Sotheby s Third Quarter 2012 Earnings Call Outline November 8, 2012

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1 Sotheby s Third Quarter 2012 Earnings Call Outline November 8, 2012 Safe Harbor: During the course of this call, the Company may make projections or other forwardlooking 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. Summary: In the third quarter of 2012, revenues increased 18% to $68.5 million primarily due to a 50% increase in private sale commission revenues and, to a lesser extent, a 56% increase in finance segment revenues. Clearly, our commitment to these two important areas of our business is providing solid returns. Net loss for the third quarter was ($32.6) million which is slightly unfavorable to 2011, due only to a tough comparable on the tax line in the prior year, we had an $11.6 million tax benefit that did not recur this year. On a pre-tax basis, our quarterly results improved by 20% to ($46.4) million from the prior year third quarter. For the nine months year-to-date period, income continues to be down, largely because auction sales experienced an historically unprecedented level of single owner sales in But there are definite bright spots in the year-to-date period private sales revenues of $56 million are up 17%, lending revenues have increased dramatically, by 41%, and operating expenses have been well-controlled. Turning to the current fourth quarter, our Asian business has slowed alongside the economy there, but it remains very profitable and a source of substantial long term opportunity with newly wealthy collectors. Our sales in London last month brought record results and we have a number of rare works on offer, beginning tonight, that we are very excited about. The art market remains quite robust, especially at the high end. Overall Results Net loss for the third quarter is ($32.6) million, or ($0.48) per share and net income is $42.2 million, or $0.61 per diluted share for the nine months. This compares to 2011 third quarter net loss of ($29.7) million, or ($0.44) per share, and nine months net income of $99.9 million, or $1.43 per diluted share, a year ago. Operating Revenues For the third quarter, total revenues increased 18% to $68.5 million, primarily due to a 50% increase in private sale commission revenues, an increase in Finance revenues, and, to a lesser extent, slightly higher auction commission revenues, with auction commission margin increasing to 21.8% from 19.7% a year ago. 1

2 For the nine months period, total revenues decreased 13% to $477.4 million when compared to the prior year, largely resulting from a decline in single owner sales from the record level of Direct Costs of Services Consists largely of catalogue production and distribution costs, as well as sale marketing costs and shipping expenses. Direct costs of services decreased $0.9 million, or 17%, in the third quarter largely due to lower private sale exhibition expenses. In the year-to-date period, direct costs of services decreased $1.4 million, or 3%. Auctionrelated direct costs decreased in line with the level and composition of auction offerings during the period, as well as favorable foreign currency movements. However, this decrease is largely offset by an increase in private sale expenses and a non-recurring prior year recovery. Marketing Expenses Marketing expenses are costs related to the promotion of the Sotheby's brand consisting of costs related to corporate marketing activities, client service initiatives and strategic sponsorships of cultural institutions. For the three and nine months ended September 30, 2012, marketing expenses increased $0.7 million (25%) and $1.9 million (18%), respectively, largely a result of our brand promotion activities in Asia and in particular, China, where Sotheby s incurred costs in the third quarter to promote the launch of our joint venture with Beijing GeHua Art Company. Salaries and Related Costs For the third quarter, salaries and related costs increased $7.7 million, or 17%, principally due to a $5.5 million increase in employee benefits from the prior period. This is largely attributable to significantly improved investment performance associated with Sotheby s Deferred Compensation Plan, which increased employee benefit costs by $4.1 million. This increase is substantially offset by market gains in the trust assets related to the Deferred Compensation Plan liability, which is reflected within Other Income (below operating income on the income statement). For the year-to-date period, salaries and related costs are largely flat when compared to the prior period. Incentive compensation expense is lower by $11.7 million, or 25%, in the period, due to the lower level of Sotheby s earnings relative to the prior year. This is partially offset by an $8.2 million, or 84%, increase in employee benefits which is primarily due to significantly improved investment performance associated with Sotheby s Deferred Compensation Plan. 2

3 General & Administrative Costs For the three and nine months ended September 30, 2012, general and administrative expenses increased $0.6 million (2%) and $6 million (5%), respectively, primarily due to the following factors: Increases of $1.2 million (10%) and $4.4 million (12%), respectively, in professional fees, primarily attributable to a higher level of consulting fees in support of Sotheby s strategic and corporate initiatives, as well as a higher level of legal fees and technology development consulting costs. Net increases of $1.5 million (15%) and $4.9 million (16%), respectively, in facilities-related expenses. These increases are primarily due to increases in rent expense for Sotheby s expanded premises in Hong Kong. A $0.9 million (5%) year-to-date increase in travel and entertainment expense incurred in part to support Sotheby's strategic initiatives in emerging markets. A year-to-date increase of $0.6 million in technology costs primarily in support of the sothebys.com website. Net Interest Expense For the nine months ended September 30, 2012, net interest expense increased $2 million (7%) primarily due to a benefit of $2.2 million of interest income recognized in the first quarter of 2011 as a result of the resolution of a legal matter related to a delinquent client account. At the end of September, we successfully issued $300 million in ten-year debt at 5.25%, which is far below the effective interest rate for our current high yield debt of 8%. The net proceeds will be used to pay the $80 million remaining of our 7.75% Senior Notes that are due in June 2015 and for general corporate purposes, including the repayment of other existing indebtedness. It is our current intent to use $182 million of the net proceeds to settle the 3.125% Convertible Notes when they mature in June All of the 2015 Senior Notes have been called for redemption on November 25, The estimated redemption price is expected to be approximately $97 million, which includes a premium of approximately $14 million and unpaid accrued interest of $2.7 million. This redemption is expected to result in a loss of approximately $15 million in the fourth quarter of 2012 which includes the write-off of related unamortized debt issuance costs and discounts of approximately $1 million. As a result of the issuance of these new ten year notes and the redemption of the notes due in 2015, net interest expense is expected to increase $5.3 million for the year ending December 31, However, due to the favorable interest rate on the new notes, we expect to achieve annualized interest expense savings of $4.7 million. 3

4 Income Tax Expense For the third quarter, our effective income tax benefit rate was 30%, which compares to 49% in the prior year period, and for the nine months, our effective income tax expense rate was 33% which compares to 19% in the prior year period. The change in Sotheby s effective income tax rate when compared to the prior periods is due primarily to an $11.6 million tax benefit recognized in the third quarter of 2011 related to the reversal of a valuation allowance against certain deferred tax assets. We anticipate that our annual effective income tax expense rate for 2012, excluding discrete items, will be approximately 32%. Liquidity Information (in millions) 9/30/12 9/30/11 Cash $585.8 $542.4 Restricted Cash $5.1 $22.7 Current Assets $1,356.6 $1,192.8 Current Liabilities $671.4 $572.1 Credit facility borrowings $- $- LT debt $515.2 $462.6 Fourth Quarter Sales To Date We launched the fourth quarter with our week-long series of sales in Hong Kong that took place early last month. Over 3,000 lots were sold over the five days of auctions, bringing a total of $261.9 million, which came in towards the high end of the pre-sale estimate, but below last October s level of $410.8 million. In conjunction with Frieze week in London last month, our Contemporary and Italian Art sales brought record results. These sales totaled $112.1 million which was at the high end of the presale estimate and a record total for a London October sales series in the category. Highlighting the Contemporary sales was an exceptional painting by Gerhard Richter which claimed a record for the artist at auction when it sold for $34.9 million. Upcoming Sales Turning to our sales here in New York, we are looking forward to our evening Impressionist and Modern Art sale in just a couple hours time where we are offering two legendary Picasso portraits of his mistress Marie-Thérèse Walter. One was painted in 1932, which many believe to be during the peak of his extensive career, and another was painted in 1936 and is part of a group of works that have come to epitomize Surrealist figurative painting at its most emotional and dramatic. These works carry a pre-sale estimate of $35/$50 million and $15/$20 million, respectively. Tonight s Impressionist and Modern Art sale has a total pre-sale estimate of $173/$251 million. This sale was originally scheduled to be held this past Monday, but was rescheduled 4

5 for this evening due to the severe storm damage in the New York area. We are confident that this small adjustment to the auction calendar will help us better serve our customers. Next week, also here in New York, we have our Contemporary Art sales with a number of exciting works on offer. Highlighting the sales is Mark Rothko s extraordinary No. 1 (Royal Red and Blue). Painted in 1954, this large scale masterpiece has a pre-sale estimate of $35/$50 million and was one of eight works chosen by Rothko for his landmark solo show of the same year at the Art Institute of Chicago. Also featured in the sale is Jackson Pollock s Number 4, 1951, an exceedingly rare drip painting on canvas, as well as one of the most important versions of Francis Bacon s iconic Pope Paintings ever to have appeared at auction. The works have a pre-sale estimate of $25/35 million and $18/25 million, respectively. The total Contemporary Art sale series carries a pre-sale estimate of $363/$502 million. Competitive Environment/Outlook Again, as mentioned on previous calls, we have some very tough comparables to 2011 largely due to the record level of significant single owner sales a year ago. We continue to see a very competitive climate for the most high-value consignments, with these consignments often earning fractional margins. But we are focused on stabilizing these margins and maximizing revenues. We remain confident in the opportunities in the global art market. Demand and prices continue to be strong, especially at the high end, and we re anticipating that tonight and next week s sales will be confirming events. 5