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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the iPic Entertainment Fourth Quarter and Full Year 2018 Conference Call. [Operator Instructions] Please note that this conference is being recorded today, March 12, 2019. On the call today, we have Hamid Hashemi, Founder and Chief Executive Officer of iPic Entertainment; and Andre Loehrer, Interim Chief Financial Officer.
Now, I would like to turn the call over to Andre to begin.
Thank you, operator, and good afternoon, everyone. By now, you should have access to our earnings press release, which can be found on our Investor Relations website at investors.ipictheaters.com in the news releases section.
Before we begin, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings and our annual report on the Form 10-K for more detailed discussion of the risks that could impact our future operating results and financial conditions. During today's call, we will also discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in today's earnings release, which is available on our website.
And with that, I'd like to turn the call over to Hamid Hashemi, our Founder and Chief Executive Officer.
Thank you, Andre. Good afternoon, everyone, and thank you all for joining us today. We appreciate your interest in iPic Entertainment. I would like to begin our discussion with our 2019 plans, as we believe this is going to be a very exciting year at iPic.
Andre will then review the quarterly financials along with our annual guidance, before I conclude and open the lines for your questions. As you know, we have previously laid out our 4 key strategic initiatives, along with the steps that we're taking to capitalize on our many opportunities. We view successful execution across these items as critical in driving our top line and bottom line results and creating long-term value for our stakeholders. The 4 initiatives are: improving existing location profitability; opening new high-returning iPic locations domestically; pursuing international growth opportunities; and four, expanding our non-box office revenue related to branded partnership, membership and other digital growth options.
Let's begin with improving existing location profitability. Last year, as you may recall, our primary focus -- our primary course of action was executing our remodeling program. This entailed expanding our use of Premium-Plus seating, which includes our latest patent-pending Pod Seats and patented chaise lounges to generate higher revenue per screen. Customer preference for Premium-Plus seats is 4:1 even with a higher ticket price, and Generation III admission revenue per screen is 72% higher than Generation I.
We're pleased to report that we completed all 5 projects on time and under budget. Four sites converted their auditoriums to offer exclusively Premium-Plus seating: Pasadena, Austin, Dallas and Redmond. And our fifth remodel in Scottsdale was converted to offer predominately Premium-Plus seating.
Early results at our remodeled sites have been positive as average spend per guest increased at twice the rate of non-remodeled sites in 2018. We are excited and poised to capitalize on the strong film slate in 2019 as we continue to optimize our service model in these locations. On an annual basis, we believe that they will return in excess of our 20% return-on-investment goal.
On a related note, although we are still serving prepared-to-order chef-driven menu and craft cocktails at the Scottsdale location through our iPic Express, we closed the full-service restaurant itself in January 2019 as it was underperforming relative to our expectations. This was an unfortunate but necessary step we needed to take so that we can reallocate our resources to those areas of that location that are already profitable and have the greatest opportunity for improvement. There are 2 remaining locations with Generation II auditorium configurations in Bolingbrook, Illinois, and South Barrington, Illinois, that are targeted for remodeling. These were originally planned for completion in 2019, but have since been postponed until 2020 in an effort to limit our CapEx spending this year.
We're proud of the fact that we are able to grow our store-level EBITDA during both the fourth quarter and for the full year amidst the potential disruption of completing 5 remodels in all of our locations to accommodate live performance. This year, we have shifted our focus to realizing greater cost efficiencies at the store level, which should yield higher profitability when combined with our expectation of comparable store sales growth.
We're particularly focused on more effective labor management and scheduling as we believe that we have an opportunity to optimize our productivity compared to last year. We have proactively taken steps to mitigate headwinds stemming from minimum wage increases that occurred and continue to occur in many of our key markets. We are also navigating the varying regulations regarding sufficient scheduling notice to hourly employees, and of course, the tighter labor markets overall.
Beginning late last year, we implemented a new labor schedule to 2 locations that have since been deployed to all 16 sites. This new process better enables us to optimize our staffing model by presenting insightful calls to action at key points in the scheduling process. This helps us schedule labor appropriately while providing sufficient notification to our teams, all while ensuring that our guests receive the unparalleled service that they are accustomed to.
This optimization is expected to reduce our labor cost by 100 basis points on an annual basis, all else being equal. In doing so, it will help us thwart rising hourly labor costs and ideally reduce turnover as we are able to provide our team with greater visibility into when they are needed to -- for work.
We're also conducting a comprehensive review of all of our store-level service contracts with an aim of yielding greater efficiencies. In some cases, this will involve moving away from national service providers and bid returned maintenance contracts at the local level, which could result in considerable savings. In aggregate, you can see from our guidance that we are projecting modest growth in our comparable store sales, which should provide some cost leverage, but we are also anticipating higher store-level EBITDA and a narrower adjusted EBITDA loss as we lap the remodeling and other disruptions from last year.
Our second key strategic initiative is to open new iPic locations domestically. We have 2 locations planned for 2019. Just last week, we opened our third Florida location in Delray Beach, which is our 16th location overall. We now operate a total of 123 screens across 9 states.
iPic Delray Beach is a 429-seat luxury theater located in Delray Beach, Florida, and is the first movie theater to open in downtown in over 40 years. Opening our doors in Delray marked the culmination of a 6-year journey made possible through a close collaboration with the city and the community redevelopment agency to deliver a truly unique experience to the community.
iPic Delray also has a collection of custom curated artwork by internationally renowned street artists that complement the showcasing of blockbuster films and live ticketed events. Pieces designed by Peter Tunney, [ Wheels ], Ernest Zacharevic combine with the unique architectural features of the building construction for an immersive experience for our guests. Our next opening this year will be in Irvine, California, during the fourth quarter, which will also be our third location in Southern California.
This will be a 310-seat luxury theater at Park Place, a 2.5 million square-foot office and 165,000 square-foot retail and restaurant space at the intersection of Jamboree Road and 405 Expressway, and will serve as an entertainment hub offering the only affordable luxury food service, theater and restaurant experience in the area. We also have 6 additional leases signed, which are in various stages of development, and a pipeline of additional 12 sites in negotiation.
As you can see in the near term, the majority of our planned openings are targeted to help achieve critical local market scale in our core markets of Florida, Texas, California and the Tri-State areas. However, beyond that, there is a significant white space opportunity to expand in both existing and new U.S. markets. Our ultimate long-term goal remains reaching 200 locations and roughly 1600 screens across the United States.
Our third key strategic initiative is to pursue international growth opportunities. I realize that we've been discussing Saudi Arabia for some time and the process has certainly taken longer than we expected. I'm actually leaving for the kingdom the week after next in the hopes of finalizing our license so that we can begin the process of opening theaters there.
As you know, we've already been cleared to receive a license to operate theaters and are just awaiting the receipt of final documents once the security clearance has been completed. Our first location in Riyadh, which is the country's capital and main financial hub, is now expected to open next year, and circumstances out of our control have delayed this opening. This temporary delay, however, in no way diminishes our excitement to bring our first-class entertainment experience to the people over there as part of our international expansion of the iPic brand.
Lastly, our fourth key strategic initiative is to increase our digital revenue growth. Building on what we accomplished in 2018, we're confident that we can continue increasing revenue associated with corporate sponsorship and customer membership at a faster pace than our 4-wall revenue.
Social and experiential revenue comprised 22% of our total revenue in 2018, while theatrical box office amounted to 27% and food and beverage comprised 51%. This compares rather favorably to our theater competitors, where other revenue only amounted to 6% of their total revenue, while theatrical box office amounts to 60% and food and beverage about 34%. While box office as a percentage of revenue is smaller, on a per-screen basis, our theaters are among the highest per-screen and per-seat revenue in the country.
Sponsorship revenue via branded partnership generally comes in the form of a 20-minute film segment that plays on the theater screens before the preview starts. This is where we showcase some of our partner brands and products as well as our latest menu creations. Sponsorship revenue was $4.2 million in 2018, up from $1.8 million in 2017, an increase of 133%. Partnerships last year included Bulgari, Louis Vuitton, Avion, Dior, Cartier, Capital One, Netflix, Dell and among others. Our new CMO, who I will speak about shortly, has been tasked with taking our branded partnership activity to the next level. We continue to believe there is a meaningful opportunity to grow this revenue stream by leveraging our large and growing membership base, which has very favorable demographics.
We have also enhanced our membership rewards program leading into 2019. All paying gold members will now receive a 10% discount on all food and beverages purchases, which is on top of a package of ongoing and enhanced benefits that include discounted membership ticket pricing and early access to reserved seats. We also made it faster and easier for guests to earn platinum and platinum elite status. Additionally, we gave all nonpaying silver members a free 3-month upgrade to gold price membership so they can experience all the perks and benefits.
Current silver members were then given the option to pay a $29 membership fee before March 1 to retain their gold status for the forward-looking year. Showing nonpaying silver members the benefit of gold level demonstrated the strong value proposition of remaining a gold member and in fact, we saw over 10,000 silver members elevate their membership to gold status during the promotional window through March 1. Another key part of our plan to grow membership revenue is by greatly expanding the value offering to paid members by providing them with more one-of-a-kind offerings, goods and services from other branded partners. Over time, we expect to materially expand both the quantity and quality of special offers and giveaways to our members. Total membership stood at about 2 million people at year-end, which was up about 10% from the end of 2017.
On a related basis, last month, we revealed a new brand identity that was introduced through a variety of media and physical applications. The new identity aligns with our steady and robust growth in our iPic Access Membership Rewards Program and consistent role as an industry leader in dining and entertainment.
Finally, before it turn the call over to Andre, I want to welcome Carla D'Alessandro as our new Chief Marketing Officer. She has been tasked with leading and overseeing all marketing efforts across the entire iPic brand portfolio, including theaters, restaurants, experiential content, membership and partnership strategy. She comes to us after building out digital capabilities and leading innovation marketing programs for Fortune 500 brands at Zimmerman Advertising. She achieved this by creating a best-in-class digital experience, customer acquisition and database loyalty program to grow market share and revenue. We are thrilled to have Carla join the iPic family and build out capabilities to tailor and scale marketing programs across earned and owned channels for both new and existing members.
Lastly, our search for a new CFO is ongoing, but we have no new news to report. Currently, our finance team is in very capable hands under Andre. So we will take our time until we can identify the right candidate.
With that, I'd like to now turn the call over to Andre to provide more details on our financial results.
Thank you, Hamid. I'd like to begin with some highlights from the full year before discussing results from the fourth quarter itself.
Total revenue for 2018 increased by 2.8% to $148.3 million compared to $144.3 million. The $4 million increase in revenue was derived from the following sources: One, $2.1 million from the net increase in year-over-year revenue from noncomparable stores, with increases in our Dobbs Ferry, New York, location, partially offset by decreases at our closed Glendale, Wisconsin, location; and secondly, a $1.9 million or 1.4% increase in comparable store sales.
Cost of food and beverage decreased 40 basis points to 26.5% of applicable revenue. The decrease in food and beverage cost was driven by same-store margin improvements of almost 50 basis points. And notably, the food and beverage spend per person increased by 1.7 -- by $1.78 to $26.61 or a 7.2% increase. This is primarily attributable to the remodel increasing the number of Premium-Plus seating, which led to higher food and bev spend per person.
Store-level EBITDA increased by $0.5 million or 3.4% to $15.1 million, and margins increased by 10 basis points of total revenue to 10.2%.
Now let's review our quarterly results in greater detail. Total revenue for the fourth quarter decreased 2.8% to $37.8 million, driven mainly by 2% screen capacity lost stemming from the remodel closures in October and the fact that we operated 1 less site during the comparable period. Nonetheless, strong [ key ] performances from our New York, New Jersey, Washington D.C. and Los Angeles locations have partially offset these factors and we finished the quarter with a 0.6% decrease in comparable store sales, including the remodeled sites.
At our Gen III locations, comparable store sales rose 4.7%, and at the Gen II locations, comparable store sales increased 4.6%. These both exceeded the industry by a rate factor of 2x. Notably, the other revenue line, which includes membership revenue, parking and valet and gift card breakage, rose 57% to $0.9 million during the fourth quarter and 100% to $3.4 million for the full year ended 2018. This was primarily driven by higher membership revenue and should continue to grow at a faster rate than food, beverage and theater revenue in the foreseeable future.
Store-level EBITDA, a non-GAAP measure, increased by $400,000 or 9.1% to $5.3 million in the fourth quarter 2018. As a percentage of total revenue, store-level EBITDA margin increased 150 basis points to 14.1% versus the 12.6% last year. The increase was substantially driven by lower cost of theater as a percentage of theater revenues, offset by the impact of lost capacity due to our 3 remodels that were under construction early in the quarter that negatively impacted occupancy and other operating expenses. Now digging into each cost line item a little deeper.
Theater-related costs declined 630 basis points year-over-year to 37.5% of the applicable revenue due to the higher sponsorship activities positively affecting theater revenue, which created leverage on this line item, along with positive film slate changes. Food and beverage costs increased 10 basis points to 25.8% of applicable revenue, although our spend per person increased by $1.91 or 7.4%, and this included both price and higher mix.
Operating payroll and benefits declined by 10 basis points to 25.6% of total revenue. This was because of greater efficiency in labor scheduling, which more than offset the deleverage experienced from the remodel sites due to the loss of screen capacity and labor wage inflation of mid- to high single digits.
Our occupancy costs rose 90 basis points to 12.3% of total revenue, driven by lower comparable store sales and deleverage experienced from the remodel sites due to the loss of screen capacity. Other operating expenses increased 80 basis points to 21.3% of total revenue. The increase was due primarily to higher repairs and maintenance expense, along with fixed operating cost deleverage incurred during the screen closures.
Moving down the income statement. G&A expense was $4.6 million during the fourth quarter, 140 basis point increase compared to the fourth quarter last year. This increase came largely from equity-based compensation charges. Total adjusted EBITDA, a non-GAAP measure, increased to $1 million for the fourth quarter from $700,000 in the fourth quarter in the prior year.
To note, we expensed $272,000 of stock-based compensation in the fourth quarter and $4.4 million in impairment charges from property and equipment, primarily related to our Scottsdale and South Barrington locations. In the prior period, there was no stock comp recorded, but we did incur $400,000 in impairment charges for property and equipment. There were also nonrecurring charges totaling $1.5 million in both quarters that are excluded in our adjusted EBITDA calculations.
Interest expense rose slightly to $4.4 million from $4.2 million, reflecting a higher average debt balance, while our total long-term debt at year-end increased by $46 million to $188.3 million from the prior year.
So looking ahead, we are reiterating our full year 2019 outlook based upon the following guided ranges: Total revenue of $153 million to $158 million, this represents growth of between 3.2% and 6.5% compared to last year; comparable store sales growth in the range of low- to mid-single digits versus a 1.4% comparison from last year; store-level EBITDA of $19 million to $21 million, this represents a growth of 25.8% and (sic) [ to ] 39.1% compared to last year; G&A expenses, excluding stock comp base expense, of $22.5 million to $24.5 million; an adjusted EBITDA loss of between negative $3 million and negative $1 million, which suggests at a minimum that we'll be on par with 2018, but more than likely narrow our losses even further; we plan 2 domestic openings, Delray Beach, Florida, which operations began last week; and Irvine, California, in the fourth quarter; and finally, capital expenditures of $17 million to $19 million, net of tenant improvement dollars, making a substantial decrease from 2018.
And lastly, I'm pleased to report that we received a letter from NASDAQ today that because the market value of our listed securities had exceeded the minimum requirements for the last consecutive 10 business days, we've regained compliance with NASDAQ's listing rule 5550(b)(2) and now, this matter is closed.
And with that, I'd like to turn the call back over to Hamid for closing remarks.
Thank you, Andre. While 2018 was in many respects a transitional year, 2019 is poised to be a very exciting year for our brand as we leverage our unique and disruptive offering in pursuit of becoming America's premier entertainment destination. Through the execution of our strategic initiatives, we can successfully grow the brand across the United States and internationally, and generate long-term profitable growth and increased value to our stockholders over time. We have resumed opening new locations, with Delray just last week and Irvine in the fourth quarter. We will have a full year of benefit from the 5 remodels we completed in 2018 as we move past the lost screen capacity that negatively impacted our results last year. Our pipeline during 2019 is robust, and we have numerous sites that are either under construction or have signed leases.
We have cost-saving initiatives in place that will enable us to grow our store-level EBITDA and should result in a narrowing of our adjusted EBITDA loss compared to last year. We are forging ahead with Saudi Arabia and hope to have good news to share with you all soon. We have made much progress growing our branded partnership, but are also in a unique position to grow it further given our membership model. There is the potential for significant network effect opportunity as we continue to grow and scale both locally, domestically and internationally. As more units increase the number of iPic members, it should lead to more sponsorship interest from branded partners. That, in turn, would then increase the value of being an iPic member, driving an increasing membership rate.
Let me thank our team members for their hard work, hospitality and dedication to our brand. They are the reason why we have such a loyal and growing membership base. We greatly appreciate your taking the time today to follow our story, and we're looking forward to updating you on our future calls. Operator, please open the lines for questions.
[Operator Instructions] Our first question today is coming from James Goss from Barrington Research.
This is Pat Sholl on for James Goss. I just had a couple of questions. With the current soft box office environment, how is sort of the more -- or, I guess, the less box-office-emphasized business that you guys operate, how is that managing in the current environment?
Obviously -- this is Hamid. Hi, Pat. Obviously, movies are the traffic drivers, but we're fortunate to have revenue from our restaurants that operate independent of the theaters as well as revenue from membership and our partnership. So those have, to some degree, offset the softness in the box office, but we are not immune to quality of pictures. We still -- our business fluctuates up and down, but not as significantly as -- we have said this in the past, in the calls. Given the number of screens and the size of the auditorium, the number of seats that we have, we are not as vulnerable to the quality of the pictures and the quantity of them. So we don't have the big fluctuations up and we don't have them on the way down.
Okay. On the capital spending side of that net just under $20 million of CapEx for 2019, how much of that would be part of the 2020 opening schedule?
That is basically for the opening of Delray and the Irvine location. I mean, there is some soft cost associated that we continue to pay towards the 2020. The way our leases are structured also, there is significant contribution from landlords. Their contribution comes in first before we invest capital in the sites. So given the position of these locations and where they are in the development, as of right now, by the end of this year, we don't anticipate to have to contribute towards construction of any of those until 2020.
Okay. And then could you sort of go through the structure of your planned operations within Saudi Arabia, just in terms of it being -- I think you've described it as capital light, so just could you provide a little more detail on that?
Sure. Our relationship there is with a local partner and the plan is to raise the capital locally. We've had many meetings and dialogue with companies that, upon obtaining our license, will be able to take it to the next stage in terms of raising the capital in the local market to grow the brand. And the structure is such that there will be a loyalty paid to the U.S. company and then there is -- the balance of it is a profit-sharing between iPic U.S.A. and iPic KSA.
Your next question is coming from Brian Kinstlinger from Alliance Global Partners.
Can you remind us how you expect a new facility like Delray or even Irvine eventually to ramp in, say, year 1, year 2? And then how long it takes until it becomes mature?
Sure. We typically model our theaters to mature over a 3-year period. Some mature sooner than the others. Given our presence in South Florida market as well as California, given that we already are known quantities, we have theaters in operation, they typically ramp up a little bit faster. So we've only been open for about a week in Delray. So it is really premature for us to make any long-term forecast, but we're extremely happy with the results so far.
You guys made sure to open up the week of Captain Marvel, so that was good.
Yes. That's right.
So I may have not written them fast enough, I'm not sure you gave all the numbers, but you remodeled 5 theaters last year. Can you highlight today what you think the increase in ticket sales are, maybe profitability, the impact is, and then food and beverage spend?
Sure. When we remodel these theaters, we basically -- we're actually reducing seat count. A theater that had, say, 450 seats may go down to 350 because we are putting larger seats in. So from an attendance standpoint, the numbers are -- they only grow marginally, but where the significant difference is the occupancy. So in terms of total attendance, those are more favorable seats so we do pick up -- I mean, that's why -- your occupancy rate grows, therefore, your total attendance remains kind of neutral where it was. But where the significant difference is that typically, our premium seats, if the spend was, call it, $12 to $14, now that spend is going to $25. So the growth really comes from additional food and beverage sale, as we stated in our report.
Right. So what is the -- the price per seat is different. So what were those -- what was the average theater of those 5 generating in revenue before, and what's kind of the run rate, you think, right now?
I don't have that matrix in front of me, but I would tell you, we are seeing -- we're really measuring it based on return on invested capital, and we're seeing better than 20% return. We went into these transactions or these remodels with an idea of 20%-plus. And we're happy to say that we are exceeding those numbers, but I can certainly provide you with the numbers after the call if you want those specific 5 theaters, because we haven't identified them. Some of these theaters have only been open as of end of the year. They got finished remodeled by end of October, mid-October and couple of them were done mid-year. So to give you specific numbers resulting to the end of the year was difficult, but we'll have more visibility now that we can provide that.
And then in the income statement you guys have nonrecurring charges. Can you remind me what these nonrecurring charges are there, added back to EBITDA, adjusted EBITDA, $1.5 million?
Sure there was -- yes, dot com, when we went public last year, there was a litigation charge of $1.5 million. The IP-related cost, there was legal fees, accounting fees to the tune of $3.5 million combined. So those are onetime nonrecurring charges.
The $1.5 million this quarter, what was that for? And will there be more nonrecurring charges this year?
There was a settlement -- the $1.5 million was a settlement of a litigation case.
I see. So going forward, we shouldn't see any nonrecurrings like that anymore or do you see...
Hopefully not. We don't have any pending items at this point.
There is no pending litigation.
Perfect. And then my last question is, with the recent events that have gone on geopolitically in Saudi Arabia, has your strategy changed at all and/or has the government's process been impacted at all into gaining a license, do you believe?
I don't think -- I mean, our plans have not changed. So I think there is some more scrutiny on the part of the government in terms of background checks that they're going through that I don't think that was the norm in the past, but beyond that, I really can't comment any more than that. I mean, there is still theaters being built, there are leases being negotiated. Frankly, it's business as usual right now.
We've reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.
Well, I'd like to thank everyone for participating in this call, and we look forward to getting on the call with you in 3 months. Thank you, everyone.
Thank you.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.