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Edited Transcript of BPF.UN.TO earnings conference call or presentation 9-May-19 3:30pm GMT

Q1 2019 Boston Pizza Royalties Income Fund Earnings Call

Richmond May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Boston Pizza Royalties Income Fund earnings conference call or presentation Thursday, May 9, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jordan Holm

Boston Pizza International Inc. - President

* Robert Kirincic

Boston Pizza Royalties Income Fund - Director & VP of Finance - Boston Pizza GP Inc

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Conference Call Participants

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* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Analyst

* Nick Corcoran

Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Hello, this is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza's First Quarter 2019 Conference Call. (Operator Instructions) And this conference is being recorded on May 9, 2019. (Operator Instructions)

At this time, I would like to turn the conference over to Rob Kirincic, Vice President, Finance. Please go ahead.

I'm sorry, one moment please. Please go ahead, Mr. Robert Kirincic.

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Robert Kirincic, Boston Pizza Royalties Income Fund - Director & VP of Finance - Boston Pizza GP Inc [2]

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Thank you, and welcome to the call. We'll be discussing the 2019 first quarter results for both Boston Pizza Royalties Income Fund, or the Fund, and for Boston Pizza International, or BPI. For complete details on our financial results, please see our 2019 first quarter materials filed earlier today on SEDAR, or visit the Fund's website at www.bpincomefund.com. Should you require additional information after the call, you can reach us via the Investor Relations phone number listed in our press release. The Fund is a limited purpose, open-end trust established under the laws of British Columbia to acquire indirectly certain trademarks and tradenames used by BPI, and as Boston Pizza Restaurants in Canada, whereby BPI pays an amount to the Fund based on franchise revenues of Royalty Pool restaurants. For a complete description of the Fund, please see the annual information form dated February 13, 2019, which was filed on www.sedar.com.

Before I turn the call over to Jordan Holm, President of BPI and the Fund, I have to remind everyone about the risks inherent in forward-looking information. Certain information in the following discussion may constitute forward-looking information that involves known and unknown risks, uncertainties, future expectations and other factors which may cause the actual results, performance or achievements of the Fund, Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, Boston Pizza Canada Limited Partnership, Boston Pizza Canada Holdings Inc., Boston Pizza Canada Holdings Partnership, Boston Pizza Restaurants or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. For a complete definition of forward-looking information and associated risks, please refer to the Fund's management discussion and analysis issued earlier today. Forward-looking information is provided as of the date of this call, and expect as required by law, we assume no obligation to update or revise forward-looking information to reflect new news, events or circumstances.

With that, I'll turn the call over to Jordan.

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Jordan Holm, Boston Pizza International Inc. - President [3]

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Thank you, Rob, and welcome, everyone, to Boston Pizza's first quarter investor conference call. Today, I'll discuss our results for the first quarter ended March 31, 2019, and Rob will review the key financial items.

Later, I'll discuss Boston Pizza's plans for the second quarter of this year and we'll leave time for questions at the end. As you can see from the press release and financial statements filed this morning, Boston Pizza posted system-wide gross sales of $265.3 million for the period, in line with the same period in 2018. In addition, the Fund posted franchise sales from restaurants in the Royalty Pool of $206.4 million for the period, representing an increase of 1.2% versus the same period in 2018. The key driver of our sales results for the period was the additional sales from the 5 net new Boston Pizza Restaurants opened during 2018 and added to the Fund's Royalty Pool on January 1, 2019. Same-store sales growth, or SSSG, for the period was negative 1.3%, while same-store sales growth on a franchise sales basis was flat at 0.0%. Same-store sales growth for the period was principally due to continuing declines in guest traffic partially offset by increases in takeout delivery sales and menu price increases. Much of the menu price increases were made in response to provincial minimum wage increases, and those menu price increases negatively impacted guest traffic compared to the same period last year. Takeout delivery sales continue to be positively impacted by our delivery partnership with SkipTheDishes. BPI completed 5 restaurants renovations during the period compared to 10 in the first quarter 1 year ago. Boston Pizza Restaurants typically close for 2 to 3 weeks to complete the renovations and experience an incremental sales increase in the year following the reopening. We started the first quarter of 2019 with our Big Rib Deal promotion, which featured our delicious slow roasted barbecue pork back ribs with the choice of 2 side dishes and garlic bread for just $19.99. The Big Rib promotion was supported with digital and social media campaigns. Our annual Valentine's heart-shaped pizza promotion ended on February 14, 2019. As part of this campaign, Boston Pizza locations across Canada raised funds for charity by providing paper hearts for a minimum $2 donation. All proceeds from the paper heart sales, along with $1 from each of the heart-shaped pizza sales on February 14, and our special triple moose chocolate cake, were donated to a local community charity selected by each of the stores. This popular and successful promotion raised over $530,000, an increase of more than 25% versus the same campaign one year ago.

Turning to restaurant development. We didn't open any new Boston Pizza restaurants during the first quarter of 2019, which is quite normal given the cool winter conditions that are not suitable for construction, but just a few days ago, we celebrated our first opening of 2019 in Petawawa, Ontario, and we have 2 more restaurant openings planned for later this month. We have some -- we also have some exciting initiatives planned to drive sales for the second quarter and the remainder of the year, which I'll speak about in a moment here, but first, I'd like to turn the call back over to Rob for a review of the Fund's financial performance. Rob?

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Robert Kirincic, Boston Pizza Royalties Income Fund - Director & VP of Finance - Boston Pizza GP Inc [4]

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Thank you, Jordan. The Fund posted royalty income of $8.3 million for the period compared to $8.2 million for the same period one year ago, representing an increase of 1.2% for the period. The Fund posted distribution income of $2.7 million for the period compared to $2.7 million for the same period one year ago. Royalty and distribution income in respect to the period was based on the Royalty Pool of 396 Boston Pizza Restaurants reporting franchise sales of $206.4 million for the period. In the first quarter of 2018, royalty and distribution income was based on the Royalty Pool of 391 Boston Pizza Restaurants, reporting franchise sales of $204.0 million.

The Fund's net and comprehensive income was $11.1 million for the period compared to net and comprehensive income of $2.4 million for the first quarter of 2018. The $8.7 million increase in the Fund's net and comprehensive income was primarily due to a $10.0 million change in fair value adjustments partially offset by higher noncash deferred income taxes of $1.3 million. While net and comprehensive income is the measurement of the Fund's earnings under International Financial Reporting Standards, or IFRS, the Fund is of the view that net income does not provide the most meaningful measurement of the Fund's ability to pay distributions, as the calculation of net income contains noncash items that do not affect the Fund's cash flow. Noncash items include the fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, the Class B unit liability, the interest rate swaps and changes in deferred income taxes. Consequently, the Fund reports the non-IFRS metrics of distributable cash and payout ratio to provide, in the Fund's opinion, investors with more meaningful information regarding the Fund's ability to pay distributions to unitholders. The Fund generated distributable cash of $6.6 million for the period compared to $6.7 million for the first quarter of 2018. The decrease in distributable cash of $0.1 million or 1.1% was primarily attributable to an increase in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties Limited Partnership, totaling $0.1 million, partially offset by higher royalty income previously discussed. The Fund generated distributable cash per unit of $0.303 for the period compared to $0.305 per unit for the first quarter of 2018. The decrease in distributable cash per unit of $0.02 or 0.7% was primarily attributable to the decrease in distributable cash just mentioned. The Fund's payout ratio for the period was 113.9% compared to 113.1% in the first quarter of 2018. The increase in the Fund's payout ratio for the period compared to the same period in 2018 was due to the combined effects of distributable cash decreasing by $0.1 million or 1.1% partially offset by distributions pay decreasing by a nominal amount, or 0.5%. The decrease in distribution paid during the period was a result of there being fewer Fund units outstanding compared to the same period in 2018, due to the Fund's normal course issuer bid that was active from November 26, 2018, to December 14, 2018, which resulted in the purchase and cancellation of 98,300 units at an average price of $15.86 per unit. The Fund strives to drive unitholders with consistent monthly distributions, and as a result, the Fund will generally experience seasonal fluctuations in its payout ratio. The Fund's payout ratio is likely to be higher in the first and fourth quarters each year compared with the second and third quarters each year, since Boston Pizza Restaurants generally experienced higher franchise sales during the summer months when restaurants open their patios and benefit from increased tourist traffic. Higher franchise sales generally result in increases in distributable cash. On a trailing 12-month basis, the Fund's payout ratio was 103.4% as at March 31, 2019. Given the top line structure of the Fund and no current mandate to retain capital for other purposes, it is important to note that a payout ratio close to 100% is expected over time. For additional context, the Fund's annual payout ratio for the prior 3 years ended December 31 were 103.3% in 2018, 100% in 2017, and 98.9% in 2016. The Fund also ended the quarter with $2 million in cash. On May 8, 2019, the trustees declared a monthly distribution to unitholders of $0.115 per unit for April 2019. This distribution will be payable on May 31 to unitholders of record on May 21. This represents the 202nd consecutive monthly distribution since the Fund's initial public offering. And with this distribution, the Fund has paid out total cash or will have paid out total cash distributions of $316 million, or $21.10 per unit since the IPO in July 2002.

With that, I'll turn the call back to Jordan for the outlook. Jordan?

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Jordan Holm, Boston Pizza International Inc. - President [5]

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Thank you, Rob. As I mentioned, we have some exciting promotions for our guest at Boston Pizza. We started the second quarter of 2019 with our Shareable promotion, which introduced several new menu items, including the delicious new Pepperoni Pizza Poutine, Mad Mac Pizza and Kick’n Onion Rings. This campaign is currently running at our restaurants and is supported with television advertising as well as digital and social media campaigns. With hockey and basketball playoffs in full swing, we are promoting Boston Pizza's Canada's sports bar headquarters as the place to experience the big games. To that end, we have ongoing campaigns focus on NHL Hockey, NBA basketball, including that big Raptors game tonight, and also, upcoming UFC pay-per-view events. Next month, we will be refreshing our main national menu at all locations and that gives us a chance, not only to introduce some new menu items and improve some of our recipes, but also to adjust regional pricing where appropriate. We have 395 locations of Boston Pizza across the country today and 5 more locations that are currently under construction. So we're optimistic about the continued expansion opportunities for BP. We also have completed 9 restaurant renovations to date and have many more scheduled for completion during the rest of the year. These renovations help keep Boston Pizza Restaurants looking fresh and modern, and bring knowledge and equipment up to the latest standards. This continued development further solidifies our position as Canada's #1 casual dining brand, helping us to serve more than 50 million guests annually in more locations than any other full-service restaurant brand in Canada. In addition, our experience shows that a franchisee's investment in a store renovation is rewarded with an incremental sales increase when the location reopens, and more guests are attracted to the great new look. While we continue to see challenges with in-store guest visitation and the impact of higher labor cost across Canada, we are seeing positive results in other areas, including increased online takeout and delivery sales, particularly driven by the adoption of our third-party delivery channel.

With that, I'd like to begin the question-and-answer session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nick Corcoran of Acumen Capital.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [2]

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I have a couple of questions. So my first question has to do with the same-store sales growth. Can you point to any regional trends between Alberta, Ontario, or the (inaudible) versus the other parts of Canada?

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Jordan Holm, Boston Pizza International Inc. - President [3]

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Yes. So we saw strength in Eastern Canada, particularly Québec and Atlantic. We saw weakness in Ontario. And I mentioned just in the prepared remarks about the impact of changes in minimum wage, and particularly it was very abrupt in Ontario in 2018, and so we're seeing that as an industry, including the 120 Boston Pizza locations in that province. And then Saskatchewan, and we've mentioned Saskatchewan on prior calls as being a challenged area, both economically and also specifically for the restaurant segment given that they have introduced a tax on restaurant meals there of 6%, and have also some of the strictest drinking and driving laws in Canada, which may affect late night business and alcohol sales. So that -- those are the regions that I would call out as being away from the national average.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [4]

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And then with regards to Alberta, how is the same-store sales growth there doing?

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Jordan Holm, Boston Pizza International Inc. - President [5]

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It was modest. We -- or in line, I would say, with sort of the national results and we've commented on Alberta having gone through about a 4-year economic headwind and the recovery has been slow and -- but there is some room for optimism with Alberta and obviously people know Boston Pizza started in Alberta in 1964. We have a huge presence in that province. One of the stores that we're opening this month is in Alberta. We continue to find room for growth. And compared to Saskatchewan, we're seeing better results in Alberta and look forward to that recovery continuing and getting it back to where it was a real strength for BP overall.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [6]

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Great. And then in your MD&A, you talked about 5 restaurants being under construction. Can you just tell me where those are?

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Jordan Holm, Boston Pizza International Inc. - President [7]

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Yes. So we have restaurants under construction in Gander, in Airdrie, we have 1 under construction in Brantford, Ontario. I don't have the list in front of me here, but I can send it to you afterwards. But like our most recent years, our target is 10 to 15 new restaurants opening for the full year. We do continue to open them across the country. And from the examples I threw out there, all the way from Gander to Airdrie, we'll continue to open the locations right across the country. So they're not all concentrated in one particular area, but yes, we do have, like I said, 2 more opening this month. Petawawa just opened on Friday. So continuing to see new growth in all parts of the country.

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Operator [8]

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Your next question is from Elizabeth Johnston with Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [9]

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In terms of your off-premise sales, we have seen that as a percentage of total sales increase year-over-year. Do you have any kind of estimate or idea of what that could grow to? Clearly, you've been able to make meaningful progress in 2018 versus 2017, more quickly than in prior years. So wondering if you -- where do see that number going? How much higher, if you can tell us that? And if you think that this last year SkipTheDishes was a meaningful contributor?

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Jordan Holm, Boston Pizza International Inc. - President [10]

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Yes. So two questions there. We're seeing just -- in terms of consumer preference, takeout delivery is just a surging area for our industry. Restaurants that were never involved in delivery have now participated in it through third-party delivery services. About a year ago, we launched a national partnership with SkipTheDishes and just to answer the last question you had there, yes, it is a meaningful contributor to our results and to our takeout delivery growth overall, and that's really driven by consumer preferences. We always planned to continue to grow the percentage of our sales that are off-premise or through takeout delivery. And that was primarily because the Western stores, the roots of Boston Pizza being in the West, there's a much greater consumer awareness that we do takeout delivery and our full menu is available for takeout delivery. And so we've always had a penetration rate of, say, 15% of total sales being in the takeout delivery channel, whereas in Ontario, Québec and Atlantic, we're a newer brand, those numbers have been sort of mid-single digits, high-single digits. And we always communicated that we would want to grow those to be in line with the West. And what we're seeing is growth in both halves. Actually we're seeing growth in our traditional channels in the East as well as aggregators or third-party delivery services, and we're seeing growth in third-party delivery services contributing to off-premise in the West. So overall, that's a -- it's a growing part of the industry. It's a growing part for Boston Pizza. In terms of where we could get to, I mean we do have locations within our system today that do upwards of 25% of their sales in takeout delivery, even some north of 30%. And that's great that we have the capacity to handle lots of takeout delivery, and since that's a growing area of guest demand, we can service that. But there are downsides to that as well. We have big dining rooms and sports bars. We want to bring people in for in-restaurant dining occasions in both parts of our business there. One of the things that led to the difference between the gross same-store sales results in Q1 of negative 1.3% versus the franchise sales SSSG number of 0.0% was the decline in alcohol sales. And as we grow off-premise, those do not include, naturally, alcohol sales. And so we did see a decline in alcohol sales related to in-restaurant visitation declines as well as some general, just people consuming a bit less alcohol and some weather impact there as well in January, February. But just to point out, we did put an extra bullet in our press release to specifically call out the franchise sales SSSG number of 0.0% and that's a meaningful number for investors in the Income Fund because that is the basis upon which royalties are paid to BPI and, ultimately, to the Fund.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [11]

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That's great. And you actually went on to my --- one of my next questions about that difference in franchise versus growth. And therefore, just to confirm, since Fund -- the Fund is paid based on franchise sales and not growth, there -- Fund holders would be therefore indifferent when it comes to an in-store sale versus an off-premise sale, in terms of one having alcohol, one not. Is that fair?

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Jordan Holm, Boston Pizza International Inc. - President [12]

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Yes. And just for the wider audience on the call, Boston Pizza has never charged royalty on alcohol sale. That goes back to the 1960s when our franchise agreement was put together. It was illegal to charge royalty on alcohol in Alberta. We've always stuck with the charging of 7% royalty on all food sales as opposed to, say, a 5% royalty on total sales, and we like that setup and we can get more into that if you like. But that is -- the difference is that franchise sales are collected on food sales, not alcohol, and therefore, you're right. The 0.0% number is the more meaningful of the 2 numbers for investors in the Income Fund, and to some extent, Income Fund investors are agnostic about whether the sales take place in restaurant and include alcohol or off-premise because it's only the food sales that contribute to the royalty calculation.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [13]

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Okay. Great. And in terms of off-premise sales, as you mentioned, it's been a meaningful contributor. I'm just wondering if you had any -- if you have any data to indicate whether or not you're seeing, in the regions where you're active with Skip, any cannibalization of sales into that channel from an in-store.

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Jordan Holm, Boston Pizza International Inc. - President [14]

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Sorry, Elizabeth. You cut out there, just a sec. Can you repeat that question?

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [15]

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Sure. Just wondering in regions where you're active with SkipTheDishes. Have you had -- do you have any data available to you to indicate whether or not you're experiencing cannibalization into the off-premise channel from the in-store sales?

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Jordan Holm, Boston Pizza International Inc. - President [16]

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Yes. The -- we have, I mean, like I said, we weren't an early adopter of third-party delivery services. We just on -- started to onboard with them last year and very much -- we are seeing it as a new customer. They tend to order at different times of the day versus our traditional takeout delivery customers. They tend to be smaller orders, usually an individual ordering just an individual meal versus a group occasion or more of a traditional Boston Pizza delivery customer, which would be a larger order or ticket dollar value. But you know, when people do choose to eat at home, the impact that we're seeing, that I referred to about alcohol, is that they have beer or wine at their house or they don't want to deal with the Uber or the taxi to get them to a Boston Pizza location, than bringing that food in and eating at home is their alternative, and it is a growing preference among consumers and we do see that impacting in-restaurant guest visitation as well as the alcohol sales that would go along with that on-premise.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [17]

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And since you mentioned the smaller, the 1 person versus a group, have you seen off-premise transactions, the number of transactions increase? I know it's still very early, you really only have a couple of quarters. But is there any -- can you give me any commentary with respect to that?

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Jordan Holm, Boston Pizza International Inc. - President [18]

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Yes, you mean the total number of delivery orders?

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [19]

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Yes. As opposed to what driving it being increased average check, I guess?

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Jordan Holm, Boston Pizza International Inc. - President [20]

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Yes. We have. We've seen -- from the inception when we started to test with these, we have seen it add to the number of delivery orders, and so it is growing as a total dollar value and number of transactions and I mentioned that they do -- the third-party delivery services tend to be a smaller check. People will ask for a single item to be delivered. It's more about convenience and speed than it is about traditional value. So we're learning a lot from participating in it. We have 50 years of experience in doing delivery. So we're very good. We feel it designing our menu items and packaging and procedures to service a delivery market, whether it's our own branded Boston Pizza delivery vehicles and drivers or whether it's a Skip and UberEats, DoorDash, Foodora, any of those third parties.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [21]

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Okay. Great. So in terms of overall traffic then, given your commentary about traffic under pressure overall, but it sounds like increased transactions at least in off-premise. Just trying to get a sense of if that's -- so we have in terms of transaction and traffic off-premise growing, but in-store declining. Is that fair?

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Jordan Holm, Boston Pizza International Inc. - President [22]

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That's correct.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [23]

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Okay, great. And just moving on to renovation activity. You mentioned the number that were renovated this year, I believe it was 5 versus last year, which was higher at this time. Can you comment on the difference year-over-year?

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Jordan Holm, Boston Pizza International Inc. - President [24]

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Really just timing. We have the same target number. About 1/7 of our system will go through a renovation this year. I think the number is mid-40s. I think in the first quarter, we completed 5, but I think since then another 4 have been completed. So 9, year-to-date. And will be at or around the exact same number of total renovations. I think I've been to a half dozen of them, recent ones, myself and it's really great when a location undergoes that. At the 7-year mark, they are ready for a refresh and our new prototype was rolled out a couple of years ago, has a very different looking feel, lighting, fabrics, A/V package, so really nice to see some of the locations that have undergone recent renovations coming out refreshed, and obviously that signals more reasons to come in and visit.

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Robert Kirincic, Boston Pizza Royalties Income Fund - Director & VP of Finance - Boston Pizza GP Inc [25]

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And just to circle back on the 5 restaurants currently under construction, 2 are in Alberta, 2 are in Ontario and 1 in Saskatchewan.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [26]

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And just maybe one final question for me. I know you already mentioned it earlier about the traffic in regions specifically like Ontario. Since we've now lapped the minimum wage increase of last -- of January 2018, just wondering if you're seeing any moderate improvement in terms of traffic levels despite the fact that it may still be under pressure. Any change with respect to Ontario, specifically?

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Jordan Holm, Boston Pizza International Inc. - President [27]

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Yes. Thank you, Elizabeth. We are -- I mean, it'll take a while to digest that one. Unlike British Columbia and Alberta, the provincial government in Ontario took a very abrupt approach to the change. I think it was 21% overnight on January 1, 2018. The industry, overall, had to process that and I think the number was almost a 7% menu increase year-over-year. I think it was 6.7%. And we would have been in line with that and it does take time for consumers to adjust their behaviors based on that level of menu price increases. They don't have the disposable income going up by 6.7% or 7%. So they either come less frequently or they spend less when they do come. So it'll take a little bit for people to adjust to that, but we -- it is -- you're right, we've lapped on the menu price increases. We are very prudent regionally when we address menu prices. We understand that we play in the mid-scale casual dining segment and that pricing is a consideration, and we don't want to have that being a headwind for us, but we do have to protect store profitability and when your single largest P&L item is increased by 21.5%, you have to make some menu adjustments. We saw that in the industry and we saw that internally as well. So I hope that answers your question. I'll turn it back to the operator to see if there are any further questions.

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Operator [28]

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There are no further questions. This concludes the question-and-answer session. I'd like to turn the conference back over to Jordan Holm for closing remarks.

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Jordan Holm, Boston Pizza International Inc. - President [29]

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All right. Thank you. Since there are no further questions, I'd like to thank everyone for taking the time to listen in, and we look forward to speaking you -- with you all again on our second quarter conference call in August. Thanks, everyone.

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Operator [30]

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This concludes today's conference call. Thank you for participating and have a pleasant day.