Sotheby s Second Quarter and First Half 2007 Earnings Call Outline August 8, 2007

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Matilda White
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1 Sotheby s Second Quarter and First Half 2007 Earnings Call Outline August 8, 2007 Summary: Today we are pleased to announce our strongest second quarter and first half earnings in Company history. We are reporting first half Consolidated Sales 1 of $3.24 billion, a 45% increase from the prior period figure of $2.2 billion and income from continuing operations of $131.7 million, a 92% increase from the prior period and surpassing all of Consolidated Sales 1 is the sum of Aggregate Auction Sales, Private Sales and Dealer Sales. Clearly, the strength of the global art market continues. This significant improvement is largely due to the substantial increase in auction revenues attributable to the 44% increase in Aggregate Auction Sales over the first half of 2006, as sales in both New York and London again broke records. The largest contributors to the sales increase over 2006 include: - A $371 million, or 52%, improvement in auction sales results from this year s spring Impressionist and Contemporary art sales in New York and London which established numerous records. - A $135 million, or 60%, improvement in auction sales results from the winter Impressionist and Contemporary art sales in London. - A $37 million increase in the spring Antiquities sale in New York, which included the record sale of a bronze figure of the beautiful Artemis and the Stag for $28.6 million. These excellent results in conjunction with our exceptionally strong cash flow give us the ability to announce an increase in our quarterly dividend by 50% to $0.15 a share, solidifying our belief in the future of this Company. Overall Results Income from continuing operations for the second quarter of 2007 was $107.3 million or $1.64 per diluted share, compared to $72.4 million, or $1.17 per diluted share, in the prior period. - This $35.0 million, or 48%, improvement is largely due to a 37% increase in total revenues (to $339.5 million) over the period. Income from continuing operations for the first half of 2007 was $131.7 million, or $2.02 per diluted share, compared to $68.4 million, or $1.14 per diluted share for the prior year period. Excluding the impairment charge relating to Noortman Master Paintings, the insurance recovery from the policy covering Robert Noortman and the gain from the sale of our Sussex property in the U.K. in the first quarter of 2007, income from continuing operations 2 for the first half of 2007 would have been $123.3 million, or $1.89 per diluted share, a $54.9 million, or 80%, improvement from the first half of 2006 and $16 million, or 16%, higher than the full year Total Revenues For the second quarter, total revenues increased $91.2 million, or 37%, to $339.5 million, when compared to the same period in the prior year. - This improvement is primarily due to: A $77.0 million, or 36%, increase in auction commission revenues due to the significant increase in auction sales over the period. An increase in private sales commissions of 35% due to an increase in private sales to $172.6 million from $119.0 million in the second quarter of In the second quarter of 2007, our guarantee position provided a significant increase in auction commission revenues. These improvements were partially offset by a $10 1

2 million decline in principal activities revenue related to guarantees. In comparison, in the second quarter of 2006, we experienced a significant benefit from the sharing of upside on a guaranteed property that sold at auction. For the first six months of 2007, operating revenues were $486.9 million, a $142.6 million, or 41%, improvement from the prior six month period, primarily due to a $113.7 million increase in auction commission revenues and a $7.6 million increase in private sale commissions over the period. For the first six months of 2007, foreign currency translations had a favorable impact on operating revenues of $19.4 million as compared to the prior period. Direct Costs of Services (from Continuing Operations) Consists largely of catalogue production and distribution costs, as well as sale marketing costs and corporate marketing expenses. For the quarter and first half ended June 30, 2006, direct costs of services increased $7.0 million, or 30%, and $11.4 million, or 31%, respectively, when compared to prior year periods principally due to the higher level of auction sales from last year and consistent with the volume and type of property offered at auction in the first half. - For the three and six months ended June 30, 2007, direct costs increased approximately $1 million and $2 million, respectively, due to foreign currency exchange rate changes. - Overall lot volumes for the first half of 2007 are up 14% with lots sold over $500,000 up 39%. Salaries and Related Costs (from Continuing Operations) Salaries and related costs increased $14.8 million, or 21%, to $85.1 million in the second quarter of 2007 and $25.6 million, or 22%, to $139.9 million in the first six months of 2007 as compared to the same periods of For the three and six months ended June 30, 2007, salaries and related costs increased $2.5 million and $5.3 million, respectively, as a result of movements in foreign currency exchange rates. Full-time salaries increased $4.1 million, or 15%, to $31.1 million in the second quarter of 2007 and $8.0 million, or 15%, to $61.5 million in the first half of 2007, primarily due to strategic headcount additions subsequent to the second quarter of 2006, as well as the impact of limited salary increases. Stock compensation expense increased $4.4 million in the second quarter of 2007 and $7.8 million in the first six months of 2007, primarily due to restricted stock awarded in February, 2007 and costs relating to restricted stock awarded in conjunction with employment arrangements established with key senior executives in General & Administrative Costs (from Continuing Operations) For the three and six months ended June 30, 2007, general and administrative expenses increased $13.1 million, or 42%, and $19.6 million, or 31%, when compared to the same periods in the prior year. - During these periods, general and administrative expenses increased approximately $1.5 million in the quarter and $3.2 million in the first half as a result of movements in foreign currency exchange rates. The remainder of the overall increase is largely attributable to the following factors: 2

3 - Increases of $5.1 million, or 55%, and $9.1 million, or 55%, respectively, in professional fees, largely due to increased legal fees and higher tax staffing support fees, as well as expenses relating to an initiative for outsourcing our catalogue production operations in Europe, and higher consulting fees, partially in support of various strategic initiatives; - A second quarter increase of $2.7 million in client goodwill gestures, authenticity claims and other litigation-related charges; and - Increases of $1.6 million, or 26%, and $2.5 million, or 24%, respectively, in travel and entertainment costs principally due to the higher level of travel for pursuing business opportunities during the period. Also contributing to the higher level of T&E were price increases for airfares, hotels and other travel costs. Net Interest Expense Due to the substantial improvement in operating results, net interest expense declined $4.1 million, or 56% for the second quarter of 2007 and $7.3 million, or 48% for the first half of Earnings per Share Overall, second quarter 2006 diluted earnings per share from continuing operations was $1.64, an improvement of $0.47, or 40%, from $1.17 for the second quarter Diluted earnings per share from continuing operations for the first six months of 2007 was $2.02, $0.88 or 77% increase from the prior period figure of $1.14. Dividend Since the resumption of our dividend in August of last year, our financial performance has only been getting stronger and we are pleased to be able to reward our shareholders for their support with a 50% increase in our quarterly dividend to $0.15 a share. Second and Third Quarter Sales Since we last spoke to you in May, we have continued to experience strong sales results around the world. Our May sales in New York were outstanding and highlighted by the sale of Mark Rothko s White Center (Yellow, Pink and Lavender on Rose) from the Collection of David and Peggy Rockefeller for a record $72.8 million, the highest price ever for a Contemporary Art work at auction and the highest price achieved at auction so far this year. - This masterpiece was sold in the Contemporary Art series of sales which brought $344.6 million, Sotheby s highest total ever in this category. - The New York May Impressionist sales also achieved excellent results with a total of $337.2 million, in line with the pre-sale estimate of $265/361 million. Last month s Impressionist and Contemporary sales in London brought tremendous results with a total of $402.5 million for the week, the highest ever in our history in Europe. - The Impressionist and Modern Art Sales brought $209.4 million and were highlighted by the sale of Claude Monet s Nymphéas for $36.7 million. - The Contemporary Art sales totaled a remarkable $193.1 million, more than double last year s figure of $77.6 million and far above the pre-sale estimate of $112/157 million. - Both achieved their highest totals ever in Europe in their respective categories. 3

4 In the first half of 2007, we have had the privilege of selling four of the top five lots sold at auction. In addition to the Rothko and Monet, we also sold two Francis Bacon paintings, Study after Pope Innocent X in New York for $52.7 million and Self-Portrait in London for $43.0 million. Sotheby s spring sale of American Paintings in New York brought $55.8 million, above the high end of its pre-sale estimate of $32/47 million with works by Albert Bierstadt and Norman Rockwell bringing exceptional prices. In our June Antiquities sale in New York, the auction record for sculpture was shattered when the beautiful bronze statue Artemis and the Stag sold for $28.6 million, more than four times the pre-sale estimate of $7 million. - The Antiquities sale achieved $47.2 million, the highest total ever for an Antiquities sale, and significantly above the pre-sale estimate of $8/12 million. Upcoming Sales We are encouraged by the current level of consignments for the upcoming auction season. Notable highlights are: Our fall Impressionist and Modern Art sales in New York will be held on November 7 th and 8 th. We are still in the process of securing consignments for these sales but already have a number of great works consigned by artists such as Pablo Picasso, Georges Braque, Lyonel Feininger, Claude Monet, and Henri Matisse, among others. In London next month, we will offer for sale the Rostropovich-Vishnevskaya Collection of Russian Art from the European apartments of the internationally renowned cellist Mstislav Rostropovich and his wife, the famous Russian soprano, Galina Vishnevskaya. The entire offering of 18 th to 20 th Century fine and decorative Russian Art is estimated to bring $26/40 million. On September 21 st, we will begin our Asia Week sales in New York highlighted by a Magnificent and Highly Important 13 th century Tibetan Gilt Bronze Maitreya, which is among the most important Himalayan works of art ever to come to auction and is estimated to bring $3.5 million. - The work will be the centerpiece of The Arts of the Buddha sale which will include 50 lots and is estimated to bring $8/11 million 3. - The series also includes Sotheby s fourth sale of Asian Contemporary Art Asia which is estimated to bring $20/30 million and a sale of Fine Chinese Ceramics and Works of Art estimated at $9 million. In October, Sotheby s New York will offer for sale property from the legendary Galerie Ariane Dandois in Paris. Following a decision to close her gallery space on the prestigious rue du Faubourg Saint-Honoré to pursue other interests, Ariane Dandois will offer nearly 800 lots of high quality Continental furniture and decorative objects. In total the auction is estimated to achieve $12/16 million. A major exhibition of Modern and Contemporary sculpture entitled Beyond Limits will be held at Chatsworth in Derbyshire in the British countryside this fall. Works by artists such as Rodin, Maillol, Chadwick, Flanagan and Rickey will be exhibited and all will be available for private sale. The exhibition will take place between September 8 th and November 4 th. Competitive Environment/Outlook These second quarter and first half results were truly extraordinary and the best ever in our Company s history. We are encouraged by 2007 auction sales results to date, as well as by the level of 4

5 consignments for the remainder of the year and currently see no evidence to suggest that this strong market will not continue through the fall season and beyond. Sotheby's sold a virtually identical value of art and collectibles related property as our traditional competitor in the first half of We achieved this with 50% smaller lot volume, a much higher average selling price and with significantly fewer staff, worldwide. As many of you know, our traditional competitor has raised their buyer s premium on lots sold for $20,000 and under to 25%, up from 20%. We continually study our pricing structure and will disclose any changes in due course. After completion of a strategic review of the business, it became quite clear that catering to our clients is our first and foremost concern. As a result, we have been investing in people to give our clients the care they deserve and are excited to announce the addition of Lisa Dennison, formerly the director of the Guggenheim, to our team as a senior client relationship director. 1 Consolidated Sales is equal to the sum of Aggregate Auction Sales, Private Sales and Dealer Sales, and is a non- GAAP financial measure. See Appendix B to the Company s earnings release. 2 Non-GAAP financial measure. See Appendix B to the Company s earnings release. Note: All estimates do not include buyer s premium. 5

- A $20 million insurance recovery from the key man life insurance policy covering Robert Noortman, who died unexpectedly in January 2007;

- A $20 million insurance recovery from the key man life insurance policy covering Robert Noortman, who died unexpectedly in January 2007; First Quarter 2007 Earnings Conference Call Outline May 7, 2007 Summary: Today we are pleased to announce our highest first quarter earnings from continuing operations in Company history. Traditionally