Diversified Restaurant Holdings (SAUC) CEO David Burke on Q4 2018 Results Earnings Call Transcript

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About: Diversified Restaurant Holdings, Inc. (SAUC)
by: SA Transcripts
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Earning Call Audio

Diversified Restaurant Holdings (NASDAQ:SAUC) Q4 2018 Results Earnings Conference Call March 8, 2019 10:00 AM ET

Company Participants

Craig Mychajluk - IR

David Burke - President and CEO

Phyllis Knight - CFO

Conference Call Participants

Jeremy Hamblin - Dougherty & Company

Mike Wallace - White Pine Capital

Will Hamilton - Manatuck Hill Partners

Operator

Greetings and welcome to the Diversified Restaurant Holdings' Fourth Quarter and Full Year 2018 Finance Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations. Thank you, sir you may begin.

Craig Mychajluk

Thank you and good morning everyone. We appreciate your time today and your interest in Diversified Restaurant Holdings. Joining me on the call is David Burke, our President and Chief Executive Officer; Phyllis Knight, our Chief Financial Officer and Treasurer.

You should have a copy of the financial results that were released after markets closed yesterday, and if not, you can access it at our website, diversifiedrestaurantholdings.com. There's also a slide presentation posted on our website that we will refer to during today's call.

If you would, please refer to slide two. As you are aware, we may make forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements applied to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call.

These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on the company's website or at sec.gov.

During today's call, we will discuss non-GAAP measures, which we believe will be useful in evaluating of 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 of non-GAAP to comparable GAAP measures are provided with the tables accompanying in the earnings release.

So, with that, let me turn it over to David to begin. David?

David Burke

Thank you, Craig and good morning everyone. So, we continue to be energized and excited by the initial changes that have been implemented by our franchisor. And as noted in our preliminary release last week, we're starting to really reap the early benefits of the new marketing, media, and promotional initiatives, combined with our steadfast focus on guest experience, loyalty attachment, and development of the delivery channel.

For the first time since 2015, we achieved positive same-store sales of 2.2% in the fourth quarter. Importantly, that moment has carried into 2019 with the positive same-store trends continuing to the first nine-week for the first quarter despite severe weather that impacted the significant portion of our footprint.

Excluding these weather-related delays, same-store sales growth has been over 3% and fabric continues to be the leading driver at positive 4.5%. But it's more challenging that the recent performance that encompasses little promotional impact as most of the fall football campaigns are phased out in January.

I'll touch on the litany of new chains that are upcoming after Phyllis runs through the financials. But beforehand, I'd like to comment on last week's announcement, regarding an agreement to acquire nine Buffalo Wild Wings restaurants in the Chicago area for $22.5 million.

But there are number of reasons this transaction is attractive for us and while it stands up well on its own merit, we view it as an important catalyst to broaden our debt refinance offerings with the ultimate goal to strengthen and stabilize the balance sheet, increase our free cash flow to drive future value creation. These four stores are located with one of our existing footprint in the Chicago market, where we currently have nine other locations.

Healthy AUB is about $3.6 million, are attributable to strong demographics. However, we do believe, there is room to improve on these levels with additional emphasis on loyalties attachment rates and delivery. There's a marginal opportunity as well as we expect to leverage our scale and infrastructure.

We're currently generating restaurant-level EBITDA margins in 13% range and the salary has done a great job of maintaining the facility, that's really now to meet for any significant capital investment for this time.

The acquisition is subject to franchisor consent, waiving of its right of first refusal and customary closing conditions. We anticipate closing in the second or early part of the third quarter.

We are evaluating various alternatives to finance this transaction and everything is on the table. While there are variety of debt options under consideration, equity will likely have the part of the financing structure as we aim to eliminate our leverage ratios and eliminate the immediate refinancing risk that that our debt goes current in June. The added EBITDA from the acquired sports bar plays a significant role in this risk reducing initiative.

With that I'll pass it over the Phyllis, and then I'll come back and touch on the upcoming changes.

Phyllis Knight

Thanks David and good morning. Before we get started, just a quick reminder that 2017 was a 53-week year, so the fourth quarter and full year comparisons were impacted by an extra week, typically, the largest sales week of the year. In the slides that we've posted to our website, we broken that out, so you can see a more relevant comparison of the period.

Sales in the fourth quarter totaled $39.1 million, an increase of $700,000 or 1.8% compared with the comparable 13 weeks in the fourth quarter of 2017. Same-store sales increased 2.2%, with traffic up 4%, and average check down 1.8%.

It's worth noting that we didn't take much price in 2018. The decline in average check was a result of the $5 football promotion that ran throughout the quarter. We do have an approximately 1.5% price increase coming with the new menu rollout next week, which David will talk about later in the call.

For the year, sales totaled $153.1 million compared with $165.5 million in 2017 or $162 million for the comparable 52-week period.

Adjusted EBITDA for the quarter totaled $3.8 million and restaurant-level EBITDA totaled $5.6 million. Absolutely extra week in 2017, both metrics performed relatively well compared with last year, as higher sales and lower G&A expenses kept to offset increase labor costs.

For the full year, adjusted and restaurant-level EBITDA margins were down 1.7 and 1.9 points, respectively, and were impacted by the significant negative traffic we experienced during the first three quarters of the year.

Slides five through 10 provide further details on traffic and average ticket trends, as well as a bridge of period-to-period sales and adjusted EBITDA. Cost of sales benefited again in the fourth quarter from lower traditional chicken wing costs coming in at 29.2% of sales, down 10 basis points.

For the year, cost of sales improved 90 basis points to 28.6% of sales. The impact of lower traditional wing costs in the fourth quarter was largely offset by the $5 football promotion that was implemented in the fall. And as David mentioned, those promotions were largely dialed back in January.

Traditional wings as a percentage of total cost of sales held in the 20% to 21% range for most of the past year, a significant change from the mid-20% range in 2017. More recently, the wing cost environment has been relatively stable other than the typical seasonal increase that's around the Super Bowl. This history has shown on slide 13 and 22.

Productivity initiatives have helped to offset some wage inflation, but like everyone, we continue to contend with the tight labor market which is driving higher average wages.

Hourly and total labor costs as a percent of sales increased 160 basis points in both the fourth quarter and full year period. However, we estimate that about 60 basis points of this increase was attributable to the 14th week in the fourth quarter of last year, where fixed labor are spread over the additional week and hourly wages are efficient relative to the average due to the high sales volume that week. We break the components out on slides 14 and 15.

Our G&A costs were in line with expectations. As a percentage of sales and adjusted for some incentive accrual timing differences between the years, G&A decreased 20 basis points to 5% of sales for 2018.

G&A totaled $8.2 million, approximately $700,000 of that consisted of non-recurring items, primarily fees around the first quarter bank amendment and the July equity offering. As we look forward, we're targeting maintaining G&A expenses in the range of 5% of sales.

During the quarter, we recognized an impairment loss of $2.8 million, resulting from the write-down of fixed assets of four locations. For the year, we have now recorded $3.8 million in impairment charges related to five locations. These are restaurants with a somewhat limited market that experienced slightly negative restaurant-level EBITDA in 2018.

We do not currently anticipate closing any of these sports bars and we remain optimistic about the brand level changes that are beginning to take hold and they expect to continuation of positive sales trends. We fully expect to return to profitability for each of these five locations. The impairment charge is a result of a strict application of the accounting rules, not our view around future profitability.

Cash and cash equivalents of $5.4 million, were up from $4.4 million at the end of 2017. 2018 capital expenditures were $1.6 million and more for minor facility upgrades and general maintenance type investments.

We do not expect to build any new restaurants nor do we anticipate completing any major remodeling in 2019. However, the company is planning to invest in corporate initiatives and point of sales system upgrades in 2019. As a result, we expect CapEx to be approximately $2 million in 2019.

Total debt at quarter end was $102.4 million, down $11.6 million for the year and we remain in compliance with all loan covenants.

With that, I'll turn the call back over to you, David.

David Burke

Thanks Phyllis. As I mentioned, we're about two-thirds the way to the first quarter and are seen early success from the creative measured approach been taken by our franchise order to re-energize and rebuild about the revolving brand.

Given the marketing plans and other forthcoming brand enhancing initiatives, we believe, there's a significant opportunity to continue to build on this momentum through 2019 and well into the future.

Starting next week, there will be a significant strategic media and marketing push around March Madness, leveraging TV, radio, and social medial to drive traffic. This will be the first campaign with the brands, new creative ad agencies and media buyer. And currently, we're rolling out a number of new brand in elements that would enhance our average and our guest experience.

Next time you walk in one of our sports bar, I'm confidence that you will see and feel the difference. The first thing customers will notice is the new menu. Beyond featuring some new items, which I'll talk about in the moment, the menu design itself has been shared with the wood back clipboards stock format.

On the food front, there's a new fresh twin patty all American cheeseburger that will illustrate the level of food quality we speak to obtaining for all menu items going forward.

They're also have introduced in the significant upgrade to few of the most popular shareholders, including our new ultimate nachos, our new Hatch Chile con Queso and our new salsa with house-made tostada chips. Along with these menu items, the food presentation will also be greatly enhanced. No more paper boards and plastic cups. We have all new plating which includes aluminum trays, craft paper liners, and stainless steel cups for staff.

Team members' uniforms are also new with hip, Bedas, T-shirts and jeans. Lastly, we're also working on the bar, introducing among other things classic cocktails like the old-fashioned, Moscow Mule and mojito, served in new proper glassware.

Each of these items are truly a step change from our legacy. And importantly, we will have superior products without materially higher costs. For example, the plateware upgrades pay back in just a few months, given all the illumination of many disposable paper products.

We anticipate new menu items to be added throughout the year and current plans are still focused on a completely relaunch of the brand this fall. All of these exciting initiatives on-going, we're continue to run a best-in-class operations and focus on controllable aspects of our business.

Guest experience scores are strong and our push to improve penetration of the Blazin' Rewards loyalty program remain a success, with attachment rates jumping north of 27% last month, still far outpacing the Buffalo Wild Wings franchise system. Our goal is to reach 35% loyalty attachment this year, where we remain focused on continuing to push growth and loyalty to increase the frequency of guest visits to our sports bars. Read slides 19 and 20 for additional details.

We are uniquely positioned to benefit from Inspire Brands plans to take Buffalo Wild Wings to next model. With the building resurgence to brand combined with our operating expertise, we believe we can achieve strong long-term growth and market performance.

Operator, we can now open the line for any questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting question-and-answer session. [Operator Instructions]

Thank you. Our first question comes from the line of Jeremy Hamblin with Dougherty. Please proceed with your question.

Jeremy Hamblin

Good morning. Congratulations on seeing the improved trend and the results. I wanted to start by asking a question on Q4 result. And your other operating expenses saw I think about a 90 basis points uptick. And just wanted to get a sense of how much of that was, maybe, to higher delivery costs? And how we should be thinking about that line item I think maybe as delivery individual ordering becomes a higher percentage of total rev. Can you provide some color on that?

Phyllis Knight

Sure. Hey Jamie, yes, you're right. I mean, the bulk of that decrease was driven by delivery fees. We did see delivery sales ramp up quite a bit in the fourth quarter and we expect that to really to continue through 2019.

Having said that, we're certainly looking for ways to work with our key delivery partners to try to be more efficient in the way that expense hits us and I think we've got some opportunity there, but that was the main driver. We saw a little bit of increase in our repairs and maintenance expense in the quarter, but nothing too material.

David Burke

Hey, Jeremy, this is David. Just -- add a little bit more to that we are -- we have -- I like to look at it as from a recent casual dining, we really started this about and was two years ago now to really ramp-up the delivery, I have a -- I'm firm believer in it that it is implemented business to us. And you had to do despite the bees, but now we're working as we're building that business really working diligently with our vendors to reduce those as much as possible and make the meet the entire process more efficient, so we need a better contribution in the end.

Jeremy Hamblin

Okay. And on a longer term basis, you view that businesses as being in a margin accretive or margin dilutive business -- that portion of the business?

Phyllis Knight

No, I mean I think, if you take that portion of the business stand and look on it, it's certainly going to be at a lower margin than either carry out or dine in. But because -- it's just I think our view and just, again, we have to be in and our product actually traveled very well and it's a popular product.

It's kind of interesting, if you look at the dynamics, we have a very favorable mix because we see a lot of performance wings get delivered, which has a very attractive cost of sales. And so if you look at the food mix compared to dine-in, even though you're absent the alcohol, you add a slightly favorable cost of sales, you give up a little bit on paper costs which is something that we're working hard on as a total system.

And then, obviously, you have the delivery fees. So, I guess, so it takes standalone, kind of channel-by-channel, it's certainly add a lesser margin. But I think -- a lot of this is going to develop over time if you view a high percentage of that business as incremental. But then I think, overall, because of the leverage we get on the sales that it will be positive to margins.

Jeremy Hamblin

Got it. Thanks. And then a couple of items here early on. Just in terms of the, one, your wing prices is looks like that tracking a little bit higher year-over-year. How should be thinking about, kind of, the delivered cost of Q1 wing prices? And then the second thing would be -- just Easter is almost a month later this year, can you just talk us through how we should be thinking about the impact of that both on Q1 but then also in Q2?

Phyllis Knight

Yes. Sure, I mean, that's a great point. Both the timing in Easter and actually the NCAA tournament have an unfavorable calendar shift for us in Q1. So, March Madness the final four -- the four last week of the tournament moves into Q2 because everything's back a week compared to last year.

Hard to say, how that's going to impact Q1, probably that is in itself favorable and then the shift back in Easter can be -- between the two quarters, it all evens out. So, we'll just have to see that plays out.

On wing prices, they're, kind of, back to following a pretty normal pattern. So, we saw a big run up, not to unusual highs, spread around Super Bowl, and then we see them to come, kind of, sharply back down here over the last couple of weeks. So, it'll little bit higher year-over-year than they were last year, but not materially so.

And then I'll just point out, if you're going to look sequentially Q4 had such big impact on cost of sales as a result of the $5 football menu, which were very supportive of. We really do think it was traffic driver and we think the pictures are very popular.

But it came at a cost on average check and the impact on cost of sales; we're not going to have that for the most part in Q1 because that promotion really wound down after January, that will be favorable offset.

Jeremy Hamblin

Great. Thanks. And then just one more and I'll hop out of the queue. But in terms of the transaction and the nine restaurants you're looking to acquire, as you compare your restaurants already in that market with restaurants being acquired? Can you give us a sense for what the gap is on margins, that they are currently running in those locations on a restaurant level basis versus yours?

And, kind of, the timeframe that you think you'll be able to get those restaurants in a similar operating performance to what you're seeing in your location?

David Burke

Yes. Sure, Jeremy. As we stated in the prepared notes, they acquired to be required restaurants, are operating around $3.6 million for ADBs and 13% EBITDA margins, are nine which are in different markets, Chicago, north of Indiana, so different demographics. Population density is much, much lower.

We're running right around $3 million ADBs and we're probably have a lot of three point advantage on the margins. So, we do believe, there's a lot opportunity for us, not just the growth topline with leverage and delivery in our loyalty program, et cetera, it also the profitability side of it as well.

We're running at 3.6 on up, we should be doing that significantly better. I think the timing of that -- some of its will improved, some of it can happen pretty quickly, it's certain things that very mechanical like contracts. So, we can leverage our existing contracts from -- anywhere from insurance to credit card fees and then some will take a little more time making adjustments versus on labor and cost of sales and ways to -- just cultural and training. And that you want to be able to be able to quick as possible, but not too fast because you have -- you want to need to retain the culture and there is training involved -- done. So, I believe within the 12-month period, we can have that pretty much setup.

Jeremy Hamblin

Great. Sounds like an exciting transaction. Thanks for the question. Good luck.

David Burke

Thank you.

Phyllis Knight

Thanks Jeremy.

Operator

[Operator Instructions]

Thank you. Our next question comes from the line of Mike Wallace with White Pine Capital. Please proceed with your question.

Mike Wallace

Yes, good morning Dave and Phyllis.

David Burke

Good morning Mike.

Phyllis Knight

Hey Mike.

Mike Wallace

Got a couple of questions some around Jeremy was discussing. The -- can you give us some sense of why the seller is selling?

David Burke

I don't give the appropriate -- have the discussions, these are at least one of the public forums, frankly. I'll give you some color, I mean, franchises -- we've been around for over 20 years. And I think there's some others and just depending on when you get in.

Typically, in the past, it's been a result of either of the retirement or just wanted to move on as you run out of territories, because with a lot of entrepreneurs, they started these from scratch and once you build in your other territory, you want to move on and can do something else often times when you have entrepreneurial spirit. So, that's really all are comfortable expressing from that topic.

Mike Wallace

All right. Is there some discussions regarding the seller possibly taking some equity or they completely going to get out?

David Burke

No. No, no, completely get out.

Mike Wallace

Okay. And then can you give us some sense of the type of financing you're considering. Maybe some sense of the ranges of mix between debt equity? And some of the preliminary terms you're getting back from the vendors?

Phyllis Knight

Sure. Hey Mike, it's Phyllis. There is -- you, kind of, start with the debt side. I mean, the big advantage for us with this transaction, frankly, is the ability to add a minimum, get a term extension, there's some kind of refinance around the current senior debt, it's on our balance sheet that goes current in June, sets obviously, a huge priority for us.

To the extent that we decided on the debt side to stay in that market, I don't think you can really look at having a lot of upside in terms of additional debt you can take on. Should we choose to go outside the bank market, I think, there is additional debt that we can take on and that could cause softening the blow or kind of reduce the amount of equity that needs to be raised to complete the deal and so I don't really want to put percentage on it right now, but we're looking at both things. That obviously there are trade-offs in the bank market. We don't necessarily love having cash flow go to mandatory amortization. But we like the better interest profile, and we don't love the idea of trading interest for principal necessarily.

Having said that, there is a lot of merit to the conversation going outside the bank market, maybe trading a little bit higher interest rate for the ability to take on some incremental debt. And not have the aggressive mandatory amortization that pose cash flow toward debt as opposed to other opportunities.

So, kind of all those things that we're looking at, we've kind of model everything out; we're having pretty active discussions. And we'll no more over the coming weeks, but that's really all we can comment on at this point.

Mike Wallace

Is it possible you do a mix of bank and outside -- non-bank financing? Mix of it or would it be one or the other?

Phyllis Knight

Honestly, I think, it's more unlikely that it's one or the other, but it doesn't mean it's not possible to do some kind of combination. I don't think it's the most likely outcome.

Mike Wallace

Okay. And then what kind of equity mix are you really thinking about range of equity mix?

Phyllis Knight

What do you mean in terms of--?

Mike Wallace

50/50, 50 equity, 50 debt, is it going to be 35 equity, 65 debt, is the range of 20 to 40 debt equity and balance being debt?

Phyllis Knight

Yes, I mean, obviously, that's an important question and it's not one I really want to comment on, specifically at this point. What I will say is that when we model this thing out, I'm highly confident that its value accretive over the next couple of years, regardless if you do 20%, 50% or 100% equity.

And so we're going to be careful how we structure it and do the best thing we can for the equity side, but I think the deal has a very strong merit, regardless of where that percentage kind of fall.

Mike Wallace

With the addition of the additional Chicago restaurants, you guys are going to be, I think, you already were, but now at the largest franchisee in the system, correct?

David Burke

That's right.

Mike Wallace

Yes. And are you getting any guidance or help from Inspire regarding the transaction?

David Burke

I mean, we're -- I'm pretty reluctant to comment too much on that. They're in the process now going through their traditional due diligence and en route for waiver process, consent process, so really not inclined to comment on that at this time.

Mike Wallace

Okay. So, when you expect to close?

Phyllis Knight

Yes, I think, we said, we'd love to get it closed by the end of the second quarter. It could certainly move into early part of third quarter, July.

Mike Wallace

Would Inspire be a lender to you or is that not part of your business model?

David Burke

I don't -- we're not assuming that at all. I don't think that's really part of it. There's no precedence after that. I wouldn't take that assumption.

Mike Wallace

Okay, that's good. Just changing topic then it -- you did a $19 million tax throughout in 2018. Did that have any impact on the NOLs? And what are the NOLs; could you just remind us of that?

Phyllis Knight

Yes, I mean, the NOLs today, when we look at it, it shelters about $75 million of pretax income in the NOL and tax credits together. So, it went up a little bit, I mean, obviously, we reported negative pretax income for the year.

Mike Wallace

Okay. And then -- so there was no impact from the true-up of the $19 million?

Phyllis Knight

No.

Mike Wallace

Okay. All right. Good. Thank you. That's good, maybe we can chat little bit later, but appreciate your thoughts. Thank you.

David Burke

Thanks Mike.

Operator

Our next question is a follow-up question from Jeremy Hamblin with Dougherty. Please proceed with your question.

Jeremy Hamblin

Thanks guys I had a follow-up on the transaction as well. And just I'm thinking about, as we model out the potential impact of the deal, and you have roughly $4.5 million of EBITDA, currently, being spit out by those restaurants.

As you mention that, kind of, 300 basis point GAAP on lower AUV that your restaurants are doing, so I think, theoretically, it could be even a little bit higher than that, but just working with the 300 basis points, should we read that to think that $4.5 million, could quite easily become a $5.5 million run rate, just simply by closing that gap on margin performance.

And then in addition to that, can you speak to whether or not there are cost synergies simply because you got a nice overlap in markets because you're already in that market. So, is this something where essentially this could be like a $6 million restaurant-level EBITDA transaction over, let's say, 18 months period?

David Burke

Yes, from a restaurant-level perspective, first, I would say that your first -- the first obviously is pretty accurate. We do believe we can achieve those types of numbers in a reasonable amount of time.

In terms of other synergies, just because we're in -- within market, a lot of the costs are going to be associated on the restaurant level. So, I'm not going to try to pretend there's synergies just because we're in that market, all right, the synergies a lot of it comes from the above store side of it. And there definitely are some and then just sales leveraging from our corporate G&A that's where you really see a lot of pickup.

Jeremy Hamblin

Right, okay. And then just to Phyllis, this point, even at a -- even if I run the gambit of equity versus debt mix upon closing the transaction, even just with the assumption of $4.5 million, by my math, you still see this accretive even if there was a 100% equity? Is that consistent with remodeling?

David Burke

Yes, absolutely, right, yes.

Jeremy Hamblin

Okay, all right. Thanks guys. Good luck.

Phyllis Knight

Thank you.

David Burke

Thanks Jeremy.

Operator

Our next question comes from the line of Will Hamilton with Manatuck Hill Partners. Please proceed with your question.

Will Hamilton

Hey good morning.

David Burke

Hi Will.

Will Hamilton

David, I just wanted you to express some enthusiasm, obviously, about the initiatives coming out, I guess, next week in terms of marketing and menu and whatnot, and obviously, you're already expressing some comp momentum. You don't like to give guidance, I know, but can you give us a framework of where you think, sort of, traffic comps could go? Could we -- are we talking mid-single-digits or a good scenario, you've -- could it -- can increase to high single-digits, comparison is obviously easier.

And then as a follow-on on that, our labor costs starting to stabilize at least for you a little bit? And then what would be the flow through the income statement, if we do achieve something like the mid-single-digits? Thank you.

David Burke

Yes, okay. As you know, it's very difficult to predict, particularly, when we're reinventing the brand right now, quite a lot of initiatives, but we are very optimistic in what we can achieve. And you -- we've already hedges about what we're doing so far this year and that's really without a lot of weight behind it. You saw the momentum in Q4, so and then we're adding -- we're taking prices as new menu rollout starting next week, we know right around on 1.5%.

So, you stack that up. You're pushing to that mid-single-digit as it is, right? So, I don't think that's out of reasonable in this to make that assumption. We will -- and I'm not going to deal, but overly optimistic and try to pitch that we're going to do double-digits something like that. But I feel very comfortable with that kind of momentum.

In terms of the labor market, yes, it's starting to level out. We really -- it was really rough last with the inflationary side of things on the wages and I think that slowed down a little bit. And we're working really hard on retention to try to reduce our turnover, get that in check with residuary expense of piece of it. That really played into the competition side of the labor. So, despite the inflationary side, as you're getting higher turnover because it's so competitive, that's actually cost more in the long run monetarily and just when it gets to experience standpoint because you have a lot of training to do and et cetera, so, but we feel much better about that this year. So, we'll continue to work through that.

Phyllis Knight

I do think, well, look, on the labor front, so we came in 2018 at 26.8% and if you, let's say, you want to model up 5% on sales, I guess, I'd still say, I think from our perspective, we're going to be cautious on assuming that labor leverage, kind of, outstripped potential increases in wages, but they'll continue.

And I guess what I'm trying to say about that is, I would. I think the safe assumption is that labor in this environment still maybe just kind of remains flattish as a percentage of sales as opposed to seeing improvement. I think the sales leverage we get will be great for offsetting what may continue to be pressure.

Hopefully, as David said, I do think it's abated some, but I just think it's a line we need to be cautious on right now. So, we're not forecasting a big improvement in the labor line for 2019.

Will Hamilton

Okay. Thanks.

Operator

Our next question comes from the line of Jeremy Bloom, a private investor. Please proceed with your question.

Unidentified Analyst

Thanks. I just had a question about the marketing with your new franchisor, what's the scale of the budget, is it a lot bigger? And were they spending of the changing -- were they spending a lot at this point?

David Burke

There is quite a few changes within, I mean, the overall budget for the year really isn't -- didn't change significantly because it's -- a lot of it's depended upon our contribution as a franchisee. So, they're working with that budget, but I think I can say that the efficiency is going to be much greater, right?

So, taking advantage of efficiencies and the media buys, we're part of a much larger company now with Arby's and then just most recently Sonic. So, the buying power is much better.

And then the efficiency of just the organization as a whole. There's also the allocation of the overall advertising spend. So, from a media perspective, how to allocate towards TV, little more weight on social media, which should really does not exist in a few years ago with the old regime.

And I think you can see that now, if you're following Twitter or Instagram and what we've done in the past, receivable and even before that, a lot more activity. And I think that started to show in the numbers as well because it's always a contributor.

So, everything is looking in a much better from an efficiency standpoint which is really where you're going to get into biggest games.

Unidentified Analyst

And then just a follow-up. With adding nine new restaurants, how much more an overhead are you going to need to support that initial nine new restaurants?

Phyllis Knight

Yes, we're assuming about $300,000. So, bit really what that in. With that, the nine restaurants in the market right now, we got 18 in that market and we'll probably run it with, kind of, three regional managers as opposed to one today, just be a little bit closer to the operations at least in the near-term, so estimating about $300,000.

Unidentified Analyst

Okay. Thank you.

Operator

We have no further questions this time. I would now like to turn the floor back over to management for closing comments.

David Burke

Hey, I'd like to thank everyone for joining us on today's call and your interest in Diversified Restaurant Holdings. And please feel free to reach out to us at any time. And we look forward to talking to you again after first quarter results. Again, thanks for participating, and have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.