U.S. Markets closed

Edited Transcript of BID earnings conference call or presentation 3-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Sotheby's Earnings Call

New York Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Sotheby's earnings conference call or presentation Thursday, August 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Amy Cappellazzo

Sotheby's - Chairman of Fine Art Division

* Jennifer Park

* Michael Fenton Goss

Sotheby's - CFO and EVP

* Thomas S. Smith

Sotheby's - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Cecile Pascual Origenes

Cowen and Company, LLC, Research Division - Associate

* Robert S. Majek

CJS Securities, Inc. - Research Analyst

* Westcott Irvin Rochette

Evercore ISI, Research Division - Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Sotheby’s Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded. At this time, I would like to introduce Jennifer Park, Vice President of Investor Relations. Ms. Park, please go ahead.

--------------------------------------------------------------------------------

Jennifer Park, [2]

--------------------------------------------------------------------------------

Great. Thank you, Tanya. Good morning, and thank you for joining us today. With me on this call are Tad Smith, Sotheby's President and Chief Executive Officer; and Mike Goss, Chief Financial Officer. 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 an adjusted non-GAAP basis. An explanation of the non-GAAP financial measures used in this earnings call as well as reconciliations to the comparable GAAP amounts is provided in the company's Form 10-Q for the period ended June 30, 2017.

Also, during the course of this call, the company may make projections or other forward-looking statements regarding future events or the 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-K and Form 10-Q. These documents identify important factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements. Also, please see our Investor web page for a transcript of our prepared remarks.

Now I'll turn the call over to Tad.

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Jennifer, and good morning, everybody. Thank you for joining us. Today, we're reporting second quarter diluted earnings per share of $1.43 compared to $1.52 in the prior period, a 6% decline. For the half, diluted earnings per share is $1.21 compared to $1.03 per share in the prior period, a 17% improvement. After excluding certain charges in both periods, adjusted diluted earnings per share improved 8% from $1.13 to $1.22. This morning, Mike and I will change things up a little bit. I'll begin by addressing 2 questions. How do we in the quarter and the first half of 2017? And second, what are our key takeaways from the second quarter and first month of the third quarter? Then Mike will provide detail on the numbers for the second quarter and first half results, after which I will come back on again and say where Sotheby's is headed.

Obviously, after that we'll turn to questions. So how did we do in the quarter and the first half of 2017? Overall, the quarter was solid. Revenue was up by 5% during the quarter, mainly due to a rise in inventory sales, but also a noticeable and welcome improvement in the performance of our guarantees in the auction room versus a year ago.

We are pleased that these results were slightly better than we anticipated on the last earnings call when we cautioned that we were up against tough comparisons on revenue because of an outstanding spring sale series in Asia and the record jewelry sales in Geneva last year.

When reviewing our quarterly expenses, please note that we've provided for staff bonuses at their target levels versus last year's much-reduced level. In addition, equity compensation expense has increased due to the improved performance against our return on invested capital targets, which of course, is a good thing for investors. The quarter also reflected the effects of investments we've been making in technology, specialist expertise and digital marketing to take our company secular growth trajectory to the next level. Later in the call, I will say more about those investments and what investors can expect in the future.

So overall, the quarter was solid and I'm confident more growth will come both as the market improves and as our investments begin to yield returns.

Our results reported today also shine a light upon many encouraging aspects of our business.

One has been private sales, which for the first half of 2017 were up 34% over the prior year to $333.8 million.

We also had substantially more private sales transactions in the first half of 2017 than we had in any of the similar periods of the prior 4 years. For example, the number of sales is up 52% from the first half of 2016. Versus 1 year ago the number of overall transacting clients, this is not just private sales, but overall transacting clients for the quarter is up 10%. The result was an increase of 19% in the average number of bidders per lot sold and a rebound in the average hammer versus the low estimate from 97% to 112%.

Speaking of clients, the number of new clients grew in the first half of the year versus a year ago by 4%, and their average hammer purchased soared by 59%. Another big change in the first half was the return of high-priced lots. For example, lot unit growth above $1 million was up 5% and total average hammer for those same lots was up 17%. The number of buyers in that same $1 million-plus lot band rose 10% and sellers rose 13%. Overall geographic dispersion of the buying volume reflected a sharp rebound in American buying, up 26% versus a year ago first half, to displace Asia as the largest purchasing region by dollar volume.

Continental Europe also grew 18%, and we were also pleased, by the way, that Asia buying, already very large, nonetheless still grew 3% in the quarter. Our online progress continues to be a good story. To be clear in our terminology, we have 2 types of online sales. The first is the online participation in live sales that are conducted in our auction rooms around the world. The second is what we call online-only sales, which occur entirely online. Unless we say online only, all of the statistics below import incorporate both. For the first half of the year, 22% of our lots were sold to online buyers. That's 22% of all Sotheby’s lots were sold to online buyers versus 19% a year ago and 13%, 2 years ago.

More registrants and bidders are participating online than ever before, and the total value of online underbids rose 23% from the first half period in 2016. The buying behavior online is truly global in our New York sales, 26% of all lots sold to online buyers and our salesrooms in London, Hong Kong, Geneva and Paris all saw percentages in the double digits as well. The behavior is also across categories, with our top 5 lots sold to online bidders coming from our Contemporary, Jewelry, Latin American, Prints and Fine Chinese Paintings departments.

Turning now to our online-only sales, which were launched last year. We're exceeding our expectations. The number of online-only sales last year was 16, and we are on track to double that in 2017. Our overall sell-through rate in online-only sales improved to 81% compared to 62% in 2016. Most importantly, online-only sales continue to be among our best methods of acquiring new clients, 45% of buyers in those sales were new to Sotheby. Our digital editorial products have done well in the first half. For example, the growth in paddle registration by the audience reading our editorial content outpaced overall growth in registrations by 77%. The percent of site visits by editorial readers that include a paddle registration is 37% higher than the overall average. Over the coming year, we'll begin to measure the actual return on investment of each piece of editorial we create and, therefore, we'll have a much clearer picture on this effect.

Turning to my second question. What are our key takeaways from the second quarter and first month of the third quarter? Broadly speaking there's not much change in the market from what we said in the last earnings call, but I will summarize briefly the state-of-the-art market. The things we sell fall largely into 2 groups. The first group is masterpieces that are fresh to the market and are in excellent condition. Demand for works in this first group is robust and pieces sell at very high, some would say eye-popping prices. However, that is only a small part of the market story. If a piece we sell is not fresh, not the best example of an artist's oeuvre, or not the most desirable artist, then demand for the piece is quite discerning and price will need to be realistic in order for it to sell. In other words, the market for fine objects is healthy and efficient, but neither frothy nor depressed. One consequence is that we're working hard to get prospective consignors either to part with their masterpieces we described in group 1 or realize that their favorite work of art is really in group 2 and they need to be realistic about price expectations for it to sell.

However, it was encouraging to see that according to Sotheby’s Mei Moses database, the average and median returns on art sold in the first half of 2017 stabilized versus the full year of 2016 based upon a sharp rise in the average and median returns of sales of Contemporary Art. As for exogenous market factors, I've spoken about them extensively on prior earnings call, and there's not much to add to my prior comments, except perhaps to acknowledge that the uncertainty in Washington is troubling. I will now turn it over to Mike for a review of the results before coming back to me to discuss where Sotheby’s is headed in the future. Mike?

--------------------------------------------------------------------------------

Michael Fenton Goss, Sotheby's - CFO and EVP [4]

--------------------------------------------------------------------------------

Thanks, Tad, and good morning, everyone. As Tad alluded to earlier, during the course of our last earnings call, we indicated that we expected little, if any, EPS growth during the first half of the year and that revenues generated by our strong North American spring sales may well be offset by tough comparisons elsewhere. And we identified our 2016 Hong Kong spring sales, a record-breaking jewelry sale in Geneva last May, onetime fees at Sotheby’s Financial Services from last year and adverse exchange rates versus last year as the primary sources for the tough comparisons. We turned out to be right, although we actually came in slightly better than we anticipated 3 months ago with our first 6-month adjusted diluted earnings per share coming in at $1.22 per share versus $1.13 per share during the same period a year ago.

This morning, I plan to cover the results of the most recently completed quarter in our typical detail. But as we suggested many times before, we also want to spend time on the 6-month results because we think such analysis helps to overcome some of the seasonal peculiarities of our business and provides more insight into the current state of our business. Let's start with our sales activity. First, let's discuss the aggregate auction sales that are reported on our Investor Relations website. When the hammer comes down in the auction room, a sale is generated and the hammer price is recorded along with the buyer's premium, or BP. If the transaction takes place abroad, the hammer price and BP are translated into dollars using that day's exchange rate. For the first half of 2017, such aggregate auction sales using this methodology were up 8%, and the second quarter sales were up 5%. The decline of the British pound was significant last year and for those who have interest, our first half and quarterly growth in sterling, rather than U.S. dollars, was 22% and 18%, respectively.

Secondly, is our aggregate auction sales that are reported in our 10-Q filed with the SEC. This starts with those sales reported on our website, but importantly, it excludes any property that we sell in the auction room from our own inventory or sales that don't yet qualify for sale recognition under generally accepted accounting principles as an auction sale. For the first half of 2017, aggregate auction sales as reported in our 10-Q were down 2% and for the second quarter were down 1%. On a constant-currency basis, I should note, they rose slightly for the quarter, up 2%, and the June year-to-date period, up 3%.

Third is consolidated sales, which are an important metric that provides visibility into the broadest level of activity across Sotheby’s. This measure includes our auction sales, our sales from our own inventory and the private sales we do. For the first half of 2017, consolidated sales were up 4% and for the second quarter up 2%. On a constant-currency basis, consolidated sales were up 9% and 5% for the 6- and 3-months periods, respectively.

Consolidated sales is the most representative of how we currently view the strength of the markets in which we compete and our own performance. Again, the first half and quarterly growth of consolidated sales in British pounds rather than U.S. dollars were 18% and 14%, respectively. With respect to our auction revenue, our auction commission margin was largely flat for the quarter at 16.3% this year versus 16.4% last year. However, we are very pleased with this result given the substantially larger number of lower margin and higher-priced fine art pieces sold in the major evening sales in New York and London, associated with the recovery this year. For the 6-month period, our auction commission margin of 16.7% was better than last year's level of 16.1%, and we still expect to end the year with a modest improvement in margins year-over-year despite the greater mix of lower margin, higher-priced objects. Two other items of note on revenue in the second quarter. First, our book of guarantees and irrevocable bids performed very well as evidenced by the strong growth in other agency commissions and fees, which were up $7.7 million. And secondly, we reported lower facility and other fees generated at Sotheby’s Financial Services down $3.5 million due to the inclusion of unusually large collateral release fee in last year's second quarter.

Moving on to adjusted expenses. We were once again higher than we were for the year ago periods, up 11% for the quarter and up 9% for the 6-month period. Looking forward, we reiterate our view that we expect adjusted expenses to end the year closer to our spending level of 2015. This increase is primarily the result of a restoration of our annual incentive compensation to targeted levels in 2017 and higher spending against our various growth initiatives that is intended to drive our future growth.

On a related note, it's worth pointing out that we frequently have the opportunity to invest in start-ups in the digital space and, while we are always on the lookout for innovation and specialized technology, we frequently, although not always, conclude that it is much more economic to make our e-commerce capability ourselves than to buy them from others. However, the consequence of this decision, while economically rational, has the effect of elevating our operating expenses, while such capabilities are being developed. But we make these investments in full expectation that they will yield economic benefits in the not-too-distant future. Before moving to the balance sheet, it's interesting to point out that foreign exchange rates cost us $6.9 million in operating profit in this most recently period -- in most recently concluded 6-month period, largely because of the importance of our U.K. business in the first half of every year. To put that figure into perspective, this is $0.09 per share negative impact on our first half earnings per share.

Moving to the balance sheet, we have several items to flag for investors.

First, we are very pleased with the performance of our Sotheby’s Financial Services business. Our average loan portfolio balance rose 5% versus the year ago quarter. And if one excludes the onetime unusual collateral release fee from a year ago, our underlying profits rose sharply.

Second, our capital allocation measures to convert our inventory to cash continue, with our quarter end inventory balance now standing at $131 million on a reported basis. But quite importantly, that balance still includes the entire amount of $68 million pink diamond, which was sold at auction during this quarter, but will not be recognized as a sale under GAAP until we collect the money from the buyer, which we anticipate to happen within the year. Recall that the end of 2015, we held $215 million in inventory, so our progress has been meaningful, down 71% since 2015 once the pink diamond is accounted for. Moreover, our earnings in the past 2 years have been negatively impacted by write-downs on inventory that had accumulated over many years. In the first half of this year alone, such write-downs totaled $8 million or $0.10 per share in earnings per share. But that inventory is now being converted to cash and put to better use for investors.

Secondly, as we reported in an 8-K filing in June, we amended our York Avenue mortgage and prepaid the principal balance by $32 million in return for a reduction in our minimum net worth covenant in order to continue to provide flexibility for share repurchases. Other than a very small amount, $6 million, we have no current authorization remaining on our stock buyback program. However, as we continue to evaluate the best uses for any excess cash, we can and will move quickly if we conclude that increasing the authorization is best for Sotheby’s and its shareholders.

As we look forward to the third quarter, we are mindful that in 2016, we generated only 4.5% of our total net auction sales for the year in the third quarter. As a result, third quarter results usually tell us very little. I anticipate that on our next call together, we will once again be encouraging investors to look at our 6-month run rate as a more meaningful measure of our financial health.

We will share more about the fourth quarter on the next earnings call, but for the near term, we are managing our business in a manner that anticipates a continuation of our modestly upward sloping trajectory on consolidated sales. For the longer term, we plan to continue our focus on our strategic growth initiatives and on efforts to efficiently fund such growth and allocate our capital.

So with that, I'm going to hand things back to Tad.

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, again, Mike. So where is Sotheby’s headed? Our vision is to be world's preeminent destination to discover, experience and trade valued objects. In pursuit of that vision, we have 4 key priorities, strategy, technology innovation, team and capital allocation. So what can clients, investors and staff expect in the next couple of years? Here are some key themes on my mind. In terms of strategy, we will continue to fill out our suite of services to buyers and sellers, who appreciate our ever-greater sophistication and creativity. Art advisory will continue to expand with more clients, services and deeper relationships. We've already seen a more than 20% increase in the number of clients since we acquired the firm. As for our new business of advising artists and artist estates, we're pleased to have signed up 10 new clients and with plenty more in the pipeline.

Jewelry will be a meaningfully larger part of our business, and our services will migrate from mainly auction to greater private sales, both in-person, and through online marketing and e-commerce. Already the strongest worldwide player in auctions, wine will also be a meaningfully larger part of our business and our services will migrate to greater collection services, curation and online sales. Our marketing materials will be digital and social, and our selling strategy both digital and personal. A mainstay of our history and the market, the traditional print catalogue will remain only for those who value it, want it and use it. At the same time, our digital catalogues will be greatly enhanced with each passing quarter.

Our staff will have great digital tools that reduce the time and resources they devote to manual processes that yield no value for clients or shareholders. One of my favorite, our auction room, for example, will be paperless. Our clients will experience much more consistent levels of service as well as a more tailored and personal service delivery model. Those who prefer a friendly phone call and a regular visit will receive it. Those who want a terrific digital experience with personalized recommendation engines will have that. But even the friendly phone call or visit will be made more consistent in its service quality by the enablement of digital tools. In terms of our staffing, I have several thoughts to share. First, we've been adding staff who are skilled specialists, experts in needed technologies, strong salespeople and excellent digital marketers. At the same time, we have an opportunity now to pause and reexamine our cost structure in areas that are not growing or where automation, data, or standardization of processes will yield significant savings. We believe that there are numerous opportunities for our company to improve efficiency and productivity, and we will address this opportunity by the end of this year.

I arrived at Sotheby’s in March 2015 to find a talented and dedicated group of people. What we set out to do was to build one team from the talented individuals to serve clients and shareholders at a high-performance level around the world. Now, over 2 years later, we've made progress toward that one team objective, but my colleagues and I have identified areas where we still fall a bit short and by the way, our clients and shareholders sometimes suffer as a result. The good news is that we're relentlessly focused on the one team culture and this will bring noticeable benefits over the next couple of years. In summary, we continued to refashion Sotheby’s right now, for an even more successful future than its illustrious 273-year past. We're confident that our success will be shared among clients, shareholders and our winning team. Mike and I are now happy to address your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Dan Moore.

--------------------------------------------------------------------------------

Robert S. Majek, CJS Securities, Inc. - Research Analyst [2]

--------------------------------------------------------------------------------

This is actually Robert Majek filling in for Dan this morning. In terms of investments spend and G&A expense, in general, what types of growth rates do you expect over the next several quarters and into 2018? In other words, if revenue continues to recover, how should we think about the incremental margins over the near term, while you're still in the mode of investing in technology talent, et cetera?

--------------------------------------------------------------------------------

Michael Fenton Goss, Sotheby's - CFO and EVP [3]

--------------------------------------------------------------------------------

Yes. Well, we did say in that prepared comments that investors should anticipate that we'll basically be restoring our levels -- our spending to a level closer to what we spent in 2015, which is another way to say, we cut back in 2016. We're going back to where we were in 2015. That's not completely out of line if you just doubled the first 6 months of this year. So I think a continuation of kind of what we've seen is not a crazy assumption.

--------------------------------------------------------------------------------

Robert S. Majek, CJS Securities, Inc. - Research Analyst [4]

--------------------------------------------------------------------------------

And then, clearly we're seeing signs of recovery, but how would you describe the mindset of sellers overall? Is kind of confidence roaring back here? Or is it more still toe in the water attitude, so to speak at this stage of the recovery?

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [5]

--------------------------------------------------------------------------------

What is the mindset of the confidence of buyers and sellers? Is that what says your question?

--------------------------------------------------------------------------------

Robert S. Majek, CJS Securities, Inc. - Research Analyst [6]

--------------------------------------------------------------------------------

Sure, yes.

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. Let's go to Amy for that. Amy?

--------------------------------------------------------------------------------

Amy Cappellazzo, Sotheby's - Chairman of Fine Art Division [8]

--------------------------------------------------------------------------------

Well, I would say we're seeing the market step-up to what is very excited for launch and it doesn't feel any sort of pause or hesitation about where it should land if the quality of the object is very, very high. As Tad said earlier in his comments if the object is just a notch below that top quality, we're seeing a more predictable outcome in value. So things have a greater known value and a less unknown value if the object is sort of ordinary, or just one of these or one of those. But quality continues to drive our market at the high end and that's where we see the most participation and the most percentage increase and the most excited buyers.

--------------------------------------------------------------------------------

Robert S. Majek, CJS Securities, Inc. - Research Analyst [9]

--------------------------------------------------------------------------------

And just lastly for me. You touched on it in your prepared remarks, but can you give us a further update on your online initiatives and what you've learned thus far? And maybe some of the tools that you're using to drive traffic to sotheby's.com and by extension increased the number of bidders at the auction?

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [10]

--------------------------------------------------------------------------------

Well, I'd love to. Let me start with, one of the things that is exciting to me today, sort of 2.5 years in plus or minus is that I'm actually more excited about Sotheby’s and the future than I was on the day I started. I was pretty excited then. And a lot of that has to do with when you look at the organization and the terrific team and the talent, but also, look at how technology can change so many different things that we're doing and significantly improve them. In terms of -- and by the way we're seeing that externally. I mean, right now we don't -- we haven't reported it, but we can attribute buyers premium to specific ad buys that we're doing digitally. We can track exactly how our digital activities are driving sales or not driving sales. And the challenge in the area where we've got a little investment still to go is actually on our own internal employees. It's fascinating. One of our very bright junior executives put together a literally hilarious video that shows how complicated it is for our own internal staff using our existing tools to actually put catalogues online, and to load up lots. And the number of manual errors and the manual issues and it's just over and over and over again and they sort of set it to music and sped it up to 5x the normal speed and it was still painful to watch. And when you look at that and you see the, at the same time what our digital team is developing and how fast it will improve our manual processes you think, not only will there be fewer errors, but in fact, the client service will be better and the cost structure will be lower. And so I look at that, and I say, at every level, both internally, externally, and here's one, but if you just -- my plan about the paperless auction room. Unless you've actually sat into an auction room from the side of the auction house and seen what happened. What happens is our key client managers walk in there in the evening and they carry a big pile of paper. The pile of paper has what the clients bids are, got yellowish tickets on it. It's got writing all over it, and so if I'm on the phone with Amy Cappellazzo to bid on something, if I'm the client, Amy -- and I'm an underbidder. I don't get it. Unless, Amy, actually physically takes that piece of paper and a manual process, loads it up into a system that may or may not actually happen. The fact that I was an underbidder on a particular piece is lost, is a piece of information. Whereas if I'm buying online, I will immediately have it and then we can automatically suggest something else or we can serve up a potential private sale. So there are just so many areas where I look at this, and I say this is incredibly exciting. And one other thing I would say, is if you look at the business, is that the buying rate. There are 2 ways you can view the buying rate. But one way, I would say, and it's the more provocative way is the buying rate is really a measure of opportunity for us to serve our clients better. And that depends on a lot of things. But one element of it could be just better information. And so technology, better information, better data and better use of the data could significantly improve that over time, should significantly improve our client service. So those are just some of the reasons why, and I gave you few examples there, of why I get really excited about what we're doing and the future of Sotheby’s in the next couple of years.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from Oliver Chen of Cowen and Company.

--------------------------------------------------------------------------------

Cecile Pascual Origenes, Cowen and Company, LLC, Research Division - Associate [12]

--------------------------------------------------------------------------------

This is Cecile Origenes. I'm on for Oliver today. We want to ask a question on the auction commission margin. It was largely flat in Q2 following a nice improvement when we saw in 1Q of 160 basis points. I know you stated earlier that you still expect to see a modest improvement at year-end. If possible, could you talk more about any puts and takes we should note as we think about modeling that cadence of that margin for the back half of the year?

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [13]

--------------------------------------------------------------------------------

Sure. Remember the auction commission margin is kind of the result of 2 offsetting tensions. One is the impact of mix, which by structure of our buyers premium, the higher the price item, the lower is the auction commission margin. And so we've always cautioned and then, the other tension is with better dealmaking that we've tried to instill in our dealmaking relative to consignors. We've always been cautioning that as the market recovers, the tension from an adverse mix is going to be increasing even if we continue progress in our dealmaking. And I think this quarter definitely illustrates that. We were very strong in the upper end of the fine art market this year and the tough comp we were up against in jewelry, in Hong Kong, where margins were higher. Those 2 things. That tension actually caused us to moderate the improvement. If you want to look for evidence of our continued improved dealmaking, I would look at that other agency commissions and fees line, which shows kind of the performance of our guarantees and irrevocable bids and that number's up strongly. So we continue to believe we're doing better deals, but we're just selling higher-priced items in this quarter than we did in the year ago quarter. For the balance of the year, remember that third quarter last year, we had this goofy-looking spike of 21% or something was their auction commission margin from a year ago. And that's because the number of high-end art items sold in the third quarter is virtually nil. So the next auction commission margin will look similarly strange relative to the balance of the year. At the end of the year, the fourth quarter, that's where we're really going to work on our auction commission margin and where you'll find some meaningful improvement. And as I mentioned, we're up through the first 6 months. We're still fairly confident we'll be up for the year, but as we've always said, our performance or our improvement compared to 2016 will be moderated by that mix question.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from Omar Saad of Evercore IS.

--------------------------------------------------------------------------------

Westcott Irvin Rochette, Evercore ISI, Research Division - Associate [15]

--------------------------------------------------------------------------------

This is actually Westcott on for Omar. I have 2 questions. One, looking at your online growth and your comments about jewelry and your kind of build versus buy. There are definitely players that are already out there that have been growing kind of that business, but on the kind of lower end, like do you look at those platforms as someone you can partner with, that you want like -- as you think about growing kind of the jewelry business and maybe the watch business and think about kind of getting supply? Like where should -- like at what levels should those categories kind of move towards and how you're thinking about the overall development of those businesses?

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [16]

--------------------------------------------------------------------------------

A very interesting question. And the interesting thing is, if you look at the last couple of days, Mike and I literally went over every word that part of his talk because I think he got it exactly right. And the color commentary I would add to his remarks is that really what we were talking about was capital allocation, and how do we use capital. And what he was saying and I -- and we're very excited about it is that when we look at potential -- well to be direct, acquisitions or material to the partnerships in emerging technology space or in emerging digital space, in areas that we think might be adjacent or potentially accelerators. The first thing we're going to ask is, is it a good use. First of all, is it strategically on point for us and I think you -- some of the things you said there could potentially be, and -- but second of all, the thing we want to look at is, is it a really good use of our capital? And the nuance that I really like about what Mike was saying was that it's interesting. The cost of technology is plummeting. And so what these entities have to bring is something more than just technology. They've got to bring something that is additive to our e-commerce. They have to bring something that is related -- a brand that works for us or potentially, new customers, or there has to be some theory of a case that they've hit minimum efficient scale and that we're not there in a particular adjacency. Those are the kinds of things we would look for and then, we would think about where the price premium for those things is and whether it is a good use of capital. Because our capital is very dear to us. We treat it with great seriousness and that's how we think about it. So I don't know, Mike, you want to add anything?

--------------------------------------------------------------------------------

Michael Fenton Goss, Sotheby's - CFO and EVP [17]

--------------------------------------------------------------------------------

No. I think if you're asking, are there adjacent categories to what is currently our core business in order to compete with some of the other e-commerce digital platforms out there. I think we feel about as good about our business to be able to enter those adjacencies on our own and feel, we will compete and win in those adjacencies. We have a great brand name. We have a great client list. We have great technology. There's really -- there's not a competitor out there that makes us think we can do anything other than succeed.

--------------------------------------------------------------------------------

Westcott Irvin Rochette, Evercore ISI, Research Division - Associate [18]

--------------------------------------------------------------------------------

Okay. That sounds great. And one other bigger-picture question is, in Asia, we've noticed in China the high-end market has really kind of started to pick up again, whether it's VIP in Macau, or it’s in the luxury, I'm -- and wondering how the art market -- how you perceive the art market there developing? And whether you're starting to see some signs of life of acceleration on that side as well?

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [19]

--------------------------------------------------------------------------------

Yes, sure. I mean, Asia, I think is reasonably healthy. There are and certainly, the overseas, the non-Mainland portion of China is also very healthy, and the Mainland Chinese are also very healthy. The trick there with Mainland China is going to be about currency availability. But yes, I think we see it as a reasonably encouraging picture. Yes. We're not seeing clouds necessarily on the horizon in any of our markets at all.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And I would like to turn the call back to Tad Smith for closing remarks.

--------------------------------------------------------------------------------

Thomas S. Smith, Sotheby's - President, CEO & Director [21]

--------------------------------------------------------------------------------

I just want to thank everybody for joining us this morning and appreciate your interest in Sotheby's. Thanks.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.