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Edited Transcript of BID earnings conference call or presentation 1-Nov-18 1:00pm GMT

Q3 2018 Sotheby's Earnings Call

New York Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Sotheby's earnings conference call or presentation Thursday, November 1, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Park

Sotheby's - VP of IR & Strategic Planning

* Michael Fenton Goss

Sotheby's - Executive VP & CFO

* Thomas S. Smith

Sotheby's - President, CEO & Director

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Conference Call Participants

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* Daniel Joseph Moore

CJS Securities, Inc. - Director of Research

* David Adam Schick

Consumer Edge Research, LLC - Director of Research, Senior Retail Analyst & Managing Partner

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Peter Lucas

* Westcott Irvin Rochette

Evercore ISI Institutional Equities, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Sotheby's Third Quarter 2018 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.

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Jennifer Park, Sotheby's - VP of IR & Strategic Planning [2]

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Great. Thank you, Chelsea. 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 are provided in Appendix B to the third quarter 2018 earnings release as well as the company's Form 10-Q for the period ended September 30, 2018.

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-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. Also, please see our Investor web page for a transcript of our prepared remarks.

Now I'll turn the call over to Tad.

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

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Thank you, Jennifer. Good morning, and thank you for joining us. Today, we are reporting a third quarter loss per share of $0.55, worse by 22% compared to a $0.45 loss in the prior-year period. After excluding certain charges in the current period, however, adjusted diluted loss per share improved 9% from a $0.45 loss in 2017 to a $0.41 loss in the current quarter.

For the 9-month period, diluted earnings per share is $0.43 that's positive compared to a positive $0.78 in the prior period. After excluding certain charges in both periods, adjusted diluted earnings per share improved 1% from $0.79 in 2017 to $0.80 in 2018.

As Mike Goss will explain later in the call, the quarterly comparison is even better when one takes into consideration the $7.4 million benefit reported in the third quarter of 2017 for the reversal of a tax reserve, which provided a $0.14 per share benefit at this time last year.

So this morning, I will start with an update on the market as well as look ahead to what we can expect from the fourth quarter and close with how we are thinking about technology before handing things over to Mike.

Given the few sales we hold in the third quarter, we try to look at our 9-month figures to get a sense of where we are. Consolidated sales, which as a reminder, combined aggregate auction sales, private sales and sales from our inventory increased 20% for the 9-month period to $4.04 billion.

Private sales alone are up 49% to a total of $675.4 million.

In terms of recent data points to consider, at the end of September and into the first week of October, we held our semiannual sales in Hong Kong, which provided valuable information about the health of the market and the mindset of our clients across Asia. The sales had a number of significant highlights, including a monumental modern painting by Zao Wou-ki that sold for a record $65 million, 2 porcelain masterpieces that sold for close to $20 million each, and a rare 100% sold Contemporary Art Day sale, to name a few.

By the way, let me depart from the script to say, when we have a 100% sell-through rate, we call it a white glove sale, and I'll come back to that a little bit later.

In the modern and contemporary art categories, both the number of buyers and aggregate spending were up sharply, including from Mainland China. Also with particular strength from Taiwan and Hong Kong, which could bode well for our upcoming New York auctions in the same categories.

In summary, our Hong Kong sales series totaled $466.1 million, which was a 15% increase year-over-year and virtually flat with the April, 2018 series, which itself was the second best result in our history.

Overall, Asian buying in those sales rose 12% in value, which was led by great strength in Taiwan, stability in Hong Kong and a decline of 14% from Mainland Chinese buyers, a weakness that showed up particularly in categories such as Chinese Works of Art, traditional Chinese paintings and jadeite jewelry.

In the first week of October, we also held our annual Contemporary Art auctions in London along the -- alongside the Frieze Art Fair.

Our evening and day sales, included 50 works from the collection of David Teiger, achieved an aggregate total of $109.2 million against a low estimate of $82.7 million, just below our total for the same series held in October 2017.

The sales were led by one of the most important paintings by a British artist of the last 30 years, Jenny Saville's Propped, which established a new auction record for any living female artist when it sold for $12.4 million after a battle among 8 bidders.

Our recent wine auctions in Hong Kong and New York are also worth mentioning. The Hong Kong series totaled $14.5 million with a combined sell-through rate of 99%. The New York sales were similarly strong, achieving a total of $12.3 million and setting a new world auction record for any bottle of wine. Those sales bring our year-to-date total for wine to $88 million, a 77% increase compared to the same period in 2017.

Looking ahead to New York and Geneva, we are very pleased with what our teams have assembled. With respect to the market conditions, there are uncertainties, including political noise here and abroad as well as rising interest rates and slowing global growth. Despite these data points, we remain cautiously optimistic about our prospects for November in New York and Geneva due to the strength, superb selection, attractive pricing and freshness of our works. Our Impressionist & Modern Art Evening and Day Sales on November 12 and 13, carry a combined low estimate of approximately $320 million, a 25% increase compared to our net totals from one year ago.

Among the highlights is one of the world's finest private collections of Fauve, Expressionist and Modern Works that is estimated to achieve more than $90 million. The team put a lot of thought into crafting a dynamic sale that would look different than others on the market this season. One dimension of that strategy is a curated selection within the evening sale focused on the tremendous and varied impact of the First World War on the artistic production of those whose lives it transformed, just as we are about to acknowledge the 100 year anniversary of the Armistice.

The combined low estimate of our Contemporary Art evening and day sales on the 14 and 15 of November is $323 million, just slightly below our net totals from November 2017. The auctions include major canvases by Gerhard Richter, Georgia O’Keeffe, Christopher Wool, David Hockney, and 4 works by Jean-Michel Basquiat.

Our auctions of Impressionist -- of both Impressionist & Modern and Contemporary art in New York are complemented by an extensive offering of works available for private sale. We have assembled about $250 million in works by a range of artists, including Joan Mitchell, Alexander Calder, Georges Braque, and Marc Chagall that are available for immediate purchase. Once again, that's private sale.

Turning to Geneva and Jewelry, we begin with our sale with Important Watches on November 13, which carries a low estimate of $10.2 million, a more than 100% increase compared to the results of the same sale a year ago. The low estimate for our Magnificent Jewels and Noble Jewels on November 15 is $86.2 million, which is about 10% higher than our net total from last November.

Next, let me address the emerging picture for 2019. We are at the beginning of our planning process for next year, and we'll certainly know more after our major November sales. Nevertheless, we are planning for market conditions in 2019 to be a bit more subdued than what we experienced at the end of 2017 and into early 2018.

Turning now to our technology strategy. We are building a company that will endure and crucially grow beyond the boundaries of its historical value. The elements of this technology strategy and investment are 1, digital infrastructure; 2, data; 3, basic services; 4, enriched content with enhanced reach; 5, advanced services; and 6, block chain-enabled innovations.

First, we've been investing in what we call our digital infrastructure. After 2 years of work, next year, we plan to have all auctions migrated to a new auction engine as well as to have a paperless auction room with resultant improvements in client service, speed, and cost reduction.

In addition, we recently replaced our outdated content management system with a new one having significant benefits in terms of stability, depth, search optimization and the potential for innovation. Second, we have access to a number of different collections of data on valuable objects, provenance, title, authenticity, ownership, pricing, buyer preferences and behaviors and sales transactions. We have also added data from the acquisition of the Mei Moses Index in late 2016, the dramatic expansion of our customer relationship management marketing over the past 2 years, the promised and now nearly completed investment in an object database to facilitate private sales execution as well as the enormous growth in our social media capability.

However, these data have been fragmented throughout the company, not easily accessible and not harnessed fully for innovation. Earlier this year, we began to collate, clean, centralize and standardize this data, establishing a foundation for powerful machine learning and other products that will greatly enhance our ability to serve our clients. We expect the fruits of this to begin to show up next year.

Third, we've been investing in what we call basic digital services over the past 3 years. These basic services include a beautifully refreshed public website and a mobile app launched in 2016 that has subsequently been upgraded with capabilities now including access to preferred benefits, credit card payments, complete catalogue materials, condition reports and the beginning of mobile bidding for our single-owner online-only auctions, with various owner sales to follow next year.

We have also upgraded and enabled our retail wine store for e-commerce as well as purchased Viyet, relaunched last month as Sotheby's Home, to give us a first-rate, low-touch retail capability for non-auction transactions. As we turn to the future, our investment program will gradually migrate from these basic services to the more advanced innovations that can propel outsized future growth.

Fourth, part of creating a great experience for clients is to develop and distribute rich and engaging content. Our new content management system, mentioned earlier, has given us the ability to surround clients with a growing menu of deep content to enrich their discovery, purchase or sale of valuable objects. Thus far this year, our media team has produced and distributed more than 1,500 original pieces of editorial content, including 315 videos viewed over 20 million times. More than 15,000 visitors who engaged with this content registered to bid in our auctions, and a similar number registered -- or sorry, requested estimates for consignments.

New artist pages on our website give a perspective on more than 140 of the most searched-for artists, in many cases, with a Mei Moses snapshot of the recent price performance of their works and the associated holding period as well as a selection of related artists to explore. Total video views across all of our platforms is up over 100% from last year, one of the key reasons that we are on track to end the year with a more than 40% increase in unique visitors to our site and a 20% increase in total site traffic.

In social media alone, for example, we are 65% larger than the next competitor, and our reach includes Facebook, Instagram, Weibo, Twitter and WeChat.

Fifth, we have been piloting a range of even more advanced digital services that will serve as a platform for future growth. We announced our online consignment tool in March 2017. So far this year, we've sold more than $30 million in items submitted via this tool, with an average buyer's premium of 22% and a wonderful average vendor's commission of 5%. And the growth of this tool is very exciting. In October, we received approximately 7,500 submissions, which is 20% over the prior month. Obviously, this level of growth requires that we create new service models using technology and more flexible staffing processes to satisfy our exploding demand. Through a better mobile and web user interface, which we call Appraise, expected to be launched next year, we plan to scale this growth and serve as a platform for consignors who want to transact quickly, easily and conveniently.

Another more advanced service is the recommendation engine that we've been piloting internally and testing on our artist pages.

Sixth, it would be hard to discuss technology in luxury markets without at least commenting on blockchain. Clearly, blockchain poses opportunities for the art market, and we here at Sotheby's are taking the technology very seriously.

Let's begin by noting that an immutable distributed ledger technology with independent attestation combined with security, convenience, and low cost would be a powerful enhancement to reducing art transaction costs and enhancing the velocity and dollar volume of global art asset turnover. No question about it. We see several critical roles for Sotheby's to play in such a market structure: one, seeding the distributed ledger with crucial data to make it easy for client adoption; two, providing branded and potentially legally binding attestation behind aspects of the data, such as provenance, title transfer, authenticity, and attribution; three, assembling or teaming up with partners to catalyze widespread trial and adoption; and four, appending services to the core ledger that allow clients to maximize the value, increase the enjoyment of and reduce the cost of owning their valuable objects.

We are well underway at assessing and implementing this vision and will have additional announcements in due course. As we have said before, not all innovations are technology related. We are 5 months into our construction project for our new gallery space on floors 1 through 4 of our Manhattan headquarters and are on target to unveil the finished product next April. We have completely reimagined the existing public spaces on those floors and repurposed significant space that had not been adequately deployed previously.

The result will be vibrant new galleries that will provide us with opportunities for more events and exhibitions throughout the year, particularly around our major sale moments as well as new special guest exhibitions. In addition, both our Paris locations and our London locations are completing improvements to make their gallery space larger and more inviting for clients. Regarding innovation, as it relates to talent, we continue to look for ways to engage our employees and make Sotheby's a best-in-class place to work. In March, we granted all eligible employees restricted stock units, representing shares of Sotheby's common stock, and we are looking forward to this March and the first vesting event, making all of our colleagues owners of Sotheby's.

Just last week, we announced the launch of a new student loan repayment benefit program aimed at easing the burden of our employees, which will enable employees to repay their student debt, college or graduate, more quickly by supplementing their regular payments with monthly contributions from Sotheby's. And the program covers our employees for as long as they remain an eligible full-time United States-based employee of Sotheby's with qualifying student loans.

Our colleagues are our company's greatest strength and their engagement and satisfaction are paramount in the value we deliver for our clients and shareholders, and I thank our colleagues for that.

One point before I turn it over to Mike and going off script momentarily, I do want to point out the PR Newswire that came across this morning. In terms of congratulating our employees, our French colleagues spent the last 2 days on a single owner sale by Pierre Bergé, and they accomplished a white glove sale, they sold 975 lots without a single one passing, and they actually managed to triple the high estimate on the sale. It was a phenomenal effort and an incredible amount of performance, and we thank them for it.

So now Mike, over to you to go through our financials before we take your questions.

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Michael Fenton Goss, Sotheby's - Executive VP & CFO [4]

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Thanks, Tad. As most of you are aware, the third quarter is always a quieter one and clearly, the smallest of our 4 quarters, as we hold fewer sales in the summer, for example, for the trailing 12 months, this recently completed third quarter accounted for only 9% of our net auction sales. We recorded a loss for the period, which is not surprising, given our highly seasonal business. The most important news from our third quarter is what it tells us about the environment as we head into the all-important fourth quarter. A quarter that last year produced 65% of our annual earnings and in stark contrast to the third quarter is usually our most important.

Before I address our outlook for the fourth quarter, let me first call attention to just a few points from our announcement this morning. Our net auction sales were up 30% versus the same quarter last year, with almost all the growth resulting from an evening of exceptional modern and contemporary sales held at the start of our Hong Kong sales week. Our adjusted expenses rose only 2% for the quarter compared to increases of 13% in the first quarter and 8% in the second quarter, confirming our prior indications that the growth in these expenses would moderate over the course of 2018, as we start comparing to periods that already reflect our strategic investments in technology and innovation.

As a result of the strong sales and more moderate expense growth, our adjusted operating loss for the quarter improved significantly from a loss of $41 million last year to a loss of $27 million this year. These factors translate into a slight improvement in third quarter adjusted diluted loss per share to $0.41, despite 2 factors which hurt our comparison to last year. First, as Tad mentioned earlier on the call, last year's third quarter included a significant benefit for the reversal of a tax reserve that favorably impacted last year's per share calculations by $0.14. And secondly, because of our aggressive share repurchase program, this year's third quarter loss is spread over 50.9 million shares versus the 52.5 million shares we had last year.

Put another way, if we had 50.9 million shares outstanding last year, our third quarter 2017 loss per share would have been a little over $0.01 higher.

Now it's a good time to pause and reflect on our stock buyback program. Through the end of the third quarter, in 2018, we have repurchased almost 3.8 million shares, which does not include any fourth quarter true-up for the amount -- for the accelerated stock repurchase plan we did in mid-September for slightly more than $195 million.

Going forward, we continue to expect the return -- to return capital to shareholders through stock buybacks. After we complete our recent $95 million accelerated stock repurchase plan, we may review with the board an additional authorization, particularly given our assessment that we still have the approximately $250 million in excess capital that we mentioned on our last earnings call.

Now let's move to how investors should view the upcoming quarter. Remember, the Hong Kong Modern and Contemporary Sales that took place in the third quarter were up 117% or $84 million. However, this was partly counterbalanced by weaker sales that followed in Q4, which were down 18%. Therefore, we are not encouraging investors to add any over performance in the third quarter to their previous expectations for the full year.

Thank you, and now we're ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of David Schick with Consumer Edge Research.

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David Adam Schick, Consumer Edge Research, LLC - Director of Research, Senior Retail Analyst & Managing Partner [2]

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A couple. So first, if you could give us some color on mix versus rate within commission margin. I think that would be helpful. Second, you mentioned planning for somewhat more subdued environment in 2019, I imagine, that means your expense planning as well, just want to make sure that would mean the leverage point would be lower than otherwise if things were then to turn out better. I just want to kind of relate that to the leverage point. And then lastly, the Viyet -- the Sotheby's Home, I know it's relatively small on a recent change but just how that transition's going, those would be helpful.

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

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Sure. The most important thing to understand about your question about mix is that a lot of our growth in Hong Kong in the third quarter during that modern and contemporary sale was from the $65 million sale of a very large high-profile picture by Zao Wou-ki, which accounted for a full 17% of our sales for the quarter. And if you only use the buyer's premium schedule and rate card, the buyer's premium on that painting is 13.4% compared to an overall margin of 19% for the quarter. If you just understood just that part alone, it would completely explain the reduction in auction commission margin is purely from the sale of one big, beautiful $65 million picture. As far as the leverage on our -- I think you're talking about the leverage on our expense base, is that what you were talking about, David?

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David Adam Schick, Consumer Edge Research, LLC - Director of Research, Senior Retail Analyst & Managing Partner [4]

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Yes, exactly.

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

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Yes, so we're still undertaking our planning for the full year of 2019. A lot will be learned in the next couple of weeks in November. So I don't want to be premature in how we talk about that. We certainly expect to continue to achieve operating leverage as we expect our expense growth to continue to be more moderate than it was, let's say, in 2017, when we were ramping up our spending around technology and innovation. But it's a little bit too soon for us to provide any color on what we expect at the revenue line. Give us a couple of weeks to see what happens in November.

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David Adam Schick, Consumer Edge Research, LLC - Director of Research, Senior Retail Analyst & Managing Partner [6]

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Sure. And then lastly -- yes, sorry go ahead.

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

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Yes, David, Sotheby's Home is doing great. I don't have anything more to say other than the comments I made in the script. We've got a lot of very exciting and innovative things going on there. It is a part of the business that has the potential to do some -- and I think I even hinted at it in the prepared remarks, we can do interesting things there with low touch models that are different from our standard models. We have it reporting into our -- one of our most talented executives in the company, a guy by the name of John Auerbach, and I'm very excited about the future of that.

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Operator [8]

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Our next question comes from the line of Oliver Chen with Cowen and Company.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [9]

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When you speak about 2019 being more subdued, what underpins your thoughts there? And you mentioned the mindset of clients across Asia, just how is that interplaying with both the consignor part and also, how may that interplay with demand, and there is a certain amount of anxiety about Chinese spending abroad and consumer confidence within China. So that would be very helpful. And blockchain is quite -- sounds quite innovative, just curious on that topic, how you interplay it with what your customers want and how that matches with the customer need and customer friction points, and what are key aspects for the potentially binding legal attestation of blockchain?

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

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So let's -- your questions hit the very, very near-term and the very long term. So let's do the very near term first. When we say that the -- we're planning, meaning the planning environment that we've undertaken, which, as Mike pointed out, is not yet done, is -- we're planning the conditions to be a bit more subdued. There are couple of things to keep in mind: a, it is -- the word's a bit more subdued; and the second thing I would say is, let's play the tape back to the end of 2017 and the beginning of 2018 and actually remember what those conditions were. We had just passed a major tax cut in the United States, growth was robust and expected to increase in the United States. We -- as John Quincy Adams probably said at one point, "We were not seeking trade monsters to destroy around the world." Lots of interesting things were going on. It was a different macro and political environment then. It was extremely healthy and extremely favorable with a very, very, very, that's 3 very, strong tailwind in the sail. If you change just a few of those things and you say, "Growth still looks pretty good in America", but you know the consensus for 2019 is a couple of basis points might come off the expectation. There is some uncertainty around a bit of slowing growth in China, but some portion of that could be rectified at any point if the trade picture improves noticeably. Obviously, we're well aware of Chairman Powell's remarks in early October and with the reversal of quantitative easing and the gentle, some would say not as quite as gentle, but it seems fairly gentle to me, rising interest rates. But by the way, those rising interest rates are coming because the growth is so strong, and the picture is very strong. But the rising interest rates do put a little touch of pressure on some emerging markets. All of that tends to affect psychology, but it's very easy to just focus on that and actually not look at the underlying fundamentals, which are actually quite strong. And we went into great detail, more detail than we've ever given. Actually, I don't think we've ever called out any sort of activity by Mainland Chinese buyers, who, by the way, are only 10% of our aggregate sales volume this year, I should point out. So they're not huge. We care a lot about them, we care immensely about them, but there's a lot of noise about China, and then I think I also went into great detail about the situation in Hong Kong was robust and the situation in Taiwan was positively ebullient. So the psychology is a tricky thing, but it's also a thing that can change quickly. And if the markets find a floor, it is some question as to whether the Asian equity markets have already found a floor, there was a little bit of that earlier this week, you saw a little bit of a pop from the Chinese regulators, we'll see how it plays out. If the United States markets, which have had a very difficult October, find a floor, sentiment can change very quickly. So I wouldn't say necessarily that we are turning bearish by any means, far from it. What I'm saying is this -- beginning of 2018, we had the wind firmly blowing in the sail, and we're still moving at a good clip, and we feel very good about things, but the wind has moderated slightly. We're a bit more subdued.

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Michael Fenton Goss, Sotheby's - Executive VP & CFO [11]

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Right, to put a number on it, I'll point out that net auction sales have grown at a 20% clip for the first 9 months of the year, which is well above trend line for this industry.

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Thomas S. Smith, Sotheby's - President, CEO & Director [12]

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If you turn now to the very long-term part of your question, Oliver, on blockchain, and by the way, I think it's something that will be a long-term play, meaning it's -- and I love the way you framed it, which is -- and you said it very nicely, but the point you were making is what does this do for customers. And here's the thing, imagine -- there really 2 visions of it, I'm going to deal with just one. But one vision is, imagine a customer can go on effectively what is a Wikipedia for art. And then if they like a particular -- well, we've got this magnificent Rembrandt coming up for sale, which is just divine, imagine someone wants to comment on that Rembrandt, we could provide -- Sotheby's could provide, for example, attestation on it, but Sotheby's could also see the underlying Wikipedia so that the content there and other museums could do the same thing, various players and parties can create the underlying foundation so that we can actually democratize the ability for people both to transact and to comment on and to make attestation and to improve the authenticity or to make comments about attribution of art. And imagine when you are doing a large single-owner sale with us, I mean, the boxes of paper that you have to deal with and the paperwork and the record you have to keep, all of that will literally cause you to lose the will to live. So the possibility that we can have it all secure and private and confidential to the buyers in a place that is an immutable ledger technology at very low cost and once put in there and attested appropriately, that forever after, literally, forever after, the ease and low cost of handling that is a truly powerful way to think about it, and then if you append services to this immutable and protected digital ledger technology that enable you to, for example, privately be approached about exhibitions or private sales, some extraordinary things might come out of that. So I love the long-term vision of blockchain. I think it has -- the whole purpose of it is not about technology or Sotheby's or things like that, the purpose of it is actually to hand over to the public, the people who either appreciate art, comment on art or own art or wants to purchase or discover or buy or sell valuables, the opportunity to do it at very low cost with convenience, security, low friction, and so the vision is big. Execution is going to be a long time, it will be tricky. There are numerous very, very insightful and clever players that emerging in the space. We know them well, we have great respect for all of them, and I think there are roles for us to play that we're excited about. It's early days for us, but I thought that it -- since we were talking about technology, it would be conspicuous in its absence if we commented on all of technology stuff extensively as we did, and we were silent on blockchain. There's a lot of noise on the topic. We are thinking seriously about it and not just thinking, we're actually doing things about it, and we gave you a little bit of a hint to that today, but we don't want to say more than that. Okay?

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [13]

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Yes, that's very helpful. On the technology front, you gave a lot of really great details. What are your thoughts on how this will translate into earnings per share in terms of what we should think about over the longer time horizon and modeling it? I guess, in that context, how will it impact new versus existing customers? And what do you see as the earlier factors to drive results versus longer term because you're building quite a powerful infrastructure, and you're also looking to broaden your appeal enabled by technology as well? So curious about that.

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Thomas S. Smith, Sotheby's - President, CEO & Director [14]

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Let me take the first part of your question about -- and again, very nicely stated, as usual, with Oliver. It was sort of when do the benefits show up, let me put that second and deal with the second part of your question first. When you think about what we're doing with technology. What we're doing is creating a way for the company not to be trapped in its historical valuation because it makes it -- it solves the problem of why it has been trapped in historical valuation. What I mean by that is, one vision for this company is a business that only serves high end, it does it only at a individual face-to-face, high-touch service model. It does it in selective locations around the world, and it reaches only 1% of the world's ultra-high net worth or the 1% of the people, not 1% of the ultrahigh net worth, more than that, but 1% of the people that can actually afford to buy here. That's one model. And by the way, if that is the model, then the strategic opportunities are for us to take the brand and extend them over various things, as one option or to be trapped in an historical range of valuation. Our vision is different from that, which is to say that we already, without doing anything different to the classic business model, sell things and -- around the world that can -- that are affordable by literally orders of magnitude more people than are currently buying them. So what are the reasons they're not buying them? And one of the reasons is that we have historically, through an absence of technology or an absence of embracing technology and the innovations associated with it, not made it easy enough, not made it convenient enough, not made it simple, easy, secure, we're very safe, that's never been an issue, but it's just not easy. And so there's a sort of inherent barrier. So what we're trying to do with technology is make it so easy to engage with us, so exciting to get our content and say, "I never registered with Sotheby's before, maybe I'll try it this time", and you saw statistics on that and what we said. That, really, orders of magnitude, not one bit of my vision, 2 orders of magnitude, more people that transact with us can be transacting with us on our existing business model and then on the online consignment tool, if you think about what are the barriers, if your mother has a painting sitting in the living room, and it's been there forever, and you have no idea what to do with the painting, one option is we make it, through technology, so easy for you to get a quick estimate for us with a quick turnaround using an online consignment tool, that suddenly, we can increase the velocity and turnover of this far beyond the high-touch, relatively less scalable model. That's what we're trying to do. And if you think about, you just probably have already inferred the revenue benefits of that, and we've hinted at them on the online consignment tool because we actually disclosed, I think, in this earnings remarks, the specific margins on that, that were coming in. But on the cost side, imagine how much it is better for us as we migrate to a period of temporary investment that we've been in to a paperless auction room, much more efficient, much lower cost, much more streamlined processes, much faster communication to bring buyers and sellers together, much -- by the way, when everything is digitized sensibly, even though it would be invisible or transparent to the client, we can immediately find private sales opportunities for underbidders. Those are the things that we're doing and where we're trying to go. And in terms of the specific benefits of it, they are, in fact, creeping through, but of course, so much of our business is sensitive to both the seasonality, the cyclicality of the large sales and will continue to be for a while. It will be difficult to see that in the underlying business for a while. To David Schick's earlier point, obviously, we're mindful of the expense that we're putting into it, and we're going to be very careful, and we're certainly going to be very mindful of the expense in connection with the economic environment. We're also investors here, everyone who works here is an investor, and we care very deeply about it.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [15]

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Just our last -- our last question is the interplay between guarantees and auction commission margins as well as the environment you're seeing, would love your thoughts there because it's important incoming topic we're getting regarding your strategy and how that may evolve.

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

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Well, guarantees because we're providing a guarantee, meaning because we actually are providing effectively an insurance product, not an insurance product legally, but because we're providing a promise to -- that something we'll sell, inherently, it has higher margin than not providing that promise. So on balance, guarantees are favorable for the margins. The downside, of course, of guarantees is when that they are not -- when they're not hedged, it exposes the auction house to occasional losses. And from our perspective, guarantees are a crucial part of our business model. Hedging those guarantees is a crucial part of our business model. We think that they have been very profitable, and we like them. At the same time, we also are thrilled to take unguaranteed work, and we do all day long, all night long, and we're thrilled to do that, too. When you step back, and you look at the commissions or the margins generally, in an area where -- in a period of time when people have a bit more uncertainty about whether something will sell, they have a slight on the margin preference for guarantees, and you can see that, again, on the margin, our profits as a percentage of the base should go up, generally speaking because the mix of guarantees will get a little higher. When everyone has extremely high confidence that things will sell, the opposite happens, which is they don't want guarantees, and the margins slim down a little bit. Now remember, the offset of that is that the volume increases dramatically when people think things will sell. So what's actually builds into it is this very interesting -- when the volume -- when people get a little bit nervous about things selling, the volume might tick down a little bit, but they have a slight preference for guarantees, and so our margin slightly offset it. When the underlying confidence among sellers is high, and the proclivity to take a guarantee is a bit lower, you'll see the margins slim down a little bit because guarantees have higher margins than nonguaranteed, but at the same time, the volume expands. So on balance, we like it, but it's -- in our view, we love guarantees, and we love the hedges as well. We think it's the appropriate thing to hedge, and we're going to continue doing it.

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Operator [17]

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And our next question comes from the line of Dan Moore with CJS Securities.

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Peter Lucas, [18]

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It's Pete Lucas for Dan. You guys have covered a lot, just one from me on expenses. I know that adjusted expenses moderated nicely this quarter. I just want to see where we were in the process of eliminating $20 million annualized planned expense that you announced last quarter. Just trying to get a sense of the run rate savings embedded in the Q3 results.

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

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Right, well, one thing, first, to be clear, is that the $20 million was hedged against anticipated spending, not necessarily the same as taking $20 million out of our historical spending. So we did it by eliminating open positions, planned investments. We had a very small amount of headcount of positions that -- of jobs that were already filled and so forth. Our tracking internally is that we're right on the numbers for having reduced our prospective cost structure by $20 million. So again, going back to the question about will we see operating leverage next year? This certainly goes to help that more than looking historically.

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Daniel Joseph Moore, CJS Securities, Inc. - Director of Research [20]

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Very helpful. I guess last one for me, then. Last quarter in your prepared remarks, you mentioned there seemed to be a bit less bidding activity in the auction room year-over-year. You talked a lot about the results of the auction, but just wondering, I know the quarter was seasonally light, but do you see that trend reversing at all? In other words, is bidding activity flat, declining or starting to firm heading into the seasonally stronger end of the year?

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

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It's a little soon to say. Let's go back -- the interesting data point, let's go to London contemporary sales for just a moment. What we saw was robust bidding. Elsewhere, above $10 million, some bidding faced a little bit more trouble. So we take that as a sign that the market is looking for direction. And I think, certainly, at our place and elsewhere, there's some exciting stuff coming up in the next couple of weeks, and we'll have a real clear picture then.

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Operator [22]

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And our next question comes from the line of Omar Saad with Evercore ISI.

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Westcott Irvin Rochette, Evercore ISI Institutional Equities, Research Division - Associate [23]

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This is Westcott on for Omar. Just a question on how you're viewing the current kind of market environment compared to maybe, say, 2016 in terms of the geopolitical? Do you think it's more kind of the overall market volatility or the geopolitical that would be -- that would have a bigger impact on buyers being as aggressive? And I have a couple of follow-up questions.

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Thomas S. Smith, Sotheby's - President, CEO & Director [24]

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Well, 2016 had 2 different perspectives, and I was going to say, they came from the United States. Actually, let me argue, 3 different perspectives. There is a period during the -- and let me do U.S. and then switch to Britain in a minute. In the United States, there was a period leading up to the first week of November or the first Tuesday in November, where the received wisdom among, I think, the world and some elites was that Hillary Clinton would be the President. And so going into that, I think there was a certain degree of not expecting material changes, as it were, it was going to be sort of business as usual with the presidential transition. As we all know, that didn't happen. And immediately after that, the policies of President Trump, as it was becoming more articulated between the period of early November and the end of December, came out, and I think there was a certain burst of enthusiasm in the equity markets that maybe there would be some regulatory relief and some improvement in the tax picture. And subsequently, you saw some of those things, certainly, the equity markets believed in. There was also a period between January of '16 and June of '16, at which -- during which we -- and there was lot of sort of -- I mean, I don't think the world had really caught on to the Brexit idea until it actually got closer and closer. So 2016 was a -- a fairly nuanced environment, but it's probably fair to say that, prior to Brexit, I thought the environment would have been expect more of the same at the U.S. administration level, and we probably didn't expect a Brexit vote the way we did. Subsequent to that, you saw a little bit of discontinuity and questioning and not really knowing what Brexit meant and looking for answers there, and then in the United States, there was a certain more enthusiasm on the markets where the potential changes that were ascribed to the new president coming in. Fast-forward, the tax cuts have been implemented, the rate picture has gotten less accommodating, I think it's probably the best way to say it and there are -- and I'm not making a political comment, but whatever your view on the trade is, one thing we can all agree on is that the overall level of noise of that trade globally has gone up. So those really aren't comparable. Do I think one was more favorable than the other? No, I think it's very fair to say though that the period between '17 and '18, strong wind in the sails, very favorable. Right now, we don't think it's necessarily unfavorable, it's just been certainly a bit more subdued.

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Westcott Irvin Rochette, Evercore ISI Institutional Equities, Research Division - Associate [25]

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And can I just touch once more on the guarantees? Just looking to add your 10-Q. It seems like the aggregate level has gone up as has the counterparties, so the net amount hasn't changed that much. Is that more of a function of the type of buyers, or is that kind of the environment? Like, what generally leads to that big step up and you applying the guarantees more and more aggressively? I know you touched on it before, but is there something that's changing the environment that's making the net guarantee be a bigger part of the overall auction, upcoming auctions?

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Thomas S. Smith, Sotheby's - President, CEO & Director [26]

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So let's go through guarantees because you've got a very nuanced question there. The first thing I want to do is, as a reminder, there's a gross guarantee, which is the amount we promised, we get a third-party guarantee against it on irrevocable bid, and then there's the net amount, which is the net amount exposed of the house. And in the 10-Q, you will see net amount, I think, of the [180] range, plus or minus, as of right now, forget the September 30 number, but as of right now, that's the one to focus on. By the way, if you were to look back to the November call of 2017, and you found that para wrap in the 10-Q, I think the last time I checked, it was up -- the comparable number is in the 130 range plus or minus there thereabouts. So the -- what's -- the first headline, answer to your question, is that the net amount in the queue currently for us relative to the call 1 year ago is actually less. And moreover, the other thing to notice that some portion of the gross guarantee and the uncovered net amount is actually for guarantees that aren't even happening until 2019. Not a lot, but some. So those are 2 things to think about. The second thing to think about is what I was saying earlier, is that when people get a bit more uncertain about the market environment, on balance, they will occasionally prefer a guarantee. And what you can see is also, there's been a great deal of work done here at Sotheby's to expand both the depth and range of irrevocable bidders, which are what we call the hedge counterparties, and that has produced a very desirable result for the shareholders and for the clients, which is that we can hedge much more quickly, much -- using much more diversity, and we can hedge -- protect our shareholders as well as take on more guarantee exposure very rapidly with a net exposure to the shareholders actually going down. Everyone turns out to be a winner, the client and the shareholder and the consignor, for sure. So you are astute to observe that particular change and yes, it has a little bit to do with the environment in terms of the gross guarantee picture, but what you should feel pretty good about from a shareholder perspective is that net number shows that we're doing some things innovatively thereto.

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Westcott Irvin Rochette, Evercore ISI Institutional Equities, Research Division - Associate [27]

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That's great. And then one last question. Outside of the major New York and some of the Hong Kong auctions, it seems like the other auctions increasingly have been gaining momentum. Can you talk about the environment beyond the bellwether, in the different categories that you're -- the wine, the watches, cars? As you think longer-term to smooth out and diversify away from just the major New York auctions.

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Thomas S. Smith, Sotheby's - President, CEO & Director [28]

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Well, the more types of auctions you do, everything else being equal, unless they are 100% correlated in their variability, you would expect the average variability to decline, so that's one.

Number 2, the more price points that you serve, you would expect on average, unless their variability is 100% correlated, and by the way, it's not, you would expect the overall volatility to go down and by the way, particularly among the more affordable stuff, which is by far already the least volatile that we have. So as our online activities continue to diversify, expand, bring new buyers in and by the way, move at scale, substantially more middle-market material, you would expect the overall volatility returns to go down. And then, needless to say, private sales by the way can have some counter cyclicality because if people are bit concerned about the auction environment, but they still want to move something, private sales going up, everything else being equal, should reduce the average volatility returns. So we're very focused as investors, we're very -- and by the way, we all are again, we're very focused on increasing and enhancing the predictability of returns, and we're taking steps, the ancillary benefit of which is to do that, but a clear ideal that would say we still remain, in terms of our returns, focused on significant auctions and significant seasonality, and we would expect that to continue for a while.

Thank you, all. I want to make one last -- Is there any other question? Okay, then I want to make one last pitch. We did mention that the building is under renovation. You will not actually be able to tell if you come by, it's completely hidden behind walls, and on those walls is some of the most spectacular art, in fact, I think for the next couple of weeks, we have one of the greatest museums in all of the world, and we invite everybody, please, to come see. Thank you all very much for your time.

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Operator [29]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.