Sothebys 1Q17 Earnings Call Notes

Thomas Smith – President and CEO

*The market is starting to show signs of strengthening

“So, what is the state of the market for the art and luxury goods that Sotheby’s sells? In short, the market is starting to show signs of strengthening. The message from our Hong Kong sales in April was that East and Southeast Asia’s buyers were prepared to pay top prices for excellent quality art and jewelry.”

*Purchasing power of wealthiest has grown more than price of art

“In 2006, the 201st wealthiest person on the Forbes 400 would have had to spend 10% of his wealth to purchase the most expensive piece of art sold in auction that year. In 2016, that same number was only a little over 5%. In 2006, the 201st wealthiest person on the Forbes 400 would have had to spend over 70% of his wealth to purchase all of the top 10 pieces of art sold at auction that year. In 2016, that same number was under 40%. In other words, the median member of the Forbes 400 would have seen his personal spending power to purchase art at auction, grow 75% in the past decade alone.”

Sotheby’s 4Q16 Earnings Call Notes

Thomas Smith

Collectors responded enthusiastically

“we were cautiously optimistic in November, but as it turns out, the weight in that statement should have been on optimism as collectors responded enthusiastically to the great collections and works we secured for sale. Second, greater pricing discipline and intelligent deal-making contributed to yet another quarter of improved auction commission margins. Third and most importantly, this quarter demonstrated that when the market stabilizes, let alone when it returns to its secular growth trajectory, our Company is poised to capitalize on the upturn and do very well for our shareholders.”

The average outcome in the US is higher, but there’s also more risk

“In terms of – I’d like to separate tax reform and set that aside for just one second, and I’ll come back to it, Oliver – in terms of how people are feeling, if you look at the stock market, if you look at generally the growth profile in the United States, I think on average people are feeling noticeably better about it. I think if you look at Europe, they are feeling a little bit better about that. At the same time, the probability of an unusual outcome has gently gone up. So in other words, the distribution of outcomes has become on average much more favorable but the distribution of outcomes has become a bit flatter, which is to say that everyone is feeling better but there’s a higher probability, very gently higher probability, that there is some risk around it. And that is a good segue into what are the kinds of risks. One thing is that at least in the United States there is a high degree of enthusiasm for some pro-growth policies, including regulation changes and also particularly tax reform. With respect to tax reform, it has lots of positives. If the corporate rates become more favorable and there’s repatriation, that’s definitely better for investment. The stock market is already probably benefiting from that. And if more money gets put into our pockets and we’re feeling better about things, that will definitely have a positive impact going forward. If either the prospects for either legislation in the United States dim or people get a look at what the legislation is and they decide they don’t like it quite as much, I said a minute ago, the distribution of outcomes would be a bit flatter even though the average goes up. Well, that would be an example of a situation where they may not be as enthusiastic and that would be a risk to the marketplace. I have to tell you, I feel quite good about it and I’m thinking things are going to go rather well.”

Sotheby’s 3Q16 Earnings Call Notes

Sotheby’s (BID) CEO Thomas Smith on Q3 2016 Results
Thomas Smith

Signs that the market might stabilize

“Underneath the seasonally weak results that we expected during the quarter, we are pleased both with some small signs that the market might stabilize and also more significant internal progress on our initiatives such that, when the market does stabilize, Sotheby’s will be poised to do very well for shareholders.”

People are looking for an opportunity to buy

“Yes, actually we are seeing – I’ve been travelling extensively talking a lot of our both consigners and buyers. And it’s clear that coming out – the summer was a little bit of a pattern of the doldrums. Coming out of the summer there was a little bit more confidence, consignments began to pick up. Some very interesting things came to the marketplace. And there is a sense in the art market from lots and lots of consigners that we’ve had a long sort of not very exciting patch during the art market, and that they are looking for an opportunity to buy. I mentioned in prior earnings call that there a lot of people that have a lot of money and are very interested in buying good things or things at good prices or both. And those folks are eager to see good things and good things or good prices in the auction rooms, but the problem more recently in the last number of quarters has been a little bit of reticence on the part of consigners who have the discretion not to consign to wait and see how things that are uncertainty shake out.”

Miscellaneous Notes 5.12.16

Third Point Reinsurance’s (TPRE) Dan Loeb on Q1 2016 Results

We’re seeing some opportunities in distressed debt

“we’re seeing opportunities in distressed debt. So I want to stress. We’re not in a credit cycle where I think there’s going to be massive opportunities due to a slowing economy and large defaults. But we are seeing a lot of dislocations in various credits and we have been scooping up some very attractive names in – we’ve talked about this in the past, some fulcrum securities in energy companies. On the sovereign debt front, we’ve talked about Argentina. And there are a couple of distressed situations out there that we have been buying. I think structured credit is also – it was really off only for liquidity reasons, not for fundamental reasons. So we feel good about that portfolio. And I think the most interesting space right now is just in equities that are getting oversold or just underappreciated and under-owned that are in the industrial sector.”

Sotheby’s (BID) CEO Tad Smith on Q1 2016 Results

Do not expect art markets to return to 2014 or 2015 levels this year

“On our last earnings call, we said that we did not expect sale levels for the full year 2016 to reach the annual held levels of 2014 or 2015. And as of right now our view remains unchanged. However as I just outlined, recently, we observed the number of positive indicators most notably our Hong Kong sales series which was up 17% year-over-year. Of course our most significant data points for the second quarter kicked off tonight, with a number of important auctions to follow in the coming days so the next two weeks should provide all of us with a lot of good market intelligence. Until then we will remain cautiously optimistic.”

Dean Foods (DF) Gregg A. Tanner on Q1 2016 Results

See favorable supply/demand dynamics in dairy with supply outgrowing demand

“We expect global dairy fundamentals to continue to be overall supportive to our business as production growth continues to outpace demand. In the U.S., we continue to see domestic supply growth. Total U.S. milk production increased 1.8% year-over-year in March with production in the Midwest, Northeast and Northwest more than offsetting the continued decline in California. In addition, dairy herd continues to grow both sequentially and year-over-year. The current USDA forecast calls for 2016 milk production to increase 1.5% year-over-year. On the global supply front, the EU remains a leading contributor as their milk production has increased more 5% year-over-year. In contrast, we look at the continued decline of production in New Zealand. It has had minimal to no impact on the global markets. With U.S. butter and cheese prices remaining uncompetitive versus the international market, we continue to see a decline in overall U.S. dairy exports. Despite the temporary increase we saw in exports in January and February, the USDA published March data showing a decline of over 21% with the major drop in non-fed dry milk driving the decline. These supply and demand factors should continue to contribute to a relatively benign dairy commodity environment over the short term.“

Tyson Foods (TSN) Donald J. Smith on Q2 2016 Results

Low grain costs have helped us outperform

“ Obviously, our grain position is favorable this year with the low end of what we expect the five-year range of grain to be, and that helps over-deliver a bit.
And if you look going forward at what might cause any dip, it’s that level of fundamentals, primarily driven around the grain. But I tell you, we’ve done a very good job of utilizing the price discovery mechanisms afforded to us to be able to take a lot of the grain volatility out of our business. We’ve priced much more of our products off in some kind of a grain-based mechanism

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.”

Southeby’s 4Q14 Earnings Call Notes

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

Strong global art market leads to 20% operating income growth

“With a strong global art market and increased sales worldwide we achieved a 20% improvement in adjusted operating income in 2014”

Competition is robust, but so is demand

“Competition for the best works is robust in this strong market and we’re certainly winning our share of those and of course this keeps commission margins under some tension. But as Patrick said those margins appear to be stabilizing year-to-date. 2014 saw double-digit sales growth in many important categories, Impressionist, Modern, Contemporary, Jewelry, Old Masters, American Art among others, where almost a third of our categories had the highest levels of sales in our history. ”

One third of buyers are new

“And across Sotheby’s worldwide auctions one-third of our buyers in 2014 were new to us accounting for about fifth of global sales.’

Commitment to acquiring art despite market volatility

“I’ll start with the particular, the February sales in London where against the backdrop of some instability in Russia and questions about Chinese growth, you could have seen in those high profile Impressionist and Contemporary sales some hesitance or reticence to bid on those quality offerings. In fact, we saw just the opposite, strong demand, a strong commitment towards wanting to acquire great works of art, leading to one another things, the highest price for our Gerhard Richter’s in I believe Living Artists in the marketplace.”

The market is open and demand is strong

“So whenever you’re seeing strong demand that tends to facilitate discussions with people who are thinking about selling works of art, because the market is clearly open and demand is strong.”

Don’t see meaningful shift from private selling to auction

“I don’t see a meaningful shift in seller mindset. Certainly big auctions and successful outcomes tempt people towards auctions and those opportunities to pit bidders against one other are buffered in some circumstances by some individual’s appetite for privacy and certainty around the traction.”