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Sotheby's (NYSE:BID)
Q2 2018 Earnings Conference Call
Aug. 6, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to the Sotheby's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.

At this time, I'd like to introduce Jennifer Park, Vice President of Investor Relations. Ms. Park, please go ahead.

Jennifer Park -- Vice President of Investor Relations

All right, thank you, Shannon. 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 second quarter 2018 earnings release as well as the company's Form 10-Q for the period ended June 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 a 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 Form 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 webpage for a transcript of our prepared remarks.

Now, I'll turn the call over to Tad.

Thomas Smith -- President, Chief Executive Officer, Director

Good morning and thank you for joining us today. Today, we are reporting second quarter diluted 2018 earnings per share of $1.08 compared to a $1.43 per share in the prior period, and for the first six months of 2018, $0.95 per share compared to $1.21 per share in the prior period. After excluding certain charges in both periods, our adjusted diluted earnings per share in the second quarter of 2018 was $1.09 compared to $1.44 in 2017. And for the first half, adjusted diluted earnings per share was $1.18 versus $1.22 in 2017.

Overall, these results were lower than we expected. At the same time, management and the Board are as excited as ever about the company's prospects going forward, and I will spend some time on explaining why, before turning the call over to Mike for a financial review.

Let's begin with our assessment of the marketplace. Generally speaking, the market is clearly healthy. The second quarter saw an enormous amount of property come to market. In the big May and June sales, fresh pieces that were correctly priced did extremely well in the auction room. However, much of the growth in the quarter was attributable to a few large, competitive, fiduciary-driven consignments that tend to carry lower margins. In addition, with respect to a couple of the season's high value lots, there appeared to be a bit less bidding than a year ago, both here and elsewhere. The result of these two factors was reflected in our Auction Commission margin, which Mike will cover in greater detail later in the call.

Against this market backdrop, we performed well from a sales perspective. Consolidated sales, which as a reminder are a combination of our aggregate auction sales, private sales and sales from our inventory, increased 15% to $2.4 billion in the second quarter of 2018 and 22% to $3.5 billion in the first half of 2018, right in line with the highest totals in our Company's history. Private sales continued its recent performance of doing very well, up 57% in the second quarter to $296 million and 63% to $543 million in the first half of 2018 versus the same periods a year ago.

Our enhanced focus on this area of the business, together with a stronger organization and better tools, have clearly begun to have a beneficial effect. Approximately 80% of the more than 23,000 lots offered in the first half of 2018 sold, continuing our strong performance on behalf of our consignors.

We continue to grow the number of new buyers at Sotheby's. In the first half of 2018, approximately one-third of total buyers were new to the company and 19% of our total hammer in that same period came from new buyers, which is up 5 points from the prior three years.

Asia also continued to be a success story. Our aggregate auction sales in Asia for the first half of 2018 totaled $488 million, up 15% and with a strong sell-through rate of 90% and 21 world auction records set. We continue to lead the market across critical categories, including Chinese Works of Art, Modern & Contemporary Art and Chinese Classical & Modern Paintings.

Equally important is the impact of Asian clients, felt not just in Hong Kong, but in our New York, London, Paris and Geneva salesrooms. In the first half of 2018, Asian clients accounted for 28% of our aggregate auction sales and purchased eight of the top 20 lots sold at Sotheby's year-to-date.

We are also encouraged by the growth of new clients. In the first half of 2018, 28% of buyers were new to Sotheby's Asia and, coincidentally, 28% was also the growth rate of Asian clients buying Western art.

As you know from prior earnings calls, we have been investing to sharpen the differentiation between Sotheby's and other competitors, as well as to grow our business. What has this investment been buying at Sotheby's? After over a year of work, the first item this has brought to us is much better tools for private sales. Secondly, the investment program has replaced our old and poorly functioning content management system with a new one that has the capacity to enhance our selling experience for clients and dramatically improved our search optimization. Third, we are also implementing advanced customer relationship management techniques to increase our sell-through rate.

Fourth, our mobile capabilities and digital plumbing to support online bidders and sellers have made huge strides and are months away from a full roll out of significant innovations in terms of payments, user experience, security, speed and cost reduction. Fifth, our efforts to use advanced technologies that make online consignments friendly, easy, and quick are a key area of our focus, and we are encouraged at our near-term progress. Sixth, our efforts to make the auction room paperless are well on track and should be rolled out next year, with efficiencies to follow. Last, our marketing programs have made the leap over the past few years from analog and paper-based to digital and smart, with the recognition that great content drives better commerce.

When will all of this pay off? It has already begun to do so. Versus the first half of 2017, our performance statistics in the first half of 2018 show real progress. Online sales are up approximately 30% versus last year, totaling a little more than $100 million. Lots sold online are up 19% to a 25% share of the total, versus 21% share last year. Online bidders are now 45% of the total, up 7 points from last year. Online buyers are now 32% of the total, also up 5 points from last year. The number of online-only sales staged is equivalent to the whole of 2017, with as many as 40 additional sales planned for the balance of the year.

Revenue from middle-market property is up nearly 9% versus last year. The number of mobile users is up 39% versus last year. Social media reach is greater than the closest competitor by more than 50%. Video views are up 100% year-over-year. Editorial content production is up by 46% and 40% of all registrants consumed our editorial content as part of their transactional journey so far in 2018. Our continued digital growth, including total site traffic, unique visitors, social audience, and editorial consumption, is important not only from a buying and selling perspective, but it also allows us to attract new audiences, who are increasingly discovering our content through search engines and social media, something that is particularly relevant to developing our middle-market categories.

Not all innovations however come from technology. For example, we have an exciting renovation project under way at our New York offices that will expand our historical gallery space from 67,000 square feet to 90,000 square feet. When finished next April, we will have enough space to put our next two competitors into our galleries with room to spare, which will enable us to provide a powerful marketing advantage for consignors. Our new exhibition space will also exceed that of major institutions, including The Broad, the Whitney Museum of American Art, and The Uffizi Gallery. And even before then, our current 48,000 square feet of untouched and beautiful exhibition space remains larger than that of our next largest competitor this autumn. Moreover, our London and Paris colleagues are sprucing up their own galleries in a more limited fashion.

Finally, I would like to touch on the company's capital allocation, since using capital more efficiently has been a major area of focus for the company over the past few years. For example, our inventory balance in the most recent quarter was $32.6 million versus $74.5 million at the end of 2017 and $215 million at the end of 2015. Thanks to efforts like this, Sotheby's is flushed with liquidity right now, and given the enthusiasm by the Board and management about Sotheby's prospects, we will likely take advantage of our $133 million in unused authorization to repurchase our stock over the coming quarters.

I will now turn it over to Mike to go through our financials before we take your questions.

Micheal Goss -- Chief Financial Officer, Executive Vice President

Thank you Tad. Just as a quick reminder, when looking at this year's second quarter results, one needs to consider the shift in the timing of certain Hong Kong sales from the second quarter in 2017 to the first quarter in 2018. Recall, we reported $130 million in net sales and approximately $20 million in operating profit in the first quarter of 2018 for sales that occurred last year in the second quarter, making for a tough comparison for this year's second quarter. This is a vivid reminder that you should always consider the trailing six-month period to fully understand what is going on in our business.

With respect to our Auction Commission margin, which came in below where we would have liked to see it, Tad mentioned several of the factors driving the comparison, namely the heavy mix of competitive, fiduciary-driven and charitable estate sales, and a couple of high value paintings that performed below our expectations. To quantify the issues, of the 170 basis points decline in Auction Commission margins from first half of 2017 to the second half or to the first half of 2018, a full 110 basis points of the decline was attributable to the sale of two large guaranteed paintings. The balance of the difference was due to the higher sharing amount, typically required to win the large estate style consignments. For most of our collecting categories and for the overwhelming majority of our sales, we were flat on a year-over-year basis at very attractive levels.

With respect to our adjusted expenses, we are indeed seeing the moderation we discussed at the end of 2017 with a much lower rate of growth for the second quarter, as we are up 8% versus last year compared to the 13% year-over-year increase in the first quarter. Despite being roughly where we expected to be in total, there is spending that can be eliminated, some of which will represent savings as a result of the digitization discussed earlier. In particular, we can operate from a logistical and market coverage point of view much more leanly and we have reassessed which marketing initiatives make the most sense for us. As a result of this review, we and our colleagues are eliminating more than $20 million in annualized planned expenses and neither our business nor our growth will be affected by these changes.

In terms of the balance sheet, we continue to manage our capital more efficiently but with the necessary prudence to support the demands of the business. We estimate that we have approximately $400 million in excess capital, including the $133 million remaining on our previously approved but unspent authorization, to buy back stock.

Part of this extra capital has been generated by the refinancing of our asset-based borrowing facility in late June. Even while improving our interest rate by 25 basis points, we also managed to enhance the inclusions in our borrowing base by close to $145 million and we liberalized our covenant package to allow for greater flexibility in how we manage our business and how we deploy our capital.

Another part of our capital allocation story, which is often overlooked, is the extent to which we have reduced our leverage even while buying back over $467 million worth of shares since the end of 2015. At that time, we were carrying over $1.1 billion in total debt and we had only $232 million in undrawn credit. Today, we are carrying approximately $725 million in debt and we have undrawn credit of almost $600 million, demonstrating the strong free cash flow generated by our business. Clearly, we have all the capital we need to continue funding our business and returning handsome amounts to our shareholders.

Looking forward, this year's third quarter we will see little in the way of auction activity, such is the natural rhythm of our business. So we are focusing on our big fourth quarter sales. I also urge that when everyone is looking at this year's third quarter, you remember we had an unusual $0.14 per share tax benefit in last year's third quarter that won't be repeated this year.

Looking longer term, all of our strategic growth initiatives remain on track, and the results of our improved capital allocation policies are proving to be as impactful as ever. Our team here is as enthusiastic about the future as they've ever been.

Tad and I are now available for your questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Westcott Rochette with Evercore ISI. Your line is open.

Westcott Rochette -- Evercore ISI -- Analyst

Thanks a lot guys. So I guess the first question would just be on balancing commission margin versus securing consignments particular in the higher profile lots. I know it's been the stated focus on keeping margin kind of protected and not kind of chasing some of the higher profile and letting the margin kind of flow down. I mean, was it something that's gotten more competitive that you felt you had to chase, was it just a couple of one-off items and how should we think about that margin mix as you head into future big results?

Thomas Smith -- President, Chief Executive Officer, Director

Well, Adam Chinn, our Chief Operating Officer is definitely right smack in the mix of the sort of back and forth in the marketplace on the competitive situation. My own true sense, is the market has been competitive for quite a long time, that's not a new thing and -- I mean, we feel really good about the fourth quarter, but let's -- Adam what do you think about that question?

Adam Chinn -- Chief Operating Officer & Executive Vice President

Yes. So I think, the big May season was unusual in a couple of respects. Obviously, you had Rockefeller in the market, which is an event that is unlikely to be repeated, which I think added some additional competitive pressures. Sort of in direct answer to your question, as Mike said in his sort of formal remarks, a lot of what happened to our margin last quarter was a result of two particular decisions that were made, where the results that we got were not as good as we hoped that they might have been. A couple of bids here or there would have had a significant impact on margins. So I think the company is still highly focused on maintaining margin. And when we make big bets, it's with the hope and expectation that we'll get appropriate returns. Unfortunately I think in this quarter, as Mike said, there were a couple of instances where this didn't take place. But I don't see any massive secular change in the competitive nature of the market.

Micheal Goss -- Chief Financial Officer, Executive Vice President

Yes, it's probably important to know, let me just add, that in one of those instances it was a contribution-positive deal that had -- we had a bit more bidding than we thought, it would have been robustly attractive and positive. And the other one, we just made a pricing error.

Westcott Rochette -- Evercore ISI -- Analyst

Okay, great. And can I ask a question on the depth of the art market. So it seems like, not just this last auction but in subsequent auctions, they tend to be driven by very top-heavy results with less aggressive bidding on the lower end, as you kind of indicated on the value added. How would you characterize the overall breadth of the art market currently and the willingness to participate in -- outside of the extremely high profile lots?

Thomas Smith -- President, Chief Executive Officer, Director

Well actually on that, we've got Amy Cappellazzo who runs the Fine Art Division here. In just a moment, I will pass it over to her. But I would not include -- I would not infer that at all from either what I said or what Mike said. In fact, the opposite. The market in the second quarter was robust and clearly, clearly healthy. And interestingly, it was the very highest priced lots that were just a little bit softer than the rest. So one should conclude from this that the market is really very strong. And Amy, I don't know if you have any comments on it.

Amy Cappellazzo -- Chairman of Fine Art Division

Just that we -- I think the market is robust, as Tad said. I think we work very hard to figure out where there is depth of market and try to match property with that depth of market. So obviously, the number of people in the world who can buy paintings at $50 million or more is quite a bit smaller than people who can pay $5 million or $500,000 or whatever lower price point number one can think of. So we work hard to match demand in the marketplace with depth of what their choices can be in consignments and in things to have a look at and buy. So try to keep it strong at all levels and try to pick the right deals to do and the most attractive works to have to market at all levels.

Westcott Rochette -- Evercore ISI -- Analyst

Great. And just one more if I could. I noticed that you had a lot of management changes in your Fine Arts division and your Modern Art and Impressionist. Can you talk about where you think you are in terms of the depth of talent in those divisions and whether there might be more to come? Thanks.

Amy Cappellazzo -- Chairman of Fine Art Division

I think you're talking about a press release that probably came out about some of the changes in our Impressionist and Modern group?

Thomas Smith -- President, Chief Executive Officer, Director

Yes, two days ago, but those were promotions and additions.

Amy Cappellazzo -- Chairman of Fine Art Division

Yes, those were promotions and additions. And, I mean, the collective experience of the senior Impressionist and Modern team is hundreds and hundreds of years of experience --

Thomas Smith -- President, Chief Executive Officer, Director

It's unparalleled. Exactly. It's unparalleled.

Amy Cappellazzo -- Chairman of Fine Art Division

I think part of it is making sure that we are expanding the team in the right way and that we are looking to expand the marketplace not just in terms of our auction catches, but also our private sales, etc. So us looking closely at that team and shifting around a little bit is a way to expand and keep people motivated and make people excited about the future.

Thomas Smith -- President, Chief Executive Officer, Director

Right, exactly. Was there something else that you were referring to?

Westcott Rochette -- Evercore ISI -- Analyst

No, I'm just thinking about the strength of the team, whether there are additions that you are still trying to make to --

Thomas Smith -- President, Chief Executive Officer, Director

Oh, oh well on that -- I mean if we walk down the street and we see LeBron James or Michael Jordan, sure, we will grab them, for sure. Sotheby's is always interested in looking for highly qualified, highly talented people that will help what we're up to. But no, I mean we're thrilled with our team.

Westcott Rochette -- Evercore ISI -- Analyst

Okay, perfect. Thank you very much. Good luck, guys.

Operator

Thank you. Our next question comes from Oliver Chen with Cowen and Company. Your line is open.

Unidentified Participant -- -- Analyst

Hi, this is Jenelle (ph) on for Oliver today. Thank you for taking our questions. Just one more on Auction Commission margin. You noted your flexibility for the year before. Should we expect a lower rate for the second half, how are you thinking about that? And just on the expense side, do you expect continued moderation in growth for the second half as well? And just lastly, is there any sort of particular sign that you're seeing in any particular region, any sign of weakness, if you can just brief on that, that will be great? Thank you so much.

Micheal Goss -- Chief Financial Officer, Executive Vice President

Sure, Jenelle (ph). As for the Auction Commission margin, I will take your questions in order, we had hoped that we could pull the Auction Commission margin flat with 2017 coming into the year. I think the second half will show much more strength, because the first half, really, specifically the second quarter was impacted by the two paintings we keep referring to. Let's consider those to be unique. For the full year, it will be hard to overcome those again. So we're probably expecting a slight decline for the full year in operating commission margin, because it will be hard to make these two paintings back. But I think given the growth in the marketplace, we'd easily make that trade for the market kind of growth and a slight contraction to the Auction Commission margin, as a result.

On adjusted operating expenses, the guidance we gave at the beginning of the year that we would expect a much more moderate increase for the full year is definitely how we're feeling. We felt that way even before doing the cost review that I mentioned in my prepared remarks that are going to lead to annualized planned savings of around $20 million. So we're feeling very good about where we are with respect to adjusted expenses.

Thomas Smith -- President, Chief Executive Officer, Director

With respect to the tail end of your question about, are there any particular areas of the world or categories that seem a bit soft or might be softening, I think I heard you say something. Could you just repeat that part of the question?

Unidentified Participant -- -- Analyst

Yes. Just anything that you're seeing, any weakness in one particular region, Europe versus Asia, anything that you're seeing that will be great.

Thomas Smith -- President, Chief Executive Officer, Director

Yes, we didn't see any weakness in the second quarter. And we're feeling very good about our upcoming sales in Hong Kong. There is always a question about China and currency exchanges and things like that. And if there's any trouble in our markets, we're definitely not seeing. The supply looks good and we're feeling very bullish and we're out there in the market talking to buyers and they are flushed with cash and eager to find correctly priced things that are fresh to the market and we're going to deliver them.

Unidentified Participant -- -- Analyst

Got it. Thank you so much.

Operator

Thank you. Our next question comes from Dan Moore with CJS Securities. Your line is open.

Pete Lucas -- CJS Securities -- Analyst

Yes, hi. It's Pete Lucas for Dan. You talked about remarks highlighting the strength coming out of Asia and touched on it again. Just any particular areas where you're seeing that and anything special that you're doing to take advantage of future growth out of that area?

Thomas Smith -- President, Chief Executive Officer, Director

Well clearly, the overseas Chinese and the Japanese are extremely strong right now. And there are a lot of Mainland Chinese that are also strong right now and that have convertible cash as well. The key thing about what we're doing to develop those markets, we are doing a whole lot and we're doing it sort of at high and very tactical levels in every one of the countries over there, but I really don't want to say more than that at this point on this call.

Pete Lucas -- CJS Securities -- Analyst

Great. And then switching gears a bit, can you update us on any penetration and progress in some of your non-traditional categories, like classic cars, wines, etcetra? And any new categories that you're currently exploring or might consider?

Thomas Smith -- President, Chief Executive Officer, Director

Wine, we have and have been seeing how our new Internet platform performs and that is doing rather well, which we're quite encouraged by. We've been looking also to take our strength in wine and begin to change and evolve it in other kinds of related services, which are pretty exciting. And jewelry for us is a terrific area. For close observers of our web products, you'll see that we've been experimenting with loose stones sold online, and in fact there are two aspects to that. One is the stones that we are putting out there. But the second aspect is actually the mobile experience itself. First, the visuals on it are outstanding. And second, we have quietly introduced in selected spots and have been testing, bidding in the mobile app, which is absolutely transformative and a real potential game changer. Also, private sales, jewelry started contributing to private sales in the most recent quarter, which is a very encouraging sign and we're feeling very good about the prospects for that as we go forward. And Mike can speak to cars more directly but I think Monterey should be gangbusters.

Micheal Goss -- Chief Financial Officer, Executive Vice President

Right. Remember on the collectible cars, we don't consolidate those results into our own. We report our 25% equity interest in RM Sotheby's below the line. But RM Sotheby's is doing terrifically well, as is the car category in general. One thing I might add to the conversation here is that when you mentioned our traditional areas, I'm sure you were thinking kind of the big fine arts categories. We should also mention that we have a number of other smaller regional businesses that you might consider to be -- I don't know whether you consider them to be core or not, we certainly consider them to be core -- we certainly consider them to be core. But these are some of the smaller categories that are performing extremely well, right on our expectation, if not a little bit better. And these are pretty high margin categories as well. So we are very enthusiastic about some of the smaller categories that are art-related or 20th century design prints, multiples, photographs, books. Those categories are all performing extremely well also.

Thomas Smith -- President, Chief Executive Officer, Director

And recall that we mentioned in the prepared remarks that middle-market revenue, which is the extremely high-margin and high profit stuff, is up 9%.

Pete Lucas -- CJS Securities -- Analyst

Okay, great, thanks. And last one for me. Just you highlighted the success you've had as far as the online auctions go. Can you just update us on the customers that you're seeing there and your ability to turn them into repeat customers/collectors?

Thomas Smith -- President, Chief Executive Officer, Director

Sure. Well, the customers we're seeing there represent all demographics, all parts of the world, extraordinarily sophisticated population and growing very, very rapidly. In fact, it's at such scale that they're really a remarkable group. But they also -- there is not any particular characteristic of them. They skew a bit younger, there are plenty of Millennials in it, there are plenty of people from Asia, and there are plenty people from all over the world. It's a really, really attractive, robust group of buyers and we're excited about it.

Pete Lucas -- CJS Securities -- Analyst

Very helpful. Thank you.

Thomas Smith -- President, Chief Executive Officer, Director

One last thing, I did want to add. Mike, you did that very interesting analysis and showed repeat buyers are the people that had come in online have been trading up. Do you want to share that?

Micheal Goss -- Chief Financial Officer, Executive Vice President

Sure. So one of the reasons that we are attracted to online-only auctions is, we actually find that of the participants who go there first, number one, half of those people are new to Sotheby's. And when you're a company of our age and scale, to generate that much in the way of new customers from online-only sales is very meaningful. But then of that amount, one out of five then go on to start bidding in live auctions too. So it's a great feeder for new first-time clients. We suspect it's because it's just so much less intimidating to register online and for an online auction. And once you get comfortable with the whole format, you quickly graduate to some of the more lucrative bidding areas.

Thomas Smith -- President, Chief Executive Officer, Director

That is the essence of it, which is if we just make dealing with us, either on the buy side, the sell side or in the discovery process, incredibly easy, incredibly intuitive, and incredibly quick and efficient. Good things are going to happen with millennials, good things are going to happen with Gen X, and everybody else as well.

Operator

Thank you. Our next question comes from David Schick with Consumer Edge Research. Your line is open.

David Schick -- Consumer Edge Research -- Analyst

Hi, good morning.

Thomas Smith -- President, Chief Executive Officer, Director

Good morning.

David Schick -- Consumer Edge Research -- Analyst

Couple of questions. So, I guess I'll list them both. First, you talked about this, really built on what you were just talking about. You talked about in the systems investments that you've made systems to enhance the selling process. I think it'd be helpful if you could walk through actually how that works and what you hope that drives other than -- how could that impact numbers, either market share or the total margin characteristics of the business you're doing, those systems that you're building or you have built? Second, some granularity and cadence on the $20 million in cross (ph) sales would be helpful. Thanks.

Thomas Smith -- President, Chief Executive Officer, Director

Yes. On the first one, I think it was maybe the second earnings call last year where I went into great detail about the private sales process and the various pieces of it and also talked at some length about as much as, for competitive reasons I wanted to say about the technology tools you can use to sell more effectively on the private sales. The basic idea is, when you have technologies that let you know who wants what and where it is and how effectively to communicate that within an organization discreetly and carefully, good things start happening. And, moreover, that you could see whether in private sales or in the auction. In the auction room, one of the things I mentioned earlier in the call is the notion of paperless. And the reason it's so important is if we know Mike Goss, for example, was an under-bidder for a particular painting and if that's entirely captured electronically, then it makes it very easy for us to find a painting that's just like that or that is a substitute for that or something that might also appeal to him, based upon his under-bidding and automatically do it without having it written down on a piece of paper, without having it pursued manually, although -- and immediately the sale person that covers him can be prompted to reach out, hey, Mike Goss, did you know that this one is also available, maybe I'll reach out for him. That's a really good example on the demand side.

On the supply side, you know, very quietly we have been accepting online consignments and dramatically using technology to improve our processes in lots of ways. I'll give you one example. We get a lot of material that comes over the transom and we are in the middle of deploying an internal software that allows us to queue them, based upon whether the probability that it will sell to the top. So our people will focus on the more important stuff and the less important stuff will take a bit longer. That's an efficiency tool and a very powerful one, though, that begins to help us think about creating a much better service experience on the online consignments. And in terms of the online consignments, just as one example, we've already had over $20 million of the stuff sold in the auction room that came in over the transom.

David Schick -- Consumer Edge Research -- Analyst

Got you, that's helpful. On the $20 million cost saves, it will be great if we could understand some ways to think about that for the model. Thanks.

Micheal Goss -- Chief Financial Officer, Executive Vice President

Sure. Some of this is going to speak to competitive dynamics that'll be kind of big. Now this is all relative to the guidance we gave earlier as to -- which projected a more moderate rate of growth for all of 2018 versus 2017. Someone might say, going to be even more moderate than we had planned. And again, this is -- the $20 million figure, David, is an annualized run rate. So that's not going to be $20 million hit this calendar year. So you kind of need to take into account that. Roughly half of that amount is to not fill positions that are either open by vacancy or were planned additions, which we decided that we don't need, so that's roughly half. The other half is split evenly between non-personnel related marketing activities. And that's the part I don't really want to get specific for competitive reasons, but think in terms of marketing events, traveling exhibitions, non-personnel related things that we do on the marketing front. And the other half of that half or quarter, we'll be taking a look at our headcount that's currently employed. But the numbers right now look for it to be very, very modest as a percentage of our total employment numbers, less than 2.5% kind of number.

David Schick -- Consumer Edge Research -- Analyst

Very helpful, thank you.

Operator

Thank you. Our next question comes from Rommel Dionisio with Aegis Capital. Your line is open.

Rommel Dionisio -- Aegis Capital -- Analyst

Yes, thanks very much. Tad, well, I certainly appreciate your comments on the state of the overall art market. Just want to ask, though, there's always sort of ongoing trade issues, obviously, a developing story. Are you seeing any impact on the consignments that are coming up for the fall auctions? Sounds like you said China seems OK, despite some of the weakness in their equity market and the trade issues there. But how about Europe or Canada, or any of these other markets. Are you seeing some of that uncertainty from these trade spats that are developing? Thanks.

Thomas Smith -- President, Chief Executive Officer, Director

So let me split the answer into two pieces. One is what are we seeing in terms of the pipeline, and then whether trade is a factor in that. The plain fact of the matter is, there is a lot of supply in the marketplace coming for the fourth quarter, just a lot, really quite a lot. And I think that'll be shaking out. Some of it started shaking out a week or two ago. I think it will be shaking out for the next few weeks to figure out where it's going to go. So there is clearly no shortage of supply. And then the extent to which trade seems to be affecting it is hard to say, because it seems to be the opposite of what you would expect, which is there's a huge amount of supply and the trade has folks a little bit distracted in some instances.

By the way, on the trade, I should point out there was a little bit of a kerfuffle a week ago about the effect of a possible tariff on Chinese works of art sold in the New York auction room. I should probably take the opportunity to mention that it would be over the last number of years less than -- or something like 0.1% of our sales of all Chinese works of art sold in New York. So we're not expecting anything from trade even on that.

So now look, we prefer a stable, exciting, growing, global environment. That's good for us and that's good for a lot of companies like us. Trade will go up, they will go down, we're not seeing any concerns about at all at this point.

Rommel Dionisio -- Aegis Capital -- Analyst

Great, It's very helpful. Thank you.

Operator

Thank you. Our next question comes from William Reuter with Bank of America. Your line is open.

William Reuter -- Bank of America -- Analyst

Good morning. The first, you talked about the importance of these online-only auctions that you guys have been conducting. I guess, can you talk a little bit about if there is any differences in the margins there? I'm not sure if I've asked that historically. And then what you're seeing from a competitive standpoint from other online-only auction houses and whether you think they are growing their businesses?

Thomas Smith -- President, Chief Executive Officer, Director

Well, on the online-only, it's important to see that as technology evolves, we will move beyond online-only to just auctions. And what I mean by that is online-only are currently time based auctions. But you could very easily append a -- have them set up and then roll into an auction room experience, also entirely electronically. So online-only doesn't necessarily need to be carved out from a broader auction suite of products. We've been doing it, because there are certain kinds of products that are really good for a time-based-only auction. In addition, we use the online-only auctions to try experiment new ways and new exciting things, such as we had this very interesting Bang & Olufsen example. We did the loose stones point that I mentioned a minute ago. So there are new and innovative things that we're doing in the online-only space that aren't quite ready for a live auction experience.

Moreover, we use the online-only in a way to evolve in new ways on technological products and services before we put them into a bigger or more -- a big evening auction or big day sale auction on the live experience. So they're tremendously valuable to us in lots of ways. And because the price point is low, the margin tends to be high. That's a different question as to whether the fixed cost investment we're putting in there makes each particular sale profitable or not. Obviously, the contribution is higher, because the price point is lower.

William Reuter -- Bank of America -- Analyst

That's very helpful. And then, I know through periods where the art market gets extremely strong, there are examples of you and your other competitors kind of bidding up wages of your employees or trying to get some of the employees with the relationships. Have you seen much of a change in activity of, I guess, competition for these assets?

Thomas Smith -- President, Chief Executive Officer, Director

Well , listen, our employees are -- and first of all, they're not employees, they are colleagues. And I should also point out they are also shareholders. So let me just start on that. Listen, we have the most amazing talent in the world and every single minute we need to be thinking about -- and we do think about how we keep these people enchanted and excited about what they do. When we lose people we want to keep for money, it's generally our fault, but it's usually not just related to money. Yes, there's no question that the competition for the most valuable resource that Sotheby's is privileged to have are people, is robust. There's no question that the fact we have an amazing pool of talent is recognized by our competitors and they flatter us by going after our people. But no, we're not seeing any fundamental changes in the underlying economics, because we want to be the preferred place where that incredible talent wants to work.

William Reuter -- Bank of America -- Analyst

Okay. And then just lastly from me, you talked about potentially accelerating the pace of your share repurchases. I think you mentioned that the authorization is $133 million right now. I guess, how are you thinking about timing of that and then in the context of any goals around leverage at this point? That's all from me. Thanks.

Thomas Smith -- President, Chief Executive Officer, Director

Our Corporate Secretary is here and he reminds me that we can start buying on Wednesday.

Unidentified Speaker --

That is correct.

Operator

Thank you. Our next question comes from Greg Pendy with Sidoti. Your line is open.

Greg Pendy -- Sidoti -- Analyst

Hey guys, thanks for taking my question. I guess just one on inventory. It's now down to around $32 million. That's a significant drop. I'm just wondering how you're thinking about that and are you guys going to be comfortable at any point, maybe taking a chance on some works in the future that you can own in inventory. Is this something to allow you to be more aggressive in the future? Is this the run rate you want to keep it at?

Thomas Smith -- President, Chief Executive Officer, Director

Oh, it's a really good question. By the way, we should split. There are two kinds of inventory; one inventory is bad inventory and the other inventory is good inventory. Bad inventory is the inventory that builds up on the balance sheet because of errors on guarantees in the auction room and you take something to house and it fills up. And that's a lot of what we have been selling over the years, which is the result of prior year's errors and occasional current errors in the auction room. And that's why you see the inventory account very encouragingly dropping. However, that doesn't mean necessarily that in certain instances, as part of a client service opportunity or select opportunity to -- for our shareholders, we would not take an inventory position. And we have in other instances, briefly, at various points in time, with the inventory account dropping to a very low number, some bouncing around down there, you will see from that what I call good inventory uses, just because the overall amount of inventory is now so low, will be more apparent.

Greg Pendy -- Sidoti -- Analyst

That's helpful. Thanks.

Thomas Smith -- President, Chief Executive Officer, Director

But the idea, for example, that we're going to go back to a policy of bad inventory is off the table. And, in fact, you saw that in our results this quarter. We'd rather take -- just take a hit on a particular painting where we didn't quite get the pricing right, rather than put it on the inventory thing and hold it for several years. It's not a good capital allocation decision.

Greg Pendy -- Sidoti -- Analyst

That's helpful. Thanks a lot.

Operator

Thank you. And I'm currently showing no other questions at this time. I'd like to turn the call back over to Tad Smith for closing remarks.

Thomas Smith -- President, Chief Executive Officer, Director

I want to thank everybody. We're really excited about our business, we're really excited about the fall and we think that things are going to happen. So thank you all for joining us today.

Operator

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

Duration: 45 minutes

Call participants:

Jennifer Park -- Vice President of Investor Relations

Thomas Smith -- President, Chief Executive Officer, Director

Micheal Goss -- Chief Financial Officer, Executive Vice President

Westcott Rochette -- Evercore ISI -- Analyst

Adam Chinn -- Chief Operating Officer & Executive Vice President

Amy Cappellazzo -- Chairman of Fine Art Division

Unidentified Participant -- -- Analyst

Pete Lucas -- CJS Securities -- Analyst

David Schick -- Consumer Edge Research -- Analyst

Rommel Dionisio -- Aegis Capital -- Analyst

William Reuter -- Bank of America -- Analyst

Unidentified Speaker --

Greg Pendy -- Sidoti -- Analyst

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