Sotheby’s cost cutting helps profits rise 20%

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Sotheby's

Sotheby’s has released its fourth quarter results for the twelve months ending December 2014. The results show a 19% increase in 2014 net auction sales.

Cost cutting and the strength of the global art market helped Sotheby’s profit grow 20% in 2014.  Sotheby’s reported 2014 adjusted operating income was $267.9 million, up $44 million (20%) from 2013. “These successes highlight the incredible depth and breadth of Sotheby’s expertise and demonstrate our ability to deliver for our stakeholders.” said Sotheby’s chairman, president and chief executive officer Bill Ruprecht.

The chief financial officer at Sotheby’s Patrick McClymont, opened the annual fourth quarter conference call by saying “Ours is the best team in the industry and we have the results to prove it.”

Sotheby’s 2014 net income was $142.4 million after tax, an $11.6 million (9%) increase on 2013. The improvement in operating income was offset by an increase in Sotheby’s effective income tax rate from 30% to 39% in 2014. The adjusted diluted earnings per share at the end of 2014 are $2.03.

Expenses

Last year it was announced that Bill Ruprecht would be stepping down as the CEO of Sotheby’s. This announcement followed pressure from shareholder Third Point, requesting more seats and questioning Ruprecht’s management. The costs of restructuring and hiring a new CEO have been outlined in the final year financial statements. Sotheby’s have accounted that around $7.5 million in pre-tax charges will be associated with change in CEO. Other charges outlined are those associated with shareholder activism, operating income, net income and diluted earnings which are $226.0 million, $117.8 million and $1.68, respectively per share for 2014.

The fourth quarter net income for 2014 was $74.0 million, or $1.06 per diluted share. Excluding the costs associated with the CEO transition, adjusted net income was $78.4 million with an adjusted diluted earnings of $1.12 per share.

For the full year 2014, auction commission revenues improved $70.4 million (10%). The improvement in auction commission revenues was due to the $812.5 million (19%) increase in net auction sales, which was partially offset by a decline in auction commission margin. The decline in auction commission margin reduced from 15.9% to 14.7% due to the competitive environment for winning high value consignments, as well as sales mix. Ruprecht said “competition for the best works is robust.”

Private sales commissions also decreased significantly in 2014. These dropped 32% which Sotheby’s claimed was due to the prior year’s results including a significant number of individual high-value transactions.

At the start of February 2015, Sotheby’s raised Buyer’s Premiums. Buyers now pay 25% on the first $200,000 of hammer price; 20% on the portion of hammer price above $200,000 up to and including $3 million; and 12% on any remaining amount above $3 million.

Savings and growth

Sotheby’s also said that they were on track with the savings they set out in 2013. The financial results showed that savings had been made up to 50% more than the management target originally projected in 2013. Originally savings of $22 million were predicted for 2014 in comparison to 2013. Based on similar level of net auction sales as 2013, savings ultimately totalled $33 million in 2014.

The results also make a point of mentioning the recent purchase of 25%share in RM auctions for $30million dollars. RM Sotheby’s will be a long term investment against the $2 billion market for valuable automobiles.

Sotheby’s financial services results have also shown significant growth.

The start of 2015

Sotheby’s said it had record sales in New York Old Master Painting as well as records set in London for both Contemporary & Post war and Impressionist & Modern sales in February. “We have seen a 12% growth in global participation” said Ruprecht on the sales.

There has also been an increase in online sales, seeing the audience for live-stream auctions double. Ruprecht said “We’re reaching more collectors, in more corners of the world, through more channels”

The end of February saw shareholder Marcato Capital Management write a letter of complaint to Sotheby’s in reaction to the decision not to offer any return to shareholders until a new CEO has been found. The letter demanded an immediate $500 million return of capital to shareholders and put into question the decisions of McClymont and suggesting that the new CEO should look at replacing him.