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Edited Transcript of PLC.TO earnings conference call or presentation 29-Mar-18 1:30pm GMT

Q4 2017 Park Lawn Corp Earnings Call

TORONTO Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Park Lawn Corp earnings conference call or presentation Thursday, March 29, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Clark

Park Lawn Corporation - Chairman of the Board & CEO

* James Joseph Leeder

Park Lawn Corporation - CFO & Director

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Conference Call Participants

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* Brian D. Pow

Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst

* D. Joseph MacKay

Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation

* Johann Rodrigues

Raymond James & Associates, Inc., Research Division - Research Analyst

* Leon Aghazarian

National Bank Financial, Inc., Research Division - Former Special Situation Analyst

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Sanford Lee

* Stephen C.A. Harris

GMP Securities L.P., Research Division - Head of Research

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Presentation

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Operator [1]

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Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Lawn Corporation Year-End 2017 Results Conference Call. (Operator Instructions) Thank you.

Andrew Clark, Chairman and CEO, you may begin your conference.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [2]

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Thank you, Tiffany. Good morning, everyone, and thank you for joining us today. With me on the call are Joe Leeder, our Chief Financial Officer; and Suzanne Cowan, our VP, Business Development and Corporate Affairs. Today's call is being recorded, and a replay will be available after the call.

Please be aware that certain information discussed today is forward looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please see our public filings for more information regarding forward-looking statements.

During the call, we will reference non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see our public filings for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS financial measures.

I'll begin with an overview of our business highlights for the 2017 fiscal year. Joe will follow with a more detailed review of our financial results, both for the fourth quarter and the year-end.

Our year-end results reflected the continued successful execution of our business plan. During 2017, we continued to make several important business acquisitions. The company's most significant acquisition was of Saber Management, L.L.C. in the third quarter of 2017. The acquisition of Saber, which owns 19 cemetery properties and 4 funeral homes, located in Kentucky, Texas and Illinois, further increased the number of cemeteries in the company's portfolio, added funeral home assets into its U.S. operations and further diversify geographically the company's U.S. operations.

Saber's experienced management team has joined the company's existing U.S. management team, which will help the company further execute its growth strategy. In addition to the Saber acquisition, the company acquired several funeral businesses in Ontario in the first 6 months of 2017, which expanded the company's footprint and diversified business lines in that province.

The company entered the British Columbia market in the first quarter of 2017, with the purchase of Providence Funeral Homes & Crematorium and Credible Cremations. In addition, the company expanded its operations in both Manitoba and Saskatchewan during the latter 6 months of 2017, with the purchase of Vita in Manitoba and Christie's in Yorktown, Saskatchewan with our partner at Park Lawn -- Parkland Funeral Services.

In the first quarter of 2018, the company acquired CMS Mid-Atlantic, which currently operates, manages and provides financial services for 7 cemeteries in New York, New Jersey. And in addition, we acquired Billingsley Funeral Home in Huntsville, Ontario.

The operating results in 2017 reflect the continued successful execution of our business plan. As a result of the company's recent acquisitions, in 2017, revenue increased year-over-year by 29.8% to approximately $87 million. After adjusting for the impact of foreign exchange, growth from comparable business units year-over-year was flat. However, excluding the Michigan-based MMG cemetery business, which experienced softer pre-need sales in 2017, growth from other comparable business units increased 3.3% year-over-year. The company introduced new sales initiatives at the start of 2018 to improve pre-need sales in the Michigan market. This is being overseen by the experienced sales leadership of Saber Management.

I'd like to now turn the call over to Joe to review our 2017 fourth quarter and fiscal year-end financial results in more detail.

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [3]

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Thanks, Andrew, and good morning, everyone. You'll find a detailed breakdown of our full year and fourth quarter financial results in our press release, MD&A and financial statements, which are available on our website or on SEDAR. And I will start with some comments on the fourth quarter of 2017.

Our total revenue for the 3-month period ended December 31, 2017 was approximately $25.9 million, an increase of 31% over the same 3-month period last year. If I exclude revenue from our businesses acquired over the past year, revenue from the company's comparable businesses would less by 9.5% compared to the same period in 2016.

Most of this decline is attributable to our cemetery operations in Michigan. Revenue from other comparable business units declined 2.9% in the fourth quarter. And this decline is because of comparable revenue in Q4 2016, which was particularly strong as the company had just opened a new mausoleum at Park Lawn Cemetery in Toronto during the fourth quarter of 2016.

As you might recall in last year's results, the organic growth in Q4 of 2016 compared to 2015 was 17.2%. So revenue growth in the comparable quarter of 2016 was very robust and a difficult quarter to be measured against. The gross profit margin improved to 76.5% in the fourth quarter of this year compared to 71.5% for the same 3-month period in 2016.

Our gross profit margin can vary each quarter based on such factors as product mix and investment income. And in the current quarter, the gross profit margins in the cemetery business were higher as Saber results were included for the full 3-month period. And we had more funeral business in 2017 than '16, which has higher gross margins than our cemetery business.

General, administrative, selling and maintenance expenses at comparable business units were lower than Q4 of 2016 by approximately $910,000 in the aggregate. Most of the decline in operating expenses is related to lower sales revenue. However, G&A expenses in 2017 were higher by $250,000 to support the company's overall growth initiatives. And as a result of the above, our earnings from operation for the 3-month period ended December 31, 2017, totaled approximately $3 million, an increase of 144% over the $1.2 million earned in the same period in 2016.

As with other reporting periods, there were other income and expense items which were nonoperating in nature that had a cumulative negative impact on our reported net earnings for the period. This includes items such as acquisition and integration costs, noncash compensation expenses related to share-based compensation, foreign exchange gains and losses and other miscellaneous amounts that are explained in detail in the MD&A.

As a result of these items, the company reported net earnings attributable to PLC shareholders of $2.3 million in the fourth quarter of 2017 compared to net earnings of $4.3 million for the same period in 2016. And our fully diluted earnings per common share attributable to PLC shareholders for 2017 was $0.146 per share compared with $0.456 per share in the same 3-month period in 2016. And the weighted number of average common shares outstanding for the fourth quarter of 2017 increased to 15.5 million shares compared to 9.5 million shares for the same period in 2016. And this is a 63% increase in the outstanding shares this year compared to last year.

As Andrew noted previously, by the end of the year, the company had not yet deployed all of the capital raised in its June 2017 prospectus offering, so we had some delusion in the current quarter. However, as of March 2017, all of this cash had been fully deployed.

And as discussed in our MD&A, we used non-IFRS measures to provide additional information that we believe is useful to investors and other third parties to access -- assess our operating performance. One of these measures is adjusted net earnings. And so in calculating adjusted net earnings, we eliminate the after-tax impact of the onetime nonrecurring, noncash expenses and revenue items that I had previously mentioned. We believe that the adjusted net earnings is a better reflection of the company's operating performance for these periods under review.

Adjusted net earnings attributable to PLC shareholders for the 3 months ended December 31, 2017, increased to $2.8 million compared with $1.2 million for the same period last year. This is an increase of 140% year-over-year. While the adjusted net earnings increased by 140% year-over-year, our fully diluted adjusted net earnings per share was $0.183 in '17 compared to $0.124 in the same period in 2016. And this represents a year-over-year increase of 48%. And again, the increase in per share amounts this year is limited by the dilution that we -- I previously spoke about.

Another IFRS measure we use is adjusted EBITDA. The adjusted EBITDA attributable to PLC shareholders for the 3-month period 2017 was approximately $5.6 million or $0.36 per share compared to $3.2 million or $0.34 per share in 2016. Again, although the adjusted EBITDA increased by 70 -- 76% for the period, the fully diluted earnings per share increased by just 7.7% because of the impact of the dilution from the recent financings. I'll note that our adjusted EBITDA profit margin in Q4 of 2017 improved to 22.2% compared with 16.6% in Q4 of 2016.

I'll now make a few comments on our full year operating results. The total revenue for the 12-month period ended December 31, 2017, was approximately $87 million, an increase of 30% over the same period last year. If I exclude revenue from businesses acquired over the past year, our revenue from comparable business units adjusted for foreign currency fluctuations was flat year-over-year.

However, excluding the Michigan cemetery operations, our revenue from comparable business units increased by 3.3% year-over-year. Our earnings from operations for the year ended December 31, 2017, totaled approximately $9.3 million, an increase of 72% over the same period ended December 31, 2016. And the company's net earnings for the year ended December 31, 2017, totaled $4.5 million compared to $7.9 million for the same period in 2016, and the fully diluted per share earnings attributable to equity holders of PLC for the year ended December 31, 2017, was $0.31 compared to $0.94 for the period in 2016.

And once again, there were the other income and expense items which were nonoperating in nature that had a cumulative negative impact on our reported earnings for the current period. The largest of these was a $3.5 million income amount in 2016 relating to the change in fair value of the contingent earnout payment and a $4 million acquisition and integration expense in 2017. These items are fully explained in our MD&A.

Adjusting for the impact of these one-time nonrecurring revenue and expense items, the adjusted net earnings for the year ended December 31, 2017, totaled $8.6 million, an increase of 75% over $4.9 million earned in 2016. The fully adjusted net earnings per share for this period in 2017 was $0.64 compared to $0.61 for the same period in 2016, and that represents an increase of 4.7% year-over-year.

Adjusted EBITDA attributable to PLC shareholders for the current year was $16.6 million, an increase of 50% over the $11.1 million earned in 2016. It represents adjusted EBITDA of $1.25 per share, a decline of 10% from $1.39 adjusted EBITDA per share in 2016.

And again, our adjusted EBITDA profit margins for the full fiscal year of 2017 was 19.8% compared to 17.5% in 2016. Again, the weighted average common shares outstanding at the end of December 31, 2017, increased to 13.4 million shares compared with only 8 million shares for the same period in 2016. That represents 67% increase in the shares outstanding over 2016. And again, the increase attributable to the June 2017 prospectus financing.

While we believe -- while management believes that the company benefited from raising the equity capital last year, the growth in adjusted earnings and adjusted EBITDA per share were negatively impacted by the dilution. We also believe that with the capital now fully deployed on the acquisition of CMS and other smaller funeral home acquisitions during the first quarter of 2018, the company will see growth in its adjusted per-share earnings amounts and EBITDA per share going forward.

And one final comment on our year-end financial statements. You will notice that we have modified the presentation of cemetery inventory on the balance sheet. We -- previously, all of the cemetery property inventory was recorded as a current asset. The revised presentation is to include only the estimated inventory expected to be sold in the next 12 months as a current asset, and the remaining inventory is presented as a long-term asset. This presentation is a better reflection of the intended use of the inventory and provides a better comparison to presentations of our peer group.

I will now turn the call back to Andrew for some closing remarks.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [4]

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Thank you, Joe.

We're pleased to have delivered another successful quarter and year-end results, and look forward to reporting on the first quarter of 2018 in May. Looking ahead, we remain optimistic about our pipeline of opportunities, both organic and acquisitive in nature. We believe that some of the changes we are making in the business will well position us to continue the create value for our shareholders in 2018 and beyond.

Joe and I are ready to now open the line for questions. So Tiffany, please go ahead and do so.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Leon Aghazarian with National Bank Financial.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Former Special Situation Analyst [2]

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Just on -- the first question would be on the cadence side of the business. I do understand that there was a new mausoleum that opened in Toronto in Q4 '16. So just can you talk to us a little about -- were there any other factors in the quarter that would help explain a little bit why Canada was a little bit weaker as well on the organic front side?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [3]

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This -- that is -- the significant issue, Leon, is the very challenging comparative period in Q4. There was some softness in the funeral side of our business, which, obviously, it being primarily an at-need business is sort of subject to factors beyond our control. But there was a modest amount of softness in the -- on the -- in the funeral side of the business in Q4. But nothing that, in our view, would be material in nature.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Former Special Situation Analyst [4]

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Okay. Fair enough. And in the -- and in any of the other markets in Canada such as maybe in Ottawa, were there any softness there? Or it was just kind of -- the overall, what was your impression there?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [5]

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Well, that would be -- that would relate back to the comment about the -- we don't have cemetery assets in Canada outside of Toronto. So all of that softness related to the funeral business would be in those other markets. Specifically, there was softness in the market in the prairies. But that again, on a year-over-year basis, was not material.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Former Special Situation Analyst [6]

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Fair enough. In the U.S., for the MMG, I mean we know that, that's the main culprit behind the organic decline. Can you give us a bit more color as to what actually went on there? And again, you also mentioned that you did some -- introduced some sales initiatives for 2018, to get the pre-need sales up. So can you talk to us a little bit about that as well?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [7]

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Sure. So our business at MMG has been historically lumpy relative to the rest of the portfolio. What we have identified late in the fourth quarter and started to implement early in the first quarter was a predictable plan-driven, process-driven, repeatable sales process on the pre-need side. That is something that, as we had been working with MMG, we have been more focused on the cost side of the income statement as opposed to on the revenue side of the income statement.

So with the introduction of the Saber Management team, following that acquisition to the MMG business, we are now in the process of developing and also executing on a property-by-property basis, a repeatable, process-driven sales platform that was previously not in place. It was more erratic and more ad hoc as opposed to that definitive clear process.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Former Special Situation Analyst [8]

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And is it possible to quantify the impact that you think that some of the organic decline had on margins that MMG would have?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [9]

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We did address in our press release, in -- the enhancement in margin was partly attributable, in some way, to cost reductions at MMG. So I think we don't break out margins on a business unit-by-business unit basis specifically. So I'm not at liberty to give you disclosure on that specifically. But I can say that there is -- part of the margin enhancement is a result of the cost initiatives that we've taken at MMG. So we don't necessarily correlate the revenue shortfall to declining margin.

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Leon Aghazarian, National Bank Financial, Inc., Research Division - Former Special Situation Analyst [10]

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Sure. Appreciate the color. Just one final one for me before I get back into queue would be just on the acquisition pipeline front, I mean, you did mention that you're still quite active there. If you could just kind of reiterate what your comfort level would be in terms of your leverage? And what the pipeline looks like at the moment?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [11]

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No problem. So the pipeline remains robust. There are a number of opportunities on both sides of the border at various sizes, I would say. They are -- I would say that history would provide a relatively useful marker post in terms of what the cadence of those transactions might look like.

In terms of our leverage, our comfort level is around the 2x debt to EBITDA level that has not changed from -- historically, so we have a bit of excess capacity currently. But in the event of a larger scale acquisition, there would be a need to explore equity financing alternatives. So the debt comfort level, Leon, has not changed.

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Operator [12]

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Your next question comes from the line of Joe MacKay with Clarus.

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D. Joseph MacKay, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [13]

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I guess the question on margins, you've touched on that a couple of times. Very impressive, 22% in the quarter. If I look at it, sequentially improved from 18%. And if you kind of look at revenue sequentially, it increased $3.5 million, EBITDA $1.5 million roughly, so the margin the kind of EBITDA that fell through off that revenue was above 44%, which is very impressive ex the water rebate, I guess it was like, well, 38%. Can you talk, Andrew or Joe, what -- just your comfort level in margins going forward in 2018, given now your recent acquisition in New York State? I think you had 24% to 25% margins. Kind of what you're thinking at a consolidated level for 2018?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [14]

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I think -- Joe, thanks for the question. I think our consolidated level for 2018, our comfort zone is in the low 20% range, 20% to 22% in that range. We continue to hope to see improvements in the MMG business and the margin profile there. And as we fully integrate through Saber, CMS, other acquisitions, a low 20% range is -- on an annual basis is not unreasonable.

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D. Joseph MacKay, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [15]

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Okay. Great. And maybe just -- and maybe -- you kind of have on the M&A side, I guess, maybe -- but more specifically, you kind of have 4 clusters, if I will -- at least geographically. Can you talk -- like a need to infill? I know you said the pipeline is robust, but do you need to infill regions to get maybe the synergies that you require? Or it's just as a matter of you're happy with the operations you have now and economies of scale you get from maybe pulling purchasing, back-office, et cetera, that gets you where you need to be? How important is it to infill? I guess is the question.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [16]

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There are advantages to infill. Although I would say that there is not a significant amount of operating leverage in the cemetery business, unless they are very tight geographic clusters. The average catchment area of a cemetery would be 10 square kilometers, 15 square miles, that sort of range. So it really becomes difficult to gain operating leverage without a relatively tight geographic cluster.

That said, the areas that you have highlighted on in terms of back-office procurement, administration, finance, trust fund management systems and technology are meaningful areas for us to explore synergies. But those can be achieved, obviously, on a wider scale.

So while there may be some relatively small advantages to infill, on the cemetery side, there is not a screaming desire to do so. Where those advantages come from, on infilling, is really on funeral operations. And you will have seen some of the infill that we've done running north of Toronto. We're able to share resources, share staffing because it's more of a service-oriented business. Resources, staffing, those cremations from those markets north of Toronto are able to come into our facilities in this market. So on the funeral side, there is more operating leverage opportunity than there is on the cemetery side.

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D. Joseph MacKay, Clarus Securities Inc., Research Division - VP & Research Analyst of Growth and Innovation [17]

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Okay. Great. And just one final question. Is there anything on the regulatory front, any jurisdictions that helps you or impedes you that you see kind of going forward?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [18]

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Not that we're aware of, in either helping or impeding. It's quite unlikely that it would be helpful.

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Operator [19]

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Your next question comes from the line of Stanford Lee (sic) [Sanford Lee] with [Canaccord Genuity].

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Sanford Lee, [20]

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You guys, you've really stuck your neck out and provided a nice multiyear $25 million EBITDA target for 2019. If you look at adding CMS to the last quarter annualized, you now have like $29 million EBITDA. So I'm just wondering, Andrew, are you going to stick your neck out again and provide an updated target for that?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [21]

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Thanks for the question. We will be willing to stick our neck out in the not-too-distant future. We're doing some board strategy conversations over the coming month or 6 weeks. And we'll be working on that with our Board over the coming weeks. So stay tuned, I would say. But we're not prepared to comment at this particular point in time.

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Sanford Lee, [22]

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That's fair enough. And as far as your M&A activity goes, it looks like you have a lot more, I guess, runway or maybe a lower-hanging fruit to go in the U.S. Can you give us your impression on where you prioritize your M&A activity right now in U.S. versus Canada?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [23]

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I think we would -- that's a good question. I think we have historically made 2 different types of acquisitions. We've made sort of more platform type of acquisitions in the United States and more bolt-on opportunities in Canada. I think we're looking for complementary businesses in either market that will help give us further -- not only further scale but further to the point on the previous question, further back-office administrative-type synergies, again, related to scale. So we're geographically agnostic for the most part. It's practically speaking, however, more scale assets are available or potentially available in the U.S. than they are in Canada.

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Sanford Lee, [24]

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Great. And you mentioned, obviously, the impact from the mausoleum opening in the Q4 '16. The last time that happened was Q3 '15 with the Westminster and you provided a number of about a $1.2 million sort of bump from mausoleum presales. Can you quantify the impact for Q4 '16? What do you think that might have been?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [25]

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Not of -- I'm not sure that's a disclosed number. So I...

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [26]

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But I don't have that. But -- I mean, perhaps, we could get back to you on that one. I don't have that number right offhand right now. Even we have disclosed it, I'd have to check on that.

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Sanford Lee, [27]

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Okay. I'm trying to think. I'm just going through a list of things here. You mentioned in the release, a 3.3% organic revenue growth and, obviously, excluding FX in MMG. You were running -- I think it was 2.5% at the 9-month mark for the year. So it kind of implies Q4 '17 organic growth accelerated, is -- that you made around the 5% level there, right? And can you comment on whether you think that sort of growth rate organically mid- to single digits is sustainable, given your momentum and new sales efforts in Michigan?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [28]

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I'll deal with the second question first. Mid-single-digit organic growth rate is -- well, it has been sort of lumpy. And this quarter is evident of that, that our businesses is highly predictable but it's not exactly linear in its predictability, that we do not think that going forward a mid-single-digit organic growth rate is unattainable. In other words, we think it is -- now I used a double negative. We think it is attainable. So that answers the second part of the question.

On the organic growth in the quarter...

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [29]

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In which quarter were you speaking of, Joe (sic) [Sanford Lee]?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [30]

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You're speaking of Q4?

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Sanford Lee, [31]

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For the Q4 '17, correct. Now I thought in your opening comments, you mentioned a negative 2.9%. But if you're looking at 3.3% for the full year. And I'm pretty sure I read somewhere, 2.5%, 9-month year-to-date for '17. So it seems to be...

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [32]

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I would guess it would probably relate to the Saber business coming on for a full quarter in 2017. And that would be -- the measurement of the organic growth on the Saber had in -- during the first quarter or during the last quarter on the full year.

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Sanford Lee, [33]

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Okay. And maybe if I could just -- on the financial-type question. The margin improvements that you're seeing are great. Can you maybe speak to what percentage or what type of contribution you're getting from the margin is related to revenue mix versus realization of cost synergies?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [34]

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Again, it's not a disclosed number. But you know, a good portion of the margin contribution -- the incremental margin contribution was from the Saber business in the fourth quarter. So that would speak to better revenue margin contribution than cost reduction from the MMG business.

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Sanford Lee, [35]

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Great. And then, just lastly, with -- there are just some of your revenue now generated in the U.S., I know you've tried to mention strategies in the past for currency fluctuations. Just wondering, your thoughts, can you provide any sensitivity figures? For example, say, a 10% change in the U.S.-C dollar exchange rate? What impact that might have on revenue, EBITDA, CapEx, free cash flow? Anything you could provide.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [36]

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Yes. We haven't disclosed those numbers in the past. We are -- our general view is that we keep U.S. currency in U.S. dollars. We keep Canadian currency in Canadian dollars. Certainly, operating from an operating perspective. And so any foreign exchange movements that we see on the income statement side are generally accounting attributions rather than actual realized gains or losses, in that respect.

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Operator [37]

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Your next question comes from the line of Maggie MacDougall with Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [38]

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I just wanted to circle back on MMG and maybe dig in a little bit in terms of exactly sort of what you guys are doing on the sales initiatives front. Is it a retraining process? Was there some changes in staff? And then to the extent that you have any view, what sort of time line you may expect to see things perhaps start to work a little bit more in terms of pre-need sales at that particular division?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [39]

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So part of it is -- I wouldn't necessarily call it a retraining, I would call it a refocusing. Part of it is utilizing marketing tactics that have not been actively utilized for a number of years in that market, including direct-to-consumer initiatives, including more sort of what we would have used in the Canadian market in terms of traditional sort of marketing level initiatives rather than simply individual selling tactics in line with a plan that would focus initially on a number of properties, and then would roll out across the portfolio based on the successes and improvements that are made in those markets.

So we're really talking about specific refocusing of lead generation, the introduction of marketing agents who are, ultimately, people who share a commission with the sales folks who go out and generate leads for the salespeople in order for them to go out and close those leads, local newspaper advertising, compensation-related items, where we would focus on selective call-to-action discount programs, short-term discount programs, 2 for 1, that type of thing. So various sort of tactical initiatives on a property-by-property basis, as we indicated. Every market is slightly different. And you might approach an ethnically different market, you would approach them very, very differently.

So -- but those are -- I've given some examples of the way that we might deal with it. I think given the rollout, the rollout is initially focused on some of the more significant properties in the Detroit market specifically. So that would -- we're aiming to generate the most sort of bang for our return -- for our investment by addressing some of the most significant properties.

So I would say that we would -- we expect that it will take through the full year of 2018 to generate meaningful improvement, but we hope to see modest improvements starting relatively shortly.

The sales cycle is not immediate, as you can imagine. So a number of these initiatives on the pre-need side were rolled out on February 4, 2018. And so it takes time to generate those leads, for the salespeople to work the leads, and for those leads, ultimately, to convert it into sales. So we're hoping, as I said, to see modest improvement in the Q1 and 2Q -- Q2, and a more meaningful traction in the back half of the year and into 2019.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [40]

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Okay. That's really helpful. And then just in terms of the -- I'm assuming some of the MMG organic sales decline was as a result of the need for some of these sales tactics you've just discussed but, potentially, also just to what has been, I guess, natural lumpiness in that business. And so I'm curious, has that sort of reversed a bit in Q1? Have you seen the sales profile, I suppose both in the Ontario funeral homes and also the MMG market, normalized if you want to call it that? Or should we be expecting more volatility through the early part of this year?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [41]

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Our hope is not for more volatility. And early sort of indications would be that the sales tactics that we've been deploying and some of the opportunities that we're seeing in the Canadian markets are sort of normalizing. So we're not expecting, at least based on the information we have at this point, any comparable volatility in -- at least to this point. Our business has historically been, and we expect it to continue to be, long-term predictable but potentially short-term lumpiness, as I mentioned earlier. And I think that's what we've seen, obviously, here.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [42]

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Okay. And then just one final question. I'm wondering if you guys are able to give a bit of an idea around expectation for effective tax rate and cash tax rate on a go-forward basis. Just given that your percentage of business in the U.S. is now higher in respect of changes in the corporate tax rate there, I want to make sure that the model is sort of capturing the correct rate as closely as possible anyway.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [43]

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So we had some tax planning initiatives that we had used between the U.S. and Canada that allowed us to have a perfectly legal but lower effective tax rate. With those changes in the -- under the Trump tax credits, those loopholes have largely or we believe they are largely going to be closed. So I'll turn it to Joe, but I would expect our effective and cash tax rate to go up modestly.

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [44]

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Right. We're looking, Maggie, at implanting tax rates in the low 20%, 21% overall. It -- as we expand in the U.S., it will likely tick up a little, a point or 2 as we get more revenue and more profits out of the U.S. The effective tax rates across the 2 countries are basically similar now. We have some permanent timing differences in Canada related to the investment income, which makes our tax rate lower than the 26% that is the statutory rate. But when we combine everything and take a look at some of those permanent differences, then we're now into the sort of low 20% to 21% effective tax rate currently. We do have some tax shelter through deferred tax assets on the balance sheet that help us in terms of cash taxes. But going forward, I would guess as we grow and our profits are higher, our cash taxes will actually increase as well. I haven't done a full -- you do some sort of analysis on the tax -- on the cash tax side, but it would be safe to say that we would be paying more taxes going forward, cash taxes.

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Operator [45]

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Your next question comes from the line of Steve Harris with GMP Securities.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [46]

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Just a couple of quick questions here. And I think I know the answer to the first one. But if you could just talk a little bit about volume versus price in the revenue mix for Q4 and how that's looking going forward. I'm assuming the lumpiness was overwhelmingly volume-related, but if you can just sort of break it down, it would help.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [47]

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Yes. It is overwhelmingly volume-related. The prices do not tend to fluctuate materially. And as a matter of fact, they can -- the prices from some of our more rural properties to the more urban properties can vary substantially. So we don't break down volume number specifically, but it would be logical to infer that the lumpiness relates to volume and not pricing.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [48]

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Okay. Great. And just a question done on a different vein. But if you step back for a minute and you look at what you've accomplished over the last couple of years, there's 3 large-scale acquisitions. If my math is right, 46 cemeteries. And if you look at all the groups, then that means there's 4 management teams and 4 sales structures and 4 IT systems and all the rest of that. Where do you stand in terms of bringing the platforms together and developing the culture and the management teams that you want to drive the business going forward? And to what extent is that sort of integration process something that gives you pause in continuing to make larger-scale acquisitions? Or it's something that's advanced enough that you think, no, we're in good shape to continue driving forward? Where do you stand on all of that?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [49]

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I think we would broadly classify the process as being in the early days and being iterative. It -- that -- you're quite correct in that we have multiple management teams, multiple operations leaders. Again, the sort of highly localized nature of the market limits our ability in some respects, particularly on the cemetery side, to integrate what I -- we would broadly call sort of front of house sales and sales management and in-the-field type of leadership. The back-office integration really has -- is starting in earnest, through the back end of Q4 and into Q1. And now we expect we'll be further enhanced through the CMS opportunity.

In terms of our willingness to make sort of more scale based or larger acquisitions, we -- scale is usually beneficial particular in our industry, particularly on the cemetery side and particularly with some of those head-office integrations and back-office administrative procurement type of functions. And so I think that our willingness to do that would be selective, but it would be -- we would be willing to entertain those larger acquisitions in order to continue to do that. I don't think we're far enough along in the integration process to say that we've got it set and we're ready to go. I don't think that would be a realistic representation of where we are.

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Stephen C.A. Harris, GMP Securities L.P., Research Division - Head of Research [50]

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Great. And as you bring CMS into the fold, are there some things that you -- when you look at that business, it is probably the highest margin business of any of them. Are there things that they do, that there are platforms that they have that you think can apply to the whole group? Or is it still too early to be thinking about that?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [51]

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I would say it's probably relatively early to be thinking about that. Quite frankly, the CMS business is unique in its geographic focus and the density of the population and the sort of religious and cultural support of those markets being in and around hugely and very densely populated area. So the sales approaches that are used there are different and -- than many of the sales approaches that are used in other less densely populated, more rural markets. So we'll, of course, try and adopt the best practices. We've got the teams communicating with each other extensively as you might imagine. But not all of those best practices will be applicable through all markets.

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Operator [52]

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(Operator Instructions) Your next question comes from the line of Johann Rodrigues with Raymond James.

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Johann Rodrigues, Raymond James & Associates, Inc., Research Division - Research Analyst [53]

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I just want a quick clarification first. Early on in the call, I think you said you expect 2018 margins to be between 20% and 22%, low '20s. Sorry, was that with CMS? Or was that just the organic business? Or what you had at year-end?

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [54]

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Yes. That would be including CMS -- the CMS business, yes.

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Johann Rodrigues, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

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Okay. And then on the CMS business, one of the reasons you gave for the acquisition was you thought that you guys could implement a better process that would lead to an increase in pre-need sales because, obviously, there's a lot of inventory there. I guess I was just wondering what they kind of -- what they were doing kind of on an annual basis in terms of pre-need sales, I guess, in terms of numbers of plots and what you thought, on a percentage basis, you guys could kind of improve or shift the mix between pre-need and at-need?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [56]

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Yes. So we can't, obviously, speak to specifics because we haven't reported that -- their numbers to this point in time. Broadly speaking, their business has been -- a significant focus of that business has been bulk sales to the various cultural and religious groups. I think some of the opportunity that we saw and continue to see is through the option to purchase the Lafayette property, which will provide significant number of incremental burial spaces when that is closed. That will continue to drive some bulk sales opportunities there. In addition, there is the Princeton Abbey opportunity, which is relatively new to the CMS business. So we're really sort of trying to understand how we can develop some further attraction at Princeton Abbey, which is predominantly a cremation-oriented option. So I think -- I'm not sure if that answers your question. I'm sort of limited in terms of how we can talk about CMS, given we haven't reported. But I think much of the organic growth, if you want to call it that from here on in, coming out of the CMS business will be focused from those bulk sales and continuing growth in the bulk sales and the development -- further development of those 2 properties in Lafayette and Princeton.

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Operator [57]

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Your next question comes from the line of Brian Pow with Acumen.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [58]

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Just wanted to -- maybe just a little bit of housekeeping that -- any anticipation on what your CapEx spend's going to be in 2018?

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [59]

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Our CapEx -- on just sustaining CapEx, Brian, I presume that you're asking?

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [60]

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Yes.

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James Joseph Leeder, Park Lawn Corporation - CFO & Director [61]

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Yes. And we tried through the budgeting and planning process to keep that no higher than our annual depreciation, and that's running at about $3 million. I would say, if I looked at the CapEx plan for 2017 on our business, excluding CMS, it would have been below $3 million.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [62]

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Okay. Is there any major sort of project thoughts? Any more mausoleums or any like that you're thinking of?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [63]

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We're developing some mausoleum product in both the Louisville, Kentucky market and the Houston market. They would have different characteristics to what might have been developed in -- previously in the Toronto market. It's a very different market. It's going to be outdoor in nature, lower price points. So -- and then there's on-site funeral opportunities that we're exploring in a couple of our markets as well. Those are -- the funeral opportunities are in relatively early stage. I wouldn't classify them us shovel ready but the mausoleum projects are moving forward. But their -- the capital required for that would not be nearly close to what it is in the Toronto market, for example. We're in the low single million dollar range rather than in the high teens range. But also point out that in most U.S., if not all U.S. jurisdictions, unlike the Canadian market, we're able to presell and trust the funds for those mausoleums. So we're not necessarily, although we potentially could, we're not necessarily funding it with our own balance sheet, the pre-selling process can fund that rather using our own capital.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [64]

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Okay. Great. That's good insight. And can you provide an update? At one point, I know with the MMG acquisition, there was some chat of some divestiture of some cemeteries and that. Can you sort of speak to where that's -- that process is at right now?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [65]

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That process is engaged and ongoing. And we are in dialogue with various regulative -- regulatory authorities in Michigan on how to facilitate some of those things. So we are actively working on some selective divestitures in that market.

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Brian D. Pow, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Analyst [66]

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Okay. And when you -- again, that sort of insight you gave us on where you sort of expect margins to be for 2018. When you look at some of your integration initiatives and that, how long do you -- like when we look at sort of, I can say, normalized Q1 margins versus Q4, when do we really sort of start to see the pickup of that integration?

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [67]

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Our expectation would be on the latter half of the year rather than the earlier half of the year. That would be fair for planning purposes.

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Operator [68]

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There are no further questions in queue at this time. I'll turn the call conference back over to our presenters.

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Andrew Clark, Park Lawn Corporation - Chairman of the Board & CEO [69]

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Thank you, everybody, for joining the call today. We appreciate your ongoing support and interest in Park Lawn. And we look forward to speaking with you all again soon.

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Operator [70]

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This concludes today's conference call. You may now disconnect.