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.”

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.”