Sothebys 3Q15 Earnings Call Notes

Sothebys’ (BID) CEO Tad Smith on Q3 2015 Results

Macro economic uncertainties have us looking at our expenses for 2016

“Over the past weeks and months, macro economic uncertainties have us carefully looking at our expenses for 2016. As part of that process, we will probably need to make some adjustments.”

The buyers are getting more discerning in the middle market

“With respect to the middle market, it’s interesting. I would say this, I think what I said to CNBC the other day, it still holds even sort of week later, 10 days later when the auction began which is, the buyers are getting more discerning. ”

You have two tiers of buyers, several hundred that buy >$1m and others that buy smaller lots

“And frankly when you look at the buyer population at Sotheby’s, you really have two tiers and arguably you can even make it three tiers. But we will do two tiers just for the sake of argument. There is a relatively several hundred, call them, folks who buy stuff that are lot sizes more than $1 million and then there is a much larger group of people that buy smaller lots. So let’s break it in these two tiers.”

High end still has plenty of money but is more discerning with respect to quality. Quality still sells for enormous prices

“And with respect to the high-end, the folks who are buying things of more than $1 million, that group is getting — certainly still has plenty of money and it’s getting very discerning and quality oriented in their purchases. And you see that reflected I think in some of the auctions, both last night and also last week and also over the past couple of months. So when I talk about the buyers getting more discerning, but quality still sells and by the way quality sells for enormous prices and sometimes belong to the high estimates, that’s the group I am talking about.”

Folks in the larger pool–the middle market is sluggish, but lower priced options are moving better than expected

“When you talk about folks that are a much larger pool that are invariably going to be a little bit more sensitive to macroeconomic uncertainties, it’s interesting, there is a diversion, if you look at the nine month period through the end of September this year, the focus in the market which I typically define as the middle-market, little bit sluggish and then some lower-priced options generally moving better than we expected. So that’s really what it looks like. It’s almost a tiering, if you will. And I think that that is emblematic of a market that is solid. I think it creates buyers that are discerning, quality oriented, but careful. I don’t know how to say it.”

The high quality stuff is going very strongly, but everything else is soft

“it’s hard to talk about average price because that’s not what’s happening, honestly, in the auction room. What you are seeing is the prices of very high quality objects are going very strongly against the estimates and the prices of everything else are soft. ”

The performance of the quality stuff is driving expectations for the lower quality stuff and that means that prices are missing expectations relative to estimates

“one thing that’s going on here is, of course, a consignor sees pieces going for eye-popping numbers in the auction room and the consignor’s expectation about what it’s worth goes up. So the estimates then go up and so vis-à-vis the estimate, if it doesn’t performing as the estimate, it’s not clear that the value of the item didn’t appreciate considerably, it just maybe it didn’t appreciate vis-à-vis the actual estimate price that we guaranteed or didn’t guaranteed and consigned it to go into the auction room.”

The top line is holding in even though there is a skew of results underneath it

“So my general view is that the consignor’s expectations about estimates are robots and what that means is, there really needs to be a significant bit of quality in the item in order for it to go well above the estimate in the auction room. And there are a lot of things that don’t achieve that but on balance, it’s ending where the sales are strong at the top line, even though there is a skew of results underneath it.”