Sotheby's CEO Discusses Q3 2010 Results - Earnings Call Transcript

Sotheby’s (

BID

)

Q3 2010 Earnings Call Transcript

November 4, 2010 4:45 pm ET

Executives

Bill Ruprecht – President and CEO

Bill Sheridan – CFO

Analysts

George Sutton – Craig-Hallum Capital Group

David Schick – Stifel Nicolaus

Marc Riddick – Riddick Consumer Strategies

Presentation

Operator

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Good afternoon, ladies and gentlemen, and welcome to the Sotheby's third quarter and first nine months 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded.

GAAP refers to generally accepted accounting principles in the United States of America. In this earnings call, financial measures are presented in accordance with GAAP and also on a non-GAAP basis. A reconciliation of the non-GAAP financial measures used in this earnings call to the comparable GAAP amounts is provided as an appendix to the outline of the call, which can be found on the Investor Relations sections of the company’s Website.

Also during the course of this call, the company may make projections or other forward-looking statements regarding future events or 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 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.

At this time, I would like to introduce Bill Ruprecht, President and Chief Executive Officer; and Bill Sheridan, Chief Financial Officer. Mr. Ruprecht, please go ahead.

Bill Ruprecht

Thank you, Mary. Good afternoon everybody. Thank you for your ongoing interest in Sotheby's. Today, we are announcing very strong third quarter and nine-month results. Revenues were up 63% to $73.1 million in the third quarter, up 71% to $456 million through September 30

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, thanks of course to strong sales worldwide, which have brought consolidated sales up to $2.8 billion in the first nine months. Impressionist and Contemporary art auction sales increased $666 million or 183% in the first nine months.

In the third quarter, we are reporting a net loss of $19.4 million, that’s $0.29 a share, a 67% improvement from the prior period. This results due to the increased revenues and a return to more normal tax rates for the company. Total expenses did grow in the quarter by 23% to just over $102 million, but continued to reflect focused cost management. 75% of that expense increase was due to non-auction higher dealer cost of sales, which is offset by growth in dealer revenues, again non-auction. Excluding the dealer inventory costs and sales, total expenses for the business increased in the quarter only 6%. Remember, on a 63% revenue increase, that’s 6% cost increase. We continue to be confident in our ability to manage both our expenses and margins to positive effect.

We are reporting net income in the nine months of $65 million, $0.94 diluted share, $145 million increase from the prior net loss of $80 million. We have come a long way in the last year. The bottom line for nine months is possible due to a mix of factors; of course the increase in revenues related to strong worldwide demand for works of art, we will talk a little bit about that later in the call; fierce attention to managing margins; and ongoing focus on cost control in an environment of significantly higher top line sale results.

Our profitability has led to a much more normal effective income tax rate. With respect to costs, there are some growth, which is attributable to the significant sales increase, revenues and profitability. The driver is an increase in accrued incentive comp costs, which is attributable to the significant improvement in profitability in 2010 as compared to last year.

The fourth quarter has begun remarkably. Our Hong Kong sales series brought a record $397 million – almost $400 total, that’s 137% above last year’s total, and well above our highest pre-sale estimate. And our Impressionist sales this week brought a strong $264 million, 24% above last year’s total, highlighted by a Modigliani picture, which brought $69 million on Tuesday of this week.

Bill Sheridan, take it over, please.

Bill Sheridan

Thank you Bill. I will be referring Page 8 of the earnings release, which is Appendix A. Overall results, our overall net loss for the third quarter was $19.4 million or $0.29 per diluted share, which compared to a net loss of $57.8 million or $0.89 per diluted share of the prior period, $38.4 million or 67% improvement.

For the first nine months, net income was $64.7 million, or $0.94 per diluted share. This compares to prior-year net loss of $80.1 million or $1.23 per share, improvement of $145 million. Turning to operating revenues, for the three and nine months ended September 30

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, total revenues increased $28.1 million or 63%, $189.7 million or 71% respectively when compared to the same periods in the prior year. This principally stems from the $85.7 million or 66% increase in net auction sales in the third quarter, and the $1.1 billion or 113% sales increase for the first nine months, very impressive.

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