Sotheby s Third Quarter 2011 Earnings Call Outline November 7, 2011

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1 Sotheby s Third Quarter 2011 Earnings Call Outline November 7, 2011 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 strong nine months results. And most importantly against a backdrop of enormous global volatility, Sotheby s continues to do well. Our Impressionist sales last week brought $230 million, with the highest prices, best results for our clients, and a clear industry-leading position. These results are proof yet again that there is vibrant demand for works of art which are fresh to the marketplace and appropriately priced. As for the nine month results we are reporting today, total revenues are up 20% to $547.6 million on a 36% increase in consolidated sales 1 to a total $3.8 billion. There has been a decline in auction commission margin from 18.5% in the first nine months of 2010 to 16.6% this year attributable to competitive pressures to win the highest value collections. As you know, we have been investing in the development of our activities in newer markets such as China, as well as in an enhanced web-based presence and tool-kit for clients. Consulting fees associated with these strategic initiatives are a significant component of the 19% increase in general and administrative costs over the first nine month period. We are not at all uncomfortable with the level of resource we are allocating to these critical growth initiatives. There has been some additional operating expense increase year-to-date, largely resulting from higher incentive compensation accruals and a higher level of direct costs consistent with the volume and composition of auction sales including several important single-owner auctions. And foreign currency exchange rate movements alone account for $9.8 million of the overall increase in operating expenses this year. Incentive compensation accruals have increased $12.7 million, or 38%, over the first nine months of 2010; this is consistent with our established variable compensation philosophy, as we reward staff for strong results. With compensation levels closely aligned with the value delivered to shareholders, incentive pay levels will ultimately depend on full year performance. All this has led to net income for the first nine months of $99.9 million, a $35.2 million, or 55%, improvement when compared to the prior period. Looking at the third quarter alone, this is typically a loss quarter at Sotheby s, due to the seasonally lower level of auction activity. We are reporting a larger loss this year than last, primarily due to a higher level of operating expenses, as well as inventory writedowns at our Noortman gallery and European restructuring charges, neither of which are part of our usual runrate expenses. As always, we encourage investors to focus on results for the six and twelve month periods, which better reflect the auction market business cycle. 1

2 We are at a fascinating and unique market moment. We look out at a global economy with very real positives such as the enormous and unprecedented liquidity across the globe as well as the potential negative catalysts for both the U.S. and European economies related to debt levels. Against this backdrop, we are staying focused. Our recent auction results prove yet again that we can execute in the sweet spot of our business, where works of great quality when properly priced, do extremely well. On the private sales front, we sold last week four Matisse bronzes just before our Impressionist sale which will benefit our fourth quarter. And our balance sheet is very strong which enables us to announce an increase in our quarterly dividend by 60% to $0.08 a share, solidifying our belief in the future of this Company. Now I will turn things over to Bill Sheridan, our CFO, who will talk in more detail about our financial results for the three and nine months ended September 30, Overall Results Net loss for the third quarter of 2011 is ($29.7) million, or ($0.44) per share, as compared to ($19.4) million, or ($0.29) per share in the prior period, a $10.4 million deterioration. For the first nine months of 2011, net income is $99.9 million, or $1.43 per diluted share, as compared to $64.7 million, or $0.94 per diluted share, an improvement of $35.2 million, or 55%, over the period. Operating Revenues Revenues for the third quarter of 2011 declined 20% to $58.2 million primarily due to a $14.4 million deterioration in dealer revenues over the quarter. Auction and related revenues declined 4% largely due to a lower level of single-owner auction sales in the period. For the first nine months of 2011, revenues are $547.6 million, a $91.2 million or 20% increase from the prior period, largely due to the 36% improvement in consolidated sales 1 to $3.8 billion for the first nine months of Partially offsetting this increase for the first nine months of 2011 is a decline in auction commission margin from 18.5% to 16.6% which is attributable to the competitive climate for high-end consignments. Direct Costs of Services Consists largely of catalogue production and distribution costs, as well as sale marketing costs and shipping expenses. For the third quarter of 2011, direct costs of services increased $0.5 million, or 12%, due to higher costs to promote and execute private sales during the period. For the first nine months of 2011, direct costs of services increased $7.7 million, or 24%, which is in line with the level and mix of our auction and private sale offerings to date, including costs to promote a record level of single-owner sales year-to-date. 2

3 Marketing Expenses Marketing expenses are costs related to the promotion of the Sotheby s brand and consist of costs related to Sotheby s corporate marketing activities, client service initiatives and strategic sponsorships of cultural institutions. For the three and nine months ended September 30, 2011, marketing expenses increased by $0.3 million (11%) and $1.9 million (22%), respectively, due to increased sponsorships of museums and other cultural institutions, as well as a higher level of costs incurred to support certain strategic initiatives, including brand promotion activities in China and other emerging markets and the enhancement of the sothebys.com website. Dealer Cost of Sales Includes the net book value of Dealer inventory sold during the period and any writedowns to the carrying value of Dealer inventory. Dealer cost of sales increased $9.0 million in the third quarter of 2011 and $3.0 million in the first nine months of 2011 primarily due to a significantly higher level of inventory writedowns than in the prior year. Through the first nine months of 2011, dealer inventory writedowns related to our Noortman Master Paintings gallery totaled $8.3 million. These writedowns are discussed in detail in our third quarter 10-Q. Salaries and Related Costs Salaries and related costs decreased $1 million, or 2%, to $45.7 million in the third quarter of 2011 and increased $26.5 million, or 16%, to $194.2 million in the first nine months of 2011 as compared to the same periods in The nine-month increase is partially due to a higher level of accrued incentive compensation costs, attributable to the increased profitability this year. Incentive compensation expense increased $12.7 million to $46.0 million in the first nine months of 2011 when compared to the prior year. 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. Also for the three and nine months ended September 30, 2011, full-time salaries increased $3.7 million (13%) and $12.0 million (14%), respectively, due to strategic headcount and salary increases as well as an unfavorable impact of changes in foreign currency exchange rates, which contributed $1.0 million and $3.0 million to the quarter and year-to-date increases, respectively. 3

4 General & Administrative Costs For the three and nine months ended September 30, 2011, general and administrative expenses increased $7.7 million (26%) and $17.4 million (19%), respectively, when compared to the prior year, primarily due to the following factors: - Increases of $2.7 million and $6.7 million, respectively, in professional fees, primarily due to a higher level of consulting fees to assess and develop Sotheby s strategic initiatives, including the development of Sotheby s presence in emerging markets such as China and the enhancement of Sotheby s website. - Increases of $1.1 million and $2.9 million respectively, in travel and entertainment expenses in response to a higher level of consignment opportunities through the first nine months of Increases of $1.1 million and $2.7 million, respectively, in charges related to litigation claims and client goodwill gestures. - Increases of $0.4 million and $1.1 million, respectively, in facilities-related expenses. - Increases of $1 million and $3 million, respectively, due to unfavorable changes in foreign currency exchange rates. Restructuring Charges In June, we announced a restructuring plan impacting our operations in Italy and the Netherlands. The plan will streamline Sotheby s European selling operations and allow Management to focus resources on growing markets, especially China, and other strategic priorities. For the first nine months of 2011, net restructuring charges are $4.5 million, and are primarily for employee termination benefits and a lease termination fee related to Sotheby s Amsterdam salesroom. Net Interest Expense For the third quarter of 2011, net interest expense decreased $1.7 million (14%), primarily due to a $1 million decrease in interest expense resulting from the repurchase of an aggregate principal amount of $48.3 million of Sotheby s 7.75% Senior Notes in the fourth quarter of 2010 and, to a lesser extent, lower amortization of credit facility related fees. For the nine months ended September 30, 2011, net interest expense decreased $6.4 million (19%), primarily due to a year-to-date $2.9 million decrease in interest expense related to our Senior Notes, as well as $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, and lower amortization of credit facility related fees. In June, Sotheby s received conversion requests totaling a principal amount of $18.1 million from holders of our Convertible Notes. 4

5 - Accordingly, in the third quarter of 2011, we recognized a $1.5 million loss representing the write-off of a proportionate amount of unamortized discount and deferred transaction costs related to the Convertible Notes redeemed. Income Tax Expense Sotheby s effective income tax rate for the three and nine months ended September 30, 2011 is 48.7% and 19.1%, respectively as compared to 49.2% and 25.0%, respectively, in the prior year. The change in Sotheby s effective income tax rate when compared to the prior year is largely due to an $11.6 million benefit recognized in the third quarter of 2011 related to the reversal of a valuation allowance against certain deferred tax assets. Management anticipates that Sotheby s annual effective income tax rate for 2011, excluding discrete items, will be approximately 27%. Liquidity Information (in millions) 9/30/11 9/30/10 Cash $542.4 $345.6 Restricted Cash $22.7 $24.6 Total Cash $565.1 $370.2 Current Assets $1,192.8 $940.1 Current Liabilities $527.1 $345.8 Credit facility borrowings $- $- LT debt $462.6 $518.9 Fourth Quarter Sales Last week in New York, our Impressionist and Modern Art sales brought a strong $230 million, well within the pre-sale estimate of $202/289 million with terrific prices for many works. The highlight of the evening sale was a landscape by Gustav Klimt s which brought spirited competition in the sales room and sold for $40.4 million, much above the pre-sale estimate of $25 million. - Other highlights include a late Picasso which sold for $23.0 million, setting the record at auction for a late work by the artist, and a brilliant landscape by Gustave Caillebotte which sold for $18.0 million, well in excess of the pre-sale high estimate of $12 million and a record for the artist at auction. Last month in Hong Kong, Sotheby s series of sales brought $410.8 million, down from the record level achieved this past spring, but our second highest total for a week-long series of sales in Hong Kong. - Record various-owner sales totals were achieved last month for Contemporary Asian Art, 20 th Century Chinese Art, Fine Chinese Paintings, Magnificent Jewels and Jadeite, and Important Watches. - These successful results bring Sotheby s Hong Kong 2011 consolidated sales 1 total to a record $1 billion which is a 38% increase from 2010 s $724 million total. 5

6 In London, our October series of Contemporary and Italian Art sales brought $72.5 million in London, within the pre-sale estimate of $66/91 million and with the 20 th Century Italian Art sale achieving the highest ever total for a sale in this category, at $34.1 million. Upcoming Sales Beginning on Wednesday evening, we have our autumn sales of Contemporary Art in New York which is highlighted by four paintings by Clyfford Still which are being sold to benefit the Clyfford Still Museum. The top lot of the evening sale is his 1949-A-No.1, a canvas of fiery reds and velvety blacks that has a pre-sale estimate of $25/35 million. - Also highlighting the evening sale is Still s 1947-Y-No.2 and Francis Bacon s Three Studies for a Self Portrait which was acquired by the present owner back in 1967, the year it was painted. Both pictures carry a pre-sale estimate of $15/20 million. - The entire Contemporary Art series has a pre-sale estimate of $249/351 million. On November 15 th in Geneva, we are very excited to offer the Sun-Drop Diamond, a carat Fancy Vivid Yellow diamond. One of the most impressive diamonds to come to auction in recent years, this stone is the largest known pear-shaped fancy vivid yellow diamond in the world and has a pre-sale estimate of $11/15 million. Competitive Environment/Outlook Uncertainty and volatility in the global economic environment may have contributed to the mixed results we have seen in certain auctions in the early autumn, as the sales growth achieved in the first half of 2011 has now slowed. And there continues to be significant price competition for the highest quality collections. But as I noted earlier, our diligent approach has brought us very meaningful successes as well, this season. Our performance last week, and I expect this week are based on our formula of experienced experts taking care of clients, and thoroughly understanding markets. We remain committed to measured investments in the strategic initiatives that are vital to Sotheby s future. We are mindful of the current climate, however, and we remain very focused on auction commission margins and maintaining a rational cost structure. Despite the very real challenges of this volatile global economy and the accompanying high levels of uncertainty, Sotheby s continues to build liquidity and financial strength. 1 Defined as the sum of Aggregate Auction Sales, Private Sales and Dealer revenues. Aggregate Auction Sales represent the hammer (sale) price of property sold at auction plus buyer s premium and Private Sales represent the total purchase price of property sold in private sales brokered by Sotheby s. Note: Estimates do not include buyer s premium. Sale totals for auctions discussed in this release include buyer s premium. 6