice.
We appreciate it.
There will be no calls until the normally scheduled one at the ---+ I think it's the last day of February, is it not.
Plus or minus.
We're not sure yet, excuse me.
And we wish you a great Friday.
Thanks for calling in.
