Sotheby s Second Quarter 2010 Earnings Call Outline August 5, 2010

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1 Sotheby s Second Quarter 2010 Earnings Call Outline August 5, 2010 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: Today we are announcing outstanding second quarter and first half results. Total revenues are up dramatically to $281.4 million in the second quarter and to $383.3 million in the half, thanks to strong sales worldwide which are up 116% to $2.2 billion in the half. In particular, Impressionist and Contemporary Art net auction sales combined increased $684 million, or 188%, in the half. We are especially pleased to report that despite the significant increase in revenues 68% for the quarter and 73% for the half operating expenses were well controlled. As a result, second quarter net income grew $74.1 million to $86.2 million, and first half net income was up $106.4 million to $84.1 million from the prior year periods and is our second best ever. Expense control remains a constant focus for us. Although our payroll is smaller, there is some expense growth which is attributable to the significant increase in sales, revenues and profitability. The largest driver is an increase in accrued incentive bonus costs due to the significant improvement in profitability in 2010 as compared to last year. - But in this regard, it is worth noting that the entirety of our Salaries and Related costs as a percentage of our Operating Revenues is down below 32% a year ago this ratio was nearly 44% and this first half percentage is lower than we ve seen in any full year over at least the last dozen years. We are still in the midst of property gathering for the autumn sales but we already have a number of upcoming exciting auctions that I will speak to later in the call. Overall Results As Bill said, net income for the second quarter was $86.2 million, or $1.26 per diluted share and $84.1 million, or $1.22 per diluted share for the first six months. This compares to prior year second quarter net income of $12.2 million, or $0.18 per diluted share, and prior year first half net loss of ($22.3) million, or ($0.34) per diluted share. 1

2 Operating Revenues For the three and six months ended June 30, 2010, total revenues increased $114.1 million, or 68%, and $161.5 million, or 73%, respectively, when compared to the same periods in the prior year. - This growth principally stems from the $715.7 million, or 113%, increase in net auction sales in the second quarter and the $1 billion, or 120%, sales increase in the first half. - Also, private sale commissions increased $0.9 million, or 9% in the second quarter, and $4.6 million, or 31% in the first half, when compared to the prior year primarily due to improved commission margins on private sales. - Partially offsetting this increase is a decline in auction commission margin from 21.3% to 18.7% in the second quarter and from 20.8% to 18.3% in the first half, attributable to the change in sales mix towards higher valued items in both periods. As you are aware, over $1 million, the buyer s premium rate decreases from 20% to 12%. Direct Costs of Services Consists largely of catalogue production and distribution costs, as well as sale marketing costs and shipping expenses. For the three and six months ended June 30, 2010, direct costs of services increased $6.7 million, or 46%, and $4.4 million, or 18%, respectively, when compared to the same periods in the prior year. These increases are in line with the level and mix of our auction offerings year to date and are due in part to the following factors: - A $1.9 million increase in costs incurred in the second quarter to promote a higher level of single-owner sales. - Increases of $1.4 million and $1.2 million, respectively, in traveling exhibition costs, primarily due to traveling exhibitions for property offered in our second quarter Impressionist Art and Contemporary Art sales. - Unfavorable experience in property loss and damage claims, with a year-to-date increase versus the prior year of $1.5 million. - The overall increase in direct costs of services for the first half was partially offset by the absence of $3 million in costs relating to our first ever sales in Qatar, which took place in the first quarter of Salaries and Related Costs Salaries and related costs increased $25.0 million, or 51%, to $74.3 million in the second quarter of 2010 and $23.6 million, or 24%, to $120.9 million in the first half of 2010 as compared to the same periods in This increase is almost entirely due to a higher level of accrued incentive compensation costs due to the significant improvement in profitability during the first half of 2010 when compared to the first half of Incentive compensation expense increased $26.7 million to $28.9 million in 2

3 million in the second quarter and $27.3 million to $31.0 million in the first half when compared to the prior year periods. The amount of incentive compensation expense recorded in a period is largely dependent upon the level of Sotheby s profitability and is ultimately paid at the discretion of the Compensation Committee of the Board of Directors only after assessing Sotheby s full year financial results. In addition, incentive compensation includes amounts awarded to employees specifically for brokering private sale transactions. Partially offsetting this increase is a decline in full time salaries by $2.0 million, or 7%, in the second quarter of 2010 and $4.8 million, or 8%, in the first half of 2010 due to lower headcount from the implementation of our restructuring plans in General & Administrative Costs For the three and six months ended June 30, 2010, general and administrative expenses increased $2.0 million, or 7%, and $2.8 million, or 5%, when compared to the same periods in the prior year. These increases are primarily attributable to the following factors: - Increases of $2.3 million, or 67%, and $3.6 million, or 48%, respectively, in travel and entertainment expenses in response to a higher level of consignment opportunities through the first half of Increases of $1.9 million and $4.1 million, respectively, in bad debt expense, primarily due to bad debt recoveries occurring through the first half of 2009 that were not repeated in the current period, as well as a $1 million charge recorded in the first quarter of 2010 related to an overdue auction receivable balance. - Increases of $1 million and $1.3 million, respectively, in various other general and administrative expense categories. - Partially offsetting these items are decreases of $1.3 million and $2.9 million, respectively, in facility related costs attributable to lower rent and building maintenance expenses in the U.K., as we vacated our former London middle-market salesroom in June Also partially offsetting the increases in general and administrative expenses is a second quarter and year-to-date decrease of $2 million in authenticity claims, goodwill gestures and other litigation-related matters and a year-to-date decrease of $1 million in professional fees, primarily due to lower costs associated with our previously outsourced tax compliance function. - Lastly, since our existing lease for warehouse space in London expires in the first quarter of 2011, we signed a lease for a new London warehouse in April We expect to occupy this space in the first quarter of 2011 after we complete the build-out of the facility. Rent expense related to this new warehouse is expected to be $0.5 million in 2010, which is in addition to the rent expense for our existing London warehouse, which we will continue to use until the lease expires in the first quarter of

4 Net Interest Expense For the three and six months ended June 30, 2010, net interest expense increased $1.5 million, or 15%, and $3.2 million, or 16%, respectively, primarily due to lower interest income and higher arrangement and commitment fees related to our revolving credit facility. - The lower level of interest income is principally due to $0.8 million and $1.4 million recognized during the three and six months ended June 30, 2009 related to previously delinquent client accounts that were determined to be collectible. Income Tax Expense Our effective income tax expense rate for the three and six months ended June 30, 2010 is approximately 32% for both periods. This compares to income tax expense of 67% for the second quarter of 2009 and an income tax benefit rate of (28%) for the first half of The change in our effective tax rate was primarily due to the expectation at the time that our 2009 results would be near breakeven, which exaggerated the impact of certain permanent book-to-tax differences. - Also, the prior year tax rates included the impact of $1 million and $16.6 million of income tax expense during the three and six months ended June 30, 2009, respectively, that related to the establishment of a valuation allowance against certain state and local and foreign deferred tax assets - In addition, the change in our effective tax rate when compared to the prior year is also due to a change in the jurisdictional level and mix of earnings. Liquidity Information (in millions) 6/30/10 6/30/09 Cash $462.5 $141.4 Restricted Cash $31.9 $11.5 Total Cash $494.4 $152.9 Current Assets $1,402.4 $904.7 Current Liabilities $801.5 $444.4 Credit facility borrowings $- $- LT Senior debt $516.9 $508.8 Second and Third Quarter Sales Sotheby s summer fine arts sales in London in late June brought $273.7 million, 107% higher than last year s total of $132.0 million. - The Impressionist and Modern Art sales brought $193.6 million and included sales of three works over $15 million, among them works by André Derain and Henri Matisse. - The Contemporary Art sales totaled $80.1 million and were highlighted by the sale of Yves Klein s work, RE 49, Relief Eponge Bleu which sold for $9.3 million. 4

5 Our July London Old Masters and British sales led the market and brought $94.5 million, near the high end of the pre-sale estimate and 31% above the prior year total of $72.4 million. - The top lot was Turner s Modern Rome which sold for $44.9 million, a record for the artist at auction and above the pre-sale high estimate of $27 million. This extraordinary piece went to The J. Paul Getty Museum in Los Angeles, California. Upcoming Sales Asia is of course a main strategic focus for us and we expect our Hong Kong Autumn Sales will be among our best ever. Held from October 2 nd to 8 th, we will offer over 3,000 lots of Modern and Contemporary Chinese and Asian art, traditional Chinese paintings, fine Chinese ceramics and works of art as well as jewelry, watches and wine. The total estimate for the week s sales is in excess of $200 million and of particular note, the Chinese Ceramics and Works of Art Sale will be the largest ever in terms of value with a pre-sale estimate in excess of $100 million. On September 25 th in New York, we will be holding the single owner sale of works from the Neuberger Berman and Lehman Brothers Corporate Art Collections. Among the works to be auctioned are examples of early works by Hirst, Richter, Gonzalez-Torres, Prince, Currin and Murakami. The over 400 works have a combined pre-sale estimate in excess of $10 million. Also in New York, we will be offering The Culbertson Guidon from The Battle of The Little Bighorn, also known as Custer s Last Stand. Few physical artifacts of the battle were left on the field but a cavalry guidon, or swallow-tail flag, was discovered after the battle by Sergeant Ferdinand Culbertson. The flag has a pre-sale estimate of $2/5 million and will be sold in October. From October 5 th to 7 th, we will be selling property from Chatsworth House in Derbyshire, England, the magnificent stately home of the Duke and Duchess of Devonshire. The over 1,400 lots will be sold on site and have combined pre-sale estimate in excess of $4 million. RM auctions in association with Sotheby s will offer the world s most famous car; the 1964 Aston Martin DB5 James Bond movie car in their Automobiles of London auction on October 27 th. The car, which has a pre-sale estimate in excess of $5 million, comes to the market for the first time in its history and is the sole remaining of the original 007 DB5s which were driven by Sean Connery in the Goldfinger and Thunderball movies. On November 30 th in London, we are pleased to offer twenty pieces from the Jewels of the Duchess of Windsor sale originally held to record results at Sotheby s twenty three years ago. The upcoming sale includes beautiful examples of collaboration between the Windsors and Cartier and has a combined pre-sale estimate in the region of $4.5 million. Competitive Environment/Outlook Last quarter on this call we said that we believed we were well-positioned for strong operating results and I believe these outstanding second quarter and first half results confirm this view. In the second half of 2010, we expect individual artworks to sell for very strong prices, but would be surprised to replicate the extraordinary sales growth achieved in the first half of 2010, when the recovery of the global art market accelerated. Nonetheless, we are encouraged by the current 5

6 strength of the global art market and by the level and quality of our consignments for the remainder of 2010, which have largely been secured without the use of auction guarantees. We continue to limit the use of auction guarantees and, when appropriate, we will enter into risk and reward sharing arrangements to reduce our financial exposure under any such guarantees, as is the case with our guarantee portfolio currently, which is fully hedged. We are still very much in the middle of our busy property gathering period for our autumn sales but, as I said, we are encouraged by the material we have secured to date. The cupboard is far from empty. 6