Sotheby's Holdings, Inc. Q2 2010 Earnings Call Transcript

Sotheby's Holdings, Inc. Q2 2010 Earnings Call Transcript
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Sotheby's Holdings, Inc. (BID)

Q2 2010 Earnings Call

August 5, 2010 4:45 pm ET

Executives

Bill Ruprecht - President and CEO

Bill Sheridan - CFO

Analysts

David Schick - Stifel Nicolaus

George Sutton - Craig-Hallum

Rommel Dionisio - Wedbush Morgan

Kristine Koerber - JMP Securities

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Sotheby's second quarter first half 2010 earnings call. (Operator Instructions)

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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 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.

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

Bill Ruprecht

Thank you, Jonathan. Good afternoon. Welcome, and thank you all for your interest in Sotheby's. Today we're announcing second quarter and first half results, which we consider outstanding.

Total revenues are up dramatically to $281.4 million in the second quarter and to $383.3 million for the half, thanks to strong worldwide sales, which are up 116%, that's to $2.2 million for the first half, and particularly Impressionist Art and the Contemporary Art net auctions increased to 188% in the half.

We're pleased to report that despite the significant increase in revenues, 68% for the quarter, 73% for the half, operating expenses were well-controlled. As a result, second quarter net income grew $74 million to $86.2 million. First half net income was up $106.4 million, which is the second best for the period in our history.

Expense control remains a regular and indeed constant focus for us, although our payroll is smaller. There's some expense growth, which is attributable to the significant increase in sales revenue and profitability. The significant driver is an increase in accrued incentive bonus cost due to the improvement in profitability in 2010 as compared to last year.

It's important to note in this regard that the entirety of our salaries and related cost line as a percentage of our operating revenues is down below 32%, a year ago this ratio was 44%, and this first half percentage is lower than we've seen it any full year for at least the last dozen years.

We assume in the middle of property gathering, it's early August for the Autumn sales, but we already have a number of exciting auctions and considerable property for those sales. I'll talk some more about that later in the call.

I'll turn it over now to Bill Sheridan, the CFO, who will give you some detail on the P&L and balance sheet.

Bill Sheridan

Thanks, Bill, and good afternoon, everyone. I'll be referring to page 6 of our earnings release, which has the three months and six month income statement.

Our 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 a loss of $0.34 per diluted share.

Looking at operating revenues, for the three and six months ended June 30, total revenues increased $114.1 million or 68%, and a $161.5 million or 73% respectively when compared to the prior years. This growth principally stems from $716 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, revenues from private sales commissions increased $4.6 million or 31% in the first half when compared to the prior year as a result of higher commission margins on private sales. Partially offsetting this increase was 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, which is attributable to the change in sales mix towards higher-valued items in both periods. As you are aware, over $1 million the buyer premium rate declines from 20% to 12%.

Lots sold over $1 million grew from $115 million in 2009 to $273 million in the first half of 2010 for an increase of 137%. That was the principal reason for the decline in auction commission margins.

Turning to the direct cost line, for the three of six months ended June 30, direct cost of services increased $6.7 million or 46% from $4.4 million or 18% respectively. These increases are in line with the level and mix of our auction offerings and sales growth 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, and traveling exhibition cost primarily due to traveling exhibitions for property offered in our second quarter Impressionist and Contemporary Art sales. In addition, we had an unfavorable experience in property loss and damage claims with a year-to-date increase versus the prior year of $1.5 million.

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